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72–741 PDF 2012

S. HRG. 112–245 

HOUSING FINANCE REFORM: ACCESS TO THE 

SECONDARY MARKET FOR SMALL FINANCIAL 

INSTITUTIONS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING ACCESS TO THE SECONDARY MARKET FOR SMALL 

FINANCIAL INSTITUTIONS 

JUNE 28, 2011 

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

( 

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

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

ERIN BARRY, Professional Staff Member 

BETH COOPER, Professional Staff Member 

WILLIAM FIELDS, Legislative Assistant 

ANDREW OLMEM, Republican Chief Counsel 

CHAD DAVIS, Republican Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

LEVON BAGRAMIAN, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, JUNE 28, 2011 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 2 

Senator Hagan .................................................................................................. 2 

WITNESSES 

Jack Hartings, President and Chief Executive Officer, The Peoples Bank 

Company, on behalf of the Independent Community Bankers of America ..... 3 

Prepared statement .......................................................................................... 26 

Edward J. Pinto, Resident Fellow, American Enterprise Institute ..................... 5 

Prepared statement .......................................................................................... 31 

Rod Staatz, President and Chief Executive Officer, SECU of Maryland, on 

behalf of the Credit Union National Association ............................................... 7 

Prepared statement .......................................................................................... 40 

Responses to written questions of: 

Senator Shelby ........................................................................................... 71 

Senator Reed .............................................................................................. 72 

Christopher R. Dunn, Executive Vice President, South Shore Saving Bank, 

on behalf of the American Bankers Association ................................................ 8 

Prepared statement .......................................................................................... 62 

Responses to written questions of: 

Senator Shelby ........................................................................................... 73 

Senator Reed .............................................................................................. 75 

Peter Skillern, Executive Director, Community Reinvestment Association of 

North Carolina ..................................................................................................... 10 

Prepared statement .......................................................................................... 68 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted by the National Association of Federal Credit Unions ........... 77 

(III)

(1) 

HOUSING FINANCE REFORM: ACCESS TO THE 

SECONDARY MARKET FOR SMALL FINANCIAL INSTITUTIONS 

TUESDAY, JUNE 28, 2011 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:03 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I call this hearing to order. 

The Committee meets today to continue our series of hearings on 

housing finance reform. This hearing will examine how small 

banks and credit unions currently sell mortgages on the secondary 

market and how any potential changes to the housing finance system would affect their access to that market. 

Community banks and credit unions play a crucial role in local 

economies across the country, particularly in rural areas, and as 90 

percent of FDIC-insured institutions hold less than $1 billion in assets, any action by Congress must not ignore small institutions. 

The current system is unsustainable and the need for reform is 

clear, but I am concerned that proposals for the future of the secondary market could lead to bank concentration and unintentionally limit access for these institutions. This hearing will help us 

better understand the possible consequences of such proposals as 

well as their potential impact on the rest of the housing market, 

local communities, and the broader economy. 

There are several questions we must consider. If small institutions do not have access to the secondary market, will they be able 

to offer mortgages to their customers and at what cost? How would 

it affect those institutions and their surrounding communities? 

Would some proposals provide more equitable secondary market access than others? 

I look forward to hearing from our panel and thank them for 

their testimony and their time. I would also like to submit testimony for the record on behalf of the National Association of Federal Credit Unions. 

With that, I will turn to Senator Shelby. 

2 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. 

Small and community banks play a unique and vital role in our 

housing finance market. Historically, small banks were the primary source of mortgage lending. If you wanted to buy a home, you 

went to your local bank to get a mortgage. Today, however, the financial landscape is quite different. 

First, the banking industry has witnessed substantial consolidation. In 1984, there were 15,000 banking and thrift organizations 

in this country. Today there is less than half that number. In addition, mortgage lending is concentrated in just a few banks. Last 

year, three banks—yes, three banks—originated 56 percent of all 

mortgages while 8 institutions serviced 63 percent of all outstanding mortgages. 

Another shift in the mortgage landscape is the dependence on 

capital markets to finance mortgage lending. Before the advent of 

securitization, the vast majority of single-family residential mortgages were held by banks. In 1970, banks held over 70 percent of 

single-family residential mortgages while 30 percent were held by 

the Government and other investors. By 2008, those numbers had 

flipped, with banks holding less than 30 percent of mortgages. The 

days when your local bank actually owned your mortgage generally 

have long passed. 

Despite these significant changes, small banks have proven to be 

remarkably resilient and able to adapt to the new environment. Because they are close to their communities, small banks are often 

able to find profitable lending opportunities overlooked by the big 

mortgage lenders. Therefore, there is no economic reason why 

small institutions cannot compete with large ones. I believe we just 

have to make sure here that we do not create regulatory barriers 

that place small banks at an unfair competitive disadvantage. 

Accordingly, as we consider how to reform our housing finance 

system, it is critical that we devise a system that works for all 

banks, not just large institutions. Any reform should recognize that 

small banks have very different business models. Failing to account 

for the distinct needs of small banks could needlessly accelerate the 

consolidation of our banking industry to the detriment of consumers and taxpayers. 

For generations, small banks have been the backbone of the communities throughout our Nation, and as we undertake housing finance reform, we must ensure that they remain so for generations 

to come. 

Chairman JOHNSON. Thank you, Senator Shelby. 

Senator Hagan wants to say something briefly in that we have 

a witness from North Carolina. 

STATEMENT OF SENATOR KAY HAGAN 

Senator HAGAN. Thank you, Mr. Chairman, and thank you for 

holding this hearing on the role of the secondary mortgage market 

for small financial institutions. 

As we look at ways to reform our housing finance system, it will 

be critical to understand the issues faced by small financial institutions and the communities that they serve. I would also like to 

thank the Chairman for inviting Peter Skillern, the executive direcVerDate Nov 24 2008 08:43 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\06-28 HOUSING DISTILLER\62811.TXT JASON
3 

tor of Community Reinvestment Association of North Carolina, to 

testify before the Committee today. CRA–NC, as the association is 

known, is dedicated to promoting and protecting the community 

wealth in underserved areas. Since its creation in 1986, it has 

played a key role in regional advocacy and development for underserved areas. 

Mr. Skillern is a graduate of the Kenan-Flagler School of Business at UNC–Chapel Hill, came to work at CRA–NC after serving 

as the executive director of the Durham Affordable Housing Coalition, and under his guidance CRA–NC has pioneered innovative 

outlets to promote financial education to residents in underserved 

areas, and this is something that I have championed for many 

years, especially during my time in the North Carolina General Assembly. I look forward to his testimony and the deep knowledge he 

can bring to today’s discussion on access to the secondary market 

for small financial institutions. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Before I introduce the witnesses, would any 

of my colleagues like to make a brief opening statement? 

[No response.] 

Chairman JOHNSON. If not, then we will proceed. 

Mr. Jack Hartings is the president and CEO of the People’s Bank 

headquartered in Coldwater, Ohio. Mr. Hartings is also the treasurer of the Independence Community Bankers Association. 

Mr. Edward Pinto is a resident fellow at the American Enterprise Institute, a private, nonprofit institution dedicated to the research and education of a host of different policy issues. 

Mr. Rod Staatz is the president and CEO of SECU, a North 

Carolina-based credit union founded in 1937. Mr. Staatz is also a 

member of the Board of Directors for the Credit Union National Association. 

Mr. Christopher R. Dunn is the executive vice president of South 

Shore Savings Bank, a Massachusetts-based full-service mutual 

savings bank. 

Finally, we have Mr. Peter Skillern, executive director of the 

Community Reinvestment Association of North Carolina, which is 

a nonprofit community advocacy and development group. 

We welcome all of you here today and thank you for your time. 

Mr. Hartings, you may proceed. 

STATEMENT OF JACK HARTINGS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE PEOPLES BANK COMPANY, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF 

AMERICA 

Mr. HARTINGS. Chairman Johnson, Ranking Member Shelby, 

Members of the Committee, I am Jack Hartings, president and 

CEO of The Peoples Bank Company and a member of the Executive Committee of the Independent Community Bankers of America. The Peoples Bank Company is a $350 million asset bank in 

Coldwater, Ohio, and I am pleased to represent community bankers 

and the ICBA’s nearly 5,000 members at this important hearing. 

Any broad-based recovery of the housing market must involve 

community bank mortgage lending. Community banks represent 

approximately 20 percent of the mortgage market, but more imporVerDate Nov 24 2008 08:43 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\06-28 HOUSING DISTILLER\62811.TXT JASON
4 

tantly, our mortgage lending is often concentrated in rural areas 

and small towns not effectively served by large banks. For many 

borrowers in these areas, a community bank loan option is the only 

option. The Peoples Bank Company serves a community of about 

5,000 people and has been in business for 105 years. We survived 

the Great Depression and numerous recessions—as have many 

other ICBA member banks—by practicing conservative, commonsense lending. 

Today I would like to talk about my bank’s mortgage lending and 

the importance of the secondary market access. Mortgage lending 

is about 80 percent of my business. About half the mortgage loans 

I make are sold, mostly to Freddie Mac, with a smaller portion 

going to the Federal Home Loan Bank of Cincinnati. The secondary 

market allows me to meet customer demand for fixed-rate mortgages without retaining the interest rate risk these loans would 

carry. As a small bank, it is not feasible for me to use derivatives 

to manage interest rate risk. Selling into the secondary market 

frees up my balance sheet to serve customers who prefer adjustable 

rate loans as well as small businesses which play a vital role in our 

community. 

The mortgages I sell perform extremely well. None of my mortgages that I originated for Freddie Mac have gone into foreclosure. 

Currently, none of my loans in my $75 million Freddie Mac portfolio have been 30 days or more delinquent in the past 3 months. 

Although my bank’s performance may be exceptional, it is typical 

of community bank-originated mortgages to perform well, and it 

shows in the data. 

The key to the performance of community bank mortgages is diligent, community-based underwriting and servicing. Again, using 

my bank as an example, while Freddie Mac’s automated underwriting, Loan Prospector, provides a set of ratios and statistics that 

are useful in the initial screening, our underwriting is enhanced 

with the direct and personal knowledge of the community and the 

lifestyle of the borrower. A grasp of these intangibles is what 

makes the difference between community-based relationship lending and remote transactional lending done by the megabanks. 

When it comes to servicing—and we service all of our loans that 

we sell to Freddie Mac—again, our community connection makes 

the difference. We know, for example, when an employer closes in 

our community and how that may impact the income of our borrowers. We intervene early and work out mutually agreeable solutions with struggling borrowers. 

My written testimony has a comprehensive list of features that 

make the secondary market entity attractive to a community bank. 

I will limit my discussion here to the essential ones. 

First, equal access and equal pricing. A sustainable and robust 

secondary market must be impartial and provide equitable access 

and pricing to all lenders, regardless of size and lending volume. 

Second, originators must have the option to retain servicing after 

the sale of the loan. While servicing is a low-margin business, in 

fact I would make more by releasing servicing rights. It is a crucial 

aspect to my relationship lending business model, giving me the opportunity to meet additional banking needs of my customers. What 

is more, when I release servicing, I release proprietary consumer 

5 

data that is highly valuable for cross-selling products. Community 

banks must be able to preserve customer relationships and franchises after transferring loans. 

As we listen to the debate over the secondary market reform, 

community banks are particularly alarmed by proposals that would 

transfer the functions of Fannie Mae and Freddie Mac to a small 

group of megabanks, the very ones whose abusive loan terms, slipshod underwriting, and exotic securitization contributed to the 

most recent financial catastrophe. Such proposals would intensify 

systemic risk and moral hazard through concentration of assets. I 

urge this Committee to reject any proposal that does not provide 

equal representation for community banks and lenders of all sizes 

and does not ensure that communities and customers of all varieties are served. 

Thank you again for holding this hearing and for the opportunity 

to testify. 

Chairman JOHNSON. Thank you, Mr. Hartings. 

Mr. Pinto, you may proceed. 

STATEMENT OF EDWARD J. PINTO, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. PINTO. Chairman Johnson, Ranking Member Shelby, thank 

you for the opportunity to testify today. 

In mortgage lending, community financial institutions face two 

continuing but related threats. While community financial institutions did not cause the financial crisis, it appears now that they 

will be subjected to regulatory overload. The 12 pages of statutory 

provisions related to qualified residential mortgage and qualified 

mortgage have now ballooned to over 800 pages of proposed regulations. This adds insult to injury. Fannie Mae and Freddie Mac, the 

GSEs, had a long history of giving their largest and riskiest customers lower guarantee fees. This denied community financial institutions fair and equal access to the secondary market. It disadvantaged them economically and in many cases resulted in handing over their best customers to their large bank competitors. 

As far back as 1995, Fannie Mae’s top 25 customers, led by 

Countrywide, benefited from substantially lower guarantee fees 

than Fannie’s 1,200 smallest customers. Large lenders like Countrywide also benefited from looser underwriting standards, many 

times undertaken to meet affordable housing goals. In 1995 Fannie 

Mae was frank about the risks and why it was willing to take 

them. Countrywide liked to test the limits of investment quality 

underwriting and had a major impact on Fannie Mae’s affordable 

housing goals. 

In my written testimony is a chart that speaks volumes about 

the risks posed by too-big-to-fail financial institutions as compared 

to regional and community banks. There are over 6,000 banks in 

this country with less than $10 billion in assets. Virtually all of 

them are community banks, and there are virtually no community 

banks over $10 billion. They had a current nonperforming loan rate 

of a little over 2.5 percent. The four banks that are over $1 trillion 

have a rate of over 16 percent nonperforming loan rate, and all 

banks over $20 billion have a rate of approximately 12 percent, 

about 5 times what community banks experience. 

6 

The nonperforming loan rate is a delinquency in excess of 90 

days, 90 days or more, or a loan that has already been moved into 

foreclosure. You have heard similar statistics from Jack Hartings 

on the sales to Fannie Mae. 

A white paper I coauthored with Peter Wallison and Alex Pollock 

has principles, many of them similar to those suggested by Mr. 

Hartings’ testimony. 

First, a limited scope of conservatively underwritten products 

available for securitization. We advise repealing QRM and QM and 

replacing them with a statutory definition of prime loan, and that 

is outlined in my written testimony. We have already been beset 

with problems emanating from the broad delegation in the original 

legislation to regulators, lobbying by industry groups against the 

proposed regulations, and claims by many Members of Congress 

that their intent was thwarted. 

Second, adequate private capital would insulate taxpayers. Riskbased pricing needs to be adequate for long-term cycles, and that 

would help assure equal access regardless of loan volume. Any replacement structure must avoid re-creating the moral hazard represented by Fannie and Freddie by not replacing them with a few 

too-big-to-fail banks. 

We need strong supervision. Relying on a regulatory structure 

that incorporates countercyclical capital accumulation and other 

self-implementing features rather than expecting regulators to be 

all knowing and all seeing, with somehow having the ability to 

reset capital levels on the fly based on market conditions or put 

brakes on at just the right time is not reasonable of feasible. 

And, last, accommodate a joint venture structure that will aggregate the mortgages produced by community financial institutions. 

There is one area that we think special caution should be taken. 

Many industry participants call for the Government to guarantee 

mortgage loans for catastrophic loss. History suggests that that 

guarantee will end up costing the taxpayer dearly. Why? Because 

the reserves necessary will not be accumulated, the Government 

will not be able to successfully price the risk, and you will have distortion of prices, resource allocation, and competition, and there 

will be political interference, which leads to weakened credit standards. 

The private market that would develop under a more privatized 

approach would be entirely different from the distorted market created by the GSEs. A high preponderance of the mortgage would be 

prime loans, loans of the kind that community financial institutions usually originate. These loans will be highly sought after because not only are they good investments, but the type of mortgages that can be securitized. 

Thank you and I would be happy to answer questions at the appropriate time. 

Chairman JOHNSON. Thank you, Mr. Pinto. 

Mr. Staatz, you may proceed. 

7 

STATEMENT OF ROD STAATZ, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SECU OF MARYLAND, ON BEHALF OF THE 

CREDIT UNION NATIONAL ASSOCIATION 

Mr. STAATZ. Mr. Chairman, Ranking Member Shelby, Members 

of the Committee, thank you very much for the opportunity to testify at today’s hearing. 

A healthy, efficient, and accessible secondary market is vital to 

credit unions and the millions of consumers we serve. The problems that led to the conservatorships of the Fannie and Freddie 

need to be addressed in a comprehensive and meaningful manner. 

However, as Congress and the Administration undertake this effort, it is critical that a widespread availability of mortgage credit, 

housing affordability, consumer protection, financial stability, and 

strong regulation are maintained. We urge Congress to take reasonable time to complete GSE reform and to ensure that an effective foundation will be responsive to the needs of borrowers and 

lenders. 

Credit unions are increasingly important players in the residential mortgage market. Since 2007, we have originated over a quarter of a trillion dollars in mortgages. I will focus my testimony on 

our principles of housing finance reform and our concerns with the 

proposed definition of a qualified residential mortgage. 

Quite frankly, many credit unions fear a world in which the secondary market is occupied by a handful of very large banks. Concerns about access to and pricing in such a market are frequently 

expressed. We believe that it is very important that there be a neutral third party whose sole role would be as a secondary market 

conduit. 

The Federal Government has a very important role to ensure 

that the secondary market operates efficiently, effectively, and fairly for all borrowers and lenders alike. We believe that there are 

seven principles that are essential to consider as you develop comprehensive housing finance reform: 

Number one, equal access. The paramount concern for credit 

unions is equitable access to the secondary market. It is essential 

that the Federal Government’s regulation ensure that terms, rates, 

and conditions for selling loans are affordable and fair to all lenders, regardless of their size or charter type. 

Number two, strong oversight and supervision. Secondary market services must be subject to appropriate oversight to ensure 

safety and soundness, including strong capital requirements. 

Number three, durability. 

The new system must ensure mortgage loans will continue to be 

made to qualified borrowers even in troubled economic times. 

Four, financial education. Credit unions are leaders in providing 

quality financial education to their members, which may help account for credit unions’ low loss rates. If other lenders did the 

same, borrowers could make better decisions. 

Preservation of the 30-year fixed-rate mortgage. This product is 

the centerpiece of the mortgage lending market, and the new system should facilitate its availability to qualified borrowers. Federal 

support should remain to preserve this product, and the costs 

should be borne by the financial mortgage finance system, not by 

the taxpayers. 

8 

Affordable housing, number six. The important role of Government support for affordable housing should be a function separate 

from the responsibilities of the secondary market entities. Programs to stimulate the supply of credit to lower-income borrowers 

are not the same as those for the broader mortgage market. Combining both goals in a single vehicle can frustrate the achievement 

of each goal individually. 

And, number seven, transition. Changes to the housing finance 

system must be reasonable and orderly to avoid further disrupting 

a housing market that is in a fragile State of recovery. 

I would also like to briefly address our concerns with the proposed definition of QRM. This definition is narrower than what was 

contemplated under Dodd-Frank, which requires a credit risk retention rule. We are concerned that the stringent definition of 

QRM could not only shut out an entire class of qualified borrowers 

from the market, but could also drive up mortgage liquidity for 

small lenders. Further, QRM could be a template that regulators 

will impose on all home mortgage loans, whether they are 

securitized or not. We urge Congress to insist that the regulators 

go back to the drawing board and issue a new proposed QRM definition for public comments. 

Mr. Chairman, reform of the housing finance system has already 

proven to be a very difficult challenge, but failing to make necessary changes to improve the system will result in even greater 

challenges for the economy, lenders, and borrowers. 

Thank you for taking credit unions’ concerns into consideration. 

I appreciate the opportunity to testify, and I am happy to answer 

any questions the Committee may have. 

Chairman JOHNSON. Thank you, Mr. Staatz. 

Mr. Dunn, you may proceed. 

STATEMENT OF CHRISTOPHER R. DUNN, EXECUTIVE VICE 

PRESIDENT, SOUTH SHORE SAVING BANK, ON BEHALF OF 

THE AMERICAN BANKERS ASSOCIATION 

Mr. DUNN. Chairman Johnson, Ranking Member Shelby, and 

Members of the Committee, my name is Christopher Dunn. I am 

executive vice president and chief operating officer of South Shore 

Savings Bank in South Weymouth, Massachusetts. I appreciate the 

opportunity to testify on behalf of the ABA. 

The issue of GSE reform is a critical one for banks, particularly 

for community banks like mine, which use the GSEs as the primary mode of access to the secondary markets. I have been in the 

mortgage lending business since 1972 and sold my first loans to 

Fannie Mae in 1974, so I know the importance of secondary market 

access for smaller banks. Without that access, my bank could not 

be an active player in the mortgage market because our balance 

sheet could not support the demand. Further, we would not be able 

to offer long-term fixed-rate loans due to the increased interest rate 

risk that this would create for our portfolios. 

The ABA believes that a private market for the vast majority of 

housing finance should be encouraged with a much smaller Government role. To distinguish our position from others, we define a private market as one without a Government guarantee of any sort, 

not private ownership of companies that operate with a GovernVerDate Nov 24 2008 08:43 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\06-28 HOUSING DISTILLER\62811.TXT JASON
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ment backstop. Therefore, the role of Fannie Mae and Freddie Mac 

should be reduced and transformed. We believe that the Government’s role in housing finance should be to ensure stability and accessibility of the capital markets in the event of a market failure. 

In addition, FHA should return to its traditional role of servicing 

first-time homebuyers and borrowers who may not qualify for conventional financing. 

The overarching principle is to ensure that banks of all sizes 

have access to the secondary market financing. The ABA has not 

endorsed a specific structure for the GSEs and the private secondary market, and finding the right system will be challenging. In 

the meantime, there are steps that can be taken and should be 

taken to reduce governmental involvement, foster private sector financing, and still assure equitable access to all secondary markets 

for the banks. These steps are essential to begin an orderly transition from the failed market structure. 

First, the compensation being paid for what amounts to full Government backing is simply not priced correctly in the market. 

These G-fees, as they are called, should be dialed up in an orderly 

manner so that eventually the private market will be able to price 

for risk in a fashion that allows for safe and sound lending at comparable and eventually better rates than the GSEs. The increased 

G-fees will also help to offset losses and repay the Government for 

its investment in Fannie Mae and Freddie Mac. 

The second mechanism for a transition to a private market is to 

set more reasonable loan limits for GSE purchases. The current 

maximum loan limits are dramatically higher than necessary for 

the purchase of a moderately priced home, especially in light of 

housing price declines nationwide. 

Underpinning all of this must be workable and clear underwriting standards for all mortgage loans. We must get the underwriting standards correct today if we hope to transition to a stable 

system for secondary market instruments. 

The current regulatory proposals for risk retention define a narrow qualified residential mortgage exemption. As a result, many 

high-quality loans posing little risk will end up being excluded. 

This will inevitably mean fewer borrowers will qualify for loans to 

purchase or to refinance a home. Moreover, should this proposal be 

adopted as proposed, it will drive many banks out of mortgage 

lending. ABA strongly believes that this rule should be substantially rewritten and reproposed. Specifically, we recommend that 

most mortgage loans with lower risk characteristics, which include 

most of the loans being made today by community banks, should 

be exempted from the risk retention requirements regardless of 

whether they are sold to Fannie Mae and Freddie Mac or private 

securitizers. The imposition of risk retention requirements is a significant change to the operation of the mortgage markets and must 

not be undertaken lightly. Driving community banks from the 

mortgage marketplace and shutting out many borrowers from the 

credit market entirely is completely counter to having a vibrant 

mortgage market. ABA urges Congress to exercise its oversight authority to assure that logical, consistent rules are adopted. 

Thank you for the opportunity to testify, and I would be pleased 

to answer any questions. 

10 

Chairman JOHNSON. Thank you, Mr. Dunn. 

Mr. Skillern, you may proceed. 

STATEMENT OF PETER SKILLERN, EXECUTIVE DIRECTOR, 

COMMUNITY REINVESTMENT ASSOCIATION OF NORTH 

CAROLINA 

Mr. SKILLERN. Thank you. Thank you very much, Chairman 

Johnson and other Members, for allowing me to speak today on reforms in the secondary market. 

On September 6, 2000, I testified before the House Financial Institutions Subcommittee on Government Sponsored Enterprises 

and I stated, quote, ‘‘For the record, these high-cost loans will become a significant problem in the coming years. In the future, this 

Committee will return to discuss how the financial markets played 

a role in spurring high default rates and the decline of our neighborhoods.’’ That proved to be true. Subprime lending was bad for 

our neighborhoods and for our economy, and the purchase of those 

high-cost subprime loans was the primary cause for the GSEs’ failure. 

Today, I am concerned that reform proposals that eliminate the 

GSEs and convert to a solely private capital market will also be 

harmful for our communities and housing sector as a whole. We 

support reforms to increase private mortgage capital with adequate 

oversight. However, the GSEs are needed as public purpose agencies that provide stability for our Nation’s housing and financial 

markets. 

We are concerned that megabanks will dominate the mortgage 

market from origination to securitization, to the detriment of consumers and small banks. In the rural areas of Alabama, North 

Carolina, Oregon, Ohio, and South Dakota, megabanks originated 

75 percent of conventional loans and 88 percent of FHA loans. By 

comparison, small institutions, under $10 billion, originated 16 percent of conventional loans. 

Small lenders shop their loans among the secondary buyers of 

GSEs and financial banks. Loans are underwritten to a standard 

established by the GSEs and sold as commodities to those who are 

offering the best price and services. If the GSE is eliminated, the 

secondary capital markets will become dominated by megabanks, 

which will further concentrate capital in a vertical integration of 

the mortgage market. This will disadvantage small lenders’ access 

to capital, underwriting, and technology that is controlled by their 

competitors. If megabanks are too big to fail now, imagine their 

size, power, and vulnerability as they become guarantors and holders of the mortgage-backed security market. 

Capital is greedy and scared. Its volatility adds to swings during 

booms and busts. Private capital is the primary source of liquidity, 

will not act countercyclically to provide credit in a recession or to 

slow things in a boom. 

By analogy, mortgage credit is like water. We are concerned 

about the quality of water that comes out of our tap, but we also 

want to know who controls the water’s availability and its price. 

Who owns the plumbing from the water source of the glaciers to 

the spigot at home? Mortgage credit, like water, is too critical and 

should not be entirely controlled by private interests. 

11 

But if we should not privatize the secondary market, what 

should be done? We believe that the GSEs should be converted into 

public purpose entities that are accountable to Congress but are 

not a department of the Government, such as the Federal Housing 

Administration. The agency would provide liquidity for 30-year 

mortgages that are explicitly guaranteed or price adequately for reserves. The agency would provide liquidity for multifamily financing. The agency would act as a provider of underwriting standards 

and technology for the benefit of the whole market. It would balance private influence by providing choice on the secondary market. 

As an example, the North Carolina Housing Finance Agency is 

not a Government department. It is independent, but yet it serves 

a public purpose of financing affordable housing and rental. While 

appointed by the Governor and State legislature, the board is independent, self-supporting, and operates without appropriations. 

Likewise, the GSEs can serve the public purpose in the secondary 

market for rental and home ownership financing. 

We concur that the status quo is not acceptable in the long term 

for a healthy secondary market. We support reforms that include 

reducing the portfolio of GSE loans and liabilities. They have 

grown too large and the sale of assets can help to strengthen the 

capital base of the institutions. Pricing for explicit Government 

guarantees on 30-year mortgages is needed. Reforming FHA to provide adequate infrastructure and oversight to its portfolios is part 

of a broad reform. 

We oppose the GSEs’ current loan level pricing program and recommend that it be amended to better utilize private mortgage insurance. This will lower FHA volume, yet increase lending to creditworthy households who have low downpayments. 

The financial meltdown was caused in large part by private label 

mortgage-backed securities. Private institutions should be involved 

in mortgage securities, but on the condition they are recognized as 

systemic risks and have adequate oversight for safety and soundness. 

Let me state for the record, if the proposal to eliminate the GSEs 

succeeds, this Committee will meet in the future to address new 

problems. We will have more volatile capital markets, greater inequality in the access to mortgages, and disinvestment from lowand moderate-income communities. The real estate market will 

struggle as it becomes more difficult for renters to become firsttime homebuyers. Small lenders will be less competitive with 

megabanks. We will lack financing for affordable rental housing for 

our workforce. 

If mortgage financing is not inclusive of low- and middle-income 

families, we will have a system that works very well for some, but 

not for too many others, and ultimately not for the greater good. 

Our agency affirms the vision of an inclusive and healthy housing 

market. 

Thank you very much. 

Chairman JOHNSON. Thank you, Mr. Skillern. 

For Mr. Hartings, Mr. Staatz, and Mr. Dunn, an article in the 

HousingWire last week stated in its headline, ‘‘Big Four Top Contenders to Replace Fannie and Freddie,’’ and went on to name 

12 

Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo as 

the likely replacements. Can you discuss the challenges or benefits 

this might present to small institutions? Mr. Hartings. 

Mr. HARTINGS. To answer that, I guess I cannot see any benefit 

to moving it from a Fannie and Freddie and just moving it to the 

four or five largest megabanks. It just moves that risk. I think the 

key to at least our success in underwriting loans has been being 

able to be close to our customer base, some common-sense lending, 

and whatever program would be improved on, I guess for Freddie 

and Fannie, would have to have those same guidelines to have that 

equal access and fair access and fair pricing. That is part of it. You 

know, you can have—you can be able to sell to a larger institution, 

but you could be priced out of the market, either because you 

charge more for servicing or a higher rate to sell that loan to those 

larger institutions. 

Chairman JOHNSON. Mr. Staatz. 

Mr. STAATZ. First of all, one of our principles was that we want— 

we would like to see equal access, and I am just not sure that if 

those four very large banks are the conduit or are the ones that 

are participating in this, do you really think that we will have 

equal access? In other words, do we believe that pricing would not 

be affected and it would be different for them versus us smaller institutions? 

So, again, would we have equal access? I am not sure that we 

would. And would the pricing be different? I am almost positive, 

because you are putting in the hands of for-profit institutions control of the marketplace and I am not sure that is a wise idea. We 

need an independent third party. 

Chairman JOHNSON. Mr. Dunn. 

Mr. DUNN. There is no question that large banks have a decided 

advantage, and that is why one of the principles that we have had, 

as the other speakers have stated, is that replacement of the GSEs 

needs to provide for access by all lenders. The mortgage markets 

nationally have been well served by community banks and other 

lenders other than the big four over the years and we think that 

is a very important ingredient for a successful, stable mortgage 

market going forward. 

Chairman JOHNSON. Mr. Skillern, in your written testimony, you 

raise a concern that phasing out the GSEs will disadvantage smaller institutions, making them less competitive and less independent 

from large institutions while creating even greater concerns about 

institutions being too big to fail. Would you elaborate on those concerns. 

Mr. SKILLERN. Yes, sir. Access to capital is not only about the 

money, it is about access to the technology and the business services that allow you to sell on the secondary market. One can imagine large lenders saying, if you would like to have capital access 

through our channel, you will need to adopt our business operations to do so and our underwriting, trapping small institutions 

into one channel or the other and, therefore, becoming less competitive, unable to shop their loan among different players. So that 

is one of our primary concerns about its impact on the local institutions. 

13 

Chairman JOHNSON. Mr. Hartings, Mr. Staatz, and Mr. Dunn, 

we have heard from previous witnesses that without a Government 

guarantee, the 30-year fixed-rate mortgage would not exist, but 

that adjustable-rate mortgages or rollover mortgages would develop. Would limiting access to the secondary market create a similar reduction in the availability of the 30-year fixed-rate mortgage? 

Mr. Hartings. 

Mr. HARTINGS. It is hard for me to answer that theoretical question. I can tell you from my customer base, we are in the secondary 

fixed-rate mortgage market because that is what the customers are 

demanding out there. It stabilizes their budgets. They do not have 

to worry about interest rate fluctuations. So whatever is done going 

forward, I think providing a secondary market for a 30-year fixedrate mortgage is of the utmost importance. 

Chairman JOHNSON. Mr. Staatz. 

Mr. STAATZ. Like my colleague here, we do quite a business in 

30-year mortgages because that is what our members want, and for 

the very same reasons, and it avoids future issues. Now, does it 

need to be priced differently in the future? That is a possibility. 

But I also tell you that with our 30-year mortgages, again, the ones 

that we have sold to Freddie, there have been no losses whatsoever. So from a credit standpoint, they have been fine. Only interest rate risk has been an issue for us. But there ought to be a way 

to price that in the future. 

Chairman JOHNSON. Mr. Dunn. 

Mr. DUNN. Tying the fixed-rate mortgage, the elimination of that 

to the changes in the secondary market, I do not think they necessarily go hand in hand. I think that the key determinant longterm of the existence of the 30-year mortgage is really the correct 

risk pricing of that loan. I think that increasing the G-fees as presently discussed in our testimony is really the key. Without a proper 

risk premium in a 30-year fixed-rate, I think you do see a possibility of the 30-year fixed-rate going away. 

Chairman JOHNSON. Senator Johanns. 

Senator JOHANNS. Mr. Chairman, thank you, and let me start 

out by saying to all the members of the panel, thanks for being 

here. Your testimony and your comments have been very, very interesting. 

Let me, if I might, come at this from a little bit different direction. One of the things I hear from our bankers back in Nebraska— 

and I am not talking about the big four or five, obviously, I am 

talking about bankers like a couple of you represented at the 

table—is that you have a small bank out there, limited ability to 

respond to the requirements of Dodd-Frank, et cetera, et cetera, 

stacks of paperwork to understand, the potential liability that occurs in making a real estate loan, and on and on, and they are saying to me that they are kind of getting to a point where they are 

saying, why are we doing this? It does not make any sense for us 

to be in the mortgage business. 

Mr. Dunn, I would like to hear your thoughts about those comments from Nebraska bankers. Are they overreacting, or are they 

pretty much hitting the nail on the head? 

Mr. DUNN. It has crossed our mind. 

14 

Senator JOHANNS. I think you are being diplomatic. You do not 

have to be here. 

[Laughter.] 

Mr. DUNN. The regulatory burden is significant. I think that 

probably the most important issue that we see before our bank 

right now in terms of determining whether or not we are going to 

be in the mortgage business or not is this whole discussion circulating around the Qualified Residential Mortgage. If that stays as 

currently proposed, we have—we have talked to a number of our 

fellow community bankers and we have no doubt that the move toward a safe harbor protection will be there, and quite frankly, a 

lot of loans that otherwise are being made today to qualified borrowers will not be made in the future. 

The regulatory burden itself overall has become pretty significant, and quite honestly, it is hard to keep them straight and many 

of the bills overlap, or many of the regulations overlap and contradict and it is a challenge. 

Senator JOHANNS. Mr. Hartings, do you have some thoughts 

about that? 

Mr. HARTINGS. Well, I would agree with the comments of Mr. 

Dunn. I think, you know, as a banker, as a community banker, we 

are very good at understanding credit and qualifying credit, and I 

always tell everybody, there are two documents I need on every 

loan. I need a note and a mortgage. The rest of the items are just 

disclosures and slows down the process. 

Now, a lot of those are very well intended, but one of the interesting emails I have received, or several of the interesting emails 

were from bankers, actually, one from your State, that said, tell 

them about the regulatory overload. A lot of the smaller institutions are just not able to stay up with the paperwork and are leaving the market just simply because it is too cumbersome to close 

a real estate mortgage, and it seems sad to me, because that is 

really the heart of our business as community lenders is to take 

care of our communities. 

Senator JOHANNS. Now let me add another feature to this, if I 

could. Everybody, I think, wants a robust mortgage industry. We 

have got a struggling housing market. We can only benefit by having community bankers involved in the process, and the more the 

better for a guy like me, you know. I go to these local banks. These 

are community leaders. These are the people that are asked first 

to contribute to new uniforms for the high school football team, 

whatever it is that is going on, and they are always the first to say 

yes. I mean, they lead the effort. 

What I see happening, and I would like you to react to this, too, 

is that the smaller banks who have limited ability to respond to the 

burden of additional regulations and requirements and oftentimes 

have a difficult time getting the expertise to come to a small town 

to live, et cetera, are just starting to look around and say, you know 

what? I know we have been around 100, 125 years, but quite honestly, it is time to sell. Are you seeing that in your States? Let me 

start again with Mr. Dunn. 

Mr. DUNN. We are not a publicly owned institution, first of all, 

but there is no question that it has been more difficult for us to 

compete, but I think we are a little bit more optimistic about our 

15 

ability to do that, particularly now that—one of the reasons we lost 

a lot of market share over the course of the last several years is 

the playing field is not level and a lot of that had to do with lack 

of enforcement of regulations that were already in place. And we 

were disadvantaged in the marketplace to a great extent by people 

who did not play by the same rules that the community banks play 

by. 

We, as a bank, and I think most community banks, are comfortable with the whole concept of ability to pay. In fact, we like 

to have people pay us back when we lend them money. And the 

standards of ability to repay are good. What we do not like is regulations that come down and they are ‘‘check the box’’ underwriting 

that removes all discretion and does, in fact, challenge our ability 

to perform in the marketplace the way we have done. 

Senator JOHANNS. Mr. Hartings, do you have a thought on that? 

Mr. HARTINGS. In our State, I know a lot of community bankers 

getting up in age a little bit, looking for succession planning, and 

are having a difficult time being able to find a qualified individual 

to bring into that bank to continue. I do not know that they have 

made that decision to sell out, but, you know, we look at regulations as kind of a pile-on. Sometimes we are asked, what regulation 

would you like to see eliminated? It is not one regulation. It is 

every regulation and it continues to pile on, and that is really the 

difficulty that we have. 

When I have examiners come in, they look at my institution and 

I will occasionally ask them a question and they will say, well, we 

are not the expert of that. We will get back to you. Well, I have 

to be the expert of all of those regulations and every community 

bank has to be. So size is not a determining factor. So that is definitely pushing some individuals to reconsider their franchise. 

Senator JOHANNS. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Tester. 

Senator TESTER. Yes, thank you, Mr. Chairman. I also want to 

echo those remarks. Thank you all for being here. I very much appreciate all your testimony and thank you for your perspective on 

this issue. 

You all talked about access, all talked about equal access to the 

secondary market, and it is something that is very, very important 

in rural America, as I think it is important across the country. As 

we look at the secondary market and Fannie Mae and Freddie Mac 

in particular, what can we do to ensure that you have that access? 

I will start with Mr. Hartings and then Mr. Staatz and then Mr. 

Dunn—on equal access. 

Mr. HARTINGS. I think that is the biggest concern that I have 

about going from a GSE market to a private market. You have to 

have some kind of a system in place, and I do not have the answer 

for you for that today. I know ICBA has talked about a co-op, and 

that is an idea, to own part of that company. But that concerns me 

very much, Senator. 

Senator TESTER. OK. Go ahead, Mr. Staatz. 

Mr. STAATZ. I cannot tell you exactly how it should be structured, 

but I can tell you that it should not—should not be structured 

where it is just in the hands of the largest institutions. 

Senator TESTER. Amen. 

16 

Mr. DUNN. ABA does not have, nor do I, a silver bullet solution 

to this, and it is why we also believe that the direction of a private 

market is the way to go, but maybe some governmental role in that 

process. 

Senator TESTER. I have got you, and I thank you all for your 

comments. It is not an easy situation, but the fact is that with 

input from folks like you all, I think that we can get around it. 

You know, we all want a stable, liquid market. I think we all 

want more private investment in that market. Can a 30-year 

note—30-year fixed-rate, let me put it that way—can it exist without a Federal Government backing? And the same three, and we 

will start in reverse order, go with Mr. Dunn first. 

Mr. DUNN. I believe I tied the future of the 30-year fixed-rate 

really to the pricing of the 30-year fixed-rate. I believe that, properly priced, there is probably a market out there for the 30-year 

fixed-rate without a guarantee. 

Senator TESTER. OK. 

Mr. STAATZ. I think that is a possibility. I think it is a possibility, 

but there may need to be some sort of guarantee, certainly not 

what we have been used to in the past. 

Senator TESTER. OK. Mr. Hartings. 

Mr. HARTINGS. I think it is also possible to do without some type 

of guarantee. It is really the equal access I would be more concerned about. Is that 30-year fixed-rate mortgage offered in small 

towns and rural areas if you let it controlled by the four or five 

largest banks. 

Senator TESTER. And let us go back down the line again. Is the 

30-year note something that is important, 30-year fixed-rate? 

Mr. DUNN. The consumer pretty much decides that, and right 

now, it is very important to them. But I know the models have 

worked differently in other countries, so—and in terms of not having 30-year fixed rates. 

Mr. STAATZ. It is—— 

Senator TESTER. Go ahead. 

Mr. STAATZ. It is what our members want, the majority of our 

members. 

Senator TESTER. OK. 

Mr. HARTINGS. Fifteen years ago, I sold no mortgages to the 

GSEs. I started about 15 years ago. We were all adjustable-rate 

products. Today, I have $75 million in that portfolio. That tells me 

that my residential borrowers want the 30-year fixed. 

Senator TESTER. OK. Mr. Dunn, on a previous question that was 

asked, you talked about lack of regulatory consistency and I very 

much appreciate those comments. I think they are critically important. I think we all want to have a level playing field for everybody, 

and I think the consolidation of the banking industry that we have 

seen over, as the Vice Chairman talked about, over the last 25 

years or so, has not been healthy for the industry as a whole and 

is certainly not healthy for the consumer. 

As we—the percentages are there. I mean, we talked about the 

percentages. Four percent of the largest banks currently have 70 

percent of the originations. That is up. Is there anything we can 

do, and I do not mean to pick on the same three guys all the time, 

and I apologize to the two I have not asked—is there anything we 

17 

can do to have you play a bigger role, because I, quite frankly, feel 

the same way you guys do. The role you play in rural America is 

critically important, and I think I should not just say rural America, the role you play in America is critically important. Are there 

ways that we can make it so you can have a bigger piece of the 

pie? 

Mr. DUNN. Well, I think that if you look at the replacement or 

whatever is going to replace the GSEs—— 

Senator TESTER. Yes. 

Mr. DUNN. ——we really do need some type of vehicle to allow 

the community bank access. We cannot just let it be through the 

big four lenders. I think that is one of the principles that we have 

talked about in approaching the whole subject. Again, it is not an 

easy solution. I think we are all pretty cognizant of the fragile state 

of the housing market. So any kind of a quick solution is not going 

to be there. The co-op structure may be a way to go, and I think 

that—I know the ABA is very open to looking at all sorts of different possibilities in helping shape that. 

Senator TESTER. OK. Anything you would like to add, Mr. 

Staatz? 

Mr. STAATZ. No, just equal access. I cannot stress that enough. 

Senator TESTER. Same thing, Mr. Hartings. 

Mr. HARTINGS. I would say, you know, it is a little bit like regulation. I do not want a bigger piece of the pie. I just want to keep 

my piece of the pie—— 

Senator TESTER. I have got you. 

Mr. HARTINGS. ——and it is starting to leave, the way it looks 

to me. Thank you. 

Senator TESTER. I, once again, want to thank you all for being 

here. I very much appreciate your testimony. I apologize to Mr. 

Pinto and Mr. Skillern for not asking you guys questions, but 

maybe next time. Thank you. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chair, and thank you all for 

addressing this issue because it is really a key one. 

I thought I would try to concentrate on this concept of the lender-owned cooperative. Mr. Hartings, in your written testimony, you 

elaborated a bit on how covered bonds would consolidate the market among, really, to the advantage of just a few large financial institutions. So I wanted to get a better sense of how you picture the 

lender-owned cooperatives. Do you picture this being essentially a 

cooperative in which it is all financial institutions, or primarily the 

smaller banks, the community banks, the credit unions, et cetera? 

What would be the—who would own them? What lenders are we 

talking about here? 

Mr. HARTINGS. I do not know that I can answer that by going 

into quite that detail, but the idea of the cooperative is a little bit 

the way that I think we are successful today in the Freddie and 

Fannie market. We rep and warrant what we sell to Fannie and 

Freddie. That means that if Fannie and Freddie looks at our applications and they are incorrect or we falsified or we did not cross 

every ‘‘t’’ and dot every ‘‘I’’, it comes back to us. We have capital 

to back that up. 

18 

That is the idea of the cooperative a little bit. The other point 

of the cooperative is equal voices, having one vote per bank. So I 

am not sure that you limit it or not. Again, I do not know that we 

have gone into that detail. It is one proposal and it is the proposal 

that I think we have out on the table today. 

Senator MERKLEY. OK. And in your written testimony, you talk 

about strategy for insulating taxpayers and note, and I quote, 

‘‘Government catastrophic loss protection would be paid for by an 

appropriately priced co-cop premium.’’ So it sounds like you are expecting the Government to stand behind the co-op as the insurer 

of last resort, essentially, but I want to make sure I understood 

that structure. 

Mr. HARTINGS. I am not—I really would not like to comment on 

that. I mean, I am not sure that is exactly our theory. I think the 

idea would be—again, at this point in time, our proposal out there. 

I think when you get into the details, I think that is when you 

have to look at that a little bit more seriously, how you would take 

care of that backstop. 

Senator MERKLEY. OK. So I wanted to invite other folks to weigh 

in on this. This is part of the challenge we are all trying to figure 

out here, is how do we create a functional secondary market in 

which the taxpayers are not on the hook or are on the hook in a 

very defined and responsible manner of some sort. But I think it 

makes me a little nervous to see the Government being the insurer, 

because how do you know that you have an appropriately priced coop premium? If the premium is completely appropriately priced, 

you would not need that insurer to begin with. You could just put 

it into a fund to the side. So a little expansion on this role would 

be helpful. Mr. Pinto. 

Mr. PINTO. Yes, Senator. I think that is a good point. If you could 

price it properly, you would not need it. I think the problem with 

real estate financing is it is cyclical and there are boom-bust periods and there are the normal losses, and those losses can be actuarially calculated based on the normal risk factors. And then there 

are the imponderables, which occur as a result of some economic 

event. This past one was very unusual because it was led by very 

weak mortgage lending. Normally, it is led by some type of other 

economic event, like unemployment, and then that impacts the 

weaker loans. We had the reverse this time. 

But what you can be sure of is that there will be these catastrophes periodically. When, is the problem. We do not know. All we 

know is they will occur and you need to accumulate enough capital 

to deal with the largest event you can anticipate. It is kind of like 

the 100-year flood, and you accumulate that capital. 

The problem with a Government guarantee is the history of accumulating that level of capital is not very good. Pricing it, the impacts on, as I said, the impacts on the marketplace that are unintended, the political pressures to reduce the amount of capital. Oh, 

we have not had any claims in three or 4 years. Therefore, we 

should not do anything. That happened with the FDIC. They did 

not charge any premiums for 96 or 97 percent of the banks in this 

country for about 10 years because it was thought that they had 

accumulated enough capital. Those are the risks that really put the 

taxpayer in the cross-hairs. 

19 

Senator MERKLEY. One thing about that FDIC model, though, is 

that it does allow them to go back out and increase their rates to 

recoup it and, therefore, not have the Government as the ultimate 

backstop, but I am running out of time and I wanted to go on. 

Mr. Skillern, you talk about something modeled more or less on 

the North Carolina Housing Finance Agency, that is, a public purpose entity, and you note in your written testimony that you get 

rid of the conflicting private profit motive which may have driven 

some of the practices in the GSEs that came back to haunt us. 

Does the idea of a lender co-op perhaps fit into that, or is this kind 

of a different, completely different structure? 

Mr. SKILLERN. I think it would be a different structure. In addition to my concern about access to capital for small financial institutions, I also have it for low- to moderate-income households and 

communities of color, and that the pricing of that risk and how we 

define the boundaries could be very narrow or more expansive as 

long as they are more responsible and sustainable. So I also think 

that the Housing Finance Agency model would be a smaller role to 

play, if you look at the total, what is really happening in North 

Carolina. It fits a particular range where there is an appropriate 

role for Government to help facilitate home ownership and rental 

housing. 

So there is a—we really embrace this concept of both private and 

public participation, but that public has to be intentional. And I 

guess my concern about the cooperative model is that that is not 

intentional enough to assure us that we are going to have enough 

access to a range of communities across the country. 

Senator MERKLEY. Do you see the Government standing behind 

such a public purpose entity, an independent nonprofit, if you will, 

that is playing this secondary market role? 

Mr. SKILLERN. Yes, sir, I do. You know, I believe that, while as 

much as we want to put taxpayer money behind private money, 

that we want to assign risk to the decision maker so that we are 

not putting taxpayers to insure someone else’s moral hazard, the 

reality is is that our Government and our taxpayers stand behind 

our society as far as the risk that we take and our cost. So there 

is a role for that and I think we should be up front about it, but 

also then be clear about defining what those limits are, and I think 

that this finance agency model allows us to define that more clearly, to say who pays once private dollars are taken. 

Senator MERKLEY. Thank you. Thank you, Mr. Chair. I am going 

to continue for a moment here. 

Mr. Pinto, you observed that the community banks and credit 

unions were producing better loans but paying higher guarantee 

fees, and I am trying to picture how this unfolded and I assume 

it was volume discounts and the competition between Fannie and 

Freddie, but can you elaborate a little bit on how it is that a better 

product had to pay a higher insurance fee? 

Mr. PINTO. Yes, I would be happy to. Back—I actually went back 

into the late 1980s and the guarantee fees were level regardless of 

lender, and then starting in about—I had data from 1993, 1994, 

1995, the guarantee fee started diverging, and I mentioned—that 

is in my written testimony. What was going on was this competition with Fannie and Freddie for customers and also for affordable 

20 

housing loans. I found credit policy meeting minutes that talked 

about the fact that the credit variances were being approved. I also 

found evidence that there were lower guarantee fees being offered 

to the larger customers. 

Over time, those widely diverged, and so Mr. Hartings’ testimony 

is correct. The losses on the community bank loans were much 

lower at much higher guarantee fees than experienced the other 

way around. Countrywide and the other large lenders were paying 

much lower guarantee fees but had much higher default rates. 

Again, it was driven by a combination of competition and the goals 

that were looking for the kinds of loans that were most easily gotten from the large lenders. 

Senator MERKLEY. Were those fees denominated in terms of percentage rates for the size of the loan? Is that how it was done? 

Mr. PINTO. Yes. It is termed in basis points, so it was called a 

guarantee fee, and normally guarantee fees would range from, you 

know, 20 to 25 basis points, and things got down as low in the midaught years around 10 basis points, 11 basis points, somewhere in 

there for the largest lenders as their base fee. So you can see the 

disadvantage. That does not sound like a lot, ten basis points, but 

when you multiply it every year, it ends up being something on the 

order of close to half-a-percent. Well, given the profit margin that 

one has on a loan, a half-a-percent looms large. 

Senator MERKLEY. So if I am an investor, would I not want to 

pay a higher price, if you will, for loans originated by community 

banks and credit unions where they have a tradition of kind of honest underwriting, if you will? 

Mr. PINTO. One would think so. I actually had conversations with 

Freddie Mac on this precise topic about 5 years ago and asked that 

question from the head of marketing and I was told, well, we already have their business. Why would we pay up for it? And I 

made the exact point that the quality was better, and there were 

lots of different reasons why it was better, and the answer was, we 

already have that business. Why would we pay up for it? 

Senator MERKLEY. Well, and in essence, the investor was looking 

at pools that mixed the loans from many sources, so they did not 

have really a choice of discriminating as far as I am aware. 

Mr. PINTO. Well, when you said investor, I was talking about 

Fannie Mae or Freddie Mac. 

Senator MERKLEY. Yes. 

Mr. PINTO. But as far as the investor, the end investor’s concern, 

everything got, as you said, put together and the investor had the 

implicit guarantee of Fannie and Freddie. So they really did not 

look below to see what was going on below that guarantee by 

Fannie and Freddie. 

Senator MERKLEY. Thank you all. Thank you very much. 

Chairman JOHNSON. Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman. 

Mr. Skillern, in your testimony, you mentioned that the GSE 

loan level pricing adjustment policy impacts on low- to moderateincome borrowers. This appears to be similar to what is being proposed in the Qualified Residential Mortgage proposed rule. Loans 

with low downpayments become less affordable as conventional 

loans and are forced into FHA. Can you explain this program to me 

21 

and what lessons can be learned from it in regards to pricing loans 

according to the size of the downpayment rather than the ability 

to pay? 

Mr. SKILLERN. To echo the comments of the bankers who feel like 

they have the ability to understand risk because they know their 

customer and to do the loan file review, the ability to repay is really the primary underwriting that we should have in approving 

loans. 

The loan level pricing program of GSEs is essentially pricing 

much higher for loans that have downpayments less than 10 percent and credit scores less than 720. And while we certainly applaud stringent underwriting, safe underwriting, the result, 

though, is that as you start to add price to anything outside that 

narrow band, you push folks over to FHA, which has a bigger impact of more credit being direct—more risk directly on the taxpayer 

as the Government guarantees FHA loans, or you start to price 

people completely out of the home ownership market and deny 

them. And it starts to shrink who is able to purchase a home, particularly on the first-time homebuyer. 

The QRM is similar in that it is even a greater definition. It 

starts to—it is setting the benchmark at 20 percent downpayment, 

further narrowing who the eligible, creditworthy borrowers are, 

and as my fellow bankers have said, there are a lot of good borrowers out there who do not necessarily have ten or 20 percent 

down. And when you look at who in that category does not, it often 

tends to be low- and moderate-income households or communities 

of color who do not have that downpayment or wealth to be able 

to meet that criteria. 

So part of our housing policy has to be based on sound economics, sound underwriting, protecting the taxpayer. It also should be 

done with some sense about how do we have social inclusion that 

allows credit across the spectrum of our communities. That is the 

intentionality that I referred to earlier. 

So we are opposed to the QRM because it draws that band of 

what is prime much too narrow and is not good for the housing 

market as a whole, nor for the local communities. 

Senator HAGAN. When I look at the average income in North 

Carolina and I think about a 20 percent downpayment, it appears 

that people would have to save upwards of 15 years plus in order 

to be able to afford a 20 percent downpayment on an average house 

in North Carolina, and I just think that is definitely pricing people 

out of the market—— 

Mr. SKILLERN. Yes—— 

Senator HAGAN. ——and unreasonable. 

Mr. Pinto, the FDIC before the passage of Dodd-Frank put in 

place its own risk retention regulation. Has the FDIC risk retention provision that predates Dodd-Frank ignited mortgage 

securitization, and how important is the return of a vibrant mortgage securitization market for the return of private capital? 

Mr. PINTO. Senator, you are referring to the one that was passed 

in 2001? 

Senator HAGAN. No, I was referring to the most recent DoddFrank. 

Mr. PINTO. No, the FDIC—— 

22 

Senator HAGAN. Yes. 

Mr. PINTO. ——pre-Dodd-Frank—— 

Senator HAGAN. Right. 

Mr. PINTO. Was that in 2001, that securitization? They had a 

rule that changed the weighting—— 

Senator HAGAN. I presume so. 

Mr. PINTO. OK. If that is the one, the regulators, and it was not 

just the FDIC, I think, banking regulators changed the weighting 

for AAA private mortgage-backed securities. The research I have 

done has shown that that did not have any immediate impact on 

what was going on in the mortgage-backed securities market. 

Whatever happened, happened with about a 3-year lag. So I could 

not tie the two together. 

Regarding your second question, yes, I believe it is necessary for 

the financial markets to have a vibrant mortgage-backed securities 

market because the banking system is not large enough to handle 

it, number one, and number two, the too-big-to-fail problems in the 

banking system, we do not want to end up just moving mortgage 

risk from Fannie and Freddie, where it was not very well managed, 

to, as has been talked here today quite a bit, three or four large 

banks. 

Senator HAGAN. Thank you. And, Mr. Hartings, how reliant are 

small community bankers on the ability to originate, to sell a mortgage, and how problematic is the proposed rule for the risk retention language in Section 941 if the regulators do not get the QRM 

right? 

Mr. HARTINGS. Well, we look at our balance sheet when we have 

risk retention. We have interest rate risk in our—we are rated as 

banks under CAMEL. They added CAMELs a couple of years ago, 

which was sensitivity, risk rate sensitivity. If we have to retain 

some of that mortgage on our books, then we have a whole another 

issue with capital. So, yes, I think that would be devastating to 

community banks. 

Senator HAGAN. I do, too. And, Mr. Hartings, currently, small 

lenders are able to participate in the mortgage market by selling 

loans to Fannie Mae and Freddie Mac without having to go 

through one of the big banks to accumulate enough loans, as we 

were talking about, to create a securitization pool. What would the 

Administration’s proposals do to the ability of smaller lenders, such 

as community banks, to compete in the mortgage market and what 

would this do to the concentration of the market? 

Mr. HARTINGS. You know, my belief would be it would concentrate it to the, certainly the larger megabanks, again, without 

equal access, and it is equal pricing. Mr. Pinto touched on it a little 

bit. Every day, we go out to Freddie and Fannie and we price our 

loans accordingly. They give us—we sell at a par or par plus a halfa-percent. If that pricing gets raised, how often does my customer 

want to come to me if I have to charge him a half-a-percent higher 

or a full 1 percent higher? We would lose it either immediately or 

as a slow burn, as we call it. 

Senator HAGAN. Thank you. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Reed. 

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

thank you, gentlemen, for your excellent testimony. 

23 

Mr. Pinto, I want to follow up on something that you commented 

upon in your testimony, and that is the need for both strong supervision and adequate capital. You know, we have a debate right now 

about adequate capital. I think you also suggest that it has to be 

countercyclical, that capital has to be built up. So if you could 

elaborate on those points, I would appreciate it. 

Mr. PINTO. Thank you, Senator. I would be happy to. As I said, 

the mortgage business is countercyclical, has these two components 

of risk, the second of which is this catastrophic risk that occurs because of, generally, some external event. And back in the early 

1980s, it was the collapse of oil prices which then led to high unemployment in Texas and elsewhere. So you do not know what it is 

going to be. You just know you have to be prepared for it. 

And the problem, and Fannie Mae is the perfect example. Fannie 

Mae had a static capital requirement that was 45 basis points on— 

less than half-a-percent on its guaranteed loans. That stayed pretty 

constant. They were accumulating very little in the way of loss reserves because of the way the accounting works for that. And so 

as the risk was building up in the system—but it did not look like 

risk was building up in the system because delinquency rates 

looked very low. Well, that was being fed by the boom that was 

keeping them down and everybody was thinking everything was 

fine. 

What happened was they were not accumulating any additional 

capital, and then when the boom ended and they collapsed, A, they 

were very thinly capitalized. The mortgage-backed securities were 

220-to-one. And their actual capital was very weak. Half of their 

capital was tax advantaged. Well, again, if you are a financial 

guarantee entity, to invest your money in something that you need 

to make money in order to have your capital be worth something, 

it seems, is backwards. So those are the kinds of—— 

Senator REED. Right. But in the context today, when we are talking about capital rules for these large megabanks and for—particularly large megabanks, my sense is that you would suggest that 

there needs to be more than less capital. 

Mr. PINTO. In general, more, and in general, if the entities are 

too big to fail, they should be smaller. 

Senator REED. Thank you very much. 

Mr. Hartings, one of the issues here on the Qualified Residential 

Mortgages, what is the downpayment and what is the sort of percentage of your income that you are devoting to housing. And I 

think one of the reactions across America, not on Wall Street but 

on Main Street, was as this housing crisis evolved was people were 

shocked, saying, they did not put any money down and 45 percent 

of their income was a mortgage payment? 

So now, looking at this proposed regulation—and it is a proposed 

regulation—we were very general in our description of what the 

QRM should be. There seems to be—there has got to be some notion of a, I think in the minds of people on the street, of a minimum downpayment to make this a safe loan, a traditional loan. 

So just what is the average downpayment that you would insist 

upon in your very well-run community bank? Is it 10 percent? Is 

it 15 percent? 

24 

Mr. HARTINGS. We have a couple of different programs. Certainly, most of everything we sell to Freddie Mac has got the 20 

percent down, the Federal Home Loans, and we actually have a 

program we do internally in our bank called Homebuyers Assistance that we have five, ten, or 15 percent down. 

What you really find out is it is not the downpayment. It is other 

things, like payment-to-income ratio. It is, did you come up with 

your own downpayment? What is your credit card debt? It is not 

one silver bullet that decides if that is going to be a good loan or 

not. Our concern would be if you just look at downpayment, you do 

not want to be an asset lender, and that is the way you are going 

to get paid back. You really want to look at the probability of payment from your customer through a regular source. 

Senator REED. Can I presume that you would think appropriate 

that when this regulation is finally approved, it would have some 

combination, as you suggest, of minimum downpayment—in fact, 

my sense is most people are still shocked that people were getting—I grew up in the 1950s, 1960s, 1970s, where you had to put 

money down—some combination of downpayment and also some 

percentage of your housing per income and also other expenses per 

income. Are we just arguing about what the proper sort of numbers 

are—— 

Mr. HARTINGS. My concern—— 

Senator REED. ——because you—— 

Mr. HARTINGS. My concern is this. I saw the market a couple 

years ago when we did not participate in the subprime, and what 

I would see happen is I would see someone selling a home for 

$100,000. They would increase the price to $110,000 or $115,000. 

That person, that seller, would give the buyer the downpayment 

and he had the downpayment. So they gamed the system—— 

Senator REED. No, I—— 

Mr. HARTINGS. ——so that is what I am concerned about when 

you put some hard ratios in there—— 

Senator REED. Of course, the other concern is if you do not have 

any of these rules of the road, you get exactly what we had, which 

was gaming, no money down, great products, et cetera. So I think, 

you know, the challenge we gave to regulators was come up with 

an appropriate balanced mechanism that exempts certain loans 

from the requirement to hold, and you would not have to hold a 

loan. You could sell anything you want to the securitizer. They 

would have to hold 5 percent. And we thought, and I think, again, 

the logic we can examine, is that if they had to hold some of these, 

they would not be quite as willing to buy terrible products that 

were emanating from many different sources. So I am just trying 

to get a sense from a community banker of what you are doing and 

what we have to do. 

Mr. HARTINGS. Well, I think what we are doing is when we see 

less of a downpayment, we have somewhat of different standards, 

maybe a little higher standards in some of these other areas, and 

we hold them a little firmer to those, because it is all risk and we 

do not want our customer not to be able to make their payment. 

We do not want them to have to leave their home and have it foreclosed or sell it out from underneath them. So I think prudence 

says that if you have less of a downpayment, Senator, you probably 

25 

have to have a little bit more stringent underwriting with those 

lesser downpayments. 

Senator REED. Thank you. 

Chairman JOHNSON. Thanks again to all of our witnesses for 

being here with us today. Steady access to the secondary market 

for small financial institutions is a necessary component to any 

proposal for reforming the housing financial system. Your testimony today will, without a doubt, serve as a resource to this Committee as we continue to work toward creating a stable and sustainable housing market for American families. 

The hearing record will remain open for 7 days for additional 

statements and questions. 

This hearing is adjourned. 

[Whereupon, at 11:22 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

26 

PREPARED STATEMENT OF JACK HARTINGS 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE PEOPLES BANK COMPANY, ON

BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA

JUNE 28, 2011 

Chairman Johnson, Ranking Member Shelby, Members of the Committee, I am 

Jack Hartings, President and CEO of The Peoples Bank Company and a member 

of the Executive Committee of the Independent Community Bankers of America. 

The Peoples Bank Company is a $350 million asset bank in Coldwater, Ohio. I am 

pleased to represent community bankers and ICBA’s nearly 5,000 members at this 

important hearing on ‘‘Housing Finance Reform: Access to the Secondary Market for 

Small Financial Institutions.’’ Community bank mortgage lenders have a great deal 

at stake in the future of housing finance in this country. Any proposal for reform 

must support fair and robust access to the secondary market for community banks. 

Community Banks Strengthen the Mortgage Market 

Any broad based recovery of the housing market must involve community bank 

mortgage lending. Community banks represent approximately 20 percent of the 

mortgage market, but more importantly, our mortgage lending is often concentrated 

in the rural areas and small towns of this country, which are not effectively served 

by large banks. For many rural and small town borrowers, a community bank loan 

is the only mortgage option. 

A vibrant community banking sector makes mortgage markets everywhere more 

competitive, and fosters competitive interest rates and fees, better customer service, 

and more product choice. The housing market is best served by a large and geographically dispersed number of lenders. We all witnessed the danger and devastating fallout that resulted when mortgage lending became concentrated in a few 

major market players. We must promote beneficial competition and avoid further 

consolidation and concentration of the mortgage lending industry. 

Quality Community Bank Mortgage Lending 

The Peoples Bank Company has been in business for 105 years. We survived the 

Great Depression and numerous recessions before and since—as have many other 

ICBA member banks—by practicing conservative, common-sense lending. We make 

sure loans are affordable for our customers and they have the ability to repay. 

Loans are underwritten based on personal knowledge of the borrower and their circumstances—not based on statistical modeling done in another part of the country. 

Community banks generally did not make subprime loans with the characteristics 

that have led to recent problems, such as ‘‘teaser’’ rates and lack of appropriate documentation. As responsible community-based lenders, community banks require appropriate documentation of borrower income and do not make loans that compel borrowers to refinance or sell in order to remain solvent. As a result, our borrowers 

are less likely to default. 

When community banks sell their well-underwritten loans into the secondary 

market, they help to stabilize and support that market. Community bank loans sold 

to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs) are underwritten as though they were to be held in portfolio. We often go beyond the ratios 

and statistics used by the GSE automated programs and underwrite based on direct 

and personal knowledge of the community and the lifestyle of the borrower him or 

herself. This relationship underwriting makes a striking impact on the performance 

data. In a typical year, before the GSEs accelerated their purchases of riskier loans, 

community bank-originated loans became ‘‘seriously delinquent’’ (i.e., more than 3 

months delinquent) at about one-third the rate of all GSE loans. In the most frenzied, exuberant years of mortgage lending, 2005 through 2007, the general pool of 

GSE loans was seriously delinquent at a rate four or five times higher than loans 

originated by community banks and sold to GSEs. In the wake of the financial crisis, with the general tightening in underwriting standards, community bank loans 

have continued to perform better—with a delinquency rate one-third to one-half that 

of other loans. Community bank loans perform better in all market conditions and 

contribute to the safety and soundness of the secondary markets. Our role must be 

preserved in any reform. 

Better underwriting is complemented by better servicing—the two sides of the 

lending equation. Community bank servicing, which is also based on our close ties 

to customers and communities, is more effective at keeping mortgages out of default. 

We know, for example, when an employer closes in our community and how that 

closure impacts the income of our borrowers. A servicer based 1,000 miles away 

won’t have such knowledge. Smaller servicing portfolios and better control of mortgage documents also provide an advantage over the large servicers. For these reaVerDate Nov 24 2008 08:43 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00030 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\06-28 HOUSING DISTILLER\62811.TXT JASON
27 

sons, community banks have generally been able to identify repayment problems at 

the first signs of distress and work out mutually agreeable solutions with struggling 

borrowers. 

As Congress and the agencies consider how to address the abusive servicing 

standards of some large lenders, they must recognize community banks have fundamentally different standards, practices, and risks. Overly prescriptive servicing 

requirements should not be applied across the board. For example, if the State attorneys general foreclosure settlement term sheet were applied to all banks, regardless of size, it would cause many community banks to exit the mortgage servicing 

business and accelerate consolidation of the servicing industry, leaving it to the 

largest too-big-to-fail lenders. 

Fair Access to the Secondary Market 

While community banks choose to hold many of their loans in portfolio, it is critical for community banks to have robust secondary market access in order to support lending demand with their balance sheets. My bank’s access to Freddie Mac, 

for example—I have a $75 million servicing portfolio of loans we originated and sold 

to Freddie Mac—allows me to support the broad lending needs in my community, 

fixed-rate lending in particular. As a community bank, it is not feasible for me to 

use derivatives to offset the interest rate risk that comes with fixed-rate lending. 

Secondary market sales eliminate this risk. In addition, I have the assurance that 

Freddie Mac won’t appropriate data from loans sold to solicit my customers with 

other banking products. 

While many community banks remain well-capitalized following the financial crisis, others are being forced by their regulators to raise new capital, even above minimum levels. With the private capital markets still largely frozen for small- and 

mid-sized banks, some are being forced to contract their lending in order to raise 

their capital ratios. In this environment, the capital option provided by the secondary markets is especially important. Selling my mortgage loans into the secondary market frees up capital for other types of lending, such as commercial and 

small business, which is critical to our communities. 

In addition to selling mortgage loans to Freddie Mac, for the past 2 years my 

bank has participated in the Mortgage Purchase Program (MPP) through the Federal Home Loan Bank of Cincinnati. While our sales to the MPP are only a fraction 

of our sales to Freddie Mac, we’re pleased to have this alternative secondary market 

access. The Federal Home Loan Banks (FHLBs) are an important source of liquidity 

to support community bank mortgage lending. The FHLBs were particularly important during the financial crisis when they continued to provide advances to their 

members without disruption while other segments of the capital markets ceased to 

function. The FHLBs must remain a healthy, reliable source of funding. 

Key Features of a Successful Secondary Market 

The stakes involved in getting housing-finance market policies right have never 

been higher. Given the fragile state of the housing market across America, there is 

no room for policy missteps and no luxury for experimentation. Housing and household operations make up 20 percent of our economy and thousands of jobs are at 

stake. Proven, practical solutions must take precedence over the theoretical. 

With regard to the secondary market, the critical questions of corporate structure, 

governance, and mission will determine whether, and to what extent, community 

banks are able to participate. If the terms are not right, the secondary market could 

be an impractical or unattractive option for community banks. Below are some of 

the key features community banks seek in a first-rate secondary market. 

Equal access. To be sustainable and robust a secondary market must be impartial 

and provide equitable access and pricing to all lenders regardless of their size or 

lending volume. Without the appropriate structure, a secondary market entity will 

have a strong incentive to offer favorable terms to only the largest lenders. Such 

an outcome would drive further industry consolidation, increase systemic risk and 

disadvantage the millions of customers served by small lenders. 

Financial strength and reliability. A secondary market must be financially strong 

and reliable enough to effectively serve mortgage originators and their customers 

even in challenging economic circumstances. Strong regulatory oversight is needed 

to ensure the secondary market is operating in a safe and sound manner. 

No appropriation of customer data for cross-selling of financial products. When a 

community bank sells a mortgage to a secondary market entity, it transfers proprietary consumer data that would be highly valuable for the purposes of cross-selling 

financial products. Without large advertising budgets to draw in new customers, 

community banks seek to deepen and extend their relationships with their current 

customer base. Secondary market entities must not be allowed to use or sell this 

28 

data. Community banks must be able to preserve our customer relationships and 

our franchises after transferring loans. 

Originators must have option to retain servicing and servicing fees must be reasonable. Originators must have the option to retain servicing after the sale of a loan. 

In today’s market, the large aggregators insist the lender release servicing rights 

along with the loan. Transfer of servicing entails transfer of data for cross-selling, 

the concern identified above. While servicing is a low margin business—in fact I 

would make more by releasing servicing rights—it is a crucial aspect of my relationship-lending business model, giving me the opportunity to meet the additional banking needs of my customers. 

Because the income provided by servicing is only enough to cover costs, ICBA is 

very concerned about a recent Federal Housing Finance Agency (FHFA) proposal to 

significantly reduce servicing fees and, by rewarding servicers of nonperforming 

loans, remove the incentive for diligent servicing that keeps loans current. This 

would be unfair to community banks that predominantly service performing loans. 

Additionally, some of the proposed fees do not reflect the cost of loan servicing at 

a community bank. 

Limited purpose and activities. The resources of any secondary market entities 

must be focused on supporting residential and multifamily housing. They must not 

be allowed to compete with originators at the retail level where they would enjoy 

an unfair advantage. The conflicting requirements of a public mission and private 

ownership must be eliminated. 

Private capital must protect taxpayers. Securities issued by the secondary market 

entities must be backed by private capital and third party guarantors. Any Government catastrophic loss protection must be fully and explicitly priced into the guarantee fee and the loan level price. This guarantee would not only provide credit assurances to investors, sustaining robust liquidity even during periods of market 

stress. 

The Future of the Secondary Markets 

For decades the housing GSEs worked well and supported high-quality mortgage 

lending by banks of all sizes. However, conflicting demands of investor expectations 

and arbitrary affordable housing goals, combined with weak oversight and inadequate risk management, sent the GSEs off track, ending a long and successful run. 

The steep and sudden drop in the value of GSE preferred shares had staggering 

consequences for many community banks that purchased these shares with the support of their regulators. My bank held Freddie Mac preferred shares, so I speak 

from first-hand experience. This injustice must be corrected by restoring the dividend payments on the preferred shares and paying injured holders the amount of 

suspended dividends. 

There is widespread agreement that this troubled model must be reformed. Any 

reform cannot simply reestablish the GSEs or recreate them under a different name 

with the same scale and risks. An aggressive role for Government in housing is no 

longer a viable option. The private sector should and will take the lead in supporting mortgage finance. ICBA welcomes this new reality as an appropriate response to the moral hazard and taxpayer liability of the old system. Community 

banks are prepared to adapt and thrive in this environment. But however different 

are the successors to Fannie Mae and Freddie Mac are from the legacy of those institutions, we believe they must retain the key features and principles that allowed 

community banks to thrive as mortgage lenders and to serve their communities. 

The worst outcome in GSE reform would be to allow a small number of megafirms 

to mimic the size and scale of Fannie and Freddie under the pretense of creating 

a private sector solution strong enough to assure the markets in all economic conditions. This would create a new moral hazard, just as pernicious as the one it replaced. The concentration of assets would make them too big to fail. The market 

would know full well that the Government would bail them out (as it did in 2008) 

rather than let the housing market and the economy collapse. These lenders would 

in effect become privatized ‘‘Fannies’’ and ‘‘Freddies,’’ with all the benefits and the 

risks that come with TBTF status. Moral hazard derives from the concentration of 

risk, and especially risk in the housing market because it occupies a central place 

in our economy. Any solution that fuels this consolidation is only setting up the financial system for an even bigger collapse than the one we’ve just been through. 

The GSEs must not be turned over to the Wall Street firms that fueled the financial crisis with sloppy underwriting, abusive loan terms, and an endless stream of 

complex securitization products that disguised the true risk to investors while generating enormous profits for the issuers. These firms have exploited the trust of investors and brought the economy to the brink of collapse. Lack of trust in these 

firms has hindered private investment in the mortgage market and prolonged GovVerDate Nov 24 2008 08:43 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00032 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\06-28 HOUSING DISTILLER\62811.TXT JASON
29 

1 ICBA’s cooperative model is similar to a proposal favorably analyzed by the New York Federal Reserve and the Government Accountability Office. 

ernment dominance of it. They must not be allowed to reclaim a central role in our 

financial system. 

A Note on Covered Bonds 

While covered bonds have been advanced as an alternative to the secondary markets in providing liquidity to loan originators, they have, to date, enjoyed little investor interest. Also, these bonds are capital intensive which makes them infeasible 

for all but the largest banks. Banks like mine would have to sell their loans to larger banks thus fueling further concentration and consolidation. 

With the conservatorship of Fannie Mae and Freddie Mac, there is some legislative interest in making covered bonds more attractive to investors by enhancing investor claims over the pool of assets that secures (or ‘‘covers’’) a covered bond. ICBA 

continues to analyze the legislative proposals that have been put forward. We are 

concerned the covered bond system may provide covered bond investors superior 

rights in receivership that aren’t provided to other secured creditors. We have expressed our concerns with how this ‘‘super priority’’ status for the covered bond investor could affect the Deposit Insurance Fund (DIF) in the event an FDIC institution that held these covered bonds failed. Therefore, like all secondary market proposals, more analysis and rigorous debate is warranted to avoid unintended consequences. 

ICBA Concept for Secondary Mortgage Market Reform1

One option for reform, which would address the criteria outlined above, would replace Fannie Mae and Freddie Mac with lender-owned cooperatives. 

We believe this proposal would protect taxpayers from another bailout, ensure 

equal access and pricing for lenders of all sizes, deter further consolidation, ensure 

liquidity during periods of market stress, preserve the significant benefits of the ‘‘tobe-announced’’ (TBA) market, and minimize disruption in the market by providing 

for the direct transfer of Fannie Mae’s and Freddie Mac’s infrastructure to the new 

co-ops. While ICBA is prepared to advance the co-op option, other options that address our principles may be equally appealing to community banks. 

Cooperative governance would ensure broad access and deter excessive risk taking 

The key securitization role of Fannie and Freddie could be done by cooperative 

entities owned by mortgage originators who purchase stock commensurate with 

their loan sales to the co-ops. This is similar to the capitalization of the Federal 

Home Loan Banks (FHLBs) and provides a capitalization source that can be adjusted based on market conditions and risk profile and performance of the co-ops’ 

book of business. Members would have an incentive to transfer only soundly underwritten loans to the co-ops because any losses would adversely affect their own capital investment. 

The co-ops would be governed on a one-company-one-vote basis. Big banks would 

not be allowed to dominate the new co-ops. Further, directors would be appointed 

to represent various sizes and classes of members, while a minority number of seats 

would be reserved for outside independent directors with financial expertise. 

The advantage of this form of governance is that all co-op members would enjoy 

open and equal access and benefits in terms and pricing, regardless of their origination volume. This would prevent industry consolidation and preserve access to credit 

for the millions of small town and rural borrowers served by community banks. The 

co-ops would be required to provide liquidity to all home mortgage markets on a 

continuing and equitable basis. Guarantee fees and reinsurance fees would be set 

by the co-op boards and would be the same for all members. However, any mortgage 

originators with substandard loan performance would be subject to additional surcharges and restricted access until their loan performance improved. 

The co-ops would guarantee a limited range of conservatively underwritten products: 15- and 30-year fully amortizing mortgage loans. 

The co-ops would only be engaged in the secondary market and would be barred 

from operating in the primary market. They would not unfairly compete with mortgage originators. 

A privately capitalized guarantee fund would insulate taxpayers 

Mortgage-backed securities issued by the co-ops would be guaranteed by a fund 

capitalized by co-op members as well as 3rd party guarantors. Resources would be 

mandatorily set aside in good times to prepare for challenging times. Any Government catastrophic loss protection would be paid for by an appropriately priced coop premium. Any guarantee, must be fully and explicitly priced into the guarantee 

30 

2 In a TBA trade, participants agree to exchange a given volume of mortgage-backed securities 

at a specified date and at an agreed-upon price. This allows lenders to sell mortgages forward 

before they are even originated. Because it facilitates hedging of interest rate risk, the TBA 

market also allows lenders to offer borrowers an interest rate ‘‘lock’’ for as long as 90 days. TBA 

trades are based on an assumption of homogeneity among the securities that will actually be 

included in the MBS. This assumption is facilitated by standardization in the underwriting of 

mortgages and by a Government guarantee, implied or explicit. 

fee and loan level price, and would not only provide credit assurances to investors, 

sustaining robust liquidity even during periods of market stress, but—a point less 

often noted—it would enable the co-op securities to be exempt from SEC registration 

and trade in the ‘‘to-be-announced’’ (TBA) forward market. 2 Without the TBA market, which allows lenders to sell loans forward before they are even originated and 

to hedge their interest rate risk during the rate ‘‘lock’’ period, the typical 30-year 

fixed-rate loan as we know it and on 8 8 which our housing market is based will 

become a rarity. Again, private capital from members, mortgage insurers, and private reinsurers would absorb all but catastrophic losses to ensure taxpayer would 

be well insulated. 

The infrastructure of Fannie and Freddie—including their personnel, patents, systems, automated underwriting engines—could be transfer to the new co-ops. This 

is an important and essential feature of the proposal as it would minimize disruption in the market and reduce the cost of the transition to the new system. 

The outstanding debt and securitizations of Fannie and Freddie would maintain 

the current guarantee. 

Strong Supervision 

The Federal Housing Finance Agency (FHFA) would regulate and supervise the 

co-ops. FHFA would be responsible for setting and monitoring capital levels based 

on market conditions, portfolio performance and overall safety and soundness. 

FHFA would approve all new mortgage products purchased by the co-ops. 

Closing 

Private entities must play a more robust role in the mortgage securitization market. That much is all but settled. Still to be determined is what form those entities 

will take—instruments of Wall Street or those in which community banks and lenders of all sizes are equally represented and communities and customers of all varieties are served. 

The co-op proposal is one option that encompasses our principles for a successful 

secondary market. ICBA looks forward to working with this Committee, the Administration, and our industry partners to examine proposals that can support quality, 

competitive mortgage lending and are in the best interest of the communities we 

serve. 

Thank you for holding this hearing and for the opportunity to testify. 

31 

PREPARED STATEMENT OF EDWARD J. PINTO 

RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE

JUNE 28, 2011 


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PREPARED STATEMENT OF ROD STAATZ 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, SECU OF MARYLAND, ON BEHALF OF THE

CREDIT UNION NATIONAL ASSOCIATION

JUNE 28, 2011 


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PREPARED STATEMENT OF CHRISTOPHER R. DUNN 

EXECUTIVE VICE PRESIDENT, SOUTH SHORE SAVING BANK, ON BEHALF OF THE

AMERICAN BANKERS ASSOCIATION

JUNE 28, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, my 

name is Christopher Dunn, Executive Vice President and Chief Operating Officer 

of South Shore Savings Bank, South Weymouth, MA. I appreciate the opportunity 

to present the views of the American Bankers Association (ABA) on the future of 

Government-sponsored enterprises (GSE) and particularly the access to the secondary market by community banks. ABA represents banks of all sizes and charters 

and is the voice of the Nation’s $13 trillion banking industry and its two million 

employees. 

The issue of GSE reform is a critical one for banks, particularly for community 

banks like mine, which use GSEs as the primary mode of access to the secondary 

markets. At South Shore Savings Bank, we have a proud heritage of commitment 

to the communities on the South Shore since 1833, with 13 branches and 187 employees. From a personal perspective, my entire career since 1972 has been in the 

mortgage lending business within the community bank world. I sold my first loans 

to Fannie Mae in 1974, so I know well the importance of secondary market access 

for smaller banks. Without that access, my bank could not be an active player in 

our primary mortgage market because our balance sheet could not support the demand in the market. Further, we would not be able to offer long-term fixed-rate 

loans due to the increased interest rate risk that this would create in the bank loan 

portfolio. 

Over the course of the last year, ABA has gathered bankers like me to discuss 

the future of Fannie Mae and Freddie Mac and to consider an outline for a path 

forward. ABA has also engaged in discussions with regulators, which have helped 

us refine our views. In that process, ABA developed eleven principles to guide reform of the GSEs, which are attached to my testimony as an appendix. As Congress 

begins the next phase in shaping the future of the mortgage markets and the Government’s role in them, I hope these principles, and the recommendations I will discuss below, will provide a base to build on. 

ABA believes that the role of Fannie Mae and Freddie Mac should be reduced and 

transformed, enabling the private sector to shoulder more of the responsibility to assure an effective and efficient secondary mortgage market. In addition, the Federal 

Housing Administration (FHA) should return to its traditional role of serving first 

time homebuyers and other borrowers who may not qualify for conventional financing. The end goal we envision is a housing finance market in which more than half 

of mortgage finance occurs without Federal secondary market guarantees of any 

type. An ideal goal might be to have 10 percent of loans in direct Government guarantees like FHA and VA, 30 percent in well-regulated and mission-directed businesses that are privately owned and operated with a Government backstop, and 60 

percent with no Government aid. 

The overarching principle is to ensure that banks of all sizes have access to secondary market financing. The ABA has not endorsed a specific structure for the 

GSEs and the private secondary market to achieve this going forward; finding the 

right mechanism will be challenging. In the meantime, however, there are significant actions that can provide a transition vehicle to reduce governmental involvement, foster private sector financing, and still assure equitable access to secondary 

markets for all banks. 

Possible transitional structures for the GSEs or their successors include a wellregulated and controlled cooperative structure owned by the financing entities or a 

similarly controlled secondary market utility that is publicly owned. Whatever structure is chosen will require significant control and direction of guarantee fees, mission, investor returns, and potential taxpayer liability. Activities under that portion 

of the structure with Government support or backstop will need to be confined to 

a controlled mission that is intended, among other things, to foster and accommodate development and expansion of purely private sector mortgage financing alternatives. 

Rather than develop a single ‘‘silver bullet’’ solution to housing finance, it may 

be desirable to develop several sources which aid in the reestablishment of a private 

market. Multiple sources of liquidity for private market (including portfolio) lenders 

will lead to a more diverse and ultimately safer housing financing system. Thus, in 

addition to the creation of a successor entity or entities to the GSEs, policy makers 

may want to consider the creation of a well-regulated covered bond market, as well 

as enhancements to the Federal Home Loan Banks which would better help them 

63 

continue to meet their mission of providing advances to private market portfolio 

lenders with minimal taxpayer exposure. It is also important to ensure that any actions taken with regard to Fannie Mae and Freddie Mac do not harm or destabilize 

the Federal Home Loan Banks, which provide a key source of liquidity to our Nation’s banks, especially community banks. 

Further, we would note that to fully protect taxpayers from additional losses, it 

will be necessary to impose similar reforms on the Farm Credit System, which continues to follow the discredited model of privatized gains and public losses which 

failed so badly in the housing sector. Without similar reforms to the Farm Credit 

System, it is only a matter of time until taxpayers again are put at risk. 

That vision of transforming the GSEs and enhancing the role of the private sector 

may take years to attain, and goals can be better calibrated as we proceed. However, it is essential that we start taking incremental steps toward these goals, and 

trust in our ability to make midcourse corrections as we progress. 

Underpinning all of this must be workable and clear underwriting standards for 

all mortgage loans. We must get the underwriting standards correct today if we 

have any hope of transitioning to a stable system for secondary mortgage instruments. The current proposals defining a narrow Qualified Residential Mortgage 

(QRM) exemption from risk retention requirements fly in the face of workable and 

clear standards. In fact, should this proposal be adopted as proposed, it will surely 

drive many banks from mortgage lending and shut many borrowers out of the credit 

market entirely. ABA strongly believes that this rule should be substantially rewritten and reproposed in a new form. 

Not only is the proposal ill-conceived and will have long-term negative impacts 

on mortgage lending, but it comes at a particularly bad time with the housing market still struggling to recover. Since it is also the stated goal of both the Congress 

and the Administration to end the conservatorship of Fannie and Freddie, it is important that risk retention requirements be rational and nondisruptive when they 

are applied broadly to the market. The rule as proposed does not meet those tests. 

In the remainder of my testimony, I want to focus on three key things: 

• The role of the Government in housing finance should be dramatically reduced 

from its current level. Guarantee fees should be used to encourage private sector involvement. 

• The transition to a private market should be carefully managed to protect taxpayers and ensure continued credit availability. 

• New proposed mortgage rules on risk-retention are likely to drive many community banks out of mortgage lending and cut off mortgages to some borrowers. 

I will discuss all three of these points in turn. 

I. Government’s Role in Housing Finance Should Be Dramatically Reduced 

A private market for the vast majority of housing finance should be fostered and 

encouraged with an ultimate goal of a much smaller governmental role. Therefore, 

ABA proposes that the Government’s role in housing finance should be focused primarily on ensuring stability and accessibility of the capital markets in the event of 

market failure. 

Direct Government involvement may be necessary and desirable for the creation 

of affordable rental housing and to assist first-time borrowers or others who may 

not readily qualify for conventional financing. A well-regulated private market 

should be the desired financing source for the bulk of borrowers whose income and 

credit rating qualify them for conventional financing. We do strongly urge the continued Federal guarantee of existing GSE debt and securities to ensure stability as 

the process moves forward. 

Because of the trauma suffered by the financial markets and the borrowers they 

served during the recent financial crisis, it will be necessary to move toward a substantially private market in a cautious and well-considered fashion. A transition period taking a number of years will be necessary. 

Guarantee Fees Should Be Used to Encourage Private Sector Involvement 

ABA recommends that the primary mechanism for reducing Government involvement (and for compensating the Government for its ongoing support) is through adjustments to the guarantee fees (G-fees) paid to the GSEs (or their successors). The 

current G-fees are too low—the compensation being paid for what amounts to full 

Government backing is simply not priced correctly. Raising the G-fee can do much 

to encourage development of the private market and to begin to repay the Government for its current support. By ‘‘dialing up’’ the G-fees in an orderly and well-detailed manner, eventually the private market will find itself in a position where it 

is better able to compete with the GSEs for business. 

64 

With a high enough G-fee, the private market will be able to price for risk in a 

fashion that allows for safe and sound investment and lending at a rate that is comparable (and eventually better) than the rate charged by the GSEs. In the meantime, the increased rates for G-fees will help to offset losses and assist in the repayment of the Government’s investment in Fannie Mae and Freddie Mac. This approach also allows for flexibility in the setting of guarantee fees, thereby ensuring 

a safety valve for housing finance in the event of private market disruptions. 

The other key mechanism for transition to a private market will be setting more 

reasonable loan limits for GSE purchases. The current maximum loan limit of 

$729,750 in high cost areas and $417,000 in all other regions is dramatically higher 

than necessary for the purchase of a moderately priced home, especially in light of 

housing price declines nationwide. While some high-cost areas persist—and a recovery of the housing market will entail a hoped-for stabilization and recovery in home 

values—the conforming loan limits for most of the Nation can be reduced. This will 

assist the development of a private market for loans outside of the conforming loan 

limits as a step to a more fully private market for all loans. 

Underwriting will also be an important mechanism, but given the significant new 

underwriting requirements required by the banking regulators and by the DoddFrank Act, it would seem that the most important role played by the GSEs in this 

area for the foreseeable future is to ensure that uniform underwriting requirements 

are followed by all market participants selling to the GSEs or their successors. 

Under the Dodd-Frank Act, the current GSE regulator, the Federal Housing Finance Authority, will be among the regulators establishing underwriting standards 

and ‘‘safe harbors,’’ so they will remain heavily involved with setting underwriting 

standards. As I mentioned in the introduction, getting the underwriting standards 

correct and consistent is the first and most important step toward any transition 

of the GSEs. I will cover this in detail in my third point below. 

II. The Transition to a Private Market Should Be Carefully Managed To 

Protect Taxpayers and Ensure Continued Credit Availability 

The critical question in creating a private market is how to mitigate costs as the 

transition is made. Any successor entity to the housing GSEs must provide market 

stability and liquidity, and be adequately capitalized. It is reasonable to expect that 

the users of that entity will contribute to capital or at least pay the full value and 

cost of any Government guarantee, explicit or implicit. Similarly, any assumption 

of the hard resources of the existing GSEs by a private entity must occur in a manner in which the Government recovers fair value for the assets acquired. In other 

words, the taxpayer should not subsidize the formation of privately owned successors. 

It is not realistic to imagine that there is capacity within the financial services 

industry to fully capitalize a new entity in the near term, or to take on the debt 

of the existing GSEs. It is our recommendation that income from increased G-fees 

be used to begin building capital, to repay the Treasury, and to better protect taxpayers. 

This could be facilitated by cordoning off the troubled assets of Fannie Mae and 

Freddie Mac into a segment of the enterprises which would remain in need of Federal support while being wound down. Ultimately, the troubled assets of the GSEs 

may have to be separated into a ‘‘bad bank’’ structure and the remaining losses realized. However, as the economy recovers some troubled assets may yet be salvaged 

and losses recovered. The new book of G-fee business, which would consist of guarantees for securitized pools of high quality mortgages—with higher G-fees going forward—should provide healthy returns that support Government payments and absorb some or all of the potential bad asset losses. 

The resulting healthy guarantee businesses should be managed and regulated in 

a manner intended to dramatically shrink their market share, and also to establish 

incentives for growth of purely private mortgage finance alternatives to fill that 

market share. This most likely will require that the successors initially be managed 

under a public utility model under Government control. Subsequently, the Government can exit its controlling interest by spinning the successors to private ownership as cooperatives or through public offerings, further recouping its investment. 

If these smaller private successors retain some form of Government guarantee, 

which we believe likely, a continuation of the public utility regulatory model will 

be necessary to ensure capital requirements and G-fee pricing necessary to compensate the Government, protect taxpayers, and prevent leveraging of the Government guarantee in a manner that discourages growth of private sector, nonguaranteed mortgage markets. To be clear, this is not the only possible approach, but we 

believe this offers a path from the current environment of Federal support for the 

65 

mortgage markets to a more realistic and sustainable private sector driven mortgage market. 

III. Proposed Mortgage Rules Will Harm Creditworthy Borrowers and 

Drive Community Banks From the Market and Must Be Revised 

ABA has grave concerns that the risk retention proposal issued by the regulators 

will drive many banks from mortgage lending and shut many borrowers out of the 

credit market entirely. Responding to widespread objections from consumer groups, 

banks, and Senators and Congressman, the regulators extended the comment period 

from June 10th to August 1st. While more time for commenting on such a far-reaching regulatory proposal is welcome, what is really necessary is for the rule to be substantially reconsidered and reproposed. 

It is true that the proposal’s immediate impact is muted by the fact that loans 

sold to Fannie Mae and Freddie Mac, while they are in conservatorship, escape risk 

retention. However, once the rule’s requirements are imposed broadly on the market—should they be adopted—they would likely shut out many borrowers entirely 

and act to destabilize the housing market once again. Since it is also the stated goal 

of both the Congress and the Administration to end the conservatorship of Fannie 

and Freddie, and since ending the conservatorships and the related GSE exemption 

would expand the proposal’s negative impact, it is important that risk retention requirements be rational and nondisruptive when they are applied broadly to the market. The rule as proposed does not meet those tests. 

Therefore, ABA urges Congress to ensure that the regulators revise the risk retention regulation before it is imposed on the mortgage market broadly. Specifically we 

recommend: 

A. Exemption from risk retention provisions must reflect changes in the market 

already imposed through other legislative and regulatory change, and 

B. Risk retention requirements should be conformed to GSE underwriting standards. 

I will explain each of these recommendations in more detail: 

A. Exemption From Risk Retention Provisions Must Reflect Changes in the Market 

Already Imposed Through Other Legislative and Regulatory Change 

In the Dodd-Frank Act, Congress determined that some form of additional risk 

retention was desirable under certain circumstances to ensure that participants in 

a mortgage securitization transaction had adequate ‘‘skin in the game.’’ The goal 

was to create incentives for originators to ensure proper underwriting (e.g., ability 

to repay) and incentives to control default risk for participants beyond the origination stage. There have already been dramatic changes to the regulations governing 

mortgages and more are pending with new ‘‘ability to pay’’ rules. The result is that 

mortgage loans with lower risk characteristics—which include most mortgage loans 

being made by community banks today—should be exempted from the risk retention 

requirements, regardless of whether sold to Fannie Mae and Freddie Mac or to private securitizers. 

Exempting such ‘‘qualified residential mortgage’’ loans (QRM) is important to ensure the stability and recovery of the mortgage market and also to avoid capital requirements not necessary to address systemic issues. However, the QRM as proposed is very narrow and many high-quality loans posing little risk will end up 

being excluded. This will inevitably mean that fewer borrowers will qualify for loans 

to purchase or refinance a home. Instead, the QRM definition should closely align 

with the proposed ‘‘Qualified Mortgage’’ (QM) definition promulgated by the Federal 

Reserve Board. The QM definition (as proposed) focuses on a borrower’s ability to 

repay and allows originators to measure that ability with traditional underwriting 

tools. The proposed QRM rule, in contrast, takes most underwriting decisions away 

from originators in favor of rigid loan-to-value and other targets. 

For example, for the loan to qualify for QRM status, borrowers must make at 

least a 20 percent down payment—and at least 25 percent if the mortgage is a refinancing (and 30 percent if it is a cash-out refinance). Certainly, loans with lower 

loan-to-value (LTV) ratios are likely to have lower losses if in default, and we agree 

that this is one of a number of characteristics to be considered. However, the LTV 

should not be the only characteristic for eligibility as a ‘‘Qualified Residential Mortgage,’’ and it should not be considered in isolation. Setting the QRM cutoff at a specific LTV without regard to other loan characteristics or features, including credit 

enhancements such as private mortgage insurance, will lead to an unnecessary restriction of credit. To illustrate the severity of the proposal, even with private mortgage insurance, loans with less than 20 percent down will not qualify for the QRM. 

66 

ABA strongly believes that creating a narrow definition of QRM is an inappropriate method for achieving the desired underwriting reforms intended by DoddFrank. 

B. Risk Retention Requirements Should Be Conformed to GSE Underwriting Standards 

The proposal presented by the regulators will make it vastly more difficult to end 

the conservatorship of Fannie and Freddie and to shrink FHA back to a more rational portion of the mortgage market. As noted above, under the proposed rule, 

loans with a Federal guarantee are exempt from risk retention—which includes 

loans sold to Fannie Mae and Freddie Mac while they are in conservatorship and 

backed by the Federal Government. FHA loans (as well as other federally insured 

and guaranteed loan programs) are also exempt. Since almost 100 percent of new 

loans today being sold are bought by Fannie and Freddie or insured by FHA—and 

as long as these GSEs can buy loans without risk retention—it will be dramatically 

more difficult for private securitizers to compete. In fact, the economic incentives of 

the proposed risk retention strongly favor sales of mortgages to the GSEs in conservatorship and not to private securitizers. Thus, this proposal does not foster the 

growth of private label securitizations that would reduce the role of Government in 

backing loans. 

Equally important is the fact that the conservatorship situation is unsustainable 

over the long term. Eventually, these narrow and restrictive rules would apply to 

a much, much larger segment of the mortgage market. After the conservatorships 

end, even fewer borrowers will qualify for QRM mortgage loans, and the risk retention rules make it less likely that community banks will underwrite non-QRM—but 

prudent and safe—loans. Some community banks may stop providing mortgages altogether as the requirements and compliance costs make such a service unreasonable without considerable volume. Driving community banks from the mortgage marketplace would be counterproductive as they have proven to be responsible underwriters that have served their borrowers and communities well. 

Instead of exempting the GSEs from risk retention, the QRM should instead encompass most if not all of the low risk loans being underwritten today and purchased by the GSEs. If a loan meets those requirements (which we anticipate will 

evolve to conform with any new QM definition) and is thus eligible for purchase by 

the GSEs, it should also be exempt from risk retention requirements. Conforming 

the QM, QRM, and GSE standards will set the foundation for a coherent and sustainable secondary mortgage market. 

The imposition of risk retention requirements to improve underwriting of mortgage loans is a significant change to the operation of the mortgage markets and 

must not be undertaken lightly. ABA urges Congress to exercise its oversight authority to assure that rules adopted are consistent with the intent of the statute and 

will not have adverse consequences for the housing market and mortgage credit 

availability. Setting logical, consistent, and workable underwriting standards is the 

foundation upon which GSE reform must be built. 

Conclusion 

The task ahead will not be easy. Fannie Mae, Freddie Mac, and the Federal Housing Administration currently constitute the vast bulk of available financing for the 

American mortgage market. It is imperative that reform be cautious, in order to 

avoid inflicting further harm on an already fragile housing economy, but deliberate, 

in order to move away from the current situation of full Federal support for the 

long-term. We must not wait, but start the process now. I hope that these recommendations and the eleven Principles for Reform which are appended to this 

statement are helpful to you in this process. The American Bankers Association 

stands ready to assist in any way possible. 

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PREPARED STATEMENT OF PETER SKILLERN 

EXECUTIVE DIRECTOR, COMMUNITY REINVESTMENT ASSOCIATION OF NORTH

CAROLINA

JUNE 28, 2011 

Greetings, I am Peter Skillern, Executive Director of the Community Reinvestment Association of North Carolina, a nonprofit advocacy and community development agency working at the local, regional, and national levels. Thank you for the 

opportunity to speak on reforms in the secondary mortgage market. 

On September 6, 2000, I testified in the House of Representatives Subcommittee 

on Government Sponsored Enterprises to warn against Fannie Mae and Freddie 

Mac purchasing high cost subprime loans. I said ‘‘For the record . . . these highcost loans will become a significant problem in the coming years. In the future, this 

Committee will return to the issue of how the financial markets played a role in 

spurring high default rates and the decline of our neighborhoods.’’ 

That proved to be true. Subprime lending was bad for neighborhoods and the 

economy. The GSEs purchase of subprime securities was a primary cause of their 

failure. 

Today I am concerned that reform proposals that eliminate the GSEs and convert 

to a solely private capital market will also be harmful for communities and our 

housing market as a whole. Reforms are needed to increase the private market role 

with adequate oversight and to reduce risk to tax payers. However the GSEs are 

needed as public purpose agencies for the stability of our Nation’s housing and finance markets. 

GSEs Role in the Mortgage Markets 

Megabanks have accelerated their market dominance and size since the financial 

crisis. Nationally, in 2008, 56 percent of mortgage originations were made by the 

top five banks; today 70 percent of originations are made by the top four banks. In 

the rural areas of Alabama, North Carolina, Oregon, Ohio, and South Dakota, 

megabanks originated 75 percent of the loans and 88 percent of FHA loans. By comparison small institutions under $10 billion originated 16 percent of conventional 

loans (Federal Financial Institutions Examination Council, 2009). Concentration of 

capital and mortgage origination market share of big banks will continue. 

Megabanks do not have dominance in the secondary market. There are three primary sectors that loans are sold to: (1) Private commercial entities like commercial 

banks, insurance companies, and their affiliates (2) Fannie Mae and Freddie Mac, 

and (3) Ginnie Mae, which deals exclusively with FHA. 

Smaller financial institutions shop their loans among these secondary buyers. 

Loans are underwritten to a standard established by the GSEs and sold as a commodity that can to those offering the best price and services. This practice should 

be preserved. 

If the GSEs are eliminated, the secondary capital markets may become dominated 

by megabanks, which will further concentrate capital in a vertical integration of the 

mortgage market. This will disadvantage small lenders access to capital, underwriting, and technology controlled by their competitors. 

If megabanks are too big to fail now, imagine their size, power, and vulnerability, 

as they become guarantors and holders of the mortgage-backed security market. 

Capital is scared and its volatility adds to swings during booms and busts. Private 

capital as the primary source of secondary markets will not act countercyclically to 

provide credit in a recession or to slow liquidity in a boom. 

By analogy, mortgage credit is like water. We are concerned not only with the 

quality of water that comes that comes out of our tap, but who owns and controls 

the water and the plumbing from the water source of the glaciers to the spigot at 

home. Mortgage credit like water is critical and should not be entirely controlled by 

private interests. 

If we should not privatize the secondary market, what should be done? We believe 

that the GSEs should be converted into public purpose entities that are accountable 

to Congress, but are not a department of the Government such as the Federal Housing Administration. The agency would provide liquidity for 30-year mortgages that 

are explicitly guaranteed, but priced for adequate reserves. The agency would provide liquidity for multifamily rentals. It would act as a provider of underwriting 

standards and technology for the benefit of the market. It would balance privatemarket influence by providing choice on the secondary market. 

As an example, the North Carolina Housing Finance Agency is not a Government 

department, yet serves a public purpose of financing affordable home ownership and 

rental housing. While appointed by the governor and State legislature, the board is 

independent and operates without appropriations. It does not have a conflicting priVerDate Nov 24 2008 08:43 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00072 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\06-28 HOUSING DISTILLER\62811.TXT JASON
69 

vate profit motive with its public mission. Its staff is paid competitively, but not excessively. Likewise, the GSEs can serve the public purpose in the secondary market 

for rental and home ownership financing as an essential element to our national 

housing and financial policy. 

Other Reforms 

The status quo is not acceptable in the long term for a healthy secondary market 

and its risk to taxpayers. We support reforms that include: 

• Reducing the portfolio of GSE loans and liabilities. They have grown too large 

and the sell of assets can help to strengthen the capital base of the institutions. 

• Pricing for explicit Government guarantees on 30-year mortgages, which are 

placed in reserves. 

• Reforming FHA to provide adequate infrastructure and oversight to its portfolio. 

• The financial meltdown was caused in large part by private label mortgage 

backed securities. Private institutions should provide mortgage securities, but 

on the condition they are recognized as systemic risks to the market and have 

adequate oversight for safety and soundness. 

Reform GSE Loan Level Pricing 

The Community Reinvestment Association advocates for the reform of the GSE 

loan level pricing policy in order to reduce FHA volume and engage private capital 

in the mortgage market. 

Federal Housing Administration loans are playing a significant role in the mortgage market. In 2005 FHA represented 6 percent of purchase mortgages, but grew 

to almost 40 percent by 2011, placing greater risk on the taxpayer (FHA, 2011). This 

is in part a result of the credit contraction by the private sector and the role of FHA 

in providing needed countercyclical liquidity. 

It is also a direct result of current GSE Loan Level Pricing Adjustments LLPA. 

LLPA charges higher rates and fees for loans with downpayments lower than 10 

percent, credit scores below 720 and homes in a declining market. The GSEs are 

taking the cre`me of the mortgage market with new GSE loans having high credit 

scores and low loan to value ratios. 

This has not lowered risk for taxpayers. LLPA prices loans away from the GSE 

portfolio and into FHA. If these loans did not have higher LLPA pricing, they would 

be insured by the private sector with private mortgage insurance (PMI). PMI premiums layered on top of higher GSE LLPA rates are not competitive with FHA 

loans with low downpayments. PMI originations have dropped by two-thirds over 3 

years. 

The LLPA program also demonstrates the impact of requiring high downpayments 

as a condition of the best pricing for loans. With higher downpayments used as a 

proxy for underwriting, rather than ability to pay, creditworthy borrowers who can 

pay their mortgage are denied because of downpayment requirements that will take 

years to save for. The result is fewer people can buy their first home and owners 

have greater difficulty in selling. The people most affected are low- to moderate-income households and communities of color. For a more thorough analysis of the 

LLPA program please read The New Hurdle to Homeownership (Adam Rust, Community Reinvestment Association of North Carolina June 2011). 

70 

We oppose the GSE loan level pricing program and recommend that it be amended to better utilize PMI. This will lower FHA volume and increase lending to creditworthy households with low downpayments. 

Conclusion 

The proposals being discussed in reforming the secondary market potentially 

throw the good out with the bad in eliminating the GSE. The catastrophic failure 

of the GSEs in chasing the private label subprime mortgage markets is not a justification for eliminating the successful elements of the institutions’ public purpose. 

A conversion to a completely private market delivery system will not serve the Nation’s economic or social interests. 

Let me state for the record, if the proposal to eliminate the GSEs succeeds, this 

Committee will meet in the future to address new problems. We will have more 

volatile capital markets; greater inequality in the access to mortgage credit; and disinvestment and decline of low- and moderate-income communities. The real estate 

market will struggle as it becomes more difficult for renters to become first time 

homebuyers reducing household mobility. Small financial institutions will be less 

independent and competitive with megabanks. 

If we phase out the GSEs completely, we will lack financing for affordable rental 

housing for our workforce. If the approach is not inclusive of low- and middle-income 

households, we will have a system that works very well for some, but not for many 

others and ultimately not for the greater good. The Community Reinvestment Association affirms the vision of an inclusive and healthy housing market. 


62811033.eps
71 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM ROD STAATZ 

Q.1. Mr. Staatz, Fannie and Freddie were responsible both for supporting the secondary mortgage market by guaranteeing mortgagebacked securities and for providing affordable housing by meeting 

Government-mandated housing goals. In your testimony, however, 

you state that ‘‘[t]he important role of Government support for affordable housing should be a function separate from the responsibilities of the secondary market entities.’’ 

Why do you believe that it is important for affordable housing 

goals to be separated from any entity that supports the secondary 

market? 

Should affordable housing mandates be on the Government’s 

budget? 

A.1. The requirements of a program to stimulate the supply of 

credit to lower income borrowers are not the same as those for the 

more general mortgage market. Combining both goals in a single 

vehicle can frustrate the achievement of both goals. 

In principle, it would be better for the Government’s support for 

affordable housing to be explicitly funded rather than being subsumed in the mission of some entity such as a GSE with a broader 

mission, or imposed on lenders. However, it might be reasonable 

for the source of that funding to derive at least in part from borrowers and financial institutions that might benefit from the Government’s support for the mainstream secondary mortgage market. 

For example, if the Government were to provide some sort of backup guarantee to the qualifying mortgage-backed securities made of 

up mainstream mortgages, the fee charged for that guarantee could 

include both a risk-premium and a small fee to fund affordable 

housing goals. But in any event, using the same mechanisms to 

support both the broader secondary market and affordable housing 

is likely to frustrate the achievement of both goals. 

Q.2. Mr. Staatz, in your testimony you warn that Dodd-Frank will 

increase costs for small financial institutions. In fact, you argue 

that the requirements of Dodd-Frank are one factor that ‘‘will likely require small financial institutions to retain additional employees . . . stretch small financial institutional monetary resources to 

untenable levels, or worse, force more of these institutions, including credit unions, to cease to exist altogether.’’ 

What aspects of Dodd-Frank are most costly to small financial 

institutions? 

A.2. It is probably too early to tell which provision of the DoddFrank Act will ultimately be the most costly for credit unions. 

However, over the last several years, there has been an accumulation of regulatory burden which has combined with the enactment 

of this legislation and the pending implementation of the rules it 

requires to create a crisis of creeping complexity. Every time a rule 

is changed—whether it increases regulatory burden or not—costs to 

credit unions are increased. So it’s not any one regulation, but the 

cumulative effect of many, many recent regulatory changes that is 

adding to the cost burden. Because of the credit union ownership 

structure, under which each member is an owner in equal standing, every dollar that a credit union spends to comply with regulaVerDate Nov 24 2008 08:43 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00075 Fmt 6602 Sfmt 6602 L:\HEARINGS 2011\06-28 HOUSING DISTILLER\62811.TXT JASON
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tion is a dollar that is not used to the benefit of the credit union’s 

membership. 

Q.3. Mr. Hartings and Mr. Staatz, you both have advocated that 

the Federal Government, and by extension the American taxpayer, 

provide some level of guarantee to the secondary mortgage market. 

Secretary Geithner, however, has warned this Committee about the 

difficulty in having the Government guarantee mortgage-backed securities. He cautioned: ‘‘guarantees are perilous. Governments are 

not very good at doing them, not very good at designing them, not 

very good at pricing them, not very good at limiting the moral hazard risk that comes with them.’’ 

Do you agree with Secretary Geithner? 

If not, on what basis do you believe that the Government can accurately price risk? 

A.3. Secretary Geithner raises very valid points. It would indeed be 

difficult to design a system of Government support to the secondary 

mortgage market that does not ultimately impose undue risk to the 

taxpayer. But difficult is not the same as impossible. We can learn 

from the lessons of the recent financial crisis. We do not expect a 

free, no-questions-asked Government guarantee. We would expect 

to see significant underwriting requirements, and also a substantial guarantee fee to cover the risk. Perhaps the most difficult aspect of such a program would be maintaining discipline after a period of several years of low losses. 

Q.4. There has been discussion lately about various approaches to 

housing finance reform. However, until we identify the most important objectives of any new entity, speculating on the structure of 

that entity or its products is premature. 

Setting aside any characteristics of a future structure and its 

products, please list and describe the most important, specific priorities that community banks have in the reform of our Nation’s 

housing finance system. 

A.4. In the context of the reform of our Nation’s housing finance 

system, the most important priorities for credit unions are: (1) access to the secondary market; (2) strong oversight and supervision 

of entities operating in the secondary market; and (3) that the secondary market is durable enough to continue to function during financial crisis. We also believe it is critical that there be a reasonable and orderly transition from the current system to any new 

system. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM ROD STAATZ 

Q.1. Recently, the Wall Street Journal reported that the percentage 

of mortgage applications being rejected by the largest lenders increased last year to more than 1 in every four 4 (and increasing 

in every State except Delaware). Has there been a similar increase 

in rejections by community banks? If so, what is driving the increase? How has demand changed? (Community bank lending appears to have increased.) How have borrowers changed their behavior, if at all? 

73 

A.1. We do not yet have recent data on rejection rates on credit 

union mortgages, although they have historically been much lower 

than rejections at other lenders across all types of borrowers. We 

do know however that the credit union share or first mortgage 

originations has risen dramatically since the beginning of the financial crisis. Before the crisis, credit unions would typically originate less than 2 percent of total first mortgage loans. Last year, 

that proportion had doubled to about 3.5 percent. This suggests 

that credit unions are still willing and able to grant first mortgage 

loans to their members. Also, prior to the recession, credit unions 

were primarily portfolio lenders, selling only a quarter to a third 

of their new loans. Last year credit unions sold over half of new 

production because of the risks inherent in holding long-term, 

fixed-rate loans during a period of very, very low interest rates. 

Q.2. One significant point in the housing finance reform debate has 

centered on the use of ‘‘guarantee fees.’’ How much of the housing 

reforms could be accomplished just through proper establishment 

and use of guarantee fees? How should they be established? What 

would be the increase to the cost of the average mortgage? 

A.2. This is of course the crux of establishing a responsible program. In general, a guarantee fee would need to be sufficient to 

cover the risks to the Government. Following are some likely useful 

features of a guarantee fees: 

• Fees should be sufficient to build a substantial minimum reserve fund for losses. Fees should err on the side of more than 

fully funding possible losses rather than the other way around. 

• A series of reserve levels could be established, with the guarantee fee reduced each time a higher reserve level is reached. 

• Guarantee fees should reflect loan-specific risks factors, but 

under no circumstances should they be zero. 

• Guarantee fees should be set by a single entity within the Government, rather than by competing GSEs. 

Q.3. What would be the price of private guarantee fees? Should 

there be consideration given to a gradient of guarantee? For example, a guarantee of 60 percent or 75 percent or lower, similar to 

current private mortgage insurance? 

A.3. We do not have the expertise and information to opine on the 

actual level of Government guarantee fees, but believe they would 

likely be higher than historical fees charged by the GSEs. Gradients of guarantee fees are unlikely to be very attractive to investors, and might be an unnecessary complication. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM CHRISTOPHER R. DUNN 

Q.1. Mr. Dunn, in your testimony you state that creating multiple 

sources of liquidity, including covered bonds, may be the best way 

forward for housing finance reform. 

What benefits would covered bonds provide for community 

banks? 

A.1. Covered bonds may be a potential additional source of liquidity for community banks, but there likely would be impediments to 

74 

such use. In comparison, large banks are much more likely to use 

covered bonds, because they have the scale and investment ratings 

to enter capital markets readily. I do not expect community banks 

to change their pattern of use of collateralized borrowing from Federal Home Loan Banks (FHLBs) to finance mortgage loans, even if 

covered bonds become available. FHLB advances operate in a manner similar to covered bonds, where advances to banks are backed 

by collateral which generally is in the form of mortgage loans held 

in a bank’s portfolio. The FHLBs have the scale and investment 

rating to issue debt directly in capital markets, which in turn funds 

FHLB advances to banks and other lenders. 

Q.2. Mr. Dunn, you advocate two methods for reducing Fannie and 

Freddie’s role in the mortgage market: raising the guarantee fee 

and lowering the conforming loan limits. 

Please explain how these two actions would help revive the private market. 

A.2. Simply stated, a private label mortgage securitization market 

cannot develop if Fannie Mae and Freddie Mac are managed in 

conservatorship in a manner which significantly underprices the 

valuable Government guarantee that is being offered. Only when 

investors face the full cost of the Government guarantee will they 

actively consider and begin to chose alternative MBS that can offer 

an enhanced yield equal to or greater than the cost of the fully 

priced guarantee. No rational investor will buy private label MBS 

as long as the Government guarantee is being given away on the 

cheap. 

Lowering the high cost area exceptions from loan limits created 

at the start of the financial crisis will shrink the pool of loans on 

which the full guarantee is available, opening the door further for 

the private market to address needs in the higher loan value categories. This has already been occurring, because the high cost 

area exceptions were defined to be 125 percent of median area 

home prices, up to a maximum of $729,000. As median home prices 

have declined over the past 3 years, the permissible high cost area 

exceptions have also declined in frequency. It is time to reduce the 

maximum high cost limit from $729,000 to keep pace, as is scheduled to commence in October, 2011. 

Q.3. Mr. Dunn, a key issue in housing finance reform is what 

should be done with the portfolios of Fannie Mae and Freddie Mac. 

Currently, these portfolios are scheduled to be dramatically reduced. However, some have argued that Congress should preserve 

the portfolios when it undertakes housing finance reform. 

Do you believe that it is appropriate to continue reducing the 

GSEs’ portfolios? 

Do you believe that portfolio lending by a public sector entity is 

necessary for there to be a healthy secondary market? 

A.3. The American Bankers Association strongly believes that the 

GSE’s portfolios should be reduced and eventually eliminated but 

for a small portfolio which may be necessary to facilitate balance 

sheet and liquidity management. 

We do not believe that a GSE must retain a significant portfolio. 

While a small portfolio may be necessary for balance sheet and liquidity management, anything further is unnecessary and counterVerDate Nov 24 2008 08:43 Mar 06, 2012 Jkt 048080 PO 00000 Frm 00078 Fmt 6602 Sfmt 6602 L:\HEARINGS 2011\06-28 HOUSING DISTILLER\62811.TXT JASON
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productive to an efficient private mortgage market. Some flexibility 

may be desirable to allow for temporary and contained growth of 

portfolios during times of market disruption to ensure that a GSE 

is able to step in during a market failure, but such flexibility 

should be limited and tightly controlled. 

Q.4. Mr. Dunn, many have argued for continuing, or even expanding, certain housing goals within the future secondary mortgage 

market. 

Based upon your experience, is imposing arbitrary social goals 

upon mortgage market participants the appropriate method for the 

Government to implement social policy? 

A.4. We do not believe that social goals should be imposed as a 

part of secondary market facilitation by the Federal Government. 

The goal of Federal involvement in the mortgage markets should 

be to ensure liquidity and stability in the mortgage markets for 

lending to qualified borrowers. Affordability and other social goals 

may be important, but should be addressed through other, more direct means such as Federal programs through the Department of 

Housing and Urban Development. 

Q.5. There has been discussion lately about various approaches to 

housing finance reform. However, until we identify the most important objectives of any new entity, speculating on the structure of 

that entity or its products is premature. 

Setting aside any characteristics of a future structure and its 

products, please list and describe the most important, specific priorities that community banks have in the reform of our Nation’s 

housing finance system. 

A.5. First, the paramount priority for community banks is equitable access to the capital markets, and preserving the function of 

Federal Home Loan Banks is a key priority. It is imperative that 

the accessibility and services provided by FHLBs to their members/ 

owners not be disrupted. Community banks do not have the capability to access the capital markets directly, and the cooperative 

FHLB system has proven to be a safe and reliable means for community banks to fund loans, particularly during the recent crisis. 

Second, community banks support a much smaller Government 

footprint in mortgage markets. We believe that a predominantly 

private secondary market will best serve borrowers and lenders 

alike. At the same time, we believe that a secondary mortgage market GSE(s) based on a guarantee business model only should be 

maintained in an important, if residual, role. We believe that some 

form of ‘‘controlled’’ secondary market GSE should be maintained 

to ensure that community lenders have equitable market access regardless of the size of the institution. Such a GSE structure also 

would offer an operating fail-safe in the event of future mortgage 

market disruptions. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM CHRISTOPHER R. DUNN 

Q.1. Recently, the Wall Street Journal reported that the percentage 

of mortgage applications being rejected by the largest lenders increased last year to more than 1 in every 4 (and increasing in every 

76 

State except Delaware). Has there been a similar increase in rejections by community banks? If so, what is driving the increase? How 

has demand changed? (Community bank lending appears to have 

increased.) How have borrowers changed their behavior, if at all? 

A.1. It is difficult to answer this without great speculation; however, there is no doubt that lower appraisals and tighter underwriting standards contributed to an increase in declines throughout 

the industry. Nevertheless, borrower demand is clearly down, most 

likely due to uncertainty about housing prices and a fear by some 

borrowers of buying now when prices may still fall further. Additionally, many potential borrowers are in the process of paying 

down other debts before considering new borrowing. 

It should be noted that the article referenced covers a period in 

time where many customers were focused on refinancing. Many of 

these existing borrowers shortened their loan term to pay off their 

loans sooner. 

Q.2. One significant point in the housing finance reform debate has 

centered on the use of ‘‘guarantee fees.’’ How much of the housing 

reforms could be accomplished just through proper establishment 

and use of guarantee fees? How should they be established? What 

would be the increase to the cost of the average mortgage? 

A.2. The American Bankers Association believes that adjusting 

guarantee fees (G-fees) charged by the GSEs is a critical first step 

in bringing about reform. The full guarantee being provided by the 

Federal Government to Fannie and Freddie is significantly underpriced at the moment. G-fees should be carefully, but deliberately 

ratcheted up to a level more appropriately reflecting the true value 

of the guarantee. Eventually, as these fees increase, the private 

market will likely return and offer products without a guarantee 

at a lower price which will then be considered competitive. 

Q.3. What would be the price of private guarantee fees? Should 

there be consideration given to a gradient of guarantee? For example, a guarantee of 60 percent or 75 percent or lower, similar to 

current private mortgage insurance? 

A.3. The price of the guarantee fee, as well as the usefulness of a 

gradient is more accurately determined by the investor channel, so 

we would defer to those market participants for input on this question. 

Q.4. In your written remarks, you note that ‘‘[w]ith a high enough 

[guarantee fee], the private market will be able to price for risk’’ 

What is the differential in that rate? How should it be set? What 

would be the impact on the rate of an average loan? 

A.4. Again, this is likely a question better addressed to the investor 

community. It will be up to investors to determine how much risk 

is offset by the guarantee (and how much they will pay for that offset) and how willing they are to invest in products that could potentially be offered without such a guarantee. 

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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTER SUBMITTED BY THE NATIONAL ASSOCIATION OF FEDERAL 

CREDIT UNIONS 


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