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FACILITATING CONTINUED INVESTOR 

DEMAND IN THE U.S. MORTGAGE MARKET 

WITHOUT A GOVERNMENT GUARANTEE 

FIELD HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

SEPTEMBER 7, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–56 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 7, 2011 ............................................................................................ 1 

Appendix: 

September 7, 2011 ............................................................................................ 41 

WITNESSES 

WEDNESDAY, SEPTEMBER 7, 2011 

Hughes, Martin S., President and CEO, Redwood Trust, Inc. ............................. 8 

Lieberman, Jonathan, Angelo, Gordon & Company, on behalf of the Association of Mortgage Investors (AMI) ....................................................................... 13 

Rajadhyaksha, Ajay, Managing Director, Barclays Capital ................................. 6 

Rosner, Joshua, Managing Director, Graham Fisher & Company ...................... 10 

APPENDIX 

Prepared statements: 

Hughes, Martin S. ............................................................................................ 42 

Lieberman, Jonathan ....................................................................................... 59 

Rajadhyaksha, Ajay .......................................................................................... 70 

Rosner, Joshua .................................................................................................. 74 

(1) 

FACILITATING CONTINUED INVESTOR 

DEMAND IN THE U.S. MORTGAGE MARKET 

WITHOUT A GOVERNMENT GUARANTEE 

Wednesday, September 7, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:17 a.m., at the 

National Museum of the American Indian, The George Gustav 

Heye Center, Alexander Hamilton U.S. Custom House, One Bowling Green #1, New York, New York, Hon. Scott Garrett [chairman 

of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Neugebauer, Hayworth; and Maloney. 

Also present: Representative Velazquez. 

Chairman GARRETT. Good morning. This field hearing of the Subcommittee on Capital Markets and GSEs is called to order. 

I welcome everyone to the field hearing and thank you for coming out. And I also appreciate all the panelists who joined us this 

morning as well. 

So we will begin, as is the custom, with opening statements for 

those members who would like to make opening statements and 

then go from there to our panel. 

Thank you. 

And so, as we begin, and as we all sit here, we remember that 

it was on this day, almost exactly 3 years ago, that the mortgage 

giants Fannie Mae and Freddie Mac were placed in conservatorship by the Federal regulator. And $170 billion in taxpayer bailouts 

and counting since then, these two entities continue to do what? To 

bleed billions of dollars of losses each quarter, with no end in sight. 

Both of these companies combined, as we know, with FHA, guarantee or insure around 95 percent of the U.S. housing market. And 

so, when you think at the time when this country is facing huge 

Federal deficits, the last thing that we should be doing or even contemplating is permanently adding an additional $11 trillion of expenses and exposures to the Federal Government. 

There is widespread agreement, it seems, that the government 

cannot and should not back our entire mortgage marketplace, and 

we all agree with that. I realize that winding down these two companies must be done appropriately, though, and, as I have said repeatedly, done so over time. 

2 

And why do we do that? Basically, to ensure that you have a relatively smooth transition, if you will, to a new system, one that 

would be a new system backed by private capital. But we need to 

begin this transition to that period now. And waiting, as some have 

suggested, will only make it worse and more difficult to transition 

by ensuring that market participants are more reliant on the government. 

So, that is why we are all here today, here in New York City, 

in the world’s financial capital, to examine ways to encourage private capital, private investment to reenter our Nation’s mortgage 

market and ensure that we have a robust level of private investment in this market and will remain in the mortgage market without any more government backstop. 

There are a number of reasons why government investment has 

been slow to return to the housing sector. I would look at those and 

say, first and foremost above those, I believe, is the government’s 

expanded role in the mortgage market. That has acted as a roadblock or a hindrance, if you will, to private capital coming back into 

the marketplace. 

When issuers can find mortgages more cheaply, as they can by 

using the taxpayers, it is really not surprising at all for them to 

go that route. So, at the end of this month, an extremely modest 

drop in the conforming loan limits, as we all know, is set to occur. 

And what will it do? It will show that private capital can, indeed, 

fill that segment of the marketplace and that rates will not skyrocket for those borrowers, as some people would believe. 

This will be a good—albeit small, but necessary—first step towards weaning, basically, the mortgage market off of the guarantee 

of government support back to a more private capital support. 

But to make significant headway in our efforts to move the secondary mortgage market back to this, where we would like to go, 

the private sector, we must do certain things. We must reform the 

private securitization market and make sure that investors feel basically comfortable with returning to the marketplace where they 

had so many bad experiences over the last several years. 

What do we need to do? I believe one negative aspect of the 

securitization market that could be improved upon is the lack of 

transparency in the marketplace today. Basically, too many times 

during the housing run-ups that we have seen, investors were sold 

securities where the underlying collateral specifics were not properly known or shared, and they were rushed through into purchasing bonds without having time, basically, to review them and 

did not have the prices of other trades on similar products available to them at the time. 

So, what do we do? First, by providing investors more transparency and additional disclosures, I believe investors will be able 

and more willing to return to our mortgage securitization marketplace. 

Second, another area that needs to be addressed is the lack of 

legal clarity for these very same investors. Unfortunately, the rule 

of law has come into question not only in this area, but in a lot 

of other areas as well over the last several years, and many investors have had their rights, you could say trampled upon in the 

aftermath of the housing market bubble. 

3 

For investors to feel comfortable again with investing in the private securitization marketplace, what do we need to do? There 

must be legal clarity, and conflicts of interest between the various 

parties must be addressed and minimized and mitigated. 

And finally, I believe that increased standardization and uniformity within our securitization market will help as well. What 

will it do? It will help drive long-term and robust investment back 

again. Even with Fannie and Freddie’s many defaults, I do believe, 

that there were some benefits. They did provide some benefits in 

the marketplace through their standardization of underwriting criteria, as well as government documents of securities. 

I believe that if this uniformity was replicated in some way in 

the private sector market, the market would become much more 

liquid, which is what you want to get to, and many investors 

around the world will once again feel comfortable in participating 

in that marketplace. 

I look forward to the hearing and I look forward to the testimony 

from our esteemed panel that we have here today on specific steps 

that Congress can take to advance these ideas and fix the so-called 

plumbing, if you will, of the securitization market. 

I am also interested in discussing and addressing ideas to do 

what? To facilitate the creation of a TBA market, the ‘‘to be announced’’ market, which we have previously. 

Some people raise questions as to how that will be structured or 

exist going forward. You can do that by replicating the sameness 

or the homogeneity and uniformity within the GSE markets as 

well. So, what do we need to do over there? 

One final side note, but related to this, there has been some 

news, I would say disturbing news from the Administration in contemplating the United States using the GSEs, if you will, to conduct a backdoor approach to the stimulus program. Of course, we 

will hear this fleshed out on Thursday, I presume, when the Administration, when the President gives his speech as to what he 

feels needs to be done with regard to job creation and stimulus. 

But there are some rumors out there, and the idea that was 

floated out—by forcing, on the breaking of any legal and binding 

contracts and requirements on these securitizations, basically, for 

the GSEs to forfeit their legal standing on claims to banks that 

sold them these loans, additionally. 

What would this do if it were to go through? This would potentially subject the GSEs to billions of dollars of additional losses, 

and those losses would be passed on to whom? Of course, they 

would go directly to the American taxpayers in the end. So, we will 

be carefully watching that. 

Fannie and Freddie, if you look at them and how they have been 

used over the years by decades, by past Administrations, and now 

potentially for this, you have to look at them and say they are not 

just entities to be used any way you want. They are not just toys, 

as some say, to use to test into new ways, to various new social 

policies, new social policies’ experiments. 

What they are, in fact, are two failed companies that played a 

leading role in the crisis of September of 2008, leading to the financial difficulties that we still find ourselves in as a country right 

now. And so, at a time when we are trying to get private investVerDate Nov 24 2008 17:05 Feb 29, 2012 Jkt 072597 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\72597.TXT TERRIE
4 

ment back into the housing market, the last thing we need to do 

is to give investors yet another reason not to buy U.S. mortgages. 

With that, again, I thank you all for being here, and I turn to 

a member who, as you said, makes this meeting today a bipartisan 

discussion on GSE requirements. 

Ms. Velazquez, you are recognized. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman, for coming to New 

York City to hold this important hearing and for inviting me. I 

don’t sit on this subcommittee, but I sit on the Financial Services 

Committee. 

We are here today to examine the conditions necessary to restore 

a vibrant private market for residential mortgage-backed securities. Just 5 years ago, this market was valued at over $1.43 trillion. 

In the years since, we have lost over 97 percent of this value. 

Our economic troubles started with the housing sector, and most 

economists agree that we will not see a return to prosperity until 

the housing market has recovered. To do so, investors must be able 

to once again buy and sell these assets with confidence. 

Mortgage servicers must be empowered to restructure and work 

out troubled loans. And homeowners must have a clear means of 

knowing who to contact to prevent a wrongful foreclosure. Until 

these conditions are met, the housing sector will continue to drag 

on our recovery. 

While privately issued mortgage securities comprise just 12 percent of the first lien market, they represent 40 percent of the loans 

that are currently 60 days or more past due. These numbers illustrate the depth of the challenge facing private mortgages securities. 

It also highlights the demands these mortgages are placing on 

servicers. 

Servicers are overwhelmed with the sheer number of problem 

loans they must handle on a daily basis. Unfortunately, for many 

homeowners, these numbers have resulted in rampant problems in 

the foreclosure process. Members of this committee are all too familiar with the issues of illegal foreclosure and the debacle caused 

by robo-signing. 

To address these problems, some have proposed establishing national standards for mortgage servicing, including improved accounting and reporting requirements. While these proposals are encouraging, these proposals must also include enhanced restructuring and loan modification requirements for troubled loans and 

provisions to ensure that servicers act in the best interests of investors and homeowners. 

Problems in the RMBS market are not limited to servicers. There 

is broad agreement on both sides of the aisle that, while necessary, 

the government’s current role in this market should not be made 

permanent. Few policymakers will support a system where the 

Federal Government guarantees 95 out of 100 of mortgages issued. 

Our efforts to reverse this trend and to strengthen our housing 

market must acknowledge that the private market will not return 

without the participation of investors. By improving transparency 

and disclosures in the securitization process, we can begin to address investors’ fears in the market and encourage more private 

capital to flow into this crucial sector. We should also give investors time to better understand the assets they are purchasing, and 

5 

that is why a statutory cooling-off period in the RMBS market is 

now being considered. 

This is not a partisan problem, and I am encouraged by the bipartisan approach that has been taken in the discussion of this 

topic thus far. I hope that this will continue as the proposal moves 

forward and will carry over to other areas. 

I want to thank Chairman Garrett and Ranking Member Waters 

for their leadership on this issue and for holding this hearing in 

New York City. 

I thank the witnesses for being here today, and I look forward 

to hearing their testimony. 

I yield back. Thank you. 

Chairman GARRETT. Thank you. 

The gentleman from Texas? 

Mr. NEUGEBAUER. Thank you, Chairman Garrett, for calling this 

hearing. 

As we are looking at how we get America back going again, I 

think getting a robust housing finance market operating again is 

an important part of that. 

And I think it is kind of interesting when we hear people talk 

about getting the private sector back, private mortgage activity 

back going again, private securitization, as if that is a new concept. 

And it is not a new concept. We have had private securitization. 

We have had private market activity throughout the history of the 

mortgage industry in this country. 

What we do have, though, is we have an entity or a group of entities that are crowding out the ability for there to be a robust private market. And as long as you can sanitize those mortgages 

using the American taxpayers as the backstop, there is very little 

incentive for private activity, particularly in the subjumbo market. 

And so, one of the things that I hope that we will discuss today 

are ways for us to create some space for the private sector. The Administration has talked a lot about that. Secretary Geithner put 

out a White Paper, and some of us found some of the concepts in 

that paper to be something upon which we could agree. 

Unfortunately, this Administration has not acted on any of the 

recommendations that it initially made. And so, Fannie and 

Freddie continue to dominate the mortgage market in this country. 

As I think the chairman pointed out, about 95 percent of the mortgage origination today is either FHA-, Fannie-, or Freddie-guaranteed. 

The other thing that I think people talk about is what is Congress going to do about that? Obviously, Congress has not been 

able to move any major reform for Freddie and Fannie, but does 

Congress necessarily need to do that? 

These entities have their own legal right to reduce, for example, 

the size of loans that they will purchase. The FHFA—Mr. DeMarco 

has some broad powers as the conservator of that entity, and one 

of the things that we have encouraged him to do—and I think they 

are working slowly on that—is to increase the g-fees, and so there 

to be some financial incentive for private securitization. 

But as long as you can sanitize those loans for a relatively small 

risk premium, you are not going to see a lot of private mortgage 

activity. And so, we can talk about standardization and all of those 

6 

things, and those are great concepts, but until we get a more competitive environment for the private mortgage industry, I don’t 

think we are going to see a lot of movement. 

I think as we work on all of these various solutions, we need to 

understand that as long as there is a monopoly in the marketplace 

by Freddie and Fannie and FHA, it is going to be extremely difficult to encourage private activity unless we make it a more competitive environment. 

So, Mr. Chairman, I appreciate you holding this hearing, and I 

look forward to hearing from these witnesses. 

Chairman GARRETT. And I thank you. 

Again, I welcome our full panel here, welcome your testimony we 

are about to hear. Your full statements will be made a part of the 

record. You each will be recognized for 5 minutes, and I guess we 

are going to be a little more liberal with that than we normally 

would be back in the hearing room. 

We will begin with the managing director of Barclays Banks. 

Ajay? 

STATEMENT OF AJAY RAJADHYAKSHA, MANAGING DIRECTOR, 

BARCLAYS CAPITAL 

Mr. RAJADHYAKSHA. Chairman Garrett and members of the subcommittee, I thank you for your time. 

I am Ajay Rajadhyaksha, in U.S. fixed-income research at 

Barclays Capital in New York, including research on housing finance and the mortgage markets. 

As the members have said, as Chairman Garrett has said, the 

state of housing finance in the United States, where the GSEs account for over 90 percent of all mortgage loans currently made, is 

problematic. We think there are several ways in which the government can help change this to encourage private sector issuance of 

mortgages. 

And what I am going to do is break these proposals into three 

areas. The first is about how to incentivize issuers and underwriters of private label MBS. The second is about making life easier for investors who will be called upon to buy these in the primary 

and secondary markets. And the third pertains to establishing a 

benchmark to help the private sector price mortgage credit. 

On the issuance front, there are three specifications to address. 

One is to rationalize various regulatory regimes related to capital 

requirements. For example, the U.S. banking system, still very regulated, still follow a ratings-based approach. Meanwhile, the insurance industry has moved to loss-based models. In general, we are 

in favor of loss-based models, as opposed to the ‘‘black box’’ ratings 

approach. 

On that same front, reducing areas of legal uncertainty with regard to rep and warranty, representation and warranty enforcement mechanisms, is also important. 

And finally, clarifying the rules around risk retention and disclosures to reduce regulatory uncertainty would go a long way toward 

making issuers more involved in this market. 

On the investor side, there are a few other things to consider 

also. The first is that from the investor standpoint, we do need a 

transparent way to enforce reps and warranties. In the private 

7 

label transactions in particular, as opposed to in the agency mortgage markets, in several cases, investors have had a hard time 

even getting access to the loan files unless they own more than a 

majority of the deal. 

We would like MERS, the Mortgage Electronic Registration System, to be legalized, and the legal process required to correctly 

transfer loans will be streamlined from current levels. 

And finally, a number of members also mentioned uncertainty 

around servicing. We can reduce this, we believe, from the policymakers’ standpoint, by creating servicing standards that are similar to those required by FHA and FHFA. 

Taken together, the first and second steps, I believe, will go a 

long way to reducing legal uncertainty and providing greater transparency to both investors and issuers. But we are not convinced 

that this by itself is enough to jumpstart private label mortgage 

issuance. 

Policymakers also need to make an effort to replicate the standardization and uniformity provided by the agency MBS market in 

one more way—by providing a benchmark that helps the private 

sector price mortgage credit. What I mean by this is that for decades, the GSEs—Fannie Mae and Freddie Mac—have actively 

hedged their interest rate risk in the capital markets. But as we 

now know, to the detriment of the taxpayer, their bigger exposure 

always has been the credit risk in the mortgages that they guarantee. 

We recommend that the GSEs sell a portion of the credit risk in 

their existing guarantee business to the private sector. I will not 

go into the exact details in the interest of time, but I will say that 

we believe implementing this process should be relatively easy. The 

GSEs have the financial technology to do it. They have done similar one-off deals in the past. It does not require additional congressional action. It does not require legislative action. 

Selling credit risk to the private sector would also transfer some 

of this risk from the taxpayer to the private sector. But again, the 

single most important reason to do this, we believe, is to establish 

a benchmark against which the private sector can price mortgage 

credit. 

So what do I mean by that? Consider the loans from 2009 that 

Fannie Mae and Freddie Mac have guaranteed in the 4.5 percent 

coupon. There are more than $300 billion of these loans, and they 

have been outstanding for more than 2 years. That is a lot of data 

that is available. There is a lot of uniformity around these loans 

that is available. 

This big cohort with so much uniformity, if the GSEs were to sell 

part of the credit risk in this pool to the private sector, what we 

think it would do is create a considerably more active market for 

private mortgage credit. The uniformity, the size of the cohort, and 

the available data for more than 2 years as far as credit performance goes, all of that means private sector investors will have a 

benchmark against which to price new deals as they come to the 

market. 

Such a benchmark—and it exists in other markets also—for example, in the agency debt markets, the swaps market, one of the 

reasons why we believe it took off is because agency debt created 

8 

a benchmark for that market—is very important for an active secondary market. In this case, an active secondary market for mortgage credit. And an active secondary market, as any participant 

will tell you, is extremely important for a primary market for mortgage credit. 

Finally, and my last point, while I do believe that the private 

label mortgage market needs to be responsible for a greater share 

of origination, I would caution policymakers along the lines of the 

argument Chairman Garrett made to closely watch the pace of any 

such transition. The availability of mortgage credit is extremely important to the housing market, especially in its current stage. 

I look back to the first half of 2007. The unemployment rate was 

at 5 percent when home prices started falling. It was not because 

we collectively threw up our hands and decided that housing was 

clearly too expensive. The reason that happened was because at 

that point, the availability of mortgage credit came in large part 

from the nonagency markets. And as primaries shut down, the 

housing market started to tumble. 

So any transition we believe should happen, but the pace we 

hope policymakers will watch very closely. In the near term, I 

think the government will need to provide support to housing finance even as it slowly withdraws away from that market. 

Chairman Garrett, members of the subcommittee, I thank you 

for your time and attention. 

[The prepared statement of Mr. Rajadhyaksha can be found on 

page 70 of the appendix. ] 

Chairman GARRETT. Thank you. 

Mr. Hughes, from Redwood Trust? 

STATEMENT OF MARTIN S. HUGHES, PRESIDENT AND CEO, 

REDWOOD TRUST, INC. 

Mr. HUGHES. Chairman Garrett, members of the subcommittee, 

good morning. 

I am Marty Hughes, CEO of Redwood Trust, and I sincerely appreciate the opportunity to testify here today. 

Redwood has a long history as an issuer and an investor in private prime mortgage-backed securities. Since the market freeze 3 

years ago, we have done only two transactions, fully private, 

backed by new issue mortgages. We are expecting to do a third 

transaction shortly and would hope to do a fourth by years end. 

My written testimony details specific recommendations on DoddFrank and rating agencies. I thought with my oral testimony today, 

I think it is best with a difficult problem that sometimes it is easier 

to elevate the view and look at the markets, the private label markets in context of what any thriving, healthy market requires. 

The underpinnings of those markets are willing buyers and willing sellers. That is what makes it work. 

The buyers on the private label side are major financial institutions—insurance companies, banks, and money managers. These 

investors today are awash with liquidity, looking for safe, attractive yield. With the 10-year at 2 percent, these investors have the 

capacity to greatly reduce the government’s burden that it is taking 

in the mortgage arena. 

9 

I believe a vast pool of these investors will come back and buy 

AAA mortgages backed by prime loans with two criteria. First, they 

are going to need a modest premium over comparable agency securities. Again, I think it is modest, perhaps 50 basis points. And in 

comparison to historical standards, the historical standard of 25, 

which was in place for 15 years, was where the difference between 

the two different securities traded. 

Second and most importantly, they need to have trust and confidence in the safety of the underlying securities. In completing the 

two transactions that we did, we worked really closely with AAA 

investors to win their trust and to meet their demands, and their 

demands are pretty straightforward: They want fully documented, 

plain vanilla mortgages that borrowers can clearly repay; 

downpayments that are real and meaningful; servicers that are 

competent and trustworthy agents of investors’ safe and simple 

securitization structures; strong and enforceable representations 

and warranties; and transparency in disclosures and alignment of 

interests. 

In my opinion, the one gaping hole to restoring investors’ confidence is the unresolved threat from second mortgages. It was a 

significant factor contributing to the mortgage and housing crisis. 

And the first and most important level of skin in the game is at 

the borrower level. If the borrower can effectively withdraw their 

skin in the game through a second mortgage, the risk on default 

on the first goes up significantly. 

So now, if we were to switch gears from willing buyers to willing 

sellers, the sellers in this instance are mortgage originators, which 

are dominated by the major banks. Under the current paradigm, 

there is little need for these banks to sell their mortgages through 

private securitization. Why? They can sell 95 percent into an attractive, subsidized government program, and they have excess balance sheet capacity to easily portfolio the rest. 

There is simply no financial incentive for banks to change the 

status quo. Necessity is the mother of invention. When you need 

to figure things out, you figure things out. 

Post-crisis, all of the other ABS markets are up and running. 

When you look at how they recovered, it is pretty simple: Success 

breeds success. Issuance velocity leads to more issuance velocity. 

There are simply too few loans outside the government’s reach to 

gain any real issuance velocity. Government subsidies need to be 

scaled back and loan limits reduced on a safe and measured pace 

to level the playing field and to permit the private markets to 

flourish. 

I would echo the chairman’s comments that we need to begin a 

process of testing the private market’s ability to step in the breach. 

Otherwise, we are always going to be stuck in the circular conversation of, the government can’t back out because the private sector isn’t there, and the private sector isn’t there because the government is stifling and crowding out the private sector. 

The perfect test is 3 weeks away. It is when the conforming loan 

limit is scheduled—the high-cost loan limit is scheduled to come 

down from $729,750 to $625,500. It represents 2 to 3 percent of 

total originations, and contrary to what many status quo advocates 

had been forecasting, there is a smooth transition under way today 

10 

towards that lower loan limit. Jumbo loans above $625,500 are 

being offered today for closing after September 30th at only 25 

basis points higher to where they were prior to that date. 

In closing, the private markets worked effectively for years. I 

really don’t think it is that hard to figure out how to get them back 

on track. We can go back to when losses were 10 to 25 basis points 

on prime securities. 

So, at Redwood, a small team, we are driven. We have a lot of 

passion for doing this. We can figure it out. I think with the help 

of this subcommittee, we need to keep pushing it along, advancing 

structural policy changes to bring about the redevelopments on the 

markets on a broader scale. 

Thank you for giving me the opportunity to testify here today. 

[The prepared statement of Mr. Hughes can be found on page 42 

of the appendix.] 

Chairman GARRETT. Thanks a lot. I appreciate that. 

From Graham Fisher, Josh Rosner. 

STATEMENT OF JOSHUA ROSNER, MANAGING DIRECTOR, 

GRAHAM FISHER & COMPANY 

Mr. ROSNER. Thank you, Chairman Garrett, and members of the 

subcommittee, for inviting me to testify on this important issue. 

Between 1989 and today, securitization markets and, therefore, 

capital markets replaced banks as the lead funding mechanism for 

home mortgages. It is true that excessive social engineering to 

overstimulate housing purchase drove speculation. But in my view, 

poorly developed and opaque securitization markets drove excess liquidity and irresponsible lending and borrowing. 

Without the confluence of these issues, we would not have had 

the withdrawal of liquidity to the mortgage finance market and an 

ongoing cycle of falling housing prices. Today, as it was in the prelude to the crisis, securitization markets operate in a ‘‘wild west’’ 

environment, where rules are more opaque than clear, standards 

vary, and useful and timely disclosures of the performance of loanlevel collateral is hard to come by. 

Asymmetry of information between buyer and seller is the standard. To believe that the real estate market or the economy itself 

can find a self-sustaining recovery without first repairing this important tool of financial intermediation is unrealistic. Nothing has 

been done to create industry standards or useful and timely disclosures of loan-level collateral characteristics. 

The primary market for securitizations had been different from 

the equity markets. There was no red herring or pre-issuance road 

show period during which investors had the ability to analyze a 

deal and its underlying collateral. 

Typically, deals came to market so quickly that investors were 

forced to rely on rating agency pre-issuance circulars, term sheets, 

or weighted average collateral data. These tools have proven inadequate. Moreover, with a lack of pre-issuance collateral disclosure 

standards, deals usually came to market before the collateral pool 

was even complete. 

While this approach worked well in the TBA market, that was 

a direct result of clear underwriting guidelines, credit boxes, and 

11 

servicing standards. Such standards do not exist today outside of 

the agency market. 

To ensure adequate transparency in the non-TBA market, data 

on specific underlying collateral in each pool should be made available for a reasonable period before a deal is sold and brought to 

market. Such a requirement would enhance investor due diligence, 

foster the development of independent analytical data providers, 

and reduce reliance on rating agencies. 

The automation, standardization, and public disclosure of key 

collateral information before securitization is marketed and at least 

monthly thereafter is a necessary ingredient to the development of 

deep and broad markets necessary to fund our economy. 

Pooling and servicing agreements and representation and warranties can be several hundred pages long. They define features 

like the rights to put back loans that had underwriting flaws, the 

responsibilities of servicers and trustees, and the relationship between the different tranches. 

We need to address the lack of uniformity in contractual obligations between various parties to a securitization. Key terms that 

define contractual obligations are not standardized across the industry, across issuers of securities, or even within the same type 

of collateral by particular issuers. 

The lack of standardization and length of documentation contributed directly to problems in the securitization market. When panic 

set in and investors began to question the value of their securities, 

they knew they didn’t have time to read all of the different severalhundred-page deal agreements. This reinforced the rush to liquidate positions and supported a run on the market that caused securities values to fall further than fundamentals justified. 

With the best interest of the investing public and clarity of contract at their core, legislation should direct regulators to create a 

single standard pooling and servicing agreement governing each 

collateral class, whether the issued securities are registered, overthe-counter, or bespoke. 

Why standards matter: Legislative and regulatory standard setters must also focus on addressing a lack of clear definition in 

securitization markets. Without a common language and agreement on the meanings of fundamental concepts, the value of data 

is diminished. Conversely, if everybody is using a common language, it becomes very hard to game the system. 

Amazingly, 3 years after the crisis, there is still no single standard, accounting or legal, of delinquency or default. Currently, the 

term ‘‘delinquency’’ can be determined either on a contractual or 

recency of payment basis. Even among firms that would define it 

on the same basis, each servicing agreement can have different interpretations of the reporting of delinquencies. 

While the conflicts inherent in the public-private corporate structure of Fannie and Freddie caused great and significant distortions 

in the market and led to their ultimate failure, there are really valuable lessons the GSEs demonstrate. 

Investors can and will support a TBA market comprised of standardized securities, composed of clearly defined collateral as long as 

there are adequate clear requirements and standards defining credit, documentation, pooling, servicing, representations, and warranVerDate Nov 24 2008 17:05 Feb 29, 2012 Jkt 072597 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\72597.TXT TERRIE
12 

ties. Going forward in an absence of a government guarantee, that 

TBA market would require a gatekeeper to oversee an audit compliance with such standards. 

Collateral servicing: When a pool of first lien mortgages is created and sold into a trust, a servicer is chosen to service the loans, 

collect the mortgage payments, and direct the cash flows to investors as defined by agreement. While investors in different tranches 

to the securitization may not always have aligned interests, in light 

of the significant number of mortgages today that have negative 

equity, most of the remaining holders would be willing to write 

down the principal balance of the loan if it would result in re-performance of collateral, and this would be driven by private agreement. 

Unfortunately, due to an ill-defined legal relationship between 

servicer and investor, along with a large common conflict of interest between servicer and affiliated companies that own most of the 

servicers, many servicers do not prefer this ‘‘less is better than 

nothing’’ approach. The largest servicers are owned by large banks, 

banks that hold the majority of second liens and home equity lines 

on the underwater houses. 

Remember, the second lien is, by definition, subordinated to the 

first. So if the servicer wrote down the principal on the first lien, 

it would, where the mortgage is in a significant negative equity position, completely wipe out the value of the second lien and cause 

the bank to experience a total loss on that loan. 

As a result of an unclear duty of servicers, both investors and 

troubled borrowers are held hostage to servicing practices that may 

seek to protect often under-reserved banks rather than the investors in the securities. 

New rules in securitization should clearly define the servicer’s 

obligations and require a fiduciary duty to the investors in 

securitized pools. Perhaps more effectively, legislation should specifically prohibit financial entities from owning servicing where the 

servicing results in a conflict. 

Four years after the crisis began, we still haven’t begun to have 

real discussions about either housing policy or the re-creation of 

the mortgage finance industry. These are two different subjects. To 

reduce the temptation of legislators to use private markets as tools 

of social policy, the structure of the mortgage finance industry 

must be separated from housing goals. 

We should be seeking ways to credibly shift financial sector risk 

back to the private sector, not ways to formalize the government 

exposure to that risk. The hope is the original promise of 

securitization through which banks could originate quality loans 

and sell them to investors who would be better able to hold the risk 

of those assets can be realized. This would free up bank balance 

sheets to make more loans in support of financial intermediation 

and economic expansion. 

Thank you for inviting me. 

[The prepared statement of Mr. Rosner can be found on page 74 

of the appendix.] 

Chairman GARRETT. Thank you. 

And last, but not least, Mr. Lieberman. Thank you for joining us. 

13 

STATEMENT OF JONATHAN LIEBERMAN, ANGELO, GORDON & 

COMPANY, ON BEHALF OF THE ASSOCIATION OF MORTGAGE 

INVESTORS (AMI) 

Mr. LIEBERMAN. Thank you, Chairman Garrett, and distinguished members of the subcommittee. 

Thank you for the opportunity to present on behalf of the Association of Mortgage Investors, to testify and comment on this critically important topic. 

I am head of Angelo Gordon’s residential debt business, the CIO 

of our REIT, aging mortgage investment trust, which went public 

about 6 weeks ago, and also the portfolio manager for the publicprivate investment partnership with the U.S. Treasury. The U.S. mortgage market is truly an awesome market. It is $11 

trillion. It has the deepest, most diverse investor base in all of fixed 

income. It has the most liquidity, and it has been historically capable of financing all housing finance in the United States. 

Historically, it was built upon three legs of a stool. Those three 

legs were bank balance sheets—community banks, big institutional 

banks that portfolioed mortgages; as well as insurance companies, 

U.S. Government-backed mortgages as well—Fannie, Freddie, 

FHA, Federal Home Loan Bank; and then, finally, private investor 

capital, predominantly in the form of securitized product. 

Unfortunately, certainly one of the major legs of the market has 

basically been shut down. Basically, private investors have been 

very, very significantly punished in the current downturn, have 

been very, very disappointed about how the market has conducted 

itself over the past several years. And as a result, it is completely 

shut at this point, other than a few deals. 

There are two major consequences to this. First, it affects our 

overall access to capital from main street. The diversity of financing available to consumers is dramatically diminished. It creates 

systemic risk, if anything, even more so than previously existed in 

the marketplace. 

Opportunities for credit are becoming vastly more expensive. And 

the choices that are available to our citizens are vastly reduced. 

With respect to AMI, we have become, we believe, the primary 

trade association representing private mortgage investors. Our 

members do not control servicers. We do not foreclose on borrowers. 

We simply seek to earn a return on investment in the securities or 

the mortgages. 

For most of our members, all that we are seeking to retrieve is 

basically a Treasury return, plus a small premium to Treasuries. 

We are not seeking oversized returns for the vast majority of our 

membership. It could be as simple as Treasuries plus 50 basis 

points or 100 basis points, not excessive returns, not equity-oriented returns for the vast majority of our members. 

The association has members that basically have investors that 

are your life insurance companies, your State pension funds, your 

local retirements systems, your endowments, your retirement systems, your 401(k)s, your mutual funds. We have sought to develop 

a set of priorities that we believe will contribute to the rebirth of 

the marketplace. AMI has come together to basically identify obstacles and try to identify solutions that we believe can be implemented by folks like yourself. 

14 

In summary, the current mortgage investors have basically suffered from a number of problems in the securitization space. The 

market is very opaque, asymmetric in terms of information flow, 

and thoroughly lacking in transparency. 

Underwriting standards are basically nonexistent to poor. There 

has been a lack of standardization and uniformity concerning 

transaction documents, delinquency, default status, advancing status, true sales status, and the list goes on. There are numerous 

conflicts of interest among all of the parties and even the regulators. 

So, in terms of conflicts of interest, many servicers are conflicted 

that they have outsourced to their own entities different thirdparty activity, whether it is property appraisals, whether it is title, 

whether it is flood insurance, whether it is foreclosure management—all of which basically results in skimming of equity from the 

property, from the borrower as well as from investors as well as 

from the U.S. Government. 

Originators and issuers are not honoring their contractual representations that they sold into the securitizations. The past is a 

prologue, and there are serious assurances that this will not be repeated in the same bait-and-switch scenario as we have seen. 

The market is generally lacking in sufficient tools to protect first 

lien holders, such as recourse to the homeowner to avoid strategic 

defaults, and efficient ways to basically manage second liens to 

allow the borrower to work out their loan and stay in their house, 

as well as protecting first lien holders. 

Servicing practices are antiquated, defective, and generally unreliable. Information flow is unreliable to investors. Oftentimes, we 

cannot reconcile cash that is coming into us. Oftentimes, servicers 

come back and 2 years later seek capital back from us because they 

have made some error in the servicing process or reporting process. 

Investors lack any sort of effective legal remedies for violations 

of RMBS contract obligations or other rights arising under State 

and Federal law. 

The development of enhanced structures, standards, safeguards 

will all contribute to the proper functioning of capital markets, the 

proper allocation of capital, the proper pricing of capital, and ultimately, a more successful main street that we believe in. Mortgage 

investors share your frustration with the slow restoration of the 

housing market, relief for homeowners, and finally, the redevelopment of capital markets in a meaningful way. 

We believe that the recommendations that we lay out will help 

in developing the market once again in a safe and competent fashion and incentivize the right positive economic behavior. 

In sum, AMI offers the following recommendations for enhanced 

transparency and as an alternative to risk retention within the 

capital markets. 

We believe that we should be provided with loan-level information that all investors, as well as regulators, as well as rating agencies can use to evaluate collateral in an open and thorough manner 

for making our investment decision and continuing to monitor our 

investment decision. With Fannie, Freddie, and FHA controlling 95 

percent of the market, you would think at this point in time, they 

15 

would release the data necessary for us to do so and conduct that 

evaluation. 

We would require a cooling-off period where asset-backed securities are offered, where investors have sufficient time to review and 

analyze loan-level information before making investment decisions. 

We wouldn’t expect the investment to be put together after we purchased the asset. 

Make deal documents for all asset-backed securities and structured finance securities publicly available to market participants 

and regulators in a sufficient manner where we can basically analyze and comment on them in advance. 

Develop for each asset class standard pooling and servicing 

agreements with model representations and warranties as 

nonwaiverable industry minimum standards. To kind of make this 

common sense, currently, we have situations where the definition 

of a dollar doesn’t mean 100 pennies. Everybody in our market has 

a slightly different definition of what a dollar is, what a pound is, 

what an ounce is. It is very hard as an investor to basically navigate in a market where basically a dollar doesn’t mean a dollar. 

Develop clear standards for the securitization market and the 

capital markets. Direct address conflicts of interest for the 

servicers and try to basically remediate economic incentives that 

are adverse to investors as well as homeowners. Once again, we 

should all be on the same page that we are just getting our Treasury plus yield. 

Homeowners, we want you to stay in the house. Nobody is interested in owning a lot of real estate. That is not our objective to own 

these securities. 

And come up with a thorough way to restructure, modify, and 

work out these assets in advance that all parties are in agreement 

on. Inevitably, there will be personal events, crises, because we are 

human beings, and we should have a game plan in place to basically try to modify these loans or basically do the correct thing in 

terms of processing the collateral so that we can continue to offer 

low interest rates. 

Just as the Trust Indenture Act of 1939 requires the appointment of suitable independent and qualified trustees to act on behalf of holders of corporate debt securities, model securitization 

documents must contain substantive provisions to protect assetbacked security holders as well. 

Asset-backed securities should be explicitly made subject to private rights of action for fraud and securities disclosure violations. 

Certain asset-backed securities can be simplified and standardized. 

Fannie and Freddie should be working to help achieve that. 

And rating agencies need to use loan-level data and basically 

make their assumptions known in an organized manner to all investors if they are going to continue to be a central part of the 

securitization process. We believe all of these recommendations will 

result in more home lending, less expensive credit, fewer housing 

foreclosures, and more options for working-class Americans. 

We hope that this is helpful, and we appreciate the opportunity 

to share the views of the Association of Mortgage Investors with 

the subcommittee, and please do not hesitate to use us as a resource. 

16 

[The prepared statement of Mr. Lieberman can be found on page 

59 of the appendix.] 

Chairman GARRETT. And I thank you for your testimony. 

I see we are joined by the gentlelady from New York, Ms. 

Hayworth. It is good to have you with us. Good morning. 

We will begin the questions, and I will do my best to keep it 

down to 5 minutes, as we have a number of people here. 

Just to Mr. Lieberman’s comment with regard to the definition 

of a dollar, a lot of us realize the dollar is not just worth what it 

used to be after all the spending down in Washington right now. 

So that may be an issue that we have to take up. And we will have 

the answer on that one Thursday, I think, after we hear from the 

Administration. 

So taking this all from, what, a 30,000-foot level and then bringing it down into the weeds a little bit, there seems to be some commonality on the issues of where we were, the problems that we experienced, and at least some of the solutions on where we need to 

get to. There seems to be some sort of a degree of common thought 

with regard to not having to the extent that we have had in the 

past with regard to government backstop and to move towards 

greater capital infusion from the private sector—all good. 

One of the statements I will direct to Mr. Hughes, and anybody 

else can join in on these questions. So one of the questions going 

on, on the top level is, so is there a problem with, as some people 

say, that there is a lack of—maybe Mr. Lieberman could chime in 

on this—investor demand on the one hand, or is it actually an 

issue of lack of supply on the other hand? 

Or maybe it is—from the testimony, maybe it is a mixture? Mr. 

Hughes? 

Mr. HUGHES. I do think investors—and again, issuers have to 

meet all of the investor’s criteria for trust and confidence—are 

awash with money looking for investments today. I think the bigger issue is there is very little to buy, and you can’t gain any traction if there is nothing to even buy. 

And you can’t gain traction on all the best practices that we are 

talking about. You can’t gain traction on reps, warranties. What is 

the best way to do it? We put two deals out there and let people 

shoot at them, and if we got something wrong or we can improve 

it, we will improve it. 

But the only way you can get there is by having a deal flow. And 

we are not going to get there if there are really no loans to 

securitize. 

Chairman GARRETT. What is the reason for that? 

Mr. HUGHES. The government is crowding out the private sector. 

Chairman GARRETT. Thank you. 

Mr. Rosner, you were shaking your head? 

Mr. ROSNER. No, I was going to agree that it is a process of one 

crowding out. The other side is we had overstimulated homeownership, which is another reality that we need to consider, which is 

homeownership rates, having gone from 64.5 percent in the early 

1990s to just over 69.5 percent, have fallen back. 

There isn’t the fundamental demand at this point, partially because there isn’t the confidence that we have stabilized housing. 

And so, it becomes a virtuous circle that at the point at which we 

17 

are able to bring confidence that housing has started to bottom, 

maybe we will start seeing increase in homeownership. 

I do fear that when you look at the homeownership rates by age 

cohort, they are falling considerably in every grade except for really 

the retirement age. And you wonder how much of that is, unfortunately, a permanent impact of the realization that maybe homeownership is not always the right answer for every household. 

Mr. LIEBERMAN. Chiming in, I guess we seem to do pretty well 

in the credit card market and the auto market, providing private 

capital to individuals, Americans, at very attractive levels. You can 

go into pretty much any auto dealership, and they have 24 different lenders that will lend you money at 1, 2, or 3 percent or zero 

percent, pretty much. 

We have, I think, significant private capital that is looking for 

attractive investments. But when you are competing with either 

the world’s largest S&L or the world’s largest REIT that is financed with the cheapest cost of capital and has basically total access and control over 95 percent of the market, you take a step 

back and realize that predominantly you are going to be adversely 

selected. 

So we might as well wait until the rules are set and we understand what the real rules are for the process. And maybe some of 

the piping, which still has not really been addressed— 

Chairman GARRETT. Right. Let me be the devil’s advocate on 

that point. So much of this testimony that we have heard here 

today is that we need some degree of uniformity on these areas, 

some clarifications and all. We will probably all go into each one 

individually, but do you have that in all these other marketplaces, 

the same degree of uniformity and government definitional aspects 

within all those other marketplaces there to the same extent that 

you would have here, that you would look for here? 

Mr. LIEBERMAN. You have much greater uniformity. In the credit 

card market, you really only have 6 to 10 parties that issue credit 

card securitizations, and they are typically— 

Chairman GARRETT. But the uniformity doesn’t come about necessarily because of regulations that we have defined and as far as 

servicing agreements and all that sort of thing, right? It comes because of the nature of that marketplace. 

Mr. LIEBERMAN. The issuers there have taken a great deal of responsibility, have built very robust programs and have also retained a great deal of risk in the programs. So if you buy an American Express securitization, you know you are going to get a dollar 

back, and you know— 

Chairman GARRETT. Why can’t we do that or why can’t you all 

do that in this area? Mr. Rosner, you mentioned during your testimony that in some aspects of this, it is taken care of contractually. 

Mr. Hughes might want to join in on this as well. 

In your couple of situations, you said here is what we are going 

to do, and again, devil’s advocate, why can’t we just do this, going 

forward, maybe incrementally small at first, and just grow the 

market from that perspective? 

Mr. HUGHES. I don’t see any reason why it can’t grow on that 

basis. 

Chairman GARRETT. Okay. 

18 

Mr. HUGHES. One thing that I— 

Chairman GARRETT. So you don’t need—so you disagree? You 

don’t need the extent— 

Mr. HUGHES. You do need standardization. 

Chairman GARRETT. Okay. 

Mr. HUGHES. You need some, but it needs to develop over time. 

If we sit back and wait for the perfect legislation, the perfect process, we will be back here 3 years from now. The way processes and 

best practices are going to develop is by testing them. 

Chairman GARRETT. Okay. 

Mr. HUGHES. The second thing I would note is—and I am glad 

for this subcommittee—some omnibus oversight of all the initiatives that are going on. You have stuff under legislative. You have 

Dodd-Frank. You have some stuff that has to happen under the securities law, under Reg. AB. You could have Garn-St. Germain. 

There is an assortment—best servicers, best practices. So it is 

great to have a subcommittee of this type where somebody has a 

to-do list to figure it out so that all the links in the chain are pulling ahead, so that we don’t—not working on one while someone 

else is going to hold things back. 

Chairman GARRETT. Sure. 

Mr. ROSNER. I was just going to point out there are some obvious 

differences, though, between auto securitizations and credit card 

securitizations versus mortgage securitizations in terms of duration. And there are, by the way, increased disclosures in static pool 

data in those other markets that you don’t get in the MBS market. 

So I think that standardization is somewhat easier, given the 

turnover in the underlying collateral. 

Chairman GARRETT. Okay. 

Mr. LIEBERMAN. I would just add that I think that the private 

sector, in order to compete with the public sector, resorted to certain shortcuts. The way you basically compete with somebody with 

the lowest cost of capital and the best access to product is you basically change the definition of what a dollar is. 

You change the rules of the game. You create opaque markets. 

Otherwise, if it is standardized, people understand. They are just 

going to migrate to ‘‘the best product out there,’’ which is no risk 

and— 

Chairman GARRETT. Right. So this will be my last question, and 

then I will turn it over to the other side of the aisle. 

One of the areas you will address—and I am sure other will people want to delve into this and go in more detail—is on first and 

second lien situations, that can’t be done just—it could be, but not 

adequately with regard to a contractual obligation, based on this 

last series of answers. So what is each one of your answers to that 

solution, question? 

Mr. HUGHES. To me, I think there needs to be some limitation 

on the ability to take out a second mortgage. It could be a mathematical test of the loan-to-value can’t go above 80 percent. In no 

other form of lending, whether it is in commercial loans, corporate 

loans, can the borrower go out, take out a primary loan and then 

go out and be able to impair their credit condition by taking out 

a second loan. The first is going to say ‘‘stop.’’ 

19 

But there is no governor on here, and I think the governor could 

be some formula-based, based on a reappraisal. And I would say it 

would have three benefits. In addition to protecting the first, it 

would have the benefit of protecting the financial system from 

banks offering something they shouldn’t and it can protect the borrower from taking and putting themselves in the position where 

they shouldn’t be in terms of putting themselves in credit peril. 

Mr. LIEBERMAN. I would say that in Texas, they had an experience where they had an oil bust, and it led to a housing bust. And 

I think the response there is they prohibited second liens for a long 

period of time. 

One of the reasons the Texas housing market has held up better 

than any other market in the United States, not only because of 

job growth, is also because they truly had equity in their houses. 

That law was subsequently changed and modified in the last 3 

years. But still, it was one of the best housing markets where if 

a borrower really wanted additional equity, they had to go refinance their entire first mortgage and could not put a second lien 

there. 

Chairman GARRETT. Ms. Velazquez? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Lieberman, what is your take regarding voluntary 

cramdown? 

Mr. LIEBERMAN. I think we would like to see Bankruptcy Code 

changes that basically elevate the first mortgage on a house and 

allow us to price the credit effectively. And if that involves cramming down second liens and other obligations, we believe that if society, government, and the homeowner wishes to have a very low 

cost of funds on their first mortgage, that is something they should 

think about. 

But it is a judgment call. And if the corporation wants first lien 

debt and wants a very cheap cost of funds, their lien has priority 

over all others, and there can still be cramdown there. 

Ms. VELAZQUEZ. Does your organization come out with any position on this area? 

Mr. LIEBERMAN. We have not formally come out with a position. 

Ms. VELAZQUEZ. Mr. Hughes, mortgage originators and 

securitizers are currently facing numerous lawsuits for the mortgage-backed securities that were issued prior to the financial downturn. Are these developments keeping potential investors from reentering the market for mortgage-backed securities? 

Mr. HUGHES. I don’t think it is the lawsuits themselves. But the 

underpinning of those lawsuits, which were faulty representations 

and warranties where the reps and warranties which underpin 

these securitizations really failed on three levels. First, the actual 

representations and warranties themselves had little teeth. The 

second one was they were unenforceable. So, there was no traffic 

cop that could actually take it and determine whether there was 

a legitimate issue. And the third was, in many cases, they weren’t 

collectible. 

So, on all three levels, it failed. And in our deal, on the 

underpinnings of the past, we changed all three levels of the representations and warranties to give them teeth. We tried to get the 

model representations and warranties. We wouldn’t buy loans from 

20 

anybody unless they are willing to submit to binding arbitration if 

something goes wrong. 

But, yes, I think it is the underpinnings of those lawsuits that 

really have investors alarmed. 

Ms. VELAZQUEZ. Mr. Lieberman, do you have any reaction to this 

question? 

Mr. LIEBERMAN. I think I would have to get back to you on that. 

Just a clarification on cramdown: The organization, the Association 

of Mortgage Investors, believes in the priority of a first lien under 

all circumstances. Second liens, we believe, if there is no equity in 

the house, should be wiped out to allow for the first lien to be protected. 

Ms. VELAZQUEZ. But on the question of the lawsuits that have 

been brought up against mortgage originators and securitizers, do 

you believe that they have any effect in keeping investors from reentering the market? 

Mr. LIEBERMAN. I think the underpinnings, to Mr. Hughes’s 

point—if we can’t enforce rep and warranty violations and we cannot be certain about contractual rights that we have, representations on the quality of the merchandise that we are buying cannot 

be protected, we just—investors, like a taxpayer, need to be protected, and that will affect our decisions. 

As I said, we have to know what the rules of the game are, and 

we have to be protected under those rules. Otherwise, we will take 

our capital and invest in other markets where we know what the 

rules are and we know what the return is. 

I come back to, we are really not seeking oversized returns. We 

are not trying to be equity investors. That is for others. 

Ms. VELAZQUEZ. Understood. Thank you. 

Mr. Ajay, I will not dare to pronounce your last name. Sorry. 

But given the failure of rating agencies to perform sufficient due 

diligence in the review of private label securities prior to the financial crisis, what role, if any, do you think the credit rating agencies 

should play in this market, going forward? 

Mr. RAJADHYAKSHA. Thank you for the question. 

We are in favor of industries in general moving towards the approach that the insurance industry has taken, where what they 

have done is for individual asset classes, they have decided that 

specific loss-based models—in one case by PIMCO, in another case 

by Blackrock—will be the model space on which capital standards 

will be generated. 

For obvious reasons, I think ratings on securitized products have 

been found wanting, and at this point, given the last several years, 

many investors that we talk to prefer to do their own due diligence, 

as opposed to buying an asset because of a rating. 

Ms. VELAZQUEZ. Do you believe that the credit rating agency reforms included in the Dodd-Frank will be sufficient to restore confidence in the use of credit ratings? 

Mr. RAJADHYAKSHA. I am not sure, to be very honest. 

Ms. VELAZQUEZ. I expected that answer. 

Recent settlement proposals between leading mortgage servicers 

and private MBS investors have focused largely on chain of title 

provenance and the effort to define who should have the right to 

foreclose on troubled mortgages. Is it reasonable to believe that 

21 

these parties can adequately resolve these issues between themselves without the need for government intervention? 

Mr. RAJADHYAKSHA. That will depend, I suspect, in many cases 

on a case-by-case basis. But I will say this. For a securitized market, that is in many ways a very good thing for the U.S. homeowner, because you basically have a market which is attracting 

capital from the rest of the world to lend to the U.S. homeowner 

at the lowest possible rate. 

The actual process, the plumbing, in many cases is archaic. So 

what we would like is for policymakers to set specific rules that are 

clear and then let the capital markets have their way. 

Ms. VELAZQUEZ. Okay. Thank you. 

Thank you, Mr. Chairman. 

Chairman GARRETT. The gentleman from Arizona? 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

I am going to try to bounce around quickly, just get into some 

specifics. 

Mr. Hughes, you spoke about the second loan problem, ‘‘chewing 

up the skin in the game,’’ I think was your term. Would it work 

if the first deed of trust, first mortgage instrument said if you chew 

up this equity without getting a release or an acceptance from the 

first, the first now becomes a personal liability? Is that enough? 

Mr. HUGHES. Potentially. I think the right answer is to prevent 

the second loan from coming out in the first place. Because I always think if you leave it to the borrower and allow them to pull 

equity out, even with penalties, I think that would be bad policy. 

Mr. SCHWEIKERT. So you would create sort of a first loan instrument that would—the way however it is recorded and whether it 

be the MERS world or the county recorders, there would be a document saying, oh, by the way, I also pledge that no secondary instrument is allowed to go behind us? 

Mr. HUGHES. Yes. I think that one way to do it, and there are 

probably a lot of ways to do it is I think you need to—if you get 

your loan from ‘‘XYZ’’ bank and that is the first, really what you 

need is to prevent a second bank from extending that mortgage. 

And I think really the best place to put the control mechanism 

in place is if that second bank extends a loan above some criteria, 

whatever, it is 80 percent of whatever you do, is put it somewhere 

in truth-in-lending so that they can’t foreclose. Put them in a position so that they are not going to extend a mortgage that a borrower can’t afford. 

Mr. SCHWEIKERT. That is actually a creative idea. 

Mr. Lieberman, you have touched on the exact same issue. We 

have been playing with some language, saying that if you chewed 

up that equity you had pledged in acquiring your first, that first 

now became a personal liability. What would you do? How would 

you deal with that secondary issue, that second loan issue? 

Mr. LIEBERMAN. I think, going forward, you either have to prohibit seconds altogether, and the borrower is fully entitled to take 

out unsecured debt. But not to basically permit, as Mr. Hughes 

said, that second lien holder from either impeding foreclosure or 

foreclosing on that borrower. 

If you want to have the lowest cost of capital for that first mortgage, which is ultimately what really drives homeownership, then 

22 

basically protect the first lien and take the second lien holder’s 

ability to seize collateral away. Now you— 

Mr. SCHWEIKERT. Mr. Lieberman, I am sorry. I just am trying to 

be very efficient here. My understanding is, though, if the second 

is foreclosing—I come from a deed-of-trust State—it has to also still 

pay off that first. And that is the same in a mortgage State. So 

what am I not understanding in those mechanics? 

Mr. LIEBERMAN. I am just saying that basically, if you are a first 

mortgage holder, do you want to even get into a situation where 

there is a foreclosure action going on because of a second? Okay, 

that is really what I am driving at. 

It is hard to, if you try to basically nuance it and try to basically 

thread that needle so you have seconds that can take out the firsts, 

then how do you have a situation where the second is underwater 

and can stop the first, other than the first goes through the foreclosure process and then can’t get rid of the second? 

Mr. SCHWEIKERT. Okay. Now the second—not to try to be amusing, but the second part of what you just said or in your testimony 

was now the strategic defaults. I have a first. I am underwater. I 

am making an economic decision that I am creditworthy enough. 

I am going to go buy the house down the street. I walk on this one. 

What would you do in that situation? 

Mr. LIEBERMAN. Okay. I have the first mortgage. Josh has a second mortgage. 

Mr. SCHWEIKERT. Poor Josh. 

Mr. LIEBERMAN. I am partially underwater. Josh is fully underwater. He won’t subordinate. He won’t basically give up his second 

lien. The only choice for the borrower is to strategically default. 

Even if I want to compromise with that borrower and shave 10 

percent off my mortgage, that is a very untenable situation where 

I can’t create a workout with the borrower, whom I want to keep 

in the house. I am going to lose another 30 points if I have to foreclose, okay, and then I can get rid of Josh’s mortgage. But I am 

going to lose 30 or 40 points because I am going to have to go 

through the whole foreclosure process. 

It would be much better if Josh basically can’t stand in the way. 

He has a choice: Buy me out at par, or let me modify my loan. 

Mr. SCHWEIKERT. That would have to be designed very carefully 

so as not to create a cascade of where I am now incentivized to fall 

a handful of payments behind so I can actually participate there. 

Mr. LIEBERMAN. That is true. That is the conundrum. 

Mr. SCHWEIKERT. Okay. 

Mr. ROSNER. You also have to remember that the reality is, yes, 

the first has to be paid off on a foreclosure attempt. But if you have 

the servicer of the second tied to an affiliated entity that owns the 

second, what you will often find is the bleeding of cash flows from 

the first to protect the second, to protect servicing income, etc. 

So you are just trying to string it out as long as you can to maximize your income from the second and from the servicing of the 

first, knowing that any advances that you are making on the first 

are also going to bring you to the top of the waterfall, and then you 

are going to end up taking that back. 

So that conflict is, frankly, untenable even where it is designed 

to work well. 

23 

Mr. SCHWEIKERT. I think we are all open to any suggestions on 

if you were designing a UCC of private label MBS, what mechanics 

or what triggers you put in there. 

Trying to do this quickly, you talked about the TBA, the ‘‘to be 

announced’’ market. In your vision, how would you deal with that? 

Mr. ROSNER. Look, the reason that we have an effective TBA 

market is Fannie and Freddie created a very clear underwriting 

box, and they created very clear documentation, rep and warrant, 

servicing standards. I don’t think it is impossible to go from one 

very large underwriting box to five or six clearly defined underwriting boxes. 

Mr. SCHWEIKERT. But would you have to basically create a TBA 

market that says the only things we will be acquiring—is it a guarantee into a future, if you were trying to put that together right 

now in a private MBS? 

Mr. ROSNER. Yes. I think it would require that there first be the 

definitions of the collateral that could be put into each of those 

very clearly. I don’t know—at this point, I think you would probably need a transition period of guarantee or some form of guarantee to have any comfort there. 

But I think that we should start by putting in place the plumbing to effectively have a private— 

Mr. SCHWEIKERT. You and Ajay and this plumbing thing. 

[laughter] 

Mr. ROSNER. I think I just took it from him because it was— 

Mr. SCHWEIKERT. Yes. 

Mr. ROSNER. I think, ultimately, we can have a private TBA 

market. But again, it would require very clear rep and warrants. 

It would require very clear underwriting boxes. And we haven’t 

seen any effort to do any of that yet. 

Mr. SCHWEIKERT. All right. Mr. Chairman, thank you. And I 

have a few more but will wait, hopefully, for a second round. 

Chairman GARRETT. Sure. Absolutely. 

The gentlelady from New York has also joined us. Mrs. Maloney? 

Mrs. MALONEY. First of all, I would like to thank all the panelists and thank all my colleagues, particularly Chairman Garrett 

and my colleague Nydia Velazquez, for coming to New York and 

holding this hearing. It is very important, and I appreciate all the 

presence here. 

And I think we all agree that attracting private pull to capital 

is critical to a well-functioning securities market and that, done 

well, mortgage-backed securities are an important source of capital 

to institutions that allow them to continue to lend and extend credit. So, I am thrilled with the panelists here. 

I would like to ask a question, if I could, about covered bonds. 

I am the lead Democrat on a bill that I have been working on with 

Chairman Garrett and the other members of the committee for, I 

think it is 4 years now. And this would create a regulatory structure for a covered bond market. 

While I know that covered bonds are not the answer to the entire 

problem, it is a source of capital. And so, I would like all of you 

to comment on how you think that they could work to get capital 

out there like the GSEs did in the housing finance system. And I 

24 

think that they are an important tool. They are not the complete 

answer, but an important tool. 

And can each of you comment for the record on how you see covered bonds functioning either with or without a government role in 

the market? That is my question, and if you could just go down the 

line and comment, your comments would be very helpful to us. We 

are working on a bill. We have passed it out of the subcommittee 

and hope to pass it on the Floor. 

So, any comments you can give today or put in writing, we would 

appreciate. Thank you. 

Mr. RAJADHYAKSHA. On our side, I should start by saying that 

we believe that covered bonds are absolutely a viable source of 

funding, an alternative viable source of funding for the mortgage 

market in the United States. We have had very good experience. 

Barclays actually happens to be one of the biggest players in the 

European covered bond markets, where that market is one of the 

bigger sources by which mortgages are financed. 

For the next several quarters, even if legislation goes through 

quickly, we suspect that the overall size of that market is probably 

going to be limited to about $300 billion to $350 billion, which is 

not small. It definitely doesn’t solve all of our funding problems on 

the mortgage side. 

The reason is because, as you know, the FDIC has mandated basically that more than a certain amount of bank value sheets 

should not have covered bond exposure. So what that basically 

means is if you make the argument that in the near term, you are 

only talking about big banks being able to issue covered bonds, 

then you are talking about maybe a $7 trillion balance sheet. Four 

percent of that gets you to about $300 billion, which is what I 

talked about. 

The one thing I will say is that the most successful covered bond 

market is the Pfandbrief market in Germany. It has very, very 

clear-cut rules. I do not think you need government support. What 

you do need is a legal framework, a legislative framework. None of 

that exists in the United States. 

Hopefully, the bill that is being proposed takes care of that. If 

that happens, then we think the covered bond market will start to 

be not the main solution or a silver bullet, but a viable source of 

funding for mortgages. 

Mrs. MALONEY. Any other comments? 

Mr. HUGHES. I would agree with Ajay and his comments, and I 

don’t have a lot to add, as really our focus is on trying to bring 

back securitization. But I think, certainly, covered bonds could play 

a viable role in bringing liquidity back to the mortgage markets. 

Mrs. MALONEY. Mr. Rosner? 

Mr. ROSNER. I think covered bonds have to be considered very 

carefully in a world of too-big-to-fail institutions. Because I think 

there is a risk that we are creating incentives for those banks to 

increase the size of their balance sheet. 

Yes, there is an understanding of isolation of those assets. But 

I fear that debt investors would, nonetheless, increasingly assume 

that the issuing entity is gaining an even stronger implied government guarantee, much like a GSE on the debt issued by the entity 

itself. 

25 

Mrs. MALONEY. Okay. 

Mr. LIEBERMAN. We believe in a hybrid, multi-distribution model 

for the mortgage market. It is the broadest potential distribution 

will bring down the cost of capital. Covered bonds are effectively 

just a form of secured financing, not all that dissimilar from credit 

card master securitizations. 

And so, I think it is just another form of capital for the market. 

It is one of many, including traditional securitization, that we 

think is a valuable tool for financing mortgages in the marketplace. 

Mrs. MALONEY. Thank you. And any other comments anyone 

would like to get in the record, I would appreciate. 

I believe my time is up, Mr. Chairman, or do I have time for another question? 

Chairman GARRETT. Sure. Absolutely. 

Mrs. MALONEY. Okay. On securitization, we really have to get 

that moving again, and I know that was a subject of your testimony. I was at three meetings before I got here. This is a district 

work period for us, and so we are focused on a lot of things happening here. 

Could I just go down the line again, not in great depth, but if 

you had to name the top one thing we could do to get the 

securitization working in the markets again, what would it be? 

What could government do to help the private sector? 

Mr. RAJADHYAKSHA. Reduce both legal and regulatory uncertainty, which is stymieing, we believe, both the issuing side as well 

as the investor base. 

Mrs. MALONEY. Thank you. 

Mr. HUGHES. Something I didn’t mention before is that sometimes when you have a really complex problem, the best way to 

solve it is to simplify. And I think one of the things we might think 

about is if we are trying to solve all the problems that were in 

prime, Alt-A, and subprime, it is really difficult. Bad things happen 

to all, but really bad things happen in subprime. 

Is there a way through the securities laws that you could promote and allow people to use their shelf-registrations for prime 

loans, to the extent we define prime loans. Similar to what they do 

if you are going public, depending if the first time, you are an S1, it takes a really long time to get public. If we could define a certain type of collateral as prime and if it is a down the middle definition of prime, then here is your route to use your shelf registration to securitize it. If your collateral is not prime, if your deal is 

overly structured, if the collateral is weak, you do what they do 

with an S-1. You just sit in the penalty box and wait for the SEC 

to approve it. 

So, really, my thoughts around if you really want the prime market back as the best place to alleviate the government’s burden, 

maybe there is a way to subdivide the problem and simplify it 

around prime and move away from Alt-A and subprime. 

Mrs. MALONEY. Mr. Rosner? 

Mr. ROSNER. I think to simplify at least what I was saying before, the goal should be to get the borrower and the investor to actually come as close to each other as they can and take out the distortions and the arbitrage of the middle, okay? 

26 

Because the reality is the interests of the borrower and the interests of the investor are actually well aligned. 

Mrs. MALONEY. What about the servicer? They are often in there. 

Can you align the servicer with the borrower and the investor? Because oftentimes that is in there in between. They buy it. They own 

it. 

Mr. ROSNER. The servicer, though, often has other conflicts in 

place, which we went through. And frankly, maintaining fees sometimes protecting affiliates are, frankly, larger incentives. 

Mrs. MALONEY. But they are right there in the middle. You 

can’t— 

Mr. ROSNER. No, they are in the middle. 

Mrs. MALONEY. You can’t align the investor and— 

Mr. ROSNER. The testimony was really about servicing standards, 

standardizing reps and warrants, standardizing the issuance of collateral-level information to investors before deals come to market 

and on a monthly basis after they come to market, and making 

sure that the ability of the investor to work with the borrower isn’t 

impeded by that servicing relationship. 

Mrs. MALONEY. Thank you. That is very helpful. 

But on your first question on covered bonds, you said that covered bonds were going to make banks too big and imply a government guarantee. There is no government guarantee on covered 

bonds. So I didn’t quite understand the point you were making— 

Mr. ROSNER. No, there is no government guarantee on covered 

bonds, but the issuing institutions will be growing their balance 

sheet. Some of the assets will be theoretically isolated, legally isolated through the covered bond. But the market will likely offer a 

lower rate of issuance on the debt of the institution itself because 

there is an understanding or an expectation of an implied government guarantee. 

I think that has to be something to be thought through and be 

careful of because we are also creating again a further unleveling 

of the playing field between our small financial institutions and 

those handful of largest financial institutions through the covered 

bond market. 

Mrs. MALONEY. And also you know we are no longer too-big-tofail. We have in place a law that allows us to wind down institutions so that—we just had two choices at one point. You could either bail them out, or they would fail. Neither choice was appropriate. We now have an FDIC approach for the large institutions 

and to wind down in the event of a problem. 

Mr. ROSNER. That only works if you assume that a single large 

institution can go down in isolation without the correlation of that 

institution being well related to its peers, in which case you end 

up with four or five going down at the same time, and I don’t believe that Dodd-Frank addresses the ability to deal with that. 

Mrs. MALONEY. Thank you very much. 

Do you have a comment on securitization? 

Mr. LIEBERMAN. Yes. I think confidence that if I am lending 

yourself money for the next 30 years, that my servicer, my agent 

will be able to collect that money and foreclose, if need be. And the 

money that is owed to us as an investor, which is typically a pension fund at the other end, will be respected so that I have the cerVerDate Nov 24 2008 17:05 Feb 29, 2012 Jkt 072597 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\72597.TXT TERRIE
27 

tainty to make the original investment decision to lend you the 

money. 

Mrs. MALONEY. Thank you, panelists, and thank you, Mr. Chairman, for coming to New York. Thank you. 

Chairman GARRETT. Thank you. 

The gentleman from Texas is recognized. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Hughes, I know that you all have done a couple of deals. You 

said you have one maybe coming out quickly, and then maybe another one before the end of the year. Why aren’t you doing below 

jumbo deals? 

Mr. HUGHES. Right now, we could not be competitive with 

Fannie and Freddie pricing. 

Mr. NEUGEBAUER. In other words, today, if I had a bunch of 

loans that met Freddie and Fannie’s criteria, you wouldn’t be a 

buyer for them because you can’t make any money because you 

can’t— 

Mr. HUGHES. Correct. We cannot compete at the moment with 

their price. 

Mr. NEUGEBAUER. If I would take 50 basis points less, offering 

you 50 basis points more, would there be a market for that? 

Mr. HUGHES. I think if you—yes, I think there is a market. If 

you level the playing field, if you went and looked at the 

underpinnings of some of the agency securities that are going out 

now, there are 8 percent have some MI on it. But if you look at 

the vast majority and you look through the FICO scores, you’re at 

750, there is 30 percent down on average, these are loans that the 

private sector, in my opinion, will buy. They look a lot like the 

loans, if you get the low loan size, in the deals that we did. 

So if the borrower is a good borrower, then we just need to clean 

everything up. Yes, I see no reason why—Redwood Trust is prepared to buy any loan of any size, to the extent that it is a good 

prime loan. But right now, we can’t buy that loan. 

Mr. NEUGEBAUER. So if the g-fee was increased to a point where 

there is a 50 to 60 basis points premium, that if you had well-documented, well-underwritten loans where you could offer the investors another 50 or 60 basis points other than buying the sanitized 

version which you get are 50 to 60 basis points less yield, you say 

that there is a market for that? 

Mr. HUGHES. I believe there is a market there, yes. 

Mr. NEUGEBAUER. Ajay? I will call you Ajay. You can call me 

Randy. How is that? 

[laughter] 

Mr. NEUGEBAUER. You mentioned something interesting, and I 

apologize that I have not had a chance to read the entire version 

of your written testimony. But what you are talking about is selling about $300 billion worth of the guarantee business that Freddie 

and Fannie has originated since 2008. 

Is that a way to kind of test the market and see if there are entities out there interested in being in that business? 

Mr. RAJADHYAKSHA. Yes. What we were talking about was selling 

what you might call the first loss piece or the credit risk of those 

$300 billion. So you are really talking about selling maybe $10 bilVerDate Nov 24 2008 17:05 Feb 29, 2012 Jkt 072597 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\72597.TXT TERRIE
28 

lion of actual assets into the market, which is a much more digestible issue for the market. 

And there are three or four advantages there. One is, and I go 

back to the point one of the other panelists made about a healthy 

secondary market being extremely important for the primary market to pick up. 

Mr. NEUGEBAUER. Yes. Because they hold portfolio, they have 

some loans in a portfolio. 

Mr. RAJADHYAKSHA. Right. 

Mr. NEUGEBAUER. But you are basically just talking about the 

guarantee portion now, and somebody would buy that income 

stream of those guarantee fees that are coming in on a monthly 

basis? 

Mr. RAJADHYAKSHA. That is correct. The goal would be to—if I 

may take a step back, if you go back to January 2006, Fannie and 

Freddie, which have been a bigger and bigger share of originations, 

started to lose market share because the loan agency market was, 

quite frankly, doing silly things, right? 

But Fannie and Freddie, in an effort to maintain market share, 

followed the loan agency market down the credit spectrum, and 

that is where the vast majority of their losses come from, loans 

made in 2006 and 2007. 

What we would do is even if Fannie and Freddie ever felt the 

need to do something like that, they would have to go and then offload that credit risk in the secondary markets. And chances are the 

market would—the same reason why the market is willing to buy 

mispriced credit risk in the private markets, they would also be 

willing to buy credit risk off Fannie and Freddie’s books. 

Mr. NEUGEBAUER. Yes. I thought it was interesting that you 

were talking about the more recently underwritten loans. I would 

think that there would be maybe more interest in the pre-funny 

stuff. In other words, more seasoned loans where you have repayment history. Obviously, the duration of those that cash flow probably going to be reduced because, what, the average loan life is, 

what, about 7 or 8, 9 years or something like that. And so, the investor would be buying possibly a shorter cash flow. Is that right? 

Mr. RAJADHYAKSHA. Yes. But the problem with loans underwritten by Fannie Mae or Freddie Mac before, say, 2008 is that 

many of these loans are, quite frankly, very poor credit quality. By 

contrast, the loans from 2009 are pristine. 

So if you want to test the market, if you want to get a secondary 

market up and running, it is much easier to transfer credit risk 

from those loans to the private sector. 

Mr. NEUGEBAUER. And do you have any reason to believe that 

there are companies out there, or is this kind of a hypothetical 

thing, or do you have knowledge that you think there are entities 

interested in that? 

Mr. HUGHES. There are entities that are interested in doing it. 

And I think, to the extent the thought was if we are going to wait 

until some co-op gets built or some utility gets built, it could take 

a very long period of time. 

What you could look to are the one-off transactions where the 

private sector would essentially take the first loss risk and put 

Fannie and Freddie in a reinsurance position similar to Ginnie 

29 

Mae, similar to the multi-family may go a long way. You have to 

think through preserving the TBA status, but basically de-risking 

and putting into private sector potentially a company like Redwood 

actually taking that credit risk. 

Mr. NEUGEBAUER. What I was thinking about, and as you all 

were involved in this conversation, is where are we in the sense 

that we have the Treasury saying that they will capitalize Freddie 

and Fannie to whatever level to meet their obligations? 

Do you believe legally that, in other words, if I bought these 

securitizations in the last 2 years, I bought that based on the assumption I am actually buying sovereign debt because I have the 

United States Treasury behind the entity that is—so if I transfer 

that, let’s just say Redwood wants to buy that. So if I transfer to— 

Redwood buys that book of business, $200 million worth of guarantee business, how are we going to separate that from Freddie 

and Fannie? Because my interest is, obviously, getting the taxpayers out of this business. 

Mr. HUGHES. It wouldn’t be that simple. Potentially, but there is 

a model out there on the multi-family side, on Freddie Mac deals 

right now, they sell off first loss risk to the people that are putting 

those down and basically putting themselves in a second loss position. 

There are shelves available currently that the GSEs have where 

they can, again, sell off a piece of first loss risk, but it would be 

something that we would need it to be carefully thought through 

and carefully think through the impact on the TBA markets. 

But I think it is an idea where I think there is an abundance 

of capital. And again, we are more credit investors and that 

would—to the extent that it met all of the criteria, we would invest 

in that and could put the government in a second loss position. It 

could really accelerate the process here. 

Mr. NEUGEBAUER. I just wonder if the existing securitization documents would allow it? 

Mr. RAJADHYAKSHA. There is a way to make it simpler. We have 

actually been discussing this with Treasury and the regulators, 

FHA and FHFA, for a while now. And the GSEs absolutely have 

the financial technology to do this, right? The key, as Michael said, 

is that the TBA market is not being backed up. The way that they 

do that is what Fannie and Freddie sell would be new debt, which 

behaves the way a first loss piece will behave. 

So, the mortgage side of it would not be impacted at all, except 

that the performance of that first loss piece of debt that they sell. 

They have done this before. For example, the GSEs a few years ago 

started selling what was called final maturity bonds, which are, 

again, debt. It was not mortgage-backed securities, but it behaved 

the way a certain pool of mortgage-backed securities that they were 

referenced to actually behave. 

Mr. NEUGEBAUER. So it would be a synthetic, basically? 

Mr. RAJADHYAKSHA. The problem with synthetic is that 

counterparty risk comes into the question, right? So you would actually sell that. You would get cash, and that will end up building, 

starting to develop an insurance fund immediately. And what you 

would pass on is part of the g-fee from the mortgages that you already originated. 

30 

Mr. NEUGEBAUER. So it is a reinsurance thing for Freddie and 

Fannie, basically? 

Mr. RAJADHYAKSHA. To allow the private sector to take on that— 

Mr. NEUGEBAUER. To take on that risk. 

Mr. RAJADHYAKSHA. Yes. 

Mr. HUGHES. You could do it, one way to do it is you could do 

it through some form of synthetic, but it would need to be fully 

funded so that you didn’t have the counterparty risk of, hey, it is 

an insurance company. Who insures the insurance company? 

So, yes, I would think it would have to be fully funded up front, 

similar to a transaction on the private side. 

Mr. RAJADHYAKSHA. Sell it for cash. 

Mr. NEUGEBAUER. Table number two have some thoughts on 

that? 

Mr. ROSNER. Yes. I think your concern about the transfer of risk 

is the correct one, and I don’t know how you would actually make 

investors comfortable that what was an implied government or at 

this point functionally explicit government guaranteed asset, it will 

no longer be once it is in the hands of private investors or purchased outside of the GSEs. 

Mr. NEUGEBAUER. But if Freddie and Fannie, I guess, stay in the 

chain here, is—I think is being implied where they are just then 

selling that risk off. In other words, they are buying— 

Mr. ROSNER. Then I am not sure it really actually represents a 

real tracking instrument, as you are intending. 

Mr. NEUGEBAUER. Yes? 

Mr. LIEBERMAN. I would agree with Ajay that Freddie Mac has 

done what they call the K series deals in the multi-family world. 

They sell off the first loss piece. It trades between an 8 and 10 percent yield. It seems a very attractive level for Freddie to sell that 

risk off, an 8 to 10 percent yield for first loss piece. 

And I think the thing that should be taken advantage of, over 

the last 5 years, private investors have developed quite a bit of 

credit expertise on housing. Maybe not because they wanted to, but 

unfortunately, we have all become experts in credit, and we have 

all basically halted any sort of reliance upon rating agencies. 

And it would seem that you would have a very, very deep and 

broad market to sell credit risk off on the GSE portfolios, and there 

is a variety of ways to do that, some more complicated, some less. 

But the investor appetite is there. The capital is there. It is just 

a question of the willingness to allow a little bit of sunshine into 

that market and see how it progresses. 

Mr. NEUGEBAUER. My last question is just a quick one. We are 

talking about creating a space for the private market and, obviously, with the loan limits coming down at the end of this month. 

But what if Freddie and Fannie said, for example—and they have 

the ability to do this—that instead of 125 percent of the medium 

price, that we are going to do 110 percent of medium price? 

How much new space does that create for—do you have just an 

idea? I know that requires some statistics. But would that create 

10 percent new demand in the private market? 

Mr. RAJADHYAKSHA. At current credit levels, it would probably 

create 10 to 15 percent more demand, we expect, in the private 

market. But one thing I would add to that is that now is as good 

31 

a time as any to transition to the private sector as far as new origination goes because credit standards for new origination for Fannie 

Mae and Freddie Mac are also reasonably tight. 

So what you are looking at is there is not going to be if the private sector ends up replacing Fannie and Freddie, you should not 

get a drop-off in mortgage credit availability, which is the biggest 

concern for all of us here. 

Mr. NEUGEBAUER. So if you lowered, you don’t think you are 

going to see a drop-off in availability? 

Mr. RAJADHYAKSHA. I do not think you will see a drop-off in 

availability right now because the loans that, like Marty said, 

Fannie and Freddie are originating post 2009, the new loans, that 

is, are very tight credit, have a very tight credit space. 

Mr. NEUGEBAUER. So, that would create some space then. It 

would create some space? Yes. 

And without—Ajay, I think what I am hearing is without causing 

a lot of major disruption in the credit availability based on the current conditions? 

Mr. RAJADHYAKSHA. Yes. If you transitioned, if you had tried to 

transition, say, 5 or 6 years ago when Fannie and Freddie were a 

much bigger share of the market and the credit box was looser 

than— 

Mr. NEUGEBAUER. You might have created some space. Mr. 

Rosner, 110 percent? 

Mr. ROSNER. I think it would free up—I agree with Ajay generally. I think the big question is does it do anything to really restart the private label market, as opposed to it just ending up on 

bank balance sheets, which is fine, to some degree, to take that 

pressure off of the government and put it back on private balance 

sheets. 

But I still think we need to first address the plumbing—sorry to 

use that again—and documentation and origination issues. 

Mr. LIEBERMAN. I would assume that it would open up some 

room, but I don’t have a figure in mind on how much room would 

open up. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Chairman GARRETT. Thank you. 

The gentlelady from New York is recognized. 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

It certainly sounds as though, fundamentally, what we are talking about is essentially rationalizing the mortgage marketplace to 

make it appealing for private investors, to make it a common-sense 

decision to do that. Right now, we don’t have that because the Federal Government has so intervened against common sense in the 

marketplace. 

Is that a correct impression? Essentially, what you are saying, 

Ajay, is that Fannie and Freddie now have adopted behaviors that 

come closer to resembling what a marketplace would demand? 

Mr. RAJADHYAKSHA. Right. So if I may take a step back? Of the 

$5 trillion or so of the agency mortgage-backed securities market 

that is currently outstanding, our sense is that suppose Congress 

decided that tomorrow morning they wanted to transition to the 

private sector, right, all in one day? Fifty percent, about 50 percent 

32 

of that market, worth $2 trillion to $2.5 trillion, should be able to 

transition without their mortgage rates going up. Another $1.5 trillion or so, another 25 percent, will be able to 

transition with the mortgage rates rising by 100 or 150 basis 

points. 

Dr. HAYWORTH. Because right now they are just too low? 

Mr. RAJADHYAKSHA. That is correct. And the bottom 15 to 20 percent will have rates that are considerably higher. The point, 

though, is that the loans that have been currently originated even 

by Fannie and Freddie are in the top 50 percent. 

Dr. HAYWORTH. Right. 

Mr. RAJADHYAKSHA. So that transition should not be—we want 

it to happen smoothly and slowly, but it should not be too much 

of a problem. 

Dr. HAYWORTH. So, we have made movement toward that kind 

of a transition, in a sense. We are preparing the housing marketplace in general and the mortgage marketplace in general in the 

United States for that to happen? Okay. 

I had a question regarding something a bit more specific, if I 

may? There is a program called PACE, Property Assessed Clean 

Energy, and in mid-2010, FHFA determined that participants in— 

which is 90 percent of mortgage holders in the United States, those 

who have mortgages backed by Fannie Mae and Freddie Mac, 

homeowners, property owners—could not participate in Property 

Assessed Clean Energy programs. 

Are those familiar to everyone here? Because it represented essentially senior debt, and in the case of foreclosure, FHFA determined that that would be an obstacle to collecting on the loan. 

I have introduced legislation to enhance the appeal of the program to FHFA so that they will be assured that the likelihood of 

PACE participation getting in the way of recovery would be very 

low. Do you think the private marketplace would have any similar 

difficulties in accepting a PACE assessment as part of a property 

owner’s range of obligations? Any of our panelists or all of them? 

Mr. RAJADHYAKSHA. I, unfortunately, don’t know enough about 

the details of this program. 

Dr. HAYWORTH. Just briefly, the PACE programs allow property 

owners to make energy-saving improvements on their homes or 

structures and to finance them through a property tax assessment 

that is allowed by the issuance of municipal bonds from a special 

taxing authority that is granted to a community. And every State 

has to authorize this kind of a program for its communities. New 

York has a PACE program, as do 26 other States and the District 

of Columbia. 

But currently, as mentioned, as of June 2010, when FHFA took 

receivership of Fannie Mae and Freddie Mac, they were excluded, 

90 percent of mortgage holders were excluded from participating in 

PACE. And in this kind of environment, given that we would like 

contract just to go back to work, we would like to encourage energy-saving practices, PACE seems like a win-win. 

So I am endeavoring, along with colleagues in our House, to 

make it possible for FHFA to find its way to allow Fannie Mae and 

Freddie Mac mortgage holders to participate. But because it is 

viewed as—if there were a foreclosure, it would be viewed—obviVerDate Nov 24 2008 17:05 Feb 29, 2012 Jkt 072597 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\72597.TXT TERRIE
33 

ously, it is a tax-related obligation. It would be viewed as senior 

debt. They view it as problematic, even though the rate of foreclosure for PACE property, PACE assessment holders is actually 

lower than that for those who don’t have them. So— 

Mr. RAJADHYAKSHA. I think if it occupies the same position in 

the pecking order when they went to foreclosure as property tax 

liens do, then—which already exists—then I cannot know why—it 

would just have to be very clear cut in that situation. 

Dr. HAYWORTH. Okay. Thank you. 

Any of our other panelists? 

Mr. LIEBERMAN. I think investors price a mortgage based upon 

three general characteristics—credit, character, and collateral—the 

‘‘three Cs’’ of old-fashioned banking. If a PACE loan jumps ahead 

of the collateral, your house that you are going to foreclose upon, 

that is going to affect the valuation of that secured interest. And 

you are going to either have to price the mortgage higher, or you 

are going to have to decide that the collateral is not worth as much 

and the recovery is not going to be as much. And it will affect pricing. 

A tax lien is typically maybe 1 to 2 percent of assessed value, 

and you can figure out what the timeline is for foreclosure and how 

much is going to accrue and factor that into the loss. 

On the PACE side, if you give a loan to a borrower and then a year later, they put a $50,000 solar panel complex on top of the 

house that jumps in front of your mortgage, it is certainly going to 

add value to the house. But you are uncertain what has happened 

to your collateral package. I think that throws some doubt in there. 

Dr. HAYWORTH. So, there have to be ways in which we can consider the technical aspects, if you will, of the financing. Yes, sir? 

Mr. Hughes or Mr. Rosner? 

Mr. HUGHES. I would agree with Mr. Lieberman. 

Dr. HAYWORTH. It wouldn’t necessarily exclude a property owner 

from having a privately secured— 

Mr. LIEBERMAN. It wouldn’t exclude it. But I would think that 

there probably has to be some upper boundary to the amount that 

can jump in front of the lien. There has to be some way to quantify 

it. Otherwise, we can’t price for the risk, and it becomes, once 

again, very much like, unfortunately, the securities we already 

own, where we thought we had an owner-occupied house and it 

turned out to be an investor house. 

So that, subsequently, down the road a year or two later turns 

out to be something else, we are not going to, unfortunately, get 

our capital back. 

Dr. HAYWORTH. Understood. Thank you. 

Chairman GARRETT. And I thank you. 

That concludes the first round, and I see we are approaching the 

top of the hour. So what I thought we might want to do is our allfamous lightning round at this point and just allow, since some of 

the members indicated they may have a couple of other questions, 

just 2 minutes for each member. 

My vice chair said he will be strict on the time clock mechanism 

here, and then we will allow the panel to be dismissed. 

Going very quickly, I think Ajay’s comment will be the take-away 

from today, that now is as good a time as ever to move on these 

34 

areas. So, I think that will be the take-away from this panel discussion. 

Let me just run down a couple things just to reaffirm. On TBA, 

which I questioned Mr. Rosner on—and others talked about as 

well—it seems as though we could actually re-create a different 

type of TBA market, as long as we get the underwriting standards, 

homogeneity in the marketplace there, uniformity in the underwriting standards. Correct? Okay. 

To that, a side note, though. Mr. Hughes made some comment— 

I don’t know if this is on point or not—saying that some of our suggestions that have been out there floating is to say that we come 

up with some standards as far as what is prime, what have you, 

and some have suggested that you have multiple, prime and 

subprime. 

So, again, you would have some—you all would be able to take 

a look at and whether you just come and put one or, some have 

suggested, sort of a good, a bad, and a not so good. Your comment 

was that you really only need one on that area? 

Mr. HUGHES. No, no. I think you need multiple definitions. 

Chairman GARRETT. Okay. 

Mr. HUGHES. So that we are clear what a prime loan is, the AltA loan is, and the subprime loans are. That is what we need, a distinction. 

Chairman GARRETT. Good. I just wanted to clarify that. 

Ajay, on your opening comment with the—and Randy followed up 

on with regard to the credit risk aspect of it, that is a neat idea 

there. One, I guess, upside of that—I guess, is maybe this is where 

you were going—is that if you did that tomorrow, that would be 

able to help the market be able to do what? To be able to price the 

g-fees effectively is the way I am understanding this. 

Mr. RAJADHYAKSHA. Right. It would help the market to price 

mortgage credit, more like a benchmark or— 

Chairman GARRETT. Yes. So I got that the first time, but Randy’s 

comment, sort of following up on that, says another aspect of that 

is actually pricing what the g-fees should be, going forward. 

Mr. RAJADHYAKSHA. That is correct. That is correct, and then 

you, as Congress, get to decide whether you want to subsidize certain out of the mortgage universe and would you increase loan subsidy costs here. 

Chairman GARRETT. Right. And so, if you do that, you price that, 

you set g-fees, that goes to Mr. Hughes’s comment or questions on 

that with Mr. Hughes as far as them being able to say if they are 

priced correctly, that market basically opens up. 

Mr. HUGHES. The market opens up. And again, if you did that 

on a basis where the private market was pricing effectively the 

credit, you would need a rating agency, which is an obstacle right 

now, an impediment of getting real velocity on the package— 

Chairman GARRETT. And the last point, just running through 

this, with regard to the whole second lien issue here, we understand the problem as it exists today, most of us understand that 

in the market today, it is particularly tough to get a second lien 

anyway out there. 

I just want clarification that if tomorrow we were to change the 

law one way or the other, and you have different variations on 

35 

what these tools should be in regard to the limit on second liens, 

if you will, what does that look like in the marketplace, going forward, as far as my ability to own a home, to have a first mortgage? 

What does that do to my ability to go out and get a line of credit 

or anything else like that at second lien? 

Mr. HUGHES. Your ability, I believe you couldn’t use your house 

as an ATM. 

Chairman GARRETT. Correct. 

Mr. HUGHES. You use it on a responsible basis so that if you put 

20 percent down and your house went up by 10 percent, you could 

borrow 10 percent of the original amount. But you can’t just go out 

the next day and withdraw your equity in the house— 

Chairman GARRETT. Interesting. I said that was my last question, but I just want to ask one last question. What does that do 

as far as structured in what way? Were you basically saying that 

the initial first mortgage holder is—on the first mortgage or the 

limitation on— 

Mr. HUGHES. The bank you go to initially has to sign off on that. 

It doesn’t have to enforce the—it doesn’t have to necessarily raise 

the rates that you would have to have for the second lien unnecessarily high. 

Chairman GARRETT. So, that would not be the solution to doing 

that? 

Mr. HUGHES. Correct. 

Chairman GARRETT. Okay. Any other comments on any of the 

questions I had? 

Mr. LIEBERMAN. I want to add that basically putting some controls around the second lien will stabilize home values going forward. You will have less potential volatility, and so there will be 

more equity offered on homes to absorb that volatility. 

You actually may increase the velocity of home sales because you 

have access once again. Your house went up in value, you basically 

could go out and sell the house and you could buy a new one, which 

adds viability to commercial outcomes for the borrower as well as 

for— 

Chairman GARRETT. That is interesting. What that actually 

proves then—that this proves that this is good for the real estate 

market. It is actually good for those who are actually certain they 

want to sell and they could have an availability, what-have you, 

and you can actually see that long term. 

Mr. ROSNER. It would be great if this committee could promote 

the ideas of allowing second liens because it is really not anywhere. 

It has fallen through the cracks. Every time we talk to somebody, 

they mention [inaudible], but we can’t touch it. 

And so, it would be great if this committee could put forward 

ideas on different ways—there are lots of different ways to do it. 

But I think it would be warmly embraced by private investors to 

know that the first lien would be this protected. 

Chairman GARRETT. That is something that is part of our role. 

I thank the panel for all their answers. 

The gentlelady from New York is recognized. 

Mrs. MALONEY. Thank you, Mr. Chairman, for having this meeting, this hearing. 

36 

[Inaudible] testified before the Subcommittee on Financial Services that 25 percent of our economy is healthy, and if we can’t figure out how to move this forward and solve this problem, it is 

going to continue to drag down our economy. 

I also want to note that it is the 10th anniversary of 9/11, and 

I want to thank my colleagues who were part of that recovery effort 

here in New York. Most of your districts sent people who worked 

and helped us recover. We appreciate that. 

And after this, after the 9/11 recovery, we are meeting on 9/11. 

We are still recovering, still working on it. 

I want to ask Mr. Rosner a question really that concerns Attorney General Eric Schneiderman. He recently was thrown out of a 

coalition by Attorney General Tom Miller of Iowa, a coalition of attorneys general who were seeking to get something on financial institutions, and Attorney General Schneiderman said he didn’t believe that there had been enough effort to investigate servicers, and 

he was asked to be removed from the coalition. 

So I would like to ask you, do you think that the 50 State attorneys general have robustly investigated the servicers’ actions? 

Mr. ROSNER. No. 

Mrs. MALONEY. You do not? 

Mr. ROSNER. No. 

Mrs. MALONEY. Do you want to elaborate on how you don’t think 

they robustly— 

Mr. ROSNER. I think that there has been very little investigation, 

discovery, very few depositions. We have had a rush to settlement, 

it seems, which is beyond just on the original robo-signing that was 

talked about. So it would include at least the liabilities for frontend issues and servicing broadly without any real investigation. 

I don’t think Attorney General Schneiderman being thrown out 

of the committee matters very much because, at the end of the day, 

he would have to sign on to any agreement for it to be a 50-State 

agreement. 

But I don’t think there has been a real consideration, and I 

think, frankly, these suits that continue demonstrate that there 

has not been enough investigation, which would help private parties if there was more as well. 

Mrs. MALONEY. So, in other words, you think that Attorney General Eric Schneiderman is correct to continue investigating 

servicers before signing on and that this is an important part of 

moving forward. 

I want to thank all of you. I think I have met a new source of 

people to call for input on many things that are happening before 

this committee. 

Again, thank you, Mr. Chairman, for bringing this hearing to 

New York. We appreciate it. 

Thank you. 

Chairman GARRETT. Mr. Schweikert? 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

And coming from Arizona, you have this funny thing that falls 

out of the sky here. 

[laughter] 

Mr. SCHWEIKERT. I live in the middle of the desert. That is actually funny. And actually, as you notice, I didn’t turn on the timer 

37 

when the chairman was speaking. You learn how to kiss up to your 

chairman. 

Okay. Let’s do some of this quickly. 

Mr. Lieberman, externality on the pricing of loans is one of the 

discussions we keep having. Arizona is a deed-of-trust State. It can 

theoretically foreclose in 91 days. A mortgage State could take you 

a year, with much higher litigation costs. Should that be priced 

into the loan? 

Mr. LIEBERMAN. I believe it is already. When we price, we price 

in the actual process, and we also price in who is servicing the loan 

currently. Different servicers have different processes. 

Mr. SCHWEIKERT. Okay. And then, Mr. Hughes, when you were 

buying your loans to package up and securitize and sell them, did 

you look at them geographically to see if they were in higher regulatory or difficult areas to— 

Mr. HUGHES. When we analyze loans, we analyze them by MSA 

or by zip code, and we have an opinion on every single zip code. 

Mr. SCHWEIKERT. Okay. And I assume within that formula is— 

Mr. HUGHES. Absolutely. There are different timelines, and I 

think one other thought here is probably the best thing we can do 

is put more efforts in preventing foreclosures than mechanisms on 

the back end. And I am serious about that. If we can make sure 

borrowers can—day one, a borrower can clearly afford the house. 

Mr. SCHWEIKERT. Part of that question is coming. Because certain States create greater impediments, and— 

Mr. HUGHES. Absolutely. 

Mr. SCHWEIKERT. —if you have a federally-backed system, the 

rest of the taxpayers across the country are basically subsidizing 

the impediments from that State and getting subsidized by other 

States having more efficient systems. 

So, it is sort of an externality question that is a little ethereal, 

but he only gave me 2 minutes. 

Ajay, one quick one. When you say selling off the first loss 

piece— 

Mr. RAJADHYAKSHA. Right. 

Mr. SCHWEIKERT. First, how big? If you and I were looking at it 

in strips of the loan— 

Mr. RAJADHYAKSHA. Sure. 

Mr. SCHWEIKERT. —what part would I be actually looking at? 

Mr. RAJADHYAKSHA. What would you be looking at is, basically, 

debt that corresponds to the hit that the mortgage-backed security 

would take on liquidation, which is— 

Mr. SCHWEIKERT. Okay. So I would be discussing, basically, the 

subordinated strip? 

Mr. RAJADHYAKSHA. It would be, absolutely. In a capital structure, that would be what the subs will be called, yes. 

Mr. SCHWEIKERT. And you think that might be a way of helping 

finance a, we will call it a guarantee? 

Mr. RAJADHYAKSHA. It does two or three things. Number one is 

it immediately starts to build up a cash insurance fund for Fannie 

Mae and Freddie Mac, which they do not have right now. Number 

two, and most importantly, it does provide a benchmark for the private sector to price mortgage credit off of. And number three, even 

the GSEs for a while are going to continue originating loans. It 

38 

gives them a market-based signal on whether the g-fees that they 

are charging are market-based or not or whether they are way off 

market. 

Mr. SCHWEIKERT. All right. Ajay, thank you. 

Thank you, Mr. Chairman. 

Chairman GARRETT. The gentlelady is recognized. 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

I am thinking synthetically in a sense. When we had a covered 

bond hearing, I believe it was in April, Mr. Chairman, a representative of the community banks was concerned about the developing 

covered bond marketplace because, as I am recalling, if I am recalling correctly, there was a certain amount of fear that community 

banks would have not the wherewithal, if you will, to use a very 

broad term, to participate in it. 

Would developing—and I am thinking of underwriting standards 

as well because our community bankers will contend, and certainly 

intuitively it makes sense. They know their mortgage holders well. 

So, there is that relationship. There is that quality of the character 

reference, if you will. There is a relationship with the communities. 

We have a lot of community banks in our district. I am sure that 

is true pretty much of districts across the country. And we have big 

banks, too. 

Would a fuller development of a private residential mortgagebacked securities marketplace alleviate some of those concerns, if 

you will, on behalf of our community banks regarding covered 

bonds? 

Mr. RAJADHYAKSHA. I think, absolutely, it would. It is a fair 

point that the covered bond market would be far more accessible 

to big banks, but you can also make that argument about the corporate bank market. Banks are allowed, last I checked, to issue 

corporate debt, right? 

It is true that a securitization market would probably provide a 

concertedly more level playing field. It would not be named specific, 

and community banks will have a greater shot at funding their 

mortgages. 

Mr. HUGHES. Another mechanism that I believe could work that 

could provide liquidity to the community banks if they don’t have 

portfolio capacity is to aggregate the loans that they have. You 

would probably have to use the Federal Home Loan system and 

have them intermediate and sell it to a company like Redwood 

Trust, where you can make sure that the Federal Home Loan System is not taking any risks, but you would funnel it through in a 

way that would bring liquidity for jumbo mortgages and others 

that they couldn’t otherwise sell. 

Because otherwise, right now, if you are a small community 

bank, you can’t portfolio it. You are forced to sell it to a bigger 

bank, and generally, you lose your customer when you do that. But 

I think that is another opportunity. 

Dr. HAYWORTH. Thank you. 

Mr. Rosner? 

Mr. ROSNER. I agree. 

Dr. HAYWORTH. Okay. Mr. Lieberman? 

Mr. LIEBERMAN. I agree. 

Dr. HAYWORTH. Thank you all. 

39 

Thank you, Mr. Chairman. 

Chairman GARRETT. And the gentleman from Arizona is recognized yet again. 

Mr. SCHWEIKERT. Mr. Chairman, thank you. 

And this is—some of us have already had this conversation over 

the last few months. I am hunting for ideas on the aggregator portion of, loan is written by the community bank, money center bank, 

mortgage banker. 

How is it being collected and moved up to the securitizer, and if 

you were to do that on a very large-scale basis? And I would be 

elated for some suggestions because I have looked a little bit at 

your model and wondered how it would scale. 

Mr. HUGHES. I think it could scale very well. I think you have— 

there are certain of the Federal Home Loan Banks that were 

aggregators in the past. I think, to use a word that has been used 

a lot, they have all the plumbing to be the aggregation source. And 

then I think the real trick, at that point in time, is to companies 

like Redwood would look to buy those loans. 

We would, again, draw an underwriting box so if it looks like 

this, we would buy it, but I think there would be a vast amount 

of capital. 

Mr. SCHWEIKERT. Mr. Chairman, to everyone on the panel, do 

you like the idea of using the Federal Home Loan Bank— 

Mr. HUGHES. On a de-risked basis— 

Mr. SCHWEIKERT. Yes. 

Mr. HUGHES. —where really a true, true— 

Mr. SCHWEIKERT. Yes, I was about to say with the caveat that 

there is a wall so the possibility of liability does not transfer into 

the participating institutions. 

Chairman GARRETT. Can you do that? 

Mr. HUGHES. I think you could do that. You can. 

Mr. LIEBERMAN. I think it depends on if they are just another 

name for Fannie and Freddie. 

Mr. SCHWEIKERT. Okay. 

Mr. LIEBERMAN. If they are truly—are they providing a wrap? 

Are they providing just the plumbing, or are you basically just creating 12, or however many Federal Home Loan Banks there are, 

new Fannies and Freddies. 

Mr. SCHWEIKERT. Yes. The concern would be the true classic aggregation. They acquire, they hold for 90 days. It is a tiny bit of 

seasoning until someone comes in and buys it. 

Mr. HUGHES. I think you could buy them right at the time—we 

could make it a commitment. And again, there are two of the 

banks—actually, the primary one is the Federal bank in Chicago 

that has all the mechanisms in place right now, and I think you 

could distribute through them, and a company like Redwood will 

buy the loans. 

Mr. SCHWEIKERT. Okay. We may have some future because this 

ties back into the ‘‘to be announced’’ market that I have been trying 

to finish that piece of the package. 

So, Mr. Chairman, thank you. And gentlemen, thank you. 

Chairman GARRETT. Again, thank you, all of the members of the 

panel. Thank you to all of my colleagues for joining us here in New 

York. 

40 

The Chair notes that some members may have additional questions for the panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their response in the record. 

And with that, the hearing is adjourned. 

[Whereupon, at 12:20 p.m., the hearing was adjourned.] 

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