[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
SUSTAINABLE HOUSING FINANCE, PART III
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 7, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-55
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_________
U.S. GOVERNMENT PUBLISHING OFFICE
30-774 PDF WASHINGTON : 2018
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
Subcommittee on Housing and Insurance
SEAN P. DUFFY, Wisconsin, Chairman
DENNIS A. ROSS, Florida, Vice EMANUEL CLEAVER, Missouri, Ranking
Chairman Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
STEVAN PEARCE, New Mexico MICHAEL E. CAPUANO, Massachusetts
BILL POSEY, Florida WM. LACY CLAY, Missouri
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
STEVE STIVERS, Ohio STEPHEN F. LYNCH, Massachusetts
RANDY HULTGREN, Illinois JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DANIEL T. KILDEE, Michigan
LEE M. ZELDIN, New York JOHN K. DELANEY, Maryland
DAVID A. TROTT, Michigan RUBEN KIHUEN, Nevada
THOMAS MacARTHUR, New Jersey
TED BUDD, North Carolina
C O N T E N T S
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Page
Hearing held on:
November 7, 2017............................................. 1
Appendix:
November 7, 2017............................................. 43
WITNESSES
Tuesday, November 7, 2017
Lea, Michael, Cardiff Consulting Services........................ 8
McCargo, Alanna, Co-director, Housing Finance Policy Center,
Urban Institute................................................ 10
Tozer, Hon. Theodore ``Ted'', Senior Fellow, Center for Financial
Markets, Milken Institute...................................... 12
Wallison, Peter, Senior Fellow and Arthur F. Burns Fellow in
Financial Policy Studies, American Enterprise Institute........ 5
Zandi, Mark, Chief Economist, Moody's Analytics.................. 6
APPENDIX
Prepared statements:
Lea, Michael................................................. 44
McCargo, Alanna.............................................. 103
Tozer, Hon. Theodore ``Ted''................................. 122
Wallison, Peter.............................................. 132
Zandi, Mark.................................................. 145
Additional Material Submitted for the Record
Beatty, Hon. Joyce:
Article from Politico Pro entitled, ``Tax Plan Would Cut
Affordable Housing Supply by 60 percent''.................. 154
Zandi, Mark:
Written responses to questions for the record submitted by
Representative Sherman..................................... 155
SUSTAINABLE HOUSING FINANCE, PART III
----------
Tuesday, November 7, 2017
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The Housing and Insurance Subcommittee met, pursuant to
notice, at 10:05 a.m., in room 2128, Rayburn House Office
Building, Hon. Sean Duffy [chairman of the subcommittee]
presiding.
Present: Representatives Duffy, Ross, Royce, Posey,
Luetkemeyer, Stivers, Hultgren, Rothfus, Zeldin, Trott,
MacArthur, Budd, Cleaver, Capuano, Sherman, Beatty, and Kildee.
Also present: Representative Green.
Chairman Duffy. The Subcommittee on Housing and Insurance
will come to order. Today's hearing is entitled ``Sustainable
Housing Finance, Part Three.'' We have already had two
hearings.
Without objection, the Chair is authorized to declare a
recess of the subcommittee meeting at any time.
Without objection, members of the full committee who are
not members of this subcommittee, may participate in today's
hearing for the purpose of making an opening statement and
questioning our witnesses. The Chair now recognizes himself for
3 minutes.
I first want to thank the panel, our distinguished panel,
for coming in today and offering their insights into housing
finance. We have already heard from stakeholders that represent
several aspects of the housing finance system. We have heard
from those who finance purchases of homes, those who build
homes and those who help sellers and buyers meet for that
buyer's slice of the American dream.
And before us, we have those who have done extensive work
in this space, have policy ideas, probably have some
recommendations for the must do's and must don'ts for this
committee, and I look forward to all of your testimony as you
advise our committee.
But for us, we recognize that the home purchase, is
probably one of the largest, biggest financial and most
important decisions that a person makes. Probably besides what
ring you buy and who you decide to marry, this is the biggest
decision that you will make in your financial life.
And making sure that we have a system that actually works
for all Americans is incredibly important because we have seen
when things go wrong--back in 2008. It doesn't only impact
those who purchased a home. It wreaks havoc throughout the
whole economy.
People in the industries that involve home purchases and
home sales, they get ravaged. We have heard from many of those
sectors where many of their colleagues and friends have lost
their jobs. We have seen what it does to an economy as a whole.
But what we are focused on is what it does to actual home
buyers, people who purchased homes and couldn't afford them,
how that devastated their financial future, crushed their
families. We don't want that to happen again.
And make no mistake that we are, what, almost 10 years on
from the crisis, reforming housing finance is not easy. If we
thought tax reform was tough, as we have seen right now play
out in the House, housing finance I think is equally as
challenging.
And I think after the crisis that there has been no reform
in this space is unacceptable. I think we have an opportunity
to work across party lines to get an American solution to
housing finance. We want to make sure we bring in more private
capital.
We want to bring in more market discipline. We want to make
sure people can still get a mortgage that they can afford. Some
might argue that should be a 10-year mortgage. Some are going
to argue for a 30-year mortgage.
But what we want to do is have a system that works for
homeowners to get their slice of the American dream and the
American experience, which is home ownership.
So as we look to all of you, I don't know if we want to
classify you as think tank world, but those of you who have
worked on policy for a very long time, to give us your insight
into the opportunity that presents itself to us today, and
again, the advice that you have on how we can make the system
work better for the American family.
With that my time has expired. I now recognize the
gentleman from Missouri, the Ranking Member, Mr. Cleaver for 5
minutes.
Mr. Cleaver. Thank you Mr. Chairman. Let me thank all of
you for being here today.
This is our third in a series of housing finance reform
hearings, which I hope you and others realize that because we
are going through the third hearing that we are serious about
trying to do something that would keep our mortgage financing
system functioning at a high level or higher than it is now.
And so over the last few weeks we have had the opportunity
to hear numerous stakeholders regarding their suggestions and
proposals for housing finance reform. At these previous
hearings there has been a general consensus that housing
finance reform must preserve the 30-year fixed mortgage by
including explicit government guarantee. And I believe this is
an essential component of our conversation.
As I have mentioned in the past, housing affordability must
also remain at the forefront of this discussion. Homeownership
rates have been in decline, especially among minority
populations where families have yet to recover from the
financial crisis.
The path toward GSE (Government Sponsored Enterprise)
reform must include a very strong plan to make homeownership
options more available for qualified borrowers and to address
the rental affordability crises.
Our discussion on housing finance reform should not take
place in a vacuum. Currently, the Ways and Means Committee has
been marking up the tax plan put forth by the majority that
would make changes to the mortgage interest deduction.
Specifically that bill would cap deductions for mortgages on
new homes over $500,000, which is an issue we will get into a
little later.
But a number of groups have already raised concerns that
this change could have a detrimental impact, not only on the
housing market, but on the middle class. Home ownership is one
of our most important tools for households to accrue wealth,
and we should be concerned with proposals that would make this
more difficult.
And so as our witnesses today, you may have a variety of
proposals that can solve this problem today. We can solve it
before we have the recess with the members of the housing
intellegencia here. There is no question in my mind that you
have the solution. We want you to give it to us before noon.
Thank you, Mr. Chairman, I yield back.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the Vice Chair of this committee,
the gentleman from Florida, Mr. Ross, for 2 minutes.
Mr. Ross. Thank you Chairman, and I thank the witnesses
again for being here. The Federal Government's involvement in
housing finance is predicated on the idea that it is not only
helpful but it is also necessary.
Take a working class family, folks who are scraping by with
a modest income, they are deciding that it would be best to
purchase a home rather than to continue to pay rent. How are we
helping that family?
Reasonable people will disagree, but what is most striking
to me is that we don't ask a different question. Is it possible
that we are hurting that family? Let us recognize that a family
may not be able to afford a home. The prices may be too high
and the family's income may not rise with those prices.
So the Federal Government says don't worry. We will make
you a loan. This will be easy. We already know that the family
can't afford the home.
That loan isn't a loan, it is an albatross. It is a moral
hazard. We are inducing them to take on a risk that is
unsustainable. Yet time and again we do it.
Why? Because we are told we are trying to broaden access to
home ownership and to achieve wealth accumulation for low and
moderate income home owners. That was the argument made during
the three decades between 1964 and 1995, during which home
ownership remained relatively static despite government
intervention.
Perhaps we just need to try harder. Actually we did. The
following 10 years saw an aggressive increase in the Federal
Government's efforts to support homeownership for low and
moderate income families. We placed mandates on the GSEs, first
requiring that 30 percent of all mortgages they acquired be
ones made to borrowers below medium income.
From 1996 on, we continued to increase the artificial
ratio, until 2008 it reached 56 percent. And for a brief
moment, home ownership reached new heights of 70 percent.
Then came the crash and now we are at 63.9 percent. And for
those at home keeping score, that is just under where we
started when we kicked off this project of increasing taxpayer
exposure to risky lending. With little to show for it, this
project has taken on enormous costs, not just to taxpayers but
through bailouts.
For that family I mentioned earlier, the system has raised
prices and reduced affordability of homes. The entire point was
to help that family purchase a home. We have harmed it. The
entire point was to help families keep their homes. I am afraid
the current system makes that even harder. Let us find a better
way.
Thank you, and I yield back.
Chairman. Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from California, Mr.
Sherman, for 2 minutes.
Mr. Sherman. As I think the other hearings have
established, we need a government agency to provide the
guarantee if we are going to have 30-year fixed rate mortgages
available to regular working families in the United States.
We had a bad program about a decade ago where we had
entities that had an implicit Federal guarantee, but were
private companies seeking private profit--socialized the risk,
privatized the profit.
We have now a much better system where we basically have
government entities, and these government entities are not
losing money for the Federal Government. They are, in fact,
making money for the Federal Government.
We are also dealing with the tax cut. Up at the board we
have behind the witnesses, the total national debt. That clock
will be going much more quickly if we pass $1.5 billion in tax
cuts.
I should point out that this tax bill will certainly make
it more difficult for Fannie and Freddie because, as I think
our witnesses have written, this is going to adversely affect
home prices, particularly in high cost areas where homes could
sell for $500,000, $600,000, $700,000.
In addition, we are talking about a larger national debt,
which will cause the fed to give us higher interest rates,
again, making it tougher for Fannie and Freddie and the home
market in general.
So I realize that the jurisdiction of this committee is on
housing finance, but our purpose is to make sure that homes are
affordable on the one hand and that people who have their nest
egg invested in their homes do not see that wiped out on the
other. And the tax bill, as well as some of the issues before
us, pose real risks to that average homeowner and that average
home buyer.
I yield back.
Chairman. Duffy. The gentleman yields back.
We now welcome and recognize our panel of witnesses. First
we have Peter Wallison, a Senior Fellow and Arthur F. Burns
Fellow in Financial Policy at the American Enterprise
Institute.
We next have Dr. Mark Zandi, Chief Economist at Moody's
Analytics. Third witness, Dr. Lea, is Principal of Cardiff
Consulting Services.
Next we have Ms. McCargo, Co-director of Housing Finance
Policy Center for the Urban Institute. And finally, we have Mr.
Ted Tozer, Senior Fellow for the Center for Financial Markets
at the Milken Institute.
In a moment, the witnesses will be recognized for 5 minutes
to give an oral presentation of their written testimony.
Without objection, the witnesses' written statements will be
made part of the record following remarks.
Once the witnesses have finished presenting the testimony,
each member of the subcommittee will have 5 minutes within
which to ask the panel questions.
On your table, most of you all know this, but you have
three lights. Green light means go, yellow light means you have
a minute left and the red light means that your time is up. The
microphones are sensitive so please speak directly into them.
And with that, Mr. Wallison, you are now recognized for 5
minutes.
STATEMENT OF PETER WALLISON
Mr. Wallison. Thank very much, Chairman Duffy and Ranking
Member Cleaver. Thank you for this opportunity to testify on
housing policy reform.
My view, as detailed in my written testimony, is that the
best U.S. housing policy in the future would eliminate the
Government role in housing finance, beginning with the GSEs.
I take this position for the following reasons. First the
GSEs do not reduce interest rates. Our analysis at AEI
(American Enterprise Institute) shows that since 2014, after
controlling for mortgage interest characteristics, the private
market, primarily banks, has been offering mortgages with lower
interest rates than the GSEs.
In addition, the private sector mortgages we compared to GS
mortgages with 30-year fixed rate loans, which are readily
available from private sector lenders without a government
guarantee. Many Members of Congress have been told for years
that there would be no 30-year fixed rate mortgages without
government backing. But our research shows that this is false.
Second, the GSEs' lending policy increases housing prices,
making homes less affordable. Mortgage interest standards, not
interest rates, are the key to housing prices.
Today the GSEs are willing to acquire mortgages with 3
percent down payments or less, so the buyer will be buying 97
percent of the price of the home. What this really means is
that the buyer reaches for the most expensive house that the
loan puts within reach. This exerts strong upward pressure on
home prices, which are now again rising faster than wages. This
particularly hurts first time homebuyers.
Third, GSEs do very little to help low and moderate income
families buy homes. I think everyone would agree that if any
families need help to buy homes, it would be families taking
out loans for less than $250,000.
Half of these households have estimated income below
$66,000, which is 120 percent of the U.S. median income, yet,
only 11 percent of the GSEs' activities are helping these
families buy homes. An additional 27 percent of GSE activities
are home purchase loans greater than $250,000 with a median
borrower income of $122,000.
These loans could easily be made by the private sector,
especially when the GSEs, as noted above, do not reduce
interest rates. The rest of the GSEs' activities, about 60
percent, is refinancing old mortgages, financing second homes
and financing investor purchases of houses for rental. None of
this contributes to home ownership by families that want to buy
a first home.
Fourth, the GSEs cost the treasury billions of dollars each
year. The GSEs and their supporters often argue that because
many investors, including foreign central banks, are required
to invest only in sovereign guaranteed debt, the GSEs have a
ready market around the world.
However, because the GSEs' debt pays slightly more than
treasury securities, it is often a substitute for treasury
securities. This means that when the GSEs sell debt abroad, or
even in the U.S., they are reducing the demand for U.S.
Treasuries and thus increasing what treasury has to pay. We
estimate these costs at about $17 billion to $29 billion a
year.
For the reasons I have described, government housing
policies and particularly the GSEs, have been a failure. They
are not reducing interest rates on mortgages. They are not
necessary for 30-year fixed rate mortgages. They are increasing
the prices of homes, especially for first time buyers. And they
do not increase home ownership.
In 1964, as Mr. Ross mentioned, the home ownership rate in
the United Sates was 64 percent. It was still 64 percent in
1994. After HUD's aggressive increase in the affordable housing
goals using the GSEs, the homeownership rate almost reached 70
percent in 2004. Then came the crash and the homeownership rate
today is 64 percent.
The housing finance market, home owners, home buyers and
the treasury would be better off without the GSEs. The private
sector is fully capable of handling mortgage finance, just as
it currently handles the financing of automobiles, credit cards
and other assets through a combination of banks and asset-
backed securitization.
Thank again for this opportunity to testify.
[The prepared statement of Mr. Wallison can be found on
page 132 of the appendix.]
Chairman. Duffy. Thank you, Mr. Wallison.
Dr. Zandi, you are now recognized for 5 minutes.
STATEMENT OF MARK ZANDI
Dr. Zandi. Thank you, Chairman Duffy, Ranking Member
Cleaver, and the rest of the committee. Thanks for the
opportunity. And thank you for engaging in this conversation. I
think, as you say, it is a very important one that is much too
long to address this particular issue.
In addition to being the Chief Economist of Moody's
Analytics, you should know I am also on the board of directors
of MGIC, a private mortgage insurer. And I am also on the board
of a CDFI (Community Development Financial Institutions) based
in Philadelphia. And we do a lot of affordable housing through
the CDFI, one of the largest in the country.
Let me make three quick points, maybe two. First, the
future housing finance system that replaces the GSEs, in my
view, must have an explicit catastrophic government guarantee
that is fully paid for by borrowers. I think this is a
necessary ingredient for any future housing finance system.
An explicit guarantee stands in contrast to the implicit
guarantee that Fannie Mae and Freddie Mac enjoyed prior to the
crisis. This is important. Catastrophic in that the government
should not step into the system unless we face scenarios that
are darker than the Great Recession, the 2008, 2009 financial
crisis.
I do think it needs to be paid for by the borrowers in this
part of the system that enjoy that government guarantee. I do
think there has been a lot of work done, including some of my
own, that shows we can do this and still maintain current
mortgage rates.
In my view, without this explicit catastrophic government
guarantee that is paid for, mortgage rates would be measurably
higher than they are today.
Some of the work I did with regard to the PATH Act that was
before this committee a few years ago showed that mortgage
rates for the typical borrower would be as high as 100 basis
points higher today than they would have been otherwise. That
is for the typical borrower.
For those that are less credit worthy, toward the edge of
the credit box, the impact on mortgage rates would be
measurably higher, and thus, the ability of the system to
provide affordable loans to these borrowers would be
significantly impaired.
They would not be able to get loans. They would not be able
to become homeowners. So point No. 1, we need that explicit
catastrophic government guarantee that it is paid for.
Point No. 2, there has been a lot of work done in thinking
about how we should reform the system. I thought about all of
them. I have gone down all of the different paths.
And in my view the most viable proposal for reform, both
from an economic perspective and given the current political
environment, if we want to get this done anytime soon, is a
multiple guarantor system.
So what that means is that Fannie Mae and Freddie Mac would
only be reprivatized until the system was able to maintain a
number of--several other viable guarantors, similar guarantors,
that meet the same requirements as Fannie Mae, and future
Fannie Mae and Freddie Mac would be required to hold as well.
This will ensure that the future system will promote
competition. I think competition is key in the secondary market
to make sure that borrowers get the best mortgage rates and,
perhaps more importantly, we get innovation in the provision of
mortgage credit because the demographics of the country are
changing and the way people will access credit will change. And
we need a system that will be able to keep up with that.
This multiple guarantor system will also ensure that we do
away with too big to fail. Obviously the pre-crisis system with
the duopoly, Fannie and Freddie, they were too big to fail, and
thus, the Government had to step in and the resulting costs
were enormous.
With multiple guarantors on equal footing competing in the
marketplace, we will do away with too big to fail and that
particular problem.
All of this can be done and ensure that there is plenty of
private capital in front of taxpayers and we meet all of the
access that we need for small lenders and for underserved
communities, and we can maintain the current mortgage rates.
So it is very doable and even if you don't think that the
multiple guarantor path is the right path, again, I think it is
applaudable that you are thinking about this.
This is the time to do it. Do it now when, the economy is
in good shape, house prices are rising, and so that way we
don't have to do this in the next crisis. Thank you.
[The prepared statement of Dr. Zandi can be found on page
145 of the appendix.]
Chairman. Duffy. Thank you.
Dr. Lea, you are now recognized for 5 minutes.
STATEMENT OF MICHAEL LEA
Dr. Lea. Chairman Duffy, Ranking Member Cleaver, and
members of the subcommittee, thank you for the opportunity to
be here today. I have an extensive background both in U.S.
housing finance and mortgage markets abroad, having worked in
more than 30 countries over the last 25 years.
In addressing the subcommittee today, I have been asked to
discuss how housing is financed in other major developed
markets. My remarks will focus on five countries whose housing
finance systems differ significantly from that of the U.S.:
Australia, Canada, Denmark, Germany, and the United Kingdom.
I will cover what is common amongst those systems, what is
different, and what the U.S. might learn from how housing is
financed in different countries.
I begin with what is common. Current U.S. rates for
adjustable and fixed-rate mortgages are comparable to mortgage
rates in other countries. Recent house price increases are
similar to those in the U.S. A third commonality is home
ownership rates, which range between 62 percent and 67 percent,
with the exception of Germany at 52 percent.
There are significant differences in the size of country
markets relative to the size of their economy. The mortgage
markets of all the comparable countries, say for Germany, are
larger than the U.S. with mortgage debt-to-GDP ranging between
65 percent and 94 percent.
The U.S. has been as high as 73 percent in 2009, but is
only 55 percent today, reflecting the effects of the mortgage
crisis. Notably, of these countries, only Denmark and the U.S.
have a mortgage interest tax deduction.
There are significant differences across countries as to
which entities provide mortgage loans. In Europe, mortgage
lenders must be regulated banks. Banks originate and hold a
vast majority of mortgages in Australia, Canada and the UK.
This contract with the U.S., where banks originate only 40
percent of mortgage loans and most debt is held or backed by
government entities. There are significant differences in the
predominant mortgage instruments across countries.
The U.S. is unique in the dominance of mortgages with rates
that are fixed over the entire term of the loan and where the
loan is pre-payable without penalty.
Denmark uses this instrument with one significant
difference. While both Danish and U.S. mortgages allow pre-
payment at par if rates fall, in Denmark, borrowers can
repurchase the bond that funds their loan at a discount of rate
rise. In this way, the borrower can deleverage as rates rise,
reducing the likelihood of negative equity.
The standard product in Canada, Germany and many European
countries is a short- to medium-term fixed-rate mortgage. The
rate is fixed for a 1- to 10-year period over a longer
amortization, after which the rate is reset at current market
interest rates.
The borrower can select the same or a different fixed-rate
term at reset, which allows them some protection against
potential interest rate shock.
Australia and the UK are primarily short-term variable rate
markets. Policymakers in both countries credit the predominance
of variable rate loans for cushioning the impact of global
recession.
Mortgage rates fell close to zero when base rates were
lowered. Borrower payments fell without having to refinance,
unlike in the U.S. where many borrowers who were unable to
lower their mortgage rates and payment due to limited or
negative equity.
Mortgage funding is also different across countries. The
U.S. is unusual in the dominance of securitization. 65 percent
of mortgage debt outstanding is securitized in the U.S. This
reflects two factors, the domination of the fixed-rate mortgage
and the presence of government-backed entities that guarantee
the securities.
The only country that comes close to the U.S. is Canada at
31 percent. The main capital market funding instrument in
Europe is covered bonds.
These are corporate bank-issued bonds backed by a ring-
fenced portfolio of mortgage loans. They represent over 1.7
trillion in outstanding mortgage covered bonds, covering
approximately 25 percent of European mortgage debt.
Mortgage underwriting is usually stricter in most other
countries as well. In Europe, a typical down payment
requirement is 20 percent. Canada tightened its underwriting
requirements after the crisis. Purchase loans are required to
have a minimum 10 percent down, refinance 20 percent.
Mortgage loans are recourse obligations in all countries
surveyed, and default rates have been or are significantly less
than the U.S. So what can the U.S. learn from housing finance
systems in other countries? There is no ideal housing finance
system. Individual arrangements reflect history, market
structure and government policy.
No other country's housing finance system evolved with
extensive reliance and securitization of GSEs. Lenders are
subject to prudential regulation, but none are subject to
mission regulation or housing goals.
Importantly, there is skin in the game in housing finance
systems in most other countries. Banks are subject to domestic
and international capital rules and hold considerably more
capital than that held by mortgage agencies in the U.S.
In no other country is the 30-year fixed rate mortgage the
dominant instrument. As we learned from the savings and loan
crisis, the fixed-rate mortgage is not a suitable product for
bank lenders. Rather, it requires capital market financing,
which in the U.S. is achieved through the U.S. Government
guarantees.
Guarantees lower the relative cost of the fixed-rate
mortgage, sustaining its dominance and that of the entities
backing them. The result is the government, and thus taxpayers,
backs the majority of mortgages in the U.S.
The experience of other countries shows that high rates of
home ownership, stable well developed mortgage markets can be
achieved with less systemic risk than found in the U.S. In that
respect, the U.S. clearly learned from international housing
finance systems.
Thank you for the opportunity to appear today.
[The prepared statement of Dr. Lea can be found on page 44
of the appendix.]
Chairman Duffy. Thank you, Dr. Lea.
Ms. McCargo, you are recognized for 5 minutes.
STATEMENT OF ALANNA MCCARGO
Ms. McCargo. Good morning, Chairman Duffy, Ranking Member
Cleaver and members of the committee. Thank you for the
opportunity to testify.
My name is Alanna McCargo and I am the Co-director of the
Housing Finance Policy Center at the Urban Institute. The views
I express here today are my own and should not be attributed to
the Urban Institute, its trustees or its funders.
In 1968, President Lyndon B. Johnson founded the Urban
Institute to help solve the problems that weighed heavily on
the hearts and minds of America, by bringing sound research,
evidence, and perspective that could inform effective
policymaking.
At the time, the problem was the American city and its
people and the declaration of the war on poverty. Johnson
signed the Fair Housing Act into law that same year, making
housing discrimination against blacks and other protected
groups for renting and owning homes illegal.
I mention this history as a reflection for this Congress as
you consider the future, as we are facing some of the very same
inequities that are plaguing not only our cities, but our
suburbs and rural areas all over this country 50 years later.
I will focus on the serious issue surrounding the housing
finance system and the ways Congress can address those issues
with comprehensive reform.
Our country has changed as has its needs. Huge demographic
shifts in race, age, income, and education are all significant
drivers of what our future housing system needs to contemplate.
First, there is a growing wealth gap, and it is hurting low
and middle income families. The gap persists both between races
and between owners and renters.
We know that home ownership creates wealth through equity
and asset building and it continues to be the primary way that
many middle class and working families build wealth and achieve
economic stability, especially for families of color.
As an example, to emphasize this problem, the overall home
ownership rate today for blacks is just below 42 percent, back
to levels we have not seen since the 1960's before the Fair
Housing Act was put in place.
Major housing policy changes are needed to address systemic
constraints for people of color and avoid dire consequences for
the financial security and generational wealth prospects of
millions of Americans.
Second, we have insufficient affordable housing available
for a growing number of diverse households. Over the next
decade, there will be as many as 16 million new households
formed and an overwhelming majority of that growth will be non-
white.
Our housing inventory, rental and owner, is already
deficient, continues to age, and is not being built or
preserved to keep pace with demand for affordability.
Third, consumers have insufficient access to mortgage
markets, hampering home ownership opportunity. This issue has
its roots in underwriting standards and the lack of willingness
from market participants to take on any default risk.
Urban Institute's research finds that more than 6.3 million
mortgages would have been made between 2009 and 2015 to credit
worthy borrowers under reasonable lending standards.
In the current system, mortgages are only being made to
people with pristine credit quality, despite their overall
credit worthiness. A systemic view of underwriting systems and
credit scoring models should be considered.
Our country deserves a housing finance system that serves
the people and communities that need investment and that
provides access to sustainable and affordable credit.
I am going to highlight three critical elements for this
reform. To start, consumers must have access to sustainable
affordable mortgages. Long-term fixed-rate products allow
access to credit with affordable monthly payments and without
the risk of interest rate volatility.
This is essential in market stability and gives homeowners
the ability to build equity. Ensuring the availability of these
mortgages requires the explicit backing of the Federal
Government.
Next, taxpayers must be protected. Private capital in the
first loss position will protect taxpayers without undermining
access to credit for credit worthy borrowers and access to the
secondary market for lenders of all sizes. There must be a
mechanism to ensure capital is available throughout the
economic cycle to a broad set of financial institutions.
And finally, improvements are needed to FHA (Federal
Housing Administration) so that it can work to fulfill its
mission. Because FHA provides a critical source of financing to
historically underserved renters and homeowners, and plays a
pivotal role for low income renters, first-time home buyers and
for seniors, we should ensure that FHA and Ginnie Mae have
clarity and certainty in any housing finance reform.
FHA must work in a coordinated and efficient way in the
housing finance ecosystem. In particular, FHA needs resources
to significantly modernize its technology and operations in
order to meet the needs of today's consumer.
We have one U.S. housing market, and we should have one
housing finance system and a national housing policy that
safely and efficiently serves all communities and all
demographics and is accessible at all times.
Thank you for the opportunity to testify. I look forward to
your questions.
[The prepared statement of Ms. McCargo can be found on page
103 of the appendix.]
Chairman Duffy. Thank you.
Mr. Tozer, you are recognized for 5 minutes.
STATEMENT OF THEODORE TOZER
Mr. Tozer. Good morning, Chairman Duffy, Ranking Member
Cleaver, and members of the subcommittee. My name is Ted Tozer,
and I appreciate the opportunity to testify today on behalf of
the Milken Institute Center for Financial Markets where I am a
Senior Fellow in the Housing Finance Program.
My background gives me a unique look into the question of
housing finance reform. Prior to joining the Milken Institute,
I spent 7 years running Ginnie Mae as its president. Prior to
that, I spent 25 years running capital markets for a top 10
mortgage banker.
Any industry could find itself with the complacent status
quo leaders. The challenge is when competitive disrupters are
not able to break in. This is the situation in the mortgage
market.
The GSE duopoly of Fannie Mae and Freddie Mac is
restricting credit and slowing down innovation. A key
chokepoint is restriction on the type of loans the GSE will
allow to be sold into the capital markets.
A reformed housing finance systems should focus on
fostering innovation driven by competition. I will give you an
example to demonstrate the positive impact of competition.
When I joined Ginnie Mae in 2010, approximately 70 percent
of the new Ginnie Mae guaranteed MBS (Mortgage Backed
Securities) were issued by four large banks that had put in
place credit overlays that prevented many low to moderate
income borrowers from obtaining FHA financing.
The average credit score for an FHA loan was around 720,
limiting FHA's ability to be a countercyclical force to support
housing. Starting in 2011, smaller lenders instead became
issuers themselves. This meant they could bypass the big banks
and set their own credit standards within the limits prescribed
by FHA.
Today, Ginnie Mae has approximately 440 approved issuers.
And no issuer has more than a 7 percent market share of new
issuance. The average FHA credit score is about 675, meeting
the aim of the program in responsibly expanding access to
mortgages.
Adding the competition of lenders was key. This goes to the
heart of the difference between the various housing finance
proposals. Should it be one, two, six or hundreds of
guarantors? I believe the most advantageous approach was put
forward by the Milken Institute, that hundreds of guarantors
should be allowed.
The mortgage industry faces the challenge of changing
demographics as minority borrowers become the major homebuying
group in the future. And lenders need to have the flexibility
to create loan programs to meet the needs of these unique
communities.
The strength of Ginnie Mae's structure is the guarantors
have skin in the game, even while the U.S. backs the MBS. That
is because the issuer is responsible to advance delinquent
payments MBS whole owners and use their own funding sources to
buy delinquent loans out of pools.
Competition also means that the firms that do not perform
well can fail without hampering the whole housing finance
system. That is a huge advantage over the previous or current
system centered around the GSEs.
During my 10 years at Ginnie Mae, every issue we had to
shut down was due to the lack of liquidity to make required
payments to bond holders, not their exhaustion of capital.
The goal with Ginnie Mae was to spread the counterparty
risk among hundreds of issuers to enable Ginnie Mae to transfer
failed issuers' portfolios to other Ginnie Mae issuers, similar
to the way that the FDIC (Federal Deposit Insurance
Corporation) transfers deposits and assets from a failed bank
to another FDIC-insured bank.
A future system must assure that small lenders and
guarantors have equal access to credit enhancers. If not, the
potential base of hundreds of issuers will reduce
substantially, and the competition and community banks' lending
will be minimized.
Ginnie Mae must make sure credit enhancement is equally
available and credit enhancers are working with issuers to
develop customized solutions to support the communities.
We need to look at other options that will increase
underserved markets' access to housing finance. Having hundreds
of guarantors will allow community-based solutions, not
solutions that are just for a national level.
We need to build off the gains made by the GSEs' affordable
national housing mandate at the national level and build an
environment where lenders embrace affordable lending, not as a
box that has to be checked, but as an economically viable part
of their business model. I look forward to your questions.
[The prepared statement of Mr. Tozer can be found on page
122 of the appendix.]
Chairman Duffy. Thank you, Mr. Tozer.
The Chair now recognizes himself for 5 minutes. I am going
to cut to the chase on an issue that I know is going to come up
today because we are talking about tax.
Miss McCargo, do you have a definition of kind of how much
money someone makes to be middle income?
Ms. McCargo. We have a definition. Standard area median
incomes and it is all depending on what part of the country you
live in.
Chairman Duffy. Could it--if you make $100,000 are you
middle income?
Ms. McCargo. You can be middle income at $100,000 in--
Chairman Duffy. What about 200?
Ms. McCargo. --Part of the country.
Chairman Duffy. How about $200,000?
Ms. McCargo. Yes.
Chairman Duffy. Three hundred?
Ms. McCargo. I am not sure. I don't think so.
Chairman Duffy. And if you are making $300,000 a year, can
you get a $1 million mortgage? Pretty tough, wouldn't it be, to
get a $1 million mortgage? And I would agree with that. And I
just want to make this point that when we have a conversation,
which I am off topic, I am going to get back on topic in a
second.
When we have folks who say I don't want tax breaks for the
rich but they want to argue for a $1 million mortgage interest
deduction, they are not really focused on middle income
Americans per your point, Miss McCargo. They are focused on
rich Americans.
I don't have a problem with mortgage deduction at $1
million. But it is interesting how rhetoric and policy all of
sudden clash when a lot of my friends have very rich
constituents, who they start fighting for in some of these
loopholes and write-offs.
And I have to make sure my time is running. If you want to
give me another full 5 minutes, I guess?
Mr. Sherman. Will the gentleman yield?
Chairman Duffy. If I get all whole 5 minutes, yes, I will
yield.
Mr. Sherman. Come to my district. I will show you the
middle class, hardworking Americans, whose homes require--sell
for many hundreds of thousands of dollars more than--
Chairman Duffy. But a million? A million dollars.
Mr. Sherman. Unindexed. A few years from now, absolutely.
Chairman Duffy. We could talk--
Mr. Sherman. Remember that million is not indexed, neither
is the half million. But yes, even--
Chairman Duffy. I am going to reclaim my time.
Mr. Sherman. --Even a million dollar home with two
hardworking--a nurse married to a police officer--
Chairman Duffy. I am going to reclaim my time. They
actually took off a minute. But I just think that is an
interesting point that we can't forget in this rhetoric is one
thing, but when your constituents start to get hit by loopholes
that benefit the wealthy, they start to go away. It is
interesting to see people squirm. But I am not here for that.
Mr. Tozer, we are having a conversation about the MBA
proposal, to DeMarco-Bright, Urban Institute. Have you reviewed
those plans and do you have an opinion on what would be the
best path forward for this committee?
Mr. Tozer. Yes, sir. I have looked at all of them, and
again, I think the issue it comes down to is basically how many
guarantors or issuers you want to have. That is really what it
comes down to if you compare the MBA and the other programs.
I think they are all basically very similar, but it comes
back to how many guarantors or issuers we should have. And
again, like I mentioned in my statement, I think the concept is
having as many as possible that can be successful. So more
lenders getting back to community lending is really important
to be able to respond to market conditions.
Chairman Duffy. It is important that lenders have some skin
in the game?
Mr. Tozer. I think it is really important for the
institutions that are being backed up by the government to have
skin in the game. I think they should be aligned with the
government and their interests.
Chairman Duffy. I am interested in the panel's opinion
because right now, Q.M. (qualified mortgage) has a debt-to-
income (DTI) ratio of 43 percent. But Fannie and Freddie has
bumped their own standard up to 50 percent debt-to-income
ratio. I am wondering if lenders throughout America would be
making a lot of loans at a debt-to-income ratio of 50 percent?
Mr. Wallison do you have an opinion on that? Or if they
have some skin in the game might think, well, I might want a
little different debt-to-income ratio if I actually am one of
the first dollar losses here.
Mr. Wallison. Lenders throughout the United States would be
making these loans if they can sell them to the government.
Chairman Duffy. But if they had to keep some skin in the
game--
Mr. Wallison. If they had to keep skin in the game, they
would not be making those loans.
Chairman Duffy. At 50 percent debt-to-income.
Mr. Wallison. 50 percent debt-to-income. But if they do
make the--
Chairman Duffy. Why not, Mr. Wallison?
Mr. Wallison. One of the reasons they would not be making
those loans is that it is exceedingly risky. These loans are
exceedingly risky. These people, by definition, with a DTI of
50 percent will have a lot of obligations in addition to their
mortgage obligations.
And that kind of borrower is someone who has a high risk of
failure, especially if housing prices should fall.
Chairman Duffy. I heard a stat that half of Americans are a
$400 financial crisis away from being in financially hard
times. And it seems like it is this very person who has a debt-
to-income ratio of 50 percent that we are allowing to get into
a home that maybe they should take a little more time.
Maybe they should write their debt or make some more money
before they actually get a mortgage because, as Ms. McCargo
indicated, you get people who their main investment is their
home. And the government is subsidizing or incentivizing people
to get mortgages that they probably shouldn't get, and when
things go wrong for them it financially devastates them.
Mr. Zandi, I appreciate your testimony. I guess we have had
a lot of agreement today. It was great. Do you--of the plans
that you have evaluated, which one do you like the best in your
viewpoint?
Dr. Zandi. I think the most viable is the multiple
guarantor system, which is similar to the MBA proposal. I agree
with Mr. Tozer that it is not dissimilar for the DeMarco-Bright
proposal, but the multiple guarantor system, I think, is just
more doable. It is--
Chairman Duffy. Why?
Dr. Zandi. Because you are using the existing
infrastructure, the common securitization platform, the risk
transfer process, all those other things that the GSEs have
been doing since they have been put into conservatorship.
So you are leveraging all of the work, the good work, that
they have done to get private capital into the system and make
sure that you can have entry of other guarantors into the
system.
So I don't think we want to throw that away. I think that
is very valuable and useful. And if we go down the DeMarco-
Bright path, the sort of expanded Ginnie issuer system path,
that is just a wholly different system and you are not using
all the work, all the good work that we have done.
And it will be very hard to get, to be frank, from a
political economy perspective, all of the stakeholders involved
here to sign onto that. They just can't get their mind around
it.
Chairman Duffy. Right.
Dr. Zandi. The multiple guarantor system, they can't--and
you get a lot of the benefits that you want, the competition,
the getting rid of too big to fail, a lot of private capital in
front of the government guarantees. So I think that is just the
most viable approach.
Chairman Duffy. My time has long expired, but I look
forward to more lengthy conversations with all of you as we go
through this process.
The Chair now recognizes the Ranking Member, Mr. Cleaver
for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Just a point of the
average cost of a home in my State in Missouri is $169,000. The
median price of a home here in D.C. is $551,000, and most of
the people who live in those homes are not rich. They are
struggling.
I look at many of our staff members will just rent an
apartment with four of five people living in their apartment
together because even the rental rates are very high. But I
just mention that to speak to the mortgage cap being capped at
$500,000.
Mr. Zandi, thank you for being here again. In your opinion,
why would the disadvantages of a private GSE system largely
outweigh the advantages?
Dr. Zandi. I am sorry, can you--
Mr. Cleaver. But why would the disadvantages of a fully
private GSE system--
Dr. Zandi. Right. Right.
Mr. Cleaver. --Largely outweigh the advantages?
Dr. Zandi. So to go to a fully privatized system without a
government backstop, without an explicit catastrophic guarantee
that is paid by a borrower, that would result in my view, in
significantly higher borrowing costs for everyone, everyone in
that part of the system.
For the typical borrower, kind of in the middle of the
distribution in terms of credit characteristics, the average
mortgage rate would rise about 1 percentage point. So instead
of 4 percent today, it would be 5 percent.
For those that have credit characteristics that are not as
good as the typical borrower, their rates would be even higher
than that.
So if you get toward the end of the credit box where the
GSEs are able to make a loan or insure a loan, mortgage rates
would be so high that these folks couldn't afford to buy a
loan, so they would be locked out of the market.
So I think that is the most significant--
Mr. Cleaver. Right.
Dr. Zandi. --Disadvantage. And I will make another point,
another second point. I am not sure it is even viable because
if you get into the next crisis--think about it.
You get into the next Great Recession. The financial system
is imploding. Hopefully, that is not in our lifetime, but it
will be in someone's lifetime, do we really think the
government won't step in? It will.
Mr. Cleaver. Yes.
Dr. Zandi. And so let us just recognize that, acknowledge
it, and pay for it up front instead of waiting for that to
happen and just taking our chances. So let us just be honest
here about the reality of this.
Mr. Cleaver. Yes. I agree. I was here. Mr. Chairman, and I
don't want to get into it because I got too--time.
Because Mr. Wallison, you had mentioned earlier that in
your opinion we could make it without the GSEs, and so if you
could answer briefly because I want Ms. McCargo to also deal
with it.
So Mortgage Company A in Kansas City, Missouri is financing
all of these mortgages. Aren't they going to be limited if
there is no secondary market?
There are just so many mortgages that a local mortgage
company could handle. Aren't they going to face a problem which
eventually falls on the whole population of our city?
Mr. Wallison. No, because there is a private securitization
system that will grow up to take those mortgages that the banks
do not want to hold in portfolio.
Mr. Cleaver. What do you base that on?
Mr. Wallison. The existence of a private mortgage. The
private mortgage system that we had before--the mortgage
securitization system that we had before the financial crisis
and the existence today, and before the financial crisis, of
securitization systems for credit cards, for auto loans and for
many other assets.
So the private sector is well able to handle all of these
things, and there is no reason to have the government involved.
And as I said in my testimony, the government causes higher
prices so your constituents, as well as everyone else's
constituents here, cannot afford even the entry level homes
because of the way the government is driving up housing prices.
Mr. Cleaver. Yes.
Ms. McCargo?
Ms. McCargo. Thank you, Congressman. The privatization of
the GSEs: We have come out of an era when they were operating
as both private and public under a dual mission and we learned
a lesson from that. And that is something that I don't think we
want to go back to.
Having the GSEs available to ensure that there is a
guarantee, provide certainty, and protect taxpayers with others
and with other private support in a first loss position is a
healthy way to sort of move us forward.
I think the lack of an explicit guarantee takes away the
opportunity for markets to open up--for lenders to participate
in small communities, in rural communities--in a way that is
meaningful.
And I think that, if we had a private market that was
willing to take all these risks without anything we would have
a much healthier situation right now.
No one is making--these loans are not being made without
some sort of catastrophic loss guarantee from the government,
and I think we need to make sure we keep that preserved for any
future system.
Mr. Cleaver. My time is up.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the Vice Chair, Mr. Ross.
Mr. Ross. Thank you, Chairman. 33 years ago, my wife and I
purchased our first home. We did it under FHA, and we put 5
percent down. And at the time we also paid, what I learned, was
co-PMI, private mortgage insurance.
And the reason we had to pay that is because unless we put
20 percent down and financed 80 percent, we had to have the
guarantee in there just in case of a default.
And it led me to believe then I needed skin in the game,
but more importantly, also to this day, shows me that there was
capacity in the market from the private sector to take some of
that risk.
And I guess what we have seen over the last two panels that
appeared before you on this topic is that a government backstop
is absolutely necessary because apparently the private sector
cannot accurately price or set aside reserve for deep in the
tail risk of a severe turndown on the housing market.
Is that something that each of you agrees with?
Mr. Wallison? Are we losing? Is the private sector so inept
that we can't allow them to have confidence in their pricing in
the event that we have another crash like we had in 2008?
Mr. Wallison. One of the reasons we had the crash in 2008,
or the major reason we had the crash in 2008, is that the
government had driven up, through its policies, a housing
crisis beyond the level where they made any economic sense
because the government was buying those mortgages. And so, when
we had the crash, the housing prices fell and a lot of people,
especially low-income people, lost their homes.
Mr. Ross. To that end, let us assume that back then we had
a viable private market of buying these mortgages, would it not
almost self-regulate because it wouldn't take the risk that was
being purchased then by the GSEs?
Mr. Wallison. One of the things that we have to understand,
and what doesn't seem to be understood here, is that there is a
tradeoff between underwriting standards and housing prices.
And if you reduce down payments to a very low level, you
increase the amount of debt that the homeowner takes on. When
the homeowner takes on a lot of debt not only does that
homeowner become a riskier credit, but in addition, that drives
up housing prices and so fewer people can afford houses.
So in other words, when we reduce underwriting standards,
especially down payments, we make it harder for people to enter
the homeownership system because housing prices have risen much
faster than wages are rising.
As a result, we are stuck at 64 percent. We could have a
much more viable and a higher homeownership system in the
United States if we allowed prices to go to a level that the
private sector would produce, and that would be through using
solid underwriting standards including solid down payments.
Mr. Tozer. Can I answer your question?--
Mr. Ross. Please.
Mr. Tozer. --Real quick. Basically, that is at the heart of
our proposal because we look at the facts, and there are two
sets of investors. There are investors that will invest in
credit risk and investors in interest rate risk.
Mr. Ross. Right.
Mr. Tozer. The proposal of Milken Institute is that the
government will backstop the investors that invest in interest
rate risk because they need to have a commodity that they can
trade to manage their interest rate risk.
But our proposal is to let the private sector hold all the
credit risk in the form of the issuer's holding the tail risk
and the people who hold the credit risk in front of the issuer.
You mentioned PMI.
Mr. Ross. Right.
Mr. Tozer. I think PMI is the natural in a future state
where the PMI companies can begin to take on, not only up to 20
percent down payment, but maybe let us go to even 40 percent.
And that way the issuers are protected, but the government is
simply stepping in to support interest rate investors the same
way the FDIC protects depositors--
Mr. Ross. Right.
Mr. Tozer. --Like depositors are protected by FDIC. FDIC
does not guarantee the loans that are in the banks' portfolio--
Mr. Ross. And there is enough capacity waiting to do this,
isn't there?
Mr. Tozer. And that is exactly how Ginnie Mae works. Ginnie
Mae does not guarantee any loans. We guarantee the issuer's
ability--
Mr. Ross. Right.
Mr. Tozer. --To handle their bond payments. And that is the
heart of the Milken proposal is to say that we have hundreds of
issuers. It doesn't mean we have hundreds of banks. And they
are able to all go and get interest rate protection in the
capital markets, but the credit risk is held by the private
sector.
Dr. Zandi. Congressman, the--
Mr. Ross. Yes.
And Dr. Zandi, I am going to you.
Dr. Zandi. Just to make clear, Mr. Tozer's proposal,
though, has an explicit--
Mr. Ross. Backstop.
Dr. Zandi. --Has catastrophic government backstop as
payment.
Mr. Ross. Right.
Dr. Zandi. And that is the point. If you want--
Mr. Ross. But you seem--they can offload these credit
relationships with incentives to the private sector?
Dr. Zandi. They can offload all of the risk except the
catastrophic risk. You need a government backstop to take the
catastrophic. And if you don't, then mortgage rates will be
higher in long-term fixed-rate loans.
Mr. Ross. How much--
Dr. Zandi. Thirty-year loans--
Mr. Ross. How much--
Dr. Zandi. Fifteen will--
Mr. Ross. How much higher? Are we talking in terms of
basis?
Dr. Zandi. For the typical borrower, and I am just going
back to the PATH Act. That was the last attempt at this.
Mr. Ross. Right.
Dr. Zandi. So let us take that as our benchmark. That would
have raised mortgage rates for the typical borrower by almost a
full percentage point without that government backstop.
So now, of course, there is a lot of other moving parts in
PATH and that could be mitigated--
Mr. Ross. Right.
Dr. Zandi. --But that is what you are talking about. And
that is the person in the middle, right, not--
Mr. Ross. But that is the elimination of a taxpayer bailout
for that extra point.
Dr. Zandi. That is you have no government backstop.
Mr. Ross. Right.
Dr. Zandi. That is what you were giving up. And then if you
did that, then basically you are saying we don't--30-year fixed
rate loans, 15-year fixed rate loans, there would still be some
out there like there are some in other systems--
Mr. Ross. Some of them are--
Dr. Zandi. --But they will be a very small piece of the
pie.
Mr. Ross. I see my time has expired. I yield back.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman, for 5 minutes.
Mr. Sherman. And Mr. Chairman, you paint a picture of
luxury if someone has a mortgage of over a $500,000 in
California. I welcome you to go to the average home in your
home State, knock on the door, say you have so many bedrooms in
that most average home, you are living in luxury, because I
assure you that the average home on the average lot in the
State of Wisconsin would cost over a $1 million if located
within commuting distance of Silicon Valley.
Those are the prices. And perhaps we need to organize--we
go on CODEL (congressional delegation) to strange and foreign
countries. Perhaps we need a CODEL to California so that you
will see that things are different in my State than they are in
yours.
As to our housing finance system, we currently have a 30-
year fixed rate, non-recourse--
Chairman Duffy. Can we go in January or February?
Yes or no?
Mr. Sherman. Yes. Maybe when the Grammys, the Emmys, we
will talk. It is about time. On foreign affairs, I never
thought of a CODEL from this committee, but I think it would
make sense.
We have the 30-year fixed rate, non-recourse, pre-payable
loan. That is the best deal homebuyers have anywhere in the
world, and oh, by the way, with a 10 percent down payment.
In so many countries, if you don't have parental help, if
you don't--you can't buy a home. You can't get the down
payment. The tradition in Iceland was that you work for many,
many years on ships in order to get the down payment. And so I
think we have a system that is good for homebuyers.
It has also been profitable over the last few years for the
government. It is not true that back in the 1960's we didn't
have government involvement. What we had then was savings and
loan institutions with enormously high leverage. All supported
by the government. That provided good mortgages until it
collapsed at government cost.
Ms. McCargo, you are absolutely, right. We need to build
more homes.
Mr. Zandi, a lot of people in my district, which the
Chairman will be visiting this winter--
Dr. Zandi. Can I come too?
Chairman Duffy. Absolutely.
Mr. Sherman. They have saved all their lives. They have put
their kids through school, and what they have is about a 20
percent equity in a home that is worth between $500,000 and $1
million.
So let us say we limit the home mortgage deduction to
$500,000, we limit the property tax deduction at $10,000, and
they go to sell their home.
The buyer is going to know that those limits exist. And oh
by the way, the buyer is going to know that the limits aren't
indexed. So 10, 20 years from now when they go to sell their
home, the word half a million dollars will mean a very
different thing than it means now.
What happens to the value of that $500,000 to $1 million
home if the tax law changes?
Dr. Zandi. The analysis I have done is to take the entire
House bill and that includes all the things you mentioned plus
the increase in the standard deduction--
Mr. Sherman. Yes.
Dr. Zandi. --Which reduces the value of the MID (mortgage-
interest deduction), as well as the impact the larger budget
deficits would have on interest rates, which matter for the
housing market.
Mr. Sherman. Right.
Dr. Zandi. So in that context, with all of those moving
parts, including the $10,000 cap on property tax and the
$500,000 cap on MID, nationwide all else being equal, house
prices would decline by 3 percent to 5 percent.
In districts like yours, I don't know yours specifically,
but I can guess--
Mr. Sherman. OK.
Dr. Zandi. --In areas around where I live in suburban
Philly, New York, New Jersey, the price declines will be
double-digit, 10 percent, 12 percent.
Not that I am a fan of the MID. I am not. And we can talk
about how you might want to do this is a better way. It is very
costly, and I don't think it is as effective in promoting
homeownership as it should be. So I am not a fan.
But I think it is important to recognize that if this plan
were adopted, those are the kind of HPI (House Price Index)
house price declines you should expect in those. And that is
obviously, going to be a lot of stress for those people--
Mr. Sherman. Yes.
Dr. Zandi. --For the lenders that made those loans. It is
meaningful. The economy will--
Mr. Sherman. Or the Federal Government that has ensured
those loans. And if you have 20 percent equity and your home
goes down 12 percent in value and then you have some
transactions cost to sell, you are just not going to be able to
retire to Wisconsin after you sell your home.
And finally, there is this--oh, well, I have run out--I
yield back.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren, for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman. Thank you all for
being here. I appreciate your time and your expertise on this
important discussion.
First, I would like to address my first question to Dr.
Zandi. With respect to the concept of recap and release, you
make the point that this might be the most politically feasible
option, but I also think there is plenty of agreement that this
would have its drawbacks. Can you please speak to the economics
of recap and release?
Dr. Zandi. Sure, and I don't think it is politically
viable. You could argue it might be the least disruptive to the
system because you are just basically going back to the future.
In a sense, it is no reform at all. So I think there are a
couple of very significant problems with it.
Most importantly, we are not changing anything. We are
going to go back to a too big to fail duopoly that dominates
the system.
And, yes, maybe the GSEs in the future system will be at
higher levels of capitalization, regulatory oversight, but you
are still left with a system that is very vulnerable to the
thing that got us into this mess in the first place. Why would
we do that?
Second, these institutions are going to be released into a
system they are going to have to capitalize. It is systemically
important because they are too big to fail.
They do have costs that they have agreements with treasury,
and taxpayers paid a lot of money to bail them out. And I think
taxpayers deserve some compensation for that.
If they have any kind of backstop, they will have to pay
for that. So when you consider all of the costs that they will
face as reprivatized institutions, in my view, it will mean
that mortgage rates will be higher than they are today. So why
would we do this exactly? So in my view, recap and release is a
pretty bad idea.
Mr. Hultgren. Yes, yes, OK. That is helpful. Let me drill
in a little bit more, if I could, Dr. Zandi? Your testimony
notes--and you kind of referenced this, and I will quote from
your testimony.
``The GSEs would likely owe the government for the
taxpayers' financial support,'' end quote. How much do you
believe they owe to the taxpayers or would owe to the
taxpayers?
Dr. Zandi. I don't know the exact number. And in fact, that
is a matter of significant debate and discussion. It is in the
legal system. Let me put it this way. I am an economist. This
is at a higher pay grade than I have. It is a real thorny
question.
I would say that the taxpayers bail these guys out and
taxpayers should be repaid for that. And in the way they bailed
out--this is an important point--the way they bailed out the
Fannie Mae, Freddie Mac was not a loan.
This was equity. We took equity in these institutions and
that is at a higher cost. And I think taxpayers should be
reimbursed for that cost. What that number is, I am not sure.
Mr. Hultgren. OK.
Dr. Zandi. That is, again, a thorny question. I don't know.
But I think that should be part of the calculation.
Mr. Hultgren. That is helpful, thank you.
Mr. Wallison, your testimony points out that the United
States is the only developed country with a housing finance
system completely dominated by the government.
Why do you think that is? Do you think other countries have
observed the lessons of U.S. policies?
Mr. Wallison. I doubt it. I would like to believe that was
true, but I think we really have a case of path dependency here
and that is that the United States began to have a role in
housing back in the 1920's. And we continue to grow that system
using, for example, the S&L system.
When that failed, Fannie Mae and Freddie Mac came up to
pick up their activities. So it is something that has grown in
the U.S. system over time. And once that happens, it becomes
very difficult to change--
Mr. Hultgren. Right.
Mr. Wallison. --As I am sure everyone here is finding. That
there are a lot of people who have come to rely on this system,
especially those like realtors and homebuilders who enjoy the
fact that housing prices rise as a result of this government
involvement. But then again, from time to time, we have these
crashes which we had in 2008 as a result of these government
policies.
So we really have to look at this whole thing again from
the beginning and start talking about whether it makes any
sense to have the government involved in the housing finance
system.
And in my testimony, I have shown that all of the things
that we are talking about here, the 30-year fixed rate loan,
lower housing prices, or what we should have as lower housing
prices, lower interest rates, helping the people who want to
buy first homes, does not occur with a government program.
So we start all over again with a private system, which
will produce, as the private system always does, the things
that the American people want at a price they can afford.
And I would point out, in my testimony, I show what happens
in the auto market, which is also a gigantic market. The prices
there have been stable for 40 or 50 years in terms of the
median income in the United States. And the reason for that is
simply that this is a fully, private market where people,
consumers, negotiate with the producers.
We don't have that in the United States for housing prices
because we have the government inserting itself and requiring
lower underwriting standards as a result of which we have much
higher housing prices.
Mr. Hultgren. My time has expired. I may follow up with
some other written questions, if that is all right?
I yield back. Thank you.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Capuano--
Mr. Capuano. Thank you, Mr. Chairman.
Chairman Duffy. --For 5 minutes.
Mr. Capuano. Mr. Chairman, I was in my office doing very
important work until I decided to come over and have some fun.
First of all, Mr. Zandi, I appreciate your comments that
without a government backstop the rates really wouldn't change
a whole lot, but rates are only one factor in determining
monthly expenses.
I am a homeowner, and to be perfectly honest, I own a two-
family home because I needed the rent to be able to meet the
mortgage when I first bought the home. And for me, and most
homeowners, it is how much do I make every month and how much
can I afford every month, monthly payment, not the general. All
the other stuff works into it.
And if you are going to talk about the rates without a
government backstop, we have only had this experience. We
haven't had it since the 1930's.
Prior to the 1930's, it was a fully private market. There
was no government backstop, no government involvement, and the
rates were about the same as the rates today, pretty much. But
it was a 50 percent down payment, 5-0 percent down payment.
I don't know anybody in any market who has 50 percent to
pay down on a home. And it was a 5-year payback period which
effectively takes the average monthly principal and interest
and doubles or triples it, depending on the math you do, 2.5
times.
Tell that to the average American they love. You can keep
your 30-year mortgage, if you can get in. And the answer is,
most of us could never get in. We have done the purely private
market before, it didn't work. We are not going back. Period.
And those of you who want to go back, I dare you--I dare
you to put it on the floor of the House for a vote. It would be
a wonderful debate, and it would be a wonderful result in the
next election for those of you who thought that was a good
system.
I also want to talk quickly about the tax bill that we are
all debating, this million-dollar number. Sounds like a lot.
Before I came over, in all of 10 seconds I looked up average
home prices in Boston. And like most Americans that search
brought me to Zillow.
Here is what Zillow says the average home price in Boston
is $561,400, just the city of Boston. That does not include our
expensive suburbs. And by the way, Boston is geographically one
of the smallest cities in the country--$561,000 average median.
By the way, it sounds like well, gee, that must be a
problem. That home price has increased 9.3 percent in the last
12 months, and it is expected to increase 3.9 percent more in
the next year. That is a pretty good market, the way I look at
it, even though it is expensive.
And by the way, I also looked it up, as of this very
moment, as of right now, there are 428 homes for sale in Boston
that are for $1 million or more--428. I can't afford that.
But a $500,000 mortgage is not out of the norm for most
people in places like Boston and California and New York and
Chicago and many places in Florida and on and on and on. And I
just happened to purely circumstantially look up another town,
a nice town. I have been there, actually.
Matter-of-fact, I did very well. I went there for John
Kerry and they liked me there. I went to this town, and I
looked up their average price. Purely circumstantially, I
looked up Wausau, Wisconsin. It really is a nice town, and they
did like me.
The average home in Wausau, Wisconsin is $100,000, 20
percent of the cost in Boston. Now, I am sure it is a great
home, but that is the difference. The geographics makes a
difference. And that home has increased 5.4 percent, half of
the increase in Boston--
Chairman Duffy. Will the gentleman yield?
Mr. Capuano. --And is expected to increase 2.5 percent. It
is not the same. And the bottom line is people in Boston make a
little bit more, but not that much more.
Chairman Duffy. Will the gentleman yield?
Mr. Capuano. Sure.
Chairman Duffy. I appreciate you bringing up my hometown,
but I would note that the $500,000 of mortgage deduction which
is included in the bill would include then the median income in
Boston--
Mr. Capuano. On a median income--
Chairman Duffy. --So you are covered.
Mr. Capuano. --But median is made up by people that are
over it as well.
Chairman Duffy. But you advocated that--
Mr. Capuano. --Because there are lots of homes in Boston
that are at $700,000, $800,000, and they are not big expensive
homes. For that kind of money--I have always known. I watch
HGTV.
Chairman Duffy. Me, too.
Mr. Capuano. For the amount of money I can get for a home
in Boston, I can get the greatest home in the world in Waco,
Texas, according to what they show on HGTV. I am shocked.
You cannot buy a parking space in my district for the
amount of money you can get 40 acres in Waco. And that is not
good or bad or indifferent. It is not a statement. It is just a
fact.
And it doesn't make any good things about Boston or bad
things about Waco or Wausau. It just means if we are going to
make national policy it has to be adjusted to regional cost,
No. 1, No. 2, and I appreciate the extra time.
As far as the 30-year year mortgage goes, it is not just
one factor. There are multiple factors that lead into the
decision that the average American makes, and those factors are
totally played against them without a government backstop.
Mr. Chairman, I really appreciate the extra time, and I
can't wait to get back to Wausau.
Chairman Duffy. I might differ with you on that point.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman. Mr. Wallison, in your
written testimony you debated the merits and the necessity of
the 30-year fixed mortgage. You also discussed the role that
the government has in insuring that this product exists.
Does the 30-year fixed rate jumbo loan mortgage market have
a Federal backstop?
Mr. Wallison. No.
Mr. Rothfus. Why has the jumbo market thrived without a
Federal backstop?
Mr. Wallison. Because we don't need a Federal backstop to
have a 30-year fixed rate mortgage.
Mr. Rothfus. Dr. Lea, in your testimony, you compared the
housing finance systems in similar developed markets. I was
interested to see that Australia, Canada, Denmark, the UK and
the U.S. all have fairly similar homeownership rates despite
significant differences in the housing and finance systems in
each country.
We are often told that the 30-year fixed rate mortgage is
essential to ensuring that our homeownership rate remains high,
yet you point out that, quote, ``In no other country is the 30-
year fixed rate mortgage the dominant instrument.''
Of course, without the government support that we currently
offer, this product likely would not be as ubiquitous as it is
today. How important do you think the 30-year fixed-rate
mortgage is?
Dr. Lea. As you can see, from the data, and I go beyond the
countries that I specifically referenced, is that you don't see
this instrument around because it has a lot of interest rate
risk associated with it. So you have credit risk and interest
rate risk that is inherent in mortgages, and you have to
distribute that some way.
And other countries that have decided that customers can
take or be exposed to a bit more interest rate risk, and as a
result you don't need the government backstop in order to
ensure that you get sufficient amounts of credit and high rates
of homeownership.
So the fact that we use and built a system around the 30-
year fixed rate mortgage has, by definition, almost meant that
we have to provide this government support. And I would point
out that this didn't work with the savings and loans.
We crashed the system back in the 1980's, and we crashed
the system again in the mid-2000's. So the question is do we
have to build a system based on the 30-year fixed rate
mortgage? And if that requires government guarantees, you have
a self-fulfilling prophecy.
Mr. Rothfus. Mr. Tozer, in your testimony you wrote, quote,
``With their protected government advantage status and the
powerful economic benefits that accompany it, the GSEs have
achieved gains at the cost of crowding out a potentially
significant measure of market competition and additional
innovation.''
Assuming that the government provided advantage to the GSEs
was diminished or abolished altogether, what would some of the
other impediments to private sector competition be?
Mr. Tozer. Again, the issue gets back to this whole
concept, like Dr. Lea said, you have interest risk and you have
credit risk.
And so the big impediment to this concept is that you need
the government guarantee to support the interest rate investors
who are able to take on the credit interest risk, like Mr. Lea
said. Banks really can't do it. And the question is do
borrowers continue to avoid interest rate risk or do you shift
interest rate risk to the borrowers with an adjustable
mortgage?
And that is the big question.
So again, the impediment is that once you take Fannie and
Freddie out of the mix and their duopoly, then you need to make
sure that you have access to credit enhancement from all the
various issuers that enables them to be able to compete on an
even playing field with all of the other issuers so we have a
well-functioning market for small to medium-sized lenders.
Dr. Zandi. Congressman, can I make a quick point about the
jumbo market?
Mr. Rothfus. Yes.
Dr. Zandi. The jumbo market is dominated by large, banking
institutions. Those banks are classified as systemically
important financial institutions.
By definition, they are backstopped by the government, so
there is a backstop there. It is not like they are operating in
a vacuum without the government back there.
Mr. Rothfus. So there is no bank out there that is making a
jumbo loan?
Dr. Zandi. No, there are, but the--
Mr. Rothfus. OK.
Dr. Zandi. --The market is dominated--
Mr. Rothfus. Yes.
Dr. Zandi. --The vast, vast majority of those are--
Mr. Rothfus. Mr. Wallison, do you want to comment on that?
Mr. Wallison. Yes. Those banks and other banks, not
necessarily the too big to fail banks, are also making these
loans. And the point is that we studied this market very
carefully. We can provide a memorandum on what we found in this
market, and in every case where a bank was making a loan since
2014, a mortgage loan, it was lower cost than a GSE loan.
Mr. Rothfus. If I can--
Mr. Wallison. What we did was compare the jumbo market to
the GSE market saying--just a little bit below the GSE market,
a little bit higher than the GSE market for the jumbo loans and
we found that those loans that when they were being made were
being made at a lower interest rate.
So it is not necessary to have a government backing of any
kind in order to keep the interest rate at a competitive level.
Dr. Zandi. One other quick point--
Mr. Rothfus. My time is expired. I would like to go on, but
my time is expired--
Dr. Zandi. Oh, I am sorry.
Mr. Rothfus. --So I yield back.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the gentlelady from Ohio, Mrs.
Beatty, for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and thank you to our
Ranking Member, and thank you to our witnesses here today.
Before I go into my questions, I would like to make a few brief
statements.
But first, I would like to say to my colleague, Congressman
Sherman next to me, I would like to be included in that 30th
Congressional District CODEL along with Duffy and Cleaver.
So I just want that entered into the record, Chairman
Duffy, that I want to go on the CODEL.
Now to the witnesses--
Chairman Duffy. Without objection.
Mrs. Beatty. Thank you. To the witnesses here, thank you
for being here. And certainly while we are here today to talk
about sustainable housing finance part three, I noticed that we
have certainly not been absent of talking about tax reform.
And I was very pleased to see in your written statement,
Ms. McCargo, that you addressed the potential impact of the
House Republicans' tax plan and the effects it can have on
affordable housing.
As a matter-of-fact, Mr. Chairman, I would like to submit
an article for the record from Politico entitled, ``Tax Plan
Would Cut Affordable Housing Supply by 60 percent.''
Chairman Duffy. Without objection.
Mrs. Beatty. Thank you. Let me just take a few seconds of
my time to quote from that article. And that article states
that builders, local governments, and other housing advocates
are rallying against a provision of the House Republican tax
plan that would eliminate a key funding source for affordable
rentals.
As a matter of fact, it says the tax proposal would do away
with private activity bonds, which we all know is a growing
source of financing for low cost housing.
The cuts would reduce the supply of new affordable rentals
by more than 85,000 units a year or more than 60 percent,
according to an analyst from the Novogradac and Company.
One last thing, private activity bonds are issued by local
or State governments and are designed to attract private
capital funds to large projects. They have evolved into a
common financing mechanism for housing as the supply of low-
income housing tax credit, the primary source of financing and
it has been outpaced by the need of low rentals.
So with that and hearing from the articles, can you briefly
describe the problem you see with regards to the affordable
housing when it comes to the Republicans' tax cut bill?
Ms. McCargo, do you want to start?
Ms. McCargo. Certainly, thank you, Congresswoman. The
fundamental concerns, even without the tax plan, the affordable
housing issue is a significant issue both on the rental and buy
side, on both sides the issue.
The Low Income Housing Tax Credit has already seen a lot of
pressure going into this, and I think that one of the most
important things as a houser, and thinking about what is
happening with the tax plan, is that the fundamental decisions
that are made--whether it is the mortgage interest deduction,
low-income housing tax credits or other plans--is that we are
continuously looking at how we can put money that is taken from
one part of the plan back into housing.
One of the concerns in particular is for example the
mortgage interest deduction. If we are looking to really spur
home ownership and move forward we might want to look at how we
might be able to take--if that was to be reduced--those dollars
and how do you put those back in the housing in the form of a
tax credit, for example?
So I think affordability is a critical issue whether you
are renting a home or owning a home across the Nation today.
And that the tax plan and the decisions that are made to make
cuts or any revisions that affect housing needs to be thought
about in terms of how do we make sure that we are enabling
affordable housing and finance?
Mrs. Beatty. Thank you. My time is about to run out, but I
would like to make a brief comment as we talked about earlier
when you were asked the question of what is middle class. We
all know the numbers that we are given, but I think it is
important to say it depends on where you live.
Ms. McCargo. Right.
Mrs. Beatty. If you take my district, I have the entire
city of Bexley, and we have $10 million homes there and $2
million homes, and some of those individuals would probably
call themselves middle class that own a $1 million home.
So I think to Mr. Sherman's point, it definitely depends on
where you live. But also, I was elected to represent rich
people and poor people.
So I don't think you could make it an either/or or say to
her that it is unfair if people want a tax deduction on a $1
million or a $2 million house. So I think we have to figure out
how to do both. Not to take away those things for those who are
less than middle class, but not to punish others.
My time--
Chairman Duffy. The gentlelady's time has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Budd, for 5 minutes.
Mr. Budd. Thank you, Mr. Chairman. I am also interested in
Mr. Sherman's CODEL California. My only fear is that I would
check in but never leave.
So Dr. Lea, in your testimony you noted that Canada has a
government guarantee, correct? Right. So what percentage of the
Canadian mortgage market is covered by this guarantee?
Dr. Lea. The Canadian system is similar or pretty much
modeled after the FHA-Ginnie Mae combination. So in Canada all
loans over 80 percent loan-to-value ratio have to be insured,
regardless of whether they are held by banks or in securitized
form.
So the CMHC is providing most of that mortgage insurance,
and I think roughly about 50 percent of all mortgages have
government mortgage insurance.
The second element of that is, like Ginnie Mae, they
provide a timely payment guarantee on securities, mortgage-
backed securities that are issued and the market share there is
about 31 percent.
Mr. Budd. So that is a separate guarantee, the timely
payment guarantee?
Dr. Lea. Correct. It is a layered guarantee. So if you hold
the loan in portfolio you don't have that second guarantee, but
if you sell the loan then they put that timely payment
guarantee on that.
Mr. Budd. So by contrast, about what percentage of the U.S.
market is guaranteed by Ginnie, Fannie, and Freddie?
Dr. Lea. 61 percent is the number there that is the
combination.
Mr. Budd. OK.
Dr. Lea. Oh, no, I am sorry--no. It is 65 percent. It is 31
percent in Canada, 65 percent and then looking around the rest
of the world there is no other country that has more than 10
percent of loans securitized and almost all of those are
private label. You don't see government guarantees in most
other countries.
Mr. Budd. So what are the credit characteristics of the
loans that are covered by the Canadian government? For
instance, what is the down payment requirement or the debt-to-
income ratio of the borrowers? And you did mention an 80
percent number earlier, but if you would describe those
requirements?
Dr. Lea. Right. So after the crisis they used to have 95
percent loan-to-value ratio maximums. They lowered that to 90
percent for purchase loans and 80 percent for refinance loans.
They have since relaxed that a little bit and for loans under
$500,000 you can go back to 95 percent there.
Importantly, loans are recourse in Canada. So that also
provides a significant deterrent against mortgage default.
Mr. Budd. So is there a limit on the amount of a loan that
is covered under Canada's guarantee?
Dr. Lea. Yes there is. And that was actually lowered after
the crisis. I am trying to remember what the maximum is. There
is a maximum cap. I think it is maybe something like $400,000
or so, but I would have to actually check that. I don't
remember off the top of my head.
Mr. Budd. About $400,000 then. So does Canada have a
conforming loan limit?
Dr. Lea. No, because they don't distinguish between
government and non-government loans.
Mr. Budd. OK. And how about any limits on borrower income
eligibility?
Dr. Lea. They also have that and the most recent numbers I
think they will allow that to go up to 45 percent.
Mr. Budd. Very good. Thank you Dr. Lea.
Mr. Chairman, I yield back.
Dr. Zandi. I think it is important to point out that they
are willing to move those standards up and down on a regular
basis. Unlike here, once we make a change we generally don't
change it. They are moving those thresholds all the time. It is
a macro prudential tool they use.
Mr. Budd. Yes, very good, noted. Thank you.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from--
Mr. Royce. Thank you, Mr. Chairman. We have a very
distinguished--
Chairman Duffy. So the gentleman from California, Mr.
Royce, for 5 minutes.
Mr. Royce. Thank you very much, Chairman. And you have put
together a very distinguished panel here of witnesses today.
And I wanted to ask Mr. Tozer, given your past experience,
and this is an issue we have spoken about it in L.A. at the
Milken Institute out there. But given your expertise, again, if
we wanted to explore what the risk transfer deals at Fannie and
Freddie and NFIP (National Flood Insurance Program) have taught
us thus far, if we look at risk transfer.
We have had some deals through the bond and reinsurance
market. My understanding is that they could be doing a lot more
than they are doing already. Gwen Moore and I have legislation
to encourage them to do that.
In addition, I have recently been briefed that in light of
the damage caused by the hurricanes, the contracts that the
NFIP purchased will pay $1 billion of reinsurance. And that
would return to the taxpayers 85 cents on the dollar as a
consequence of those reinsurance contracts.
So given these and other examples, is there any reason why
the Federal Government as an entity should not seek to maximize
the transfer of credit risk and the transfer of insurance risk
and other taxpayer exposures to the capital markets and
reinsurance market when practical?
Mr. Tozer. I agree. I think you should transfer as much of
the expected credit loss as you can. The question you run into
is diminishing returns.
Most analysis I have seen shows that if you transfer 40
percent of the loan amount, for example, you have a $100,000
loan and you transfer $40,000 of risk to a third party, you are
going to cover 99.9 percent of the chance of issuer having to
cover a loss.
So the question we run into is when does the cost become
prohibitive? It is like buying too much insurance for
yourself--
Mr. Royce. I understand the concept, but let me ask you,
are we currently approaching, in your opinion, the point
where--
Mr. Tozer. The thing we need to realize is with the GSEs
and when they have a loan that has private mortgage insurance,
they are insured down to 65 percent exposure right there.
The borrower is paying to get the issuers exposure to 65
percent, so the big area that they are concerned about are the
loans with a 20 percent down payment. So I think the concern is
making sure the loans that only have a 20 percent down payment
are credit enhanced up to at least the 65 percent or 60 percent
area.
The loans secured with private mortgage insurance are
probably close to proper level of credit enhancement because
they are at 65 percent coverage level. But I think you need to
look at this whole concept what is a tipping point of the cost
versus the benefit to the taxpayer.
So the question becomes between all of those layers, I
think the question is the government should make sure that all
the losses are absorbed by the private sector.
Mr. Royce. Right. And in your testimony you state that many
have cited deficiencies and weaknesses in PLS (private-label
securities) contracts, governance structures, and collateral as
a leading cause of many billions of dollars of misallocated
losses.
The misallocated losses spurred a crisis of confidence and
the resulting trust gap on the part of the institutional
investors who bore them. So we heard similar concerns at our
hearings last week, right?
Mr. Tozer. Right.
Mr. Royce. My question is a straightforward one here to
you. What reforms could we make to help prepare the trust gap
and reignite the PLS market here?
Mr. Tozer. The key is I think we have to have an active
master servicer, because what has happened is, for example in
the Ginnie Mae world, if an issuer hires a servicer they are on
the hook for the losses. So they are going to keep them honest
to make sure there is no misallocation. If a servicer messes
up, they pay the losses.
The same thing Fannie and Freddie are acting as a master
servicer to make sure the servicers are held accountable, if
the servicers mess up they lose. In the private label
securities it was kind of like trust me. The servicer was the
fox that kind of, guards the hen house.
So the key thing is having a layer of someone there to do
the oversight over the servicers to make sure that if they make
a mistake that causes losses, that those losses are absorbed by
the servicer and not passed on to institutional investors by
making stronger contracts, but also having an organization that
actually has the teeth to enforce those contracts versus
letting the servicers police themselves.
Mr. Royce. Anything else that could reignite the PLS
market?
Mr. Tozer. The PLS market, in general, I think it is always
going to be relatively small, not so much because of the credit
side. I think there is tremendous appetite for credit
investors.
The problem is interest rate investors want the homogeneity
of being able to have a government-backed security that they
could trade. They could trade large amounts in the TBA market.
So I think the concept is--I think the PLS market as far as the
credit side, through the support CRTs (credit risk transfer), I
think it is critical to develop a PLS CRT market because if we
can move to the point where more and more credit transfer is
occurring, especially if we get to the point where we have more
and more issuers that we talked about in the Milken proposal,
we need to have a good working private sector credit transfer
process. And I think that is what we need to make sure we have
in place.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank the Ranking
Member as well. Thank the witnesses for appearing today.
Please permit me to ask a question that was a burning
question some time ago. Was the CRA (Community Reinvestment
Act) a cause of the 2008 downturn? If you believe that it was,
the CRA created the 2008 economic debacle, would you kindly
extend a hand into the air?
Thank you. Now do this for me, and I want you to be as
terse as possible, but this is really important. I need for the
record to reflect just who you are.
So if you would, let us start to my far left and just give
your name and the company that you represent. Would you do so
please, sir, at my far left. Your name and the company you
represent.
Mr. Wallison. My name is Peter Wallison, and I am appearing
for myself. I am an employee, however, of the American
Enterprise Institute.
Mr. Green. Thank you, sir.
Next please?
Dr. Zandi. Yes, I am representing myself, but I am the
Chief Economist of Moody's Analytics a division of the Moody's
Corp. I am on the board of directors of MGIC, one of the
Nation's largest private mortgage insurers and I am also soon
to be the chair of the Board of Reinvestment Fund, which is a
CDFI headquartered in Philadelphia that does affordable
lending.
Mr. Green. Thank you, sir.
Dr. Lea. I am Michael Lea. I am a self-employed consultant
in Sand Diego, California.
Mr. Green. Thank you, sir.
And ma'am?
Ms. McCargo. Allana McCargo, I am representing myself. And
I work for the Urban Institute as the Housing Finance Policy
Center Co-director.
Mr. Green. Thank you.
Sir?
Mr. Tozer. I am Ted Tozer, and I am a Senior Fellow at the
Milken Institute and basically representing myself as my
background, as well as the Milken Institute.
Mr. Green. Thank you. This has been a concern that the
committee has had to address. I just marvel at how we have gone
from the CRA being the genesis of the crisis, and we really did
have that debate in this committee.
I remember Mr. Frank talking to Ranking Member Cleaver and
I about this. And if you recall Mr. Cleaver, we went to the
floor because there was the widespread belief that it was the
CRA that caused the economic downturn. And this is going to be
of benefit to me as I go forward, dear friends. I just want to
cite that it is Tuesday, November 7th, 11:43 a.m.
All of these noted experts, persons who have some degree of
knowledge in this area have indicated to us that it was not the
CRA. Now let us move onto something else before I come back to
CRA.
The jumbos, Mr. Zandi, you wanted to say more about the
jumbos and you didn't get the opportunity to. I would like for
you, if you would, to be as pithy as you can but please speak
on it.
Dr. Zandi. Yes. I think the other point about the jumbo
market is that it is to very high quality borrowers with very
high credit scores, low loan-to-value ratios, low DTIs. So that
isn't the market we are talking about here when we talk about
housing finance reform. So it is a very, very different market.
Mr. Green. And you also mentioned that there is a backstop
for it. While it may not be direct, there is an indirect
backstop. Would you comment on that please?
Dr. Zandi. I would say it is very direct. These are
systemically important financial institutions that dominate
this market and they have a backstop.
And I would also point out in the case of Canada and in
most other countries across the world, the lending is done by
large systemically important institutions and there is no
debate about it. And they have a government backstop. So the
system is backstopped by the government explicitly.
Dr. Lea. But it is not a mortgage-specific backstop. So
banks are diversified and aren't concentrated just in
mortgages. What differs in the U.S. is we do that for mortgage-
specific institutions.
Mr. Green. Thank you. Let us move to one other area
quickly. Is there anyone who believes that there should be
absolutely no government involvement at all? Remove the
government completely, no backstop anywhere involved in this
process at all? If so, will you kindly extend a hand in the
air? I believe there is at least one.
All right sir, I would appreciate your comment. Would you
tell me, Mr. Zandi, why you are of the opinion that there has
to be some backstop, some government backstop?
Dr. Zandi. I think if we want long-term, fixed rate, pre-
payable mortgages to be the mainstay of our system, 30-year
fixed rate, 15-year fixed rate loans, we need a catastrophic
government backstop. It has to be explicit and it has to be
paid for.
The borrowers have to pay for it. And that is a very doable
thing, and we should do it because that is the system that we
believe is the appropriate one and that provides the best
service to the American citizen.
Mr. Green. Thank you very much.
I will put a to be continued, Mr. Chairman, on the CRA.
Chairman Duffy. The gentleman yields back.
The committee is now going to go into a second round of
questions, but we are not going to do 5-minute questions. We
are going to do 2-minute questions.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus, for 2 minutes.
Mr. Rothfus. Thank you, Mr. Chairman. I am just--during
this hearing, really and hearing from all of you and thank you
for being here.
Mr. Zandi, I just want to go back, and then we talked a
little bit about this concept of a catastrophic backstop. Can
we quantify that in any way?
Dr. Zandi. Yes. I think that the system, the entire
financial system is now coalescing around a capital standard
for private capital that takes the first 5 percent of loss.
After that, that would be considered catastrophic, just to put
that in context.
Mr. Rothfus. 5 percent of loss of what? How would that play
out?
Dr. Zandi. Yes, just to give you context. In the Great
Recession financial crisis, the Fannie Mae and Freddie Mac had
total realized losses of not quite 3 percent. And you have to
recognize that prior to the crisis, there was no Q.M. rule.
There was no governor on the kinds of underwriting they were
doing.
Post crisis we now have this governor and so the quality of
the loans that they are able to purchase and to ensure is
measurably higher. So even under the Great Recession scenario
where unemployment would get 10 percent, house prices would
decline to 30 percent.
The stress tests that are being required by all banks and
financial institutions, including the Fannie Mae and Freddie
Mac are being required to engage in, the losses would be
measurablly lower than that, probably if you did the
arithmetic, 1.5 percent to 2 percent.
Mr. Rothfus. Yes, and my--
Dr. Zandi. So 5 percent is a lot of capital.
Mr. Rothfus. I might want to follow up with you on that
question just to again, get in some parameters--
Dr. Zandi. That is it, it is 5 percent. After that it is
catastrophic. That is--
Mr. Rothfus. The question I will follow up with in a
written form is, like, 5 percent of what? That is what I am--
Dr. Zandi. That is the number of loans that default times
the loss would be incurred because of that default. That is the
total loss.
Mr. Rothfus. If I could, real quick, go to Mr. Wallison? In
your testimony you explained how reduced underwriting standards
can actually make housing less affordable. You described our
existing affordable housing policy as leading to, quote,
``higher leverage, a lower home ownership rate and reduced
affordability.'' And I would guess higher home prices, too?
Mr. Wallison. Yes. In fact that is the whole problem, that
the--
Mr. Rothfus. And I guess, Ms. McCargo, can you respond?
What is--because it makes sense to me what Mr. Wallison is
saying, that all these policies have really driven up the cost
of housing which it makes it a--it is an affordability issue,
is it not?
Ms. McCargo. So that we definitely have an affordability
issue, I just cannot find the way to express that I don't think
that issue comes from 30-year fixed rate mortgage or from the--
Mr. Rothfus. I don't think he is saying that.
Ms. McCargo. Yes, or from the government guarantee or the
government's involvement in this process.
Going back to 2008, if you look at the lending that was
going on, which before 2008 leading up to the crisis, and you
look at the people, the private label investors that were in
the market at that time, and you look at the performance on the
loans that were made prior to that period--I would just say
2005, 2006, and 2007--loans made prior to that period where you
had a huge proliferation of risky products that were not 30-
year straight mortgages.
Mr. Rothfus. But weren't Fannie and Freddie securitizing
Alt-As and some prime loans, too?
Ms. McCargo. They were some. They were not all. There was a
huge market called the private label securitization market that
was a big market and had much more share at the time than
Fannie or Freddie and they were holding those loans. And when
2008 happened, those players disappeared--
Mr. Rothfus. But the portfolio--
Ms. McCargo. --From the market.
Mr. Rothfus. But the portfolio of Fannie and Freddie's
paper, significant percentage of Alt-A and sub-prime, no?
Ms. McCargo. There was a percentage of it. And but it was--
Mr. Rothfus. And my time is way over expired.
But Mr. Chairman, thank you. I am going to yield back.
Chairman Duffy. The gentleman yields back. I am going to
change the rules midstream. We are going to do 3 minutes
because you did take 3 minutes.
Chairman Duffy. So the gentleman from Missouri, Mr.
Cleaver, is recognized for 3 minutes.
Mr. Cleaver. Thank you, Ms. McCargo. Again, thank you for
being here. The McKinsey Global Institute put out a study
recently which says that by 2025, we will have about 1.6
billion people globally living in homes that are either unsafe
and decrepit or housing that is unaffordable that would be
available.
Do you have any suggestions on ways in which this committee
and the U.S. Federal Government, can help create the atmosphere
for a larger stock of affordable housing?
Ms. McCargo. Thank you. The affordable housing issues have
exploded since the crisis. We have seen a lower vacancy, less
construction in the affordable space, a lot of constraint on
builders.
A regulator and the cost of construction to build housing
is incredibly high and that makes the building and the ability
to create affordable housing stock very, very difficult.
One of the key things--and I am just going to go back to
the GSEs for a moment--I think that is a good move, is the Duty
to Serve rule that is requiring that the GSEs look at the
preservation of affordable housing as part of how can they have
more of a footprint and an impact on preservation of affordable
housing?
Most affordable housing stock in America is old. And it
needs to be preserved. It needs to be renovated. And there
needs to be investment made there such that folks can afford to
get into those homes, and we can have more stock brought to the
marketplace.
I do believe we have a credit crisis on one side where
people are having trouble getting into housing. Once this
Congress fixes that problem, we then have a serious problem of
there is not going to be enough housing stock available for
people to buy or rent at this point in time given the
direction.
Mr. Cleaver. One of the problems when we are talking about
rehabilitating housing, which I agree with it, we have done
enough demolition, but the cost is going to exceed the value of
the home or the property.
And so, you get criticized by giving a loan on a property
that is not valued at the level of the money that went into it
to rehab it. It is a conundrum that many urban areas are
facing, and if any of you have any ideas on how to solve that
problem, it would be helpful.
Ms. McCargo. Can I--
Mr. Cleaver. Yes?
Ms. McCargo. One more thing on affordability and again, I
will go back to Duty to Serve and the focus that has been put
on manufactured housing, modular housing and different types of
affordable housing stock.
I do think we have the opportunity to think about better
financing structures to support those types of affordable
housing opportunities is something that, again, the GSEs are
looking at and exploring.
And I do think that is another space where in housing
finance reform and what the GSEs are doing in housing policy
there could be help for finding more ways to get at that type
of affordable housing as well.
Mr. Cleaver. Thank you.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes himself for 3 minutes. Mr. Zandi,
you have said several times, I believe, that you believe that
the borrowers should pay for their guarantee. Is that correct?
Dr. Zandi. Correct.
Chairman Duffy. How do you set the guarantee? How do we
know that we are collecting enough money to actually have
enough resources for that guarantee? I think that becomes the
context of the million-dollar question. I don't know, and then
I have to get--
Dr. Zandi. Yes, it is a great question. I don't think there
is a good answer. I would set it high enough that I would feel
very comfortable I am collecting enough money and building that
mortgage. I would set up a mortgage insurance fund, just like a
deposit insurance fund--
Chairman Duffy. Like a contingency fund of some sort?
Dr. Zandi. --And put the money in there and keep building
it, and I wouldn't stop. You can do the arithmetic. Go back to
the multiple guarantor system, and pay a 10-basis point fee.
Chairman Duffy. If we feel like to raid those kind of
funds.
Dr. Zandi. Pardon me?
Chairman Duffy. If we feel like to raid those kinds of
funds.
Dr. Zandi. No, no. You can't raid the DIF (Deposit
Insurance Fund). You can't raid the DIF, so don't raid it--you
can't. Just design it exactly the same way so you can't raid
the MIF (Mortgage Insurance Fund). It is there to backstop that
system if it ever gets in trouble, and just let it build. And
it will, it will build.
If you put a 10-basis point fee on every mortgage that is
insured by the future guarantors that take over for Fannie and
Freddie, that will raise a boatload of money, and we will be
fine. We will be very conservative.
Chairman Duffy. Mr. Wallison, do you agree with that? I
know you have thrown all these policies to the side--
Mr. Wallison. Yes.
Chairman Duffy. --I know, but--
Mr. Wallison. The private system would work anyway, but
just talking about mortgage insurance, the FHFA has required
that all mortgage-backed securities be backed by mortgage
insurance and has required the mortgage insurance industry to
have sufficient tangible assets behind its insurance. So it
would be the private system that would set mortgage insurance
premiums.
The problem with that, of course, and Mr. Zandi didn't
address it, is that very risky mortgages with low down
payments, with low FICO scores, et cetera, are going to be very
expensive under any system where you have a private mortgage
insurance.
Chairman Duffy. And therefore should you have a one-size-
fits-all or do we have to have a guarantee fee that meets the
risk of the mortgage?
Is that your position, Mr. Zandi?
Dr. Zandi. For the catastrophic backstop, no. I wouldn't do
that.
Chairman Duffy. One-size-fits-all?
Dr. Zandi. Yes. And what the other thing I would do,
though, is that I would have a clawback ability so that if you
ever got into the MIF and you blew away the MIF, and I can't
even imagine that scenario, but let us--who could imagine the
Great Recession, then you have the ability to claw that back
with higher fees in the future to future borrowers on that
system.
Chairman Duffy. And I only have 30 seconds left. And Mrs.
McCargo, I want to chat with you later. We have a housing issue
in rural America that is very challenging for us that we aren't
able to get our hands around.
Ms. McCargo. Absolutely.
Chairman Duffy. I am concerned we only focus on urban
America and because rural is sparsely populated we don't get
the same resources and effort. And it is just as devastating
for our communities.
I am sorry that we had a conversation about taxes today,
but we have seen tax policy and housing policy intersect
especially in the conversation of the day.
I would just say this. I think when we use economic warfare
and talking points, but then we accommodate the talking point
with tax policy, all of a sudden we see people get really
squeamish. And we start saying that million-dollar homes are
for poor people or middle-income people, and it is a head-
scratcher for me.
Maybe we are better off not playing that economic warfare
and go what is the best policy? Let us stop bludgeoning each
other, because when you bludgeon each other, you might not get
the best policy. And when you see that policy accommodates
rhetoric, it doesn't end up being the best policy.
With that, my times has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman, for 3 minutes.
Mr. Sherman. Mr. Chairman, I wish not to bludgeon you but
to invite you to southern California for critically important
committee business in January or February.
Chairman Duffy. I have already agreed to come. I am there.
Mr. Sherman. Yes.
Ms. McCargo, you are absolutely right. We need to build
more housing. In my area, the problem may be local government
and land use planning as much as anything else.
We are told that we ought to blame Fannie and Freddie and
the Federal guarantee. I would say that perhaps Fannie and
Freddie are so pernicious that they caused the meltdown in
2008, 2009 in Iceland, Ireland, the United Kingdom and Denmark
and that they have a pernicious effect on home affordability so
great that they have made homes unaffordable in London, Tokyo,
and Vancouver.
So we have meltdowns. Other places have meltdowns. We have
some areas with high home prices that are difficult for people
to afford. So do other places.
What is unique to the United States is that we have the 30-
year fixed rate, pre-payable, non-recourse loan very often with
a 10 percent down payment. And people whose parents can't
afford to help them can still buy a home.
Mr. Zandi, the takeaway for me at this hearing is double-
digit loss of value of homes in my district.
Dr. Zandi. If you give me your address--no, only kidding.
Dr. Zandi. In fact, I will send you, if you are interested,
a worksheet that shows by county the HPI decline I would expect
at--the peak HPI I would expect as a result of the bill.
Mr. Sherman. Yes. I need that.
Dr. Zandi. I will give that to you.
Mr. Sherman. I will look forward to getting that from you
and to sharing it with my colleagues from the variety of
counties in California.
One, we have now, Mr. Tozer, is we have the GSEs. They have
seller servicing guidelines. They both have underwriting
standards.
It is not a race to the bottom in the underwriting
standards. You can't have one guarantor cutting its
underwriting standards to gain marketing share.
One could imagine that if there were a different system,
that there would be a race to the bottom, and then many of the
mortgages wouldn't have title insurance, wouldn't have
insurance to say that it is, indeed, a first priority lien.
What are the ways we can prevent a race to the bottom in
terms of lien quality if we have more than two guarantors or
securitizers?
Mr. Tozer. The key is that you need to make sure that
guarantors transfer the credit risk to a third party because
that way that third party will play policeman to make sure that
you don't get out of control.
I think the best place to start is the private mortgage
insurance companies because they are taking on all the credit
risk now. If you don't put 20 percent down, the PMI companies
take on the credit risk.
So I think credit investors are the good policemen to put a
floor in there because they are on the hook for the losses. And
then as far as when it comes to the issue of mortgage insurance
for it, it gets back to the point again that the guarantors
have to take on the catastrophic credit risk because if the
mortgage insurances aren't there, it affects them.
The government only steps in when the issuer completely
fails, because it is a huge incentive to be viable financially
before the government steps in. This will avoid the race to the
bottom, because the government is not going to bail you out if
you survive financially.
Mr. Sherman. I believe my time has expired.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green, for 3 minutes to talk more about CRA.
Mr. Green. Yes, the CRA, and other things. Let us start
with the other things quickly. Is there anyone who believes
that there won't be a government backstop regardless of the
plan if we find that the economy is about to go under? I don't
believe in government backstops. I would rather not have one.
It is better to plan one than to have to develop one when
you find the economy about to go under, as we had to do after
2008 and 2009. Seems like we ought to look at having an orderly
process as opposed to something that we have to do on the fly.
I remember when the Secretary came in and explained to us
that we were about to have a crisis unlike we have seen in our
lifetimes, a good many of us. I don't want a government
backstop. I just don't know that there is any other choice
because we want our economy to continue.
And we could have refused to bail out the banks as we see
it, but the results would have been catastrophic. If there is
anybody who thinks that it wouldn't have been catastrophic,
raise your hand, please?
You don't think that it would have been catastrophic? I am
going to give you 10 seconds on that, maybe 20. Go ahead.
Mr. Wallison. I am just saying it wouldn't have been
catastrophic. We caused that problem.
Mr. Green. But let us talk about the point where the
problem had to be dealt with. If we had not bailed them out,
what would have happened?
Mr. Wallison. Probably nothing because--
Mr. Green. Probably nothing?
Mr. Wallison. Probably nothing.
Mr. Green. And banks wouldn't lend to each other?
Mr. Wallison. The banks were lending to each. By the time--
Mr. Green. No, no, no, no. By the time of the--when we got
involved, the banks were not lending to each other.
Mr. Wallison. That is not correct.
Mr. Green. It is correct.
Mr. Zandi, would you give your commentary?
Dr. Zandi. Yes, it would have been catastrophic. The system
was shutting down. The commercial paper market wasn't working.
The large non-financial corporates couldn't get funding. We
were on the verge of a complete meltdown.
The loss--remember back, January 2009, we lost over a
million jobs. In my book, that is catastrophic.
And it would have been much, much worse if we had not
stepped in aggressively through the TARP. Yes, no one likes
bailing out big banks or banks in general.
Mr. Green. I am one of those.
Dr. Zandi. We actually had to do it.
Mr. Green. Yes.
Let us go to Mr. Tozer. Sir, would it have been
catastrophic?
Mr. Tozer. Yes, it would have. I was a mortgage banker back
then, and just to put an example, I had mortgage trade on where
I had sold a Ginnie Mae or a Fannie Mae security to Goldman-
Sachs.
And I had bought one from Morgan Stanley, and they wouldn't
even take each other's trades. Normally, I would assign the
trades. They wouldn't let me assign the trades.
Mr. Green. I hate to interrupt you, but I have to say this.
This is the problem that we run into. We run into this problem
of persons who still believe that the CRA caused the crisis,
and that if we had done--you are not one of them, sir.
You are not one of them. But there are those who do believe
this. And this is a part of the problem that we have in
resolving the crisis that will come forward at some point in
the future.
Trying to find a way to get beyond some of these fallacious
arguments that dealt with the crisis that we had to encounter.
Look, thank you, Mr. Chairman. I have gone beyond my time.
Chairman Duffy. The gentleman--
Mr. Green. I will yield to you time to respond.
Chairman Duffy. You have no time left to yield, but I
appreciate that.
Mr. Green. I will yield the time that I don't have to you.
Chairman Duffy. But I thank the gentleman for yielding
back. I want to thank our witnesses for their testimony today.
I would just note that this is, as we can see, a complicated
and involved process. I look forward to, and I think the
committee does, to have more in-depth and longer conversations
with all of you to make sure we get it right.
Thank you for taking the time today and providing your
insight and expertise to the committee.
Hopefully, the panel will respond in a prompt and timely
manner, so you get questions from the committee. With that, and
without objection, our hearing is now adjourned.
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.
[Whereupon, at 12:05 p.m., the subcommittee was adjourned.]
A P P E N D I X
November 7, 2017
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