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86–275 PDF 2014

S. HRG. 113–146 

HOUSING FINANCE REFORM: ESSENTIALS OF A 

FUNCTIONING HOUSING FINANCE SYSTEM FOR 

CONSUMERS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE EXPERIENCE OF CONSUMERS THROUGHOUT THE 

HOUSING FINANCE SYSTEM FROM ORIGINATION TO SERVICING 

OCTOBER 29, 2013 

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 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director 

LAURA SWANSON, Deputy Staff Director 

ERIN BARRY FUHER, Professional Staff Member 

JEANETTE QUICK, Counsel 

CASEY SCOTT, OCC Detailee 

KARI JOHNSON, Legislative Assistant 

GREG DEAN, Republican Chief Counsel 

CHAD DAVIS, Republican Professional Staff Member 

TRAVIS HILL, Republican Counsel 

DAWN RATLIFF, Chief Clerk 

KELLY WISMER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, OCTOBER 29, 2013 

Page 

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

Opening statements, comments, or prepared statements of: 

Senator Crapo ................................................................................................... 2 

WITNESSES 

Eric Stein, Senior Vice President, Center for Responsible Lending .................... 4 

Prepared statement .......................................................................................... 30 

Responses to written questions of: 

Chairman Johnson .................................................................................... 121 

Senator Reed .............................................................................................. 123 

Rohit Gupta, President, Genworth Financial, U.S. Mortgage Insurance ........... 5 

Prepared statement .......................................................................................... 76 

Responses to written questions of: 

Chairman Johnson .................................................................................... 124 

Gary Thomas, 2013 President, National Association of Realtors ........................ 7 

Prepared statement .......................................................................................... 82 

Laurence E. Platt, Partner, K&L Gates LLP ........................................................ 9 

Prepared statement .......................................................................................... 104 

Alys Cohen, Staff Attorney, National Consumer Law Center ............................. 10 

Prepared statement .......................................................................................... 107 

Responses to written questions of: 

Chairman Johnson .................................................................................... 126 

Senator Reed .............................................................................................. 131 

Lautaro Lot Diaz, Vice President, Housing and Community Development, 

National Council of La Raza ............................................................................... 12 

Prepared statement .......................................................................................... 113 

(III)

(1) 

HOUSING FINANCE REFORM: ESSENTIALS OF 

A FUNCTIONING HOUSING FINANCE SYSTEM FOR CONSUMERS 

TUESDAY, OCTOBER 29, 2013 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:05 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. Good morning. I call this hearing to order. 

For many Americans, home ownership is a lifelong dream and is 

often the biggest purchase a consumer will ever make. However, as 

became clear during the financial crisis, consumers face a complex 

housing finance system that may stack the odds against them. 

From steering consumers into higher-cost products in the ‘‘originate 

to distribute’’ model to poor servicing practices leading to improper 

foreclosures, the crisis exposed major flaws in the system for consumers. 

The Wall Street Reform Act included key reforms to protect consumers from abusive mortgages—one being the creation of the Consumer Financial Protection Bureau. The CFPB has worked hard to 

address these problems and, this year, finalized rules on mortgage 

servicing and defining how a lender should evaluate a consumer’s 

ability to repay a mortgage. However, as the ongoing foreclosure 

settlements and recent CFPB report show, issues remain for consumers. 

Consumers today face tight credit conditions as only borrowers 

with pristine credit histories are able to receive loans. Yet history 

has shown that a substantial share of first-time homebuyers has 

lower credit scores and that the majority pay on time. We must be 

mindful of the impact that strict underwriting standards will have 

on the ability of creditworthy borrowers to access the mortgage 

market, particularly in rural or underserved areas, and on the economic recovery. Many factors feed into an individual’s ability to 

repay a loan, and no one factor will guarantee repayment. 

Last week, five Federal agencies released guidance to lenders on 

making loans in compliance with fair lending laws, and the Federal 

Reserve released a report showing that a high number of minorities 

may be impacted by stricter underwriting standards. These actions 

highlight the importance of being thoughtful in constructing new 

2 

standards to ensure that the mortgage market is accessible to all 

responsible borrowers. 

I look forward to hearing our witnesses explain the home purchase process for consumers—including their interaction with the 

realtor, underwriting of the mortgage, pre- and post-purchase counseling, and servicing. They will also discuss the current challenges 

in each area and their recommendations for clearer standards and 

better consumer protections in the housing finance system. 

Most consumers are not experts in mortgage lending, but our 

witnesses here today help them navigate the complex process. I believe their testimony will help inform the Committee as we decide 

how to best ensure access to credit for creditworthy borrowers. As 

we have learned in recent hearings, current reform proposals do 

not fully address important topics, such as multifamily, PLS, and 

as we will explore today, making sure a new system will function 

better for consumers purchasing homes. Any bill moving forward 

must seriously consider these issues. 

With that, I turn to Senator Crapo for his opening statement. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you, Mr. Chairman. 

Today’s hearing will focus on the consumer experience in a reformed housing finance system. Home ownership is central to our 

Nation’s economy, offering financial and social benefits for families, 

communities, and the country as a whole. The policies we choose 

to adopt during this process will determine not only the sustainability of a robust housing market, but also the future economic opportunities for millions of American families and individuals. 

A reformed housing finance system can help consumers achieve 

their dream of home ownership, but this must be done responsibly. 

Doing this in a sustainable manner requires strong underwriting 

as well as real estate contracts which can be expected to protect 

the rights of all parties. Failing to meet these two critical objectives 

will increase the risks and costs to both taxpayers and consumers. 

One of the major causes of the financial crisis was a significant 

deterioration in underwriting standards. Many mortgages turned 

out to be unaffordable, and a large number of these mortgages 

were guaranteed by Fannie Mae and Freddie Mac. Staggering 

losses were ultimately paid for by taxpayers after the Federal Government bailed out Fannie Mae and Freddie Mac in July of 2008. 

In addition to the lessons Fannie’s and Freddie’s failures, the 

Federal Housing Administration has further demonstrated the importance of returning to responsible underwriting. Last year’s actuarial report found that the FHA insurance fund’s net worth was a 

negative $16 billion, and last month the FHA required a nearly $2 

billion Federal bailout, the first in its history. 

With these experiences in mind, if we are going to consider options for reforming the housing finance system that include a taxpayer guarantee, we must ensure that the taxpayer is only guaranteeing mortgages that meet strong, basic underwriting standards. 

A bipartisan coalition of the Banking Committee Senators has introduced S.1217. This legislation required a number of compromises to secure support from Members of both sides of the aisle. 

One important compromise is that in exchange for including an exVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
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plicit Government guarantee of mortgages, private capital would 

take a strong first-loss position and loans would need to have a 

minimum downpayment of 5 percent while meeting the CFPB’s 

qualified mortgage definition. Fannie’s and Freddie’s current underwriting standards for guaranteeing loans are generally more difficult to meet than a QM loan with a 5-percent downpayment. 

Further, to my knowledge, no one is proposing to prohibit lenders 

from making loans that do not meet this standard. Existing proposals merely affirm that taxpayers will not be on the hook if those 

loans fail. 

In addition to protecting taxpayers, it is also important that the 

future housing system ensures there is adequate liquidity in the 

market so that qualified borrowers have ample access to mortgage 

credit. An essential element of ensuring that credit availability is 

preserving our system of secured lending in which a borrower’s 

home is seen as adequate collateral for the mortgage that the borrower seeks. 

Some have proposed very prescriptive laws and regulations regarding how a mortgage can be serviced, including numerous restrictions on how the collateral could be obtained in the regrettable 

event that a borrower could not maintain his or her obligations. 

Currently servicing reforms are already being implemented. The 

CFPB issued new servicing rules earlier this year, and the National Mortgage Settlement last year established new service 

standards for the Nation’s largest servicers. None of us like the 

idea of any borrower losing his or her home, and none of us have 

forgotten nor excused legal and contractual violations of the past. 

However, if we take actions that call into question whether mortgage contracts are viewed as adequately secured lending, homeowners across the country could pay a very considerably higher 

rate. 

I look forward to hearing from today’s witnesses and working 

with the Chairman and the other Members of this Committee as 

we address these critical issues, and again, I thank you, Mr. Chairman, for holding this hearing. 

Chairman JOHNSON. Thank you, Senator Crapo. 

Are there any other Members who would like to give brief opening statements? 

[No response.] 

Chairman JOHNSON. I would like to remind my colleagues that 

the record will be open for the next 7 days for additional statements and other materials. 

Our first witness is Mr. Eric Stein, who is senior vice president 

of the Center for Responsible Lending and its affiliate Self-Help. 

Mr. Rohit Gupta is president of Genworth Financial, USMI. 

Mr. Gary Thomas is the president of the National Association of 

Realtors. 

Mr. Laurence Platt is a partner at K&L Gates LLP. 

Next is Analyses Cohen, staff attorney at the National Consumer 

Law Center. 

And, finally, we have Mr. Lautaro Diaz, vice president of housing 

and community development at the National Council of La Raza. 

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

Mr. Stein, you may proceed. 

4 

STATEMENT OF ERIC STEIN, SENIOR VICE PRESIDENT, 

CENTER FOR RESPONSIBLE LENDING 

Mr. STEIN. Thank you, Chairman Johnson, Ranking Member 

Crapo, and Members of the Committee. My name is Eric Stein, and 

I am senior vice president at the Center for Responsible Lending. 

Thank you for inviting me to testify today. The mortgage market in the U.S. is a $10 trillion market, and 

there is a lot at stake in getting things right. As an initial matter, 

I agree with the emerging consensus, as reflected in S.1217, that 

taxpayer risk must be insulated by private capital and that a Government guarantee must be explicit and paid for to prevent future 

taxpayer bailouts. I have six recommendations for the Committee 

about how to design a housing finance system that will work for 

borrowers, private investors, and the economy. 

First, in order to fix the misaligned incentives at Fannie Mae 

and Freddie Mac, I recommend requiring mutual ownership of joint 

issuer-guarantor entities instead of stock ownership. One of the key 

reasons that Fannie and Freddie ended up in conservatorship is because private shareholders pushed for short-term gains and quarterly earnings. In the face of declining market share, because of 

private label securities competition, management weakened credit 

standards to compete for Alt-A business. This decision proved disastrous as Alt-A loans were 10 percent of loans in 2008 yet 50 percent of losses. Mutual ownership would reduce the chasing market 

share problem and promote longer-term sustainability. Lenders 

would need to join one or more mutuals to sell loans to the conforming secondary market and invest equity commensurate with 

the amount that they sell. The pooled capital from all members 

would stand in first-loss position ahead of any Government reinsurance. 

Second, in order to give smaller lenders a level playing field, legislation should permit direct access to the secondary market 

through a cash window. Housing finance reform should not require 

smaller lenders to go through their larger competitors. If this happened, rural and underserved communities could face reduced access to credit. 

Third, secondary market entities should be required to serve a 

national market and accept all eligible lenders. Allowing the market to fragment where one entity serves California, another serves 

the Southeast, and no one effectively serves a predominantly rural 

State would exacerbate regional economic downturns as well as 

leaving borrowers behind. 

Fourth, while I am encouraged that S.1217 includes an explicit 

and paid-for Government guarantee, I recommend that this guarantee not be available for the kinds of private label securities that 

predominated during the subprime boom. These securities should 

be able to access a common securitization platform, but they do not 

provide enough systemwide benefits to warrant a Government 

guarantee and would make effective regulation impossible. 

Fifth, a future system needs to be able to complete successful 

loan modifications by retaining a portfolio for distressed-then-modified loans with a Government backstop in times of economic stress. 

Finally, legislation I believe should not hard-wire underwriting 

standards such as a 5-percent downpayment mandate. Some borVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
5 

rower contribution should be required, but the amount and how 

compensating factors should be used should be left to the regulator, 

bond guarantors, and lenders. Enshrining in statute who can get 

a mortgage in a future system would be harmful, I believe, for 

three reasons: 

First, it would dramatically reduce the number of families who 

could qualify for a mainstream loan. Younger families, African 

American, and Latino families are the future of our housing market, but they have lower levels of household wealth. Those with 

compensating factors who can afford the monthly payments on a 

loan should not be excluded. Many are better credit risks than borrowers with 5 percent to put down but who do not have these other 

factors. 

Second, downpayment requirements harm the housing market by 

reducing the pool of available buyers. Excluding creditworthy families would harm existing homeowners and reduce their equity. Who 

will buy the house of an elderly couple needing to move to a continuing care facility? 

Third, borrowers in well-underwritten, low-downpayment mortgages can succeed. CRL’s affiliate, Self-Help, has purchased $4.7 

billion of mortgages made to low-wealth families in 48 States— 

50,000 loans. Two-thirds of these borrowers had mortgages with 

downpayments of less than 5 percent. These homeowners have had 

median annualized return on equity of 27 percent and built an average of $18,000 in wealth as a result. This is even through the crisis. Good underwriting requires looking at a number of factors, and 

legislation should not push out borrowers on account of just one, 

be it downpayment or debt-to-income ratios or FICO scores. 

In closing, if we learn what went wrong with Fannie Mae and 

Freddie Mac and fix those problems, and if we build on what has 

and is working, we can build a sturdy secondary market that will 

put private capital first in line, support the economy, and provide 

opportunities for all Americans. 

Thank you for the opportunity to testify today, and I look forward to your questions. 

Chairman JOHNSON. Thank you. 

Mr. Gupta, you may proceed. 

STATEMENT OF ROHIT GUPTA, PRESIDENT, GENWORTH 

FINANCIAL, U.S. MORTGAGE INSURANCE 

Mr. GUPTA. Thank you, Chairman Johnson and Ranking Member 

Crapo. My name is Rohit Gupta, and I am the president of 

Genworth Financial’s U.S. Mortgage Insurance business. We are 

headquartered out of Raleigh, North Carolina, and we operate in 

all 50 States. I appreciate the opportunity to be here today to talk 

about the issue of affordability and availability of credit for home 

buying and the role of private mortgage insurance to help with 

those issues. 

At its core, our business is evaluating and managing mortgage 

credit risk on prudent and sustainable low-downpayment mortgages. We put our own capital at risk in a first-loss position on 

every loan we insure. Today home prices are the most affordable 

they have been in years, and interest rates remain at historical 

6 

lows. But mortgage credit is still very tight. That is why I am 

grateful that this Committee has convened this hearing. 

Congress has done a great deal to make our housing finance system safer and more sustainable in recent years. The final qualified 

mortgage rule is a significant milestone and one that we and our 

partners in the Coalition for Sensible Housing Policy applaud. QMs 

are exactly the kind of mortgages that our system should encourage. 

Now, I want to get right to the issue of downpayments since that 

is at the heart of current policy discussions. 

The amount of downpayment matters, but low-downpayment 

loans did not cause the crisis, and they should not be a barrier to 

buying a home moving forward. It is our job as mortgage insurers 

to understand mortgage credit risk. In fact, MIs are often referred 

to as a second set of eyes in the mortgage system. That is because 

MIs use our own set of credit policy guidelines to evaluate a loan. 

When I look at a loan, I want to see more than the downpayment. I want to see a stable employment record, a strong credit 

history, manageable debt ratios, a credible appraisal, and more. 

That is what responsible credit underwriting is all about. 

As mortgage insurers, we make sure low-downpayment borrowers with sound credit get the best loans with the best terms. 

Our underwriting guidelines are sound but not overly restrictive. 

Today lender and investor overlays and fees mean that our credit 

guidelines are not being fully utilized. 

As I am sure the Committee knows, the biggest hurdle for many 

homebuyers is the downpayment, especially for first-time homebuyers and borrowers with lower to moderate incomes. When you 

consider that it takes an average working family about 7 years to 

save for a 10-percent downpayment or that half of the first-time 

homebuyers who got GSE loans made downpayments of less than 

20 percent or that nearly one-quarter of the mortgage market over 

the last 15 years was loans with low downpayments, that is nearly 

$8 trillion in mortgages that have performed well through good cycles and bad. Only then can you appreciate how important it is for 

consumers and the U.S. economy to keep low-downpayment lending 

at a viable option in home buying. 

In fact, I would guess that a majority of homeowners in this 

room today bought their first house with less than a 20-percent 

downpayment. MIs take first-loss risk, and we do it in a way that 

borrowers can afford and lenders can execute. 

Turning to the question of housing finance reform, we are encouraged by the hard work being done by this Committee. We were 

pleased to see S.1217 includes private MI at today’s standard coverage levels for low-downpayment loans. Standard coverage MI 

puts private capital at risk ahead of any Government exposure. We 

think that is essential in any reform effort. It provides meaningful 

amounts of credit loss protection, it is well understood by investors 

and lenders, and it does not introduce any new borrower costs in 

the housing finance equation. 

If the GSEs only had lesser charter coverage and not deeper 

standard MI, MI companies would have been asked to pay less 

claims, and U.S. taxpayers would have had a much bigger burden 

to pay. Consider that mortgage insurers have paid nearly $40 bilVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
7 

lion of claims to Fannie Mae and Freddie Mac through the cycle. 

That is a very significant amount of money that was taken off the 

shoulders of the GSEs, the Congress, and the taxpayers. The reason we could pay those claims is because we hold significant countercyclical capital and reserves against every loan we insure, and 

we are working closely with regulators and counterparties to make 

those requirements even stronger moving forward. 

The Committee has also asked if we believe mortgage underwriting standards should be fixed in statute. We do think that 

broad underwriting standards could be written into statute. For us, 

the most important thing is a clear mandate for prudently underwritten low-downpayment loans as part of a reformed system. 

When thinking about statute versus regulation, we need to keep in 

mind that mortgage credit underwriting is dynamic. Too detailed 

of an approach could limit credit availability or make it hard to 

fine-tune underwriting in the future. 

We also encourage the Committee to look beyond the traditional 

role that mortgage insurers have played in providing credit enhancement. For instance, there is no reason why our MI could not 

also substitute for bond guarantee coverage. The most important 

thing is that there be a level playing field that relies on well-regulated, well-capitalized, consistent credit enhancement. 

In closing, I want to commend the Committee for tackling this 

complex and emotionally charged issue. Keeping the interests of 

consumers and taxpayers in the forefront will help you arrive at a 

stronger and more resilient housing finance system. I applaud the 

provisions for private MI at standard coverage levels in S.1217 look 

forward to working with the Committee as your important work 

continues. 

That concludes my opening statement, and I look forward to answering any questions you might have. 

Chairman JOHNSON. Thank you. 

Mr. Thomas, you may proceed. 

STATEMENT OF GARY THOMAS, 2013 PRESIDENT, NATIONAL 

ASSOCIATION OF REALTORS 

Mr. THOMAS. Chairman Johnson and Ranking Member Crapo 

and Members of the Committee, on behalf of the 1 million members 

of the National Association of Realtors who practice in all areas of 

residential and commercial real estate, thank you for the opportunity to present our views on housing finance reform and the essentials of a functioning housing finance system for consumers. I 

am Gary Thomas, president of the National Association of Realtors, 

and I have more than 35 years of experience in the real estate 

business. 

The recovery of the housing market has been instrumental in 

pulling the economy out of the Great Recession. In the past year, 

home prices have increased 11.7 percent. Home sales were 10.7 

percent higher over the same period. While this is very welcome 

news, the market has not fully recovered, as evidenced by the fact 

that home sales are still stuck in the 2001 levels. Moreover, roughly 7.1 million homeowners are still underwater. 

These sobering statistics remind us that the housing market remains far from healthy and is facing certain headwinds. Access to 

8 

mortgage credit continues to be tight as lenders remain leery of 

taking on risk as a result of new lending regulations that will go 

into effect early next year. Specifically, new ability-to-repay requirements along with uncertainty regarding the proposed risk retention rules have caused bankers to be apprehensive in issuing 

new loans. 

The changing regulatory landscape compounded with growing 

student debt will limit consumers’ access to credit and contribute 

to an already tight lending environment by imposing standards 

that are even more stringent. At the same time, rising interest 

rates combined with meager increases in household income will 

continue to squeeze the affordability of home ownership. 

As Congress looks to reform our housing finance system, lawmakers must ensure the affordability and availability challenges 

faced by creditworthy borrowers are addressed, and realtors believe 

this can only be achieved through a secondary mortgage market 

upheld by an explicit Government guarantee. 

Moreover, realtors agree taxpayers should be protected. Private 

capital must return to the housing finance market, and the size of 

the Government participation in the housing sector should be decreased if the market is to function properly. 

With that being said, realtors believe it is extremely likely that 

any secondary mortgage market structure without a Government 

guarantee backing would foster mortgage products that are more 

aligned with business goals than the best interests of consumers. 

If the secondary mortgage market were to be fully privatized, we 

believe the greatest casualty would be the elimination of the 30- 

year fixed-rate mortgage, thus increasing the cost of mortgages to 

consumers. The 30-year fixed-rate mortgage is the bedrock of the 

U.S. housing finance system. Now more than ever, consumers are 

seeking fixed-rate 30-year loans because they are easily understood 

and offer a predictable payment schedule. 

We applaud Senators Corker and Warner for introducing the 

Housing Finance Reform and Taxpayer Protection Act of 2013, 

which includes many of our suggested reform elements. The legislation provides for an explicit Government guarantee which should 

ensure the availability of the 30-year mortgage going forward. 

We do, however, have some concerns about the legislation. The 

5-percent downpayment requirement is problematic because it will 

preclude creditworthy borrowers who have an issue saving the required amount from buying a home they could otherwise afford. 

Rather than focusing on downpayments, we are generally supportive of CFPB’s qualified mortgage rule and believe this standard 

should be used to define qualified residential mortgage in any future housing finance system. This underwriting approach achieves 

the twin objectives of protecting the marketplace while ensuring 

borrowers have access to safe mortgages. 

NAR is also concerned with mandating a covered security to have 

a credit risk sharing structure under which private investors have 

to take at least a 10-percent first-loss position. Realtors are worried 

this arbitrary first-loss percentage will inhibit private investors 

from participating in the secondary mortgage market, especially 

during periods of economic distress. 

9 

Finally, NAR opposes lowering loan limits at this time, especially 

because it unfairly discriminates against consumers living in highcost markets. Lowering the loan limits restricts the liquidity and 

makes mortgages more expensive for households nationwide. 

The U.S. housing sector is in the midst of recovering from the 

worst economic downturn since the Great Depression. Any restructure of the secondary mortgage market must make certain that 

mortgage capital is available in all markets at all times under all 

economic conditions. Furthermore, we look forward to working with 

the Committee to ensure that the future reform of the secondary 

mortgage market will protect and preserve the American dream of 

home ownership for all responsible, hard-working taxpayers. 

Thank you. 

Chairman JOHNSON. Thank you. 

Mr. Platt, you may proceed. 

STATEMENT OF LAURENCE E. PLATT, PARTNER, K&L GATES 

LLP 

Mr. PLATT. Good morning, Chairman Johnson, Ranking Member 

Crapo, and Members of the Banking Committee. My name is Larry 

Platt. I am a consumer finance lawyer at the global law firm of 

K&L Gates LLP. Thank you for allowing me to participate today. 

I am appearing today in my personal capacity and not on behalf 

of either my law firm or any of the clients of my law firm. 

I want to focus on whether S.1217 should impose outcome-based 

loss mitigation requirements on servicers and owners of securitized 

residential mortgage loans. By way of background, mortgage loan 

servicers are independent contractors. They work for the owners of 

the loans and the securities for a fee to collect and remit mortgage 

loan payments and enforce the loan documents. 

S.1217 presently does not impose outcome-based loss mitigation 

requirements on servicers for the benefit of consumers, in connection with either the Federal Mortgage Insurance Company or any 

uniform securitization agreement that may be created. I think that 

is the right approach. 

Earlier this year, the Consumer Financial Protection Bureau 

issued comprehensive loan-servicing regulations that take effect 

this January and that I believe are sufficient for this purpose. 

Some of the new regulations implement the provisions of the DoddFrank Act; others, though, are derived from earlier initiatives from 

the Government, such as the 2009 HAMP program of the Department of Treasury and the April 2012 global foreclosure settlement 

involving the Department of Justice, 49 State Attorneys General, 

and 5 major banks. 

The result is that defaulting borrowers already have significant 

Federal Government protections to seek to avoid foreclosure, including in some cases a Federal private right of action to sue to 

stop a foreclosure. 

The CFPB regs comprehensively address, in my opinion, virtually all of the common servicing complaints of consumers and 

regulators that lead to claims of wrongful or unfair foreclosures. 

For example, they impose detailed requirements for responding to 

customer complaints and resolving alleged servicing errors. They 

impose early intervention requirements on servicers to attempt to 

10 

establish live contact with borrowers shortly after delinquency. 

They require servicers to maintain a continuity of contact with delinquent borrowers to provide access to personnel. They require 

servicers to follow detailed procedural requirements to evaluate 

borrowers for available loss mitigation options, such as notifying 

borrowers if their applications are incomplete; promptly evaluating 

them for their eligibility for a modification; timely notifying them 

of the modification decision, including any rights to appeal; and 

prohibiting servicers from initiating foreclosures within a timeframe after delinquency or from initiating a final foreclosure while 

loss mitigation discussions are continuing. 

But despite these broad protections, the CFPB made a deliberate 

decision not to require servicers to offer or to require loan holders 

to accept specific forms of loss mitigation at all or on any specific 

terms. Many consumer advocacy groups questioned this approach. 

They asked in notice and comment for the CFPB to require 

servicers and loan holders to provide loan modifications that pass 

a positive net present value test to qualified borrowers. The CFPB 

rejected this approach. It acknowledged in the preamble of the final 

regs that those who take the credit risk on a mortgage loan do so 

in part in reliance on the security interests and the collateral. The 

CFPB wrote that it did not believe it presently could develop rules 

that are sufficiently calibrated to protect the interests of all parties 

involved in the loss mitigation process given their differing perspectives. And it expressed concern that overreaching loss mitigation 

requirements could have a material adverse effect on the availability and the cost of credit if creditors in the secondary market 

would no longer be able to establish their own criteria for determining when to offer loss mitigation to a defaulting borrower. 

Similarly, the recent final risk retention regulations abandoned 

the original 2011 proposal that would have tied the availability of 

the qualified residential mortgage exemption to requiring the 

servicer in the underlying mortgage loan documents to provide loan 

modifications regardless of the wishes of the loan holder. 

I think the robust requirements of the CFPB regulations, which 

go live in a little over 2 months, are sufficient. They came out following substantial input of virtually all interested stakeholders. I 

think S.1217 should follow the lead of the CFPB and not impose 

additional loss mitigation requirements that are outcome-based for 

consumers in default. 

Thank you for the opportunity to appear today. I look forward to 

questions. 

Chairman JOHNSON. Thank you. 

Ms. Cohen, please proceed. 

STATEMENT OF ALYS COHEN, STAFF ATTORNEY, NATIONAL 

CONSUMER LAW CENTER 

Ms. COHEN. Good morning, Chairman Johnson, Ranking Member 

Crapo, and Members of the Committee. Thank you for the opportunity to testify today on the key components of housing finance reform for consumers. 

Congress and the Nation face an important crossroads in the life 

of the housing finance system. While the housing market has imVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
11 

proved somewhat from the height of the crisis, more needs to be 

done to restore a functioning and fair housing market. 

Communities without access to affordable credit become vacuums 

that can be filled by predatory lenders. When sustainable loans are 

unavailable, borrowers are susceptible to tricks and traps because 

they have no other options. 

In addition to properly funding the National Housing Trust Fund 

and the Capital Magnet Funds, the new system should promote 

broad access to lending by inhibiting credit rationing and ‘‘creaming’’ of the market. Lenders should be required to serve all population segments, housing types, and geographical locations. 

Yet any statute should not dictate specifics of underwriting that 

would result in less flexibility to meet these broad access goals. 

Housing finance legislation should leave open the specifics of downpayment requirements, credit scores and debt-to-income ratios. 

Downpayment requirements are keyed directly to wealth, which 

itself varies widely by demographics and is not always tied to creditworthiness or ability to repay. 

Debt-to-income ratios also are an incomplete measure of lending 

capacity. Credit scores often do not provide a reliable picture of a 

borrower’s credit profile and often differ substantially by race. 

Housing finance reform also should support a healthy mortgageservicing system. Foreclosure rates are still higher than at the 

onset of the economic collapse in 2008. Servicer incentives currently result in inflated fees and unnecessary foreclosures. Despite 

the creation of several programs and the recent adoption of procedural regulations by the CFPB, specific additional measures are 

needed. 

First, the new housing finance system must require affordable 

loan modifications that are consistent with investor interests. The 

CFPB, while it has issued a series of procedural requirements for 

servicers, has declined to issue such a mandate. Yet the data show 

that almost all delinquent homeowners still get no modification at 

all. Those homeowners lucky enough to receive a modification seldom get one with the best terms available. A clear, specific mandate can be crafted that provides the market the flexibility and predictability that it needs. 

Second, homeowners seeking loan modifications should not be 

faced with an ongoing foreclosure while they are processing their 

loan modification request. Doing so raises costs and results in 

wrongful foreclosures. Instead, such foreclosures should be put on 

temporary hold rather than subjecting the homeowner to the dual 

track of foreclosure and loss mitigation. Substantial flaws in existing requirements must be addressed, and the GSE system should 

continue its role as a leader in market developments. 

Third, the new housing finance corporation should be authorized 

to directly purchase insurance, including force-placed insurance. 

The current system, in which the GSEs reimburse servicers for 

force-placed hazard and flood insurance, has resulted in vastly inflated prices for borrowers and, when borrowers default, the GSEs 

and taxpayers. 

The new housing finance system also should promote transparency and accountability. An Office of the Homeowner Advocate 

should be established to assist with consumer complaints and comVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
12 

pliance matters. Loan-level data collection and reporting should include demographic and geographic information to ensure that civil 

rights are protected. 

Finally, any new Federal electronic registry for housing finance 

must be available to the public, mandatory, with sanctions for noncompliance, and supplemental to State requirements. A national 

registry should include records of servicing rights, ownership of 

mortgages and deeds of trust, as well as ownership of the promissory notes themselves. 

There has been much discussion about electronic mortgages, instruments entirely created and stored electronically. Electronic instruments must be permitted only when there is sufficient security 

to ensure authenticity. The records must actually be signed only by 

the homeowners, and the records must be maintained in such a 

way to ensure that the terms cannot be changed. 

Thank you for the opportunity to testify today. The Nation’s 

housing finance system is in need of a revived sense of public purpose. Loan origination and servicing mechanisms should ensure 

broad and sustainable access to credit throughout the life of the 

loan. I will be happy to take any questions you may have. 

Chairman JOHNSON. Thank you. 

Mr. Diaz, please proceed. 

STATEMENT OF LAUTARO LOT DIAZ, VICE PRESIDENT, HOUSING AND COMMUNITY DEVELOPMENT, NATIONAL COUNCIL 

OF LA RAZA 

Mr. DIAZ. Chairman Johnson, Ranking Member Crapo, and distinguished Members of the Committee, thank you for inviting me 

to appear this morning on behalf of the National Council of La 

Raza, the largest national Hispanic civil rights and advocacy organization. I am Vice President for Housing and Community Development and have worked for years in the community development 

field with programs to serve low- and moderate-income families. I 

appreciate the opportunity to provide expert testimony before the 

Committee. 

For more than two decades, NCLR has engaged in public policy 

issues such as preserving and strengthening the Community Reinvestment Act and the Home Ownership Equity Protection Act. 

Also, for the last 13 years, we have supported local housing counseling agencies through NCLR’s Homeownership Network, which is 

comprised of 49 community-based counseling providers that work 

with over 50,000 families annually and that has nurtured more 

than 30,000 homebuyers since its inception. Following the financial 

crisis, the NHN responded to the Latino community’s needs by 

shifting its focus to helping families stay in their homes. 

My testimony today will focus on pre- and post-purchase counseling and the ways counseling assists the mortgage industry provide credit access to hard-to-serve markets. It also supports loss 

mitigation of individual mortgages by ensuring borrowers’ readiness and ensuring they understand the process involved with mortgage delinquency. I will conclude my remarks with an observation 

of the necessity of preserving access to affordable housing finance 

options. 

13 

Pre-purchase counseling, which helps families purchase a home, 

and post-purchase counseling, which assists after a family has 

closed on their mortgage or in the event of a mortgage delinquency, 

are the types of housing counseling most relevant to GSE reform 

legislation being considered. 

A counselor providing pre-purchase counseling does five important things: it educates the borrower on all aspects of the homebuying process; it analyzes the client’s credit, savings, and family 

budget to help them understand what they can afford; it ensures 

that obligations and essential practices are understood; it assists 

the family in understanding the documents they are signing; and, 

finally, it provides community resources to address issues that 

could impact the long-term ability for them to manage their mortgage loan. These five steps help ensure prudent decision making by 

the client because they are fully aware of the obligations they are 

undertaking. Loan performance is demonstrably greater when a 

family obtains a loan with this kind of support. 

How pre-purchase counseling supports credit access can be seen 

in an example of an Ohio family who had filed bankruptcy at the 

height of the economic downturn. The family, however, still aspired 

to become homeowners despite their personal turmoil. The NHN 

counselor advised them to enroll in a homebuyer education class to 

start the process, and after completing an action plan developed 

with the housing counselor, the family successfully qualified for a 

VA loan and purchased a home. 

In instances when a client is confronting mortgage delinquency, 

they are better served with a counselor than facing the challenge 

alone. A situation of a Miami family illustrates this point. The family received a trial mortgage modification while working with an 

NHN counseling organization. The family had continued to make 

their payments on the trial modification on a timely basis but was 

unaware that the bank still continued the foreclosure proceedings. 

The property was sold, prompting the housing counselor to involve 

legal aid to try to reverse the sale. A judge ruled in the client’s 

favor, but without the support of the counseling agency, the client 

would have lost their home. 

In addition to this anecdotal evidence I have provided, there is 

considerable research demonstrating the extent that housing counseling works. One 2013 pre-purchase counseling study by 

NeighborWorks found that borrowers with pre-purchase counseling 

and education were one-third less likely to be over 90 days delinquent on their mortgage than those who did not. And a 2012 

NeighborWorks report to Congress showed that homeowners who 

received counseling were nearly twice as likely to obtain a mortgage modification than those who did not receive counseling. 

NCLR believes counseling is an important part of the mortgage 

system to ensure access to credit to all communities, as well as to 

support safeness and soundness in the system. Without an obligation to serve all markets, communities of color in particular will 

find it extremely difficult to access mortgage credit. Without a duty 

to serve, private capital will gravitate to the cream of the crop, 

those with traditional borrowing profiles. This will result in an 

unsustainable housing finance market where creditworthy but 

lower-wealth and lower-income buyers, especially minorities, will 

14 

be underserved. This is already evident today; the private market 

overwhelmingly caters to the traditional borrowers in well-served 

locations. 

More information on preserving access and affordability as well 

as NCLR’s specific recommendations can be found in my written 

comments. Thank you again for the opportunity to appear before 

this Committee. I would be glad to answer any additional questions 

you may have. 

Chairman JOHNSON. Thank you all for your testimony. 

As we begin questions, I will ask the clerk to put 5 minutes on 

the clock for each Member. 

Mr. Thomas, we have heard that consumers face tight credit conditions today. If new legislation includes stricter underwriting, 

such as a minimum downpayment, what impact would that have 

on home borrowers and the housing market? 

Mr. THOMAS. Well, it would be very restrictive. We feel that it 

would impede the first-time homebuyer and the underserved. The 

problem that we are facing with a tighter credit box is that you are 

really shutting out the first-time homebuyers. When you do that, 

that then has implications on the move-up market. It will stall the 

market completely and could reverse all of the trends that we have 

had so far. So if we make it more and more difficult by having an 

exact downpayment and make it more difficult for them, it is going 

to be much more problematic. 

You know, the 5-percent downpayment is not just 5 percent. If 

you add closing costs on top of that, you are getting closer to 6 to 

7 percent. And so you have to take that into consideration. Downpayment is not always the most predictive analytic of whether a 

borrower is going to be able to repay. Just take a look at the VA 

loan and how well they have performed over the years with no 

downpayment. So I think you have to look at the underwriting criteria to make sure that the borrower can afford to make the payments and has the ability to repay rather than just downpayment. 

Chairman JOHNSON. Mr. Stein, Self-Help has been successful in 

underwriting and servicing home loans to borrowers with low credit scores and low downpayments. What factors are most relevant 

to a borrower staying current on a home loan? How could the structure of housing finance be improved to better serve consumers? 

Mr. STEIN. Thank you, Chairman Johnson. Self-Help’s program 

that I mentioned, where we purchased $5 billion worth of mortgages, you are correct had lower downpayments, and our loss rate 

has been approximately 3 percent, so they have performed well 

through a very tough time. But average income of the borrowers 

was around $31,000, so it is not the wealthy who received these 

loans. 

Why these loans performed well is not rocket science. They are 

all retail originated by lenders, fully documented income and assets, 30-year fixed-rate loans, amortizing, escrowed taxes and insurance, fully prepayable, low fees—basically meet all the Wall 

Street Reform Act requirements and QM requirements where there 

is full underwriting to make sure that the individual’s credit issues 

and incomes are sufficient to repay the mortgage and use compensating factors where one is weak, others are stronger. 

15 

In terms of structural features for the mortgage market, we believe that a joint issuer-guarantor model for pass-through TBA securities is the way to go. That is how our mortgages were 

securitized, through pass-through securities. Second, private capital in first-loss position as ours was—we were taking the risk—is 

important. Third, providing small lenders direct access to the secondary market through a cash window is important. Fourth, national coverage by accepting all eligible lenders; we purchased 

loans in 48 States. Many of them were going through a tough time, 

but we think it should be a national market. And, finally, a portfolio for modified loans, it was much easier for us and I think any 

lender if the loan is on Fannie Mae’s balance sheet when it comes 

time to do a modification that is still net present value positive. 

Chairman JOHNSON. Mr. Diaz and Ms. Cohen, consumers who 

experience problems in loan repayment may turn to their servicers 

for help. How does counseling help consumers if this happens? And 

do you think that existing servicing standards do enough to fix the 

servicing issues we saw during this crisis? 

Mr. DIAZ. I will take that. Relationship with servicers during the 

crisis changed as time went on. Initially counselors were seen as 

unnecessary players because they were in between the servicer and 

the consumer. As servicers had difficulty in collecting documents, 

underwriting the family, and reaching the family, counseling organizations played a more critical role. Servicers incorporated them 

into many of their processes, so the relationship improved over 

time. 

The essential problem—initially the volume of troubled mortgages—the difficulty in trying to orient the modification program a 

servicer had, and the consumer’s ability to understand it was really, really tough. The counselors, when they were used in the best 

way, really closed that gap and brought the consumer up to the 

program’s understanding of it. The servicer and the consumer could 

then finish the process they were engaged in. 

So it is almost like translating language and being able to advocate for the consumers. If a paper got lost, which was common, if 

there was a misinterpretation of income, which was common, there 

was another player who knew the process that was able to advocate and speak the language of a servicer to allow the modification 

to go through. 

So I think counselors played a really critical role, and I also believe the CFPB servicing standards are definitely an improvement. 

But, counselors still have this ability of being able to communicate 

with the servicer. And while we do not know the shape of the new 

market, my experience over the years has been that the market 

has never worked as designed. And so another advocacy point for 

the consumer I think is a really critical element to housing finance 

reform. 

Chairman JOHNSON. Ms. Cohen, do you have any follow-up? 

Ms. COHEN. My follow-up would be on the second part of your 

question about whether the standards are adequate. Before the 

Treasury’s Home Affordable Modification Program was launched, 

most loan modifications increased payments and were very hard for 

homeowners to satisfy. And right now, although we have that temVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
16 

porary program, we have absolutely no permanent standards for 

what modifications should look like throughout the market. 

The cure rates are still very low, and it is clear that many people 

who need modifications are not getting them. So there are two 

things that have not yet been done that need to be done: one, modifications need to be assured to be affordable for homeowners; and, 

second, if they are consistent with investor interests, they should 

be required by the servicers because servicers tend to make money 

even if they do not and sometimes because they do no provide those 

modifications to homeowners, especially in a timely fashion. 

It is not going to change the costs in the market significantly because NPV positive loan modifications are good for all of the relevant stakeholders. They can be done in a predictable fashion and 

still provide control for the servicer and the investor over some of 

the details of how the modifications are done. And the CFPB situation is different because their rules are, A, procedural; and, B, in 

the context of a very particular statute, the GSEs have the ability 

to issue guides and to oversee what the loan modification process 

looks like. It is what they do now, and we hope it is what you will 

do in the statute. 

Thank you. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

Mr. Gupta, as we are looking at housing finance reform, one 

thing that we need to accomplish if we are to consider a taxpayer 

guarantee is to ensure that adequate private capital exists in all 

phases of the mortgage process. And this private capital must include a mix of borrower equity, private insurance and investment, 

and adequate Government reserves. 

How important do you consider the borrower equity to be in this 

context? 

Mr. GUPTA. Thank you, Senator Crapo. Borrower equity is very 

important. We obviously are in the business of low-downpayment 

lending so we take into account every single factor. But low-downpayment loans are not the reasons for this downturn, and they 

should not be actually held back as we come out of this downturn 

and actually create the new housing reform. 

We look at the loan, we look at the three factors, which is credit, 

capacity, and collateral. So instead of just looking at a downpayment, we would look across the file and see that the borrower is 

a ripe borrower, not only can they get into the home but they can 

stay in the home long term. 

Now, turning to Corker-Warner, S.1217, we really applaud the 

usage of mortgage insurance, deep mortgage insurance in that bill. 

And when we think about the standard coverage, the way it works 

is if a borrower comes in and puts 5-percent equity down, the mortgage insurance company puts additional coverage, that basically 

creates a remote coverage for the investor. So the investor is almost covered to 65 percent loan-to-value. So the home will actually 

have to really incur a loss of more than 25 percent for the investor 

to take a loss, which actually removes the burden from the taxpayers and could also reduce the amount of bond insurance and 

bond guarantees needed. 

17 

Senator CRAPO. All right. Thank you. You answered the next 

question I was going to ask about the role of mortgage insurance, 

so let me turn to you, Mr. Platt. Some people have argued that 

some more proscriptive servicing rules are necessary because 

servicers have an economic incentive to pursue foreclosures rather 

than loan modifications, even though in some instances the modifications might be economically more advisable. 

Do you think that accurately describes the servicer’s economic incentives? 

Mr. PLATT. Thank you for your question. I do not agree with that 

assessment. I think servicers want to do the right thing. If they 

have the authority to modify and it makes sense to do so, they are 

willing. I do not believe that it is in their economic incentive to 

foreclose. I do not think that they have some nefarious plan to put 

money in their pockets at the expense of the borrower, and so I just 

completely disagree with that. 

Senator CRAPO. We have heard some proposals that would restrict the ability of servicers to collect collateral in the event that 

a borrower defaults. Can you discuss how such restrictions would 

impact the cost of taking out a mortgage for the average borrower? 

Mr. PLATT. Mortgage loans by definition are secured by a mortgage on the house. Unsecured loans have interest rates in the high 

teens; secured loans have interest rates 3 to 5 percent in large 

measure, but not exclusively, because of the value and the availability of the collateral. 

If we reach a position where it is virtually impossible or practically infeasible to realize on the collateral of the home, as horrible 

as that could be for the individuals involved, I think what we essentially have done is invalidate secured loans as a method of offering consumer credit here. I think the natural consequence of that 

will be materially higher interest rates and lesser availability of 

credit. 

Senator CRAPO. All right. Thank you. And one last question, Mr. 

Platt. Since 2010, a number of changes in servicing rules and practices have resulted from the National Mortgage Settlement, the 

interagency consent orders, the FHA Servicing Alignment Initiative, and then most recently the mortgage servicing rules from the 

CFPB. Can you discuss how these developments have impacted 

mortgage servicing practices, and especially—I assume that they 

have improved, but have they improved mortgage servicing practices? 

Mr. PLATT. Well, first, the new regulations will not go into effect 

until January, and those are the first that will have common applicability across the entire industry. I do believe that both the 2011 

consent orders with the Federal banking agencies and 14 banks as 

well as the global foreclosure settlement with the five major banks 

set a template for the way in which servicing will be done prospectively and really form the foundation in part for the CFPB regulations. 

It is a slow process trying to implement those regulations. They 

focus on various things. So, for example, the OCC consent orders 

focus a lot on systems and personnel, whereas the global foreclosure settlements were much more micro and detailed, dictating 

18 

the way in which modifications and default servicing should be 

handled. 

The CFPB decided to take, as has already been mentioned, an 

approach based more on process, that it decided that it should not 

dictate what an owner should be required to do if a borrower were 

to default. But it could dictate that borrowers are treated fairly, 

that they are made aware of the options that may be available to 

them, and that they are given prompt and effective notice and access to personnel. And I think that is going to have a lasting impact on the quality of servicing. 

Senator CRAPO. Thank you. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you very much, Mr. Chairman. 

I was intrigued listening to Mr. Platt’s testimony. Thank you. I 

appreciate the minority witness praising the CFPB for its work. 

Thank you for that. 

Ms. Cohen, you say in your testimony that, ‘‘Getting mortgage 

servicing right must be a core piece of housing finance reform.’’ 

In 2011, Congressman Miller from Senator Hagan’s State and I 

introduced legislation to address many of the problems in mortgage 

servicing. Since then, as Mr. Platt pointed out, several regulators 

and enforcement agencies have taken steps to correct some of the 

systemic deficiencies in the servicing industry, including the CFPB. 

But what we know the CFPB standards do not do is extending the 

Fair Debt Collection Practices Act to mortgage servicers, requiring 

loan modifications when they are beneficial to investors, prohibiting the so-called dual-track problem for mortgages, and the CFPB 

recently released the supervisory report over the summer that 

found systemic problems transferring accounts between servicers 

processing payments and engaging in loss mitigation. 

Your testimony was pretty clear about the problems with mortgage servicing, that those problems are not behind us. Should some 

of these ideas and expanding the powers of the CFPB be part of 

this GSE reform legislation? 

Ms. COHEN. Thank you for the question, Senator Brown. We do 

hope that some additional servicing measures will be part of the 

new legislation. 

On the overall question about why it is important to have servicing in a bill that is about origination of loans, people do not just 

get loans and then go away. They keep those loans for long periods 

of time, and during those times they often face hardship—medical 

problems, divorce, unemployment. They also may have other financial changes in their situation, and so it is essential that once you 

are in a loan, you can maintain that loan, especially when the taxpayer and the Government are picking up the bill if you cannot 

stay in your loan. So if it is good for the Government, good for the 

investors, and good for the homeowner, that needs to be a big part 

of the picture. 

In terms of your bill, there are definitely parts of your bill that 

have not been addressed by the CFPB, and they are key aspects 

of how homeowners will be able to stay in their homes, and with 

only procedural protections it is not clear that that will happen. 

Senator BROWN. Thank you. 

19 

Mr. Thomas, welcome back. Thank you for your insight, which I 

think helped to have an impact 2 or 3 weeks ago when you were 

in front of this Committee, the impact to your members with the 

absolutely unnecessary Government shutdown. 

Last week, I spoke with a number of your members, the Columbus Board of Realtors. About a hundred of them were there just to 

discuss some of these issues. The issue of short sales came up repeatedly. There is still concern about the lack of communications 

with servicers when they attempt to complete short sales. As you 

know, I have worked with Senator Murkowski on legislation to address this issue; Senator Reed from Rhode Island and Senator 

Menendez have also cosponsored. 

The FHFA has taken steps toward implementing our bill, but 

more needs to be done for non-GSE mortgages, even though newly 

issued mortgages are very few private label bills—private label secondary market, but with the old mortgages, and those are ones 

that your members talked about last week. 

Should we include these efforts, some of the language from the 

bill with Senator Murkowski, in the GSE reform package on short 

sales? 

Mr. THOMAS. Well, short sales are obviously problematic. First of 

all, the name is incorrect. It is not ‘‘short.’’ 

Senator BROWN. Long, yes. 

[Laughter.] 

Mr. THOMAS. So that is not a bad idea because it is problematic. 

The short sale process is fraught with difficulty. You know, having 

dealt with them myself, I know that you start down a path; very 

often they switch the person that is dealing with the short sale. 

You then have to deal with if there are secondary financing besides. You have to get those in line. You get an approval from one 

side. Then the other side drags their feet. You finally get the approval from the secondary, and then you have got to go back and 

get reapproval from the first. It is a can of worms. And so trying 

to get any kind of regulation around that, I would applaud that. 

Senator BROWN. So the 60- to 90-day—the regulation, the new 

regulation for GSEs has been helpful—— 

Mr. THOMAS. Absolutely. 

Senator BROWN. ——but the problem is still persisting with older 

mortgages. 

Mr. THOMAS. With the other mortgages it is still persistent, but 

with the GSEs, it has vastly improved it. It is much easier. 

Senator BROWN. But the frustration levels were pretty palpable. 

I mean, to listen to realtors that do not get callbacks, I mean they 

so often cannot even find the right people to talk to let alone see 

buyers and sellers walk away—particularly buyers walk away from 

this process after 2 or 3 or 4 or 5 months. 

Mr. THOMAS. That is correct. That is the problem. You hit the 

nail right on the head. Like I said, you can start off with one point 

of contact, and that can change three or four times during the process. And when that changes, it is almost like starting all over 

again. 

Senator BROWN. Thank you, sir. 

Chairman JOHNSON. Senator Tester. 

20 

Senator TESTER. Well, thank you, Mr. Chairman, and I want to 

thank you for holding this hearing and thank the folks who testified today. And I also want to thank the commitment from you, Mr. 

Chairman, and the Ranking Member to hold multiple hearings 

every week through Thanksgiving. I think that is a real commitment to getting something done and marked up before the end of 

the year and getting into the nitty-gritty specifics of what a housing finance system should look like. And so I very much appreciate 

that. 

I am going to really focus my questions on the role of communitybased institutions. I am going to start with you, Mr. Thomas, if I 

might. You represent an association, have worked with your members, been in the business for 30 years. As you said, you undoubtedly work with lenders of all sizes or have worked with lenders of 

all sizes. Could you discuss the important role that communitybased institutions play in facilitating strong competition in mortgage markets and the impact that competition has on the consumer 

experience both in terms of service and in terms of cost? 

Mr. THOMAS. Well, it absolutely does, and especially in rural 

communities. Rural communities depend on community-based 

banks, and so you have to have that in the mix. 

The problem that we are getting to with such a tight credit box 

and the way we are—the path we re going down is that you are 

only going to be left with large major lenders, and that is a problem because that is going to dictate exactly what the consumer 

pays, how they pay it, and they are going to be very restrictive on 

who they loan to. You know, we have young people coming out of 

college with high student loans. We are going to have a problem 

getting them into the marketplace along with, if you look at the 

HMDA data for the last year, 51 percent of the African American 

borrowers were declined loans last year. So we are getting into a 

position where only the best can get loans, and that is a big problem for all of us in sustaining a mortgage process that, you know, 

promotes home ownership throughout the country. 

Senator TESTER. Well, thank you. This is a question to any of the 

panel members who would like to respond, and I think as you folks 

know, the ability of smaller institutions, community-based institutions, to provide their customers with competitive pricing and product offerings I think relies significantly on their ability to access 

the secondary market, much more than their larger competitors. 

Could any of you who wish highlight the importance of equal access both in fair pricing in the secondary market and facilitating 

vibrant and competitive mortgage markets? Go ahead, Mr. Stein. 

Mr. STEIN. Thank you, Senator Tester. We do agree fully that 

having small lenders with direct access is very important. It is 

hard to create—if there are not lenders to serve a particular area, 

it is hard really to do much about that. But if there are lenders 

willing to make those loans, then it is very important that the secondary market be designed so that they have an outlet. And giving 

them direct access to a cash window so they do not have to go 

through their larger competitors and sell their servicing and potentially have their best customers poached is important. We think 

that that also says having the issuer and guarantor joined together 

for one-stop shopping for smaller lenders would be preferable. And 

21 

having a national mandate on those issuer-guarantors so that no 

part of the country is left behind, so that all eligible lenders would 

be able to join and participate, would also be important. 

Senator TESTER. Anybody else like to comment on that? Yes, sir. 

Mr. GUPTA. Senator Tester, I would add to this perspective. I 

think it is very important for community banks, credit unions, and 

smaller institutions to actually have access to credit across the 

board, and this is one place where private mortgage insurance companies in the current system and in the proposed system would actually facilitate availability of credit for low-downpayment loans in 

those markets. In the absence of an instrument like private mortgage insurance, that credit might not be available because the cost 

of capital market alternatives might not be predictable in the new 

finance system. So this is something where PMI, private mortgage 

insurance, can facilitate low-downpayment loans very actively, and 

that is a proven system. 

Senator TESTER. Yes, OK. Would you agree that the current 

housing finance model really does not provide equal access because 

of the pricing due to volume? 

Mr. GUPTA. There are certain disparities in the current housing 

finance system in terms of pricing. However, if you look at the 

number of lenders who originate high LTV loans or low-downpayment loans, there is broad access to low-downpayment loans across 

the board. 

Senator TESTER. OK. Ms. Cohen, a couple questions for you. I 

want to talk a little bit about the role of community-based institutions and servicing and how critical it is to get these institutions 

to be able to continue to service mortgages and not be forced to relinquish their servicing rights. Can you just speak specifically 

about the quality of servicing when you compare community-based 

institutions to those of the large servicers? Is there a difference? 

And if so, what is that difference? 

Ms. COHEN. We speak to attorneys and other advocates around 

the country daily who represent primarily low-income consumers 

seeking loan modifications, and I personally get calls weekly. And 

in our experience, the largest servicers have the most difficult time 

addressing the needs of people in a timely and comprehensive way. 

Local institutions that have relationships with people in the community do do a better job. Sometimes they face challenges as well. 

You can set up a system in which they are able to have some input 

into how they structure their NPV analysis or other things. However, the basic things about communication still need to be done by 

mail and other methods like that because in general it is not going 

to be a face-to-face thing. But it is in our experience that the biggest problems are the biggest servicers. 

Senator TESTER. Well, thank you for that, and I want to once 

again thank you all for your testimony. I very much appreciate it. 

It is very helpful. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman and Ranking Member 

Crapo. Thanks for holding this hearing today. 

Mr. Stein, I wanted to start with you for a question, and thanks 

for being here, and I really do appreciate the tremendous work that 

22 

the Center for Responsible Lending does, and Self-Help, to serve 

the people in North Carolina and around the country. 

In your testimony, you highlighted that since the financial crisis, 

the average borrower that was denied a GSE loan had a FICO 

score of 734 and was willing to put 19 percent down, and that the 

housing finance system should not push lower-wealth families and 

communities to FHA or high-cost products. 

If the GSEs and FHA are not the right way forward, what is? 

And would you agree that a reformed housing finance system that 

provides an explicit and paid-for Government guarantee protects 

taxpayers with private capital and explicitly supports affordable 

housing? Could that possibly be the right path? If you could expand 

on that. 

Mr. STEIN. Thank you, Senator Hagan. I fully agree with all the 

last three points that you made, that whatever we do we need the 

explicit, fully paid-for Government guarantee, and private capital 

to come first. I fully agree with that, and it is true that the credit 

box for the GSEs I believe is too tight. A number of panelists have 

mentioned it, that there are people who can pay a mortgage, but 

they are having difficulty getting one because of one factor or another. 

I think what that means for the future, as I mentioned before, 

not to be repetitive, but we should not hard-wire individual underwriting criteria in the legislation, because if someone is weak on 

one point but strong on the others, they are actually a better risk 

than someone who is strong on whatever that point is that you 

pull, which could be downpayment, but weaker on the others. So 

that would be the first point. 

I think making sure that the new system is in all markets at all 

times, Mr. Thomas mentioned that. It needs to be a national system, and I think that means it cannot be a fragmented system. If 

you have national entities that are issuer and guarantor together 

and they are required to accept every eligible lender, they have 

minimum qualifications for lenders, but that way no part—western 

North Carolina for example—will not get left behind in that situation. 

Direct access to a cash window as opposed to having to go 

through larger competitors, and we think that having a mutual is 

an effective way to keep prices down as well. 

Senator HAGAN. Thank you. 

Mr. Gupta, I know that over the last 5 years the mortgage insurance industry has paid claims to cover losses, and we have discussed this recently. How much has the industry paid in claims? 

And can you put that in a financial perspective? 

Mr. GUPTA. Absolutely. Thank you, Senator Hagan. 

So as I mentioned earlier, mortgage insurance industry through 

this cycle worked exactly the way it was supposed to work. Our industry is based on a regime where we actually accumulate capital 

in good times and then use that capital in bad times to pay claims. 

So prior to this cycle, we actually accumulated a lot of capital by 

keeping 50 cents of every dollar of premium that we received in a 

reserve. Through this cycle, we served our role and we paid all 

those claims. 

23 

So in financial terms, we paid close to $45 billion of claims out of which $40 billion were paid to Fannie Mae and Freddie Mac—— 

Senator HAGAN. Over what period of time? 

Mr. GUPTA. This is through the cycle, from 2008 through 2013, second quarter. So $40 billion of claims paid against Fannie Mae 

and Freddie Mac, thus taking the burden off from the GSEs, the 

taxpayers, and the Congress. And moving forward, the industry 

continues to serve its purpose in terms of writing new business, because in the last 5 years the industry is close to underwriting and 

insuring half a trillion of mortgages within the last 5 years, since 

2009 to 2013. 

Senator HAGAN. And can you expand a little bit more on the capital position of the industry today? 

Mr. GUPTA. Absolutely. So as I said, the industry has served its 

role and worked exactly the way the industry was intended to 

work. As the industry goes through a bad cycle, the industry uses 

its loss reserves—or its reserves to pay its losses, and that is what 

we did. You would expect a mortgage insurance company to actually deplete its reserves as it is going through the cycle, and as we 

exit the cycle, we start replenishing our reserves. And if you look 

at the cycle, MI industry has raised $9 billion of additional capital 

out of which $2 billion of capital was raised within the last 12 

months. And the industry continues to have extra capacity on the 

sidelines, so if needed, we can raise additional capital from either 

capital markets or from reinsurance markets. 

Senator HAGAN. From this most recent recession, have you 

changed that model in any way? 

Mr. GUPTA. I think there have been learnings from this most recent cycle for all industry players. We are working on a stronger 

capital regime with all the regulators together. We are talking to 

the FHFA, the GSEs; we are talking to the Federal bank regulators; and we are talking to the National Association of Insurance 

Commissioners to work on industry capital standards that will 

make the industry more solvent and stronger coming out of the 

cycle. 

The second learning that we are also trying to incorporate is 

make that capital risk based, so when a market participant takes 

on more risk, then they are basically taking that with the capital 

set-aside for that risk. 

Senator HAGAN. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

As you all know, in 2012 the four biggest banks originated more 

than half of all the mortgages in the country. So I am concerned 

that if we open up the secondary mortgage market to private capital but impose no meaningful requirements to protect smaller 

lenders, then the primary market dominance of the four biggest 

banks may lead to their dominance in the secondary market. And 

in turn, their dominance in the secondary market may help them 

become even more dominant in the primary market and allow them 

to further crowd out the small lenders. 

So I am worried about this. I know many of my colleagues are 

worried about this. So what I wanted to start with is, Mr. Stein, 

do you think that consolidation is a serious risk? And if there is 

24 

more consolidation, what do you think will be its impact on access 

and affordability, particularly with lower-income borrowers and 

rural borrowers? 

Mr. STEIN. Thank you, Senator Warren. I do think it is an issue. 

I think that it is fine for lenders to pick their business strategies 

and decide where they are going to lend to. But there are smaller 

lenders who are making loans in rural communities and underserved communities, and it is important to promote that and provide an outlet for those loans. So I think having a diversified primary market competition is the most important thing to make sure 

of, so I agree with your premise. 

Senator WARREN. You mentioned in your testimony that you and 

your organization support more mutuals as a replacement for 

Fannie and Freddie and that they would be responsible for issuing 

and guaranteeing more mortgages. Could you explain exactly how 

it is that mutual would make sure that there was adequate market 

access? 

Mr. STEIN. Sure. We would turn Fannie Mae and Freddie Mac 

into mutuals that would be owned by the lenders that sell to them, 

just like the Federal Home Loan Bank system is; you have to put 

capital in before you can get capital out. And we think that would 

provide a seat at the table for smaller lenders in decision making 

to make sure their interests are considered. Large lenders are always going to have more influence, but this would provide smaller 

lenders with more influence, and we would require equal pricing. 

We think that that would do two things for access and affordability. 

First, it would align incentives since equity is at risk, so that the 

entity is less likely to go crazy in terms of buying Alt-A mortgages, 

for example, and they can be more careful. But on the other hand, 

lenders want to sell loans and earn origination fees, so there is 

going to be an offsetting focus on the credit box. We think that both 

sides of that would be covered. You need to get a good credit box 

to serve people. 

And, second, we do believe it would keep rates down for consumers. We primarily want competition at the primary market 

level. At the secondary market level, it is going to be an economies 

of scale business. There is not going to be a million of these entities, most likely, and understock ownership, the mission is to create value for shareholders. And so to the extent it is possible, there 

is going to be some oligopolistic behavior. With a mutual, members 

are not just trying to make money from the equity that they have 

invested. They are trying to provide a low-cost funding mechanism 

that earns them origination fees. So there is a countervailing pressure to keep prices down, and mutuals do tend to require a lower 

return on equity, which would translate to lower prices for borrowers. 

Senator WARREN. Good. Thank you very much. I think it is critically important, as we think about the housing finance structure, 

that we focus on the access question and make certain that there 

is access all across the country and across different income levels 

for potential home borrowers. Thank you. 

I want to ask about another question, too, and that is, Fannie 

and Freddie’s charters require them to promote access to mortgage 

25 

credit throughout the Nation, including central cities, rural areas, 

and underserved areas. The broad duty to serve the entire market 

plays a critical role in making sure mortgages are affordable and 

available in all parts of the country. And it creates secondary market demand for loans that otherwise might not get written, even 

though people receiving these loans are perfectly creditworthy. 

So, Ms. Cohen, if Fannie and Freddie are replaced by secondary 

market entities that have no such duty to serve the entire market, 

what kind of impact do you think that will have on mortgage access and affordability in low-income communities and rural communities? 

Ms. COHEN. Thank you for the question, Senator Warren. The 

reason these hearings are happening now is because the market is 

quite restricted. It is mostly only a market for people who have 

wealth and who have the highest credit scores, even though there 

are many other people who are creditworthy. And so if we set up 

a system that does not provide a duty to serve, we are basically 

going to have a market like the one we have today where very 

many people who need housing cannot get the kind of housing that 

will build wealth. We have got many communities where wealth 

was gutted by the foreclosure crisis, and it is urgent that we get 

those people back into—— 

Senator WARREN. Thank you. And I know I am out of time, but 

if I could just ask Mr. Diaz to comment very quickly, particularly 

on the impact on Hispanic borrowers, if you could. 

Mr. DIAZ. Yes, I think access to credit has always been a problem 

for low-income and minority communities. Without CRA, for instance, a lot of the early lending in the 1990s and 2000s would 

have been very difficult to orchestrate because we had to prove 

that low-wealth, low-income borrowers could be good credit risks. 

If you take that away, what is going to be the incentive for lenders to go that extra mile? It is completely uncertain to me. I worry 

we are going to turn back versus trying to strengthen a market 

that works. The market collapsed for reasons having nothing to do 

with low-wealth, low-income borrowers, but these borrowers again 

are going to bear the brunt of access to credit. There is no constituency really that is going to protect these consumers’ interests. 

Senator WARREN. Well, thank you very much. Given the importance of home ownership and wealth building, I think this is just 

a critical feature. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Well, thank you, Mr. Chairman. Thank you 

all for your testimony. 

Mr. Thomas, some commentators have argued that relatively low 

reported interest rates on jumbo mortgage loans provide evidence 

that families who would be pushed out of a conforming loan market 

and into the jumbo market by a reduction in the conforming loan 

limits would not face materially higher costs. But as I read it, most 

reports show that the current jumbo market is only serving a very 

narrow and exclusive subset of borrowers who have very high incomes, lots of assets, very large downpayments, and very low debt. 

So wouldn’t it be a mistake to view these loans as representative 

of what most families in the conventional market would face if they 

26 

were pushed into the jumbo market by a reduction in the loan limits? 

Mr. THOMAS. Thank you, Senator, and you are absolutely correct. 

Those that are getting those jumbo loans are putting quite a bit 

down and have very high FICO scores, and so it is not representative of what would happen if we lowered the loan limits and then 

placed those people that were now left out of the conforming loan 

limits into the jumbo market. They could not compete in that market under the circumstances that we have right now. So you are 

absolutely correct. Higher downpayments, much higher, 30 percent 

down, and you are normally going to have very high FICO scores, 

too. 

Senator MENENDEZ. So, for the record, Mr. Chairman, I am not 

talking about households with bad credit who cannot afford a loan 

in the conforming market. I am talking about regular families with 

normal credit who can afford to responsibly pay their mortgage 

under the current system, but who might not meet the extreme bar 

to qualify for special treatment in the jumbo market. And I think 

that needs to be corrected. 

Let me ask you another question, Mr. Thomas, using your expertise in the field. There have been some proposals made to reduce 

the maximum size of loans that Fannie and Freddie Mac or whatever replaces them in a new system can guarantee. Couldn’t a reduction in these conforming loan limits disproportionately harm 

homeowners and homebuyers in high-cost areas? 

Mr. THOMAS. Oh, absolutely, and it is not only high-cost areas, 

Senator. The lowering of the upper limit happens to the high-cost 

areas as well as the normal. You know, what is being proposed 

right now would be to lower the high cost to 600 and the normal 

down to 400. Well, that affects everybody across the country, not 

just the high-cost areas, and so it would have a bad effect on home 

ownership. 

We have calculated that it would remove all of the intended—or 

what we calculate as being the run-up of additional buyers next 

year, it would wipe that amount out, so we would be back to the 

same levels we are at today. 

Senator MENENDEZ. So in addition to hurting new homebuyers, 

reducing the conforming loan limits also hurts existing homeowners by lowering demand and, therefore, reducing the value of 

their home. 

Mr. THOMAS. Absolutely. It has that effect as well. 

Senator MENENDEZ. Let me ask—and I am not picking on you, 

but you have expertise here that I am looking for. FHA Acting Director DeMarco last week announced his intention to unilaterally 

reduce the maximum size of mortgages guaranteed by Fannie and 

Freddie. And Senator Isakson, myself, and a group of bipartisan 

legislators, including Senator Schumer and Senator Warren, urged 

him not to do this, and I believe that your organization has sent 

him a similar letter, as well as others. And it seems to me a little 

bizarre for the FHFA to be making such a unilateral change while 

Congress is working on housing reform legislation. It is a topic that 

I believe clearly should be left to Congress to determine, particularly when our housing market and our economy still are recovering from the financial crisis and the recession that followed. 

27 

Would you agree that it is a bad policy for FHFA to reduce unilaterally the loan limits? And with data showing that the larger 

loans under the current loan limits tend to perform better than 

other loans when you control for other factors, wouldn’t reducing 

the loan limits to exclude these loans seem to be in direct contravention to FHFA’s mandate as a conservator to improve the financial conditions of the GSEs? 

Mr. THOMAS. I would agree, and I commend all of you for writing 

that letter. I also met with the Director and gave him our thoughts 

on it and why we felt it was a bad idea. And I might remind you 

that in 2011 he testified that he did not think he had the power 

to do it. 

Senator MENENDEZ. That is something to pursue, Mr. Chairman. 

Thank you very much. 

Chairman JOHNSON. Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman and Ranking 

Member. I think these hearings are just so valuable for us to gather information, because one thing that I have learned coming here 

is that you do not often get a chance—I mean, we will not do this 

and then come back in a couple years. That is not how it works. 

And so whatever we do has to be done correctly. 

I obviously very much appreciate the ongoing comments, how we 

can improve what we have in front of us. Obviously there is some 

advocacy here for continuing the current structure. I think that 

there is probably a broader consensus that we need to look at a 

new structure and how that would work and making sure that consumers are protected and that access to the market for all borrowers is available—not guaranteed but available. And so housing, 

20 percent of what we do, but we know that it is more than that. 

Home ownership is the bedrock of really our political philosophy, 

also the bedrock of wealth creation for many, many middle-class 

families. And so this has got to be done right. 

And, Mr. Thomas, thank you for your excellent testimony a couple weeks ago on the debt limit and what that would mean for borrowers. I think it had a huge impact. I think we were able to 

change public opinion about what that meant, and I think your 

contributions were greatly appreciated. I share Senator Brown’s 

comments in that direction. 

But I want to throw you a little curve ball because we were talking about a lot of discrete and unique groups, but in my State, one 

of the most acute housing problems we have, other than rural 

housing, is Native American housing. It presents some real challenges for lenders because of how property is organized. It presents 

real challenges in terms of the legal structure just based on whether normal legal rules of foreclosure would apply. And I want to ask 

all of you, any of you, if you have thought about the unique challenges for Native American borrowers to improve the quality of 

housing and access to first-time homeowners or access to singlefamily housing on the reservations. 

[No response.] 

Senator HEITKAMP. There we go. That answers my question. I 

make that point because we spend a lot of time talking about access, and we spend a lot of time talking about unique issues, and 

I will tell you, for me—and I know for the Chairman—we have 

28 

seen it in our communities. It is a growth area. We desperately 

need to be thinking about how we protect consumers, how we get 

access to those markets. Yes, Ms. Cohen. 

Ms. COHEN. Thank you for the question. I would point out that 

Native Americans are part of a community of low-wealth borrowers 

who face a lot of hardship in paying their bills on a regular basis, 

and the legal services network around the country serves Native 

American communities in certain States and sees the problems 

with the initial issuance of a loan and also the problems that people face once they get a loan. And part of creating a housing finance system going forward that works for all borrowers, middleclass and working-class low-wealth borrowers, is to create that 

flexibility not only in the underwriting but also in how servicing is 

done to make sure that people do get a solution and they get a solution that works for them. People who have very few dollars in 

their pocket do not really fit with the traditional DTI ratios. 

Senator HEITKAMP. And I would agree with you in terms of offreservation. But we have a unique situation as it relates to on-reservation housing and on-reservation borrowing. And so just put 

that thought into each one of your heads as you are thinking about 

how we can, in fact, meet some kind of standard there. 

My last question is to Mr. Gupta. Mortgage insurance obviously 

is key for many families, and especially first-time homeowners who 

are trying to buy a home. We see with student lending a lot of folks 

who were not qualified, cannot save a downpayment. The only access they are going to have is through some kind of mortgage insurance. We want to make sure we get this piece right in this bill. 

Are you satisfied that the mechanics that have been outlined in 

this bill will basically help maintain a robust mortgage insurance 

market? 

Mr. GUPTA. Thank you, Senator Heitkamp. We completely agree 

with the outline of what has been recommended in the bill in terms 

of mortgage insurance and usage of mortgage insurance for deep 

coverage. In addition to that, what we would add is there is no reason that mortgage insurance can also not participate in the bond 

guarantor role. At the end of the day, mortgage insurance companies are credit managers for mortgages only. By law, we are required to only participate in the mortgage insurance business. We 

do not insure auto loans. We do not insure credit card loans. So 

this is a collateral class that we know how to manage. And it would 

be a good opportunity and a sustainable opportunity in terms of 

borrower economics, in terms of sustainable housing, to actually 

have mortgage insurance companies not only provide the deep coverage which actually sits in front of the taxpayers, but also provide 

bond insurance coverage right behind it. 

In addition to that, I would say we continue to have dialogs with 

the FHFA, with the GSEs, with the Federal bank regulators, as 

well as State regulators on strengthening the industry and making 

sure that the industry continues to be more solvent and stronger 

coming out of this cycle. 

Senator HEITKAMP. Thank you. 

Chairman JOHNSON. Thank you again to all of our witnesses for 

being here today. I also want to thank Senator Crapo and all my 

colleagues for their ongoing commitment to this important topic. 

29 

This hearing is adjourned. 

[Whereupon, at 11:32 a.m., the hearing was adjourned.] 

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

30 

PREPARED STATEMENT OF ERIC STEIN 

SENIOR VICE PRESIDENT, CENTER FOR RESPONSIBLE LENDING

OCTOBER 29, 2013 

Chairman Johnson, Ranking Member Crapo, and Members of the Committee, 

thank you for inviting me to testify today about housing finance reform and its impact on borrowers. 

I am Senior Vice President at the Center for Responsible Lending (CRL), which 

is a nonprofit, nonpartisan research and policy organization dedicated to protecting 

home ownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, a nonprofit community development lender 

that creates ownership and economic opportunity, for which I also serve as Senior 

Vice President. Self-Help has provided $6 billion in financing to 70,000 homebuyers, 

small businesses and nonprofits and serves more than 80,000 families through 30 

retail credit union branches in North Carolina, California, and Chicago. 

Housing finance reform has obvious consequences for consumers. It will impact 

which families are able to access mainstream mortgage credit and how expensive 

that credit will be. We agree with the emerging consensus, as reflected in S.1217, 

the Housing Finance Reform and Taxpayer Protection Act of 2013, that taxpayer 

risk must be insulated by more private capital, that an explicit and paid for Government guarantee is necessary, that additional funds should be created to support affordable housing, and that mortgage-backed securities (MBS) provided through bond 

guarantors must support the ‘‘to-be-announced’’ (TBA). We also support current Federal Housing Finance Agency (FHFA) efforts to develop a common securitization 

platform, undertake experiments to test the market’s willingness to purchase credit 

risk from the GSEs, wind down their investment portfolio, and hopefully move toward a common security. 

In my testimony today, we provide two sets of recommendations. First, we recommend ways to structure a reformed housing finance system and how different approaches, including S.1217, would impact borrowers. Second, we recommend against 

hard-wiring underwriting criteria, such as a downpayment mandate, into reform 

legislation, because this would needlessly restrict access to credit. Instead, a reformed housing finance system should allow the regulator, bond guarantors and 

lenders to use traditional underwriting practices, including compensating factors, for 

lower-wealth borrowers. 

The mortgage market in the United States is a $10 trillion market, and housing 

finance reform must be undertaken with care to ensure that it does not inadvertently harm the housing market and economy. If legislation fixes what was broken 

and builds on what has and is working, we can create reform that will support economic growth, provide loans to creditworthy families in good times as well as bad, 

and reduce Government’s role in the mortgage market. 

The Infrastructure of a Reformed Housing Finance System Will Have a Significant Impact on Borrowers 

Our recommendations on how to structure a reformed housing finance system include requiring mutual ownership of entities that both issue and guarantee conforming securities. Additionally, we recommend retaining cash window access for 

smaller lenders, maintaining a national market by requiring secondary market entities to serve all eligible lenders, and prohibiting structured securities from accessing 

a Government guarantee. Lastly, we recommend allowing secondary market entities 

to have a portfolio for distressed-then-modified loans and to provide a Government 

backstop for this portfolio so these modifications can continue in times of economic 

stress. 

Secondary Market Entities Should Have Mutual Ownership Structure: In order to 

properly align incentives, we recommend requiring mutual ownership of secondary 

market entities instead of stock ownership. Our proposal does not call for a specific 

number of secondary market entities, but, like the 12 Federal Home Loan Banks, 

we believe that they should all be mutually owned. We also support requiring each 

of these mutually owned entities to do two things: issue securities and guarantee 

those same securities. 

One of the key reasons that Fannie Mae and Freddie Mac ended up in conservatorship is because their incentives were skewed toward short-term gains. 

Shareholders looked to steady or increasing quarterly earnings reports. Therefore, 

in the face of declining market share because of growing numbers of private-label 

securities packaging subprime and Alt-A loans, Fannie Mae and Freddie Mac management decided to weaken credit standards to compete for the Alt-A business. This 

decision proved disastrous. While these Alt-A loans were roughly 10 percent of 

31 

1See, Federal National Mortgage Association, SEC Form 10-Q, June 30, 2008, at 6; Federal 

Home Loan Mortgage Corporation, SEC Form 10-Q, June 30, 2008, at 71. 2Patricia Mosser, Joseph Tracy, and Joshua Wright, ‘‘The Capital Structure and Governance 

of a Mortgage Securitization Utility’’, Federal Reserve Bank of New York Staff Report no. 644, 

at 18, 32–38 (October 2013). 

Fannie Mae’s outstanding loans in 2008, they were responsible for 50 percent of its 

credit losses. 1

By not having private shareholders, mutual ownership of secondary market entities would curb incentives for short-term and volatile equity returns over long-term 

sustainability. Under a mutual model, lenders wanting to sell conforming loans into 

the secondary market would be required to make a capital investment in one or 

more of these mutually owned companies. This pooled capital would then stand in 

a first-loss position ahead of any Government reinsurance. (Borrower equity, private 

mortgage insurance for high loan-to-value mortgages, private investment in jumbo 

loans, and MBS investors taking on the interest rate risk of mortgages are the four 

additional primary ways that private capital would stand in front of Government 

reinsurance.) The combination of this equity investment and the absence of private 

shareholders would reduce the chasing-market-share problem that Fannie Mae and 

Freddie Mac exhibited pre-2008. Similarly, management would not be compensated 

based on quarterly stock prices, which would also result in fewer incentives for excessive risk taking. 

Requiring mutual ownership of secondary market entities would benefit consumers. Not only would the secondary market system be more stable, but it would 

also limit secondary market entities from driving up prices to lenders and borrowers. Securitizing and guaranteeing loans is inherently a scale business. Since the 

mission of shareholder owned entities is to increase shareholder value, they would 

undertake oligopolistic behavior to increase prices to the extent possible. For a mutual, on the other hand, lender-members have an interest in getting the best possible price and have influence to make this happen. Because the mutual would provide a low-cost funding source for lender-members to use to fund originations and 

earn origination income, return on equity invested would not be the only return 

from joining the mutual, as it would with shareholders. A recent paper highlights 

how the incentives created by mutually owned entities result in lower rates for borrowers. 2

Smaller Lenders Should Continue To Have Direct Access to the Secondary Markets 

Through a Cash Window: Housing finance reform should ensure that smaller and 

regional lenders—which often provide credit in rural and underserved communities 

that are overlooked by larger lenders—remain competitive in the secondary mortgage market. The current system provides smaller lenders with direct access to sell 

their loans to Fannie Mae and Freddie Mac, and a reformed system should retain 

this approach. The GSEs provide a ‘‘cash window’’ that gives smaller lenders an upfront cash payment—instead of a small interest in a security—in exchange for whole 

loans. This cash window access allows smaller lenders to avoid going through an 

aggregator, who could be a larger competitor. It also provides smaller lenders with 

the option of retaining servicing rights or selling those rights. Keeping servicing 

rights helps these lenders hold onto their best customers, rather than passing on 

customer contact information to larger competitors serving as aggregators. 

Reform proposals that would split the system into separate issuer and guarantor 

companies, such as S.1217, threaten to jeopardize this direct secondary market access for smaller lenders. Among other concerns, splitting the market in this way 

would allow larger lenders to create affiliated issuers. And, if they decided to, these 

lenders could also pool loans from other lenders. These affiliated issuer-companies 

could make business decisions about the kind of mortgage products to aggregate and 

pool, how to price loan purchases from other lenders, and whether to require a 

transfer of servicing rights. The end result would be that larger institutions could 

control their own destiny, but smaller lenders would be at the mercy of competitors. 

In the event that Congress decides to bifurcate the system into separate issuer 

and bond guarantor companies, then it should prohibit lenders from being affiliated 

with or purchasing stock in either, except through mutual ownership, in order to 

protect small lenders. In addition, these separate entities should be prohibited from 

offering volume discounts to avoid discriminatory pricing in favor of larger sellers. 

Secondary Market Entities Should Be Required To Serve a National Market: A reformed housing finance system should continue to fulfill a national role where it 

serves all markets at all times, including rural and underserved areas. One of the 

relatively unnoticed success stories of the current housing finance system is the creation of a stable national housing market that can weather regional or even national 

economic cycles. Although we believe they could have done more to prevent overly 

32 

constrained credit in recent years, the fact is that Fannie Mae and Freddie Mac 

have kept the housing market going during the worst economic crisis since the 

Great Depression. 

There is a risk that housing finance reform will jeopardize this national housing 

market, splintering the system so that anywhere between one entity to some 500 

companies might act as issuers and another 5 to 10 as bond guarantors. Whatever 

the exact number, these companies could align their business models with specific 

lenders serving parts of the country—for example, only the Southeast or California. 

This would lead to a market with niche and regional players but no entity mandated 

to serve the entire market or filling the gaps. The regulator would be powerless to 

compel any individual company to purchase loans from lenders in certain States or 

communities. 

We have two recommendations to maintain a national market. First, we recommend having secondary market entities perform both issuer and guarantor functions. This will reduce market complexity, assist small lenders in accessing the secondary market, and make it easier for the regulator to assess whether the secondary 

market is not leaving parts of the country behind. Second, we recommend requiring 

secondary market entities to serve all eligible lenders across the country. This way, 

the housing finance system would be unable to ignore lenders serving rural areas 

or parts of the country facing a regional downturn. It is entirely appropriate for individual lenders to have business strategies that focus on specific regions or communities. But, reform legislation should not assume that these individual business 

judgments are an adequate substitute for a system that supports a national market. 

Structured Securities Should Be Prohibited From Accessing Government Reinsurance: We have two recommendations about the kind of securities that should be eligible for Government reinsurance. First, housing finance reform should preserve the 

pass-through securities currently used in the ‘‘to-be-announced’’ (TBA) market, 

which is also called the forward market. Investors commit to these transactions before the security is pooled together, meaning the individual loans in the pool are 

not ‘‘announced’’ until 1 to 3 months later. This is a unique way for a capital markets system to function, and it produces a number of benefits, including widespread 

liquidity, reduced borrowing costs for borrowers, countercyclical access to credit, and 

broad availability of the 30-year fixed-rate mortgage. 

Second, we also urge this Committee to prevent structured securities from obtaining a Government guarantee. These securities should be able to access a common 

securitization platform, but they do not provide sufficient benefits to warrant a Government guarantee. Structured securities were the kind used in private-label securities during the subprime boom years, and they involve slicing securities into subordinate tranches (taking losses first) and senior tranches (taking losses last). This requires examining the individual loans packaged into each pool in order to finalize 

the tranches and find appropriate investors, which makes it incompatible with the 

in-advance approach used in the TBA system. 

This incompatibility with the TBA system means that structured securities are 

unable to deliver the same benefits that come from pass-through securities. For example, structured securities would increase mortgage costs for all borrowers because 

of lowered liquidity, and borrowers at the edge of the credit box would have additional costs on top of this. Borrowers in certain geographies would get penalized further still. Additionally, structured securities would reduce access to the 30-year 

fixed-rate mortgage, because subordinate investors would be more inclined to invest 

in securities with shorter-term and/or adjustable-rate mortgages. And, structured 

securities would cripple the regulator’s ability to fulfill supervision and oversight 

duties, because it would turn the regulator into a huge ratings agency to ensure 

that every senior position in every structured security in the country had sufficient 

and real subordinate coverage. (The new regulator should have safety and soundness authorities similar to FHFA’s in order to supervise bond guarantor/issuers.) 

Portfolio Capacity and Government Backing in Times of Economic Stress Are 

Needed for Successful Loan Modifications: One part of housing finance reform that 

seems at risk of being overlooked is the infrastructure needed to facilitate successful 

loan modifications. In order to prevent unnecessary and costly foreclosures that 

would put Government reinsurance at risk, housing finance reform should preserve 

the ability of Fannie Mae and Freddie Mac to modify distressed loans. This involves 

a portfolio capacity to hold distressed-then-modified loans and a Government liquidity backstop to support this portfolio in times of economic stress when modifications 

33 

3While new entities should not be permitted to hold investment portfolios, they also need the 

ability to hold loans for a maximum of 6 months to aggregate cash purchases from lenders. 

Without a Government backstop, this function will also disappear in times of financial stress. 4 ‘‘OCC Mortgage Metrics Report, Disclosure of National Bank and Federal Savings Association Mortgage Loan Data, Second Quarter 2013’’, at 35 (September 2013). 5See, Kenneth Harney, ‘‘Mortgage lenders set higher standards for the average borrower’’, 

The Washington Post (September 28, 2012). 6See, Governor Elizabeth A. Duke, ‘‘Comments on Housing and Mortgage Markets at the 

Mortgage Bankers Association’’, at 2 (March 8, 2013). 

are most needed. 3 In addition, we support servicing standards that require a standardized and publicly available net-present-value test for modifications. 

Comparing the loan modification process for Ginnie Mae and GSE securities highlights the misaligned incentives that occur without a portfolio. Both Ginnie Mae and 

the GSEs use pass-through securities, and distressed loans must be purchased out 

of the portfolio in order to make investors whole. While the GSEs are able to pull 

distressed loans onto their portfolio and, as a result, do affordable modifications, 

servicers are required to purchase distressed loans out of Ginnie Mae pools. Because 

servicers have no economic incentive to hold modified loans on their balance sheet, 

they complete shallow modifications that can be resecuritized along with new loans. 

However, this results in higher redefault rates than more affordable GSE modifications. For loans modified in 2011, 19 percent of Fannie Mae loans had 60-day redefault rates 24 months after the modification compared with 49 percent of Government-guaranteed loans. 4

Housing Finance Reform Should Allow the Use of Compensating Factors in 

Underwriting 

GSE reform legislation should not prohibit lenders from using compensating factors to make more informed decisions about credit risk. In the wake of the financial 

crisis and while under conservatorship, the GSEs have become overly conservative— 

only the most pristine borrowers can get a conventional mortgage. The average borrower denied a GSE loan had a FICO score of 734 and was willing to put 19 percent 

down. 5 Purchase originations are at their lowest levels since the early 1990s. 6

There is a risk of enshrining or exacerbating this narrow market as part of housing 

finance reform, which would result in pushing young and lower-wealth borrowers 

into a separate and more expensive system. 

However, a dual market approach has never served the country well. For example, a dual market existed during the recent mortgage boom, when half of all African American families were steered into high-cost, abusive subprime mortgages, 

while most white borrowers received prime loans. Going forward, lower-wealth families and communities should not be pushed into FHA as a housing reform solution. 

Rather, families able to succeed in a mainstream mortgage should be able to access 

the mainstream market. 

A reformed housing finance system must serve the full universe of creditworthy 

borrowers that can afford a responsible loan. This will not only ensure that lowerwealth families have the opportunity to build wealth through home ownership, but 

it will also support the overall housing market. To this end, Congress should not 

hard-wire downpayment mandates, as is done with a 5 percent downpayment mandate in S.1217. 

Downpayment Mandates and Other Hard-Wired Underwriting Criteria Would 

Needlessly Restrict Access to Credit: Including downpayment mandates in housing 

finance reform legislation would unnecessarily restrict access to credit for lowerwealth families. As an initial matter, these mandates overlook the fact that borrowers must also save for closing costs—roughly 3 percent of the loan amount—on 

top of any downpayment required. And, the mandates would increase the number 

of years that borrowers would need to save for a downpayment. Using 2011 figures 

that include closing costs, it would take the typical family 17 years to save for a 

10 percent downpayment and 11 years to save for a 5 percent downpayment. 

Persistent wealth disparities for African American and Latino households would 

make downpayment mandates particularly harmful for these communities. In addition to taking years longer to save for a downpayment, the wealth gap makes it less 

likely that African American and Latino families could get financial help from family members. This combination could leave many individuals—who could be successful homeowners—with restricted access to credit. 

Similar obstacles exist with younger families. Downpayment burdens and other 

obstacles are preventing these families from joining the mortgage market, and their 

participation is necessary for a thriving economy. According to former-Governor 

Duke of the Federal Reserve Board, ‘‘Staff analysis comparing first-time 

homebuying in recent years with historical levels underscores the contraction in 

34 

7See, Governor Elizabeth A. Duke, Comments on Housing and Mortgage Markets at the Mortgage Bankers Association at 2 (March 8, 2013). 8See, ‘‘The State of the Nation’s Housing, Joint Center for Housing Studies’’, at 3 (2013) (‘‘Proposed limits on low-downpayment mortgages would thus pose a substantial obstacle for many 

of tomorrow’s potential homebuyers.’’). 9 Roberto G. Quercia, Lei Ding, Carolina Reid, ‘‘Balancing Risk and Access: Underwriting 

Standards for Qualified Residential Mortgages’’, Center for Responsible Lending and UNC Center for Community Capital (Revised March 5, 2012). 10See, Laurie Goodman and Taz George, ‘‘Fannie Mae Reduces Its Max LTV to 95: Does the 

Data Support the Move?’’, The Urban Institute, MetroTrends Blog (September 24, 2013). 11See, Allison Freeman and Janneke Ratcliffe, ‘‘Setting the Record Straight on Affordable 

Home Ownership’’ at 48 (May 2012); see also, Christopher Herbert, Daniel McCue, and Rocio 

Sanchez-Moyano, ‘‘Is Home Ownership Still an Effective Means of Building Wealth for Low-Income and Minority Households? (Was it Ever?)’’, Joint Center for Housing Studies, Harvard University, at 48 (September 2013) (Overall, owning a home is consistently found to be associated 

with increases of roughly $9,000–$10,000 in net wealth for each year a home is owned.). 

credit supply. From late 2009 to late 2011, the fraction of individuals under 40 years 

of age getting a mortgage for the first time was about half of what it was in the 

early 2000s.’’ 7

On top of harming lower wealth and younger borrowers, imposing downpayment 

mandates would also be harmful for the housing market overall. According to the 

Joint Center for Housing Studies at Harvard University, households of color will account for 70 percent of net household growth through 2023. Considering that many 

of these and younger households have limited wealth, downpayment mandates could 

significantly reduce the number of future first-time homebuyers. 8 This reduced pool 

of buyers could lead to lower home prices, more difficulty selling an existing home, 

and even some existing borrowers defaulting on their mortgage. This would also 

harm older homeowners needing to sell their houses and use their home equity to 

pay for retirement, move to a managed-care facility or to a smaller house. 

Not only is there a huge cost to putting these restrictions into law, but there is 

also a limited benefit in terms of reducing default rates. When looking at loans that 

already meet the basic requirements of the Dodd-Frank Act and product requirements for a Qualified Mortgage, a UNC Center for Community Capital and CRL 

study shows that these requirements cut the overall default rate by almost half 

compared with loans that did not. Layering on a downpayment requirement on top 

of these protections produces a marginal benefit. 9 This makes sense because risky 

product features and poor lending practices caused the crisis by pushing borrowers 

into default, and the Dodd-Frank Act reforms address these abuses such as high 

fees, interest-only payments, prepayment penalties, yield-spread premiums paid to 

mortgage brokers, lack of escrows for taxes and insurance for higher priced mortgage loans, teaser rates that spiked to unaffordable levels, and outlawing no-doc 

loans. 

Given the parameters set by the Dodd-Frank Act’s mortgage reforms, Congress 

should not go further and hard-wire specific underwriting criteria into legislation, 

especially since borrowers in well-underwritten loans can succeed in mortgages with 

lower downpayment amounts. Laurie Goodman of the Urban Institute points out 

that a hard 5 percent cutoff is not the best way to address default risk, since compensating underwriting factors are more important. Analyzing Fannie Mae data, 

she found that: 

The default rate for 95 to 97 percent LTV mortgages is only slightly higher 

than for 90 to 95 LTV mortgages, and the default rate for high FICO loans 

with 95 to 97 LTV ratios is lower than the default rate for low FICO loans 

with 90 to 95 percent LTV ratios. . . . For mortgages with an LTV ratio 

above 80 percent, credit scores are a better predictor of default rates than 

LTV ratios. 10

In addition, for the last 17 years, CRL’s affiliate Self-Help has run a secondary 

market home loan program, which has purchased 52,000 mortgages worth $4.7 billion originated by 35 lenders in 48 States. Borrowers in 68 percent of these mortgages made less than a 5 percent downpayment and 32 percent put less than 3 percent down and the median income of these borrowers was less than $31,000. In addition, 38 percent of borrowers received help with the downpayment and closing 

costs from another party, and use of assistance was not correlated with higher default when controlling for other factors. The vast majority of these loans did not 

have private mortgage insurance. These borrowers saw a 27 percent median 

annualized return on equity, which increased $18,000 even through the crisis. 11

This high loan-to-value program resulted in Self-Help’s cumulative loss rate of approximately 3 percent, which includes performance during the recent foreclosure criVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00038 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
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sis and would have been substantially lower if the loans had had private mortgage 

insurance. 

Similarly, legislation should not contain credit score or debt-to-income cutoffs either. Private companies’ proprietary scoring models should not be enshrined into 

legislation; we learned that lesson with the ratings agencies. Further, each loan is 

a combination of numerous factors and if one is factor is enshrined by legislation, 

that will reduce the pool of potential borrowers with strong compensating factors 

who could succeed as homeowners. Underwriting is multivariate and complex. It is 

not susceptible to legislation and should be left to the regulator, bond guarantors, 

and lenders through traditional compensating factors. 

Conclusion 

Thank you for the opportunity to testify today. Attached as an appendix to my 

testimony is a recent CRL Working Paper on GSE reform that goes into these recommendations in greater detail. I look forward to answering your questions. 

36 


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1 According to the National Association of Realtor’s Home Affordability Index, home affordability for both first time and repeat home buyers remains well above historical averages. 2 According to FHFA’s Quarterly Performance Report of the Housing GSEs for the Second 

Quarter of 2013, Fannie Mae and Freddie Mac average LTVs are 68 percent, and average FICO 

scores are above 750 (excluding HARP loans). Available at http://www.fhfa.gov/webfiles/ 

25515/2Q2013QuarterlyPerformanceReport091913.pdf. 

PREPARED STATEMENT OF ROHIT GUPTA 

PRESIDENT, GENWORTH FINANCIAL, U.S. MORTGAGE INSURANCE

OCTOBER 29, 2013 

Chairman Johnson and Ranking Member Crapo, my name is Rohit Gupta, President of Genworth Financial’s U.S. Mortgage Insurance business in Raleigh, North 

Carolina. Genworth is one of seven private mortgage insurers active in the U.S. 

today. We operate in all 50 States, and are part of Genworth Financial, a global 

insurance company with established mortgage insurance platforms in the U.S., Canada, Australia, and Europe. I am pleased to be here today to discuss the role of private mortgage insurance in ensuring consumer access to mortgage credit as part of 

housing finance reform. Private mortgage insurers’ sole business is insuring lower 

downpayment mortgages. We make sustainable home ownership possible for many 

first time homebuyers, homebuyers with moderate incomes and members of underserved communities. 

Mortgage insurers enable home-ready borrowers to safely buy homes without having to take as long as a decade to save for a high downpayment. As others testifying 

before you today will affirm, even a 10-percent downpayment requirement would 

have the effect of making home ownership impossible for many creditworthy, responsible borrowers. That is not to say that the amount of a downpayment has no 

effect on the way a loan is expected to perform. When lower downpayment loans 

default, the risk of loss to the lender or investor is greater. However, that is precisely where mortgage insurance comes into play. Our role is to mitigate that loss, 

and to make home ownership attainable on terms that are affordable over the life 

of the loan. A majority of our business is insuring 30-year, fixed-rate mortgages— 

mortgages that are central to the functioning of a stable housing finance system (including a strong TBA market). We do this with a product that is understood and 

widely used in the market, available across cycles and affordably priced. We have 

decades of experience—and data—focused on understanding and managing mortgage risk. Our independent credit underwriting criteria helps to bring greater risk 

discipline to the mortgage market via the MIs’ ‘‘second set of eyes.’’ If a loan is not 

sustainable, the capital of a mortgage insurance firm is at risk because it must pay 

a claim—that is a strong incentive to maintain risk and price discipline. 

Congress and regulators have taken important steps toward ensuring that residential mortgages will be safe and sustainable. Dodd Frank’s QM and QRM provisions were designed to make sure that one of the key lessons of the housing crisis— 

risky mortgages make for bad housing policy—would be embedded in our housing 

finance system going forward. The final QM rule published by the CFPB represents 

a significant milestone, and we, along with other members of the Coalition for Sensible Housing Policy, are pleased that the rule discourages risky products and encourages sound credit underwriting and access to credit. When properly underwritten and with appropriate loan level credit enhancement, QMs (and likely, 

QRMs, assuming that the final rule aligns QRM with QM) are the types of mortgages that our system should always encourage. 

In this testimony, I will discuss (i) the current affordability and availability of 

credit for single family homes, (ii) the impact housing finance proposals will have 

on affordability and the cost of mortgage finance for consumers, including the role 

that private mortgage insurance can play in ensuring affordability and access for 

consumers, and (iii) whether underwriting criteria should be established in statute. 

In addition, I will provide background on the role of MI and the fundamentals of 

the mortgage insurance business model, including an update on the state of the industry following the housing crisis. 

Mortgage Credit Today 

Today, as a result of historically low home prices and interest rates, we are still 

at record levels of affordability in the U.S. 1 And yet, many borrowers who are 

‘‘home ready’’ are finding it hard to get a mortgage. 2 For others, the costs are prohibitively high or their only affordable option is an FHA loan—which puts even 

more housing risk on the Government’s balance sheet. Mortgage credit remains 

overly tight, and certain investor fees are adding significant costs for borrowers. 

Some of this is because lenders remain concerned about buy back demands from inVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00080 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
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3Fannie/Freddie first time homebuyer data based on data published by Fannie Mae and 

Freddie Mac for GSE MBS issued between July 2012 and September 2013. MI data based on 

MICA industry data for 2012. 

vestors. Many mortgage market participants are struggling to understand and implement an unprecedented amount of new regulation. In addition, GSE loan level 

fees remain very high, and guarantee fees are being increased as part of their Conservator’s strategy to deemphasize their role in housing finance. These fees add to 

borrower costs. Another factor is GSE credit policy, such as the decision to stop purchasing loans with LTVs above 95 percent, even when backed by private MI. 

For housing to continue to recover, we must do more to incent responsible mortgage financing. Genworth and others in our industry understand this and we are 

doing our part. Our credit policy guidelines are prudent but not prohibitive. Our underwriting takes into consideration a range of compensating factors to ensure that 

responsible borrowers can get affordable, sustainable mortgages. This is exactly the 

kind of underwriting that should be part of our housing finance system going forward. But the reality is that if investors refuse to purchase certain loans, then those 

loans will not get made, even if an MI is willing to insure them. 

Lower Downpayment Lending and The Role of MI 

The biggest hurdle for most home-ready consumers considering buying a home is 

whether they will be able to get a mortgage they can afford without having to amass 

a prohibitively large downpayment. For decades, our housing finance system has ensured that consumers have that access in large part by relying on private mortgage 

insurance to mitigate credit loss by assuming a first loss position in the event of 

a default. MI does this in a cost effective, consistent way that works seamlessly for 

originators, investors, and servicers. Even during the worst of the housing crisis, 

Genworth and other MIs continued to insure new mortgages in all 50 States. 

Because mortgage insurers are in the first loss position, our interests are aligned 

with those of borrowers, lenders and mortgage investors. Our business model relies 

on insuring mortgages that are well underwritten (which is why we rely on our own 

credit underwriting guidelines). We assume first risk of loss, so our business revolves around our ability to understand and manage credit risk. Our goal is to make 

sure that borrowers get mortgages that are affordable on day one and throughout 

their years of home ownership, including 30 year fixed rate mortgages that are central to our housing finance system. 

Having access to lower downpayment mortgages is especially important for first 

time homebuyers, moderate income homebuyers and members of underserved communities. For example, half of first time homebuyers with loans purchased by 

Fannie Mae and Freddie Mac made downpayments of less than 20 percent, and over 

90 percent of those first time homebuyers made downpayments of less than 30 percent. Almost half of borrowers who received loans with private MI in 2012 had lowto-moderate incomes. 3

As seen in the chart below, the data make it very clear that the amount of a 

downpayment does matter when it comes to loan performance. Loans with higher 

combined loan to value ratios (CLTVs) experience higher default rates than lower 

CLTV loans. But the data also make it very clear that there is a responsible way 

to offer high CLTV loans. The key is to make sure that they are prudently underwritten and have the benefit of credit loss mitigation (usually MI) in the event of 

default. This kind of lending is not new or exotic—in fact, it is how many of us in 

this room today first became homeowners. Over the past 15 years, nearly one quarter of the mortgage market has relied on loans with downpayments of less than 20 

percent—representing over $8 trillion of mortgages that performed well across good 

and bad cycles. Lower downpayment loans are especially important to ensuring that 

creditworthy first time homebuyers and underserved borrowers have access to home 

ownership. 

78 

4The GSEs charge significant Loan Level Price Adjustments in those limited instances when 

only shallow charter level mortgage insurance is obtained. 

Housing Finance Reform 

Historically, detailed underwriting criteria have been established through regulation, investor guidelines and market practice, and generally have not been set in 

statute. The unprecedented housing crisis has caused some policy makers to question this approach. Genworth believes that today, regulators have a much clearer 

legislative mandate that will help them guard against a repeat of the bad products 

and lax standards that led to the housing crisis. In addition, certain broad underwriting criteria that define the ‘‘outer edges’’ of loans with a Government backstop 

could be written into statute (such as limiting the term of a mortgage, requiring a 

minimal downpayment so that all borrowers have some ‘‘skin in the game’’, or including a limitation on very high debt to income ratios (DTIs)). We caution however, 

that an overly prescriptive approach could have the effect of unnecessarily limiting 

credit for responsible borrowers. Also, locking too many underwriting requirements 

into statute could make it cumbersome to make appropriate adjustments to underwriting over time; as a result, a clear grant of regulatory discretion to make such 

adjustments should be included with any hard-wired statutory requirements. Many 

proposals for housing finance reform contemplate requiring a ‘‘QM’’ or ‘‘QRM’’ standard for loans subject to Government support. Genworth generally agrees with this 

approach, with the caveat that it will be important to have credit enhancement such 

as private MI assuming first loss on lower downpayment loans in order to ensure 

that the likelihood of calling upon any Government support is truly remote. 

In the current system, the GSE charters require credit enhancement for loans 

with a downpayment of less than 20 percent, and private mortgage insurance is the 

means most often used to meet this requirement. To satisfy the charter, the MI coverage must be sufficient to reduce remaining exposure to a maximum of 80 percent. 

This minimum coverage option is known as ‘‘charter coverage’’ because it is set at 

levels that satisfy the legal charter requirement. 

However, while charter coverage is legally sufficient, it does not afford any additional economic protection against loss from default, and is not commonly used in 

the market today. Instead, the GSEs and their regulator require greater coverage 

(generally referred to as Standard Coverage) in amounts that vary based on LTVs, 

but that are always greater than minimal coverage mandated in the GSE charters. 4

Standard coverage provides significant protection even in the event of housing market downturns. During the housing crisis, home prices in many markets declined 

more than 30 percent from the market peak. If there had only been ‘‘charter coverage’’ on most loans, there would have been far less private capital in a first loss 


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5MIs are required to provision for (i) case basis reserves for loans that are currently delinquent and reported as such by the lender or loan servicer and (ii) incurred but not reported 

loss reserves (for loans that are currently delinquent but not yet reported as such). 

position, and far less economic protection for Federal taxpayers (and Fannie and 

Freddie). 

MI at standard coverage is the prevailing form of credit enhancement in the market today. Standard coverage MI is relied upon by large and small lenders, by national banks, community banks, and by credit unions. And it enables consumers to 

get affordable lower downpayment mortgages. 

Genworth strongly supports S.1217’s (the Housing Reform and Taxpayer Protection Act of 2013) inclusion of standard coverage MI. Private mortgage insurance at 

standard coverage levels can and should be an important part of a reformed housing 

finance system because it will ensure that there is meaningful private capital ahead 

of any Government exposure. At standard coverage levels, an investor’s loss exposure for a 90 percent LTV loan goes down to 67 percent. That means that, if that 

loan defaults, an investor is better off with that 90 percent LTV MI loan than it 

would be on an 80 percent LTV loan without MI. Private MI promotes market stability, especially when compared to other forms of credit enhancement that can be 

subject to volatile pricing and rapid market retreats. And private MI has minimal 

impact on consumer economics. 

As this Committee continues to work on housing finance reform, we urge you to 

consider the role the USMI industry can play not only through standard coverage 

loan level MI, but also by providing credit enhancement at the MBS level, whether 

in connection with S.1217’s bond guarantor provisions or other similar approaches. 

Sound housing finance policy should encourage reliance on well-capitalized entities 

on a level playing field. Borrowers, investors, lenders, and taxpayers will all benefit 

when the right kinds of credit protection play a meaningful role in the new system. 

MI Regulation 

Private mortgage insurers are subject to extensive State insurance regulation specifically tailored to the nature of the risk insured—long-duration (our insurance remains in place until loans amortize down to specified levels), long-cycle (housing 

market performance generally performs in 10-year cycles) mortgage credit risk. 

State laws impose loan-level capital and reserve requirements that are held long 

term. In addition, MI providers are subject to strict limits on investments and limitations on dividend payments, and to provisions designed to address potential operational risk. Many States have adopted a version of the National Association of Insurance Commissioners (NAIC) Model Mortgage Guaranty Insurance Act (the 

‘‘Model Act’’), which, in addition to imposing strong financial controls, requires that 

mortgage insurers only engage in the business of mortgage insurance, and imposes 

limitations on risk concentrations. The NAIC is in the process of updating the Model 

Act, including reconsideration of existing capital and reserving requirements. 

State Departments of Insurance have significant power of oversight. They perform 

regular, detailed examinations of mortgage insurers, and monitor and enforce insurers’ compliance with financial standards. In addition, FHFA and the GSEs undertake regular assessments to determine which mortgage insurers are eligible to provide MI for the mortgages the GSEs purchase or guarantee with LTVs above 80 percent. Accordingly, they provide additional oversight of a mortgage insurer’s operational risk capacity, credit underwriting standards and claims paying ability. Other 

federally regulated financial institutions also evaluate the financial condition and 

operational expertise of insurers that provide MI for their loans. 

There are two primary regulatory capital requirements for mortgage insurers. 

First, a mortgage insurer must maintain sufficient capital such that its risk-to-capital ratio (ratio of risk-in-force to statutory capital (which consists of its policyholders’ surplus and contingency reserve)) cannot exceed 25:1 or it may not write 

any new business absent the consent of the applicable State insurance regulator. 

Second, in addition to the normal provision for losses, 5 mortgage insurers are required under insurance statutory accounting principles to post contingency reserves, 

which are funded with 50 percent of net earned premiums over a period of 10 years. 

The contingency reserve is an additional countercyclical reserve established for the 

protection of policyholders against the effect of adverse economic cycles. 

The risk to capital ratio is one of many tools State insurance regulators use to 

evaluate MI providers. The comprehensive nature of State regulatory oversight enables regulators to retain the flexibility to exercise appropriate discretion regarding 

the ongoing operations of insurers subject to their jurisdiction. In recent years, several States have used that discretion to issue revocable, limited duration waivers 

of the 25:1 cap on the risk to capital ratio. Those decisions were made based on exVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00083 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
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tensive actuarial analysis conducted under the supervision of the State of domicile 

to assess our ongoing solvency. States still retain the ability to deem an MI provider 

to be in ‘‘hazardous financial condition.’’ A finding of hazardous financial condition 

could lead to the revocation of an MI provider’s license to insure new business. State 

Departments of Insurance, including North Carolina, Genworth’s State of domicile, 

actively monitor MI providers’ operations and financial condition. 

These countercyclical capital and reserve requirements mean that the MI industry 

holds significant capital against each loan insured throughout the time a loan is 

outstanding, and should have the resources necessary to pay claims. In this regard, 

MI is significantly different from other types of investment and credit enhancement. 

One of the lessons learned from the housing crisis is that housing markets are not 

well served by capital markets instruments and other credit enhancement structures that encourage short-term investment without adequate regulatory oversight 

and capital and reserve requirements. MI represents material amounts of private 

capital and reserves in a first-loss position that are committed for the long term. 

The MI Model and Experience Across Cycles 

Mortgage insurance premium income, capital and reserve requirements combine 

to provide countercyclical protections against housing downturns. As illustrated in 

the graph below, during times of market stress (for example, the ‘‘Oil Patch’’ in the 

mid 1980s), mortgage insurers experience high levels of losses and their risk to capital ratios rise accordingly. As markets stabilize, higher earned premiums and lower 

claims paid typically enable the industry to replenish its capital base. This countercyclical model was severely tested by 2008’s unprecedented crisis, and, as expected, 

risk to capital ratios rose in the face of unprecedented losses. In recent years, housing markets have begun to recover, loan performance has improved, and revisions 

to mortgage insurance guidelines and pricing have taken effect. Those factors, together with recent capital raises, have resulted in improved risk to capital ratios. 

Today, the mortgage insurance industry is well positioned, with the capital to pay 

claims and to write new business. 

Private mortgage insurers (unlike the FHA) do not insure against 100 percent of 

loss. Typically, mortgage insurance provides first-loss coverage of approximately 25– 

30 percent of the unpaid loan balance (plus certain additional expenses) of a defaulted loan. By assuming a first-loss position, private mortgage insurance dramatically offsets losses arising from a borrower default. By design, however, the product 

does not completely eliminate the risk of loss. Private mortgage insurance is designed to be ‘‘skin in the game’’ that offers real economic benefit to lenders and investors while still incenting them to carefully underwrite mortgage loans and holding them accountable for fraud, misrepresentation, and lack of compliance in the 

origination process. 

When a loan goes to foreclosure, the private mortgage insurer is responsible for 

paying a claim. As a result, mortgage insurers have a clear financial incentive to 


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6 Based on Mortgage Insurance Companies of America (MICA) member company data. 

work to keep borrowers in their homes. This directly aligns the interest of the mortgage insurer with the best interest of the borrower, and the MI industry has developed expertise in loss mitigation that is evidenced by its decades-long track record 

of actively working to keep borrowers in their homes. From 2008 through the second 

quarter of 2013, the industry facilitated loan workouts with approximately 660,000 

borrowers on mortgage loans with an aggregate principal balance of approximately 

$130 billion. 6 Genworth has invested significantly in resources, tools, and technology focused on keeping borrowers in their homes. We have workout specialists 

who work directly with borrowers and servicers to facilitate the best outcomes for 

homeowners at risk of foreclosure, and use programs that include borrower outreach 

as well as programs targeted to borrowers at risk of imminent default and borrowers who have received loan modifications and are at risk of redefault. From 2008 

through the second quarter of 2013, Genworth has helped over 130,000 homeowners 

avoid foreclosure, facilitating nearly 105,000 home retention workouts and nearly 

30,000 short sales and deeds-in-lieu of foreclosure. 

Mortgage Insurers Pay Claims Pursuant to the Terms of Their Master Policies 

Mortgage insurers paid approximately $40 billion in claims from 2007 to 2012, 

$35 billion of which was paid on loans purchased or guaranteed by Fannie Mae and 

Freddie Mac. In the first half of 2013, MIs paid an additional $4 billion in claims 

to the GSEs. From 2007 through the second quarter of 2013, Genworth paid approximately $5.4 billion in claims on nearly 120,000 defaulted mortgage loans. 

It has always been Genworth’s practice to pay claims in full when a loan was 

properly originated, underwritten, and serviced. We rescind coverage (and refund 

premiums paid) on loans that do not qualify for insurance; typically rescissions 

occur following review of a loan when it becomes seriously delinquent. The extraordinary circumstances that led to the collapse of the housing market, and the unprecedented levels of mortgage market fraud and misrepresentation in the years leading 

up to that collapse, increased the incidences of rescissions. Genworth, along with 

other MIs, has taken significant steps in recent years to clarify our claims paying 

practices, providing greater clarity and transparency for lenders and investors. 

MI Claims Paying Policy Going Forward 

Notwithstanding the extraordinary experience of the housing crisis, the MI industry has attracted over $8.9 billion in new capital since 2008, including capital raised 

by two new entrants, both of which have filed registration statements with the SEC 

for initial public offerings. The recent capital inflows to the industry are indicative 

of investor confidence in the business model and its regulatory construct. 

Conclusion 

Genworth commends the hard work of the Senate Banking Committee to tackle 

one of the most complex and emotionally charged issues that legislators have faced 

in many years. We believe that keeping the interests of home buying consumers and 

taxpayers in the forefront of deliberations will help us all arrive at a plan for a sustainable and fair housing finance system. We applaud the 10 Senators on this Committee who have crafted and supported S.1217. The provisions regarding private MI 

thoughtfully incorporate a prevailing market standard that is well known and easy 

to execute for consumers, lenders and investors. Importantly, this approach does not 

introduce any new costs for consumers, while at the same time it helps distance future losses from the Federal Government backstop. We at Genworth and other 

USMI companies appreciate the work of this Committee, and look forward to continuing to engage with you as your important work continues. 

82 

PREPARED STATEMENT OF GARY THOMAS 

2013 PRESIDENT, NATIONAL ASSOCIATION OF REALTORS

OCTOBER 29, 2013 


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1The nine major topics included in the final rule are: 1. Periodic Billing Statements; 2. Interest Rate ARM Adjustments; 3. Payment Crediting and Payoff; 4. Force-placed Insurance; 5. 

Error Resolution and Requests for Information; 6. General Servicing Policies and Procedures; 

7. Early Intervention Continuity of Contact; 8. Loss Mitigation. [sic] 

PREPARED STATEMENT OF LAURENCE E. PLATT 

PARTNER, K&L GATES LLP 

OCTOBER 29, 2013 

Good morning Chairman Johnson, Ranking Member Crapo, and Members of the 

Banking Committee. 

My name is Larry Platt. I am a consumer finance lawyer at the global law firm, 

K&L Gates, LLP. I have been involved in housing finance issues for over 30 years. 

Thank you for allowing me to participate in the consideration of this important subject. I am appearing today in my personal capacity and not on behalf of either my 

law firm or any client of my law firm. All views expressed today are my own. 

I have been asked to discuss whether the Housing Finance Reform and Taxpayer 

Protection Act of 2013 (the ‘‘Proposed Act’’) should impose stringent loss mitigation 

standards on servicers and owners of securitized residential mortgage loans for the 

benefit of consumers. Mortgage loan servicers are independent contractors, which 

for a fee paid by the mortgage investor pursuant to a servicing agreement, collect 

and remit mortgage loan payments and enforce the mortgage loan documents. 

I understand that the Proposed Act presently addresses loan servicing in two 

ways. First, a newly created Federal Mortgage Insurance Company (FMIC) would 

establish servicing standards for the residential mortgage loans within its purview. 

Second, a uniform securitization agreement with uniform servicing standards would 

be created for use by the FMIC and potentially by investors in private 

securitizations. Neither provision presently imposes detailed loss mitigation requirements for the benefit of borrowers in default. I believe the newly enacted loan servicing regulations of the Consumer Financial Protection Bureau are sufficient for this 

purpose and no new law is required. 

Over the last 4 years, the Federal Government has imposed increased obligations 

on residential mortgage loan servicers to avoid home foreclosures. For example, in 

March 2009, the U.S. Department of Treasury implemented President Obama’s 

Home Affordable Modification Program requiring eligible borrowers to be provided 

loan modifications for loans originated prior to the financial crisis. The Federal 

banking agencies imposed loss mitigation obligations on the 14 banks that signed 

servicing-related consent orders in 2011. Fannie Mae and Freddie Mac expanded the 

loss mitigation requirements in their new default servicing guidelines in 2011. The 

April 2012 global foreclosure settlement between and among the five largest banks, 

the Department of Justice, 49 State attorneys general and various other branches 

of Federal and State Government incorporated detailed default loan servicing standards, including loss mitigation requirements. 

Drawing on all of these initiatives as well as provisions in the Dodd Frank Act, 

the Consumer Financial Protection Bureau (the ‘‘CFPB’’) earlier this year promulgated final loan servicing regulations (the ‘‘CFPB Regulations’’) that take effect in 

January 2014. Of course, there is a myriad of new State laws also requiring 

servicers to offer loss mitigation to delinquent borrowers, including California’s recent Homeowner’s Bill of Rights, which codifies into State law various provisions 

from the global foreclosure settlement’s national servicing standards. The result is 

that defaulting borrowers already have or will have significant Government protections to seek to avoid foreclosure under Federal law. 

The CFPB Regulations are complex and comprehensive. They materially expand 

the national standards for the residential mortgage servicing industry by amending 

Regulation X under the Real Estate Settlement Procedures Act (RESPA) and Regulation Z under the Truth in Lending Act (TILA) on nine major topics. 1 Enforcement 

by the CFPB and in some cases by individual consumers in private rights of action 

ensures that the new provisions have sharp teeth. 

The CFPB Regulations directly address common complaints of consumers and regulators that led to claims of wrongful or unfair foreclosures. Imposing procedural requirements for responding to written information requests or complaints of errors 

is one example. The rule requires servicers to comply with the error resolution procedures for 10 types of errors: 

• Failing to accept a conforming payment; 

• Failing to apply an accepted payment; 

105 

• Failing to credit a payment to a borrower’s account in violation of TILA requirement; 

• Failing to pay taxes and insurance in a timely manner as required by RESPA 

or failing to refund an escrow account balance; 

• Imposing a fee or charge that the servicers lacks a reasonable basis to impose 

upon a borrower (i.e., not bona fide fees); 

• Failing to provide an accurate payoff balance; 

• Failing to provide accurate information regarding loss mitigation and foreclosure (in accordance with other provisions of the rule); 

• Failing to transfer accurately and timely information to transferee servicer; 

• Making the first notice or filing for foreclosure in violation of other provisions 

of the RESPA rule; 

• Moving for foreclosure judgment or sale in violation of other provisions of the 

RESPA rule; or 

• Any other error relating to the servicing of a consumer’s mortgage loan. 

Establishing or making good-faith efforts to establish live contact with borrowers 

by the 36th day of their delinquency and promptly informing such borrowers, where 

appropriate, that loss mitigation options may be available is a second requirement 

of residential mortgage servicers. This early intervention requirement also mandates that a servicer provide a borrower a written notice with information about loss 

mitigation options by the 45th day of a borrower’s delinquency. 

A third requirement under the CFPB Regulations is continuity of contact with delinquent borrowers, commonly referred to as ‘‘single point of contact.’’ This requires 

residential mortgage servicers to maintain reasonable policies and procedures to 

provide delinquent borrowers with access to designated personnel to assist them 

with loss mitigation options where applicable. 

Residential mortgage servicers also are required to follow certain procedural requirements regarding their evaluation of borrowers for loss mitigation under the 

CFPB Regulations. ‘‘Dual tracking’’ (where a servicer is simultaneously evaluating 

a consumer for loan modifications or other alternatives at the same time that it prepares to foreclose on the property) is prohibited. Loss mitigation requirements include: 

• If a borrower submits an application for a loss mitigation option, acknowledging 

the receipt of the application in writing within 5 days and informing the borrower whether the application is complete and, if not, what information is needed to complete the application. 

• Exercising reasonable diligence in obtaining documents and information to complete the application. 

• For a complete loss mitigation application received more than 37 days before 

a foreclosure sale, evaluating the borrower within 30 days for all loss mitigation 

options for which the borrower may be eligible in accordance with the investor’s 

eligibility rules. 

• This includes both options that enable the borrower to retain the home (such 

as a loan modification) and nonretention options (such as a short sale). 

• Servicers are free to follow ‘‘waterfalls’’ established by an investor to determine eligibility for particular loss mitigation options. 

• Providing the borrower with a written decision, including an explanation of the 

reasons for denying the borrower for any loan modification option offered by an 

owner with any inputs used to make a net present value calculation to the extent such inputs were the basis for the denial. 

• Authorizing a borrower to appeal a denial of a loan modification program so 

long as the borrower’s complete loss mitigation application is received 90 days 

or more before a scheduled foreclosure sale. 

• Prohibiting a servicer from making the first required foreclosure notice or filing 

until a mortgage loan account is more than 120 days delinquent. 

• Even if a borrower is more than 120 days delinquent, prohibiting a servicer 

from starting the foreclosure process if a borrower submits a complete application for a loss mitigation option before a servicer has made the first required 

foreclosure notice or filing unless: 

• The servicer informs the borrower that the borrower is not eligible for any 

loss mitigation option (and any appeal has been exhausted); 

• A borrower rejects all loss mitigation offers; or 

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• A borrower fails to comply with the terms of a loss mitigation option. 

• If a borrower submits a complete application for a loss mitigation option after 

the foreclosure process has commenced but more than 37 days before a foreclosure sale, prohibiting a servicer from moving for a foreclosure judgment or 

order of sale, or conduct a foreclosure sale, until one of the same three conditions has been satisfied. 

The CFPB went to great pains to focus on the procedures that need to be followed 

rather than on the result in any one case. The CFPB Regulations do not require 

servicers to offer specific forms of loss mitigation at all or on any specific terms. 

During the notice and comment period for the CFPB Regulations, many consumer 

advocacy groups asked the CFPB to (i) mandate specific home-saving strategies, 

with affordable loan modifications ranked first and with an order of priority among 

types of modifications; (ii) require all servicers to offer affordable, net present valuepositive loan modifications to qualified homeowners facing hardship; and (iii) establish rules for determining what constitutes an affordable modification by establishing a maximum or target debt-to-income ratio. The CFPB declined to be this prescriptive. The preamble to the final CFPB Regulations explains why. 

In deciding to reject prescribed modifications, the CFPB focused on the nature of 

a mortgage loan, the legitimate needs of mortgage investors, the difficulty in developing a ‘‘one size fits all’’ approach, and the potential impact on credit availability. 

For example, the CFPB acknowledged that, as with any secured lending, those who 

take the credit risk on mortgage loans do so in part in reliance on their security 

interest in the collateral. Indeed, what separates lower-interest residential mortgage 

loans from higher-interest unsecured consumer loans is that a mortgage loan is secured by the borrower’s home. While it may be in the interest of the holder to explore loss mitigation alternatives, foreclosure needs to remain a viable option. 

Different creditors, investors, and guarantors have differing perspectives on how 

best to achieve loss mitigation, explained the CFPB, based in part on their own individual circumstances and structures and in part on their market judgments and assessments. The CFPB did not believe it presently could develop rules that are sufficiently calibrated to protect the interests of all parties involved in the loss mitigation process. Expressing its concern that an attempt to do so may have unintended 

negative consequences for consumers and the broader market, the CFPB concluded 

that mandating specific loss mitigation programs or outcomes might adversely affect 

the housing market and the ability of consumers to access affordable credit. 

The CFPB emphasized that overreaching loss mitigation requirements could have 

a material adverse impact on the availability and cost of credit. It speculated that 

creditors who were otherwise prepared to assume the credit risk on mortgages 

might be unwilling to do so or might charge a higher price (interest rate) because 

they would no longer be able to establish their own criteria for determining when 

to offer a loss mitigation option in the event of a borrower’s default. Purchasers of 

whole loans and mortgage-backed securities might similarly reduce their purchases 

or prices, posited the CFPB, which could result in creditors charging higher interest 

rates to maintain the same yield. The burden of complying with prescribed criteria 

for evaluating required loss mitigation outcomes could substantially increase the 

cost of servicing. Under these circumstances, the CFPB declined to prescribe specific 

loss mitigation criteria and instead required servicers to maintain policies and procedures reasonably designed to identify all available loss mitigation options of their 

principals and properly consider delinquent borrowers for all such options. 

Other Federal agencies have shared in this public policy reluctance to obligate 

specific loss mitigation outcomes. On August 28, 2013, a consortium of U.S. banking, 

housing, and securities regulators (the ‘‘Agencies’’) reproposed the joint regulations 

to implement the risk retention rules under Section 15G of the Securities Exchange 

Act of 1934, including the exemption for ‘‘Qualified Residential Mortgages.’’ When 

first proposed in 2011, the Agencies conditioned the ‘‘Qualified Residential Mortgage’’ exemption on the inclusion of loss mitigation requirements in the underlying 

mortgage loan documents. Specifically, the proposed provision called for the ‘‘Qualified Residential Mortgage’’ loan documents to require the servicer to take loss mitigation actions, such as engaging in loan modifications, in the event the estimated 

net present value of such action exceeds the estimated net present value of recovery 

through foreclosure, without regard to whether the particular loss mitigation action 

benefits the interests of a particular class of investors in a securitization. Several 

commentators objected to this proposal, which effectively would have given a defaulting borrower a contract right to a permanent principal reduction regardless of 

the willingness of the loan owner to do so at the time of the default. In the reproposal the Agencies abandoned this requirement. 

107 

1Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has used its expertise 

in consumer law and energy policy to work for consumer justice and economic security for lowincome and other disadvantaged people, including older adults, in the United States. NCLC’s 

expertise includes policy analysis and advocacy; consumer law and energy publications; litigation; expert witness services, and training and advice for advocates. NCLC works with nonprofit 

and legal services organizations, private attorneys, policymakers, and Federal and State government and courts across the Nation to stop exploitive practices, help financially stressed families 

build and retain wealth, and advance economic fairness. NCLC publishes a series of consumer 

law treatises including Mortgage Lending, Truth in Lending and Foreclosures. NCLC attorneys 

provide assistance on a daily basis to the attorneys and housing counselors working with distressed homeowners across the country. This testimony is based on the field experience of these 

advocates as well as our knowledge and expertise in mortgage origination and servicing. 2The National Association of Consumer Advocates (NACA) is a nonprofit corporation whose 

members are private and public sector attorneys, legal services attorneys, law professors, and 

law students, whose primary focus involves the protection and representation of consumers. 

NACA’s mission is to promote justice for all consumers. 

Other than requiring servicers to offer specific forms of loss mitigation on specific 

terms, it is not clear what more the Proposed Act would or could do in the area 

of loss mitigation. The CFPB and the Agencies explicitly rejected this approach in 

their 2013 rulemaking activities. Issued pursuant to notice and comment rulemaking, the robust requirements of the CFPB Regulations go live in a little over 

2 months. While I may not agree with all of the provisions in the CFPB Regulations, 

they were fully vetted and reflect substantial input of virtually all interested stakeholders. Given the potential for the undesired consequences identified by the CFPB 

if its regulations were to mandate loss mitigation outcomes on mortgage loan investors, I believe the Proposed Act does not need to impose additional loss mitigation 

requirements for the benefit of consumers. 

Thank you again for the opportunity to appear today. 

PREPARED STATEMENT OF ALYS COHEN 

STAFF ATTORNEY, NATIONAL CONSUMER LAW CENTER

OCTOBER 29, 2013 

Chairman Johnson, Ranking Member Crapo, and Members of the Committee, 

thank you for the opportunity to testify today on the key components of housing finance reform for consumers. 

I am a staff attorney at the National Consumer Law Center (NCLC). 1 In my work 

at NCLC, I provide training and technical assistance to attorneys across the country 

representing homeowners who are facing foreclosure, and I also lead the Center’s 

Washington mortgage policy work. Prior to my work at the National Consumer Law 

Center, I focused on mortgage lending issues as an attorney at the Federal Trade 

Commission’s consumer protection bureau, where I was involved in investigations 

and litigation regarding lending abuses, and where I drafted the Commission’s first 

testimony regarding predatory mortgage lending in the late 1990s. For over 15 years 

I have worked to address the harms caused by predatory mortgage lending and have 

seen firsthand the harms caused in communities nationwide. I testify here today on 

behalf of the National Consumer Law Center’s low income clients and the National 

Association of Consumer Advocates. 2 On a daily basis, NCLC provides legal and 

technical assistance on consumer law issues to legal services, Government and private attorneys representing low-income consumers across the country. 

Congress and the Nation face an important crossroads in the life of the housing 

finance system. At a moment when many communities are still devastated from 

high foreclosure rates and when access to credit remains too scarce, the contours 

of a new housing finance system will determine the future of home ownership—who 

gets it, who doesn’t, and how fairly it is distributed. Home ownership and housing 

finance contribute to family stability, stronger neighborhoods, and economic growth. 

The new system must incorporate mechanisms to assure access and affordability for 

a wide array of homeowners, including those hardest hit in the recent foreclosure 

crisis and currently marginalized in today’s lending market—communities of color, 

low-income homeowners, and residents of rural areas. This sustainability must 

apply to the entire life cycle of a loan, including loss mitigation available during periods of hardship. 

My testimony today will provide a brief overview of the state of the housing market and the essential components of a new housing system’s approach to lending to 

consumers while focusing primarily on one key aspect of housing refinance reform, 

mortgage servicing. 

108 

3 Julia Gordon, Testimony Before the Senate Committee on Banking, Housing, and Urban Affairs (Sept. 12, 2013), citing U.S. Department of Housing and Urban Development and U.S. Department of Treasury, ‘‘The Obama Administration’s Efforts To Stabilize the Housing Market 

and Help American Homeowners’’, (2013), available at http://portal.hud.gov/hudportal/documents/huddoc?id=hudjulynat2013scd.pdf. 4 Julia Gordon, Testimony Before the Senate Committee on Banking, Housing, and Urban Affairs (Sept. 12, 2013), citing Susan Berfield, ‘‘A Phoenix Housing Boom Forms, in Hint of U.S. 

Recovery’’, Bloomberg Businessweek, February 21, 2013, available at http:// 

www.businessweek.com/articles/2013-02-21/a-phoenix-housing-boom-forms-in-hint-of-u-dot-sdot-recovery. 5 R. Kochhar, et al., ‘‘Wealth Gaps Rise to Record Highs Between Whites, Blacks, Hispanics’’ 

(July 26, 2011), available at http://www.pewsocialtrends.org/2011/07/26/wealth-gaps-rise-torecord-highs-between-whites-blacks-hispanics/. 6Mortgage Bankers Association Delinquency Survey, Second Quarter, 2013. 

7Mortgage Bankers Association Delinquency Survey, First Quarter, 2012, at 12. 

8See, e.g., Staff of the Jt. Econ. Comm., 110th Cong., 1st Sess., ‘‘The Subprime Lending Crisis: 

The Economic Impact on Wealth, Property Values, and Tax Reveues, and How We Got Here’’ 

(2007). 9See, National Consumer Law Center, Foreclosure Prevention Counseling 7 (2d ed. 2009) 

(showing rates of subprime and prime foreclosures dating back to 1998). 10OCC Mortgage Metrics Report for the Second Quarter of 2013, at 36. 11These calculations are based on data from the MHA Performance Reports, the NDS Data, 

and the OCC Mortgage Metrics Report. According to the NDS Survey, 2,393,322 homeowners 

were 90+ days delinquent during the second quarter of 2013. We adjusted that data to reflect 

the NDS coverage of the market at 80 percent. Adding the numbers of new HAMP trial and 

permanent modifications for April–June 2013, we get a total of 50,000 and 46,077, respectively, 

or 1 percent and 1 percent of the delinquencies. The OCC Mortgage Metrics data reports an 

additional 90,341 proprietary modifications during the same period or 3 percent. 12 Roberto G. Quercia, et al., Ctr. for Cmty. ‘‘Capital, Loan Modifications and Redefault Risk: 

An Examination of Short-Term Impact’’ (2009), available at http://www.ccc.unc.edu/documents/LMlMarch3l%202009lfinal.pdf; ‘‘Modified Current Loans Are Three Times as Likely 

To Default as Unmodified Current Loans’’, Moody’s ResiLandscape (Moody’s Investors Service), 

Feb. 1, 2011, at 10; Laurie S. Goodman, et al., Pew Ctr. on the States, ‘‘Modification Effectiveness: The Private Label Experience and Their Public Policy Implications’’ 6-7 (2012), available 

at http://www.pewstates.org/uploadedFiles/PCS—Assets/2012/Goodmanletlall%20ModificationlEffectiveness.pdf. 

Current Trends Highlight the Need for Better Access and Affordability 

Throughout the Loan Cycle 

While the housing market has improved somewhat from the height of the crisis, 

more needs to be done to restore a functioning and fair housing market. Approximately two-thirds of mortgage originations in the second quarter of 2013 were for 

refinancing, not home purchases. 3 The percentage of home purchases by investors 

has increased substantially. While investor purchases may support housing prices 

and perhaps even inflate them, 4 it is not a structure that builds a sound and broadly accessible housing finance system. Moreover, the wealth gap between whites and 

both Latinos and African Americans is larger than it has been since data on the 

size of the gap were first collected, nearly 30 years ago. 5 The wealth of an entire 

generation has been eliminated. As these communities begin to rebuild their wealth, 

home ownership is likely to continue to be a cornerstone of their wealth acquisition. 

While much of the discussion has moved to restoration of the lending market, 

many homeowners are still facing foreclosure. In the second quarter of 2013, 2.13 

percent of prime loans and 11.01 percent of subprime loans were in foreclosure. 6

These rates are still higher than the percent of loans in foreclosure at the onset of 

the economic collapse in 2008, 7 a year into the subprime mortgage meltdown, 8 and 

are much higher than any we have seen since before the turn of the current century. 9

Moreover, most homeowners with access to loss mitigation still do not get the best 

modifications available to them, and many who qualify get no modification at all. 

While HAMP loan modifications have the best results, with post-modification delinquency rates at half of other modifications, 10 most homeowners receive either a proprietary modification with less advantageous terms or no modification at all. In fact, 

3 percent of delinquent homeowners in the second quarter of 2013 received nonHAMP modifications, while only 1 percent received HAMP trial modifications and 

another 1 percent received HAMP permanent modifications. The remaining 95 percent of delinquent homeowners received no modification. 11

Even for those who receive loan modifications, they often are not adequately 

keyed to affordability. Homeowners who receive loan modifications with substantial 

reductions in loan payments fare much better than those with increased payments 

or even those with small payment decreases. 12 Yet, there is insufficient standardization of payment reductions and post-modification debt-to-income ratios. Modifications that reduced monthly principal and interest payment by 20 percent or more 

109 

13OCC Mortgage Metrics Report for the Second Quarter of 2013, at 39. 14OCC Mortgage Metrics Report for the Second Quarter of 2013, at 38. 15 Id. 16 Compare MHA Performance Report Through April 2012 (median HAMP permanent modification has resulted in a 37 percent payment reduction) with OCC Mortgage Metrics Report 

for the First Quarter of 2011, at 32 (in the fourth quarter of 2011 payment reductions for proprietary modifications were less than half those offered in HAMP, only 14.7 percent). 17 Center for Responsible Lending (CRL), ‘‘Lost Ground’’, p. 26 (2011); Ira Goldstein, ‘‘Bringing 

Supbrime Mortgages to Market’’, Harvard Joint Center for Housing Studies, p. 4; Ginny Hamilton, ‘‘Rooting Out Discrimination in Mortgage Lending’’ (Testimony before House Financial 

Services Committee) (2007). 18 Christian Weller, Center for American Progress, ‘‘Access Denied: Low-Income and Minority 

Families Face More Credit Constraints and Higher Borrowing Costs’’, p. 1 (August 2007). 19Ojeda, ‘‘The End of the American Dream for Blacks and Latinos 11’’ (June 2009), available 

at http://www.wcvi.org/data/pub/wcvilwhitepaperlhousingljune 2009.pdf. 

have, since 2008, consistently had the lowest 60-day delinquency rates in the first 

quarter of 2013, compared to other modifications. 13 For loans modified in 2012, the 

6-month 60+ day delinquency rate for loans with payment reductions of at least 20 

percent was 8.8 percent, while modifications with payments reduced by less than 

10 percent showed delinquency rates at 22.1 percent. 14 Modifications where monthly payments were increased showed the highest redefault rates at 29 percent, more 

than three times as high as the rates for payment reductions of 20 percent or 

more. 15 HAMP, with its target DTI of 31 percent, has produced deeper payment reductions and more sustainable loan modifications than industry modifications without a standard measure of affordability. 16 Moreover, even HAMP has failed to take 

into account the impact of back-end DTI, which can trigger redefault. 

A New Housing Finance System Should Be Focused on Access and Affordability 

Focusing the new housing finance system on access and affordability for homeowners across the country will benefit homeowners, communities, lenders, and investors. The role of the secondary market is to provide housing to our Nation’s families. However, lenders generally cater their loans to the preferences of their investors (which is how the abuses that caused the recent crisis developed—loans were 

made for investor profits at the expense of sustainability for homeowners). A secondary market focused on access and affordability will be more likely to produce an 

inclusive market. 

Communities without access to affordable credit create vacuums that can be filled 

by predatory lenders. Those abuses generally have had a disparate impact in lowincome communities and communities of color. Subprime mortgage products were 

sold disproportionately to lower-income homeowners. 17 Studies show that low-income homeowners are denied credit more often, even after adjusting for credit score 

and affordability. 18 Thus, lower-income families are forced of necessity to seek higher-cost forms of credit. A higher-cost product sold overwhelmingly to lower-income 

homeowners will, by definition, have a disparate impact on borrowers of color, 

whose incomes (and assets) lag far behind that of whites—even further behind as 

a result of the recent crisis. One example of the cumulative disparate impact is that 

white neighborhoods typically experience housing costs 25 percent lower than similar neighborhoods with a majority of African American residents. 19

The Nation’s housing finance system must include mechanisms to ensure that 

equal housing opportunities are provided in places where sustainable lending has 

been harder to find. This should be done through several complimentary mechanisms. In addition to properly funding the National Housing Trust Fund and the 

Capital Magnet Funds, the new system should promote broad access to lending by 

inhibiting credit rationing and ‘‘creaming’’ of the market. Lenders should be required to serve all population segments, housing types, and geographical locations. 

Yet, any statute should not dictate specifics of underwriting that would result in 

less flexibility to meet these broad access goals. Housing finance legislation should 

leave open the specifics of downpayment requirements, credit scores, and debt-toincome ratios. Downpayment requirements are keyed directly to wealth, which itself 

varies widely by demographics and is not always tied to creditworthiness or ability 

to repay. 

Debt-to-income ratios are an inadequate measure of lending capacity. For some 

borrowers with very low income, the 43 percent debt-to-income ratio in the CFPB 

Qualified Mortgage rule will still result in inadequate cash to cover basic living expenses. Yet the requirement of a 43 percent debt-to-income ratio also excludes some 

borrowers who can afford higher payments. Compensating factors and residual inVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00113 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
110 

20For a discussion of why residual income can be a better measure of affordability than a 

straight debt-to-income ratio, see, Michael E. Stone, et al., ‘‘The Residual Income Method: A New 

Lens on Housing Affordability and Market Behaviour’’ (2011), available at http:// 

works.bepress.com/michaellstone/8. 21FICO, ‘‘myFICO Insider’s Guide to 2010 Credit Card Reform and New FHA Mortgage 

Rules’’ (2010), (noting that under the Federal Housing Administration rules, ‘‘it may be difficult 

for a borrower to even begin the process [of getting a mortgage] with FICO scores below 600.’’), 

available at www.myfico.com/Downloads/Files/myFICOlGuidelCCFHA.pdf (visited Sept. 29, 

2013). 22 Yuliya Demyanyk, ‘‘Did Credit Scores Predict the Subprime Crisis’’, The Regional Economist (Federal Reserve Bank of St. Louis Oct. 2008), available at www.stlouisfed.org/publications/re/articles/?id=963 See also, VantageScore Solutions, L.L.C., ‘‘VantageScore 2.0: A New 

Version for a New World’’, 2011 (consumers with VantageScore of 690/-/710, or borderline between ‘‘C’’ and ‘‘D’’ grade, have about a 9 percent risk of default). 23Marieke Bos and Leonard Nakamura, Federal Reserve Bank of Philadelphia, Working 

Paper No. 12-19/R, ‘‘Should Defaults Be Forgotten? Evidence From Quasi-Experimental Variation in Removal of Negative Consumer Credit Information’’, Apr. 2013, at 1, available at 

www.philadelphiafed.org/research-and-data/publications/working-papers/2012/wp12-29R.pdf. 24 Consumer Financial Protection Bureau, ‘‘Analysis of Differences Between Consumer- and 

Creditor-Purchased Credit Scores’’, at 18, Sept. 2012, available at http:// 

files.consumerfinance.gov/f/201209lAnalysislDifferenceslConsumerlCredit.pdf. 25 Board of Governors of the Federal Reserve System, ‘‘Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit’’ 80–81 (Aug. 2007). 26Matt Fellowes, Brookings Inst., ‘‘Credit Scores, Reports, and Getting Ahead in America’’ 9– 

10 (May 2006). 

come 20 are difficult measures to calibrate and should be left to the regulatory proc- ess. Credit scores often do not provide a reliable picture of a borrower’s credit profile. 

They often contain errors and otherwise reflect disparate access to sustainable credit—a legacy of decades of redlining. Moreover, credit scores cannot predict if any 

particular person will actually engage in any particular behavior. In fact, often the 

probability is greater that a particular low-scoring person will not engage in the behavior. For example, a score of between 500 and 600 is generally considered to be 

a poor score. 21 Yet at the beginning of the foreclosure crisis in 2007, only about 20 

percent of mortgage borrowers with a credit score in that range were seriously delinquent. 22 Thus, if a score of 600 is used as a cut-off in determining whether to 

grant a loan, the vast majority of applicants who are denied credit would probably 

have not become seriously delinquent. A study by Federal Reserve researcher and 

a Swedish scientist, based on Sweden consumers, similarly found that most consumers with impaired credit did not engage in negative behavior. 23

Credit scores also differ substantially by race. Congress should not enshrine these 

racial disparities into the law by mandating the use of scores. Requiring the use of 

scores does not just permit a practice with disparate impact—it actively mandates 

it. Studies showing racial disparities in credit scoring include: a 2012 study by the 

CFPB, which found that the median FICO score for consumers in majority minority 

ZIP codes was in the 34th percentile, while it was in the 52nd percentile for ZIP 

codes with low minority populations; 24 a 2007 Federal Reserve Board report to Congress on credit scoring and racial disparities in which, for one of the two models 

used by the Federal Reserve, the mean score of African Americans was approximately half that of white non-Hispanics (54.0 out of 100 for white non-Hispanics 

versus 25.6 for African Americans) with Hispanics fairing only slightly better 

(38.2); 25 and a 2006 study from the Brookings Institution which found that counties 

with high minority populations are more likely to have lower average credit scores 

than predominately white counties. 26

There should be flexibility going forward for determining underwriting requirements for the Nation’s housing finance system. Without it, the promise of access and 

affordability would be empty. 

Housing Finance Reform Should Contain Key Essentials of a Healthy Mortgage Servicing System, Including a Requirement for Servicers To Provide Loan Modifications That Benefit the Taxpayer and the Homeowner 

Following the recent economic crisis, new mortgage servicing rules have been 

adopted in an effort to improve loss mitigation outcomes for homeowners facing foreclosure and for the investors in those loans. Despite the creation of the Home Affordable Modification Program (HAMP), changes to FHA and GSE servicing regimes, and the National Mortgage Settlement, the mortgage servicing companies 

have continued to circumvent existing requirements at the expense of investors, 

homeowners, and communities. While the CFPB issued regulations creating longterm procedural rules on default servicing, additional work is needed. A new GSE 

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27 A fuller treatment of servicer incentives may be found in Diane E. Thompson, Nat’l Consumer L. Center, ‘‘Why Servicers Foreclose When They Should Modify and Other Puzzles of 

Servicer Behavior’’ (Oct. 2009), available at http://www.nclc.org/images/pdf/pr-reports/reportservicers-modify.pdf. 28See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K) 30 (Mar. 12, 2009): Servicing continues to be our most profitable segment, despite absorbing the negative impact, first, of higher 

delinquencies and lower float balances that we have experienced because of current economic 

conditions and, second, of increased interest expense that resulted from our need to finance 

higher servicing advance balances. Lower amortization of MSRs [mortgage servicing rights] due 

to higher projected delinquencies and declines in both projected prepayment speeds and the average balance of MSRs offset these negative effects. As a result, income . . . improved by 

$52,107,000 or 42 percent in 2008 as compared to 2007. 

system should systematize loss mitigation that benefits investors while avoiding unnecessary foreclosures. Mortgage servicers often benefit from pursuing foreclosure 

over loss mitigation. Housing finance reform should realign incentives to maximize 

beneficial outcomes. 

Getting servicing right must be a core piece of housing finance reform. The Nation’s housing finance system should not only make home lending broadly accessible 

but ensure that the entire life of the loan is supported. Routine processing of loan 

and insurance payments must not result in errors or abuse that lead to unnecessary 

costs, defaults, and foreclosures. Homeowners facing genuine hardship who can still 

make loan payments that benefit the investor or taxpayer must have options to save 

their homes. Properly functioning servicing infrastructure is good for individual 

families, communities, and the system as a whole. 

Servicers’ Incentives Incline Them Toward Modifications With Increased Fees and 

Foreclosures Over Sustainable Modifications 

Once a loan is in default, servicers must choose to foreclose or modify. A foreclosure guarantees the loss of future income, but a modification will also likely reduce future income, cost more in the present in staffing, and delay recovery of expenses. Moreover, the foreclosure process itself generates significant income for 

servicers. 27

Servicers do not make binary choices between modification and foreclosure. 

Servicers may offer temporary modifications, modifications that recapitalize delinquent payments, modifications that reduce interest, modifications that reduce principal or combinations of all of the above. Servicers may demand up-front payment 

of fees or waive certain fees. Or servicers may simply postpone a foreclosure, hoping 

for a miracle. 

For servicers, the true sweet spot lies in stretching out a delinquency without either a modification or a foreclosure. Income from increased default fees and payments to affiliated entities can outweigh the expense of financing advances for a 

long time. This nether-world status also boosts the monthly servicing fee and slows 

down servicers’ largest noncash expense, the amortization of mortgage servicing 

rights, since homeowners who are in default are unlikely to prepay via refinancing. 28 Finally, foreclosure or modification, not delinquency by itself, usually 

triggers loss recognition in the pool. Waiting to foreclose or modify postpones the 

day of reckoning for a servicer. But delay can cost a homeowner the opportunity to 

obtain a modification. 

These dynamics require a housing finance system that promotes sustainable loss 

mitigation that benefits investors and homeowners. Without aligning the incentives 

of servicers with those of other stakeholders, public monies, and the welfare of communities will be jeopardized. 

Recent experience with GSE loss mitigation confirms the need to incorporate a 

stronger system of servicer accountability into the structure of a new housing finance system. While the U.S. Treasury Department’s Home Affordable Modification 

Program established substantial loan modification rules keyed to affordability, the 

GSE program lagged behind in several significant ways. Homeowners with GSE 

loans facing hardship had no effective appeals process when servicers disregarded 

GSE requirements; yet many homeowners found that servicer noncompliance with 

GSE rules was endemic. Additionally, GSE rules regarding access to loan modifications for homeowners in bankruptcy (particularly the Fannie Mae rules) have lagged 

behind other programs. GSE rules allow and even incentivize servicers in many instances to pursue foreclosure while a homeowner is seeking a modification. Finally, 

the GSE standard modification is not keyed to affordability based on a debt-to-income ratio but rather to a percent of payment reduction that may or may not result 

in a payment that is affordable. 

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29The GSE guides are a more appropriate locus for some of the other details regarding mortgage servicing. While legislation can take on the structural issues and key needed changes, the 

regulatory process is the locus for more calibrated treatment of mortgage servicing (as well as 

lending). 30Memorandum from Benjamin M. Lawsky, Superintendant, New York Department of Financial Services to State Insurance Commissioners, Reforming Force-Placed Insurance (Apr. 5, 

2013). 31 Id. 32Fannie Mae, ‘‘Request for Proposal: Lender Placed Insurance, Insurance Tracking, Voluntary Insurance Lettering Program’’ (Mar. 6, 2012). 

Housing Finance Reform Should Include Several Key Improvements to Existing 

Mortgage Servicing Rules 

The new housing finance system must require affordable loan modifications that 

are consistent with investor interests. The CFPB, while it has issued a series of procedural requirements for servicers, has declined to issue such a mandate. Yet, the 

data show that almost all delinquent homeowners still get no modification at all. 

Those homeowners lucky enough to receive a modification seldom get one with the 

best terms available. The housing finance system should promote proven regimes for 

modifying loans with optimum loan performance. This should also include limited, 

Government-backed portfolio capacity to hold modified loans. 

Second, homeowners seeking loan modifications should not be faced with an ongoing foreclosure while they are processing their loan modification request. Instead, 

such foreclosures should be put on temporary hold rather than subjecting the homeowner to the ‘‘dual track’’ of foreclosure and loss mitigation. This is the most crucial 

procedural protection for homeowners. Homeowners dealing with a foreclosure often 

face skyrocketing costs and the challenge of repeatedly rescheduling foreclosure 

sales—as well as the danger and sometime occurrence of the home being sold before 

the loss mitigation review is complete. While CFPB rules provide some protections 

for homeowners who have not yet been put into foreclosure, many homeowners seeking assistance after the foreclosure has begun are locked out of a reasonable chance 

to save their homes. Homeowners in foreclosure should be able to obtain a temporary pause to a foreclosure to promote efficient evaluation of a loan modification 

application. Additionally, dual track protections must be keyed to the homeowner’s 

initial application in order to promote timely loan modification reviews over foreclosures. Requirements keyed to a ‘‘complete application’’ invite manipulation of the 

process based on a subjective determination of an application’s status. 

While existing regulations provide some level of protection against dual tracking, 

stronger GSE rules are nevertheless appropriate. Because a pause in the foreclosure 

process during a loss mitigation review is the key procedural protection that stands 

between a homeowner and an unnecessary foreclosure, substantial flaws in existing 

requirements must be addressed. Moreover, the GSE system has long been a leader 

in market developments. The housing finance system should promote the highest 

standards for loss mitigation, as it has for home lending. Such progress would promote broader market changes and demonstrate the viability of sustainable loan 

modification reforms. 29

Third, the new housing finance corporation should be authorized to directly purchase insurance, including force-placed insurance. The current system, in which the 

GSEs reimburse servicers for force-placed hazard and flood insurance, has resulted 

in vastly inflated prices for borrowers and, when borrowers default, the GSEs and 

taxpayers. An investigation by the New York Department of Financial Services 

found that ‘‘premiums charged to homeowners for force-placed insurance are two to 

ten times higher than premiums for voluntary insurance, even though the scope of 

the coverage is more limited.’’ 30 It also found that ‘‘insurers and banks have built 

a network of relationships and financial arrangements that have driven premium 

rates to inappropriately high levels ultimately paid for by consumers and investors.’’ 31 Fannie Mae’s Request for Proposal on lender placed insurance in 2012 highlighted the reverse competition typical of this market and the effect on investors 

and the taxpayer. The proposal noted that ‘‘[t]he existing system may encourage 

Servicers to purchase Lender Placed Insurance from Providers that pay high commissions/fees to the Servicers and provide tracking, rather than those that offer the 

best pricing and terms to Fannie Mae. Thus, the Lender Placed Insurers and 

Servicers have little incentive to hold premium costs down.’’ 32 A mechanism allowing the new housing finance corporation to purchase force-placed insurance—as well 

as title insurance and private mortgage insurance—directly from insurers would decrease costs for borrowers and the corporation by circumventing the kickbacks to 

servicers that drive up insurance prices. 

113 

Fourth, the new housing finance system should promote transparency and accountability. An Office of the Homeowner Advocate should be established to assist 

with consumer complaints and compliance matters. This would help remedy the current situation in which noncompliance problems with GSE loans often go 

unaddressed. Moreover, loan level data collection and reporting should include demographic and geographic information, to ensure that civil rights are protected and 

equal opportunity to avoid foreclosure is provided. Aggregate information about complaints and the data about loss mitigation must be publicly available, as HMDA 

data is. Work to develop the new housing finance system, and to administer and 

oversee it, should include stakeholders such as community groups and representatives of homeowners, in addition to the corporate stakeholders on the lending and 

servicing sides. Finally, in order to ensure that the housing system meets its goals, 

there must be strong regulatory levers for securing compliance, including robust 

monitoring, reporting and supervision. 

Any Federal Electronic Registry Must Be Transparent, Mandatory, and 

Supplemental to State Rules 

Any new, Federal electronic registry for housing finance must be available to the 

public, transparent, mandatory, and supplemental to State requirements. Only a 

public, supplemental system will assure homeowners of access to key information 

in the foreclosure process while allowing States to continue their role as primary 

regulators of their own foreclosure procedures and land records. 

There are several important reasons why any Federal registry should be supplemental to State systems. First, local registries provide a unified system of records 

for all interests affecting a particular property: judgments, tax liens, assessments, 

divorce decrees. A national mortgage registry is unlikely to duplicate this. Second, 

in many States, such as Massachusetts, the mortgagee holds legal title to real property and the mortgage conveys a distinct property interest. The land registries establish property interests by guaranteeing title to recorded interests such as mortgages. Third, many State foreclosure laws, particularly in nonjudicial States, incorporate requirements to record documents in land records in order for a nonjudicial 

sale to convey valid title. These include various notices of default and sale, and even 

affidavits of compliance with State loss mitigation laws. Several States, such as Oregon and Minnesota, require that mortgages be recorded before a nonjudicial sale 

can take place. There has been disagreement about whether a nominee system like 

MERS (which designates a straw party to serve as a placeholder regardless of who 

owns the loan) can comply with one of these recording requirements. Even if the 

registry name is allowed to substitute for the real owner, use of a universal straw 

party nominee name destroys transparency. Finally, local land records are fully public and available to all who come to the examine records. 

A national registry system should include records of servicing rights, ownership 

of mortgages and deeds of trust, as well as ownership of the promissory notes themselves. All records should comply with Federal e-sign requirements to ensure there 

is only one authoritative electronic record. The system should assign each security 

instrument and related promissory note a unique identification number. Participation in the registry system must be mandatory. Enforcement of registry system requirements should include a schedule of sanctions for noncompliance, as well as a 

private right of action, and attorney’s fees, for homeowners with noncompliant loans 

(with the recoupment serving as a setoff against the loan). Recent history has made 

clear that without the specter of private litigation noncompliance is common and too 

often goes unaddressed. 

Conclusion 

Thank you for the opportunity to testify today. The Nation’s housing finance system is in need of a revived sense of public purpose. Loan origination and servicing 

mechanisms should ensure broad and sustainable access to credit throughout the 

life of the loan. I will be happy to take any questions you may have. 

PREPARED STATEMENT OF LAUTARO LOT DIAZ 

VICE PRESIDENT, HOUSING AND COMMUNITY DEVELOPMENT, NATIONAL COUNCIL OF

LA RAZA

OCTOBER 29, 2013 

Introduction 

Chairman Johnson, Ranking Member Crapo, and distinguished Members of the 

Committee, thank you for inviting me to appear this morning on behalf of the National Council of La Raza (NCLR), where I serve as the Vice President for Housing 

114 

1Signe-Mary McKernan, Caroline Ratcliffe, C. Eugene Steuerle, and Sisi Zhang, ‘‘Less Than 

Equal: Racial Disparities in Wealth Accumulation’’ (Washington, DC: The Urban Institute, 

2013). 

and Community Development. I have worked for over 25 years in the community 

development field, serving low-income families, and I appreciate the opportunity to 

provide expert testimony about the work on which I have built my career and that 

has been a fundamental part of NCLR’s mission. 

NCLR is the largest national Hispanic civil rights and advocacy organization in 

the United States, an American institution recognized in the book Forces for Good 

as one of the best nonprofits in the Nation. NCLR works with a network of nearly 

300 Affiliates—local, community-based organizations in 41 States, the District of Columbia, and Puerto Rico—that provide education, health, housing, workforce development, and other services to millions of Americans and immigrants annually. 

For more than two decades, NCLR has actively engaged in public policy issues 

such as preserving and strengthening the Community Reinvestment Act and the 

Home Ownership Equity Protection Act, supporting strong fair housing and fair 

lending laws, increasing access to financial services for low-income families, and 

promoting home ownership in the Latino community. As evidence of our commitment to housing-related policy and programmatic research, NCLR has recently published a number of reports on Latinos’ interaction with the market, including: 

• Puertas Cerradas: Housing Barriers for Hispanics, published by NCLR and the 

Equal Rights Center (July 19, 2013) 

• Making the Mortgage Market Work for America’s Families, published by NCLR 

and the Center for American Progress (June 5, 2013) 

• Latino Financial Access and Inclusion in California, published by NCLR (June 

4, 2013) 

In addition to policy research, NCLR has for the last 13 years supported local 

housing counseling agencies. The NCLR Homeownership Network (NHN), comprised 

of 49 community-based housing counseling providers, works with over 50,000 families annually and has nurtured more than 30,000 first-time homebuyers since its inception. Following the financial crisis, the NHN responded to the Latino community’s need by shifting the focus to helping families stay in their homes. NCLR’s 

combination of housing-related policy research and local community experience with 

the NHN gives us a unique perspective on how Latino families interact with the 

mortgage market, their credit and capital needs, and the impact of Government regulation on financial services markets. 

With this background, my testimony today will begin with a discussion of the impact of the housing crisis on low- and moderate-income families, focusing on Latinos, 

which is the target of NCLR’s work. My remarks will provide a framework to better 

understand the extent to which pre- and post-purchase housing counseling helps increase access to credit in hard-to-serve markets. It is also a critical loss mitigation 

tool to ensure that families are ready to buy and that they completely understand 

the processes involved in the event of delinquency. Finally, I will conclude my testimony with observations on the necessity of preserving access to affordable housing 

finance options, based on client interactions. It is my hope that this testimony will 

assist in clarifying some commonly held misconceptions about the origination of the 

housing crisis and, by extension, what policies are needed to remedy these issues. 

Impact and Origination of the Housing Crisis 

We are now 5 years after the collapse of the subprime mortgage market and the 

ensuing financial crisis, and the Nation’s housing market remains broken. An estimated 2.7 million homeowners lost their homes to foreclosure and many more are 

still at risk of foreclosure. Communities of color, and the Latino community in particular, were hit hardest by this crisis and suffered an extreme loss of wealth. While 

it will take considerable time to fully understand the implications of this recent economic and housing crisis, it is clear that these communities have borne the brunt 

of the impact. For example: 

• Hispanic families lost 44 percent of their wealth between 2007 and 2010; by 

contrast, black families lost 31 percent and white families lost 11 percent. 1

• From 2005 to 2009, the median level of home equity held by Latino homeowners 

declined by half—from $99,983 to $49,145. At the same time, home ownership 

rates among Hispanics also fell, from 51 percent to 47 percent. A disproportionate share of Hispanics live in California, Florida, Nevada, and Arizona, the 

115 

2 Rakesh Kochhar, Richard Fry, and Paul Taylor, ‘‘Wealth Gaps Rise to Record Highs Between Whites, Blacks, Hispanics’’ (Washington, DC: Pew Research, 2011). 3Debbie Gruenstein Bocian, Keith S. Ernst, and Wei Li, ‘‘Unfair Lending: The Effect of Race 

and Ethnicity on Price of Subprime Mortgages’’ (Durham, NC: Center for Responsible Lending, 

2006). 4 Neil Bhutta and Glenn B. Canner, 2013, ‘‘Mortgage Market Conditions and Borrower Outcomes: Evidence From the 2012 HMDA Data and Matched HMDA–Credit Record Data’’, Federal 

Reserve Bulletin (Forthcoming). http://www.federalreserve.gov/pubs/bulletin/2013/pdf/ 

2012lHMDA.pdf. Accessed on October 25, 2013. 

States that experienced the steepest declines in housing values during the crisis. 2

In the run-up to the financial crisis, the mortgage market did not serve these communities of color particularly well. More specifically, Latino and immigrant borrowers are prone to unique profiles, including a lack of traditional credit history, 

multiple coborrowers, and cash income, qualities that make them unattractive to 

lenders who rely on automated underwriting. This standardization in many instances does not capture a borrower’s true credit risk, particularly in the aforementioned cases. While prime lenders, the Federal Housing Administration (FHA), and 

the Veteran’s Administration (VA) offered loans designed to accommodate these 

unique profiles, the majority of private sector lenders referred these loans to their 

subprime affiliates or simply did not advertise in these communities at all. As a result of this market failure, a vacuum emerged that subprime and predatory lenders 

quickly filled, leading to a record-high foreclosure rate in Latino and minority communities. When compared to whites, Latinos were 30 percent more likely to receive 

high-cost loans at the height of the housing bubble when purchasing their homes. 3

Today the market is not serving communities of color significantly better. Even 

though housing prices are on the rise, the market remains broken. Housing prices 

in many urban markets with heavy minority populations are once again rising faster than income. At the same time, the so-called credit box continues to tighten. 

Creditworthy, low-income homebuyers cannot meet the overcorrection in today’s 

lending standards that have stemmed from the housing collapse. As a result, mortgage credit currently serves only the most pristine customers with FICO scores over 

760, with downpayments above 20 percent, and with the capacity to buy jumbo 

loans. 4 These trends point to an unsustainable housing market that has not yet 

fully recovered. 

Housing counseling was created in part as a response to many of the problems 

underscored by the most recent housing crisis. More than simply increasing financial literacy, counseling is a tool to combat some of the unethical and at times illegal 

practices employed by a number of subprime lenders targeting of communities of 

color. 

As a result, local housing counseling agencies are on the front lines witnessing 

these macro trends firsthand and providing assistance to families in traditionally 

underserved communities. In essence, the services provided by counselors are designed to correct the precise market failures that were integral to the economic 

downturn. Yet, as I will speak to in a moment, support for this work has not kept 

pace with demand. Housing finance reform must commit to integrating and 

strengthening the counseling infrastructure, which will help ensure that these services are widely available to expand access to credit in hard-to-serve markets. It 

would also combat foreclosures by helping future homebuyers fully understand the 

implications of their mortgage terms and avoid predatory lending practices. 

Housing Counseling 

Within this framework of a true market failure to serve low- and moderate-income 

buyers, housing counseling plays a critical role in the today’s housing market. I will 

describe how housing counseling works, the communities it serves, and its proven 

effectiveness in helping families stay in their homes. 

The Department of Housing and Urban Development’s (HUD) Housing Counseling 

Program funds a number of housing counseling organizations—a total of 277 local 

agencies, 22 State Housing Finance Agencies, and 27 national and regional intermediaries. As a national intermediary, NCLR distributes funding to its network of 

49 housing-focused community organizations based on work plan, goals, and outcomes. To support our network’s local operations, we provide quality control and 

training, build capacity, facilitate industry partnerships, pioneer products, and offer 

technology support. All organizations compete for funding on an annual basis, and 

NCLR works closely with HUD to expand the availability of counseling services to 

new communities and promote the nonprofits that serve them. HUD has comprehensive standards on how housing counseling is conducted and must certify all agencies 

116 

5 Ryan M. Johnson and Elsa Macias, ‘‘Home To Own: A New Model for Community-Based 

Low-Income Mortgage Lending’’ (Arizona: Morrison Institute for Public Policy, 1995). See also, 

Brenda Muniz, ‘‘Financial Education in Latino Communities: An Analysis of Programs, Products, and Results/Effects’’ (Washington, DC: National Council of La Raza, 2004); Janis Bowdler, 

‘‘Financial Literacy and Education: The Effectiveness of Governmental and Private Sector Initiatives’’ (Washington, DC: National Council of La Raza, 2008); and Eric Rodriguez, ‘‘Licensing and 

Registration in the Mortgage Industry’’ (Washington, DC: National Council of La Raza, 2005). 

that receive funding. To ensure compliance, HUD audits housing counseling agencies every 2 years to measure adherence to the standards. Only audited agencies 

or agencies within intermediary networks are deemed ‘‘HUD certified’’ and therefore 

eligible for funding. 

Creating home ownership opportunities in low- and moderate-income Latino communities has been a particular priority of NCLR’s for well over a decade. HUD-certified housing counselors play a crucial role in these efforts as third parties that 

offer unbiased information and advice to homebuyers, renters, victims of predatory 

lending, and families facing a financial emergency. NCLR’s NHN counselors emphasize one-on-one counseling—in-person whenever possible—which has proven a more 

effective way of generating positive outcomes for Latino families specifically. 5 This 

approach helps the family feel more comfortable, allows them to have private questions answered, and gives the counselor an opportunity to evaluate their situation 

and develop tailored solutions for the family’s personal finances. As the foreclosure 

crisis hit, this same method was used for at-risk homeowners. 

Along with the aforementioned face-to-face counseling, our network also uses 

classroom instruction and telephonic counseling where easy access to a counseling 

organization may prove difficult. Recently, counseling over the Internet using Skype 

has extended the geographic reach of individual organizations. Whether assisting a 

family with rental housing, a first-time home purchase, or mortgage delinquency, 

all HUD-approved counseling has to follow pre-specified comprehensive guidelines. 

These guidelines dictate that all counselors must advocate for the best interest of 

the client and not for a proprietary interest. This fiduciary duty in tandem with 

vital education on housing credit processes are the central factors contributing to 

housing counseling’s effectiveness. 

HUD counseling agencies assist with an array of housing crises faced by members 

of their respective communities. The primary counseling services that impact today’s 

Government-sponsored enterprise (GSE) reform discussion are pre-purchase counseling that helps families purchase a home, and post-purchase counseling after a 

family has closed on their mortgage or in the event of a mortgage delinquency. Not 

only are these services beneficial to the client, the lender and investor also benefit 

from having a more informed consumer. 

A housing counselor providing pre-purchase counseling does five important things: 

(1) educate the borrower on all aspects of the home-buying process, including the 

various private interests integral to this process; (2) review the client’s income, credit, savings, and family budget to help them understand what they can and cannot 

afford; (3) ensure that the obligation and essential practices that are central to owning a home are understood; (4) assist the family in understanding the documents 

they are signing and the obligations implied; and finally (5) provide community resources to address any issues that could impact the long-term ability to manage the 

mortgage loan. These steps are codified in HUD’s guidelines and upheld by the 

members of NCLR’s network. Furthermore, these five steps also help to ensure prudent decision making by the client because they make clients more fully aware of 

the obligations they are undertaking. Loan performance is demonstrably greater 

when a family obtains a loan with this kind of support, as opposed to loan performance without it. 

For example, an Ohio-based counseling agency worked with a family who had 

filed for bankruptcy at the height of the economic downturn. This family, however, 

still aspired to become homeowners despite their financial turmoil. The counselor 

advised them to enroll in an education class. After following an action plan developed with a housing counselor, the family shortly thereafter successfully qualified 

for a VA loan; they purchased a home. 

In instances when a client is confronting delinquency, they are better served with 

a counselor than facing the challenge alone. In this circumstance, counseling follows 

an almost identical rubric to pre-purchase processing with an emphasis on helping 

clients fully understand their options and ushering them through whatever process 

they decide is best for their financial situation. 

As a concrete example of post-purchase counseling, one of our counseling agencies 

reported a story about a family seeking help after falling behind on their mortgage 

as a result of traumatic medical debt. The economic downturn left the family with 

117 

little to no emergency savings. The family was facing foreclosure proceedings and 

they were understandably frightened and upset, having lived in their home for a 

number of years. The counseling agency reviewed all necessary documentation and 

worked with the bank in advance of a settlement conference to get a trial mortgage 

modification that could lead to a permanent modification. This case is illustrative 

of a best-case scenario where the bank was quick to confirm receipt of paperwork 

and generally responsive. 

Frequently, however, the post-purchase counseling process is less supportive. For 

example, a Miami family working with a counseling agency had negotiated a trial 

mortgage modification with their loan servicer. Even though the client had continued to make their payments on the trial modification, the bank had continued foreclosure proceedings. The property was sold, prompting the housing counselor to involve legal counsel to reverse the sale. A judge ruled in the client’s favor, but without the support of a counseling agency the client would have lost their home. There 

are countless examples like this from our NHN organizations where counselors must 

help families confront lengthy and complex processes and work with unresponsive 

banks—issues that are all the more complicated when there are language barriers. 

The NHN and similar counseling organizations are delivering mortgage-ready borrowers by following the processes outlined. All of the NHN counseling agencies focus 

on the atypical borrower—lower-income individuals with barriers to entering the 

market. Of particular importance to NCLR, our bilingual counselors play a critical 

role in helping future homeowners overcome language barriers to understand and 

access information. Housing counselors provide their clients with access to information about products and standards available in the current marketplace, information 

they may have never obtained without third-party assistance. 

The Benefits of Housing Counseling 

The positive impact of individuals having access to housing counseling services is 

significant for the mortgage industry. Housing counseling supports safety and 

soundness for several reasons and should be more fully integrated into the credit 

process by encouraging borrowers to utilize this service through pricing discounts 

or as a compensating factor for higher-risk borrowers. 

A better-prepared borrower makes the entire housing system safer and more secure. Prior to the increased participation of private hedge funds and the dramatic 

increase in liquidity eager to create and buy mortgage-backed securities in the midto-late 1990s, lenders exercised intense scrutiny to ensure that a borrower was prepared for their mortgage obligations. At that time, NCLR’s work focused less on 

mortgage modifications and more on creating lender pilot programs. These programs 

were designed to assure the lending community that a family who received HUDcertified housing counseling was fully educated and prepared for their mortgage obligation, which would decrease the risk of default; these efforts demonstrated that 

low-income borrowers with the right knowledge and tools posed acceptable credit 

risk. This changed dramatically in the period leading up to the foreclosure crisis. 

The 21st century ushered in an era of shoddy mortgage underwriting and the conventional wisdom that ‘‘if you can breathe, you can get a mortgage.’’ While a majority of lenders exercised responsible underwriting practices, pressure to create ever 

more originations by the capital in the market generally drove down underwriting 

standards. In the late ’90s, the FHA also fell prey to this pressure when it discontinued discounts on the insurance premium for borrowers who received homebuyer 

education. Due to weaker underwriting standards, counselors began to see overly 

flexible products that allowed borrowers to take on more risk with less stringent underwriting standards. This in turn spurred some of the escalation in housing prices 

and was a prime driver of the foreclosure crisis that depleted so much wealth in 

communities throughout the country. 

Essentially, a family that goes through a HUD-certified housing counselor is doubly underwritten, with a clear understanding of the true risk of each individual borrower. Housing counselors do not start the conversation with rates or features of 

a mortgage product; instead, they start by building a client’s financial profile in 

order to determine an individual’s readiness to borrow. Only after reviewing income, 

credit, savings, and family expenses in a structured way will the counselor recommend client preparedness. We believe that a borrower who has completed this 

process is less at risk of default, and research that I’ll highlight later confirms this. 

The foreclosure crisis presented a different challenge for lenders who were ill prepared to manage the ever-growing number of defaults. Loan servicers were faced 

with a collapsing housing market, and thousands of borrowers had to contend with 

not only their underwater mortgages but also higher rates of unemployment or 

underemployment. The housing counseling community responded by offering other 

avenues for distressed borrowers to obtain relief. For instance, counselors very early 

118 

6 Neil Mayer and Kenneth Temkin, ‘‘Pre-Purchase Counseling Impacts on Mortgage Performance: Empirical Analysis of NeighborWorks® America’s Experience’’. 7 Neil Mayer, Peter A. Tatian, Kenneth Temkin, and Charles A. Calhoun, ‘‘National Foreclosure Mitigation Counseling Program Evaluation: Preliminary Analysis of Program Effects’’ 

(Washington, DC: Urban Institute, 2010). 8Financial Crisis Inquiry Commission. 2011. ‘‘Financial Crisis Inquiry Report: Final Report 

of the National Commission on the Causes of the Financial and Economic Crisis in the United 

States’’. http://fcic-static.law.stanford.edu/cdnlmedia/fcic-reports/fciclfinallreportlfull.pdf. 

Accessed on October 25, 2013. 9 Hernandez-Murillo, Andra C. Ghent, and Michael T. Owyang. 2012. ‘‘Did Affordable Housing 

Legislation Contribute to the Subprime Securities Boom?’’ Federal Reserve Bank of St. Louis 

Working Paper Series, No. 2012-005B. http://research.stlouisfed.org/wp/2012/2012-005.pdf. 

Accessed on October 25, 2013. 

in the crisis raised concerns of nonfunctioning and inadequate modification programs and also helped educate clients about emerging Federal and private modification plans. Many worked to provide servicers with assessments of their clients’ financial capability to qualify them for programs that would best keep them in their 

homes whenever possible. One example of ways counselors helped distressed borrowers was through an active effort to distill information regarding common programs like HAMP and HARP or other private label programs. Many clients were 

confused, did not know if they could qualify, or were even unaware of available programs. 

While the role of the counselor is ultimately to find optimal solutions for clients 

in times of need, the scale of the crisis and an initial reluctance from servicers to 

incorporate housing counselors into the modification process limited the reach of 

counseling at a time when foreclosures peaked. Insufficient resources to support 

counseling further exacerbated this shortcoming. As the number of foreclosures decline, however, and the market shifts back toward home ownership, the role of housing counselors in determining a borrower’s readiness for a mortgage will be ever 

more critical. 

Evidence that counseling helps borrowers continues to mount, though there is the 

limiting factor of the difficulty in having to identify loans held by a borrower receiving homebuyer education, pre-purchase counseling, or both. In addition to the anecdotal evidence I have provided, there is considerable research demonstrating the extent to which housing counseling works. Whether the consumer is a first-time homebuyer navigating the pitfalls of predatory lending or a distressed homeowner trying 

to stay in their home, housing counseling produces noticeably better outcomes. For 

example, a 2013 study measuring the impact of pre-purchase counseling and education provided by the NeighborWorks housing counseling network on 75,000 loans 

originated between October 2007 and September 2009 found that borrowers with 

pre-purchase counseling and education were one-third less likely to be over 90 days 

delinquent than those who did not receive counseling. 6

Similarly, a 2012 NeighborWorks report to Congress showed that homeowners 

who received National Foreclosure Mitigation Counseling (NFMC) were nearly twice 

as likely to obtain a mortgage modification than those who did not receive this counseling. Moreover, NFMC clients who modified their mortgages were at least 67 percent more likely to remain current on their mortgage 9 months after this modification. Through counseling efforts, the report estimated that local governments, lenders, and homeowners saved roughly $920 million in 2008 and 2009. 7

Several other studies all conclude that access to pre-purchase counseling lowered 

delinquency rates, prevented the likelihood of foreclosure (in part through greater 

education about subprime loans), and had long-term economic benefits on a family’s 

ability to manage future household economic shocks. 

Access and Affordability 

After decades of working to help low-income Latino families become homebuyers, 

I have a few observations on the importance of preserving access and affordability 

for low- and moderate-income families, as well as protecting a duty to serve. 

As I discussed, there remains a prevalent narrative that blames the foreclosure 

crisis on the affordability goals and mandated duty to serve in the Community Reinvestment Act. Yet this narrative is not borne out by existing research. A number 

of studies have established no causal connection between duty to serve and the 

housing crisis, including the Financial Crisis Inquiry Commission’s report which 

found that the cause of the crisis flowed from a regulatory failure. 8 Similarly, a 

2012 independent study published through the Research Division of the Federal Reserve Bank of St. Louis found no evidence that affordable housing mandates of the 

GSEs played a role in the crisis. 9

119 

10 Neil Bhutta and Glenn B. Canner, 2013, ‘‘Mortgage Market Conditions and Borrower Outcomes: Evidence From the 2012 HMDA Data and Matched HMDA–Credit Record Data’’, Federal 

Reserve Bulletin (Forthcoming). http://www.federalreserve.gov/pubs/bulletin/2013/pdf/ 

2012lHMDA.pdf. Accessed on October 25, 2013. 11 Joint Center for Housing Studies of Harvard University. 2013. ‘‘The State’s of the Nation’s 

Housing’’, Harvard University. http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/ 

son2013.pdf. Accessed on October 25, 2013. 12 Joint Center for Housing Studies of Harvard University. 2013. ‘‘The State’s of the Nation’s 

Housing’’, Harvard University. http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/ 

son2013.pdf. Accessed on October 25, 2013. 13 Neil Mayer and Kenneth Temkin, ‘‘Pre-Purchase Counseling Impacts’’. 14 Neil Mayer, Peter A. Tatian, Kenneth Temkin, and Charles A. Calhoun, ‘‘National Foreclosure Mitigation Counseling Program Evaluation’’. 15The National Housing Resource Center is a 501(c)(3) organization that advocates for the 

nonprofit housing counseling community, as well as for housing consumers, for communities of 

color, for the elderly, and for underserved populations. NCLR is a board member of the organization. More information is available on www.hsgcenter.org. 

These findings are critical because without an obligation to serve all markets, 

communities of color in particular will find it extremely difficult to access mortgage 

credit. Without a duty to serve, private capital will gravitate to the cream of the 

crop: those with traditional borrowing profiles. This will result in an unsustainable 

housing finance market where creditworthy but lower-wealth and lower-income buyers, especially minorities, will be underserved. This is already evident today; the private market overwhelmingly caters to traditional borrowers in well-served locations. 10

This trend does not just harm borrowers in minority communities, but rather the 

whole housing sector. Although Hispanics and blacks are already significant segments of the housing market, they are projected to be an even larger portion of the 

market over the next 10–20 years. According to the Joint Center for Housing Studies at Harvard, minorities will account for 70 percent of net new households over 

this period and 33 percent of all households by 2020. These households will be 

younger than traditional borrowers and will likely have lower incomes and less credit history. These new borrowers will therefore need access to affordable housing 

credit to become homeowners. Without affordable access to credit for these prospective buyers, there will be a large supply of housing stock left unsold, leading to decreasing prices and wealth. As a result, the retirement prospects of many Americans 

depending on income from the sale of their homes will be threatened. 11

Similarly, when it comes to underwriting, there has been an overcorrection in underwriting standards. Although it has been widely acknowledged that tightening the 

so-called credit box was necessary to prevent harmful products, such as low documentation loans, from being marketed to consumers, today the credit box remains 

overly restrictive. The majority of loans to low- and moderate-income families since 

2007 have been FHA or GSE-backed loans due to lack of private capital. Since 2009, 

the typical GSE-issued loans have a loan-to-value ratio under 80 percent with FICO 

scores over 760. This is indicative of the trend I spoke to earlier in which those with 

traditional credit profiles are being served. Moreover, FHA loans have become more 

expensive and harder to obtain in minority communities. The result of these factors 

taken together is that many creditworthy minority borrowers are effectively barred 

from participating in today’s housing market. Any housing finance legislation must 

not include provisions that exacerbate today’s dire credit conditions for minorities. 

For instance, proposals to raise downpayment requirements in a move to reduce 

mortgage lending risk would severely limit access to mortgage finance for future 

generations of creditworthy young households, with little to none of the desired reduction in systemic risk. 12

Recommendations and Conclusion 

As I have emphasized throughout my testimony, HUD-approved housing counselors have a proven track record of pairing consumers with an appropriate mortgage. Buyers working in tandem with a counselor are more likely to have lower 

mortgage delinquency rates, 13 and in the event of foreclosure, are more likely to get 

a loan modification to prevent default. 14 Thus, any housing finance proposal should 

encourage increased access to housing counseling. In an October 11, 2013, letter 

from the National Housing Resource Center to this Committee, 15 there are three 

main principles that reform should address: 

1. Improve the effectiveness of HUD-approved housing counseling agencies by integrating housing counseling into the programs of the Federal Mortgage Insurance Corporation (FMIC), or other entity that replaces Fannie Mae and 

Freddie Mac. Some options within this broad category would involve the incluVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00123 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
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sion of housing counseling data fields in the Uniform Mortgage Database; the 

inclusion of housing counseling as a risk reduction tool in evaluations by the 

Office of Underwriting; and the inclusion of housing counseling as an eligible 

activity in the Housing Trust Fund. 

2. Increase access and affordability in the mortgage market. While there are a 

number of ways to do this within proposed legislation, the establishment of 

strong affordability requirements is paramount. Additionally, affordability and 

accessibility ought to be made explicit purposes, duties, and responsibilities of 

FMIC or any other entity replacing the GSEs. This entity ought to be required 

to approve originators. A distinct Market Access Fund, similarly, to address 

home ownership and rental housing for low- and moderate-income people 

would add value, as would a focus on programs to reach traditionally underserved markets. Finally, in support of this principle, legislators should not 

mandate downpayment requirements in underwriting standards. 

3. Incorporate measures to help homeowners at risk of default recover and return 

to timely payment or exit gracefully, and to improve mortgage-servicing standards. To achieve this end, services ought to be required to work with and support HUD-approved housing counseling agencies; homeowners should be provided with access to all loss mitigation options; and servicers must be required 

to stop improper servicing practices such as dual tracking. 

The letter offers additional specifications on each of these pillars. 

My testimony this morning was designed to examine the effectiveness of pre- and 

post-purchase housing counseling and its proven record in helping low- and moderate-income families, particularly in underserved and hard-to-serve communities, 

stay in their homes. As I have emphasized throughout, NCLR’s on-the-ground experience and research show that housing counseling services help homebuyers avoid 

scams, particularly with mortgage modification schemes and predatory lending practices that frequently target precisely these communities. As legislation to overhaul 

our housing finance system moves forward, it is important to keep in mind the root 

causes of the crisis and understand that housing counseling is a critical buttress 

against these. 

Thank you again for the opportunity to appear before this Committee. I would be 

glad to answer any additional questions you may have. 

121 

1Debbie Gruenstein Bocian, Wei Li, Carolina Reid, and Roberto Quercia, ‘‘Lost Ground, 2011: 

Disparities in Mortgage Lending and Foreclosures’’, 2011 (available at http:// 

www.responsiblelending.org/mortgage-lending/research-analysis/Lost-Ground-2011.pdf). 2 Brent Ambrose, Michael LaCour-Little, and Zsuzsa Huszar. ‘‘A Note on Hybrid Mortgages’’, 

2004 (available at http://ssrn.com/abstract=591660). 3 Anthony Pennington-Cross and Giang Ho, ‘‘The Termination of Subprime Hybrid and FixedRate Mortgages’’, Real Estate Economics, 38.3. 2010 (available at http://ssrn.com/ 

abstract=1660737 or http://dx.doi.org/10.1111/j.1540-6229.2010.00271.x). 4Michael LaCour-Little and Jing Yang, ‘‘Taking the Lie Out of Liar Loans’’, 2009 (available 

at http://www.fhfa.gov/webfiles/15048/websitellacour.pdf). 5Wei Jiang, Ashlyn Aiko Nelson, and Edward Vytlacil, ‘‘Liar’s Loan? Effects of Origination 

Channel and Information Falsification on Mortgage Delinquency’’ (available at http:// 

www.columbia.edu/wj2006/liarslloan.pdf). 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN JOHNSON FROM ERIC STEIN 

Q.1. What factors better predict default than downpayment? Are 

there certain product features or servicing practices that are more 

linked to high default rates than downpayment? 

A.1. At its core, the foreclosure crisis was caused by risky product 

features and poor underwriting. Loans that failed in large numbers 

had harmful mortgage features, such as built in payment shock 

and costly prepayment penalties that stripped away borrower equity. Abusive lending practices such as loans with little to no documentation and broker compensation driven by yield-spread premiums also contributed to high loan failure rates. A 2011 CRL report, Lost Ground: Disparities in Mortgage Lending and Foreclosures, highlighted the link between risky mortgage features and 

foreclosure rates. 1 For mortgages originated between 2004 and 

2008, this report showed that loans originated by a mortgage 

broker, containing hybrid or option ARMs, having prepayment penalties, and featuring high interest rates (i.e., subprime loans) had 

much higher foreclosure rates than loans without these features. 

Lost Ground also demonstrated that, while the majority of foreclosures have affected white borrowers, African Americans and 

Latinos have suffered foreclosure rates roughly twice that of 

whites, likely reflecting the fact that borrowers of color were much 

more likely to receive loans with risky features, even after controlling for credit scores. 

Further research demonstrating the relationship between these 

risky mortgage features and lending practices and defaults is substantial. Ambrose, LaCour-Little, and Husza find elevated rates of 

default attributable to the initial payment adjustments of 3/27 Hybrid ARMs. 2 Pennington-Cross and Ho also find a positive and significant association between hybrid ARMs and default rates. 3 In 

addition, they find significant increases in defaults for loans with 

limited documentation levels. The impact of reduced documentation 

levels is further supported by LaCour-Little and Yang, who find a 

significant increase in defaults associated with stated income loans 

and no documentation loans. 4 Jiang, Nelson, and Vytlacil find, 

after controlling for other risk factors, higher default rates for 

broker-originated loans. 5 They suggest this is the result of the misaligned compensation structure of brokers. The authors also find a 

positive and significant association between low documentation and 

default. A 2011 report by the University of North Carolina at 

Chapel Hill conducted an analysis of the relative risk rates of 

subprime loans compared with Self-Help’s portfolio of purchased 

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6Lei Ding, Roberto G. Quercia, Wei Li, and Janneke Ratcliffe, ‘‘Risky Borrowers or Risky 

Mortgages: Disaggregating Effects Using Propensity Score Model’’, Journal of Real Estate Research 33.2, 2011 (available at http://ccc.unc.edu/contentitems/risky-borrowers-or-risky-mortgages-disaggregating-effects-using-propensity-score-models/). 7 U.S. Department of Housing and Urban Development, Office of Policy Development and Research 2010. Report to Congress on the Root Causes of the Foreclosure Crisis (2010) p. 29. 

(available at http://www.huduser.org/Publications/PDF/Foreclosurel09.pdf). 8 Roberto Quercia, Li Ding, and Carolina Reid, ‘‘Balancing Risk and Access: Underwriting 

Standards for Qualified Residential Mortgages’’. January 2012 (available at http:// 

ccc.sites.unc.edu/files/2013/02/QRMlUnderwriting.pdf). 

loans to low-income families for a comparable set of borrowers. 6

The researchers found that the subprime loans had worse performance because they were more likely to be originated by brokers and 

had a higher incidence of adjustable rates and prepayment penalties. All of these links were confirmed by the Department of 

Housing and Urban Development in its final report to Congress on 

the causes of the crisis. This report found that, while softening 

housing prices were clearly a triggering factor, the foreclosure crisis itself was ‘‘fundamentally the result of rapid growth in loans 

with high risk of default—due both to the terms of these loans and 

to loosening underwriting controls and standards.’’ 7

The Qualified Mortgage and Ability to Repay reforms included in 

the Wall Street Reform and Consumer Protection Act address the 

kind of risky features and abusive loan practices that caused the 

housing crisis. These reforms outlaw no-doc loans, require that 

lenders consider the borrower’s ability to repay the loan, and restrict high fee loans, interest-only payment loans, and loans with 

prepayment penalties. Further, yield-spread premiums paid to 

mortgage brokers must be counted in points and fees, loan originator compensation cannot vary with the terms of the loan, and 

higher priced mortgage loans must have escrow accounts for taxes 

and insurance. Lastly, loans can no longer have built in payment 

shock. These reforms address the unaffordable and abusive loan 

products that caused the crisis. 

Research confirms how strong the impact of these protections are 

on reducing defaults. The 2012 report Balancing Risk and Access 

by the Center for Community Capital at the University of North 

Carolina at Chapel Hill and CRL analyzed nearly 20 million mortgages made between 2000 and 2008. 8 The study found that, while 

the loan pool as a whole had an aggregate default rate of 11 percent, loans that met Qualified Mortgage standards had a default 

rate of 5.8 percent, lower than that for conventional prime loans 

(7.7 percent) and a fraction of that of subprime loans (32.3 percent). 

Pursuing downpayment mandates as part of housing finance reform would result in learning the wrong lesson from the foreclosure 

crisis. Loans with risky product features and originated using 

harmful practices caused the foreclosure crisis, not lower-downpayment loans. 

Underwriting is an inherently multivariate process. For many 

lenders, this involves using compensating factors to assess a borrower’s creditworthiness. However, if one underwriting factor— 

such as a downpayment mandate—is enshrined in legislation, this 

will limit the ability of lenders to use compensating factors to make 

loans to borrowers who are strong in other areas and may have a 

lower propensity to default than borrowers who have the required 

downpayment but are weaker in other areas. Ultimately, this will 

123 

cut individuals who could succeed as homeowners out of the housing market and harm the ability of current homeowners to sell 

their homes. As a result, housing finance reform legislation should 

not reduce underwriting to a single variable. Instead, reform 

should allow the future regulator, bond guarantors, and lenders to 

use compensating factors in the underwriting process. 

Q.2. What role do common mortgage servicing standards and pooling and servicing agreements play in increasing the fungibility of 

mortgage-backed securities for investors? Should the future public 

mortgage finance system include common servicing standards and 

pooling and servicing agreements? 

A.2. The TBA market is the backbone of a highly liquid capital 

market for mortgage-backed securities. The key to this liquidity is 

having standardized pass-through securities and a streamlined investment process. All pass-through securities provide a credit guarantee to investors, pro-rata payments to investors, and only include 

mortgages meeting common underwriting standards. In addition, 

the system uses a standard set of up-front disclosures for investors. 

When taken together, this standardization makes securities highly 

fungible and, therefore, liquid. 

The standardization and fungibility of the TBA market must be 

preserved as part of housing finance reform, including the creation 

of a common securitization platform. Just as FHFA sets standards 

for servicers of GSE loans, a reformed housing finance system 

should require the future regulator to establish common servicing 

standards for Government backed loans. Additionally, maintaining 

standardization for key components of master contracts for loans 

subject to Government reinsurance will also promote liquidity and 

fungibility. 

Structured securities should not be able to access Government reinsurance, but should be able to access a common securitization 

platform. The platform can offer standardized terms for structured 

securities. The liquidity benefits of using a common securitization 

platform would be an incentive for PLS issuers to use the platform. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM ERIC STEIN 

Q.1. In an earlier hearing, Martin S. Hughes, Chief Executive Officer of Redwood Trust Incorporated, recommended that we establish 

servicer performance triggers to serve as benchmarks and as objective means for possible removal of the servicer. This is similar, but 

not identical, to a provision I pushed in the FHA Solvency Bill 

which was cleared by this Committee thanks especially to Chairman Johnson, Ranking Member Crapo, Senators Brown, Merkley, 

and Warren. Could you please discuss why servicer performance 

triggers would be helpful to consumers? 

A.1. Servicer performance has obvious impact for borrowers, particularly when borrowers are in financial distress. Just as FHFA 

currently has a responsibility to set servicing standards and to 

oversee servicers, a reformed housing finance system should also 

provide the future regulator with the authority to set servicer 

standards and enforce them, though these complicated benchmarks 

124 

should not be hard-wired in legislation. This could lead to unintended consequences in the event of a future economic downturn or 

spike in borrower delinquencies. Reform legislation should also 

allow the regulator and bond guarantor to hold servicers accountable in meeting these standards by being permitted to remove servicing from one that is nonperforming and transfer servicing, including to a specialty servicer. 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN JOHNSON FROM ROHIT GUPTA 

Q.1. You stated in your testimony that mortgage insurers would be 

interested in acting as bond insurers in a new system. As a bond 

guarantor, do you anticipate that your company would be able to, 

or interested in, guaranteeing 100 percent of principal and interest 

payments associated with the mortgage-backed securities it guarantees? 

A.1. Thank you for the opportunity to expand on the testimony I 

offered in the October 29 hearing before the Committee on ‘‘Essentials of a Functioning Housing Finance System for Consumers.’’ 

Genworth believes it is able to provide coverage that guarantees 

the timely payment of principal and interest to MBS holders, and 

if the Committee determines to include private bond guarantee protection ahead of a Government guarantee, we would be very interested in participating in that market. Our initial assessment is 

that we could do so either through structured ‘‘pool’’ mortgage insurance that backstops an all of the collateral that securitizes an 

MBS, or through a separate entity that would be organized and 

capitalized as a State regulated bond insurer. 

In considering whether to require a separate, private sector bond 

guarantee as part of housing reform, it is important to recognize 

the difference between the role of a mortgage insurer and that of 

a bond guarantor (whether organized as a licensed insurer or some 

other type of entity). Loan level mortgage insurance protects 

against losses stemming from mortgage defaults. MI providers assess mortgage credit risk on individual loans and insure against 

credit related losses, and we are required to hold capital and reserves against each loan we insure. Typically, mortgage insurance 

is provided on a loan level basis, although we also can provide insurance on a pool of loans. Traditionally, pool insurance provided 

by private MI companies protects against losses arising in the 

event a mortgage loan goes into foreclosure. But we do think pool 

coverage could be structured to guarantee payment of principal and 

interest to MBS holders. 

The ‘‘standard’’ MI coverage provisions in Corker Warner build 

upon the well-established market practice of requiring private MIs 

to assume first loss arising from foreclosure, with meaningful levels 

of insurance coverage offered at pricing that is affordable and 

transparent. This approach to credit loss protection mitigates the 

exposure of lenders and investors, and also ensures that the housing market benefits from the risk oversight that is central to the 

MI business model. As a reminder, MIs are in the business of underwriting and managing mortgage credit risk. We assume first 

loss position when a loan goes into foreclosure, and we rely on our 

125 

own, independent mortgage credit risk guidelines when making the 

insurance decision. An MI’s book of insured loans benefits from diversity of risk across geographies, lenders, and origination years. 

Bond insurers, on the other hand, guarantee payments of principal and interest to holders of mortgage backed securities. The obligation of a bond insurer arises only when cash flows from the pool 

of loans that collateralize a security is insufficient to pay bondholders, regardless of the reason for the cash flow shortfall. While 

an MI has an obligation to pay a claim whenever a loan goes into 

foreclosure, that same foreclosure may not trigger any obligation 

for a bond insurer, because cash flows from other pooled mortgages 

may be sufficient to make timely payment of principal and interest. 

Because bond insurers are not exclusively insuring against credit 

losses, they may lack the same incentive that an MI has to impose 

independent credit risk guidelines on the loans serving as collateral. 

In the U.S., mortgage insurers are regulated as ‘‘monoline’’ insurance companies. As a matter of state law, we are not permitted to 

engage in any business other than providing mortgage insurance. 

In the event Congress includes a role for private bond guarantee 

coverage as part of housing reform, we believe mortgage insurers 

could provide that coverage through pool insurance that was structured to guarantee timely payment of principal and interest. In the 

alterative, an MI could create a separately organized, separately 

capitalized entity licensed as a bond insurer. We believe an MI’s 

mortgage expertise makes it well suited to operate a separate bond 

guarantee company, and there may also be some operational efficiencies that would make an MI especially well suited to offer reliable, cost efficient bond guarantee protection. To the extent that a 

housing reform proposal contemplates the use of bond insurance 

ahead of a Government backstop, it will be important to make sure 

that the amount of any bond guarantee be calculated after giving 

effect to the benefits of loan level mortgage. 

Q.2. From 2007 to 2013, how many States granted mortgage insurance companies waivers from their capital requirements? 

A.2. Following the downturn in the housing market in 2007, 

Genworth’s main U.S. mortgage insurance subsidiary, GEMICO, 

received explicit waivers of the 25:1 risk to capital requirement 

from 13 States. Another 34 States deferred to our state of domicile, 

North Carolina, which had granted us a waiver. Given that riskto-capital is a very simple measure of an insurer’s capital, State 

regulators performed extensive analysis of our claims paying capabilities before they granted waivers, and they continue to update 

those analyses. 

GEMICO’s risk to capital ratio is 23.2 to 1 (as of September 30, 

2013), so we do not currently require waivers to continue writing 

new business. 

Q.3. From 2007 to 2013, how many mortgage insurance companies 

paid out 100 percent of the claims to policy holders? How many 

mortgage insurers issued deferred payment obligations to pay 

claims? 

A.3. Of the eight mortgage insurance companies insuring new business in 2007, five companies continue to write new business and 

126 

1MI companies do deny claims payments in the event an insured party has not complied with 

its contractual obligations. Claims denials are typically the result of fraud or misrepresentation. 

have full regulatory authority to pay 100 percent of claims consistent with the terms of our master policies (Genworth, MGIC, Radian, United Guaranty and CMG (which is in the process of being 

acquired by Arch Reinsurance)). 1 Three MIs ceased writing new 

business (went into ‘‘run off’’): Triad, PMI and RMIC. RMIC’s parent, Old Republic, elected not to infuse additional capital into 

RMIC to permit them to continue insuring new business. The MIs 

that are in run off continue to pay claims, partially in cash, and 

partially via a deferred payment obligation. Triad currently pays 

75 percent of claims in cash, PMI pays 55 percent and RMIC pays 

60 percent. Each of those MIs has increased the amount of claims 

being paid in cash since they initially went into run off, and it is 

possible that the ultimate disposition to policy holders will be even 

greater than their current ‘‘pay rate.’’ 

Q.4. Does your business use a ‘‘one size fits all’’ standard in deciding whether to insure a loan, or do you look at a variety of factors 

in an individual loan application? What factors? 

A.4. Our decision of whether to insure a loan is driven by a dynamic assessment of a loan file that includes a variety of factors. 

We consider those factors in a ‘‘holistic’’ way that allows us to fully 

consider the ‘‘three Cs’’ of underwriting: credit history, collateral 

and capacity to pay. In particular: 

• Genworth looks at a range of factors, including loan type, level 

of documentation, property type, source of downpayment, appraised value, loan-to-value ratio, loan amount, credit score 

and credit history, and debt to income ratio (DTI). 

• Our underwriting is not simply formulaic; we often evaluate a 

loan giving consideration to compensating factors. For example, a higher DTI might be acceptable for a borrower with significant cash reserves or relatively high disposable income. 

Conversely, a borrower with a high credit score but other indicia of weak credit might not be approved for mortgage insurance. 

• To ensure that we are appropriately assessing and managing 

credit risk, Genworth conducts formal monthly reviews of our 

insured business to monitor actual experience compared to a 

set of risk metrics that are designed to serve as an early warning system for potential shifts in risk within our book of business. 

• Our underwriting guidelines are complemented by our pricing 

approach, which varies based on certain key criteria such as 

loan type and downpayment amount. In this regard, private 

MI differs from FHA’s ‘‘one size fits all’’ pricing. 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN JOHNSON FROM ALYS COHEN 

Q.1. We saw during the crisis that the interests of servicers, investors, and consumers were not always aligned, partially due to 

servicer compensation or servicers holding second liens on mortVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00130 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
127 

gages that they serviced. Have these issues related to incentive 

alignments been addressed in existing standards? If not, how 

should housing finance legislation address these issues? 

A.1. The foreclosure crisis, and the failure of servicers to provide 

efficient, affordable outcomes for qualified homeowners facing hardship, demonstrate the lack of alignment between servicer interests 

and those of homeowners, investors, and the economy at large. A 

foreclosure guarantees the loss of future income to the servicer, but 

a modification also will likely reduce future income, cost the 

servicer more in the present in staffing, and delay the servicer’s recovery of expenses. Moreover, the foreclosure process itself generates significant income for servicers. Income from increased default fees and payments to affiliated entities can outweigh the expense of financing advances for a long time. A dragged out foreclosure process also boosts the monthly servicing fee and slows 

down servicers’ largest noncash expense, the amortization of mortgage servicing rights, since homeowners who are in default are unlikely to prepay via refinancing. Finally, foreclosure or modification, not delinquency by itself, usually triggers loss recognition in 

the pool. Waiting to foreclose or modify postpones the day of reckoning for a servicer. But delay can cost a homeowner the opportunity to obtain a modification. 

The lack of alignment between servicers and other market players has not been addressed by existing standards and thus housing 

finance legislation should include several key elements to ensure 

that servicer interests are aligned with the rest of the market. 

First, the new housing finance system must require servicers to 

provide affordable loan modifications that are consistent with investor interests. The housing finance system should promote proven regimes for modifying loans with optimum loan performance 

and should include a standardized, publicly available net present 

value analysis. This approach should also include limited, Government-backed portfolio capacity to hold modified loans. The modification mandate should be included both in the servicer approval 

requirements and in uniform securitization agreements. 

Second, homeowners seeking loan modifications should not be 

faced with an ongoing foreclosure while they are processing their 

loan modification request. Instead, such foreclosures should be put 

on temporary hold rather than subjecting the homeowner to the 

‘‘dual track’’ of foreclosure and loss mitigation. Homeowners in foreclosure should be able to obtain a temporary pause to a foreclosure 

to promote efficient evaluation of a loan modification application. 

Additionally, in order to promote timely loan modification reviews 

over foreclosures, dual track protections must be triggered by the 

homeowner’s initial application. A system that brings protections 

into play only when the homeowner submits a ‘‘complete application’’ invites manipulation of the process based on the servicer’s 

subjective determination of an application’s status. 

While existing regulations provide some level of protection 

against dual tracking, stronger GSE rules are nevertheless appropriate. The housing finance system should promote the highest 

standards for loss mitigation, as it has for home lending. Such 

progress would promote broader market changes and demonstrate 

the viability of sustainable loan modification reforms. Dual track 

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protections in GSE reform legislation should be included both in 

the servicer approval requirements and in the uniform 

securitization agreements. 

Third, the new housing finance corporation (or the bondholders 

themselves) should be authorized to purchase insurance directly, 

including force-placed insurance. A mechanism allowing the purchase of force-placed insurance—as well as title insurance and private mortgage insurance—directly from insurers would decrease 

costs for borrowers and the corporation by circumventing the kickbacks to servicers that drive up insurance prices. 

Fourth, the new housing finance system should promote transparency and accountability. An Office of the Homeowner Advocate 

should be established to assist with consumer complaints and compliance matters. This would help remedy the current situation in 

which noncompliance problems with GSE loans often go 

unaddressed. Moreover, loan level data collection and reporting 

should include demographic and geographic information, to ensure 

that civil rights are protected and equal opportunity to avoid foreclosure is provided. Aggregate information about complaints and 

the data about loss mitigation must be publicly available, as 

HMDA data are. Work to develop the new housing finance system, 

and to administer and oversee it, should include stakeholders such 

as community groups and representatives of homeowners, in addition to the corporate stakeholders on the lending and servicing 

sides. 

Finally, in order to ensure that the housing system meets its 

goals, there must be strong regulatory levers for securing compliance, including robust monitoring, reporting, and supervision. 

Q.2. Post-crisis, there have been a number of actions taken related 

to mortgage servicing, including the CFPB rule, the FHFA’s mortgage servicing alignment initiative, the FHFA’s servicing compensation discussion paper, and enforcement actions by the prudential regulators. Please comment on the effectiveness of these efforts, and whether there are recommendations or findings from 

these actions that should be incorporated into housing finance legislation. 

A.2. While a number of Government actions and initiatives have 

called attention to the need for reform of the mortgage servicing industry and have in many cases moved the ball forward, the results 

have been incomplete at best. Below I review the various actions 

individually. What they have in common is that they leave several 

important pieces of work undone. As noted above, important work 

still to be done includes: a mandate to provide affordable NPV-positive loan modifications to qualified homeowners facing hardship, a 

full pause in foreclosure for homeowners seeking loan modifications 

until such review is completed, and a dismantling of the reverse 

competition that characterizes the force-placed insurance system. 

Broader systemic changes relating to transparency and accountability also are still needed. 

The Consumer Financial Protection Bureau should be commended for initiating a significant set of rules governing mortgage 

servicing. The new rules, set to take effect in January, address a 

wide array of servicer duties. Yet, while the rules provide substanVerDate Nov 24 2008 15:06 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00132 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\10-29 ZDISTILLER\102913.TXT JASON
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tial procedural protections to homeowners, including the requirement to review a completed loan modification application prior to 

initiating a foreclosure, they still subject many homeowners already in foreclosure to the ‘‘dual track’’ of foreclosure and loan 

modification. The rule also relies on a servicer finding that a ‘‘complete’’ application has been submitted—a term that easily can be 

gamed by servicers, who are the party defining that term. The 

CFPB also declined to include the key component needed to align 

servicer incentives with those of the rest of the market: a mandate 

for servicers to provide homeowners with affordable loan modifications when doing so is consistent with investor interests. While the 

CFPB rules include some enhanced protections on force-placed insurance, a new GSE system is uniquely positioned to affect how 

such insurance is bought and administered. Finally, even where 

the CFPB protections are strong, the rules appear to apply only the 

first time a person faces hardship in the life of a loan. Many homeowners will face more than one hardship over the decades they 

may be repaying a loan. 

Various enforcement actions by State and Federal agencies, including State Attorneys General and the prudential regulators, 

have been able to substantially increase the amount of principal reduction offered by mortgage servicers and to provide limited direct 

compensation to homeowners harmed by abusive servicer practices. 

Moreover, the National Mortgage Settlement was the first action 

that established substantial standards for servicer conduct. These 

Federal and State measures, however, have been primarily retrospective and the standards themselves are temporary. 

FHFA’s work touches servicing in several ways. First, the FHFA 

Servicing Alignment Initiative, like the CFPB rules, requires loan 

modification reviews to be completed prior to foreclosure while still 

allowing homeowners in foreclosure to be subjected to foreclosure 

during many loan modification reviews. It also goes beyond what 

the CFPB has established by setting up a modification waterfall. 

Yet the GSE guidelines for ‘‘standard’’ modifications, while providing flexibility by not being keyed to a net present value (NPV) 

analysis, are not adequately focused on homeowner affordability 

because they operate based on a percentage of payment reduction 

not a target debt-to-income ratio. Second, with regard to forceplaced hazard and flood insurance, the current system, in which 

the GSEs reimburse servicers for force-placed hazard and flood insurance, has resulted in vastly inflated prices for borrowers and, 

when borrowers default, the GSEs and taxpayers. Lender-placed 

insurers and servicers do not have the incentives to control premium costs. A new GSE system is well situated to address problems in the insurance market through the direct purchase of insurance. FHFA recently had an opportunity to improve this situation 

and declined. 

Third, FHFA announced that it will be charging more for mortgages in States with long foreclosure timelines. We believe this policy is misguided (and the incoming FHFA director Mel Watt has 

announced that he will delay implementation of the policy pending 

further study). While some States with better consumer protections 

have longer foreclosure timelines, in most cases the protracted 

timeframe is not due to a delay mandated by the rules themselves, 

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but by the unwillingness of servicers to follow those rules. Better 

consumer protection rules prevent avoidable foreclosures, which ultimately saves money both for the GSEs and for communities while 

protecting home values and the housing market. It does not appear, however, that FHFA factored the long-term savings achieved 

in States with stronger homeowner protections into their cost calculations. Homeowners engaging in prospective borrowing in those 

States should not be penalized on the front end for living in a State 

with better foreclosure protections, and for the failure of servicers 

to properly comply with those protections. Moreover, delay in foreclosure is multilayered. Rather than penalizing consumers, FHFA 

should continue encouraging servicers to process loan modification 

and foreclosures expeditiously, particularly as consumers are hurt 

by foreclosure delays, while servicers are not. 

Finally, FHFA has failed to reform how servicers are compensated. FHFA worked with the GSEs and HUD to propose 

changes to the structure of servicer compensation but failed to 

make any changes. Moreover, the joint proposal did not address the 

misaligned incentives in the current compensation system. Nothing 

in the proposal tied servicer compensation closely to either the actual cost of servicing loans or the performance of the loans. 

Servicers under the current regime profit from their own bad behavior because they are permitted to retain all ancillary fees. Any 

new system should promote a modified fee-for-service model, coupled with rigorous servicing standards and limited ancillary fees. 

Such a model could improve servicing for both homeowners and investors, as long as it also restricts the incentive to push a loan into 

default servicing in order to recover enhanced compensation and 

fees. 

Q.3. S.1217 specifies that a new Government agency, the Federal 

Mortgage Insurance Corporation (FMIC), will approve mortgage 

servicers for participation in the Government-guaranteed secondary 

mortgage market, and may suspend their approval if certain minimum standards are not met. What role should the FMIC have in 

the ongoing regulation of servicers? Should the FMIC have enforcement, supervisory, or examination powers? 

A.3. Homeowners are unable to choose their mortgage servicer. 

Thus, the FMIC’s role in approving mortgage servicers takes on 

even greater importance because it is the primary means for assuring that servicers comply with appropriate standards. These standards should include requirements for servicers to provide sustainable loan modifications consistent with investor interests and to 

otherwise structure their loss mitigation operations to align 

servicer incentives with those of investors, homeowners, and communities. In order to provide the FMIC with the necessary tools to 

promote these outcomes, it should have enforcement, supervisory, 

and examination powers and should also coordinate with prudential regulators. In order to promote timely responses to compliance 

challenges, the FMIC also should house the Office of the Homeowner Advocate, which would serve as a locus at FMIC for consumer complaints and resolution of individual compliance-related 

matters. While enhanced Government authority would promote 

better outcomes, legislation also should provide homeowners with 

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a private right of action to enforce their rights to proper mortgage 

servicing on FMIC-insured loans. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM ALYS COHEN 

Q.1. In an earlier hearing, Martin S. Hughes, Chief Executive Officer of Redwood Trust Incorporated, recommended that we establish 

servicer performance triggers to serve as benchmarks and as objective means for possible removal of the servicer. This is similar, but 

not identical, to a provision I pushed in the FHA Solvency Bill 

which was cleared by this Committee thanks especially to Chairman Johnson, Ranking Member Crapo, Senators Brown, Merkley, 

and Warren. Could you please discuss why servicer performance 

triggers would be helpful to consumers? 

A.1. While homeowners are able to choose their lender, the servicer 

is designated by the owner of the loan and the homeowner has no 

choice in the matter. Thus, when a servicer does not properly fulfill 

its duties a homeowner does not have the option of terminating the 

relationship with the servicer in favor of one who provides better 

customer service. While servicers work for investors, a variety of 

circumstances, including a collective action problem, often make it 

difficult for investors to hold servicers responsible for noncompliance with servicer duties. In a newly reformed GSE system, the 

FMIC or similar corporation is in the best position to hold servicers 

accountable for performance on an individual and systemic basis. 

The contractual relationship between the servicer and FMIC gives 

the FMIC the ability to establish parameters concerning servicer 

performance. By establishing triggers to be used as benchmarks for 

performance and potential removal of a servicer, the FMIC would 

be able to implement a transparent and uniform system of accountability. Such a setup would benefit consumers who otherwise have 

little leverage to address servicer misconduct. Moreover, the market in general would benefit because servicer conduct and incentives would be better aligned with other stakeholders.