sorry for the lateness of the start of this hearing we have just had a significant round of votes on the house floor as we begin all hearings in this subcommittee i feel it is appropriate to read the oversight and government reform's mission statement we exist to secure two fundamental principles first americans have a right to know that the money washington takes from them is well spent and second americans deserve an efficient effective government that works for them our duty on the oversight and government reform committee is to protect these rights our solemn responsibility is to hold government accountable to taxpayers because taxpayers have a right to know what they get from their government we will work tirelessly in partnership with citizen watchdogs to we examine the rule writing of section nine hundred and forty one of the dodd frank act which mandates federal regulators promulgate rules requiring entities to retain a certain amount of risk on securitized assets we will compare the rules of risk retention and its special exemptions to policies and rules that would ensure adequate transparency and standardization under section nine hundred and forty two of the dodd frank act which requires the sec to modify regulation include loan level disclosure the focus of this comparison is to examine the effect that transparency and risk retention have on the market most importantly how does each influence the availability and cost dodd frank does not impose restrictions on fha's underwriting standards moving the agency into a position of accepting lower qualified mortgages more or less appearing to defeat the stated intention that this administration has said  reduce taxpayer exposure to the housing market in addition to exempting fha the qrm rulemaking does not permit private mortgage insurance to compensate for lower down payments i have concerns about this this raises a concern that we are driving out prudently underwritten low down payment option mortgages particularly for first time home buyers which i think further exacerbates the imbalance between the private market  fha lending secondly fannie mae and freddie mac are exempted under the proposed risk retention rule which runs contrary to the language laid out in the dodd frank act and before anyone forget freddie this exemption appears to go against the administration's proposal the broad proposal that they have to reform fannie and freddie and wind down the gses third there is no secret  for extended periods the five percent of all securitization they can plead this leads one to ask the question how will risk retention rules affect the operations and competitiveness of our community and small banks and small businesses that access their loans through those institutions in addition today's hearing gives us an opportunity to gage the value of risk retention in loan level disclosures and how government can push forward policies to open up our capital markets without opening the flood gates of unintended consequences one thing is for certain our families and businesses cannot afford overreaching government policies that increase the cost of credit and stifle economic growth it is an imperative that our rules and regulations enable the market to appropriately price the cost of capital to our families and small businesses while recognizing the importance of private capital in the housing sector i look forward to our panel's testimony with that i recognize mister quigley for four chairman our priority in the final analysis must be to ensure that the reforms are implemented that would prevent a repeat of the two thousand and eight financial crisis that crisis sparked the worst economic downturn since the great depression there can be no financial crisis amnesia when it comes to implementing dodd frank one of the chief causes of the meltdown was the originate to distribute model of mortgage lending through this model secur on was used as a means for financial institutions to escape all of the risk associated with the mortgage loans they underwrote on october rd two thousand and eight former federal reserve chairman alan greenspan explain testimony before this committee too many securitizers and lenders believed they were able to create and sell mortgage backed securities so quickly that they never put their shareholders capital at risk and hence did not have the incentive to evaluate the credit quality of what they were selling these practices led to riskier loans and misaligned incentives between lenders securitizers and investors in mortgage backed securities this originate to distribute model has ultimately been cited as a key driver of the current foreclosure epidemic that is why a vital piece of dodd frank wall street reform and consumer protection act is its provision on risk retention section nine  by requiring securitizers to have skin in the game we make lenders and investment banks more accountable for the loans they have made and facilitated the title of this hearing suggests that we should view transparency as an alternative to risk retention i think there is a likely wide consensus on both sides of the aisle that increased transparency is a laudable goal however i would emphasize that increased transparency must not come at the expense of accountability the proposed risk retention rule  professor of finance in the school of management at george mason university we have mister joshua rosner a partner at graham fisher and company and we have  h that it is standard procedure of this committee to swear in all the witnesses so if you would please stand and raise your right hand familiar we have this lighting system here in congress green red and yellow look we are members of congress we need very basic things so i will recognize you for five minutes and with thirty seconds ranking member quigley members of the subcommittee thank you for this opportunity to testify the federal housing finance agency believes that enhancing the quality and quantity of data available to investors in mortgage backed securities is an important step to encourage the return of private capital to the mortgage market to do so we need to ensure that those owners with capital have the data needed to estimate and price mortgage credit and prepayment risk such transparency is a critical component of a healthy and efficient secondary mortgage market whether or not issuers retain financial liability for some portion of the credit risk of the assets they securitize risk retention meanwhile is a complementary measure designed to give securitizers an economic stake in the credit performance of the loans just like investors risk retention seeks to protect investors and reduce information asymmetries by requiring that issuers of asset backed securities have a financial stake in the performance of loans underlyin security or as it has been said skin in the game through risk retention securitizers will have a disincentive to acquire poor quality loans for securitization because they will be required to actually hold a portion of the credit risk rather than passing it all on to investors this exposure to credit risk should in turn make securitizers more careful with the quality of loan originations as a result of these improved incentive alignments investors are expected to be more willing to provide capital for residential mortgages and other types of loans this may be an important step in facilitating the return of private capital to the residential housing market and other lending markets that benefit from securitization regulators published the proposed rule to implement the risk retention requirements of the dodd frank act in march in developing that proposal the agencies sought to implement the provision as legislated allowing for a range of securitization structures the public comment period on the rule extends until june th and the agencies invited comments on more than one hundred different questions expanded over the years to offer more detailed information to investors both enterprises provide aggregate pool level information that in many respects aligns with the securities and exchange commission's regulation ab requirements in addition freddie mac provides some amount of loan level information and both enterprises in the past year have enhanced their disclosures on mortgage delinquencies enhancing loan level disclosures on enterprise mbs both at the time of origination and throughout a security's life is on our agenda i believe that improving enterprise mbs disclosures over time will help establish consistency and quality of such data moreover it will contribute to an environment in which private capital has the information needed to efficiently measure and price mortgage credit risk thereby facilitating the shifting of this risk away from the government and back into the private sector this will take time accomplish but this is the direction in which we at fhfa are heading in sum fhfa views risk retention and enhancing disclosure of the mortgages backing mbs as complementary reforms we also see value in moving the enterprise over time toward the loan level disclosures that the amendments to regulation ab proposed by the sec would require enhancements of enterprise mbs disclosures have continued to occur since they were placed in conservatorship in two thousand and eight fhfa will continue down that path we will also work closely with the other agencies to review the public comments on the interagency risk retention rulemaking before releasing a final rule that is consistent with the statutory framework i believe that we are making progress on many fronts as congress is beginning to take up housing finance reform thank you for this opportunity and i would be pleased to answer questions  ranking member quigley and distinguished members of the subcommittee thank you for inviting me to testify today dodd frank requires that securitizers retain at least five percent of the risk in all loans that do not qualify as a qualified residential mortgage and are sold in the secur market in theory five percent risk retention would lead securitizers to be more careful in the loan origination underwriting process to be sure five percent retention would be the simplest approach to implement to encourage approved loan origination underwriting but unfortunately risk retention appears to be the least useful approach there are four points that i would like to make first the house price collapse that resulted in house price declines that far exceed five percent for example las vegas fell fifty six percent f five percent would have been blown through very quickly second risk retention does not directly address origination risk representations and warrants that are found in mortgage loan purchase agreements and related documents directly address origination risk market defeats the spirit of the risk retention since the loan originator would be tempted to sell or be insured by fannie freddie and the fha rather than keep the retained risk fourth given reg ab dodd frank nine hundred and forty two and the anticipated transparency of  require additional security of five percent risk retention since they perform substantial due diligence and analysis before purchasing securities and also securitizers can hedge the risks of risk retention and typically in industry origination risk there are more effective alternatives to risk retention transparency and improved representations and warranties one solution to origination risk is to provide greater transparency to investors transparency would permit more accurate pricing greater underlying loans in terms of critical risk measures such as loan to value ratio loan type and credit score freddie mac has taken loan transparency to a new level in two thousand and six by providing a file of loan level information the non agency market as well as the fha could provide similar loan level disclosure i would prefer that securitizers provide transparency themselves rather than be forced through regulation however some investors may prefer having less information disclosed which would result in higher expected  fully disclosed loan information investors should retain the right to choose how much information and what they want disclosed by securitizers but additional loan disclosures is one prong of the approach to improving  even though securitizers could release great loan level information the market would still be concerned that the information is inaccurate there should be mechanisms to ensure that the disclosed information is actually correct the s certificate approach has the potential to be effective because it directly addresses origination risk and contains a fraud penalty the certificate would travel with the loan and would verify that the loan was originated in accordance with the law and that the underwriting data was accurate and that the loan met all the required underwriting requirements the certificate would be backed by a guaranty from the originating firm and demonstrate that they had financial viability the seller must provide means of demonstrating financial responsibility either capital or insurance for the loans to be put in a securitization there should be a penalty for violations of reps and warranties beyond repurchase obligations and tracking of violations of representations and me to testify on this important issue current problems in the economy stemming from opacity and information asymmetry of the asset backed market are not addressed by the dodd frank risk retention rule while the rule is well intentioned it is also misguided dodd frank reasons that if lenders and issuers retain some financial liability for the underlying loans they sell they will have a greater incentive to make better loans and securities on the surface this appears to make sense if a lender or securitizer knows he will have to drink some of the poison he offers to others then he would think twice about creating the potion but as we saw in the past crisis the banks in direst need for direct government support found themselves in that predicament precisely because they had swallowed large portions of the poison the others bear stearns and merrill lynch didn't even have operational controls available information or an ability to fully model their exposures as we have seen even with a five percent risk retention of each structure different structures of similar underlying collateral remain highly correlated thus if securitization returns and grows risk retention will create a future systemic risk of already too big to fail firms transferring those risks to the taxpayer a better solution is to create industry standards of useful and timely disclosures of loan level collateral information so parties to securitization could analyze the assets underlying pools even after the disaster information asymmetry between buyer and seller remains the standard i advocate reconsideration of the risk retention rule but doing so without first addressing the dangerous opacity that remain in the market would only increase risks this is especially so given that legislators have already reduced information available to investors markets deals usually came to market before a collateral pool was even complete forcing investors to rely on rating agencies pre issuance circulars these tools have proven laughably inadequate instead data on specific underlying collateral in each pool should be made available for a reasonable period before a deal is sold and brought to market such a requirement would enhance investor due diligence foster the development of independent analytical data providers and reduce reliance on rating agencies capital and markets would be less volatile if investors could fully model the expected performance of underlying loan level collateral and regularly  uniformity in contract is also required psas and reps and warrants define features like rights to put back loans with underwriting flaws responsibility of servicers and trustees and the relationship between different tranches they can be several hundred pages long key terms defining contractual obligations can differ significantly and they are not standardized across the industry across securities with the same type of collateral or even by issuer it was not until the crisis that investors considered this lack of standardization thus when panic set in and investors began to question the value of their securities they knew that they didn't have time to read all the different seven hundred page deal agreements reinforcing the run on the market which caused securit values to fall further than fundamentals justified legislation should create both servicing standards and a single standardized psa governing each collateral asset class with investor and public interest at core standards must also focus on addressing a lack of clear definitions in securitization markets without a common language the value of data is diminished conversely if everyone is using the same common language then it becomes very hard to game the system amazingly three years after the crisis there is still no single standard accounting or legal definition of either delinquency or default currently delinquency can be determined either on a contractual or recency of payment basis even among firms that would define it identically each servicing agreement can have different interpretations of delinquency reporting some may report advances that a servicer makes to a pool which could be applied to reduced stated delinquencies other afternoon chairman mchenry ranking member quigley and members of the subcommittee as mentioned i am with the un center for community capital i also serve on the mortgage finance working group convened by the center for american progress to offer a plan for responsible housing market reform please note that views expressed are my own and that focus on the mortgage market aspects of the questions raised today i am honored to be asked to discuss how transparency and accountability can help restore confidence in the once robust u s mortgage system confidence in that system was shattered among investors borrowers at both ends of the system and the taxpayers who find themselves propping it up only the full faith and credit of the government has kept the market open and ultimately private capital must bear a greater share of the load the crisis was a result of abuses that in a regulatory vacuum and a climate of inadequate transparency lack of accountability and misaligned interests the dodd frank act identifies key steps toward a market that is safer for investors taxpayers and for borrowers one of these is transparency lack of transparency in the private label market enabled adverse selection and underpricing of risk because issuers knew more than investors certainly better loan level information and product standardization will help usher back in the private market but even with good loan level data private market investors will face potential principal agent problems and conflicts of interest nor will this help borrowers many of whom took on loans when the true costs and consequences were masked by complexity the system cannot function well unless borrowers interests in repaying their loans and investors interests in being repaid are served by the agents in between them so risk retention can help address these principal agent problems by aligning incentives and holding issuers more accountable as dodd frank intends while the regulatory proposal largely mirrors this intent we are concerned that a too narrow qrm box may discourage private capital participation and possibly disrupt the fragile market for example the down payment criteria may put a pro cyclical damper on the fragile housing recovery particularly if mortgage insurance is not taken into account that would be a pity as we have ample experience about the right way to finance lower down payment mortgages at unc we study a large pool of mortgages made in the decade preceding the crisis under affordable housing and cra programs the borrowers had access to prime fixed rate long term amortizing mortgages that they could afford to repay these households have experienced low default rates and on average meaningful equity buildup we found that non prime loans made to similar borrowers were several times more likely to have defaulted than those in our study key factors associated with these higher defaults were adjustable rate broker channel and prepayment penalty these findings underscore that risk retention should apply to product and process factors that increase risk not to characteristics of borrowers that said overall the risk retention provisions will certainly improve accountability and with greater transparency should put more natural market imposed limits on the total amount of risk taken on by the system but even transparency standardization and risk retention are not in and of themselves enough to return the market to long term vibrancy and resilience and attract the amount of private capital needed these are just two of the tools needed to rebuild the market the system must also provide for broad and constant liquidity for a nearly eleven dollars trillion market mechanisms that limit volatility access to affordable and sustainable financing for home ownership and rental housing including for underserved segments and preservation of the long term fixed rate mortgage which provides economic stability at the household and macroeconomic levels all this can be achieved with private capital serving the lion's share with the provision of a limited federal backstop that is highly protected by adequate private capital in the first loss position and that is explicit and that is paid for such a mechanism will provide investors the confidence to deliver a reliable supply of capital for both rental and home ownership options every day and in every community over economic cycles through large and small lenders alike in summary restoring confidence in the mortgage market will require greater transparency and greater accountability though we recommend a broader qrm definition than  regulators have proposed however the ultimate impact of these measures is highly dependent on the form that the mortgage secondary market takes as you move forward in this complex process it is important to bring private capital back it is important to protect the taxpayers but it is also important to restore the financial system so that it works better for the american households who rely on it for economic security transparency and confidence throughout the system depends on having informed borrowers who have access to sound well underwritten l my question is simply this who is purchasing these mortgage backed securities and what level of sophistication do these buyers have then secondly are these the types of buyers that need a rosner the buyers are qualified institutional buyers they are sophisticated investors the very nature of the structure of selling mbs is that you have to sell the equity rmbs tranch before you can sell the investment grade rated tranches so typically the buyer who is the key buyer is the one who is going to do the most due diligence if the information is available given the ability to look at loan level data before a deal comes to market they will therefore be the determinant of price by determining what they perceive as value i don't think they need assurances as much as they need clarity of contract and as much as they need the loan level data probably in preformatted industry standardized  qibs are extremely sophisticated investors they do their homework due diligence i agree with josh that it would be nice if they could get information on loan level details ahead of time in fact i am surprised they haven't been requesting that over time but if you look at it again as i said pro supps and prospective supplements issued by various they do go into fairly detailed loan level analysis but it is not as much as like freddie gave out on their loan levels which is what i would like to see going forward ratcliffe would you agree that they need clarity of contract rather than the assurances ms ratcliffe i think that they are both important there was not as much loan level data information and clearly having that available to the investors should help their ability to assess the risk there is no question of that i still think that doesn't take care of all the principal agent problems that might arise there could still of course be misrepresentation there could still be adverse selection and even with full data a lot of the complicated to these things to distinguish between those that are investing in private label mortgage backed securities for which the credit risk is managed through the securitization structure and each of the investors no matter where they are in that structure understand they are undertaking credit risk and those that are investing in ginnie mae mortgage backed securities or now with fannie and freddie in conservatorship and operating with the backstop of the treasury department the sense of government support the credit analysis and the credit review of the investors and also what they are looking for in security is clearly going to be different for some of those investors relative to investors in private label mortgage backed securities mister guinta ms ratcliffe i want to go back to something that you mentioned  you said that that only really essentially solves part of the problem relative to misrepresentations don't we have other laws though on the books now that are sufficient relative to misrepresentation ratcliffe i think it is a matter of the processes and tools that are available the remedies that are available to the investors i think we had some proposals made here that would again address some of those a little better i think i guess while i have the mic i might also add that  the investors who are making these investments today in the private market not in the fannie freddie securities they are a very small universe of investors right now who are undertaking actually extensive and rosner can you just talk very quickly about the unintended consequences that you see in risk retention mister rosner well again the assumption in the risk retention rule is that the banks acted the issuers acted maliciously in all circumstances and that forcing them to retain risk would solve for that quite often what we have found is that they made assumptions based on models which proved to be deeply flawed and historic assumptions that proved to be inaccurate and retained risks themselves forcing them to retain risks and creating a system where everyone is mismodeling the same problem the same collateral at the same time will risk creating a situation where the correlation ends up demonstrating again to cause a systemic crisis as it did and that would be better to have those risks dispersed in the hands of investors rather than concentrated back in our depository institutions or investment banks  and it is very unfortunate how short our memories can sometimes be it appears that some members of the committee do not recall that one of the frequently cited statements articulating the causes of the financial crisis was made in this very hearing room at the very table that you all are sitting on october rd two thousand and eight at the height of the financial crisis the full committee on oversight and government reform held a hearing entitled the financial crisis and the role of federal regulators at which former federal reserve chairman doctor alan greenspan testified what went wrong with global economic policies that had worked so effectively for nearly four decades too many securitizers and lenders believed they were able to create and sell mortgage backed securities so quickly that they never put their shareholders capital at risk and hence did not have the incentive avoid all risk and in essence all accountability i think that that is certainly a concern here mister cummings the only thing i would moderate in that is that actually whether we did not have the form of risk retention that dodd frank has yet these virtually all of these an important part of a better operating system going forward but i think the other things that are being raised at this hearing including improved transparency and disclosure to investors is also absolutely critical to avoiding the kinds of problems we cummings in other words ms ratcliffe there is nothing wrong with having both is that right having the transparency and the risk retention because when i think about what our country has gone through almost brought to our knees based upon what has happened here it seems like we would err on the side of protection and being very careful as opposed to just having one  for investors is not the same thing as transparency for borrowers which also needs to be seen to risk retention is part of the solution standardization fits within that as well because if you have well understood product parameters a ratcliffe the wall street journal commissioned a study which found that sixty one percent of subprime loans originated in two thousand and six went to people with scores high enough to qualify for a prime loan with far better terms isn't it true that the originate to distribute model ended up pushing countless consumers into more expensive and thus riskier mortgages than the consumers were eligible for based on their credit scores and other characteristics  appear so and i would add that in my comments i mentioned the thirty year fixed rate mortgage which is a good example of transparency and standardization this is a product which in and of itself makes for a safer loan over time the  to income improves as the loan pays down the borrower's loan to value improves so it inherently enables greater number of households to sustain home ownership safely it also enables a potential homeowner or potential mortgag to be able to compare one loan to another in the sunday paper or online very easily because there is really only one factor so it is much easier to know if you are getting a good deal or not once borrowers were led into a marketplace that had much more complex products and features and options to consider like the starter rate and the teaser rate and the maximum lifetime payment and so on and so forth it made it much more difficult for them to make good product selections and that introduced a level of systemic  do you foresee that playing out mister rosner at a time where we hear treasury and the administration talk about reducing the role of fha fannie and freddie and trying to revive private markets to exempt enhanced or a necessary situation where they end up having to sell to the enterprises mister mchenry why mister rosner because the enterprises actually are considered already to fully retain the risk therefore they don't have to play in the risk retention  exempt from risk retention the proposed rule stipulates that because fannie mae and freddie mac actually retain one hundred percent of the credit risk in the mortgages mister mchenry actually to correct you there the american taxpayer has one hundred percent of the credit  to the extent that one wants to see their portfolio begin to shrink and reduce their footprint forcing them to buy back or hold five percent of the securities that they issue is actually going to inflate their balance sheet and while i am very supportive of the notion that we need to move the u s mortgage market away from one that is so much reliant upon government related entities i am not sure risk retention is the most effective or practical means for starting to move the government out and restore private sector demarco i think that having the congress of the united states take up a comprehensive housing finance reform where we can figure out what the ultimate resolution of fannie mae and freddie mac are going to be as part of it but the other thing to really get private capital to come back into the u s mortgage market and be willing to evaluate price and undertake mortgage credit risk those investors that private capital is going to want to know what are the rules of the road and what is the long term role of the u s government in the housing market and those investors are going to want clarity about where the government is limiting its involvement and just what is being really  on the enterprises in the private market they haven't really been used they have been not demonstrated to have been effective in underwriting their rescission rates on claims have been extraordinarily high and most of them are operating under waivers with their state insurance regulators so the notion that private mortgage insurance has really helped the situation in any way i think is fallacious and i don't think there is any evidence of that as witnessed by the economic thousand and ten paid twenty two dollars billion in claims to the gses which is fourteen percent of the taxpayer payments up to that point in time so there is some economic benefit in that capital source mark rosner that was with a rescission rate that was across the industry north of twenty percent at this point it seems and you are forgetting that they collected premiums so really it was a return of not a return on that insur thank you mister chairman director demarco less than a month ago the financial services committee held a subcommittee hearing entitled understanding the implications and consequences of the proposed rule on risk retention at which your agency's chief economist patrick lawler testified one of the widely recognized causes of the financial crisis of two thousand and eight was the poor quality of loans collateral many asset backed securities with subprime loan mortgages being the most flagrant culprits too often lenders made loans they would not have been willing to hold themselves only because they knew they could sell them to securitizers at an reliance upon the notion that house prices were going up rather than really doing due diligence and good credit review of the loans to ensure that the borrowers had the capacity to repay and had a credit history to suggest that they would that strike you back to the question you were answering earlier that transparency is an important asset in all of this but it is not mutually exclusive with proper securit so that mortgage credit risk is backed by private capital not by the government for that to succeed one of the necessary steps is for those investors to have access to a much more robust set of data both at the time of origination of the security and throughout the life of the security so that those investors can properly evaluate and price the mortgage credit risk and prepayment risk of those mortgages so we clearly have a lot of work to do to enhance the  disclosure regime the transparency for private label mortgage backed securities to really be able to function in a robust way in this market the risk retention that has been proposed and was implemented in dodd frank regulators are in the midst of trying to implement now what that is designed to do in some ways it is to say look part of this problem that we had is really bad underwriting we have been doing bad loans and we want to get more retention requirement that puts that onus principally on the securitizer and what dodd frank says is the risk retention should be that the securitizer retains a portion of the credit risk because they are in the best position to be able to oversee and have some greater transparency is a great thing and it will help drive better pricing and i agree with mister demarco it will attract better capital my concern at the beginning was that i am concerned that risk retention sounds great but it sends a false comforting signal to the market because as i said housing prices if they fall again is going to wipe out risk retention in the snap of a finger secondly the other issue is that the securit our vantage point it made it neutral but the point i want to make is i don't like the false signal that everyone suddenly thinks because we have risk retention the days of bad underwriting and we don't need transparency i am just worried about that being the retention is basically having skin in the game is that correct wouldn't you say they are holding on to a piece of it that is the way loans used to be made in banks and we didn't have a problem when that was done so i really don't understand  quoting the first part of the quote if you continue on what it says is the lender would have a on the surface increased interest in making sure the loan was appropriate but as we saw in the case of  merrill lynch they died because of risk retention and they didn't offload the risk which would have been sensible if they really understood that they were creating poison instead they retained it so in a world where people are mismodeling or misconsidering or underconsidering or don't even have the information to understand what risks they retain as stan o'neal highlighted in his testimony to the fcic he didn't even realize that his firm retained the risk that it did are causing these firms to concentrating risk and several firms therefore to have highly correlated risks to each other when if you had lenders having the loans they made scrutinized by investors the investors would price those risks at such a level where the likelihood is that loan would not be made in the future because it would not be purchased at a rate that could allow the borrower to afford and some of the loans some of the financial products are so complicated that people don't understand them i even had before us in one hearing we had the head of freddie mac say that he read his credit card disclosure statement the fine print for hours with his wife over dinner and they couldn't figure out what it meant so one way to make sure that the lender is a little more careful is if he has a little bit  appears to me you would be more careful if you had risk retention which has been the traditional way of banking that is the old way of going to your community bank and getting a loan bankers were very careful in what they did  rosner first of all in the summer of two thousand and one i wrote a lengthy paper called a home without equity is just a rental with debt warning that with the changes that we had seen structurally which were being unrecognized we would end up in on the credit crisis that was about to happen in the cdo mbs market and how it would impact the real economy if you are asking me to defend the fed's understanding of what was about to happen or their look now at what happened  won't do so i will continue to say that if investors had the ability to properly price loans the loans would be prohibitively expensive where the risks are too high for borrowers to take them and that is a concentrations of held securities will only increase their risks that appears to be exactly the point it will increase their risks their incentive to focus on better underwriting better quality of securities and better outcome in the market so if you increase their risk wouldn't they be more careful mister rosner only if they are capable of assessing the risk as we demonstrated in this crisis most of them had neither the operational nor modeling prowess to properly assess risk mrs maloney you mean investment bankers could not assess the risk mister rosner that is exactly right mrs maloney that i find hard to believe i mean i think they understand risk more than most people mister rosner well most of them aren't in business today because they didn't skin in the game out of the house in the few months prior to the full unfolding of the crisis didn't have skin in the game but they too prior to that did have skin in the game many of them and would have met the same fate as those that are no longer with us mrs maloney so you say the answer is more transparency mister rosner i say the answer is allow investors to risk price because again the investors interests are actually aligned with the borrowers interest even now as we are in crisis the investor understands that a twenty percent principal write down in many case many well make a lot more sense than a seventy percent loss given default and it is oftentimes the investment bank or the servicer affiliated that doesn't want that to happen so the borrower and the investors interests are tied their interests are tied together because one has an i appreciate the concept of somebody retaining skin in the game but let me just ask a rhetorical question for a moment hopefully it won't take the chairman's time your certified public accountants don't retain skin in the game even though they do an audit they get paid they provide a service in a sense although we understand some of the things that went wrong in some cases where people were packaging up and selling products aren't there times in which what you really need is full disclosure but ultimately when you buy a car the car dealer doesn't necessarily keep any skin in the game but if he sells you a bad car you go back to him so as much as i  appreciate the nature of the rule don't we also have to have out clauses if certain other things are met mister rosner mister rosner yes that is why in my testimony i feel very strongly that before a deal comes to market investors should have a right to inspect the lo level data and there needs to be standardized pooling and servicing agreements there need to be standardized representation and warranty agreements that really do define on a collateral standardized basis what the rights and obligations of various parties are this is one of the things that fannie and freddie did do well now yes they retained the risk nonetheless investors in their instruments fully understood that deal to deal they were actually contractually identical we have a situation where you had as many as three hundred different pooling and servicing agreements each with different rep and warrants attached to it leading to the crisis and when people started seeing early payment defaults rise and jitteriness in the markets people said you know what i am going to get rid of these positions because i don't have time to read three hundred page documents and i will come sift through the rubble on the other side and demarco in terms of some of the steps you have taken in fhfa in terms of disclosures there is a uniform mortgage data program there have been some significant delays with that but i  continuing to push ahead and in fact there are some positive steps and results that have arisen from this but it does take time sir and we are continuing to do it and i do think it is an ingredient to the sort of things that you and the panelists have been talking about to have enhanced disclosure that assumes some things about the data that are being disclosed are the data consistently defined are they being reported in a consistent manner regardless of who the loan originat is so what this uniform data program is it is actually sort of the foundation for this transparency we are trying to get within the marketplace a uniform set of definitions and means of reporting data so that regardless of who  securitizer is there is that kind of standardization in the market which should be able to make the transparency that we are all advocating actually work mister mchenry thank you mister rosner so in terms of transparency what are the unintended consequences of is a thinner economic opportunity or a thinner margin for the issuers and so they will have less of an arbitrage it will negatively impact to some degree their income but the benefits will be passed on both to borrower and investor by the narrowing of that spread mister mchenry as opposed to a five percent risk retention which raises the cost of credit for consumers thereby if credit costs more those that are extending it make more right mister rosner and i think to doctor sanders point the other risk of risk retention besides the correlation in the increased is that it may lead to an increased false sense of comfort that the work was done again by the issuer and therefore the investor doesn't have to focus on it as much so rather than fixing this systemic risk problem doctor sanders in your testimony you say it actually creates more systemic risk mister sanders that is correct badly and then they get caught stuck with the risk but it can increase the systemic risk of the institutions themselves can i add one more thing if we are talking about trying to get loans to lower income households and more credit impaired households i view risk retention and the qrms as actually cutting people out of the market that want to get back in with somewhat impaired credit et cetera i don't think this is very good for consumers that have gotten i think forty percent have had serious credit score degradation this isn't going to help this is going to make it worse with full disclosure of information and no risk retention then we are aware exactly what the subprime loans are then i think the private sector can move forward with that and housing was something completely different because the automobile industry didn't have all price of cars fall sixty percent at once together not in all areas but no housing was unusual because it fell off a cliff and that is why risk retention wouldn't non captive lenders really did learn their lesson in the late s they went through a crisis very similar obviously it had less broad economic impact to what the mortgage originators did recently both actually blew up the original subpri mortgage industry and subprime auto finance industry both blew up in the late s and the auto industry ended up sort of reconsolidated mostly by the captives so there was much more by way of control but again the duration i think is the biggest just missed out in the last three or four years altogether i spent three years on the financial services committee thousands of hours literally hearing testimony over and over and over that if there is full disclosure you really don't need risk retention full disclosure to whom mister sanders not quite i am saying you need full disclosure plus you need to tighten up the representations and warranties to protect the underwriting right do you think that the investors that invested in goldman sachs in their abacus deal i think it was abacus in which they were for another client shorting the same product that they were promoting in the market do you think that was full disclosure mister sanders no i don't think it was full disclosure but then again it comes back to what investors would invest in abacus when they couldn't see what was inside of it that has always puzzled  now full disclosure oftentimes to the public and certainly to government is full disclosure to the regulators so they can in fact oversee what is going on and i am reminded  aig was profiting handsomely from cdos through their financial products division in london and had stretched themselves to  measurable places i asked the question did the office of thrift supervision know what a cdo was and they answered no so i think that it is very simplistic frankly to suggest that somehow full disclosure is the panacea the american people aren't stupid and the american people get it if you don't have skin in the game if the banks don't have to retain some form of risk then why wouldn't you sell garbage over and over and over again because you have no skin in the game you have nothing to lose if you and i were to flip a coin and it was tails you win and heads i lose why would i play with you but that is what you are somewhat suggesting i apologize for not really asking a question but let me just respond to and ask your comments the financial crisis inquiry commission many hearings reviewed many documents and in part of their report they said on wall street where many of these loans were packaged into securities and sold to investors around the globe a new term was coined ibgybg i'll be gone you'll be gone it referred to deals that brought in big fees up front while risking deal and that actually the transparency the collateral would have actually been helpful and transparency to the other side investor seems to be a different issue and that may be a securities issue it seems that the sec felt it was potentially and it as such but even there i would point out that we get back to the same issue which is if investors had the information available to them to do the full analysis they would have and might not have participated in that deal we are talking about qualified institutional buyers these are sophisticated investors and i will add one last piece which is regarding whether the regulator did know what was going on with aig i would point out  deal data because none of them were qualified institutional buyers the first was the fcic and that didn't happen until two thousand and seven that is a problem with transparency  question it is one of the things that as a financial service industry analyst bothers me the most i would have loved to have seen dodd frank include a simple paragraph that said any institution that requires extraordinary government asset purchase debt guarantees or more than sixty days at the fed window would be operating under immediate supervisory action and their executives and board would be prohibited from employment in the financial service industry for a period of five years in any capacity i think that would have forced them to decide either to shrink themselves to a point where they were manageable or increase their expenditures on risk management to make sure that they dealt with their risks but have chosen to pretend that they are not to keep them afloat and in fact to codify their too big to fail advantages in many parts of dodd frank well yes of course there are too big to fail firms but one thing i want to point out is that the chairman of the federal reserve chairman bernanke and the federal reserve system already had the regulations in place to prevent too big to fail and they just recognize those and proceed accordingly rather than pretending that there isn't a situation where government is going to have to step in to keep systems afloat mister mchenry mister demarco i don't know if you want to jump into that one not that you have enough balls in the demarco i don't believe any firm should be considered too big to fail and i believe that under dodd frank the regulators have been given tremendous challenge and set of responsibilit ensure that we operate the oversight of a financial system in the future so that institutions are not too big to fail and it will remain to be seen what we are doing now to implement our dodd frank  and asked over one hundred and seventy questions so the regulators are looking for a lot of input from the marketplace from the whole array of stakeholders in this and people that have a view panelists here have expressed views i expect we will be getting comments like that comments coming from different angles and i believe that the group of regulators charged with implementing this fully intend we are expecting a considerable volume of comments and we intend to take a very careful review of that it is not that common to ask one hundred and seventy some questions in a proposed rulemaking the regulatory community is looking for input so that that can better inform what we do in terms of the final rule mister mchenry so how does this risk retention rule add value so many firms would retain that in order for them to sell off basically that first loss position they retain mister sanders yes it has been industry practice in any deal i have ever seen they usually retained at least five percent and are holding more capital on the books so you raise the regulatory amount that they have to hold on their books and what do banks do they then raise the amount of capital they hold beyond that because they don't want to purchase that regulatory  going through and stating a five percent regulatory is that we will see suddenly everyone maybe even shrink from twenty percent risk retention and go down to five percent so this could actually make institutions more well it can come from a number of sources but it has to be out there and it has to be a level playing field and for nobody to take any risk on the loans is not going to help us i think we did see a lot of people try to hedge their risk and think they laid it off on somebody else who thought they knew what they were doing and they basis points over treasury rates that if we want to attract capital back we actually have to kind of have more private sector participation without the guaranty that will boost yields and attract investors back so i really want to go with what the administration capitol hill which is mortgage rates have to rise and no one in washington wants to accept that as the necessity or as the reality required for private capital to come back that is what is going to have to happen one way or answer and would also remind you that a lot of the problems that we saw sort of secondary and side effect problems that we saw were arbitrages on the difference between regulatory capital requirements of various parties if you remember the insurance regulators had much lower capital level requirements than the federal regulators and that became an opportunity to arbitrage or other thing that together that they can help do is just reduce the overall amount of risk that the system takes on these are really the natural market mechanisms that ought to dampen the willingness of all parties along the spectrum to take on risks so they wouldn't necessarily take on the same magnitude of risks they took on back in two thousand and four to two thousand and six so in that case i would argue strongly that the net effect of both of those would be overall reduction in  okay obviously there is some disagreement on that from the panel but my final question and we will start with you ms ratcliffe and go right down the line final question i promise do you think that the most powerful tool yes transparency in a standardized manageable format with corresponding standardization of contract and representation and warranties i think are the best solution  be done in the private sector mister rosner it absolutely can be unfortunately i think that that task has been led not with investors interests at core but with issuers interests at core so i think that we need to see most important one and again i am just going to say one last time i think for those households that have credit impairment after the housing bubble crash i think risk retention rules are going to work in the exact opposite direction it will cut off credit to households that really want it and that really scares me mister mchenry mister demarco mister demarco to have private at risk capital invested in asset based security undertaking that credit risk having transparency is essential but if i may go further it is essential that there be full and appropriate and high quality data there to some of mister rosner's points there does need to be attention to standardization to terms of contracts there may be a role government in doing that because the government can take a look at all the stakeholders not just one party but one might argue as well that that would be executed by private groups doing it but i do think that transparent but what is it we are being transparent about there has got to be the right data properly and timely disclosed and understandable to the investors that is the full definition of transparency that would be essential for private risk capital to really return to investing in mortgage backed securities where they are undertaking the actual mortgage credit risk mister mchenry well thank you i appreciate your time i am sorry yes i recognize don't understand it i am confused you just said a moment ago that i think you said the investment bankers i don't know i can't remember who you said the question was asked who would understand in other words if that accountability is critically important to the equation and transparency without accountability may not get us anywhere mister cummings when i talk to my community banks so when a lot of people think about skin in the game they think about their community banks and the community banks had an interest they serviced their loans they made sure that they didn't give no doc loans and they knew that they would be out of business if they gave enough loans that were toxic so to the layperson it the game well a lot of people i am talking about won't be in a position to get back into the game period maybe even in a lifetime so i am trying to figure out and then i think about the fact of all these people who have lost so much and i still don't think that a lot of folks get how significant this foreclosure problem is of incentive to do the right thing and due diligence and all that kind of stuff and have layers of protection layers  families across this country as a result of many difficulties and problems in the way our finance system was working earlier this decade and i think the on american families and on their communities on their neighbors and so forth has really been stunning and there are some communities that are going to take many years to recover from this and i think that is something we all should be very concerned about concerns you are raising when i look at the mortgage market today and the way it is structured i see tremendous concentration i see concentration in mortgage origination i see tremendous concentration in mortgage servicing and it does make me wonder w as we contemplate changes to the country's finance system that we go about that in a way in which the role of the community bank the community lender is not shut out and in fact we think about ways to better foster the involvement of community lenders in not just making loans but continuing to service loans in their community they have the direct touch with the borrower and they are in a good position to be able to understand the borrowers needs and concentration that is actually causing or could be said to be causing harm in our communities and i think as we go forward and think about housing finance reform what is going to be the role of government in housing finance what is the post fannie freddie world look like i think we should be very mindful of the role of community lending institutions and that we don't in an effort to tighten things down everywhere create an environment in which community institutions cannot participate and be robust and constructive yes certainly to the extent that if community banks are willing to take the five percent risk or hold the loans on portfolio and take one hundred percent of the risk they are the ultimate skin in the game and i think this speaks to one of the points we haven't addressed much here today is the alignment on the servicer side that r so you don't have those relationships so i am just saying five percent i wonder if that even does it you follow me ms ratcliffe of course it is hard to know but i believe that relatively modest amounts of risk retention are effective especially when structured right and the regs have a number of different alternatives for looking at the structure are enough to begin to get at some of the principal agent problems they are not necessarily going to be enough to protect the entire financial system and  sort of a different objective is having enough capital systemwide to pay for the losses than just the behavioral aspects of a risk retention model i would also add that small institutions can participate and those agencies right now and hopefully some kind of successor function would allow smaller institutions to continue to offer the same kinds of products in communities around the country that the large banks can offer competitively  yes the community bank i think has been a very different type of player and yes they do retain the risk not only do they know their customer they know the customer's company usually they know the local economics of the market in which they are lending they have a lot more information with which to assess risk and therefore for many reasons have much more comfort in holding that risk  the large firms when you have as we saw an increasing concentration of loans that are being made by a handful of players such that as of now last quarter fifty six percent of originations were done by three players  if you think that a lender in california knows anything of substance about a borrower in new york or any other community he really doesn't it is just a number and when you have firms that are inherently too big to fail they know that even if they are forced to retain five percent it is not their five percent it is the taxpayers five percent so we haven't addressed that and the risk retention as i said before i fear is almost a false sense of comfort because as we saw even in the fcic report a lot of the senior most managers of many of the firms did not even understand or know and weren't apprised of the risk that their firms retained as it was in many cases risks that ultimately sunk those firms so i think as mister demarco pointed out we do have to figure out a way to get deconcentration of lending deconcentration of servicing and i am just not sure that in a world where we already have institutions that have extraordinary benefits and think of themselves as too big to regular just everyday people are not crushed i mean crushed and as i say to my constituents i think what i am seeing right now probably is the greatest transfer of wealth in my lifetime from  middle class to upper class there is a tremendous transfer of wealth and it is really kind of sad and it has come in so many forms and foreclosures  suffer when that happens and i have seen community banks out there just go away and that is bad because i am a big supporter of community banks for all the reasons mister rosner said which is very good but again i get back to the point that there really is something that we can do it is strengthen representations and warranties which is by the way the ultimate skin in the game it is not five percent because what happens is if a bank such as wells fargo or one of their subsidiaries misleads investors investors then file and there are tons of these suits lined up in court and they will in some cases collect the money back and again to go back to mister cummings question you were saying well that is after the will collect money well going forward if you strengthen these and make it clear that we will enforce these laws we will enforce these regulations that are on the books and have transparency we will see a lot different market going forward but we really have to have we were were illegal activities both on behalf at times of borrowers and at times of lenders it seems that they exist in the servicing world as well we have seen no enforcement which i find to be astonishing i have spent most of my since leaving the traditional sale side have spent my entire career highlighting and warning of exactly the issues that we have come to live with  and doing analysis on that i am not at all throwing up my hands what i am suggesting is that we have to avoid the false sense of solving something that we are not solving and the closest we get is make sure that the information out there is so clear so standardized and so manageable that you can't hide reality from models that too could potentially create a false sense of security i mean to your earlier point i think the saddest thing about this situation is that it didn't really have to happen why didn't the market ask for the reps and warrants then why didn't the private investors get those why didn't they get more information then mister rosner saw it coming it seems like private investors could have used what information they had they had enough information to be able to anticipate some of these events you  didn't really have the information i e the information that we are talking about the loan level information and unfortunately i am not here to make excuses for the investor community but the reality is you have a broad and  diffuse investor community ten thousand or so firms who to get them to even offer comment letters on rulemaking processes or accounting rules to which they are extremely exposed is almost impossible so you have that relative to a handful of firms who are ultimately making the rules and there has been no regulatory intervention on behalf of the investor who by the way harms you have to remember that a lot of those people who have lost their houses have been doubly harmed because they have lost their pension assets they have lost other investment assets they have been marked all along the way they a investors most investors most professional investors are managing money for many of those same people ms ratcliffe so i agree with everything mister rosner said i just wanted to say that this is not rocket science i think the mortgage finance system for a number of years really has worked fairly well for a lot of people and we do know what it is going to take to get it right these are in a lot of ways common sense things and this eitheror discussion is a little misleading we need the transparency we need the risk retention for an extended period of time i certainly appreciate your candor in answering these questions it is a highly important issue and let's make no mistake about it there is skin in the game as there always has been with securitization at all levels the question is what can we do to foster more transparency in this marketplace clearly dodd frank doesn't address this i think the takeaway from today is that more transparency would not be a harmful thing to my constituents who seek a mortgage it wouldn't be a harmful thing to investors because they would at least have greater certainty in the products they are purchasing i think those are some enormous takeaways that we can agree to in a wider array so i certainly appreciate you addressing those issues it certainly is an important  issue not simply here in washington or on wall street but for main street for average americans and average homeowners even those that are paying their mortgage but we want to make sure we get this right and that is what this hearing is about and i