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27–426 PDF 2017

S. HRG. 115–107 

PRINCIPLES OF HOUSING FINANCE REFORM 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE PRINCIPLES OF HOUSING FINANCE REFORM 

JUNE 29, 2017 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

JOE CARAPIET, Senior Counsel 

GRAHAM STEELE, Democratic Chief Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

ERIN BARRY, Democratic Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, JUNE 29, 2017 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESSES 

David H. Stevens, President and Chief Executive Officer, Mortgage Bankers 

Association ............................................................................................................ 4 

Prepared statement .......................................................................................... 35 

Responses to written questions of: 

Senator Menendez ..................................................................................... 125 

Edward J. DeMarco, President, Housing Policy Council of the Financial Services Roundtable .................................................................................................... 5 

Prepared statement .......................................................................................... 98 

Michael D. Calhoun, President, Center for Responsible Lending ....................... 7 

Prepared statement .......................................................................................... 105 

Responses to written questions of: 

Senator Menendez ..................................................................................... 127 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter Submitted by the National Multifamily Housing Council and the National Apartment Association .............................................................................. 130 

Statement Submitted by the National Association of Realtors ........................... 132 

Letter Submitted by the National Association of Realtors .................................. 141 

Statement of Main Street GSE Reform Coalition ................................................. 142 

Statement Submitted by the National Council of La Raza .................................. 143 

Letter Submitted by the National Association of Federally Insured Credit 

Unions ................................................................................................................... 152 

Statement Submitted by GrahamFisher ................................................................ 160 

Statement Submitted by the Independent Community Bankers of America ..... 165 

Joint Letter Re: Preserve the GSE Affordable Housing Goals ............................ 174 

(III)

(1) 

PRINCIPLES OF HOUSING FINANCE REFORM 

THURSDAY, JUNE 29, 2017 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10 a.m., in room SD–538, Dirksen Senate 

Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. The Committee will come to order. 

Today the Committee will discuss and receive testimony on important principles of housing finance reform. Reforming the housing finance system is one of my key priorities this Congress. I have 

repeatedly stated that the status quo is not a viable option. 

In September of 2008, Fannie Mae and Freddie Mac were placed 

into conservatorship. Nearly 9 years later, the two enterprises remain in limbo. Today Fannie and Freddie, along with the FHA, 

dominate the mortgage market. Approximately 70 percent of mortgages are backed by the Federal Government, and the largest 

buyer of mortgage-backed securities is the Federal Reserve. 

Fannie and Freddie are currently earning profits, but if the housing market experiences a downturn—and at some point it will— 

taxpayers could again be on the hook for many billions of dollars. 

Reform is urgently needed, and the Committee is actively exploring 

a variety of options. 

There are a number of principles that I believe share bipartisan 

support that we will explore further today. We must preserve the 

to-be-announced market and an affordable, accessible 30-year fixedrate mortgage. 

We need multiple levels of taxpayer protection standing in front 

of any Government guarantee, including downpayments, loan-level 

private insurance, and substantial, robust, loss-absorbing private 

capital at guarantors comparable to the amount of capital maintained by global systemically important banks. 

Strong capital is essential to ensure that guarantors and other 

market participants can withstand the next downturn. We must 

ensure that small lenders have a level playing field when accessing 

the secondary market. 

The existing multifamily programs at Fannie and Freddie, which 

performed well through the crisis and already involve meaningful 

risk sharing with the private sector, should be preserved in some 

form as options in a future system. And, importantly, the transition 

2 

to a new system should be orderly and deliberate and should utilize 

existing market infrastructure where possible. 

Additionally, we will explore some other concepts that could play 

a role in reform efforts. One interesting idea is to securitize conventional mortgages with a Ginnie Mae wrap. One of our witnesses, 

Mr. DeMarco, coauthored a paper suggesting one way to do that. 

Another important issue to address is how to foster competition 

among guarantors, to avoid the pre-crisis duopoly of two too-big-tofail financial institutions. 

We also need to consider the role of FHA in the housing finance 

system and what reforms to FHA may be necessary as we work to 

establish a new system. A housing finance system dependent on 

two Government-sponsored enterprises in perpetual conservatorship is not the solution. Recapitalizing the enterprises and releasing them back into the market without significant reforms is also 

not a solution. 

The current system is not in the best interest of consumers, taxpayers, investors, lenders, or the broad economy. Three years ago, 

a bipartisan group of Senators passed a housing finance reform bill 

in this Committee. e have an opportunity now to build on that effort and create a broader coalition of Republicans and Democrats 

to pass a bill into law. 

I look forward to working with the other Members of this Committee and with our witnesses today throughout this process. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Chairman Crapo, for holding today’s 

hearing, and thank you for your work for years on this issue with 

Senator Corker and Senator Warner and so many others. 

Thank you, Mr. Stevens, Mr. DeMarco, Mr. Calhoun. Thank you 

for joining us. 

All three of our witnesses have substantial experience in housing. I look forward to hearing their testimony. 

I hope in a subsequent hearing we will be able to hear more from 

smaller lenders as well. For all of its faults, the current system 

does provide access to small lenders. Protecting small lender access 

to the secondary market is an important area of bipartisan agreement. I particularly appreciate Senator Menendez’s interest in this. 

We should hear directly from small lenders about the best way to 

go about this. 

Changes to the housing finance system impact everyone from 

renters and homeowners to lenders and investors to retirees 

through their 401(k) plans and pension funds. As we learned during the economic crisis, not all changes are equal. 

The expansion of exotic subprime mortgage products led to a crisis in which 12.5 million homes were in the foreclosure process in 

the 5-year period beginning in 2007. The Federal Reserve estimated that families saw a 30-percent decline in wealth in the first 

3 years of that crisis. 

In writing about the failures that led to the housing crisis in a 

book called ‘‘The Subprime Virus’’, Kathleen Engel and Pat McCoy 

concluded, ‘‘The avarice of lenders and Wall Street reversed the efforts of cities like Cleveland to revitalize their communities . . . 

3 

The Federal Government must make sure that what is good for 

Wall Street is also good for Main Street.’’ 

I would go a step further and say that the Federal Government 

should focus entirely on what is good for Main Street. The way we 

do that is by finding solutions for homeowners and renters. I am 

confident Wall Street will be able to fend for itself. 

Some proposals to reform housing finance focus more on how to 

allow private capital or financial institutions to take over for or 

stand in front of the GSEs than on the cost of the additional private capital to borrowers. Underrepresenting those costs will have 

consequences for access to credit and could reduce home values if 

new borrowers cannot access mortgages at affordable rates. States 

like Ohio and Nevada are still struggling with underwater homeowners in large numbers and how to address the ongoing problem 

of negative equity. 

Proposals do not focus enough on how to break down the barriers 

that still exist in the mortgage market for communities of color or 

providing continued access to credit in rural areas. 

As we try to achieve broad bipartisan consensus on a housing finance reform proposal, there are a number of open questions we 

need to address. How does each proposal avoid the kind of shareholder demand for returns that drove the worst decisions at the 

GSEs? How do the proposals prevent predatory mortgage products 

that targeted and stripped wealth from communities like Cleveland 

and Toledo and Dayton and Youngstown? How do we do a better 

job of prohibiting discrimination in the mortgage market? 

The Committee needs to have clear estimates that break down 

costs for borrowers across the entire eligible credit and downpayment spectrums. We need to learn more about whether and how 

adding multiple entities with differentiated products or services 

could change the national market or TBA market. We need to explore how each of these proposals would provide continuous access 

to mortgage credit when private capital flees during an inevitable 

downturn. 

There are three opinions represented here today; they are not the 

only opinions about this issue. I would like to submit for the record 

a number of plans and principles, including from the Independent 

Community Bankers of America and the Main Street GSE Reform 

Coalition, among others. 

As the Committee continues, Mr. Chairman, to work on a broad 

bipartisan plan, I hope we hear from a wide range of opinions and 

stakeholders about how the housing finance system could work better for Main Street and not just for Wall Street. 

Thank you. 

Chairman CRAPO. Thank you, Senator Brown. And now we will 

turn to our witnesses. 

First, we will receive testimony from the Honorable David Stevens, president and chief executive officer of the Mortgage Bankers 

Association. 

Next we will hear from Mr. Edward DeMarco, president of the 

Housing Policy Council. 

And, finally, we will hear from Mr. Michael Calhoun, president 

of the Center for Responsible Lending. 

4 

Before we begin, I should announce that I am going to have to 

slip out at some point for a markup in the Judiciary Committee, 

and so when I do so, the Committee will simply proceed apace. 

We have asked each witness to remember to keep their testimony to 5 minutes. I am going to remind the Senators once again 

that your question time is 5 minutes. 

With that, Mr. Stevens, you may proceed. 

STATEMENT OF DAVID H. STEVENS, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, MORTGAGE BANKERS ASSOCIATION 

Mr. STEVENS. Thank you, Chairman Crapo, Ranking Member 

Brown, and Members of the Committee. Thank you for the opportunity to testify today. 

It has been nearly 9 years since the GSEs entered conservatorship, and yet their long-term status remains unresolved. The financial crisis exposed the structural conflicts and misaligned incentives in the GSE business model as well as weaknesses in the regulatory framework that was in place at the time. Extended conservatorship is economically and politically unsustainable and an 

unacceptable long-term outcome. Without comprehensive reform, 

borrowers, taxpayers, and lenders will all face increased risk and 

uncertainty about the future. 

Because MBA represents over 2,300 member firms of all sizes, 

both single-family and commercial/multifamily, including 650 small 

community-based mortgage lenders, we firmly believe that housing 

finance reform must foster a competitive primary market that is 

served by a diverse cross-section of lending institutions. 

A year ago, we convened a task force for the future of the secondary market. The task force reflected the composition of MBA’s 

membership, residential and multifamily, from integrated financial 

institutions to the smallest community lenders. Our task force 

truly represented the full depth and breadth of the entire real estate finance industry rather than some narrow interest of any one 

specific market segment. 

Our proposal seeks to ensure equitable access for smaller lenders 

to the secondary market, prohibiting special pricing and underwriting based on loan volume, as occurred prior to conservatorship, 

preserving the cash window and small pool execution options, and 

preventing vertical integration by the largest market participants. 

I have submitted our proposal as part of my written testimony. 

Our proposal recognizes the need for any comprehensive GSE reform plan to balance three major priorities: taxpayer protection, investor returns, and consumer cost and access to credit. To achieve 

these policy priorities, MBA’s plan recommends recasting the GSEs’ 

current charters and allowing a multi-guarantor model that features at least two entities and preferably more. Guarantors would 

be monoline, regulated utilities owned by private shareholders operating in the single-family and multifamily markets. 

The core justification for utility regulation rests with the premise 

that privately owned utilities attract patient capital and derive 

much of their existence and powers from the State. The guarantors 

would be subject to rigorous capital requirements that would provide financial stability without unduly raising the cost of credit for 

borrowers. These requirements would be satisfied through a comVerDate Nov 24 2008 08:44 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\06-29 PRINCIPLES OF HOUSING FINANCE REFORM\HEARING\6291
5 

bination of their own capital and proven means of risk transfer in 

addition to that. 

The implied Government guarantee of Fannie Mae and Freddie 

Mac would be replaced with an explicit guarantee at the mortgagebacked security level only. This guarantee would be supported by 

a Federal insurance fund with appropriately priced premiums paid 

by the guarantors, much like banks pay for FDIC insurance today. 

Our plan explicitly calls for deeper first-loss risk sharing that is 

transparent, scalable to all lenders, and capable of limiting taxpayer exposure to nothing more than catastrophic risk. 

The task force also developed recommendations in two areas that 

have vexed past reform efforts: the appropriate transition to a new 

system and the role of the secondary market in advancing a national affordable housing strategy. Our proposal specifically notes 

the importance of leveraging the assets, infrastructure, and regulatory framework of the current system where possible. We also believe that any workable transition must utilize a clear road map 

and be multiyear in nature. 

We sought to develop an affordable housing framework that appropriately focuses the scope of the federally supported secondary 

market covering both renters and homeowners of various income 

levels. Our plan suggests other improvements to better serve the 

full continuum of households, including updating credit scoring 

and, most importantly, only Congress is the group that can provide 

the legitimacy and public confidence necessary for long-term stability in the primary and secondary mortgage markets. 

We cannot go back to a housing finance system that provides private gains when markets are strong, yet relies on support from taxpayers when losses occur. Calls to simply recapitalize the GSEs 

and allow them to operate without further structural changes are 

misguided. Under such plans, the post-crisis reforms already 

achieved could be reversed at the discretion of future FHFA Directors. The American people rely on a housing finance system that 

enables them to rent a quality, affordable apartment, buy their 

first home, or build a nest egg to pass down to their children. We 

owe it to them to proceed with the hard work of reform without 

delay. 

Thank you for the opportunity to testify, and I want to reiterate 

the MBA’s longstanding commitment to work with this Committee 

on all elements of GSE reform, and I look forward to your questions. Thank you. 

Senator BROWN [presiding]. Thank you, Mr. Stevens. 

Mr. DeMarco, thank you for joining us. 

STATEMENT OF EDWARD J. DEMARCO, PRESIDENT, HOUSING 

POLICY COUNCIL OF THE FINANCIAL SERVICES ROUNDTABLE 

Mr. DEMARCO. Good morning. I am grateful to Chairman Crapo, 

to you, Ranking Member Brown, and all the Members of the Committee for the invitation to be here and for this opportunity. It is 

an honor for me to be back before this Committee, this time in my 

new capacity as the president of the Housing Policy Council, a role 

that I have had for a little less than a month now. 

Housing finance reform is a top priority for the Housing Policy 

Council. The status quo is untenable for many reasons, and Dave 

6 

just went through some of them. And only Congress has the authority to make the permanent changes needed to put the system 

on a sound footing for the long term. 

The good news for all of you is that there is a lot of common 

ground, and much progress has been made over the last several 

years. Legislation can and should build on that progress. 

For my opening statement, I would like to start with two simple 

but important points. 

First, the passage of time has not diminished the need for Congress to enact legislation that brings the Fannie Mae and Freddie 

Mac conservatorships to an end while charting a path forward. 

Second, we know even more and we have greater consensus on 

many reform ideas today than we had in 2014 when the Committee 

last took up this issue. 

Consequently, the members of the Housing Policy Council are 

grateful for this Committee’s leadership in restarting this legislative effort, and we are ready to assist in working with the challenges ahead to find a bipartisan path forward. In my limited remaining time, I would like to simply summarize the five principles 

of housing finance reform that are detailed in my prepared statement. 

First, reform legislation should fix what is broken and preserve 

what works in support of consumers and the market. 

Second, the transition from the old system to the new one should 

avoid disrupting consumers and markets. 

Third, private capital should bear all but catastrophic mortgage 

credit risk so that market discipline contains risk. 

Fourth, Government should provide a regulatory framework that 

is clear and equitable across all participating companies and ensures that participants in the housing finance system operate in a 

safe and sound manner. 

Finally, the Government-protected GSE duopoly should be replaced with a structure that serves consumers by promoting competition, affordability, transparency, innovation, market efficiency, 

and broad consumer access to a range of mortgage products. 

Two of these principles warrant a bit more explanation. In any 

reform system, HPC, like many other reform advocates, believes 

that substantial private capital should be ushered in to replace the 

taxpayer capital directly at risk today. Behind that private capital, 

we believe that an explicit full faith and credit guarantee on mortgage-backed securities would help private markets work better and 

would allow us to preserve certain features of the current system 

that provide benefit to consumers. 

Importantly, though, we also believe that this catastrophic Government backstop should include a system to pre-fund potential future catastrophic losses and also include a preset mechanism to ensure that any catastrophic losses that call upon taxpayer support 

will be repaid fully. 

The current system does some things well, but what it does not 

do is provide much opportunity for competition, innovation, and 

transparency. Fixing that should create greater opportunity to 

serve customers and expand credit access. 

As the Committee restarts its legislative efforts, as I have detailed in my written testimony, there is a lot of common ground 

7 

across legislative and other stakeholder proposals on which to 

build. While important issues remain unresolved, these are not insurmountable challenges, and in many cases, the range of differences has shrunk over time. 

While not specifically the focus of today’s hearing, the Housing 

Policy Council respectfully urges you to also consider the FHA program, its role in our housing finance system, and the potential to 

address pressing FHA issues as part of reform. 

So thank you again for inviting me, and I look forward to the 

questions and answers. 

Senator BROWN. Thank you, Mr. DeMarco. 

Mr. Calhoun, welcome. 

STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER 

FOR RESPONSIBLE LENDING 

Mr. CALHOUN. Thank you, Ranking Member Brown, Members of 

the Committee. The housing finance system profoundly affects 

American families. It is also critical to the overall housing industry, 

which is nearly 20 percent of the U.S. economy. 

The Center for Responsible Lending is a nonprofit, nonpartisan 

research group that works to expand economic opportunities. We 

are affiliated and I have previously worked with Self-Help, a national community development lender, that has provided home 

loans and other financing to families, small businesses, and others 

for over 130,000 loans across the country. 

There are three key areas I will address in my testimony: first 

is the importance of our housing finance system to rural and underserved markets; second, how best to ensure our housing finance 

system works for community banks and credit unions; and, finally, 

the big question, how do we move forward with housing finance reform? 

Turning first to rural and underserved markets, one of the important achievements of our housing finance system is it created a 

national market where previously we had a fragmented one, with 

affordable 30-year mortgages available across the country, not just 

in the most lucrative, often urban markets. Today the GSEs are 

the largest provider of mortgage funding in rural areas. Other underserved markets include new households where the majority are 

and increasingly will be borrowers of color, who often bring less 

generational wealth than other borrowers. This reduces their ability to make large downpayments, and we need to recognize that. 

This challenge of first-time homebuyers, though, really drives the 

mortgage market, and today it is lagging in holding back the mortgage market, and we need further efforts there. 

The current GSE provisions—and there are an array of them— 

to address providing broad access were worked out over a decade 

of deliberations in Congress and passed in 2008 in HERA, the 

Housing and Economic Recovery Act, by a margin in the Senate of 

80–13, something that we do not see quite as often. Those need to 

be left in place and not reopened and disturbed. Rather, all who 

use the Federal housing system and benefit from its Government 

support should be required to make their loans available to all 

creditworthy borrowers wherever they live in the country. 

8 

Similarly, the housing finance system only works if it serves all 

qualified lenders, especially community banks and credit unions. 

These lenders are essential to the areas they serve and often they 

are the primary financial institution in those areas. Housing market dynamics, though, often tilt the benefits toward larger lenders, 

and I would urge the Committee to review all proposed changes 

through that lens and whether the changes exacerbate that condition. As others have said, it is critical that people be able to sell 

their loans on an individual basis to the GSEs or their successors 

and not just pool them into securities, which are very difficult for 

a small lender to do, but the pricing has to work also. You have 

to be able to get the same price, or you cannot compete. 

Thankfully, today as we look forward, we have a far different 

housing market and regulatory structure than we did pre-crisis. As 

Mr. Stevens noted, and others, the Great Recession revealed critical flaws with the GSEs, and Congress responded in 2008 with 

HERA, establishing a robust regulator, a new one, at FHFA. It has 

the duties and authority to ensure adequate capital, approve new 

products, and regulate the entire operations of the GSEs. And 

today the GSEs reinsure or transfer the risk on the majority of 

loans that they purchase. They also have greatly shrunk their portfolios, which reduces taxpayer risk. These types of reforms should 

be expanded and continued. 

For example, the current ban by FHFA on the GSEs participating in political contributions or lobbying we think should be 

made permanent, and we, too, support utility-type regulation and 

returns for the GSEs which would reduce excessive risk taking. 

Finally, it is important to recognize the central role that our 

housing system plays. As others have noted, this system is dependent upon the trust of investors from around the world. If that is 

disrupted, it will profoundly harm not just the housing system and 

the availability of mortgages, but home values across the country. 

Therefore, surgery on this system must be done with extreme care. 

Thank you again for your work on this important topic. We look 

forward to your questions and working with you on it. Thank you. 

Senator BROWN. Thank you, Mr. Calhoun. 

Questioning will begin with Senator Corker. 

Senator CORKER. Well, thank you, Senator Brown. I want to 

start by saying what a pleasure it was to work with Senator Crapo 

and yourself and your staffs recently on the Russia sanctions bill. 

I think it was an incredible effort by two committees working together, and people on both sides of the aisle, and I think it actually 

set the stage for the kind of thing we need to do with GSE reform 

when we actually get there. But I do want to thank you, and I appreciate you participating yesterday in the North Korea hearing 

that we had, and I thank you for turning to me now. 

I want to thank also Senator Crapo for his desire but also his 

great leadership on this issue, and I think all of you know that— 

because you were each involved, we passed something out of this 

Committee in 2014 and, you know, there was not much time left 

on the calendar, and we did not get it where it needed to go, but 

I want to thank him and his staff for his leadership on this issue. 

And I certainly look forward to working with them and Senator 

Brown’s staff as we attempt to do it again this year. 

9 

Each of you has played a very significant role in this issue, and 

I apologize, I am—we have a few other things going on, and I 

apologize. That is Heller calling. Thanks. 

[Laughter.] 

Senator CORKER. But I want to say to each of you—and I know 

we had dinner the other night, Mike, with DeMarco, and we have 

had numbers of off-the-record discussions. We have done the same, 

Dave and I. What I see happening right now is a real consolidation 

of ideas. We have had think tanks that lean right, think tanks that 

lean left. We have had the Mortgage Bankers Association come together, and it just seems to me that the thinking around what 

needs to happen with GSE reform is coming to a place where I 

truly believe we are going to be able to pass a piece of legislation 

this year. 

It seems to me that the consolidation is coming around the fact 

that we do need to have an explicit guarantee that is catastrophic. 

We need to acknowledge that it is going to be there. There will be 

people on my side of the aisle that that will be a tough one to get 

to, but I think that is true. It needs to be paid for. I think there 

is a recognition that having an implicit guarantee out there that 

is not paid for is not the right place for our taxpayers. 

I think there is an agreement being generated that private capital needs to be in advance of that, that having a half-percent capital like the GSEs had during the crisis is just not where our Nation needs to be, with $5 trillion in assets. Having a pre-funded 

fund to deal with failures of mortgages, not of companies, is a place 

we need to go. 

Mr. Calhoun, I enjoyed so much talking to you the other night, 

and I could not agree more that access to secondary markets by entities of all sizes need to be there, and I think there has been a 

misunderstanding that people think somehow there is something 

that is being designed that tilts toward the larger institutions. I 

mean, nothing could be further from the truth, and I think we 

learned a lot going through this last cycle. 

That credit needs to be available through all cycles, through all 

economic cycles. It seems to me that people understand that, and 

I think the last go-round we did not focus enough on that component. 

And then, last, that simplicity needs to occur. I think our last effort was way, way too complex, had way too many moving parts, 

and I think we have all learned a great deal from that. 

As a matter of fact, I think we have learned that the existing infrastructure that we have in place is something we need to build 

off of. 

So I just want to say to you all I thank you for all the things 

you have done to help us get to a place of better understanding. 

It is my hope that this Committee is going to work together and 

produce something this year, and I would love to hear if any of you 

disagree with the assumptions I just made about where commonality exists. 

Mr. STEVENS. I completely agree with everything you have said. 

Mr. DEMARCO. Same here, Senator. Thank you. 

Mr. CALHOUN. We agree with all those and have put that in our 

testimony. I would just flag an issue that you need to make sure 

10 

that capital is available in those countercyclical times for the entities to operate, and that may be more than just the securities—for 

example, modifications of loans and maintaining the TBA market 

in a crisis. There needs to be some mechanism to fund that as well. 

Senator CORKER. Well, thank you for your contributions to date 

and the ones that will come, and I hope this Committee will act 

on this most important issue that needs to be resolved. 

Chairman CRAPO [presiding]. Senator Brown. 

Senator BROWN. Thanks. I just wanted an introduction. Thank 

you. 

[Laughter.] 

Senator BROWN. Could have been a little more generous than 

that, but what are you going to do? 

Chairman CRAPO. My good friend Senator Brown. 

[Laughter.] 

Senator BROWN. Or formerly good friend. Thank you. And, Senator Crapo, when you were gone, Senator Corker thanked you and 

me and Senator Cardin on the work on the Russia sanctions. In a 

Senate that looks dysfunctional to many on the outside and to 

many on the inside, it really was a terrific effort, 97–2, and I appreciate the work of the two of you, and Greg and the staff and 

your Committee and Colin and Mark and my staff and what we are 

doing in the House to keep this moving. So thank you for that on 

the sanctions bill. 

I have a handful of questions. Mr. Calhoun, I will start with you. 

The GSEs are again accepting 3 percent downpayment loans. What 

can we learn from this product? And in the work that the Center 

for Responsible Lending has done with low-wealth borrowers, I 

thought your comments about particularly people of color that have 

not had the historic opportunity, if you will, to accumulate wealth 

like people that look more like you and me do, what—paint that 

picture about expanding access to stable credit for borrowers ready 

for home ownership. 

Mr. CALHOUN. The lesson of our lending and the lesson through 

the crisis, if you look at the GSEs, is what really matters is careful, 

fully documented underwriting. So while the subprime mortgages 

get a lot of the attention in the crisis, if you look at the GSEs, 50 

percent of their losses came from not subprime but so-called AltA loans. Those are loans to higher credit borrowers but with no 

documentation. They made up only 10 percent of the GSE loans 

but produced, again, half of their losses and really drove them into 

insolvency. 

In contrast, we have made loans for more than 35 years to families of modest means, including a lot of low-downpayment loans, including through the crisis. We had loans to those borrowers, 50,000 

of them, during the crisis, including in 2008, and they performed 

extremely well. And it is not some magic secret. They were carefully underwritten 30-year fixed-rate mortgages with full escrows 

and affordable payments. Those borrowers need a place to live, and 

they will fight to stay in that home. It is not like rent is going to 

be for free. And, in fact, today many people pay more in rent than 

what they would pay if they could purchase a home. And we have 

to serve that market going forward, or the whole housing market 

11 

also does not work beyond the importance of reaching those households. 

Senator BROWN. Thank you. As we write GSE reform legislation, 

and for many of us on both sides of the aisle, the affordable housing goals are particularly important—talk to me, if you would, talk 

to us about how GSEs’ affordable housing goals have helped expand stable access to credit and in rural and urban underserved 

areas. 

Mr. CALHOUN. So there are really four elements that the GSEs 

have to reach the whole market. First of all, they have a legal mandate to do it, but the four things they do—and one that is perhaps 

the most critical and often overlooked is that they are directed to 

pool risk like insurance usually does. And they have specifically 

said you need to make sure loans carry their own weight with the 

payments. But they do not all have to have the same rate of return, just like everybody does not pay a different Medicare premium. And if you do not do that, you price people totally out of the 

market. Access is one thing, but it has to be reasonably affordable, 

sustainable access. So that is the most important that needs to be 

looked at. And some of these proposals will tilt pricing heavily, our 

concern is, against families of modest means and, again, this is not 

evil intent or a goal, but they do have the effect of tilting things 

against community banks. Larger entities in the housing market 

have benefits of scale, and if the changes are not careful, they tilt 

things against the community banks, and it is harder for them to 

maintain the critical role that they do. So that would be the main 

point I would emphasize. 

The other three are the affordable housing goals, but equally important the duty to serve, which includes special measures by statute to serve rural areas, and also the affordable housing fund to 

sponsor programs carefully reviewed that expand housing efforts. 

Senator BROWN. Thank you. 

Chairman CRAPO. Thank you very much. I will take my turn 

now, and, again, I apologize for having to step out. 

First, to Mr. DeMarco and Mr. Stevens, each of you in your statements has made a comment. Mr. DeMarco, you said the status quo 

was untenable for many reasons, and, Mr. Stevens, you said the 

status quo was an unacceptable long-term outcome. Could you each 

briefly explain what are the consequences for consumers, taxpayers, and the economy if we do not take action? 

Mr. DEMARCO. Sure. Starting with taxpayers, right now with the 

status quo, we have Fannie Mae and Freddie Mac securitizing trillions of dollars worth of mortgage-backed securities and all of the 

credit risk and all of the risks that they take on in that process 

is actually being supported directly by taxpayer capital. So taxpayers are at risk. 

We have a problem, a challenge for consumers in that this system continues unabated with a lack of transparency in underwriting and competition that can allow for the kind of innovation 

and developments that can inure to the benefit of consumers. And 

it is challenging for the business community to know what is it we 

are planning for strategically for the long term, as long as these 

companies are in a Government conservatorship and there is this 

continued uncertainty about what the long-term path is going to 

12 

be, including what the long-term or ultimate role of the Government is going to be. So these all pose challenges in the current environment. 

Chairman CRAPO. Thank you. 

Mr. Stevens. 

Mr. STEVENS. I would echo what Ed said. Another additional perspective is there is a false sense of security, I think, amongst too 

many that the status quo is better than the alternative of reform. 

I remind everybody in the industry and every consumer group I 

can talk to that the strength and the role of the GSEs in the current environment today for extending credit to communities depends greatly on who the Director of the FHFA is. The qualified 

mortgage rule that the CFPB has put in place gives an exemption 

for the underwriting standards of the GSEs, and should a new Director come in and want to expand or contract that, that will have 

significant ramifications across the spectrum of home ownership 

and could whipsaw housing in either productive or unproductive 

ways. Extraordinary uncertainty. 

The other aspect I would just suggest is the GSEs today, their sole backstop is this $260 billion line of credit that is taxpayerfunded. And it is a deep, ample line of credit, but the capital markets around the globe still view that with extraordinary uncertainty. If you look at the price of a Freddie Mac or Fannie Mae 

mortgage-backed security against a Ginnie Mae security with an 

explicit guarantee, it is a difference of about three-eighths of a percent or so in rate, depending on the given day. And if the GSEs 

were to move out of conservatorship back to a previous state, that 

spread would widen significantly, affecting interest rates detrimentally for Americans everywhere who are looking at housing. 

So the view from our side is there is only one pathway here, and 

I think time is of the essence because we are going to go through 

a regime change at FHFA, and that should create some motivation 

to try to eliminate as much of that uncertainty as possible as we 

go forward. 

Chairman CRAPO. Well, thank you, Mr. Stevens. And you actually led into my next question, although it is to Mr. DeMarco. 

Ginnie Mae mortgage-backed securities currently trade at a premium to Fannie Mae and Freddie Mac mortgage-backed securities 

in the market, and there are more than 400 Ginnie Mae-approved 

issuers. I know you, as I indicated earlier, suggested we look at the 

Ginnie Mae model, Mr. DeMarco. Could you explain some of the potential benefits of using the Ginnie Mae model or Ginnie Mae to 

guarantee MBS in the private credit enhancement? 

Mr. DEMARCO. Right. Well, to start with just Ginnie Mae, if 

there is consensus, if the legislation is going to have a Government 

guarantee, catastrophic backstop guarantee on mortgage-backed securities, the Government already has a Government corporation 

that does that. Its name is known, its function is known globally. 

So rather than creating a new Government entity, at least it is 

available as an option as the source of that guarantee. So that is 

Ginnie Mae as the guarantor. 

But let us take the advantages of just the structure here, whether we use Ginnie Mae or we use some parallel system. There are 

several things about the Ginnie Mae model that accomplish things 

13 

that all three of us have spoken about, including Mike’s comments 

just a few minutes ago about smaller institutions. 

The way the Ginnie Mae security works is that Ginnie Mae does 

not actually issue the security. There are over 400 different entities 

that are licensed by Ginnie Mae to issue a Ginnie Mae security. 

But what that means is these 400-plus issuers are all contributing 

mortgages into a single security that Ginnie Mae is putting its 

guarantee around. And what that does is it gives lenders of all 

sizes and types 400-some outlets in which to place their mortgages 

into the security, and it allows smaller lenders the opportunity to 

get the same price that the big lenders get because they are all 

going into a common security that has a great deal of liquidity. 

And so that right there in the structure helps to level the playing 

field between smaller institutions and larger institutions, and it 

gives them many avenues, including directly themselves, to be able 

to place mortgages into Government-backed MBS. 

Chairman CRAPO. Thank you. 

Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman. Let 

me thank the witnesses not only for their testimony, but for their 

thoughtful engagement on these issues over many years. Yes, we 

are looking at each other over many years. 

I also want to thank the Chairman and the Ranking Member for 

making this a priority, but most particularly Senator Corker and 

Senator Warner for all of the work they have done to keep this 

issue close to the front burner. 

Mr. Calhoun, you reminded us of some of the things that HERA 

accomplished and that have to be maintained, but there was something else, too, and I would like to get your comment. OFHEO was 

able to get reimbursement for their activities, but it was subject to 

the Appropriations Committee, and that I think inhibited some of 

the robust oversight. HERA changed that, and going forward, I 

would presume that we have to maintain sort of an independent 

source of funding, not through the appropriations process, for whatever regulator that we produce. Is that fair? 

Mr. CALHOUN. Yes, and I think Ed knows this well, that the 

GSEs used the appropriation process to restrict what funding was 

available and how it could be used and essentially handcuffed 

OFHEO. And so they had a weak regulator. Equally important— 

and this is a very, I think, effective change made by HERA—was 

before 2008, the affordable housing, the mission part, was controlled by HUD, which had none of the other regulatory authorities 

or duties. And I think an important change that was made in 2008 

was that you consolidated that within FHFA where you have the 

same regulator doing both, how do you provide broad access but 

how do you balance that with making sure that it is safe and 

sound. 

If I can add one quick point just to clarify, on the backing for the 

GSEs today, just to be clear, they hold tens of billions of dollars 

of reserves that I think all observers believe are sufficient to cover 

any expected losses on their mortgage portfolio. They do not have 

reserves to cover a catastrophic event such as we had in 2008. But 

I did not want to leave the impression that they had no reserves 

for their operations today. 

14 

Senator REED. Let me just follow up before I get Mr. DeMarco’s 

and Mr. Stevens’ comments on the same question. Again, what we 

discovered post-2008, 2009, was many of the problems were in the 

servicers, and anything we do now, we are talking at a level of, you 

know, how do we securitize these products, et cetera. But many of 

the practical problems came about through poor regulation of services. Would that be something we would have to concentrate on 

going forward with this approach? 

Mr. CALHOUN. Yes, and it is careful about not fragmenting that 

too much. Today FHFA has implemented a lot of important reforms 

supported with the help of the MBA that have greatly improved 

servicing for both the lenders, the investors, and the borrowers. It 

is just a better system. 

Senator REED. Mr. DeMarco, you have some practical experience 

about the need for independence for the regulators. Can you comment? 

Mr. DEMARCO. Yes. I think that there is no reason housing finance regulators should be different than other financial institution regulators. I think we have got plenty of history to indicate 

that independent funding, fees paid for by the regulated entities is 

the appropriate way to finance this. Obviously, the Banking Committees should have appropriate oversight over all of our regulators. 

With regard to your comment about servicing, yes, I mean, this 

is an important and challenged area. It is one of the things that 

I go through a bit in my testimony, and the idea of—we have made 

a lot of progress in servicing and servicing standards, but we are 

not all the way there yet, and I think as this Committee does deliberate servicing going forward, continuing to move toward not just 

a national servicing standard but something that is also paying attention to sort of the efficiency and clarity of what those rules are 

would help everyone. 

Senator REED. Thank you. 

Mr. Stevens, a comment? 

Mr. STEVENS. Yeah, I will not be redundant to the comments 

made, but in our proposal, we fully support keeping the FHFA and 

its independent role as the regulator. I would add, Senator, that 

HERA is an excellent piece of legislation. It depends significantly 

on the Director in charge of the FHFA, which is why we continue 

to say there are many elements here that need to be protected 

going forward, but we do need legislation to fully reform the GSEs 

because we cannot depend on the regulator, whoever that may be 

in 5-year increments, to protect the taxpayer and protect the housing system going forward. 

Senator REED. Thank you. My time is expiring, but just one 

thought or comment. There was some discussion about Ginnie Mae, 

and there have been some thoughts about spinning that off or letting that agency be independent. Right now, as I think we all 

know, its revenues go to supplement many critical programs like 

the Community Development Block Grant, et cetera. And we have 

to think, if that is the path we take, how are we going to supplement those funds if they are no longer available, particularly in the 

context of budgets that are proposing the elimination of CDBG. 

When we were talking about Ginnie Mae going forward, it was simVerDate Nov 24 2008 08:44 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\06-29 PRINCIPLES OF HOUSING FINANCE REFORM\HEARING\6291
15 

ply supplementing what was substantial HUD commitments. Now 

we are in a situation where the proposal is zero for CDBG, for example, and if you take away the Ginnie Mae contribution, we are 

out of business. So just let me put that on the record. 

Thank you. 

Chairman CRAPO. Thank you. 

Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman, and I think this is 

an excellent subject for this Committee to pursue. Personally, I 

have not made up my mind as to what the right way is to do it. 

I am open. I like the suggestions that I have heard and that you 

have laid out. 

During the time in which we had this catastrophe to begin with 

that brings us all together, I was serving as Governor in South Dakota. And I remember at the time thinking that what it appeared 

to me from the outside looking in was that we had a number of 

things happen at one time. You had a relaxation of underwriting 

for an honest attempt to try to allow more people home ownership. 

So you had political pressure asking for that. 

Second of all, you had a time in which the price of gas went up 

substantially. And individuals who were close, who had stepped in 

and who were barely making ends meet had a decision to make 

that either they could put money into the gas pump, and that 

means gas in their cars so they could actually get to work, or they 

could make a payment on their mortgage. And while they fully intended to do both, at the end of the month they had been able to 

get to work, but by that time they did not have enough money to 

pay the mortgage, and they got behind in many cases. 

Then in addition to that, it appeared as though there was also 

a question as to whether or not the underwriting had been properly 

done, as you suggested earlier, that the careful documented underwriting was not necessarily followed. A combination of all of them 

seemed to lend itself to this problem that we have got today. 

As we move forward, the regulations that we put in place can either help us rebuild this housing market or it can be detrimental, 

and, in particular, I am thinking in rural areas qualified mortgages 

require an appropriate appraisal. And yet the guidelines that have 

been laid out for those rural appraisals is rather difficult to meet 

in a large part of our country, and it has restricted the ability of 

banks in that area to get access to the secondary market. 

Regardless of what type of total reform we do with regard to creating this secondary market to provide liquidity, it has still got to 

be accessible to rural areas as well. And I think, Mr. Calhoun, you 

have laid that out, that it is critical that we do that. 

Could you just give me your thoughts in terms of the relationship 

between the expectation for a solid marketable security, a packaged 

security, and the need to be flexible or at least the need to be able 

to modify or fix problems that come up with the regulatory environment for rural areas or perhaps for inner cities or along the way 

the different things that come up that really do perhaps in some 

areas unfairly restrict those local lenders to having access to that 

secondary market? 

Mr. DEMARCO. So, Senator, thank you. Points very well taken. 

So just to give a basic example, if one has a series of regulatory 

16 

requirements in mortgage lending that affects the cost of originating a mortgage—let us just take that as an example, and suppose it adds $5,000 to the cost of originating a mortgage. Well, if 

it is a $500,000 mortgage, that has one sort of share of the cost of 

the mortgage. If it is an $80,000 mortgage and that same requirement is still $5,000 to accomplish, that is going to make a much 

bigger impact on that loan in terms of whether it gets made or not 

or whether that potential homeowner is going to be able to buy a 

house. 

So it is a legitimate concern, and I think as we continually refine 

our regulatory framework, we need to be mindful of these costs and 

how it actually affects people particularly in inner cities and rural 

areas where otherwise the house value would be low but the regulatory costs are high as a percentage. 

If I could just briefly, you started this by talking about appraisals, and I think that this is also an area in which the housing finance reform discussion could assist the finance market generally 

by rethinking our appraisal regulatory regime, what actual information we are collecting, and what the rules are by which that gets 

done, because there are also some important cost considerations 

here. 

Mr. CALHOUN. And if I may add, a topic that came up earlier, 

we have some concerns with the Ginnie model for small lenders because it is still—there are over 5,000 community banks, as you 

know well. It requires them generally, most of them, to sell their 

loans to someone else, and often those loans have to give up the 

servicing, too, and that is the customer relationship. 

Senator ROUNDS. Yes. 

Mr. CALHOUN. And that is not the same as what we have now 

with the cash window where you get an equal cash price and you 

get to hold onto that servicing relationship. And I would just lift 

that up as something really, really important for small institutions 

to preserve in the system going forward. 

Senator ROUNDS. Thank you. 

Mr. STEVENS. And if I could just add—and, by the way, I think 

a discussion needs to be had in the context of Ginnie Mae to separate what you call the wrap itself. What is the guarantee? I think 

that is the label, and for simplicity purposes you could do that. 

How the operational platform functions—and Ed I think tried to 

say that—needs to address, Mike, what you just talked about. So 

we agree with that. 

To your concern, I think this is really important, and we talk 

about it in our affordable section of our paper, is how do you reach 

rural communities. Oftentimes the largest financial institutions do 

not distribute personnel or products to communities; either they do 

not collect deposits in those areas or just the cost of originating an 

$80,000 loan, as Ed talked about, is too prohibitive to be profitable. 

And that is where small community lenders really play a role. That 

is why you need equal access for every lender to the platform, no 

special pricing for any institution, large or small, because small 

community banks have to be able to compete equally as well as a 

large institution. That was not the case pre-conservatorship of the 

GSEs. 

17 

And the last point I would just make is to your question, is there 

a way to make credit variances in the future to accommodate the 

unique needs of rural communities? We expose that as an FHFA 

authority. The regulator needs to control excesses in credit risk, 

but they also need to make sure—and our paper explicitly calls for 

this—that we are meeting the needs of sustainable home ownership demands in underserved communities, and that would clearly 

call for rural markets. 

And so we really look forward to having that discussion because 

these are very important points that you have raised. 

Senator ROUNDS. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. Before I begin, I 

want to reflect on the pain and suffering endured by tens of thousands of New Jerseyans in the aftermath of the financial crisis. 

From 2007 to 2016, 85,000 families in New Jersey lost their homes 

to foreclosure, and the suffering inflicted by financial institutions 

that played fast and loose then continues to plague our communities. 

In 2016, nearly two-thirds of the foreclosures in New Jersey were 

related to the financial crisis. The sad thing is we knew how to 

help many of these families. We knew principal reduction would 

provide a pathway to affordable and sustainable payments for underwater borrowers. We knew if Fannie Mae and Freddie Mac had 

been permitted to participate in the HAMP principal reduction alternative, half a million homeowners could have been helped and 

taxpayers could have saved $1 billion. 

But despite clear authority and direction from Congress in the 

Emergency Economic Stabilization Act of 2008, pleas from State 

Attorney Generals and even the Treasury Department, Mr. 

DeMarco, you refused to lift a finger. In 2012, you incomprehensibly claimed that allowing Fannie and Freddie to adopt principal 

reduction would cost Fannie, Freddie, and mortgage servicers too 

much money; and, two it would create moral hazard by enticing deceitful homeowners looking to abuse a program they did not actually need. Worse, the analysis you used to justify this ideological 

position was widely regarded as flawed. 

So as then-Chairman of the Housing Subcommittee, I held a 

hearing on the issue. I urged you in a letter to provide the Committee with an accurate analysis of the effects of principal forgiveness versus other mortgage modification options. Yet even after 

FHFA’s own analysis showed the benefit to taxpayers, you remained intransigent. 

Now, as I think about where we are going in the future, that is 

something I cannot forget, and that is something that leads me to 

believe that what we need is clearer thinking, not ideology. 

So let me turn to one of the critical components that I think our 

current system is not producing enough, and that is access for 

small lenders to the cash windows that the GSEs, which provides 

them an opportunity to participate in the secondary market they 

would not otherwise have. Many of these lenders are communityoriented institutions working to increase affordable options for 

18 

homeowners and borrowers in locations all across the country. And 

it is a shame we do not have a small lender here today since these 

lenders often provide access to credit in underserved communities. 

And their presence fosters competition so that borrowers can get 

more competitive rates. And they prevent concentration of the market in exclusively large institutions. 

So, Mr. Stevens, can you talk about why small lender access is 

important from the mortgage banker’s perspective? And, Mr. Calhoun, can you speak to what the impact would be on borrowers, 

particularly those lower- and moderate-income borrowers in traditionally underserved areas where small lenders do not have access 

to the system? 

Mr. STEVENS. Thank you, Senator, and it is an important question. I would just say that of our approximately 650 small lenders 

who are in our membership, some of whom have been the chairman 

of the association just in the last couple of years. We spent a great 

deal of time talking about access and equality, and it was actually 

under Acting Director DeMarco that we finally got guarantee fees 

level amongst the—between large and small that did not exist preconservatorship. In fact, from 1998 until 2010, concentration of 

lending in the top ten lenders of this country went from 40 percent 

to 80 percent because what the GSEs did is they gave far favorable 

pricing and credit terms to the largest financial institutions, which 

left the small community banks and smaller lenders in a less competitive position. It is one of the things we want to make sure 

never happens again. 

The cash window actually for Freddie Mac and Fannie Mae today 

is very active. They have a couple of thousand customers each compared to Ginnie Mae, for example, which only has about 400 and 

does not have a cash window. And it is oftentimes a complaint from 

some larger institutions that cash window pricing is better than 

securitization pricing. It is a longer subject which we could talk 

about. It is daily spot pricing versus securities execution, which is 

a forward bid, so that does create some inter-day, inter-week dynamics in terms of ultimate execution. 

But to your point, and our paper calls for it, we think the way 

to resolve this long term is to never let the concentration return 

based on credit deals or pricing deals from guarantors, the GSEs, 

like they did before, which creates a concentration risk and an advantage to certain institutions over the thousands of others that 

are smaller and cannot bring a lot of individual market share. That 

unto itself made the competitive disadvantage of small lenders to 

be able to serve New Jersey and other States significant. And that 

is why we ultimately ended up with large concentrated risk in servicing on the balance sheets of certain institutions and a lot of the 

things you talked about. 

But this is a subject we address in our paper, and we would love 

to talk about that more as you go through considering reform. 

Mr. CALHOUN. If I can add quickly, just to highlight that point, 

for the cash window to work well, it has to provide equivalent pricing to the security execution. It does not work for a community 

bank if you have got a cash window. But you are going to get paid 

a lot less than the big lender who is executing a security transaction. And that requires some pooling of cost because it is more 

19 

efficient to transfer pools of thousands of loans than to do it on a 

loan-by-loan basis. But it is critical to protect the role of small 

lenders. 

Senator MENENDEZ. Mr. Chairman, just one point for the record. 

It is Congress that prohibited volume discounts that created pricing differences for small lenders, and so, therefore, we have an opportunity to revisit that. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Cotton. 

Senator COTTON. Thank you, gentlemen, for your testimony 

today. 

Mr. DeMarco, you served as the Director of FHFA and the conservator of Fannie and Freddie from 2009 to 2014. I am sure we 

can all agree that was an exciting and challenging task for you. 

Mr. DEMARCO. We can agree to that. 

Senator COTTON. So we are in the ninth year of conservatorship 

for those two institutions, and it is our responsibility to chart a 

path forward. I think few people are as well equipped as you are 

to offer insight to us. Given practical and political considerations 

and almost a century of established precedent in the American 

housing finance market, what do you envision as the plausible best 

case, most practicable scenario for a model that insulates taxpayers 

from market fluctuations while also maintaining liquidity in the 

housing finance market in the aftermath of conservatorship? 

Mr. DEMARCO. I think essentially, Senator, it means a mortgage 

market in which we, rather than having two different mortgagebacked securities that had been until 2008 operating with an implied guarantee from the Government and subsequently since 2008 

have been operating with explicit support from the taxpayer 

through the Treasury Department, and that that is the bulk of the 

capital supporting it, that we move to a market in which private 

capital bears all but the very end tail risk on mortgage credit risk, 

that the Government enhances the market by combining these two 

different securities into one and allow a broader array of participants to be able to issue into that security. 

What that does is it preserves the benefit of what works today, 

including the ability of a homeowner to lock in a rate weeks before 

settlement, the ability of a lender to engage with that potential 

homebuyer to buy the mortgage, knowing that even though this 

mortgage is not going to be settled for a while that there will be 

a delivery into the secondary market that will be available. 

Those are the things that we are trying to build on, and what 

we are fundamentally trying to do is move away from an incredible 

systemically risky orientation of having all this mortgage credit 

risk on the balance sheet of two GSEs with the taxpayer exposed 

to something which private capital competes to be in this market 

and holds that risk and the Government is there to provide stabilizers and help enhance liquidity. 

Senator COTTON. Ought Congress try to end the conservatorship 

in prompt fashion? 

Mr. DEMARCO. Yes, sir. 

Senator COTTON. What are the consequences of not doing so? 

20 

Mr. DEMARCO. Continuing to put the taxpayer at risk and continuing to keep the market from evolving and being able to seek 

better ways of serving customers. 

Senator COTTON. GSEs are somewhat unique to America. Are 

there other countries that you suggest we look to for alternative 

housing finance models as we study the best path forward? 

Mr. DEMARCO. Well, I think we start from a rather unique base 

with what we have, and since what we are trying to do is evolve 

from where we are, I am not sure that there are other countries 

that would make sound examples to look to because of where we 

start. 

Senator COTTON. As a practical matter. There are multiple pending lawsuits about the third net worth sweep from 2012. What is 

the potential impact of those lawsuits on our efforts to end the conservatorship and move toward a future model? 

Mr. DEMARCO. In some sense that is more a question for you all 

to answer. I think that the Congress of the United States created 

these two charters. The Congress of the United States has retained 

for itself the sole authority to alter those charters, end them, add 

to them. And so I think that the Congress should go ahead and do 

what is right for the long-term benefit of the country’s economy and 

its housing finance system, and the litigation matters should follow 

normal course. 

Senator COTTON. But if a court finds those parties are entitled 

to compensation from the Government for the impaired property 

rights, we would have to take that into account for funding any 

kind of future model, right? 

Mr. DEMARCO. Well, I assume then that there are things—right, 

I mean, we would have to know what the court ruling is. I cannot 

go any further. I am directly involved in this, Senator, so—but as 

I say, I think the Congress needs to get this done because this 

model is what broke—— 

Senator COTTON. Sure. 

Mr. DEMARCO. This GSE model. 

Senator COTTON. Mr. Stevens, in the time I have remaining, I 

want to ask a somewhat but not entirely off-topic question about 

PACE loans, a favorite topic of mine. Could you explain the threats 

to liquidity in the housing market that PACE loans can provide, 

and why right now Director Watt at FHFA is not underwriting 

mortgages with PACE loans on them? 

Mr. STEVENS. Thank you, Senator, and thank you for your leadership on the subject. The PACE financing is a program that literally violates all the consumer protections we have put in place 

through Dodd–Frank. It provides no disclosure to consumers, and 

it creates the opportunity for a cottage industry of chattel providers 

of varying supposed energy improvements the opportunity to prey 

on unknowing consumers and sell them overpriced products without any regulation or control. 

The other aspect of it, Senator, which you know all too well, is 

it comes in the form of a tax lien, and in the event of default, tax 

liens get paid ahead of all other liens. These tax liens can be secured after the fact, after a loan has been put in first-lien position 

by an originator and by the investor. We applaud the work taken 

by FHFA to exclude those. HUD right now, the program, does 

21 

allow them, and it is something that we think is nothing more than 

taxpayer risk and a consumer protection issue that needs to be resolved. And it is a rare case, Senator, where we are joined by the 

National Consumer Law Center on this issue in agreeing to the 

principles that the PACE program needs to be eliminated as an option in terms of the current structure the way it is provided without more clear consumer disclosure and lien protection rights. 

Senator COTTON. Thank you, gentlemen. 

Chairman CRAPO. Thank you. 

Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you, Mr. Chair. Thank you. I 

likewise am new to the Committee. This has been a great conversation. I appreciate it. 

Mr. Calhoun, I would like to start with you and really talk a little bit about changing demographics and access to credit. As you 

know, we have seen the pendulum swing back and forth when it 

comes to access to credit in certain communities. On the one hand, 

communities of color often were locked out of the mortgage market, 

and they were redlined or only offered products like contracts for 

deed mortgages, a kind of installment contract open to abuses. On 

the other hand, during the crisis—and I am from the State of Nevada—communities of color were flooded with subprime predatory 

mortgage credit. 

As we think about GSE reform, how do we ensure that all players serving the secondary mortgage market offer sustainable fair 

access to all creditworthy borrowers? And if we do not properly 

calibrate such a duty to serve the market, how could that end up 

either abandoning communities or inundating those communities 

with toxic forms of credit? 

Mr. CALHOUN. So, first of all, Senator, thank you for the tremendous work you did as Attorney General in fighting to help families 

hurt by the financial crisis. 

This is really one of the key issues, and I think there are a couple aspects. First is preserving requirements that loans be sustainable. Again, it was a lack of documentation. As you know, the liar 

loans—you were at ground zero for a lot of that lending, and the 

State paid a heavy price for it. 

And then the second is preserve the important tools that we have 

now at HERA with FHA to advance affordable housing. 

And then, finally, in all of these discussions, we all agree that 

there should be more private capital in front of any Government 

guarantee of a catastrophic risk. But how that risk is structured 

and priced and delivers profoundly affects access for families of 

modest means and also the ability of small lenders to participate 

in the system, because, again, the mortgage market—the huge 

economies of scale push things toward the bigger lenders and the 

more lucrative markets. I mean, that is just people following their 

duty to their shareholders and, you know, that is appropriate. We 

have to recognize that and not exacerbate it. 

So, for example, the types of risk sharing that FHFA is doing 

now, they are doing risk sharing on the majority of their transactions, but they are doing it by selling pool insurance on the loans 

that they acquire, and that enables them to make sure that a broad 

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22 

cluded in there but are not disproportionately getting hit with fees 

that can add 200 or 300 basis points to the cost of the loans. And 

the same thing for small lenders. I mean, if you are selling insurance, it is easier to sell it to somebody who wants it for 50,000 

loans than for somebody who wants it for 50 loans. And we have 

to recognize that but, again, not make a system that pushes things 

further in that direction, and that is, again, what I would urge the 

Committee to look at these proposals through that lens, because 

that will be one of the biggest impacts of what the Committee does. 

Senator CORTEZ MASTO. Thank you. That is very helpful. 

Let me jump to another topic because my time is running out 

and follow up on Senator Menendez’s conversation about servicing 

standards. I am more interested in the compensation aspect of this, 

and, Mr. DeMarco, I was one of those Attorney Generals that you 

received a letter from concerned about the lack of principal reduction. And so now I have an opportunity to ask you a question specifically, so I am going to put you on the spot here. 

What I have found, and particularly in the State of Nevada, with 

respect to servicing standards, it really was a matter of the compensation. The standards were just as important, but what we 

were paying servicers and that compensation and how it paid I 

think contributed to some of the poor conduct. There was more of 

an incentive to extract fees from homeowners and investors, and 

neither homeowners nor investors can fire their servicers, as we 

know, if they are not satisfied. 

So my understanding also was that FHFA released a white paper 

in, I think, 2011 looking to overhaul the way the GSEs pay 

servicers, and after accepting comments from industry and other 

stakeholders, it was abandoned, and the work was not complete. I 

am not sure why, but I would like to know: Do you think there is 

a way that FHFA should continue this discussion? And how should 

we pursue GSE reform and bring in the context of compensation 

and how we pay compensation? 

Mr. DEMARCO. Senator, yes, thank you. We did, in fact, issue a 

couple of papers in which we invited public comment on revamping 

the mortgage servicing compensation scheme. To me it was not so 

much that we abandoned it as it ended up being a not ripe issue. 

But I believe, in fact, it remains an important issue. 

The reason it was not ripe at the time that we did those white 

papers is that servicing standards themselves and the requirements were still very much evolving. The CFPB was just coming 

online, and what their servicing rules were going to be was really 

an unknown at that point. 

And so what we heard in the comment period was, well, maybe 

changing the compensation arrangement would work, but until we 

know what these rules are going to look like, it was very—you 

would be putting the cart before the horse. 

Senator CORTEZ MASTO. So you think there is a role now to address the compensation—— 

Mr. DEMARCO. I do. I believe that servicing compensation very 

much should be part of what is being looked at. 

Senator CORTEZ MASTO. And you are willing to work with us to 

address that? 

Mr. DEMARCO. Absolutely, Senator. 

23 

Senator CORTEZ MASTO. I appreciate that. Thank you. 

Chairman CRAPO. Senator Perdue. 

Senator PERDUE. Thank you, Chair. And thank you, gentlemen 

for your years of labor in this. 

I want to go to something at the very base of this. Having personal experience in this over the last 30 years, I have been concerned all along that the efficacy of the instrument that we are 

talking about here—and let us talk about the home mortgage. Mr. 

Calhoun, you mentioned something earlier that I agree 100 percent 

with that was lost in the debate. This was not just a subprime 

issue. But what we did is when trying to encourage more home 

ownership in this country starting in the late 1990s, we created 

low-income verification loans, no-doc loans, and so forth. And what 

this did, it did not just entice subprime lenders—or borrowers to 

get into a market over their head, but there were prime borrowers 

that overreached because, if you do not have to decide how you are 

going to pay for it, it is awful easy to get qualified. 

And so I would like to talk about what FinTech and the technology community is doing today regarding the underwriting of 

both these, and I think it—there is a company called TransUnion. 

It is a big credit bureau, and they have done a lot of studies on 

this, and I think the MBA has worked with them, and I applaud 

the MBA for all the work you are doing in giving us ideas about 

how to restructure this to learn from what we have seen, but also 

to adapt to the technology changes we are seeing today, particularly in this underwriting area. 

Today traditional, trended, and alternative data—those are three 

different types of data—are being used, and according to this study, 

some 26 million borrowers today could possibly be underwritten 

today using that that could not be under traditional means. And 

that would basically mean that 95 percent of the borrowing public 

of America could somehow be evaluated. It does not mean they 

would all be qualified, but at least we would have a good predictor. 

Isn’t the way forward what companies like SoFi and Kabbage, 

some of these FinTech communities are doing right now, with regard to alternative and trended data in addition to the normal traditional data? And I am not talking about a mortgage packet that 

is a foot deep like we see in some institutions. But what I would 

like you to do, Mr. Calhoun, is address that, because access to 

small markets, to the millennials, minorities, and all that, that 

might not have a—what do they call it? A thick file application? Is 

that what they call it? That might have a thin file—all of us had 

thin-file applications at one point. So how do we address the capabilities that technology has given us to create more opportunities 

for access, not just in small markets but in demographic markets 

that need our help as well? Would you address that? 

Mr. CALHOUN. Certainly, and, again, before my present role, I 

headed lending programs for more than a decade at our credit 

unions, including our home loan, both retail and secondary market. 

We support use of both the alternative data and the trended 

data. The alternative is, for example, traditional credit scores do 

not pick up rent payments. We often find, again, a good measure 

of someone’s ability and willingness to make a mortgage payment 

is if they paid their rent consistently and what level of rent they 

24 

were carrying for an extended period. And I know that FHFA—Ed 

started the process there, and they are looking at alternative scores 

there. 

And trended, as you know, is just looking at how someone’s credit score is moving. Are they improving their credit score or going 

down, either way, rather than just a static snapshot? And I think 

there is a lot of potential there, too, that that more accurately captures—— 

Senator PERDUE. Could we do that without having the foot-thick 

application file for underwriting? Is that still possible? 

Mr. CALHOUN. I think FinTech is adding a lot of advances in that 

area. There are massive amounts of data, as everybody knows. 

Senator PERDUE. But we want a predictor. That is what you 

want. You want an accurate forecast of somebody’s ability to repay 

the loan and not get underwater. 

Dr. DeMarco, would you just address real quick—and I am going 

to run out of time on this question. I would love for you and Mr. 

Stevens to have a shot at this one. Access to capital is a huge issue 

in this market. That is what we are all trying to do. With the Fed 

right now having a $4.5 trillion balance sheet, with current statements saying that the Fed is going to rework that balance sheet 

down to the tune of somewhere around $2 trillion over the next 21⁄2

to 3 years, what impact is that going to have on the capital markets while we are talking about restructuring the GSEs? Dr. 

DeMarco. 

Mr. DEMARCO. I think the Fed is certainly anticipating doing 

this in a measured way in which it should have little, if any, effect 

on capital markets as it affects the mortgages, and I certainly 

would expect and anticipate that is how they plan to handle it. 

Mr. STEVENS. The one thing we do look at—and I think it is an 

important question. There is a bit of an unknown. If you look over 

the last 20 years prior to conservatorship, the biggest buyers of 

agency mortgage-backed securities were the GSEs themselves. In 

post-conservatorship, it was the Federal Reserve buying most of 

the mortgage-backed securities. So we do need to make sure that 

the international, the global markets view the MBS produced out 

of this country as a credible, good-faith instrument, and that is actually one of the reasons why we think converting to an explicit 

guarantee on the mortgage-backed security will eliminate this 

question: Is it really AAA backed in good faith by the U.S. Government, or is it implicit? And if we can through reform get to an explicit guarantee on the MBS only, that will bring in a lot more institutional buyers from around the globe who today many will not 

buy—they will not buy Freddie and Fannie MBS. They will buy 

Ginnie’s because that does have that explicit guarantee. And that 

is one way to help smooth out this transition process. 

Senator PERDUE. Thank you, gentlemen. 

Chairman CRAPO. Thank you. 

Senator Schatz. 

Senator SCHATZ. Thank you, Mr. Chairman. 

I want to start with Hawaii. It is unique. Ninety percent of the 

loans are originated in the State of Hawaii. We have got a couple 

of the best banks in the country as measured by independent analysis. And yet one of the idiosyncrasies of Hawaii is that we have 

25 

sort of Manhattan real estate prices and not the corresponding salaries. And so the debt-to-income ratio has to be tweaked, and the 

local banks that originate the loans are more comfortable because 

they know that everybody stretches in order to afford a mortgage. 

And so they are more willing to extend credit to individual homeowners than perhaps a bank from the Mainland. 

So I will start with Mr. Calhoun and if we could work down the 

line. How does reform account for the geographic and demographic 

and economic idiosyncrasies? And how do we make sure that the 

system does not start to amalgamate into one bit sort of FinTech, 

three or four originators, and we are back to the point where we 

are, either through an app or whatever it may be, trying to persuade someone that we really can swing the mortgage, when we actually do not have a problem with our local banks? And, of course, 

they move it off their balance sheet just like everyone else does, 

but the problem that I see is that, to the extent that we start to 

establish debt-to-income ratios that are too firm, you are not accounting for the fact that Hawaii is different. We did not really 

have the same real estate market crash that the rest of the country 

had, despite our high prices. So there is something that they are 

doing right that I want them to be able to continue to do. And I 

will start with Mr. Calhoun. 

Mr. CALHOUN. We agree with the need for standards, but flexibility so it works. We would commend and note that the GSEs recently increased their debt-to-income ratios to provide more space 

there, with compensating factors which show up in the files in Hawaii because of the experiences of many of—I am sure the staffers 

here know that you have to stretch to buy a house, for example, 

in the D.C. market. So we experience some of that here as well. 

But I think that the FHFA and the GSEs have moved in that 

direction, need to continue to make that aware, but then the big 

key is also this support for all financial institutions, all the mortgage lenders, not just the large ones, so that it is a viable program 

for them. 

Senator SCHATZ. Quickly, Mr. DeMarco and Mr. Stevens. 

Mr. DEMARCO. Yes, in some sense, Senator, your question gets 

to the point that Mike Calhoun has raised repeatedly during this 

hearing about community lenders. As you pointed out in your question, community lenders have a particular insight into their community, the stability or risks that are involved, and they know 

their borrowers in a more personal or direct way. But the way the 

current system works is they do not get to, the technical term is, 

‘‘monetize’’ that benefit under the current system, so that is why 

in housing finance reform the idea of creating multiple channels for 

lenders to be able to access markets, to deliver mortgages to the 

secondary market, but also multiple channels for which to put that 

private capital in front—and this is an example of where the lender 

themselves might say, you know, the best thing for me to do for 

my bank and my customers is to be the credit enhancer on this. 

Leveling that playing field will help a lot with what you have outlined. 

Senator SCHATZ. Mr. Stevens, I am going to let you answer, but 

I am also going to ask another question in the interest of time just 

to you. So a family has to make $75,000 a year to afford a twoVerDate Nov 24 2008 08:44 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\06-29 PRINCIPLES OF HOUSING FINANCE REFORM\HEARING\6291
26 

bedroom rental in the State of Hawaii. And so I want to understand the distinction that we are trying to make in policy between 

single-family and multifamily lending and how we work on reform, 

sort of thinking about not just affordable housing as defined under 

statute, but just affordable housing in the sort of common sense of 

the word, housing that people are able to afford, which is not always—you know, not everybody in the country is supposed to own 

a home. Everybody in the country is supposed to live in a home, 

and that is where we are trying to get in the State of Hawaii. 

Mr. STEVENS. Thank you, Senator. My nephew, who is an Army 

doctor at that pink hospital in Honolulu, went through struggles 

with his own home, trying to get affordability to buy his first place. 

I know it all too well, and I tried to help him out. 

In our paper we talk about affordability in the same context that 

you are discussing it now, as a spectrum. The GSEs do a great role 

in both multifamily and single-family in today’s environment. We 

think affordability in communities across the country, expensive 

States like Hawaii, needs to be considered, and rural areas. We 

need to be able to look at them with a unique lens, and look at both 

affordable, available rental housing as well as affordable home 

ownership and make sure both are sustainable and that every 

American has the opportunity to live in a safe home. That is the 

most important thing. And as has been said here earlier, you never 

want to get past the tipping points where people create no-doc, negative amortizing products just to put people into home ownership 

when it may ultimately explode on them downstream. So you need 

to consider both. 

I will say for Hawaii—and you know this all too well—the GSEs 

have tried to address that over time through things like high-cost 

limits, which affected your State particularly, along with a few 

other metropolitan areas in this country. Those are tethers, those 

are triggers you can execute, and under our plan and most other 

plans, that is where the regulator plays a role to make sure that 

there is an obligation to serve communities of all shapes and sizes 

in this country. And, clearly, the uniqueness of Hawaii would fall 

into that. 

Senator SCHATZ. Thank you. 

Chairman CRAPO. Thank you. 

Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman, and I want to follow 

up on Senator Perdue’s question to Mr. Calhoun, but I want to ask 

Mr. Stevens to answer that question about the credit invisible, the 

folks who have a thin credit file. In South Carolina—he talked 

about the 26 million people around the country. In South Carolina, 

about three-quarters of our folks are scored or can be scored. There 

is about 16 percent that are credit invisible, and as has been suggested, they are making their rent payment on time, they are paying their utilities on time, they are paying their cell phones on 

time, but the FHFA does not use the latest model. 

Can you just speak for a few seconds on the benefits of the FHFA 

updating, using the latest model? 

Mr. STEVENS. Yes, Senator, thank you. And I appreciate the 

question. The issue of credit scoring today is a challenge, and there 

are new models. If you look at the 2017 FHFA scorecard, they have 

27 

a test to actually look at new credit models in the marketplace and 

determine whether there are alternatives. But without question, 

the models being used today are antiquated. 

Now, there are a lot of problems with looking at new models and 

adverse selection and things that credit experts will talk about. But 

without question, new models like VantageScore as an example, 

they can find ways to score a new population. The reason why this 

is important for all of us is, unlike the history of home ownership 

in this country, two-thirds of every new household formed over the 

next decade, according to the Joint Center for Housing Studies at 

Harvard, is going to be minority. And they come with less inherited 

wealth, more variable income patterns, and different sort of histories around credit. Many come from countries that were 

unbanked traditionally, did not trust the banking systems, and 

they just do not have the traditional credit patterns, but yet as 

Mike referred to earlier, there are other alternative forms where 

you can score them. 

We need to look at that. We need to understand the risks, if 

there are any increased risks with this new scorable population. 

But FHFA, until they take this on seriously and look at it, I think 

we are going to face this delta of those who can and those who cannot based on underwriting and credit standards of a long time ago. 

And that is what needs to be modernized. 

Senator SCOTT. Thank you, sir. Another question about the future economy or what really has become the current economy, the 

gig economy. When you think about the fact over the last 20 years 

somewhere around 27 percent of the payroll employees have increased through the gig economy. This is a shared economy with 

a number of jobs, and when I was owning a business in the insurance industry, I was paid on commission. There is a lot of fluctuation in the paychecks. Our housing financing system has not 

caught up. The same mortgage payments are due month in and 

month out. 

The real question is: Is there a way—Mr. DeMarco, you have 

said creating shock absorbers by looking at savings accounts and 

other ways. What is the new opportunity for those folks in the gig 

economy to be a homeowner in this new economy? 

Mr. DEMARCO. Thank you, Senator. This raises issues on both 

sides, right? I mean, the regulations, are so much about basic underwriting, qualified mortgage, really have an embedded presumption of a stable flow of income, and yet that is not where so many 

households are at. And so there is the challenge qualifying. 

On the other side, on the risk side, this also lends to greater income volatility, and so as we think about mortgage lending and 

mortgage risk, this income volatility, which is really growing 

throughout our economy, more and more households face it, is a 

risk factor we need to consider in how we are managing to that. 

So these things all need to be addressed. 

In terms of shock absorbers, this is where thinking a little bit 

more innovatively about products and about how we underwrite 

can help, and so I will give just two simple examples, not at all 

meant to be exhaustive. 

One is—and the work that Mike Calhoun’s group has done really 

focuses on this. It is not just about full documentation. It is about 

28 

where are the reserves and helping families build and establish reserves so that they can weather bumps in their income to pay their 

mortgage. 

The other is the mortgage product itself, and not to endorse an 

idea, but to use it to illustrate that ideas are being developed, there 

are some economists at the Federal Reserve that are looking at essentially the equivalent of a 30-year fixed-rate mortgage but with 

a savings component to it that actually builds in those kinds of 

buffers. 

So these are ideas that I think really warrant more consideration 

because I think it can expand credit access, but not just access. It 

can help make mortgage lending more sustainable. 

Senator SCOTT. Thank you. 

In terms of furthering what I call my ‘‘opportunity agenda,’’ I am 

very interested in promoting sustainable home ownership versus 

home buyership, so this is an important discussion. Thank you for 

your participation. 

Chairman CRAPO. Thank you. 

Senator Heitkamp. 

Senator HEITKAMP. Thank you so much, Mr. Chairman. 

Reviewing your testimony, and if I can just get you to agree, we 

all know that a foundational principle in all of this is preserving 

the 30-year fixed-rate mortgage. 

Mr. CALHOUN. Yes. 

Mr. STEVENS. Absolutely. 

Senator HEITKAMP. Mr. DeMarco. 

Mr. DEMARCO. Yes. 

Senator HEITKAMP. Thank you. So I do not have to ask that 

question then. I am concerned about the rental market, which, Mr. 

DeMarco, in your testimony you made a critical point that one of 

our greatest challenges is actually in the rental market. You correctly point out that QM rules generally require household debt be 

no more than 43 percent of a family’s monthly income, where we 

have 11 million renter families spending more than 50 percent of 

their monthly income just on rent, not getting any equity. You 

know, that idea that your equity in your home was going to be the 

third leg of your retirement stool, you know, when you think about 

Social Security, equity in your home, and some kind of pension/ 

401(k). We no longer have that third leg because of this problem. 

Are there improvements to the way we handle the multifamily 

portfolio at Fannie and Freddie that could help address high rental 

costs? And I will ask you, Mr. DeMarco, to go first. 

Mr. DEMARCO. I am not sure that the financing side, and particularly the role that Fannie and Freddie are playing in 

securitizing multifamily mortgages is the constraint or the barrier 

here. They are really on the renter side. It is income growth, right? 

Senator HEITKAMP. Yes. 

Mr. DEMARCO. It is stable jobs. It is growing income. And on the 

supply side, we have some real challenges in a lot of communities 

with regard to having developers be able to either rehabilitate or 

bring new multifamily units online quickly. And there are several 

reasons for that. The Obama administration actually last year had 

a report outlining some of this, but it goes to building requirements, zoning restrictions, and—— 

29 

Senator HEITKAMP. I only have so much—we can maybe get some 

other opinions on this. I only have so much time. 

Mr. STEVENS. The challenge is—and if you look at both Freddie 

Mac and Fannie Mae’s multifamily programs over the last couple 

of years, as you know, there is a cap. They set a limit to how much 

they can lend. And they have come near those caps, and not 

enough of that has been affordable. 

So what Director Watt has done under his leadership, he has 

modified the cap so that you are unlimited if you provide—if it is 

affordable. So that is a step in the right direction. But I think for 

Ed, he highlighted some of it, but I will tell you that a real challenge is the demographic mix of who is renting and who is owning, 

and the pressure of the millennial generation delaying their decision to buy and putting upward pressure on rent rates, and that 

is affecting long-term renters and pricing them out of their ability 

to afford the rental. Yes, wages are really the core part of this, but 

on top of it, we are seeing unique upward pressure on rents because people are not going to buy homes at the same ages that they 

used to before. 

Senator HEITKAMP. There was another report out today talking 

about the lack of savings for that downpayment. Millennials, I 

think in this report, 1K, that is the extent of their savings. They 

are paying off their student debt. They are living in higher-cost cities, which I think has an effect as well. 

One of the things I would suggest that we could do is encourage 

diversification, not put all of the Google employees in the high-price 

areas and look at lower-cost locations. But, you know, we need to 

have this discussion, and so I just wanted to lay down a marker. 

I want to talk about access to secondary market for small lenders. You know, we tried to address this when we were doing the 

Corker–Warner analysis and work a couple years ago, and one option we explored as part of Corker–Warner was expanding the role 

of the Federal Home Loan Bank to serve as an aggregator of small 

loans. 

What is your view on allowing the Federal Home Loan Banks to 

actually be an aggregator so that we can have greater access to the 

secondary market? And we will start with you, Mr. Stevens. 

Mr. STEVENS. It is a complicated question, so this is a follow-up 

one. But I actually thought that was a work-around because the 

way the legislation was written, there was a concern that small 

lenders would not have access to the main system. 

Senator HEITKAMP. Right. 

Mr. STEVENS. I worry about the ability to have effective, what we 

call ‘‘execution,’’ pricing for small lenders, if you use only the Federal Home Loan Banks as the aggregator platform. As you know, 

the Federal Home Loan Banks work with community banks today. 

They all get access to a home loan—— 

Senator HEITKAMP. They all have a relationship. 

Mr. STEVENS. That is correct. But nonbank originators do not 

have access to that system, and we believe strongly that the Federal Home Loan Bank is a tool here that can be used as you think 

about GSE reform to affect the overall market. 

But I would say the way we have resolved it in our plan is we 

think addressing the small lender issue is actually critical and 

30 

based on the debates we have seen over the last few days, just over 

this hearing, that is the case, making a cash window that is at the 

same price with the same credit terms in the new guarantor model 

gives an outlet for all small lenders, regardless of size and regardless of business model, and it does not force them into some other 

system that because of liquidity and size may not get them the 

same pricing ultimately. So we need to consider all the levers. 

Senator HEITKAMP. Mr. Chairman, I will follow up with written 

questions. 

Mr. CALHOUN. Can I add just two quick statements? 

Senator HEITKAMP. You have to ask the Chairman if you can do 

that. 

Chairman CRAPO. If you are very brief. 

Mr. CALHOUN. The Federal Home Loan Bank, as Mr. Stevens 

said, it is helpful. It is not sufficient. They have got to have a workable cash window. It cannot be a substitute for that. 

On the rental housing, one thing, we have got to preserve the 

things that are really helping. Those include the important role the 

GSEs play in multifamily financing, and also things like the lowincome housing tax credit. If you do not preserve that, you are certainly making the problem even much worse. 

Chairman CRAPO. And I thank Senator Heitkamp for helping me 

keep an eye on the clock. 

Senator Tillis. 

Senator TILLIS. Thank you, gentlemen, for being here, and I want 

to go back, Mr. DeMarco, to a question that you were asking. On 

rental, I think the low-income housing tax credit is very important. 

We have a housing crisis in North Carolina, affordable housing crisis. It is not limited just to urban areas. We have similar challenges in rural areas. But you were going on to a point that I think 

is very important to make, and it is really the cost of entry for 

someone to build a multifamily unit, and it relates directly to a 

number of the zoning and regulatory hurdles within the very areas 

that say we need more affordable housing, we need a product that 

in order to be able to have affordable rent can come at a right 

price. But it is the additive cost of the regulatory hurdles. 

Can you expand on—any of you can, but because you went down 

that direction with Senator Heitkamp, I wanted you to touch on it. 

Mr. DEMARCO. Right. So we clearly have seen in quite a number 

of communities the land-use restrictions, the zoning restrictions, 

and then the building requirements—even if you have a piece of 

property and can develop a multifamily development on it, the requirements that are whether it has to do with amenities or environmental or health and safety, many of which—all of which probably are good and valuable, but when these get so substantial—— 

Senator TILLIS. The projects do not work. 

Mr. DEMARCO. ——that the fixed cost of the project, it either is 

not going to get done or it is going to end up being a high-rent development. 

Senator TILLIS. They will by definition not be affordable, although the original intent was to produce an affordable product. 

Mr. DEMARCO. Exactly. 

Mr. STEVENS. It is interesting, and not wanting to sound like 

anti-regulation because good regulations are good, and we need to 

31 

protect our consumer rights, et cetera, the time to get to occupancy 

in the multifamily market is extremely long comparatively to 

where it was a decade ago. And a lot of these are to the points that 

Ed made, and so it makes the marginal return of building small 

unit—large-unit buildings but low-cost-per-unit properties. You 

cannot get the margin out of it ultimately when you factor in all 

the capital costs associated, and the delay-to-market cost. So that 

is why you see all this high-end rental stuff being built, but not 

enough focus on the low end, and that has to do a lot with the regulatory barriers that Ed referred to. 

Senator TILLIS. Yeah, I feel like we have to hold jurisdiction— 

to your point, Mr. DeMarco and Mr. Stevens, there are clearly regulations that should be in place for good reasons, but I believe that 

there are some that—at least in my State, some of the communities 

that are asking for more and more affordable housing are the worst 

offenders of putting in road blocks that create an additive cost that 

make it impossible. That is why I have really advocated as it relates to any kind of tax credits or grants from the Federal Government that we should come up with some sort of indexing scheme 

for these local areas to say once you reach a certain threshold 

where we think you are making it almost impossible to produce a 

product, then you are no longer eligible for the help to create—they 

can do whatever they want to, but they have to own the consequences of doing that, because I think it is a very big hurdle, or 

at least I can speak for North Carolina. 

In my remaining time, I wanted to ask really about the need for 

moving forward with reform, and I want to start with, you know, 

something pretty basic. Director Watt was here. He expressed his 

concerns about companies being required to operate without any 

capital. We also had Senator Cotton and Senator Crapo talk about 

the risk of another downturn, and you all made it very clear that 

the taxpayers are at risk. 

Can you give me some sense, if we reached a crisis of 2008 proportions, just what that risk is on a dollar basis or some scope, 

some order of magnitude? 

Mr. CALHOUN. Yes, so Treasury did do a detailed analysis, and 

the costs would be something in the range of $200 billion. They 

concluded that there was sufficient cushion within the existing line 

of credit, but that is the kind of dollar amount. 

I would point out that—— 

Senator TILLIS. So the taxpayers—without reform, the taxpayers 

would be at risk somewhere to the tune of about $200 billion? 

Mr. STEVENS. That is correct. 

Mr. CALHOUN. I would say in looking at that—and I think there 

is unanimity here, and I think broadly, about needing capital there 

to protect it. There are things that have democracy made this a 

safer housing system that—— 

Senator TILLIS. So that I finish my question before my time is 

out, a follow-up question, I am kind of curious if you all believe 

that financial institutions operating or maintaining no capital is 

sound policy. 

Mr. STEVENS. All I would say is the easy answer is no. The good 

news is there is an ample line of credit to cover all losses, and foVerDate Nov 24 2008 08:44 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\06-29 PRINCIPLES OF HOUSING FINANCE REFORM\HEARING\6291
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cusing on anything other than legislative reform I think is a diversion and we should not go down that path. 

Mr. DEMARCO. Completely agree. 

Mr. CALHOUN. They obviously need capital, and they need to accumulate it. 

Senator TILLIS. I will be submitting a number of questions for 

the record. 

Thank you all for being here. 

Thank you, Mr. Chair. 

Chairman CRAPO. Thank you. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. Thank you all for 

being here today. 

There is an affordable housing crisis in this country. Many people cannot afford to buy homes, and it has pushed the home ownership rate below 64 percent, which is well below the rate it was before the pre-bubble years of the early 2000s. 

Now, that in turn has put enormous strain on the rental market. 

A recent report from the National Low Income Housing Coalition 

found there is a shortage of about 7.4 million affordable rental 

units across this country. Millions of families are forced to spend 

more than half of their income on rent. This affordable housing crisis squeezes working families across the country and holds back 

economic growth. 

So any effort to reform our housing finance system must address 

this crisis. If it does not address this crisis, then it does not solve 

the problem in front of us and, in my view, is not worth doing at 

that point. 

So I just want to get all of you on record on a core point. Do you 

think that a primary goal of housing finance reform should be to 

meaningfully increase access to affordable housing, including the 

rental market? Mr. Calhoun, can I start with you? 

Mr. CALHOUN. Yes, absolutely. 

Senator WARREN. Thank you. 

Mr. DeMarco. 

Mr. DEMARCO. Yes. 

Senator WARREN. And, Mr. Stevens. 

Mr. STEVENS. Absolutely. 

Senator WARREN. All right. Good. So we have got that much 

going. 

Of course, the question is: How do we accomplish that? How do 

we get to that goal? When this Committee last considered housing 

finance reform, the two major proposals, Corker–Warner and Johnson–Crapo, including a 10-basis-point strip to provide funding for 

affordable housing. But both of those proposals also eliminated the 

affordable housing goals. 

So let me start there. Mr. Calhoun, do you think that creating 

a 10-basis-point strip for affordable housing while eliminating 

housing goals will address our affordable housing crisis or make 

the affordable housing crisis worse? 

Mr. CALHOUN. No, and, again, when we say affordable housing 

goals, that is often shorthand for the range of tools that the GSEs 

and any successor should have and which have under HERA, and 

the biggest one is that pooling of risk. The pooling of risk far 

33 

dwarfs the impact even of that increased housing affordability fund 

fee. 

Senator WARREN. So let me ask then, what are some of the ways 

that we could make progress on this front? I assume that it starts 

by maintain the goals in the affordable housing strip, but what else 

could we be doing? How could we be building from there? 

Mr. CALHOUN. So one example is, as we have talked some about 

today, the GSEs today as a model are off—are transferring risk, 

credit risk transfers, and they are doing it largely on a pool basis 

where they acquire the loans and then they sell that risk to a diversity of guarantors in the market. So it creates the kind of competition that Mr. DeMarco is talking about, but it allows for that 

pooling of risk that helps both families of modest means and the 

smaller lenders, particularly the rural lenders. And so that program should be maintained and continued, and if it is replaced 

with one—and this is the point of respectful disagreement. If it is 

replaced with one where that credit risk is all divided up on socalled the front end, before the bank makes the loan or before the 

issuer acquires the loan, that is going to push pricing that will 

favor the opposite way, to the larger lenders, to the wealthier borrowers. 

Mr. DEMARCO. May I? 

Senator WARREN. Thank you. Yes, Mr. DeMarco, please. Very 

quickly. 

Mr. DEMARCO. So you asked a great question. What more can we 

do? What can we do better? 

Senator WARREN. Right. 

Mr. DEMARCO. I will answer at the programmatic level and the 

borrower level. 

At the program level, approaches that are under consideration in 

housing finance reform include a dedicated funding stream that 

you mentioned. It also includes a duty to serve requirement for the 

secondary market. What that really is about is about creating better partnerships between secondary markets and primary lenders. 

If a lender is in Boston and says, ‘‘I have got this particular issue 

in Boston,’’ there ought to be not just sort of a national rule but 

a way of working with a secondary market aggregator to tailor 

something to those unique needs. We had an earlier discussion 

about the unique circumstances in Hawaii. There is also the importance of thinking about FHA and how we make that work better. 

At the borrower level, to create better opportunities and access, 

we also need to think about how we are preparing borrowers to become homeowners. That includes downpayment building and assistance getting there. It includes financial education, homebuyer 

counseling. And it includes not measuring that we made a loan, but 

was the loan successful or not? 

Senator WARREN. So thank you. This is very helpful, and we will 

talk more about this as we talk about some of the details. 

You know, I think it is worth looking at the original legislation. 

A big reason that the Government created Fannie and Freddie to 

begin with was to promote access to affordable home ownership. 

That is the reason for their existence, and that should be our main 

goal as we try to rewrite in this area. 

34 

I am all for ending Government conservatorship, and I am certainly all for ending the old system where the private investors 

pocket all the profits while the taxpayers take all the risks. But I 

cannot be for reform if it does not address the affordable housing 

crisis in this country. So I would like to see us stay focused there. 

Thank you. 

Mr. CALHOUN. If I may add, this is the point where we agree 

with the MBA and commend them. It only works if these actors all 

have a duty to serve the national market. Otherwise, you are going 

to have plenty of people who want to serve New York and San 

Francisco, and I love them both. But, you know, who will go to the 

rural counties in northeast North Carolina where it is much harder? Who will go to the other markets that are not as lucrative? You 

should not be able to just cherrypick and cream the market with 

the aid of a Government guarantee. 

Senator WARREN. Good. Thank you. That is very helpful. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you very much, and that concludes are 

questioning. I want to thank our witnesses for being here today 

and providing your testimony. I am looking forward to working 

with you and other stakeholders as we address this critical issue. 

I also look forward to working with our Committee Members, 

Senator Brown and the other Members of the Committee, on this 

issue and building a strong, bipartisan solution. 

For Senators who wish to submit questions for the record, those 

questions are due on Thursday, July 6, and I encourage the witnesses, if you receive questions, to please respond promptly. 

With that, the hearing is adjourned. 

[Whereupon, at 11:47 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

35 

PREPARED STATEMENT OF DAVID H. STEVENS 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, MORTGAGE BANKERS ASSOCIATION

JUNE 29, 2017 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank 

you for the opportunity to testify on behalf of the Mortgage Bankers Association 

(MBA). My name is David H. Stevens, and I am President and CEO of MBA. From 

2009 to 2011, I served as Assistant Secretary for Housing and Federal Housing Administration (FHA) Commissioner at the U.S. Department of Housing and Urban 

Development (HUD). I am a Certified Mortgage Banker (CMB), and I have over 35 

years of experience in real estate finance, including nearly a decade as Senior Vice 

President for Single-Family Business at Freddie Mac, where I witnessed the 

strengths of the business model as well as the weaknesses that contributed to the 

financial crisis and led to the current state of our housing finance system. 

MBA is the national association representing the real estate finance industry, an 

industry that employs more than 280,000 people in virtually every community in 

the country. The association works to ensure the continued strength of the Nation’s 

residential and commercial real estate markets, to expand home ownership, and to 

extend access to affordable housing to all Americans. MBA promotes fair and ethical 

lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. 

MBA’s membership of over 2,300 companies represents all elements of real estate 

finance, including firms serving both the single-family and commercial/multifamily 

markets. Our membership includes commercial banks, investors, brokers, conduits, 

and industry vendors, as well as nearly 650 independent mortgage bankers, community banks, and credit unions, which comprise almost 80 percent of our single-family 

membership. 

We are now nearing 9 years since Fannie Mae and Freddie Mac (the GSEs) first 

entered conservatorship, and yet their long-term status remains unresolved. The financial crisis exposed the structural conflicts and misaligned incentives in the GSE 

business model, as well as weaknesses in the regulatory framework that was in 

place at the time. The result—a breakdown of the secondary mortgage market, $187 

billion in taxpayer assistance, and continuing Federal support of almost $260 billion—underscores the importance of comprehensive reform. 

Conservatorship of the GSEs has already persisted far longer than was ever intended. And while the Federal Housing Finance Agency (FHFA) has taken important administrative steps during this period, an extended conservatorship is economically and politically unsustainable. In the absence of comprehensive reform, 

borrowers forego the benefits made possible by a more vibrant secondary market, 

taxpayers remain exposed to elevated levels of credit risk, development of the private-label securities market remains stagnated, and lenders face increased uncertainty about the future. In short, the status quo is an unacceptable long-term outcome. 

To address the need for change, MBA convened its Task Force for a Future Secondary Mortgage Market (Task Force) in early 2016. The Task Force was comprised 

of members covering a broad cross-section of the real estate finance industry, including bank and nonbank lenders serving the single-family and multifamily markets 

and spanning a wide range of sizes and business models, mortgage insurers, REITs, 

and title companies. The members of the Task Force spent over a year considering 

and debating many potential models before issuing final recommendations for a reformed and improved secondary mortgage market system. The result of this extensive work was a detailed proposal released in April 2017, titled GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market. I have submitted 

this proposal as an addendum to my written testimony. 

It is important to note that our Task Force focused on balancing key public policy 

objectives with the realities of the marketplace. As industry practitioners, our members placed a premium on pragmatism. We are fully aware that there is no single 

perfect solution to GSE reform—all proposals involve various trade-offs. We believe 

that our plan addresses these trade-offs in a way that will benefit consumers, industry, and taxpayers, while also providing the long-term stability so essential to a 

healthy housing finance system. 

The Task Force took particular interest in two areas that have tested past reform 

efforts—the appropriate transition to a new system and the role of the secondary 

market in advancing a national affordable-housing strategy. Distinct working 

groups within the Task Force studied these issues and developed carefully crafted 

recommendations that we believe can bridge the divides that currently exist. 

36 

With respect to the transition from the status quo to a new end state, the MBA 

proposal makes use of concepts that are well-established in finance and banking, as 

well as historical examples that have provided insights into the key elements of successful models. The Task Force specifically noted the importance of leveraging the 

assets, infrastructure, and regulatory framework of the current system wherever 

possible, while also emphasizing that any workable transition must utilize a clear 

road map and be multiyear in nature. 

The Task Force also sought to develop an affordable-housing framework that appropriately targets the scope of the federally supported secondary market within the 

full continuum of households, covering both renters and homeowners of varying income levels. To advance this objective, the MBA proposal features a framework that 

involves quantitative and qualitative metrics that focus on outcomes and that are 

transparent, well-defined, measurable, and enforceable. The GSEs’ multifamily executions and their support for rental housing would be preserved. The proposal also 

recommends other potential improvements to better serve the full continuum of 

households, including updating credit-scoring models, better capturing nontraditional income, and providing enhanced liquidity for small-balance loans. 

Another critical objective of the Task Force—and one that has been the subject 

of intense debate during past reform efforts—was to ensure that secondary market 

reform fosters a competitive primary market that is served by lenders of all sizes 

and business models. In particular, the Task Force recognized the important role 

that smaller lenders play in strengthening the system for consumers by focusing on 

niche markets and leveraging unique knowledge of local needs (see Exhibit A— 

‘‘Small Lender Access: Why It Matters’’). The MBA proposal reflects this objective 

by ensuring equitable access to secondary market programs, prohibiting special pricing based on loan volume, preserving cash window and small pool execution options, 

and preventing vertical integration by the largest market participants. 

After contemplating many different types of business structures and regulatory 

frameworks for the Guarantors that will issue eligible mortgage-backed securities 

(MBS), the Task Force determined that a model based on regulated utilities would 

be most effective. The core justification for utility-style regulation rests with the 

premise that privately owned utilities derive much of their existence and powers 

from the state. Because the Guarantors will be granted the ability to distribute securities carrying a full faith and credit guarantee from the Federal Government, 

they must also accept the responsibility—and the regulatory oversight—to serve 

customers in an efficient and fair manner. The regulator would ensure that the premiums charged by the Guarantors are neither excessive nor inadequate, and that 

they remain nondiscriminatory in nature. Pricing would be transparent, with rates 

posted for public input. And in addition to the legal and economic rationale for utility-style regulation, this framework is also intended to address the problematic 

growth-company models and mindsets that existed at the GSEs prior to the financial crisis. Investor-owned utilities will aim to provide shareholders with a steady 

dividend over time rather than taking on excessive risks in a reach for market 

share. Companies with a dividend-focused culture will compete through more efficient operations, product and process improvements, and customer service. 

GSE Reform: Core Principles 

The MBA proposal recognizes the need for any comprehensive GSE reform plan 

to balance three major priorities: (1) taxpayer protection; (2) investor returns; and 

(3) consumer cost and access to credit. Pushing too far in any one direction may lead 

to a mortgage market that does not adequately meet the needs of all participants. 

To achieve the appropriate equilibrium among these priorities, the Task Force developed the following core principles to guide its work: 

Core Principles: 

• Preserve the 30-year, fixed-rate, prepayable single-family mortgage, as well as 

long-term financing for multifamily mortgages; 

• Maintain a deep, liquid to-be-announced (TBA) market for securities backed by 

conventional single-family loans; 

• Attract global capital and preserve liquidity during times of economic stress 

through an explicit Government guarantee for eligible MBS backed by singlefamily or multifamily mortgages; 

• Limit the explicit Government guarantee to the eligible MBS, while prohibiting 

the extension of the guarantee to the equity or debt of the Guarantors; 

37 

• Require the Guarantors to support an effective national affordable-housing 

strategy that helps meet the needs of low-income and underserved households 

and communities; 

• Support a competitive and diverse primary market for lenders of all sizes and 

business models; 

• Enable a robust, innovative, and purely private mortgage market to coexist 

alongside the Government-backed market; 

• Preserve existing multifamily financing executions and permit new options; 

• Establish a strong, transparent regulatory framework that promotes liquidity 

while protecting the taxpayers; 

• Ensure that private capital assumes most of the credit risk; 

• Ensure liquidity in the event of a full-blown systemic crisis; and 

• Minimize risks to the liquidity and stability of the mortgage markets during the 

transition to the end state. 

GSE Reform: Guardrails 

The MBA proposal also addresses the risks that are inherent in any plan to reform the secondary mortgage market. To mitigate these risks, the Task Force developed a set of ‘‘guardrails’’—a statutory and regulatory framework designed to protect taxpayers, ensure liquidity, preserve what works in the current system, and 

align incentives across both the primary and secondary markets. These guardrails 

are comprised of structural requirements, prudential standards, and market conduct 

regulation: 

Structural Requirements: 

• The end state should allow for more than two approved Guarantors to issue 

Government-guaranteed MBS; 

• The regulator should be authorized to grant additional Guarantor charters; 

• The Government guarantee should be explicit, funded by appropriately priced 

insurance premiums, and limited only to the MBS issued by the Guarantors; 

• Guarantors should disperse credit risk to private capital investors through a variety of credit risk transfer (CRT) mechanisms, including deeper first-loss CRTs 

that are transparent, scalable to all lenders, and capable of limiting taxpayer 

exposure to nothing more than catastrophic risk; 

• Guarantors should be stand-alone companies and lenders should not be allowed 

to own controlling interests in Guarantors; 

• Guarantors’ rate of return should be regulated using a utility regulation framework; 

• Guarantors should issue a single uniform type of security for single-family 

mortgages; 

• The Common Securitization Platform (CSP) should be established as a selffunding, Government-owned corporation and must be accessible to new Guarantors; 

• The CSP should own all GSE historical single-family data, and new Guarantors 

and other market participants should be able to access and analyze this information for an administrative fee; and 

• The regulator should have established mechanisms in place to respond to liquidity disruptions during severe market downturns or catastrophic events. 

Prudential Standards: 

• The regulator should have sufficient powers and discretion with respect to capital regulation and other aspects of prudential oversight; 

• Single-family loans eligible for inclusion in the Government-backed MBS should 

meet a Qualified Mortgage (QM) type standard; 

• Multifamily mortgages of a type and quality similar to those financed by the 

GSEs today should be eligible for inclusion in the Government-backed MBS; 

• Guarantors may hold only limited mortgage portfolios to support cash window 

operations, delinquent loan repurchases, loss mitigation activities, and certain 

multifamily assets; and 

• Guarantors that reach a given size may be designated and regulated in a manner similar to systemically important financial institutions (SIFIs). 

38 

Market Conduct Regulation: 

• Guarantor charters should expressly maintain a bright line between the primary and secondary mortgage markets, with the Guarantors’ allowable activities limited to the secondary market; 

• The regulator should ensure that Guarantors provide equitable, transparent, 

and direct access for lenders of all sizes and types, and pricing and program 

participation should not be based on the loan volume or asset size of lenders; 

• Guarantors should be required to maintain both cash window and MBS execution options; and 

• Guarantors should be required to support an effective national affordable-housing strategy that helps meet the needs of low-income and underserved households and communities. 

Why Congress Needs To Act 

In its role as conservator of the GSEs, FHFA has put in place a number of policies 

and procedures to improve access to the secondary mortgage market and reduce the 

risks to taxpayers. These changes include more appropriate guarantee fee (g-fee) 

pricing that is based on the riskiness, not the volume, of the loans delivered; the 

development of the CSP and the Single Security initiative; extensive use of credit 

risk transfers by the GSEs; substantial reductions in the GSE retained mortgage 

portfolios; and enhanced oversight of, and risk management at, the GSEs. 

Despite these important steps, there is a critical need for legislative reform—both 

to bring about the remaining structural changes that are necessary to achieve the 

core principles listed above, as well as to ‘‘lock in’’ the recent improvements made 

by FHFA. It is only Congress that can: 

• Alter the existing GSE charters to reconstitute the firms as Guarantors; 

• Establish an explicit Federal Government guarantee on eligible MBS, as well 

as a Mortgage Insurance Fund (MIF) to stand ahead of taxpayers; 

• Empower FHFA with a utility-style regulatory mandate to maintain a level 

playing field, as well as the authority to grant charters to new Guarantors in 

order to better enable competition in the secondary market; and 

• Preserve the administrative reforms made by FHFA as conservator of the GSEs. 

And perhaps most importantly, legislative reform is the only outcome the provides 

the legitimacy and public confidence necessary for long-term stability in both the 

primary and secondary mortgage markets. 

It is therefore clear that calls to simply recapitalize the GSEs and allow them to 

operate without further structural changes are misguided. Under such plans, the 

post-crisis reforms already achieved could be reversed at the discretion of future 

FHFA directors. And recapitalization absent comprehensive legislation would likely 

embolden those who seek private profit at the expense of sound public policy, while 

mortgage market participants may lose confidence in the prospects of serious reform, creating further uncertainty around business planning. 

Finally, any movement towards recapitalization without corresponding reforms 

would be unnecessary from a safety and soundness perspective given the large levels of Federal support currently available to the GSEs. Even worse, this type of recapitalization plan would likely be counterproductive to efforts to develop and implement much-needed reforms. 

We cannot go back to a housing finance system that provides private gains when 

markets are strong yet relies on support from taxpayers when losses occur. Only by 

enacting comprehensive legislative reform can borrowers, lenders, and investors realize the full benefits of a diverse, competitive primary market and a vibrant, liquid 

secondary market. The hard work of reform should proceed without delay. 

Once again, I appreciate the opportunity to present this testimony, and I will reiterate MBA’s long-standing commitment to working with the Committee on all elements of GSE reform. 

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PREPARED STATEMENT OF EDWARD J. DEMARCO 

PRESIDENT, HOUSING POLICY COUNCIL OF THE FINANCIAL SERVICES ROUNDTABLE

JUNE 29, 2017 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank 

you for the invitation to be here today. It is an honor to be back before this Committee, this time in my new capacity as the President of the Housing Policy Council 

(HPC, or the Council), a division of the Financial Services Roundtable. The Council’s 

32 member firms are among the Nation’s leading mortgage originators, servicers, insurers and mortgage data service and settlement providers. They operate in the 

mortgage market every day and they want it to be strong and stable for the future 

to serve their customers—current and future homeowners. 

The topic of this hearing—housing finance reform—is a top priority for the Housing Policy Council. While the housing finance system continues to function with 

Fannie Mae and Freddie Mac in conservatorships, the status quo is untenable for 

many reasons and only Congress has the authority to make the permanent changes 

needed to put the system on a sound footing for the long term. The good news is 

that much progress has been made since I last appeared before this Committee in 

2013 as the Acting Director of the Federal Housing Finance Agency and since this 

Committee approved reform legislation in 2014. 

In these prepared remarks, I will review that progress and its importance to this 

effort. I will also describe the strides made since 2013 in developing a broad consensus not just on the need for legislation but, in many ways, on such legislation’s 

content. While significant differences of opinion remain on some key aspects of housing finance reform, they are relatively few and in some instances, multiple approaches may be workable and acceptable. The critical point is that reform cannot 

be completed without Congress. Your leadership in this effort is much appreciated 

and HPC’s members stand ready to help you forge the bipartisan consensus needed 

to get this legislation to the finish line. 

Enacting comprehensive housing finance reform will put the country on a better 

course to ensure future homebuyers have broad access to credit and that our financial system can deliver this credit with much less systemic risk than in the past. 

Comprehensive housing finance reform can also ensure that taxpayers are protected 

and that Congress will not need to consider another bailout, even if we face a deep 

recession and a nationwide collapse in house prices as we did last decade. While 

ending the GSE conservatorships dominates housing finance reform discussions, any 

comprehensive review of housing finance should include the Federal Housing Administration (FHA) program as a critical component of the housing finance system. 

Principles for Housing Finance Reform 

An appropriate starting point for discussing major legislation that will affect so 

many citizens and a large segment of the economy is to agree upon a set of principles that can guide reform. The Housing Policy Council centers its reform views 

on the following principles: 

1. Fix what is broken and preserve what works in support of consumers and the 

market. 

2. The transition from the old system to the new one should avoid disrupting consumers and markets. 

3. Private capital should bear all but catastrophic mortgage credit risk so that 

market discipline contains risk. The Government should provide an explicit, 

full faith and credit guarantee on MBS but with a pre-set mechanism to ensure 

any catastrophic losses that call upon taxpayer support will be repaid fully. 

4. Government should provide a regulatory framework that is clear and equitable 

across all participating companies and ensures that participants in the housing 

finance system operate in a safe and sound manner. 

5. The Government-protected GSE duopoly should be replaced with a structure 

that serves consumers by promoting competition, affordability, transparency, 

innovation, market efficiency, and broad consumer access to a range of mortgage products. 

Fixing What Is Broken 

Among the many things broken in the current system are: the burden the system 

places on taxpayers for the bulk of the capital needed to backstop mortgage credit 

risk; the lack of meaningful market forces in evaluating mortgage credit risk; persistent concerns about access to and affordability of credit for consumers despite the 

enormous subsidies inherent in the current system; the barriers to entry inherent 

99 

in a system structured around two Government-sponsored enterprises (GSEs); and 

the systemic risk that results from concentrating most mortgage credit risk on two 

balance sheets. As we have seen, this systemic risk leaves taxpayers exposed to 

emergency bailouts when the system fails. All these flaws need to be fixed. 

At the same time, we need to preserve the features of the system that are working 

well, some of which have been greatly strengthened since the crisis. We should preserve: the efficient forward market that allows borrowers to lock in rates before settlement (known as the To-Be-Announced, or TBA market); the standardization of 

data and reporting; transparent and consistent reps and warrants; attracting private capital from mortgage insurers and a range of other capital providers; and the 

ongoing, nationwide access to the secondary mortgage market by lenders of all sizes 

and types, which benefits consumers and all participants in the mortgage market. 

Ensuring a Smooth Transition 

The pathway to the new system should be constructed with care. Hasty or ill-conceived transitions can disrupt markets, add risk, and limit credit availability. By the 

same token, an excessively drawn out transition can also be disruptive, especially 

if it leads to more interim measures that add costs and risks. Legislative reform can 

and should continue the gradual transition process that has been underway for several years. Such an approach allows new infrastructures and business arrangements 

to form around the new system before the old system is ended. A thoughtful transition also protects the value of $5 trillion in mortgage securities already trading 

today and the new securities that will be issued during the transition period. 

Private Capital Should Bear Mortgage Credit Risk 

As the crisis demonstrated, the GSE-duopoly system created immense systemic 

risk and the imminent collapse of the housing finance market forced Congress to 

pass emergency legislation bailing out investors in the GSEs’ mortgage-backed securities (MBS). Since then, progress has been made in drawing private capital back 

into a meaningful first-loss position, but more progress is needed. Housing finance 

reform should continue that gradual transition away from taxpayer capital support 

to a system based upon private capital that protects taxpayers and restores market 

discipline on risk-taking. The heads-shareholders-win, tails-taxpayers-lose construct 

must be banished. Instead, as described below, a new system should encourage multiple channels for bringing private capital to this market, including bank balance 

sheets, mortgage insurance, various capital market structures, equity markets, and 

reinsurance. 

Regulation Should Be Consistent and Transparent 

Today’s mortgage market has thousands of firms engaged in the origination and 

servicing of mortgages. Some are large and operate nationwide, some are small and 

operate in a single community. Some are regulated as insured depository institutions, often with multiple Federal and State financial institution regulators overseeing their operations. Others are not subject to oversight by banking regulators, 

but have multiple Federal and State agencies monitoring their activities. This leads 

to duplication of regulatory effort and inevitable inconsistencies in the interpretation and application of rules, which drives up costs and ultimately limits credit access. We can do better. An improved regulatory framework should promote consistency and efficiency, which would lower costs to consumers while delivering more 

consistent and equitable outcomes for firms and consumers alike. Supervisory and 

other enforcement mechanisms should be consistent and transparent. Penalties 

should be commensurate with the harm and the intent of the violation. As in other 

areas of financial regulation, we need to return to an environment in which regulators seek first to encourage correction of errors rather than to immediately punish 

and penalize. But if egregious or persistent patterns of neglectful or willfully wrong 

activity exists, appropriate enforcement should follow. In sum, greater regulatory 

transparency and consistency are needed, across all types and sizes of firms and 

regulators. 

Competition Promotes Superior Outcomes 

We should not lose sight of the numerous benefits that competitive markets deliver to consumers. Reform should establish a market structure that removes barriers to entry while fostering competition and innovation. Competition benefits consumers by driving down costs. Innovation benefits consumers by adding new products and making the delivery of existing products more efficient and consumerfriendly. Appropriate standard-setting promotes healthy market competition by establishing rules of the road for all competitors. Standard setting may include data 

and disclosure standards, servicing rules, basic borrower eligibility rules, and standards around acceptable credit enhancement. Clear and enforceable standards, in 

100 

turn, give market participants a more equitable basis to resolve disputes than what 

we have experienced since the financial crisis. 

Desired Outcomes 

Given these principles, HPC supports comprehensive housing finance reform that 

leads to the following outcomes: 

1. A deep and liquid mortgage-backed securities market for multiple mortgage 

products, including 30-year, fixed-rate mortgages, that gives eligible borrowers 

access to credit throughout the business cycle and removes barriers to entry 

in the secondary market. 

2. A TBA market with a means to normalize around loan delivery and performance standards that allows borrowers to lock interest rates when they apply 

for a mortgage. 

3. A level playing field for secondary market access across charter type, size of 

lender, and source of credit enhancement giving homebuyers choices among 

mortgage originators. 

4. Competition and market efficiency in lending, credit risk syndication, and 

mortgage servicing to keep mortgage rates low and give consumers choice 

among lenders and mortgage products. 

5. Replacing the separate Fannie Mae and Freddie Mac MBS with a single deep, 

liquid MBS security with multiple issuers, backed by private capital and 

wrapped with a Government guarantee to broaden the investor pool for U.S. 

mortgage assets, thereby keeping mortgage rates low. 

6. A common securitization infrastructure that operates with a uniform set of 

standards for mortgage servicing, investor disclosure, and dispute resolution. 

7. A better approach to meeting affordable housing needs that may include elements such as a duty to serve, a dedicated funding stream, a modernized FHA, 

and/or other means to create sustainable mortgage loans for low- and moderate-income borrowers and communities. 

8. Consistency in regulation and enforcement to reduce unnecessary compliance 

costs and provide certainty to lenders, servicers and their customers. 

Restarting the Legislative Process To Achieve Housing Finance Reform 

Since this Committee approved the Johnson–Crapo bill in 2014, administrative 

and marketplace actions, and additional policy analysis have improved the foundation for reform legislation. Those developments should make your legislative effort 

easier because reform concepts have been getting a real-life market test, and continued policy analysis is helping build a consensus among stakeholders. 

In this section, I will review this progress and its implications for legislation. I 

also will highlight the numerous common elements across most, if not all, reform 

proposals before assessing the critical things left to be decided. 

The Threshold Question—Should There Be a Government Guarantee of MBS? 

The approach to reform that HPC supports, and that is reflected across most reform proposals, provides for a single MBS that has an explicit catastrophic backstop 

Federal guarantee to replace the separate MBS issued by Fannie Mae and Freddie 

Mac that carried an ‘‘implied’’ guarantee. A common platform would be used to issue 

these securities and place the Federal guarantee. Multiple private entities would be 

able to add loans to the common pool. This is how the Ginnie Mae securitization 

process works today. 

But why any Federal guarantee at all? The simple answer is that an explicit, Federal guarantee to cover catastrophic credit risk is needed to ensure a steady flow 

of mortgage credit in all economic cycles. Housing finance, however, is far from simple, so I will provide a little more context for this important issue. 

Consider how the Fannie, Freddie, and Ginnie MBS work today. In each case, 

securitizing a pool of mortgages in a MBS separates the two essential risks in mortgage lending—credit risk and interest rate risk. Credit risk is the risk that the borrower is unable to make their payments and defaults on the loan. Interest rate risk 

is the risk that interest rates move up or down over time, while the investors are 

holding long-term, fixed-rate mortgages. Interest rate movements also influence borrower’s likelihood of refinancing, which alters the expected time to maturity and creates reinvestment risk for investors. 

In a Ginnie Mae MBS, the credit risk remains with the Government insurance 

program (chiefly FHA and VA) with some residual risk to servicers. Interest rate 

risk goes to the private investors in the Ginnie Mae MBS. In the GSE world preconservatorships, beyond traditional mortgage insurance coverage, all mortgage 

101 

credit risk on mortgages placed in Fannie Mae and Freddie Mac MBS resided on 

the balance sheets of those two companies. This was a recipe for systemic risk— 

$5 trillion in mortgage credit risk on two balance sheets (and those balance sheets 

had capital requirements for that risk that were a fraction of the capital required 

for other regulated entities). The interest rate risk on those MBS went to the private MBS investors. So, in the process of securitization, Ginnie, Fannie, and Freddie 

effectively separate credit risk from interest rate risk. Private capital retains the interest rate risk and Government capital retains the credit risk (in the case of 

Ginnie) and GSE shareholders retained the credit risk (in the case of Fannie and 

Freddie). 

Of course, market participants believed that the GSE shareholders were not alone 

in this process. They looked at the GSEs’ Federal charters, subsidies, protected duopoly status, and weak capital standards together as indicating the Government 

would not let Fannie and Freddie default. This was the frequently discussed and 

officially denied implicit guarantee of the GSEs. Investors believed, rightly as it 

turned out, that the U.S. Government would not permit a global financial market 

disruption resulting from a default on Fannie and Freddie MBS. 

It is also important to understand how other significant elements of our current 

housing finance system grew out of this structure. The development of a TBA market rested on the proposition that MBS investors faced no credit risk and the MBS 

issuers’ exemptions from certain securities laws. Thus, investors in MBS could buy 

and trade contracts for delivery of mortgages not yet originated. The TBA market 

does two important things—it adds substantial liquidity to the mortgage market, assuring lenders in the process of originating mortgages that investors are ready to 

buy and it assures borrowers that they can lock in today’s interest rates even 

though it could be weeks before settlement. 

It is conceivable that, in the absence of a Government guarantee of MBS, the market would develop methods of separating credit risk from interest rate risk and create a hedging mechanism to replace the TBA market. Yet the experience of the private label MBS market should give us pause. That market, operating without the 

clarity of a Government guarantee, imperfectly separated credit risk from interest 

rate risk via complex security structures that parsed mortgage payment streams 

across multiple security tranches. There was no equivalent of TBA and the private 

label market was heterogeneous, which limited investor participation. 

In the context of housing finance reform, we envision a new secondary mortgage 

market in which multiple sources of stable private capital bears all but catastrophic 

mortgage credit risk on mortgages placed into this new MBS. We believe it is the 

responsibility of private market participants to bear this risk. But ensuring the liquidity of some $5 trillion in mortgages—the size of the Fannie and Freddie market 

today—requires more than that. To ensure that families get the benefit of deep and 

continued investor interest in MBS to finance long-term, fixed-rate mortgages, the 

consistency of the loan pools and the absence of credit risk in those pools needs to 

be protected. A meaningful segment of MBS investors today would not continue to 

invest in this market if they had to also manage credit risk. Fewer investors means 

higher rates for consumers. 

In all reform proposals that include a Government guarantee, that guarantee is 

limited to catastrophic or so-called tail risk; that is, private capital would directly 

bear all credit losses except losses caused by catastrophic economic circumstances 

(that is, the tail of the distribution of possible economic outcomes). Private market 

participants face several huge obstacles in managing mortgage tail risk. The frequency of a catastrophic event is rare. At most we have seen such events only twice 

in the past 100 years. The severity of the outcome is also extreme—losses far greater than in normal circumstances. 

Under corporate tax and accounting rules, it is difficult and expensive for private 

firms to price and hold reserves for such large and rare contingencies. So, in the 

absence of a catastrophic backstop, the cost of mortgages would go up and the supply would become more limited (for instance, downpayment requirements would be 

greater). 

Looked at this way, a Government guarantee is a way to enhance market performance by ensuring that credit risk is kept separate from interest rate risk in all 

economic environments. But we also believe that the system should have a pre-established system to fully repay taxpayers for any support provided as a result of 

the Government guarantee. 

HPC supports proposals for the Government establishing a Mortgage Insurance 

Fund and charging a fee for the Government’s catastrophic guarantee on all Government-backed MBS replacing the Fannie and Freddie market. The Government 

would manage the Mortgage Insurance Fund and use it to pay MBS holders if we 

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ever encountered a catastrophic market outcome that wiped out the private capital 

support. 

Importantly, though, this would not be the end of the story. Just as with Federal 

deposit insurance, any taxpayer advances to the Fund would be fully repaid over 

time through premiums assessed on future mortgages. The role of the Government’s 

guarantee would be to more efficiently distribute catastrophic losses over time. As 

a pre-established system, the Fund would also serve as an automatic economic stabilizer; Congress and market participants alike could count on this mechanism to 

keep liquidity and confidence in housing finance through a catastrophic storm and 

any funds taxpayers lent into this system would have a built-in repayment mechanism. 

To make the likelihood of activating the Government backstop remote, there 

needs to be robust and reliable private capital standing ahead of the Mortgage Insurance Fund. Rather than the 45 basis points of capital required of Fannie Mae 

and Freddie Mac, first loss capital should be at least as great as what banks would 

be required to hold if the mortgages were on their books rather than placed into 

MBS. 

In sum, the future system must be properly structured and capitalized both to absorb even catastrophic losses and to provide countercyclical support. We view a Government guarantee as enabling markets to work more efficiently, making more 

mortgage credit available consistently and at lower cost to consumers. Since private 

capital would bear a substantial first-loss position, private capital would be incented 

to keep mortgage credit risk at prudent levels. And since the Government backstop 

for catastrophic losses would be pre-funded and have an ex post repayment mechanism already in place, taxpayers would not be bailing out the system but rather stabilizing it and enhancing the distribution of rare but substantial credit losses across 

time in a way private markets cannot. 

Building on Progress Made 

As the Committee restarts its legislative efforts, we believe there is a lot of common ground across legislative, industry, think tank, and other stakeholder proposals 

on which to build. Most, if not all, of the leading reform plans have the following 

elements: 

• A common securitization platform operating either as an industry utility or a 

Government corporation. 

• A single, Government-backed MBS to give rate investors (the private capital 

backstopping interest rate risk and the source of the long-term funding for longterm mortgages) freedom from credit risk concerns and deepening the universe 

of MBS investors. Some proposals call for creating a new Government entity to 

provide this insurance (for example, the Johnson–Crapo bill created the Federal 

Mortgage Insurance Corporation (FMIC)) while others recommend using an existing Government MBS guarantor (Ginnie Mae), and yet others are silent on 

this point. 

• Substantial private capital would back each mortgage pool, supplemented by 

the capital of the pool aggregator (the entity bundling mortgages for 

securitization) and by an industry-funded, Government-backed reserve fund (as 

described just above). 

• The credit risk transfer market that FHFA directed Fannie and Freddie to initiate is the basis for continuing to attract private capital using multiple structures and appealing to multiple types of investors in credit risk assets. 

• A Government regulator would oversee this credit risk syndication and the sufficiency of the capital provided. 

• Fannie Mae and Freddie Mac would be wound down and then ended as GSEs 

and their GSE charters would be extinguished. Whether and how they are 

merged or broken up or otherwise repositioned in the marketplace under a new 

charter and ownership regime is unresolved. 

• The GSEs’ current affordable housing goals regime would be eliminated (or at 

least altered), typically replaced by a funding stream generated from a small 

fee placed on all of the new Government-backed MBS created by reform. The 

use and control of these funds to support affordable housing varies by proposal. 

Most proposals also include some expression of a duty of secondary market entities to serve the broad market, including low- and moderate-income borrowers 

and communities. 

This extensive amount of common ground provides a strong foundation on which 

to legislate. Importantly, relative to 2013–2014, the uncertainty associated with 

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change is much less. For example, work on a common securitization platform, which 

was first announced in 2012, now has 5 years of thought and development and is 

partially operational today. Another example: the idea that private capital can be 

raised to back mortgage credit risk via risk syndication has moved from theory to 

practice. The first transaction was completed in 2013. Today, FHFA reports that the 

GSEs have transferred risk on more than $1.4 trillion of MBS, with nearly $50 billion in capital support raised through this process. Moreover, this capital support 

has been raised through multiple channels and structures, ranging from lender recourse and deeper private mortgage insurance to reinsurance and structured capital 

market transactions. This is a very encouraging development as it shows both the 

interest of private capital in this emerging asset class and the multiple ways in 

which the capital can be raised and the multiple sources of that capital. By establishing post-conservatorship secondary market entities, Congress would be completing the development of this market. Secondary market entities engaged in this 

credit risk syndication should give lenders and investors alike confidence in this 

credit intermediation process. 

Key Issues Still To Resolve 

While important issues remain unresolved, these are not insurmountable challenges and in many cases, the range of differences has shrunk over time. Among 

the key issues left to be resolved are the following: 

• Who owns and who may access the common securitization infrastructure? May 

it be used to issue private label MBS? What is the source of the Government 

guarantee—a new Federal entity, Ginnie Mae, or some other approach? 

• How will legislation ensure consistent national servicing standards and other 

forms of standardization such as mortgage data standards, disclosure standards, and so on? 

• Assuming multiple forms and channels for bringing private capital to back all 

but catastrophic credit loss on mortgages, how would FHFA (or some other regulator) ensure equivalency of these various credit enhancement structures in 

front of any Government guarantee? Should legislation direct bank regulators 

to update bank capital and liquidity rules for this new system? Whatever the 

approach, clearly the movement from a GSE-dominated secondary market to a 

post-conservatorship market will require a holistic review of capital, liquidity, 

and disclosure rules. 

• How does this new regime ensure equitable access to the secondary market for 

loan originators of all size and charter? 

• What requirements should be placed on secondary market entities to ensure 

they strive to reach traditionally underserved markets and borrowers? 

• May lenders credit enhance their own mortgage production if they meet the 

same standards as guarantors must meet? 

• What other legal changes are needed to make the new system work (for example, amendments to securities and tax laws would enable mortgage real estate 

investment trusts to more readily be a source of private capital in this new market)? 

• What is the role of the Federal Home Loan Bank System in this new regime? 

Should their mission or membership change? 

Other Issues and Opportunities 

Beyond all the plumbing and market structure issues just reviewed, comprehensive housing finance legislation needs to concern itself with how our housing finance 

system serves the needs of all Americans. 

The Rental Market 

My testimony to this point has focused largely on the ownership market. Yet, 

today the country’s greatest housing challenges are in the rental market. While the 

CFPB’s Qualified Mortgage rule generally requires household total debt (including 

mortgage payment) to be no more than 43 percent of a family’s monthly income, we 

have more than 11 million renter families spending more than 50 percent of their 

monthly income just on rent. The waiting list for rental vouchers in many communities is years long. Moreover, local zoning, land use ordinances, and building requirements drive up the cost of new construction and rehabilitation, thereby limiting supply. While better education, jobs, and wages are the best solution, these 

supply constraints remain critical obstacles in many communities. 

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FHA 

Few reform proposals deal with FHA, which is ironic since this agency offers the 

Government’s flagship program for encouraging home ownership and because it is 

in such need of repair and modernization. While some of FHA’s many challenges 

may be handled administratively, and HPC appreciates HUD Secretary Carson’s 

openness to stakeholder input for improving the program, there can be a role for 

Congress here as well. At a fundamental level, Congress could give FHA a clear 

mission for serving 21st century borrowers and markets and ensure FHA has the 

resources to fulfill that mission. 

In my short time at HPC, I have been struck by the deep concern our membership 

has for the FHA program and its future. HPC members see great value in the program as a means for the Federal Government to target subsidies that promote home 

ownership opportunities. In that way, FHA should complement private sector efforts 

rather than using those subsidies, and FHA’s thin capital base, to compete away 

business that the private market already is serving. There is enough need for access 

to credit for low- and moderate-income homebuyers that both FHA and private lenders should be actively and fully engaged. 

Yet, trends in the FHA program are troubling. Its market share in 2016 grew to 

17 percent yet participation by depository institutions has been declining. Former 

Ginnie Mae President Ted Tozer frequently remarked on the risks this combination 

was creating for taxpayers. Neither FHA nor Ginnie Mae has the staff nor the resources to manage the evolving risk profile in the FHA program, which risks its 

long-term ability to serve its customers. 

Earlier this month, HPC submitted a public comment letter to HUD outlining our 

concerns about the program as currently administered. From operational issues like 

property conveyance rules and weak quality control practices to legal requirements 

such as certifications to the use of enforcement tools such as the False Claims Act, 

these features of the FHA program as administered today are counter-productive to 

serving borrowers. As the Committee weighs housing finance reform, HPC respectively urges you to also consider the FHA program, its role in our housing finance 

system, and the potential to address pressing FHA issues as part of reform. 

Preparing Borrowers To Become Sustainable Homeowners 

A common element across many housing finance proposals is a goal of making 

mortgage lending more sustainable; that is, reducing the likelihood of default by 

borrowers, especially borrowers with less than perfect credit profiles. This requires 

more work and thought than simply subsidizing the cost of credit to low downpayment, low credit score, low-income borrowers. It requires greater attention to saving 

both for downpayments and for cash reserves once in the home, greater financial 

literacy, homebuyer education and home ownership counseling, and more effort to 

repair credit histories. Many HPC members sponsor and support programs that do 

these things. 

A challenge facing many lower income renter and owner households, indeed even 

moderate and some higher income households, is increased income volatility. Many 

people lack the resources to buffer themselves from life’s disruptions, and income 

disruptions are more common today than in the past. Housing policy and our housing finance system needs to become more attuned to this challenge so better solutions may be found. 

Loan qualification standards also need to evolve and improve. For instance, greater competition has already led to more innovative approaches to credit scoring. With 

greater market transparency around mortgage performance and a competitive market for private capital risk-bearing, these developments will be more likely to get 

adopted, resulting in more consumers qualifying for mortgages. 

Conclusion 

In the 9 years since Fannie Mae and Freddie Mac were placed into Government 

conservatorships, the market has evolved substantially away from the failed system 

of the past. That process cannot be completed absent bipartisan legislation that 

deals with the status and charters of the GSEs and addresses related issues such 

as the role and health of FHA. The good news is that there are numerous common 

elements across the leading reform proposals. HPC is supportive of this consensus, 

which forms a solid foundation for legislation. While differences remain to be 

worked out, we are encouraged that compromise solutions are within reach. We 

stand ready to support this Committee as it crafts legislation that will set the country’s housing finance system on a more market-based and competitive path because 

we believe this is the way to best serve the housing finance needs of our Nation’s 

families. Thank you for inviting me here today. 

105 

PREPARED STATEMENT OF MICHAEL D. CALHOUN 

PRESIDENT, CENTER FOR RESPONSIBLE LENDING

JUNE 29, 2017 

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RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM DAVID H. STEVENS 

Q.1. Housing counseling is critical both at the pre-purchase stage 

to help potential borrowers evaluate their options and understand 

the risks, and it is an essential tool to borrowers that have run into 

trouble with their mortgages. We have strong evidence that housing counseling works—a 2013 study of nearly 75,000 borrowers 

found that borrowers who received pre-purchase housing counseling were one-third less likely to become 90-days delinquent on 

their mortgage loans. 

Mr. Stevens, given your role in the previous administration as 

FHA Commissioner when housing counseling initiatives were expanded, what is your view of the value of pre-purchase housing 

counseling? 

A.1. We agree that housing counseling is a valuable tool for consumers—both prior to the purchase of a home and over the life of 

a loan. A mortgage is a complex financial transaction that can be 

intimidating for many borrowers. This complexity can be particularly daunting for first-time homebuyers, who are often unfamiliar 

with the requirements of a mortgage application or the general 

process for choosing a mortgage provider or product. While resources do exist to aid potential borrowers, these materials can be 

difficult to locate and compare. 

Some of the potential benefits of pre-purchase housing counseling 

for borrowers include: 

• Improved financial literacy, which allows them to better understand mortgage-related terminology and concepts; 

• Improved financial management skills, such as budgeting, 

long-term financial planning, and approaches to strengthen 

their credit profiles; 

• More comprehensive knowledge of the process for searching for 

available homes, mortgage providers, and mortgage products; 

• More comprehensive knowledge of the resources available to 

assist them, including educational materials and financial assistance programs; and 

• Greater capacity to decide on a mortgage product that suits 

their particular needs or whether home ownership is the correct decision for them at that particular time. 

These benefits to the consumer could carry important implications through the life of the loan, such as reducing the likelihood 

of serious delinquency, which in turn could lead to more sustainable home ownership and fewer foreclosures. Our experience during 

the financial crisis and its aftermath showed that unsustainable 

home ownership can lead to costs for communities that extend beyond the individual households in default. Concentrated foreclosures have been tied to lower home values, blight, crime, population declines, and Government fiscal strains. On a national level, 

widespread foreclosures were shown to contribute substantially to 

financial and economic instability. Services that can reduce the 

likelihood of these negative feedback loops taking hold, such as 

counseling, should be encouraged and made more widely available. 

126 

In order to help raise awareness of the benefits of counseling, 

MBA joined a coalition of groups representing lenders, investors, 

real estate agents, and counseling agencies to create the ‘‘Home 

ownership Collaborative’’ in 2016. Over the past year, the Home 

ownership Collaborative brought together industry stakeholders to 

host partnerships in a variety of local housing markets. These partnerships connected potential borrowers with HUD-approved housing counseling agencies and explored new and innovative ways to 

augment the benefits and expand the reach of counseling opportunities. MBA and the other sponsors of the Home ownership Collaborative will continue to host counseling events in the coming 

months with the goal of further raising awareness among consumers and developing new strategies to increase usage of counseling services. 

Q.2. In the past, I have expressed concerns about conforming loan 

limits for the GSEs, which is why I led efforts in the Senate to ensure that borrowers in states like New Jersey, which has some of 

the highest home prices in the Nation, are able to secure GSE 

mortgages. Last time the Committee considered reform, there was 

interest in lowering the conforming loan limits. Studies and reports 

have shown that larger loans actually perform better and default 

at significantly lower rates than smaller loans. 

Do you agree that conforming loan limits should be retained as 

we consider changes to the housing finance system? 

A.2. Currently, both Fannie Mae and Freddie Mac are restricted to 

purchasing single-family mortgages that fall below the conforming 

loan limits calculated annually through a formula set by the Housing and Economic Recovery Act of 2008. We agree that this is an 

appropriate mechanism for targeting the benefits provided by the 

GSEs—primarily lower interest rates on mortgages and continued 

access to credit through all parts of the business cycle—to low- and 

moderate-income borrowers. 

We do not support lowering the conforming loan limits as a strategy by which to attract more private capital into the housing finance system. While it is important to diversify exposure to mortgage credit risk and shift this exposure away from taxpayers, there 

are more effective options for doing so. For example, increasing the 

amount and types of credit risk transfers used by the GSEs will 

move mortgage credit risk into private-sector hands with less potential for disrupting financing for low- and moderate-income borrowers. 

We do support the current system of providing for higher conforming loan limits in high-cost areas, such as many counties in 

New Jersey. The housing finance system should recognize that access to modest, sustainable housing requires more resources in certain portions of the country, and therefore it is appropriate for the 

GSE conforming loan limits to reflect this reality. Similarly, we believe it is appropriate for the conforming loan limits to be adjusted 

over time as home prices increase. This process will help ensure 

that the GSEs serve a similar segment of the market, regardless 

of movements in home prices. 

These views are consistent with the policies described in MBA’s 

recently released proposal for an improved secondary mortgage 

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1 42 U.S.C. §3601. 2 15 U.S.C. §1691. 3 Executive Order 11063, adopted in 1962, prohibits discrimination in the sale, leasing, rental, 

or other disposition of properties and facilities owned or operated by the Federal Government 

or provided with Federal funds. Available at http://portal.hud.gov/hudportal/HUD?src=/programloffices/fairlhousinglequallopp/FHLaws/EXO11063; Executive Order 12892, as 

amended, (adopted in 1994), requires Federal agencies to affirmatively further fair housing in 

their programs and activities, and provides that the Secretary of HUD will be responsible for 

coordinating the effort. Available at http://portal.hud.gov/hudportal/HUD?src=/programloffices/fairlhousinglequallopp/FHLaws/EXO12892. 4Fannie Mae’s charter is in Title III of the National Housing Act, 12 U.S.C. §1716 et seq. 

Freddie Mac’s charter is in 12 U.S.C. §1451 et. seq. 5 (83 U.S.L.W. 1993, 6/30/15). 

market. As our proposal notes, ‘‘The current conforming loan limits 

should be preserved, with similar adjustments for high-cost areas, 

because they provide a well-understood threshold and relative ease 

of execution.’’ Our proposal also calls for these conforming loan limits to be ‘‘adjusted over time based upon home-price appreciation.’’ 

These policies were designed to keep the scope of borrowers served 

by the GSEs fairly consistent and targeted to those borrowers for 

whom the benefits of GSE-provided liquidity are greatest. 

We therefore agree that the conforming loan limits should be retained in a substantially similar structure in any future housing finance system. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM MICHAEL D. CALHOUN 

Q.1. Do you think discrimination based on business judgment 

should be allowed as part of housing finance reform? 

A.1. The Fair Housing Act of 1968 1 and the Equal Credit Opportunity Act of 1974 2 prohibit discrimination in lending and lending 

transactions, and along with other provisions 3 articulate the policy 

of the United States that the housing market, including the system 

for financing housing, operates in a manner that is free of discrimination. Fair treatment is required regardless of race, gender, national origin, or other protected status. Additionally, where Federal 

funding is involved, whether in the form of loans, insurance or 

guarantees, Federal agencies administering such funds have an obligation to take affirmative steps to further fair housing. Further, 

the GSEs have a mandate to serve all credit markets at all times, 

which ensures broad credit availability in all regions of the Nation. 

The charters of the GSEs state that they must ‘‘promote access to 

mortgage credit throughout the Nation (including central cities, 

rural areas, and underserved areas) by increasing the liquidity of 

mortgage investments and improving the distribution of investment capital available for residential mortgage financing.’’ 4

Under the Fair Housing Act’s disparate impact liability, which 

was recently upheld by the United States Supreme Court in Texas 

Department of Housing and Community Affairs v. The Inclusive 

Communities Project, Inc., actions that have a discriminatory effect 

on a protected class are prohibited unless the defendant has a valid 

business justification. 5 Under the burden shifting test of disparate 

impact theory, the initial burden is on the plaintiff to establish a 

prima facie case that a housing decision or policy caused a disVerDate Nov 24 2008 08:44 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00131 Fmt 6602 Sfmt 6602 L:\HEARINGS 2017\06-29 PRINCIPLES OF HOUSING FINANCE REFORM\HEARING\6291
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6 Id. 

7 Id. 

8 Id. 

9For a more detailed analysis of the benefits of disparate impact liability on the Nation’s 

housing finance system, See the brief of the National Fair Housing Alliance et al., available at 

https://www.americanbar.org/content/dam/aba/publications/supremelcourtlpreview/ 

BriefsV4/13-1371lamicuslresplNFHA.authcheckdam.pdf. 10See ‘‘Has Foreclosure Counseling Helped Troubled Homeowners?’’ Urban Institute. Available at http://www.urban.org/research/publication/has-foreclosure-counseling-helped-troubledhomeowners/view/fulllreport. 11 Id., at 2–3 12https://www.philadelphiafed.org/community-development/homeownership-counselingstudy/ 13 Id. 

parate impact on a protected class. 6 Once the plaintiff establishes 

disparate impact, the defendant can then counter with the defense 

that the policy or decision is ‘‘necessary to achieve a valid interest.’’ 7 The defendant’s ‘‘valid interest’’ will stand unless the ‘‘plaintiff has shown that there is an available alternative practice that 

has a less disparate impact and serves the entity’s legitimate 

needs.’’ 8

For more than 40 years, disparate impact liability has been used 

to further the goals of the Fair Housing Act. It has helped to curb 

overt discrimination and redlining in lending decisions opening up 

the housing finance system to all Americans, particularly those in 

rural areas and urban communities. Moreover, it has not provided 

an undue burden on lending nor flooded the courts with litigious 

claims. Instead, it has helped make lending decisions smarter and 

more efficient in an effort to be fairer. 9

Q.2. Housing counseling is critical both at the pre-purchase stage 

to help potential borrowers evaluate their options and understand 

the risks, and it is an essential tool to borrowers that have run into 

trouble with their mortgages. We have strong evidence that housing counseling works—a 2013 study of nearly 75,000 borrowers 

found that borrowers who received pre-purchase housing counseling were one-third less likely to become 90-days delinquent on 

their mortgage loans. 

As we look to the future of the housing finance system, are there 

ways that we can better utilize pre-purchase housing counseling to 

expand affordable and sustainable home ownership? For instance, 

does it make sense to combine pre-purchase housing counseling 

with pricing incentives or as a compensating factor for credit scores 

or downpayment? 

A.2. There is strong evidence that housing counseling is effective 

in reducing foreclosures. 10 Incorporating pre- and post-purchase 

counseling has significantly reduced delinquencies and has increased the frequency of positive outcomes for troubled borrowers. 11 A recent study was conducted by the Federal Reserve 

Bank of Philadelphia. A pre-purchase home ownership counseling 

study released in 2014 confirmed the continued efficacy of housing 

counseling. 12 The study was drawn from a random sample control 

group that received varying counseling delivery models. The delivery models were standardized across the entire sample. Participants who received the counseling education and one-on-one counseling saw an average increase of 16.2 points of their credit score 

over the course of the study, and reduced the number of delinquent 

accounts that were 30, 60, or 90 days past due. 13 This study reafVerDate Nov 24 2008 08:44 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00132 Fmt 6602 Sfmt 6602 L:\HEARINGS 2017\06-29 PRINCIPLES OF HOUSING FINANCE REFORM\HEARING\6291
129 

14https://portal.hud.gov/hudportal/documents/huddoc?id=ohclcounselingworks1214.pdf 

firms significant research that finds housing counseling as an effective means to keep borrowers from becoming delinquent, and improving outcomes for troubled borrowers. 14 Based on these research findings we would encourage combining pre-purchase housing counseling with pricing incentives or as a compensating factor 

for credit scores or downpayment. 

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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTER SUBMITTED BY THE NATIONAL MULTIFAMILY HOUSING 

COUNCIL AND THE NATIONAL APARTMENT ASSOCIATION 

131 

132 

STATEMENT SUBMITTED BY THE NATIONAL ASSOCIATION OF 

REALTORS 

133 

134 

135 

136 

137 

138 

139 

140 

141 

LETTER SUBMITTED BY THE NATIONAL ASSOCIATION OF REALTORS 

142 

STATEMENT OF MAIN STREET GSE REFORM COALITION 

143 

STATEMENT SUBMITTED BY THE NATIONAL COUNCIL OF LA RAZA 

144 

145 

146 

147 

148 

149 

150 

151 

152 

LETTER SUBMITTED BY THE NATIONAL ASSOCIATION OF FEDERALLY 

INSURED CREDIT UNIONS 

153 

154 

155 

156 

157 

158 

159 

160 

STATEMENT SUBMITTED BY GRAHAMFISHER 

161 

162 

163 

164 

165 

STATEMENT SUBMITTED BY THE INDEPENDENT COMMUNITY 

BANKERS OF AMERICA 

166 

167 

168 

169 

170 

171 

172 

173 

174 

JOINT LETTER RE: PRESERVE THE GSE AFFORDABLE HOUSING 

GOALS 

175 

176