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67–591 PDF 2011

S. HRG. 112–50 

PUBLIC PROPOSALS FOR THE FUTURE OF THE 

HOUSING FINANCE SYSTEM 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING PUBLIC PROPOSALS FOR THE FUTURE OF AMERICA’S 

HOUSING FINANCE SYSTEM 

MARCH 29 AND MAY 26, 2011 

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

( 

Available at: http://www.fdsys.gov/ 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

CATHERINE GALICIA, Counsel 

ERIN BARRY, Professional Staff Member 

BETH COOPER, Professional Staff Member 

WILLIAM FIELDS, Legislative Assistant 

ANDREW J. OLMEM, JR., Republican Chief Counsel 

MICHAEL PIWOWAR, Republican Chief Economist 

CHAD DAVIS, Republican Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

LEVON BAGRAMIAN, Hearing Clerk 

BRETT HEWITT, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
C O N T E N T S 

TUESDAY, MARCH 29, 2011 

Page 

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

Opening statements, comments, or prepared statements of: 

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

WITNESSES 

Michael D. Berman, Chairman, Mortgage Bankers Association ......................... 4 

Prepared statement .......................................................................................... 28 

Arnold Kling, Ph.D. Member, Mercatus Center Financial Markets Working 

Group, George Mason University ....................................................................... 5 

Prepared statement .......................................................................................... 34 

Mark Zandi, Chief Economist, Moody’s Analytics ................................................. 7 

Prepared statement .......................................................................................... 48 

Janneke Ratcliffe, Senior Fellow, Center for American Progress Action Fund .. 8 

Prepared statement .......................................................................................... 51 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Arnold Kling web blog submitted by Chairman Johnson ..................................... 122 

Statement submitted by the Independent Community Bankers of America ...... 125 

THURSDAY, MAY 26, 2011 

Page 

Opening statement of Chairman Johnson ............................................................. 129 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 130 

Senator Vitter ................................................................................................... 131 

Senator Reed ..................................................................................................... 132 

Senator Wicker 

Prepared statement ................................................................................... 152 

WITNESSES 

Terri Ludwig, President and Chief Executive Officer, Enterprise Community 

Partners ................................................................................................................ 133 

Prepared statement .......................................................................................... 152 

Responses to written questions of: 

Chairman Johnson .................................................................................... 190 

Ron Phipps, President, National Association of REALTORS® ............................ 135 

Prepared statement .......................................................................................... 156 

Mark J. Parrell, Executive Vice President and Chief Financial Officer, Equity 

Residential, on behalf of the National Multi Housing Council and National 

Apartment Association ........................................................................................ 136 

Prepared statement .......................................................................................... 166 

Greg Heerde, Managing Director, Aon Benfield and Aon Benfield Securities ... 138 

Prepared statement .......................................................................................... 173 

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Page

IV 

Martin S. Hughes, President and Chief Executive Officer, Redwood Trust, 

Inc. ......................................................................................................................... 140 

Prepared statement .......................................................................................... 175 

Responses to written questions of: 

Senator Shelby ........................................................................................... 190 

Barry Rutenberg, First Vice Chairman of the Board, National Association 

of Home Builders .................................................................................................. 142 

Prepared statement .......................................................................................... 180 

Responses to written questions of: 

Senator Shelby ........................................................................................... 194 
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PUBLIC PROPOSALS FOR THE FUTURE OF 

THE HOUSING FINANCE SYSTEM—PART I 

TUESDAY, MARCH 29, 2011 

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

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

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I call this hearing to order. 

As we begin this hearing, I am reminded of the former Chairman’s farewell speech on the Senate floor. He challenged Senators 

to rise to the expectations of the American people and work toward 

consensus to address the difficult times facing families across the 

Nation. 

While mortgage credit continues to be available, it is almost exclusively through Fannie Mae, Freddie Mac, and the FHA. Maintaining the housing finance system in this way is not sustainable 

for the long term. Reforming our housing finance system will require the kind of hard work and consensus building that the Senate is known for. This endeavor can only be accomplished through 

passionate but civil debate. 

To help us frame the debate, we have four witnesses before us 

today with proposals for the future structure of the housing finance 

system. I would like to thank each of you for being here today and 

for taking the time to try and find a path forward for the Nation’s 

housing market. I was pleased to see that all your plans considered 

how changes would affect the cost and availability of mortgage 

credit to qualified families. 

These are complex issues with real consequences, and it is understandable that reasonable people will disagree about the path forward. While disagreement can help further our understanding of 

the potential impact of changes, we are not here to simply attack 

each other’s ideas. I hope that in the great tradition of this body 

we can disagree without being disagreeable. 

The Committee’s first hearing on this topic was a constructive 

discussion about the options for the future, and I hope we can continue that discussion today. At that time in the Committee agenda 

that I released in February, I raised several points for consideration. These included preserving the 30-year fixed-rate mortgage, 

ensuring that community banks continued to have equal access to 

the secondary market, protecting the availability of affordable 
2 

housing, and safeguarding taxpayer dollars. I look forward to hearing from our witnesses about how each of their plans address these 

points. 

Before I conclude my statement, I would like to note that the 

FDIC is considering the proposed QRM definition, as required by 

the Dodd-Frank Act. Like other rulemakings, there will be a comment period before the definition is finalized. I would encourage extensive and thoughtful public comments about the proposed rule to 

ensure that all sides are heard. 

Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. Thank you for putting this hearing together today. 

Today the Committee will again take up the issue of housing finance system. At the Committee’s last hearing, we heard from 

Treasury Secretary Geithner about the need for reform. Secretary 

Geithner noted that our housing market is now entirely dependent 

on Government support. He warned that private capital will not return until we fix the problems in our private mortgage market. He 

also told the Commission that Congress should, therefore, pass 

housing finance reform during this Congress. 

I agree with Secretary Geithner that housing finance reform is 

overdue and should be promptly addressed. Chairman Johnson has 

also stated that this is one of his highest priorities. However, I also 

believe that before Congress can consider legislation, this Committee needs to do its homework. 

The Committee needs, I believe, to thoroughly examine Federal 

housing policy and identify the problems with our current system. 

Accordingly, I believe this hearing is premature at the moment. Before we discuss solutions, I think on this Committee we should first 

clearly identify the problems we are trying to solve. Without that 

examination, a thorough examination, I fear that the Committee 

will again yield to the temptation of picking a solution before it has 

accurately described the problem. I think legislation should be driven by facts, not by predetermined outcomes. 

I would propose that the Committee establish a formal process 

for considering housing finance reform. This process, I believe, 

should include a series of hearings that are proceeded by comprehensive staff work. 

First, the Committee should hold a series of investigative hearings to examine Federal housing policy and our housing finance 

system. These hearings would seek to determine what aspects of 

our system have worked well and should be retained, as well as 

which aspects should be reformed or discarded. As part of these 

hearings, I believe that the Banking Committee would also examine what caused the failures of Fannie Mae and Freddie Mac. We 

have not done that thoroughly yet. 

The Committee would next gather the proposals for reforming 

our housing finance system from a wide variety of interested parties across industry, academia, and the public. I also believe the 

Banking Committee should then commence a second series of hearings examining the costs and the benefits of these proposals, directly applying the lessons learned from our first round of hear-
3 

ings. And once the Banking Committee has identified the problems 

and researched the potential solutions, we will then be ready for 

the final phase, which would be legislating. 

I understand that this process would be time-consuming and require a great deal of effort, but that is what this Committee should 

be about. I do not believe that the Committee has much choice. It 

is the only way to produce legislation on a subject as complex and 

important as housing finance. This process would help educate us 

on the issues so that we can make informed decisions here in the 

Committee and in Congress. 

It would also ensure that any legislation passed is effective and 

has the fewest unintended consequences. In addition, this process 

would offer the best chance of forging a bipartisan consensus on 

how we should proceed. Unfortunately, the Committee failed to follow this course with the Dodd-Frank legislation, and the result was 

partisan legislation that is full of technical problems that has had 

serious adverse unintended consequences. I hope we do not here repeat this mistake with housing finance reform. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Before I introduce our witnesses, would 

other Members like to make brief opening statements? I will also 

keep the record open for 7 days for statements and questions. Senator Reed. 

[No response.] 

Chairman JOHNSON. Senator Moran. 

Senator MORAN. No, Mr. Chairman. 

Chairman JOHNSON. Senator Merkley. 

[No response.] 

Chairman JOHNSON. I would like to introduce our first witness, 

Mr. Michael Berman. Mr. Berman is chairman of the Mortgage 

Bankers Association and a founder of CW Financial Services. In 

addition to his capacity as chairman, Mr. Berman also leads the 

MBA Task Force entitled ‘‘The Council on Ensuring Mortgage Liquidity: The Future of Fannie Mae and Freddie Mac.’’ 

Our next witness is Dr. Arnold Kling. Dr. Kling is a member of 

the Mercatus Center’s Financial Markets Working Group. Prior to 

Mercatus, Dr. Kling had extensive experience at Freddie Mac and 

the Federal Reserve and has authored numerous books relating to 

the mortgage financial crisis. 

Next is Dr. Mark Zandi. Dr. Zandi is chief economist for Moody’s 

Analytics, where he directs research and consulting. Moody’s Analytics is a provider of economic research data and analytical tools. 

Dr. Zandi has frequently testified before Congress on various economic topics, including before this very Committee, and we welcome you back. 

Our last witness is Janneke Ratcliffe. Ms. Ratcliffe is a senior 

fellow at the Center for American Progress. Her work focuses on 

research and policy within the area of housing finance. In addition 

to her work at CAP, Ms. Ratcliffe is associated director at the Center for Community Capital at the University of North Carolina. 

We thank all of you for testifying before us today. Mr. Berman, 

proceed. 
4 

STATEMENT OF MICHAEL D. BERMAN, CHAIRMAN, MORTGAGE 

BANKERS ASSOCIATION 

Mr. BERMAN. Thank you, Chairman Johnson and Senator Shelby, 

for the opportunity to testify today. I have been in the real estate 

finance industry for over 25 years, and my company has been active in the commercial mortgage-backed securities arena as an investor, lender, issuer of securities, servicer, and special servicer. 

We have also been an active Fannie Mae, Freddie Mac, and FHA 

multifamily lender and servicer. 

The current housing crisis has prompted a fundamental rethinking of the part played by the Government in the housing finance 

system. Certainty of the Federal role in the housing market is necessary to encourage private capital to return. 

Several factors contribute to the current uncertainty and the lack 

of private capital in the housing market. Ongoing uncertainty on 

risk retention rules, GSE reform, and the future of the conforming 

loan limits raise questions about the consistency of national housing policy. While the Administration’s recently released white 

paper on reforming the housing finance system was an important 

first step, much work lies ahead, and we must act in a deliberate, 

coordinated, and comprehensive fashion. 

MBA firmly believes that a carefully crafted Government role can 

serve to maintain the nascent housing market recovery and preserve the availability of the affordable 30-year fixed-rate mortgage. 

To this end, in 2008 MBA convened the Council on Ensuring Mortgage Liquidity, which I chair. This 23-member council was made 

up of industry practitioners from the single-family, multifamily, 

and commercial sectors of the real estate finance industry. Its mission was to look beyond current market conditions to what a properly functioning secondary mortgage market would look like. 

In September of 2009, MBA first articulated a plan outlined in 

my written testimony. It is based on three key principles: 

First, secondary mortgage market transactions should be funded 

with private capital. Private capital should take two forms: capital 

that takes on credit risk on the mortgages, and capital from bond 

investors that takes on interest rate risk. 

Second, to promote uninterrupted market liquidity for the core 

mortgage market, the Government should provide an explicit but 

limited credit guarantee on a class of mortgage-backed securities 

backed by core, well-underwritten single-family and multifamily 

mortgage products. This guarantee should not be free, but should 

be financed with risk-based fees to be deposited into an FDIC-type 

insurance fund. 

Third, taxpayers and the system should be protected through 

limits on the mortgage products covered, permissible activities, 

portfolio size and purpose, coupled with strong risk-based capital 

requirements and risk-based payments into a Federal insurance 

fund. This plan has largely been mirrored in Option 3 of the Administration’s White Paper as well as plans proposed by other industry practitioners and trade groups. 

Let me be clear. MBA’s plan is not an extension of the current 

status quo. It focuses on core products and enacts five significant 

lines of defense to protect taxpayers. We believe that once the tran-
5 

sition is complete, the Government footprint in the real estate market would be much smaller than today. 

The framework we have proposed is not intended to be the entire 

market. It is meant to focus on a narrowly defined set of core mortgage products that are essential to have available through all market conditions. Our proposal recognizes the need for a wide array 

of products through a reemergence of the private market, including 

private label securities and covered bonds. 

We must also ensure that the transition from the current system 

to a new model is as seamless as possible. As taxpayers, we have 

a $150 billion investment that we need to protect. Measures such 

as focusing the GSEs on a narrow range of mortgages and winding 

down their portfolios can be undertaken now. While we continue to 

rely on the GSEs as we identify a clear path forward, we must 

work to remove uncertainty and ensure that the GSEs’ resources 

are of service now and throughout the transition. 

The challenge of retaining and recruiting talented professional 

cannot be understated. Without their talent, our housing finance 

system would be further at risk. 

Mr. Chairman, MBA’s recommendations combine an acknowledgment that only a Government guarantee can attract the depth and 

breadth of capital necessary to support the market during times of 

economic stress, with a reliance on private capital, insistence on 

multiple layers of protections for taxpayers, and a focus on ensuring a competitive and efficient secondary mortgage market. These 

proposals were developed by industry practitioners and represent a 

practical approach to ensuring liquidity in the mortgage market. 

As you and other policy makers are aware, 16 diverse organizations coalesced this week around a similar set of principles, calling 

for a continued, predictable Government role in the housing finance 

system to promote investor confidence and to ensure liquidity and 

stability. We welcome your thoughts and comments on our idea. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Mr. Berman. 

Dr. Kling. 

STATEMENT OF ARNOLD KLING, PH.D. MEMBER, MERCATUS 

CENTER FINANCIAL MARKETS WORKING GROUP, GEORGE 

MASON UNIVERSITY 

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

Shelby. I would like my written testimony to appear in the record. 

Chairman JOHNSON. It will be. 

Mr. KLING. Thank you. 

I will have to apologize in advance. I am going to overlook the 

many minor areas of agreement I have with other people at the 

table and focus on fundamental disagreements. And my remarks 

may be rather harsh because this country is suffering badly from 

the consequences of God-awful housing policy, and I cannot help 

but feel exasperated by it. 

What my message boils down to is that when it comes to coming 

up with another institution that supplies a Government guarantee 

in the mortgage market, we should just say no. 

Our friends at American Progress have some critical things to 

say about the private sector, and a lot of them are justified. It 
6 

would be naive to think that the private sector always gets everything right. But it would be really naive to think that the Government gets things right. Government has committed large blunders, 

and Government has been captured by special interests. Right here 

at this table, we have two special interests represented. We have 

mortgage bankers who want a guarantee in the secondary mortgage market in order to make sure that we preserve the originateto-distribute model. We have Moody’s that wants to have a guarantee in the secondary mortgage market in order to ensure that securities are out there and they can earn fees from rating those securities. The only reason to have special interests here at the table 

is if you could look them in the eye and just say no. 

Our country’s economy is in a shambles because of a Government-sponsored credit binge in mortgage lending. If a household 

has $5,000 and walks into Las Vegas and says, ‘‘We would like 

$200,000 of poker chips,’’ what would you say? If they walked into 

their stockbroker and said, ‘‘We would like $200,000 worth of 

stock,’’ what would you say? And if they want a $200,000 house, 

what should you say? You should say no. Buying a $200,000 house 

with $5,000 down is gambling. Even if it is done under the auspices 

of a Government program designed by a well-intentioned organization, it is gambling and it is wrong. 

Only in Washington, after this shambles caused by a credit 

binge, would we be worried about making sure that there is more 

credit available in the secondary mortgage market. That is like if 

a town had been devastated by a bunch of drunken hooligans, I 

think most people would be saying let us worry about not having 

binge drinking. Instead, if that happened in Washington, we would 

be worrying about how can we keep the bars stocked? How can we 

make sure that everyone has access to alcohol? We would not want 

anyone to miss out. Only in this upside down world of Washington. 

I wish that our friends at American Progress and other well-intentioned people would focus on projects that would help American 

households become better at saving, not bigger borrowers. 

If we do without a Government guarantee, will the secondary 

mortgage market survive? Not necessarily. We might go back to 

lending like when I was growing up where, if you got a mortgage 

loan, the same bank that lent you the money held onto the mortgage until you finished making the payments. That would not be 

a disaster for the American people. 

If we do not have a guarantee, will as much foreign capital come 

into the American mortgage market? I sure hope not. 

Will the 30-year fixed rate still be the standard mortgage? It will 

if consumers choose it when it is appropriately priced. 

Again, the markets will not do everything right, but without a 

guarantee, things will not go as badly wrong as they did with the 

Government-sponsored enterprises. Any scheme to bring Government back in as a player providing a guarantee is the financial 

equivalent of building a new nuclear power plant right on top of 

a fault line. Based on our experience, we should just say no. 

Chairman JOHNSON. Dr. Kling, I would remind you that we are 

here to have a productive discussion about the future of our housing finance system, not to quote your blog to attack other witnesses’ proposals and just hope my temper stays in check. I ask 
7 

that the full blog post be entered into the record. Please be considerate of the Senate rules of civility in the remainder of your testimony. 

Mr. Zandi. 

STATEMENT OF MARK ZANDI, PH.D., CHIEF ECONOMIST, 

MOODY’S ANALYTICS 

Mr. ZANDI. Thank you, Mr. Chairman, Senator Shelby, and the 

rest of the Committee, for the opportunity to speak today. You 

should know I am chief economist of Moody’s Analytics, which is 

an independent subsidiary of Moody’s Corporation, and I am also 

a director of the MGIC Corporation, which is the Nation’s largest 

mortgage lender. My views I am expressing today are mine, not 

Moody’s or MGIC’s. I am going to make three points in my remarks. 

First, the Federal Government should significantly scale back its 

current role in the housing and mortgage markets. As has been 

pointed out, nearly all of the mortgage loans originated in the past 

couple of years have been FHA, Fannie, or Freddie loans, Government loans. While changing this quickly would be disruptive to the 

housing market and economy, it is not sustainable in the long run. 

This untenable situation is the result of the collapse of the private mortgage market during the financial panic. Just to give you 

a number, at the peak of the housing bubble in 2005, the private 

market accounted for roughly two-thirds of all originations, and 

powering the private market was the securitization process, which 

at its core was fundamentally flawed. No one in the process was 

responsible for making sure that it was working properly. Mortgage 

banks and brokers, investment banks, credit rating agencies, and 

Government regulators themselves all made mistakes. And right 

now the private market is comatose. 

To allow the private market to revive, the Government should 

phaseout Fannie and Freddie and significantly scale back the role 

of the FHA—again, not quickly but over time in a clearly defined 

way—and there are a number of policy tools to do that that I think 

the Administration has laid out that are useful: reducing conforming loan limits, which will begin later this year; raising insurance premiums at the FHA, Fannie, and Freddie; and requiring 

Fannie and Freddie to reduce the size of their loan portfolios. So 

point number one, I think it is very important for the Government 

to phaseout its role in the mortgage market. 

Point number two, as the Government steps away from its current role, I think a so-called hybrid system should replace it. You 

know, there are many different forms of hybrid systems that have 

been proposed. The MBA and other think tanks, we have made our 

own proposal. And in these systems, private capital is key. It provides the underpinning for the system. Private investors own the 

loans and insure the loans. 

But there is an important role for Government, and there are 

four key roles: 

One, providing catastrophic insurance, so if things go very badly 

wrong, as they have—in this recent period and also in the Great 

Depression—the Government would provide support. 
8 

Second, standardization. The securitization process can be much 

more efficient if it is standardized, and I think Government plays 

a key role in providing that standardization. 

Third, regulating the system, and that is key to any proposal. We 

need to have very strong, sound regulation to make sure that good 

mortgage loans are being made. 

And if there are subsidies provided to disadvantaged households, 

they must be explicit and on-balance-sheet. I think that is very important. But that is a role for Government. 

Just one quick point about catastrophic insurance. You know, to 

me I think it can be done reasonably well. The FDIC and FHA are 

good examples of where Government can get it roughly right. I 

mean, even the FHA, although it has come under significant criticism, has weathered the storm pretty well, and I think it will come 

out of this in reasonably good shape. 

My third point—the second point being that I think a hybrid system would be the best system. My third point is that the hybrid 

system has a number of advantages over other proposals, most notably a fully privatized system. Let me just go through three of 

them. 

First is I think mortgage rates would be measurably lower. I 

think for the typical borrower sort of in the middle of the distribution, under a fully privatized system in which investors truly believe that Government will not step in to save the system, which 

I think will be difficult to accomplish under any circumstance, interest rates will be nearly 100 basis points higher, about a percentage point higher. 

Second, I think it will be very difficult to preserve a 30-year 

fixed-rate mortgage in a fully privatized system. You can do that 

in a hybrid system. In a fully privatized system, I think our system 

will evolve to be similar to the European system in which very few 

30-year fixed-rate mortgages are offered. 

And, finally, I do think under a hybrid system taxpayers will be 

compensated. The catastrophic insurance would be explicitly priced 

and charged for, unlike in a fully privatized system where it would 

be implicit. And at the end of the day, if things go badly wrong, 

I do think the Government would step in and it would cost taxpayers. 

So, in conclusion, I think it is fair to say that mortgage rates are 

going to be higher after all of this, the availability of credit lower. 

But I think we need to be very careful how we design the system 

going forward. A hybrid system I think offers the best solution for 

our mortgage finance system. 

Thank you. 

Chairman JOHNSON. Thank you, Dr. Zandi. 

Ms. Ratcliffe. 

STATEMENT OF JANNEKE RATCLIFFE, SENIOR FELLOW, 

CENTER FOR AMERICAN PROGRESS ACTION FUND 

Ms. RATCLIFFE. Thank you, Mr. Chairman, Ranking Member 

Shelby, and Members of the Committee. I am Janneke Ratcliffe, a 

senior research fellow at the Center for American Progress Action 

Fund and the executive director for the Center for Community 

Capital, and today I am especially honored to be asked to speak to 
9 

you as a member of the Mortgage Finance Working Group. We 

began gathering in 2008 to chart a path forward for the mortgage 

market. Our ‘‘Plan for a Responsible Market for Housing Finance’’ 

is the result. It is included in full in my written testimony. I am 

going to summarize it, though I speak only for myself in the views 

expressed today. 

Our collective experience in the 3 years we have spent hashing 

out these issues has made us well aware of the difficult challenge 

you now face. The immediate task is to restore confidence in the 

housing market. We are also convinced that, long term, housing 

can continue to be core to Americans’ prosperity and economic security and the foundation of middle-class opportunity. To meet this 

mission, housing finance reform must meet three key goals: 

First, provide broad access to reasonably priced financing for 

both home ownership and rental housing so that more families, including the historically underserved, can have safe and sustainable 

housing options. 

Second, preserve the 30-year fixed-rate mortgage, which allows 

families to fix their housing costs, build assets, and plan for their 

future in an ever more volatile economy. 

And, third, ensure that lenders, large and small, in communities 

large and small, can competitively offer the affordable, transparent, 

safe mortgage loans that the borrowers need. 

History has shown us that a housing finance system left to private markets will be subject to a level of volatility that is just not 

systemically tolerable, given the importance of housing to the 

American economy and the American family. 

Therefore, our proposal structures an appropriate Government 

role, which is essential for stability and consistent with the goals 

just listed. Our proposal keeps beneficial aspects of our current system, including broad and constant liquidity and good, safe mortgage products, but assigned certain functions performed by Fannie 

and Freddie to the private sector. The Government’s role would be 

limited to a catastrophic backstop, one that is explicitly and actuarially priced, backed by an FDIC-like reinsurance fund and financed by levies on mortgage-backed securities. The backstop work 

be available only on loans meeting safe mortgage parameters, subject to stringent operational and securitization standards. Further, 

it would be available only through highly regulated single-purpose 

companies, chartered mortgage institutions, or CMIs, who put sufficient capital of their own in the first loss position. These capital 

levels would be higher than those previously required of Fannie 

and Freddie; thus, there would be several layers of protection 

standing ahead of taxpayer exposure: borrower equity, CMI capital, 

in some cases private mortgage insurance, and the catastrophic 

risk insurance fund. 

Our proposal preserves the traditional role of originators with 

measures to ensure that lenders of all sizes in all communities can 

offer the same beneficial mortgage products, counteracting the current trend toward extreme market concentration, and includes a 

prohibition against CMIs being controlled by originators. This system would serve the vast majority of households, those seeking consistent, affordable credit and predictable housing costs. 
10 

We also include mechanisms to see that the benefits of this system are available in a more fair and equitable way than before, 

and that prevent the dual market where certain classes of borrowers and communities are relegated to separate, unequal markets. These mechanisms prevent the CMIs from ‘‘creaming the 

market’’ and require them to extend the benefits of the system to 

all qualified borrowers. For those families whose housing finance 

needs require more support, we call for the establishment of a market access fund to promote products that close market gaps, which 

would complement the Affordable Housing Trust Fund and the 

Capital Magnet Fund; and we also outline steps to revitalize the 

FHA. 

In closing, I would say a note of caution about proposals that recommend complete privatization of the housing finance system, or 

privatization with occasional Government intervention. Such radical proposals would not achieve stability and, in fact, would expose 

taxpayers to more risk and would expose our economy to boom-bust 

cycles. They would also result in some stark consequences for 

American households. Mortgage finance would predominantly be in 

the form of loans with shorter duration and higher costs, and the 

30-year fixed-rate mortgage would not be available under affordable terms for most families. 

Rental housing would be less available and would cost more, 

even as there would be greater demand for it, and fewer working 

families would have access to asset-building potential of home ownership, and this pillar of the economic mobility that has characterized the American economy would be lost. 

Thank you for inviting me to talk about the work my colleagues 

and I have done. I will be happy to answer your questions. 

Chairman JOHNSON. Thank you, Ms. Ratcliffe. 

Dr. Zandi, Ms. Ratcliffe, and Mr. Berman, the insurance system 

you proposed differs from the FDIC Deposit Insurance. If losses 

from banks’ insolvencies exhaust the Deposit Insurance Fund, the 

FDIC raises insurance rates on the surviving banks and the Government takes no loss. Should the mortgage market have a similar 

clawback mechanism, perhaps including clawbacks from banks and 

other firms that sold mortgages to the securitizers in the new system? Dr. Zandi. 

Mr. ZANDI. Yes, I think it should have a clawback mechanism so 

that if the reserve fund is depleted, that it can be replenished 

through these types of levies. So I think that would be entirely appropriate in the context of a hybrid system that I proposed, yes. 

Chairman JOHNSON. Ms. Ratcliffe. 

Ms. RATCLIFFE. I would agree. 

Chairman JOHNSON. And Mr. Berman. 

Mr. BERMAN. The system that we have proposed is slightly different, Mr. Chairman, in that in our system, the FDIC-type insurance fund would only come into play if these mortgage credit guarantor entities, or CMIs, actually had gone under and all of their 

assets were depleted. So in that case, there would be nothing— 

there would be nobody to claw back from. We think that that alignment is critically important. Again, if private capital is going to be 

in the risk position for the credit on these mortgages, we believe 

that stockholders and bondholders who have invested in those enti-
11 

ties would be most vigilant if their capital was totally at stake first 

before any FDIC-type insurance fund were available. 

Chairman JOHNSON. Dr. Kling, in your paper, you state that the 

Government should ensure that any housing subsidies should be on 

budget, and you mentioned more robust rental vouchers and grants 

for homebuyers. How would you structure grants to homebuyers? 

Mr. KLING. I think that grants to homebuyers might take the 

form—might take a number of forms. You could have some kind of 

matching program for down payments. But I think you have—we 

have an Earned Income Tax Credit. If we could have some kind of 

savings tax credit that would encourage savings, a Saved Income 

Tax Credit, that would be a better way to help low-income households get into the housing market so that they would come in with 

equity in the home. The best guarantee in a mortgage is a 20 percent down payment, and if we could get households to save up to 

that 20 percent down payment, we will have a stable mortgage finance system. And if we do not do that, even with a Government 

guarantee, it will just come to grief. 

Chairman JOHNSON. Dr. Kling, the vast majority of subprime 

and Alt-A loans were issued securitized and included unstructured 

securities such as CDOs by sophisticated financial market participants other than GSEs. These private market solutions failed with 

terrible results outside the private mortgage market and Wall 

Street. Why should we expect that the combination of private market mortgage securitization and private insurance will produce a 

different result next time? 

Mr. KLING. I hope that the private securitization market does not 

come back unless it gets—unless it comes back in a reformed way. 

I think it is pretty dead now. I think it deserves to be dead. I think 

that the only thing that caused it to arise was a phenomenon called 

regulatory arbitrage, where the Basel Capital Accords gave rewards to banks for holding lousy mortgages, packages of securities, 

and punished banks for holding good mortgages as whole loans. If 

we change the capital requirements, we will have more sensible 

policies. 

And when we talk about pricing this Government guarantee, we 

are going to run into exactly the same issues that the Basel Capital 

Accords ran into. That is, if you have crude risk buckets, people are 

going to arbitrage against that and you are going to have the exact 

same problem, that the private markets are going to figure out how 

to dump all the risk on the Government and keep all the profits 

for themselves, and that is the danger of bringing the Government 

in as a guarantor. 

Chairman JOHNSON. Ms. Ratcliffe, quickly, with QRM being considered today, there is a good deal of focus on the down payment 

that a borrower brings to the table as a way to reduce the likelihood of default. In your experience are there other factors that can 

help assess this risk? 

Ms. RATCLIFFE. Low down payment loans can be made safely, 

and there are many ways to do this and we have lots of evidence, 

and I would just like to cite some research that we have been doing 

at the Center for Community Capital. We have been tracking a 

portfolio of 50,000 mortgages that were made in the decade leading 

up to the crisis. These loans were made by banks around the coun-
12 

try. The median income of a borrower in this program was $34,000. 

Fifty-four percent of the borrowers had credit scores of 680 and 

below. And 69 percent, almost 70 percent of the participants in this 

program, put down less than 5 percent on their mortgage. These 

loans were originated under lenders’ CRA and Affordable Housing 

programs. 

To date, fewer than 5 percent of these mortgages have entered 

into foreclosure and the households have managed to accumulate 

a level of equity in their home, at the median, $25,000, that they 

could not have achieved with any other mechanism out there. 

What led to this success? It is pretty clear that it is well-underwritten access to 30-year prime priced fixed-rate mortgages. We 

have taken borrowers in this portfolio and compared them to their 

counterparts in the subprime market and found that the same borrowers given a different set of products were three to five times as 

likely to be in default. 

So, as I said, it is good product, fairly priced, with solid underwriting. Reserves are also helpful and probably more valuable to a 

modest income household than having all their money invested in 

their down payment. Escrows—and there are other things that 

have been proven to help, as well, prepurchase counseling, down 

payment assistance. And so we believe that there are many ways 

to assure safe high LTV lending, and without that, you shut a lot 

of people out of home ownership. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Recently, Secretary Geithner before this Committee warned us of 

the difficulty in appropriately pricing a guarantee for mortgagebacked securities, and he cautioned, and I am quoting, ‘‘Guarantees 

are perilous. Governments are not very good at doing them, not 

very good at designing them, not very good at pricing them, not 

very good at limiting the moral hazard risk that comes with them.’’ 

Those were the words of our Secretary of Treasury. Mr. Berman, 

Dr. Zandi, Ms. Ratcliffe, do you agree with Secretary Geithner? 

Mr. BERMAN. If I may, Senator, in the first instance, there is no 

question that there is risk in any pricing mechanism. 

Senator SHELBY. Sure. 

Mr. BERMAN. But having said that, I think we have two new circumstances that should help us dramatically. The first is that we 

have just come through the greatest crisis since the Great Depression, so the data that we have in terms of a stressed economy and 

what the effect of that economy would be on various mortgage 

products gives us a much greater amount of information to make 

better decisions on. 

Second, in what we have described in our mortgage credit guarantor entity guarantee, we would have what we have called core 

mortgage products that would, in some respects, attract, for instance, the QRM, the Qualified Residential Mortgage, kinds of 

products. And again, we have a substantial amount of data and 

those are more conservative loans than the kinds of pricing that 

have oftentimes failed. 

So for those two reasons, we think we could do a lot better this 

time around. 
13 

Senator SHELBY. Dr. Kling, do you agree with Secretary 

Geithner? 

Mr. KLING. I would probably agree even more strongly, because 

I have a background in the analytics of pricing mortgage default 

rates—— 

Senator SHELBY. Absolutely. 

Mr. KLING. ——and they—first of all, it is a difficult problem. 

Second, it differs greatly by mortgage product. You cannot just 

have a one-price-fits-all guarantee. And finally, when you are at 

the high LTV level, it is just a pure bet on house prices. You are 

just guessing which way house prices will go. Any loan you make, 

no matter how bad, no matter how low a down payment, has at 

least a 50 percent chance of paying off because the house price 

might go up. But that does not mean it is not gambling. It is still 

gambling and the pricing of it is extremely difficult. 

Senator SHELBY. Dr. Kling, you have cited some of the potential 

risk that you would see to the taxpayer in having the Government 

price the guarantee. That is what you are talking about, the risk 

there, is it not? 

Mr. KLING. It is a catastrophic risk. You will probably make 

money most of the time, like picking up nickels in front of a steamroller, and then at some point, that steamroller is going to get you. 

Senator SHELBY. Dr. Zandi, do you agree with Secretary 

Geithner’s comment? 

Mr. ZANDI. I do. I think it would be very difficult to price risk. 

It is, for the private sector as well as the Government sector. I 

would say just a few things, three quick things. 

Senator SHELBY. OK. 

Mr. ZANDI. First of all, that in the hybrid system we are discussing, it is catastrophic insurance, so most of the risk would be— 

well, all but the very catastrophic events would be covered by the 

capital provided by the private sector. 

Second, it can be done. I think the FDIC and the FHA are good 

examples of that and they are relevant to this discussion. 

And three, the third thing I would say is that in a fully 

privatized system, you are not getting rid of the risk. You still have 

the catastrophic risk, and at the end of the day, the Government 

will step in. I just believe that if we come push to shove, that it 

is going to be very difficult for the Government not to step in and 

save the system, and therefore it is better to explicitly price for 

that service that you are providing to give taxpayers some compensation for it. 

Senator SHELBY. Ms. Ratcliffe, do you have any comments there? 

Do you agree with Secretary Geithner or disagree? 

Ms. RATCLIFFE. I think I would agree with Dr. Zandi, and I want 

to just—— 

Senator SHELBY. But not with Secretary Geithner? 

Ms. RATCLIFFE. No, I think that the Government is going to have 

to set the price on the risk one way or another, whether it is 

through capital reserving requirements—and I wanted to add a little bit about the capacity of the system that we proposed, the hybrid system, which would put private capital in the first loss position and responsible for pricing the risk, but also recognize the efficiencies that brings to the system by having special purpose enti-
14 

ties whose job it is to pool risks and manage risks across institutions, across geographies, across vintages. That makes for a much 

more efficient risk management system. 

Senator SHELBY. Ms. Ratcliffe, in your proposal, you call for a 

guarantee of mortgage-backed securities. That is what you are basically saying here, right? 

Ms. RATCLIFFE. Similar to what Dr. Zandi talked about, we 

would have the privately capitalized chartered mortgage institutions taking the first loss and guaranteeing the mortgage-backed 

securities. Then the next level of defense would be an FDIC-like insurance fund that is paid into by the private market and the Government backstop would be catastrophic only. 

Senator SHELBY. But Secretary Geithner basically says that any 

Federal guarantee should be priced according to the risk, without 

any political considerations. Do you disagree with that? 

Ms. RATCLIFFE. No, I do not disagree with that. 

Senator SHELBY. OK. Mr. Berman, the plan put forth by the 

Mortgage Bankers Association argues that social policy goals, such 

as affordable housing initiatives, should be pursued through explicit Government programs rather than entities in the secondary 

market. What is the advantage, Mr. Berman, of housing policy 

goals pursued through Government programs instead of through 

private entities, and what types of distortions could indirect public 

or social housing policy goals have on the economy? 

Mr. BERMAN. In the first instance, we would like to separate out 

the possible distortions of subsidies that would indirectly or could 

indirectly affect, for instance, what we just talked about, the pricing of risk. 

Senator SHELBY. Explain what you mean. 

Mr. BERMAN. So housing goals, we believe, should be separated 

from the hybrid Government system that we have described. We 

believe that FHA, USDA, Rural Housing, are appropriate places 

where the Government can very specifically have programs. We 

would also suggest that there could be a tax or a levy, if you will, 

on these new mortgage credit guarantor entities that could be put 

into a pool that could be used. But again, it would be a very explicit source of payment for subsidies and would not cloud the pricing of the risk or distort the pricing of the risk. 

Senator SHELBY. Dr. Zandi, in your testimony, you stated that 

the mortgage finance system should be, quote, ‘‘capitalized sufficiently to withstand losses on defaulting mortgages that would result if house prices declined by, say, 25 percent.’’ Under this standard, how high would down payment requirements need to be for potential borrowers? Ten percent? Twenty percent? And if this standard had been in place prior to the crisis, how much more capital 

would Fannie and Freddie have been required to hold? 

Mr. ZANDI. Well, if Fannie and Freddie were capitalized to a 10- 

percent house price decline scenario— 10 percent—and—— 

Senator SHELBY. And that was not good enough. 

Mr. ZANDI. It was obviously not good enough, and so I think 25 

percent—just as a starting point for discussion, because that is the 

price declines that we are going to experience in the current housing crash. 
15 

Senator SHELBY. Mr. Chairman, if I could, Dr. Kling, could you 

take a moment to describe to the Committee how the policies—you 

recently wrote a paper dealing with the financial crisis of 2008. In 

it, you discussed the connection between what you described as, 

quote, ‘‘bad bets by our Nation’s financial system and a U.S. housing policy such as affordable housing goals, the CRA, and the Federal guarantees.’’ Could you describe how these policies and insufficient capital standards have caused the financial crisis? 

Mr. KLING. Well, that is a—I will try to keep my answer brief, 

but that is a—— 

Senator SHELBY. No, that is very important. 

Mr. KLING. OK. The—first of all, encouraging low down payment 

lending is a mistake. It just creates gambling. It does not help 

neighborhoods. It destabilizes them, because people can only buy 

houses when prices are rising, and then when prices stop rising, 

they default and then the whole neighborhood collapses. So we destabilized housing markets by encouraging low down payment lending. 

The capital requirements, as I mentioned earlier, encourage 

securitization of really bad mortgages and allowed regulatory capital to arbitrage. You talked about Freddie and Fannie supposedly 

having 10 percent capital. A lot of that was not real capital. It was 

tax loss carry-forwards and other soft forms of capital. And I am 

not convinced that the regulator really was on top of the caliber of 

mortgages that were in Freddie’s and Fannie’s portfolios, and I do 

not think they really understood how much capital they really 

needed. So that is, very briefly, some of the things that contributed. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Mr. Chairman, let me, if I may, I will pass to Senator Merkley, if he is ready. 

Chairman JOHNSON. Senator Merkley. 

Senator REED. I have just arrived from Armed Services. 

Senator MERKLEY. Thank you very much, Mr. Chair and Senator 

Reed. 

I wanted to start, Ms. Ratcliffe, with your commentary on your 

study in which you looked at low down payment lending to determine whether or not low down payments drove foreclosures. And 

if I understood your testimony correctly, you found that it was not 

low down payments that drove lending, but it was more predatory 

mortgages, I assume, teaser rate mortgages, triple-option loans, 

and so forth. 

Ms. RATCLIFFE. Yes, sir. In our particular study where we compared the folks who had borrowed with low down payment loans 

with sustainable prime priced 30-year fixed-rate mortgages to purchase homes versus those in the subprime sector, the primary drivers of the difference in default was adjustable rate features and 

broker channel and prepayment penalties. So these are some of the 

features that we identified. 

Meanwhile, I mean, I think we have gotten to the point where, 

somehow, low down payment lending has become conflated with 

the term subprime, and I am not sure that is justified. Twentyseven million Americans between 1990 and 2009 have purchased a 

home with less than 20 percent down. It roughly represents a third 
16 

of the market in normal times, and in the most recent year, I understand from some data from the National Association of REALTORS® that some 57 percent of homes purchased in 2010 put down 

10 percent or less on their mortgage. So it is an important part of 

the segment and it does not equate with subprime lending. 

Just as an example, if you look at what has caused a disproportionate share of losses at the GSEs, it is the Alt-A portfolio, which 

had higher loan balance loans and average down payment of closer 

to, I believe, 27 percent and higher credit scores. These were not 

low down payment borrowers that caused this crisis. 

Senator MERKLEY. So, Mr. Kling, you have noted the risks that 

were created by various mortgages, but you really emphasized the 

size of the down payment. Given the type of study that Ms. 

Ratcliffe is noting, why do you not emphasize getting rid of the 

predatory practices, the teaser rates, the steering payments, the 

liar loans, and so forth rather than the low down payment? 

Mr. KLING. I think we should get rid of all—Senator, I think we 

should get rid of all the bad practices in mortgage lending that 

grew up over the last two decades. But there is simply no way to 

make low down payment lending safe in an environment—any environment other than a rising house price environment. Her study 

covered the last decade. If you made a low down payment loan in 

2001, there was enough of a price increase after that that you are 

probably fine, but it only works in that environment and it creates 

this cycle of a boom as house prices are rising, and then once they 

stop rising, everybody crashes. You get this epidemic of foreclosures. It destabilizes the entire market. 

Senator MERKLEY. One thing I was struck by is when you were 

talking about mortgages, you kept referring to the notion of gambling, and certainly it seems like there is an element of risk in 

every investment, but the term—if you take the framework that 

any investment that has risk is gambling, then all investing is 

gambling. Is that not really just a—why are you bringing this to 

bear and why not say nobody should buy stock, because stock can 

go up and down. 

Mr. KLING. I am not—Senator, I am not saying that nobody 

should buy a house. I am not saying that nobody should buy stock. 

I am saying that we should reduce the degree of gambling. So in 

the stock market, I believe the margin requirement is something 

like 50 percent. We do not require a 50 percent down payment for 

buying a home, but I think a 20 percent down payment is reasonable. 

Senator MERKLEY. I will just share that in my working class 

neighborhood of three-bedroom ranches, the average price of a 

house is around $200,000, and at 20 percent down, that is $40,000. 

There are very few working families in America that would become 

homeowners at a $40,000-plus closing cost. And yet if we look 

across our economy at the major instruments that have brought 

people into the middle class, one is education. One is starting businesses. But the broadest is home ownership, and I am just concerned that given the light of the type of studies that have seen 

vast transfers of wealth to working Americans through home ownership, I mean, Mr. Kling, you may be throwing the baby out with 

the bathwater here. 
17 

Mr. Zandi, did you want to comment? 

Mr. ZANDI. Senator, I just want to make a couple of points. One 

is I think it is important first to recognize that after you control 

for all the things that affect default, down payment matters, but 

it does not matter as much as you might think. So if you control 

for a credit score, if you control for debt-to-income ratio, if you control for product type, if you control for investor-owned versus 

owner-occupied, all of these things, then you will see that default 

rates do rise. They do rise as the down payment becomes smaller, 

but the increases are quite modest, up almost to a 95 percent LTV. 

The second point I would make is that because of the decline in 

housing values that has occurred over the last several years, if you 

limit lending to 20 percent down, you are going to be locking out 

the vast majority of American middle-income households because 

there is no equity left. It has been wiped out in this period. So 

there is a big chunk of the American population that will have a 

very difficult time participating in home ownership. 

And the third thing I would say is that you can price for risk, 

so if, in fact, you start—if you provide loans with lower down payments, then I think it is reasonable to charge a higher interest rate 

for that because it is riskier. 

Senator MERKLEY. Thank you. My time has expired, so I will 

apologize because I see more comments desired, but in respect to 

my colleagues, I will defer. 

Chairman JOHNSON. Senator Reed. 

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

Mr. Berman, the 30-year fixed mortgage has been sort of the 

North Star of American housing for a long time. How do you think 

it will be maintained? Should it be maintained? What is your view 

in terms of that product as a centerpoint of the mortgage market? 

Mr. BERMAN. Senator, the most recent study we have has it over 

80 percent of mortgage loan applications in February for home purchases were for 30-year fixed-rate mortgages. So it has clearly become a staple for the American consumer. Importantly, we have 

made a value decision in making that available and having the 

Government role make it affordable, that where homes are oftentimes the most significant asset that one would own throughout 

their lifetime, that taking the credit risk on that home is one thing, 

but taking an interest rate risk is quite another. And so having the 

30-year fixed-rate mortgage as an affordable product allows homeowners to virtually eliminate that risk in that they can have a fully 

amortizing mortgage product, and then, of course, given the prepayment flexibilities that we have, it allows for when rates go 

down that they can again get another 30-year fixed-rate mortgage, 

again reducing their interest rate risk. 

As you know, it is a very unusual instrument in terms of what 

is happening in other countries, and I think that the uniqueness 

in the United States is that we have made that decision that we 

want to protect homeowners from the interest rate volatility that 

would otherwise impact them. 

Senator REED. Some of the proposals would perhaps make that 

a less available product, is that your analysis of the competing proposals? 
18 

Mr. BERMAN. Yes. In fact, the TBA market, the ‘‘to be announced’’ market that has really been created by Fannie Mae and 

Freddie Mac has become a vitally important way for 30-year fixedrate mortgages to be priced and then securitized. There would be 

very few participants in the 30-year fixed-rate mortgage market if 

there was no securitization allowed, given that it would make it 

very difficult for any small banks or independent mortgage bankers 

to participate whatsoever. 

And furthermore, the ability of providing the affordability in 

terms of rates for those 30-year mortgages would be severely negatively impacted, anywhere from 50 to 150 basis points, if people 

were securitizing 30-year fixed-rate mortgages and did not have the 

TBA market to utilize as a hedging instrument. 

Senator REED. Dr. Kling, your comments on the 30-year mortgage, the proposals? 

Mr. KLING. I believe that American consumers prefer the 30-year 

fixed-rate mortgage and I believe the market will provide what the 

consumers want. The—— 

Senator REED. At a price they can pay? 

Mr. KLING. The President’s report on housing finance said that 

any rational housing reform is going to lead to a higher cost of 

mortgage credit. You cannot continue to subsidize mortgage credit 

and mortgage credit risk without running into trouble. It is not a 

rational policy. 

You know, 20 years ago, the difference between the interest rate 

in the jumbo loan market, that is the markets that Freddie and 

Fannie were not eligible to guarantee, and the Freddie and Fannie 

market was only 25 basis points, one-quarter of 1 percent. So I do 

not think that is a very frightening number. 

A more frightening number would be, you know, Ms. Ratcliffe 

said that of these wonderful well-underwritten low down payment 

loans, 5 percent of them defaulted. Well, we used to assume that 

you would lose 50 percent on each defaulted loan. So a 5-percent 

default and you have a 50 percent loss rate, that is a two-and-ahalf percentage point difference in price. You would have to charge 

250 basis points more on that loan compared to a loan that has 

much lower default risks. 

So the key is to have loans that have lower default risk. That is 

the key to having low interest rates. The interest rate risk is not 

so much of an issue and the—certainly, the Canadian homebuyers 

have never suffered from having interest rate shocks, even though 

they have a 5-year rollover, and if the American people choose to 

something like a 5-year rollover, I do not think it would be a disaster. I do not think that is what they choose. I think they will 

choose a 30-year. I think it will be—— 

Senator REED. Well, let me have Ms. Ratcliffe respond, because 

her analysis was questioned. 

Ms. RATCLIFFE. Thank you. I had a couple points to make. First 

of all, the additional charge for the higher risk would not necessarily fall on the loan every year. It would be spread over the life 

of the loan to begin with. 

I also wanted to make a point about the math that says that borrowers in the jumbo markets pay only, you know, 30 to 50 basis 

points more for a mortgage than in the Fannie and Freddie sector. 
19 

Our proposal sees that there are certain segments of the market 

which will probably always be able to, at a reasonable price, access 

a fixed-rate mortgage. Even through the jumbo market is still 

much more—tends much more toward adjustable-rate mortgages, 

there are fixed-rate mortgages there. And for high-income borrowers, that will probably remain an option. It is the rest of the 

market that we are worried about having access to the 30-year 

fixed-rate market. 

The volatility that has been talked about that we are living 

through right now was not caused by the 30-year fixed-rate mortgage but more it was a boom-bust cycle driven by private capital, 

which tends to behave very procyclically. So in good times, they 

undercapitalize risk. They rush in. They exacerbate bubbles. And 

then in bad times, they overprice risk and they basically freeze up. 

The Government recognized this in 1934 when it decided to opt 

for stability in the mortgage system by introducing the FHA and 

the 30-year fixed-rate mortgage and a number of standards to go 

with it, and it has become a key element in the strengthening of 

the middle class. And what works so well about this product is 

that, of course, the payments stay fixed, so over time, as income 

rises, the family has more disposable income for spending or for investing, and with amortization and just modest amounts of appreciation over the long run, this becomes a great asset-building tool 

for future financial needs. 

So that product in and of itself inherently reduces risk, because 

over time, debt-to-income improves, and in normal environments, 

LTV should improve. So using that product allows us to put more 

people into homes more sustainably and more safely than if we just 

went to ARMs. They are just simply a riskier product. Even if you 

just look at the—— 

Senator REED. I—— 

Ms. RATCLIFFE. I am sorry. 

Senator REED. My time—the Chairman has been very gracious, 

but thank you very much. 

Mr. BERMAN. Senator, may I just make one clarification? 

Senator REED. Yes. 

Mr. BERMAN. I appreciate that. Oftentimes, the jumbo mortgage 

market, 30-year fixed as compared to the conforming market, and 

one of the underlying assumptions that I think we have to be very 

careful about is that in order to price and hedge those jumbo loans, 

even though they are outside of the Fannie and Freddie arena, 

they are utilizing the Fannie and Freddie TBA market to hedge 

those instruments. If that market had disappeared, the hedging 

costs would, in fact, rise and that 30 to 50 basis points would be 

much more dramatic. 

Chairman JOHNSON. Senator Hagan. 

Senator REED. Thank you. 

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

your testimony here today, all of you. 

Ms. Ratcliffe, in your testimony you talk about the need for 

standardization of underwriting and documentation rules. Why is 

the standardization so important in the mortgage market? Can you 

go over that, please? 
20 

Ms. RATCLIFFE. Well, certainly. One of the things we saw with 

the private label securitization boom was a real complexity of products. They became so opaque that it was difficult for investors to 

understand what they were investing in. It became really impossible for borrowers to understand what they were borrowing. It became difficult to comparison shop. 

You know, I have never actually read every document in my 30- 

year fixed-rate mortgage because I know what I am getting when 

I sign up for it, and I can look in the Sunday paper or go online 

and make comparisons. But when you have proliferation of complex 

products that no one can understand, it introduces new risks into 

the system. So we think standardization is an important aspect of 

a stable mortgage system. 

Senator HAGAN. And would you agree that the qualified residential mortgage helps drive the standardization that you have spoken 

about? 

Ms. RATCLIFFE. So I think since we are sort of looking at new 

definitions coming out for the qualified residential mortgage, it is 

hard for me—I have not studied them closely, and there is a whole 

lot in flux with the secondary market still in flux. So I would sound 

a note of caution that QRM standards that are too restrictive will 

actually increase taxpayer risk and not address the access, make 

access harder. So it could potentially drive, for example, high LTV 

lending all into the FHA sector unnecessarily, which would put 

them all under 100 percent Government guarantee, which I do not 

think you need. And then it would leave sort of the large banks 

with excess capital to be free to serve the rest of the market. Again, 

you might find a lot of adjustable rate mortgages combined with 

higher LTV products there, which would introduce additional systemic risk, and then the FHA sector might suffer collateral damage 

from that as well. 

So I just think it is important—I think it is preliminary, so I do 

not know, but I think it is important to think hard about the unintended consequences of the QRM. 

Senator HAGAN. Thank you. 

Dr. Zandi, on March the 8th, you wrote a special report for 

Moody’s Analytics that focused on the risk retention requirements 

in Dodd-Frank and made some recommendation for what the qualified residential mortgage should look like. And as you know, that 

is a rule that I coauthored with Senator Landrieu and Senator 

Isakson to ensure that we did not inadvertently restrict the availability of capital for well-underwritten loans. 

In your report you discuss the importance of the rule-writing 

process on the qualified residential mortgage. Can you tell the 

Committee why you think it is important—and I know we have 

been discussing this—that regulators get this rule right and some 

of the features that you believe it should include? 

Mr. ZANDI. Yes. I think QRM is important because it will determine, at least in the immediate future, before we nail down the 

rest of the mortgage finance system, pricing for loans. So loans that 

are QRM, that qualify, will have a lower price—a lower interest 

rate, a higher price, than those that are not. And it is not quite— 

I state that with conviction and certainty, but it is not quite clear 
21 

exactly the numbers involved, how big a difference is this going to 

make, and I do not think anyone really knows. 

So, given that, the inability to really even come up with a good 

estimate of what the impact will be, I think it is important to keep 

the QRM box wide, at least initially. And I do not know the rules— 

I have not looked at them carefully yet, but what I saw seemed 

reasonable to me. Keeping Fannie and Freddie loans QRM now in 

this environment I think makes a lot of sense. It keeps the box relatively wide. 

I think the one thing that I would encourage is that right now, 

as I understand it, QRM is 20 percent down on non-Fannie/ 

Freddie/FHA. I think that makes sense if it is not credit enhanced. 

So if you have private mortgage insurance, then I think it is reasonable to define a QRM loan with a higher loan-to-value ratio, a 

90-percent LTV. So I think that would be a reasonable thing to 

consider carefully in this rulemaking period, and my inclination 

would be to include that. 

The other aspects of it look quite reasonable to me, very consistent with sort of the proposals I made in that paper that you referred to. 

Senator HAGAN. Well, I definitely think that the 20 percent is too 

high for so many of the people in our Nation to actually go out 

there and buy that home. I think what Ms. Ratcliffe was saying, 

too, earlier in that the numbers— could you repeat those numbers 

again that you listed? 

Ms. RATCLIFFE. Well, I have listed many numbers. 

Senator HAGAN. I am sorry. The numbers of people who have actually purchased a home. 

Ms. RATCLIFFE. Right. Over the last couple of decades, it is 27 

million homeowners. We would never want to say that those were 

all subprime homeowners. I may have been one of those along the 

way. And as I said, in normal times it is roughly about 30 percent 

of the market. In the last year, it looks like it has been almost double that share putting down 10 percent of less on their mortgage, 

on their home purchases. 

Senator HAGAN. And also, Dr. Zandi, currently small lenders are 

able to participate in the mortgage market, obviously, by selling 

their loans to Fannie Mae and Freddie Mac without having to go 

through one of the big banks to accumulate enough loans to create 

the securitization pool. What would the Administration’s proposals 

do to the ability of small lenders, such as community banks, to 

compete in the mortgage market? And what would this do to the 

concentration of the market? 

Mr. ZANDI. Well, this is a very good point, that in any mortgage 

finance reform that you decide to do, you have to be cognizant of 

the impact on the industrial structure of the mortgage origination, 

mortgage market. Already the market has gotten much more concentrated as a result of the financial collapse and crisis. If you look 

at the share of origination volume and the share of servicing done 

by the top five, it is measurably higher than at any time in history, 

and you can see it in the interest rates that they charge. They do 

have market power. And we are going to see—it is going to be a 

really good test this fall when conforming loan limits come down, 

and they are going to be asked to kind of fill the void. We will see 
22 

what the pricing looks like and how much pricing power they actually do have. 

So one of the beauties of our system is that we have a lot of 

small banks, a lot of community banks, and we need to preserve 

that. I think that is a strength of our economy and our financial 

system, and any financial—QRM, risk retention rules, anything 

you do I think needs to be looked at through that prism, what impact it will have, because we need to preserve that competition to 

keep those interest rates lower. And, frankly, I do think this is a 

problem. I think interest rates—people are paying higher interest 

rates now and will pay higher interest rates going forward because 

of the concentration that has already occurred in the system. 

Senator HAGAN. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. Thank you all for 

your testimony. 

I just want to establish one or two things because I keep hearing 

this debate that the facts—or assertions that are claimed as facts, 

and I want to make sure that we all talk about the same thing. 

So either to Ms. Ratcliffe or Dr. Zandi, I constantly hear that the 

GSEs led the charge into subprime lending, when I look at the 

FCIC report and other crisis books and pretty much see that the 

private sector rushed madly into the subprime lending, and, unfortunately, the GSEs lost their way and followed that. Is that a fact? 

Mr. ZANDI. My view of this is that the private subprime Alt-A 

market ballooned out in the mid part of the decade, and that 

squeezed Fannie Mae and Freddie Mac out of the market up until 

the very end of the boom. To me, the best statistic, the most telling 

statistic from the Federal Reserve’s flow of funds is the share of the 

mortgage market accounted for by Fannie Mae and Freddie Mac. 

If you go back to 2003—I do not have the numbers exactly right, 

but orders of magnitude, it was about 52, 53 percent of the market, 

52 to 53 percent of all outstanding mortgage debt was either insured or owned by Fannie Mae and Freddie Mac. By 2006, say 3, 

31⁄2 years later, their share had fallen to 40 percent. That is a 10- 

percentage-point drop. That is just an incredible shift. And that is 

not because they did not want the business. It is because they got 

driven out of the business. 

Now, unfortunately, by the end of the bubble, late 2006 into 

2007, they wanted back in, and that is when they made their very 

serious errors and started to get into Alt-A lending. 

Senator MENENDEZ. And that is what we have to ensure in my 

mind and reform—— 

Mr. ZANDI. And that is what we are paying for right now. 

Senator MENENDEZ. Absolutely. But it did not lead the way here. 

Mr. ZANDI. It did not. 

Senator MENENDEZ. Second, I always hear that the Community 

Reinvestment Act is to blame for the crisis because it supposedly 

forced banks to lend to minorities whose loans were bad, when, in 

fact, isn’t it true that only 6 percent of the subprime loans were 

made by entities that were even subject to the Community Reinvestment Act and 94 percent of the loans were made by lenders not 

subject to the Community Reinvestment Act? 
23 

Ms. RATCLIFFE. That is true, and I would add that only 1.3 percent of mortgages made over the period in question were CRA-covered loans that were also high-cost loans. So it is hard to imagine 

that 1.3 percent of the loans made could have led us to this point. 

Senator MENENDEZ. So I guess this is one of those things that 

if you say a lie enough it ultimately somebody will believe it, because the facts clearly do not substantiate that. 

Let me ask you two questions. You know, I listen to a lot of the 

community banks and others, and they say to me they are able to 

participate in the mortgage market by selling loans to Fannie and 

Freddie without having to go through one of the big banks to accumulate enough loans to create a securitized pool. What would the 

various reform proposals do to the ability of small lenders, such as 

community banks or mortgage brokers, to compete in the mortgage 

market? What would this do to the concentration of the market in 

the hands of a few players? 

Ms. RATCLIFFE. So our proposal lays out as one of our primary 

goals that lenders of all sizes in all communities can offer access 

to the same kinds of products, and that will be—in order to have 

that, you need a robust and independent secondary market. Our 

proposal has specific criteria in it for ensuring that the entities providing that access to the market, the CMIs in the case of our proposal, cannot be controlled by lenders and cannot have overconcentration of business going to individual lenders. So it has deliberate elements in it to ensure that lenders of all sizes—community 

banks, credit unions, nonprofit financial institutions, and the like— 

can still access the system. 

Senator MENENDEZ. Well, a corollary of that—and I would invite 

either one of your or anyone’s answer. We continue to hear that 

private capital is on the sidelines awaiting for the Government to 

get out of the way before it enters the secondary mortgage market. 

Can any of you provide us with data indicating the amount of capital awaiting to return to the secondary mortgage market and indicate a timeline for its reemergence? You know, the reason I ask is 

because there is opportunity for that capital in both the commercial 

real estate and the jumbo market space, but it has not entered 

those markets, and there is no Government participation in those 

fields. So I would like to know where all this capital is sitting on 

the sidelines waiting to come in. It seems to be waiting for some, 

you know, heralded moment. 

Mr. ZANDI. Well, I think there is no answer to that question. We 

do not know for sure. And that argues for going slowly, making one 

step change at a time. And I think actually the policy path that has 

been laid out is a good one and an appropriate one. 

So on October 1st, the conforming loan limits revert back to their 

precrisis levels. This will be a very good test to see will the private 

market step in. Will the big banks with balance sheets that have 

capacity to lend step up and lend and at what interest rate? 

Allowing and asking the FHA to raise its insurance premium 

slowly but surely I think makes perfect sense. It helps to shore up 

the FHA system. It also makes it more viable for private capital 

to come in. A good step to take. 

QRM, implementing that over the course of—and other risk retention rules over the course of the next year, year and a half, 
24 

makes perfect sense. Let everyone get used to it and get the rules 

defined. So the things that you have done, at least the path that 

seems to be in force, I should say, requiring Fannie Mae and 

Freddie Mac to reduce the size of their loan portfolios over time, 

in an orderly, clearly defined way makes perfect sense. Doing all 

these things is a good test. Each step of the way we will just see 

how much private capital is going to come in and at what cost. And 

I think that is exactly what you should do, and, fortunately, it 

seems like we are going down that path. 

Mr. BERMAN. Senator, I think I would like to underscore the caution that we would need to proceed with. While I think we all agree 

that the path forward is to reduce the size of the Government footprint and reduce the market share of Fannie and Freddie and 

FHA, each of these levers, whether it is the conforming loan limit 

or G-fees or the QRM standards, will have an independent but related impact, and the key is the private markets have spoken that 

they do not have confidence. We will not see private markets come 

back in and make loans and buy bonds until there is confidence reestablished. We have seen over the last couple of years only two 

RMBS, mortgage-backed securities issuances, and they are at 55 to 

65 percent loan-to-value. There is clearly a lack of confidence. 

I think if we were to move forward, even if the path is the right 

one, but if we move forward at the wrong pace, before there is 

enough investor confidence to come back into the market, the 

swings and the volatility at a time when the markets are so fragile 

and housing markets are so fragile could, in fact, endanger the nascent recovery that we have begun to see. 

Senator MENENDEZ. Mr. Chairman, I know my time has expired. 

I want to thank you for this hearing. I think our challenge here, 

my personal view, is that our goal is to protect the taxpayers but 

still have the opportunity for a middle-class family to get a 30-year 

mortgage and be able to do so in a marketplace that allows them 

as a responsible borrower to be able to achieve that. And I am really concerned about the calls by some to just yank out the GSEs totally and what that means to this market. 

So thank you very much. Thank you for your answers. 

Chairman JOHNSON. I understand that Senator Shelby has a couple more questions. 

Senator SHELBY. Thank you. Thank you, Mr. Chairman. 

Dr. Kling, thank you for your testimony and your candor. In 

order for this Committee, I believe, to reform Fannie Mae and 

Freddie Mac, it must first understand why those institutions failed. 

I will say it again. My microphone was not on. In order for this 

Committee to reform Fannie and Freddie, I believe that we must 

understand here why those institutions failed so that we do not repeat our past mistakes here in the Banking Committee. Dr. Kling, 

could you describe some of the factors that you believe led to the 

collapse of Fannie Mae and Freddie Mac? 

Mr. KLING. Well, Senator, I can try. Fundamentally, when you 

create a guaranteed enterprise like that, when the Government creates a guarantee, the private sector ultimately is going to find a 

way to load the risk onto the Government, onto the taxpayers, 

while it is making profits. So in some sense that kind of failure is 

inevitable. 
25 

Senator SHELBY. Explain what you meant there. I agree with 

you, but explain to the public what you meant, to load the taxpayer—— 

Mr. KLING. Well, if you have a guarantee against catastrophic 

loss, then you earn your highest return by taking the most catastrophic loss, and then most of the time you take a return, because 

by definition a catastrophic loss is something that happens very 

rarely, is very unexpected. You know, we do not have 25-percent 

house price declines every year. So it is a very rare event, and you 

load up on the risk for the rare event because you earn a return 

for taking that risk, but that risk is borne by the taxpayer. So that 

is, you know, fundamentally what is going on. 

You also have the phenomenon of procyclical regulation. We 

heard talk about the markets being cyclical, but the regulators and 

Congress are very cyclical. Five years ago, if you had had mortgage 

lenders in this room, you would have been berating them for turning down good loans. Now you are coming up with rules to try to 

keep them from making bad loans, so the regulations are actually 

going with the cycle. And this kind of—so procyclical regulation 

was certainly a factor with Freddie Mac and Fannie Mae because 

just as the housing bubble was heating up, they were ratcheting up 

their housing goals that they felt required that they go after lowquality mortgages. So that was a factor. I think there were also idiosyncratic factors. 

In 2007, I wrote something for a book that I was drafting saying 

that Freddie Mac and Fannie Mae are not part of the subprime crisis; they are going to survive. So I was shocked. There must have 

been some changes in the philosophy and the corporate culture 

there that—you know, because in the 1990s no-doc loans, we put 

a stop to that. Freddie and Fannie got together and said, ‘‘We are 

not going to do that.’’ 

You know, you are always under pressure—— 

Senator SHELBY. And what happened? Tell us what happened. In 

the 1990s they were not doing this. Tell us what happened. 

Mr. KLING. They stopped doing the low-doc loans until in the late 

1990s they came back again. And that is the pressure you are 

going to face with this QRM or whatever, that the lenders are always coming back to you and saying, well, what if we did this credit enhancement, what if we gave you excess collateral, you know, 

what if we showed you that these loans that we have been doing 

actually have not been defaulting so much. They are always pushing the envelope, and the regulators are going to feel that, too, and 

I think they are going to be procyclical; that is, over time, as the 

housing market gets better, the regulators will sort of loosen up the 

definition of what is a qualified residential mortgage or whatever, 

and they will just be back in the same boat. 

Mr. BERMAN. Senator, if I may? 

Senator SHELBY. Sure. 

Mr. BERMAN. One of the areas that we have not really focused 

on this morning is the multifamily sector, and as you are, I am 

sure, well aware, Fannie Mae and Freddie Mac last year had—the 

last 2 years have had between 60 and 80 percent of the multifamily 

market. That is an area where, in fact, they were successful and 

they were disciplined—— 
26 

Senator SHELBY. What is the default rate on the multifamily? 

Low? 

Mr. BERMAN. It is under 1 percent. I think Freddie Mac is about 

25 basis points and Fannie Mae is about six—— 

Senator SHELBY. That is unusual. That is good. 

Mr. BERMAN. And they also faced some of the same pressures 

that the single-family brethren faced with pressure from—— 

Senator SHELBY. What did they do right there as opposed to the 

other? Did they not succumb to pressure, the multifamily, and succumb to political pressure in the other? What happened? 

Mr. BERMAN. In fact, in the multifamily sector, they stayed disciplined. The products that they brought out to the public, the way 

those products were underwritten, the loan-to-values, the cashflows, stayed conservative, and so their default rates tell a very different story and, in fact, have provided a important service when 

the private sector has vanished from that market. 

Senator SHELBY. Dr. Kling. 

Mr. KLING. Well, I actually had a different experience in multifamily. It was very traumatic. In the late 1980s, Freddie Mac did 

not have a disciplined approach to lending in multifamily and had 

a horrible default experience. They lent cash-out refinances to landlords, to slumlords, who would then take the cash and then not put 

anything into the building in terms of maintenance. And so the 

properties went down, and people—— 

Senator SHELBY. Went down. 

Mr. BERMAN. In 1990, Freddie Mac actually shut down for 3 

years their multifamily program. 

Senator SHELBY. So they learned something, didn’t they? 

Mr. BERMAN. Exactly. They learned the lesson and then did it 

right—— 

Senator SHELBY. Multifamily. 

Mr. BERMAN. Yes. 

Senator SHELBY. Dr. Kling, quickly, would you sum up the bad 

choice, I would call it, or the devil we know versus the devil we do 

not know as we talk about reforming Fannie Mae and Freddie 

Mac? We know a lot about Fannie and Freddie. We know they do 

have some good things. But we know they have made some big 

mistakes, too, as opposed to re-creating a new structure. Sum it up 

for us quickly. 

Mr. KLING. I am terrified of creating a new structure because you 

are going to have inexperienced institutions and above all inexperienced regulators. I think we know how to make the Freddie and 

Fannie model work better than it did by having the regulators require real capital and by restricting Freddie and Fannie to highquality mortgages. So that would be better than coming up with 

something new. That would be less frightening. But I still 

think—— 

Senator SHELBY. It would be a lot less risk to the taxpayer, too, 

wouldn’t it? 

Mr. KLING. Certainly. Certainly less risk to the taxpayer. Just to 

keep them as they are would be less risky. Still, my preferred approach would be to phase them out and let the private market develop, and it might not necessarily be a secondary mortgage market, a TBA market. It might be banks lending the way they used 
27 

to lend, and, you know, although that would be a problem for some 

of the people in this room, I do not think it would be a problem 

for the American taxpayer or the American homeowner. 

Senator SHELBY. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thanks again to our witnesses for being 

here today. It is essential that we create a stable, sustainable housing market for American families. There are several additional proposals and certainly many opinions regarding the changes that 

need to be made. I look forward to discussing those further as the 

Committee continues to consider the future of the housing finance 

system. 

This hearing is adjourned. 

[Whereupon, at 11:30 a.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow:] 
28 

1The Mortgage Bankers Association (MBA) is the national association representing the real 

estate finance industry, an industry that employs more than 280,000 people in virtually every 

community in the country. Headquartered in Washington, DC, the association works to ensure 

the continued strength of the Nation’s residential and commercial real estate markets; to expand 

home ownership and extend access to affordable housing to all Americans. MBA promotes fair 

and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 2,200 companies includes all elements of real estate finance: mortgage companies, 

mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and 

others in the mortgage lending field. For additional information, visit MBA’s Web site: 

www.mortgagebankers.org. 

PREPARED STATEMENT OF MICHAEL D. BERMAN 

CHAIRMAN, MORTGAGE BANKERS ASSOCIATION

MARCH 29, 2011 

Introduction 

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

thank you for the opportunity to testify on behalf of the Mortgage Bankers Association (MBA). 1 My name is Michael D. Berman, CMB, and I am the current Chairman of MBA. I have been in the real estate finance industry for over 25 years and 

am a founder and member of the Board of Managers of CW Financial Services. I 

also serve as President and Chief Executive Officer of CW Capital. Headquartered 

in Needham, Massachusetts, CW Capital is one of the top 10 lenders to the multifamily real estate industry, with $3 billion in annual production and over 150 employees in 12 offices throughout the country. My responsibilities include overseeing 

the strategic planning and operations for all of the company’s loan programs, including multifamily programs with Fannie Mae, Freddie Mac, and the Federal Housing 

Administration (FHA). CW Capital has been active in the commercial mortgagebacked securities (CMBS) arena as an investor, lender, primary servicer and issuer 

of securities. Additionally, CW Capital is a special servicer of approximately 20 percent of the CMBS market. 

Today’s hearing is on the very important issue of housing finance reform. Exactly 

1 year and 6 days ago I testified on this very topic before your colleagues on the 

House Financial Services Committee. Much has changed during those past 12 

months. 

On the legislative front, Congress passed the Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 (Dodd-Frank Act). While it is too early to assess 

the full impact of this legislation, the financial services industry already has been 

directing considerable resources toward preparing for the avalanche of new implementing regulations on the horizon. Congress and the Administration have voiced 

a desire for private capital to return to the mortgage market. However, we must 

be clear that several pending regulatory actions have the potential to increase the 

cost and decrease the availability of credit to many potential borrowers, as these 

regulatory actions may drive private capital away from the market, directly contrary 

to the stated intent. 

On the economic front, data in recent months have been stronger than anticipated, with personal consumption expenditures and business spending propelling 

the current pace of economic recovery. The job market continues to improve, at a 

disappointing pace, and housing markets remain weak, but we are beginning to turn 

the corner with respect to mortgage performance. 

We also note that the Obama administration recently issued a report to Congress 

on reforming America’s housing finance market. The report, issued by the Departments of Treasury (Treasury) and Housing and Urban Development (HUD), renewed its commitment to affordable rental housing and laid out three potential 

ways to structure Government support in a housing finance market. There are positive aspects of each of the Administration’s three options, and, in fact, we believe 

that our proposal is aligned in part with the Administration’s thinking. I will briefly 

touch on other key points about the report later in my testimony. 

While much has changed in the past year, much remains the same. For example 

private capital still has not sufficiently returned to the mortgage market, leaving 

the Federal Government to backstop some 90 percent of all home mortgage loans. 

Nearly half of the new home loans for home purchase are guaranteed by the FHA, 

the Department of Veterans Affairs (VA), or the Department of Agriculture’s Rural 

Housing Services (USDA) programs. Almost all other home mortgage loans and 

most mortgage refinancings are financed through Fannie Mae and Freddie Mac, 

both of which are in Government conservatorship. Fannie Mae and Freddie Mac 

also now purchase more than half of all multifamily mortgages, loans to owners, and 
29 

developers of rental residential properties. Because of the current difficulty of attracting investors, only a handful of boutique private label securitization transactions have taken place during the past 3 years, with ultra-low risk loan characteristics such as very low loan-to-value ratios. The investment community anticipates 

only three or four more transactions in the year ahead. This situation is as undesirable as it is unsustainable. 

MBA continues to identify the key components and optimal structure of a safe, 

stable and liquid housing finance system for the long-term. I have the privilege of 

chairing the ‘‘Council on Ensuring Mortgage Liquidity’’ that has been charged by 

MBA to undertake this initiative. The council’s approach has been to examine the 

issues so that stakeholders can assess options in a measured, thoughtful manner. 

My fellow council members also are industry practitioners who understand the capital markets and have perspective on what will and will not work. Therefore, the 

council’s recommendations are grounded in pragmatism. 

We knew in setting up the council that the policy winds would shift with economic 

circumstances. Therefore, we continue to refine our recommendations in the context 

of current events. 

Before I go into the specifics of MBA’s recommendations, I would like to explain 

the basic tenets of housing policy that guided the council’s work. We believe that 

housing policy begins with the premise that shelter, like food, is a basic human 

need. As such, a good and just society ensures that all of its citizens are able to 

attain at least a minimum standard in terms of their housing, and many families 

are able to do much more, achieving the American Dream of owning a home. U.S. 

housing policy, developed over decades, has consistently highlighted these objectives. 

These include: 

• Bringing stability and affordability to the single- and multifamily mortgage finance markets (through Fannie Mae, Freddie Mac, Ginnie Mae, and the Federal Home Loan Bank System); 

• Promoting home ownership (through FHA, VA, USDA, the mortgage interest 

deduction and down payment assistance programs); 

• Providing consumer protections to homebuyers and renters (through fair housing, truth in lending and other regulatory efforts); 

• Providing subsidies to fill gaps between low-income households’ incomes and 

market rents (through project- and tenant-based Section 8 and other programs); 

and 

• Supporting and promoting the development and preservation of affordable 

single- and multifamily housing (through HUD and other subsidy and grant 

programs). 

All of these efforts are vitally important, and all are necessary to maintain a 

housing market that provides safe, decent and affordable housing to the American 

public. In the wake of the recent crisis, policy makers may choose to re-order or 

change the emphasis of these priorities to some extent. However everyone would 

agree they are all important. MBA’s recommendations are designed to further this 

policy in a safe, sound, and efficient manner. 

The MBA Proposal 

MBA’s recommendations were first issued in September 2009, in a document titled ‘‘Recommendations for the Future Government Role in the Core Secondary 

Mortgage Market.’’ (See, www.mortgagebankers.org/advocacy/issuepapers/ 

ceml.htm.) These recommendations established a foundation for the current debate 

and have been integrated in many of the proposals that have since come forward, 

including the Administration’s. 

Key Principles and Components 

Three principles lie at the heart of MBA’s recommendations. First, secondary 

mortgage market transactions should be funded with private capital. Second, the 

importance of housing, whether owner-occupied or rental, in the U.S. economic and 

social fabric warrants a Federal Government role in promoting liquidity and stability in the mortgage market. This role should be in the form of an explicit credit 

guarantee on a class of MBS, and the guarantee should be paid for through riskbased fees. Third, taxpayers and the system itself should be protected through limits 

on the mortgage products covered, limitations on the types of activities undertaken, 

strong risk-based capital requirements, and actuarially fair payments into a Federal 

insurance fund. 

The financial crisis proved that some form of Government support is required to 

keep the mortgage market open during times of distress. The current dearth of ac-
30 

tivity outside of the existing Government-supported liquidity channels exemplifies 

the risk averse nature of private capital. More importantly, even in good times, investors will remember the experiences of the recent crisis. If they doubt their ability 

to sell mortgages during a crisis, they will be less apt to buy them outside of a crisis. 

However, the size and scope of the U.S. housing market mean that, except in 

times of extreme duress, the Federal Government’s secondary market role should be 

to promote liquidity for investor purchases of MBS, not to attempt to provide the 

capital for or absorb the risks itself. 

A guarantee that aims to protect the entire market will be both less effective and 

less efficient than targeted support for the core of the market, those products that 

regulators determine should be available to borrowers at all times. 

The centerpiece of MBA’s recommendation for Federal support for the secondary 

mortgage market is a new line of MBS. Each security will have two components: 

(a) private, loan-level guarantees from privately owned, Government-chartered and 

regulated mortgage credit-guarantor entities (MCGEs) which will in turn be backed 

by (b) a security-level, Federal Government-guarantee (GG) ‘‘wrap.’’ The Government guarantee will be conceptually similar to that provided by Ginnie Mae by 

guaranteeing timely interest and principal payments to bondholders and explicitly 

carrying the full faith and credit of the U.S. Government. 

Investors in the guaranteed MBS would face no credit risk, but would take on the 

interest-rate risk from the underlying mortgages. In supporting their loan-level 

guarantees, the MCGEs would rely on their own capital base as well as risk-retention from originators, issuers and other secondary market entities such as mortgage 

insurers. Only in the event of a failure of a MCGE would the Government guarantee 

come into play. Before taxpayers were called upon to support the guarantee, a Federal insurance fund, capitalized by risk-based fees charged on the supported securities would be next in line. Only in the event that the insurance fund ran dry would 

there be a call on taxpayer resources. The fund would be capitalized so that this 

would be an extremely unlikely event, and could likely include provisions to have 

future MCGEs repay the taxpayers over time as well. 

Mortgage Credit Guarantor Entities (MCGEs) 

The MCGEs will be privately owned, mono-line institutions focused solely on the 

mortgage credit guarantee and securitization business. This business encompasses 

both single-family and multifamily residential mortgages. The loan-level MCGE 

guarantee would be backed by private capital held by the MCGEs which would be 

overseen by a strong regulator. 

The MCGEs will be required to manage their credit risk by using risk-based pricing, originator retention of risk (such as reps and warrants backed by sufficient capital to support them), private mortgage insurance (PMI) and risk transfer mechanisms including other risk-sharing arrangements, to ensure that there is a strong 

capital buffer before the GG and insurance fund would come into play. Loans would 

not be included in a GG security unless they were guaranteed by a MCGE. 

In most cases the MCGEs will own the loans underlying the GG securities they 

issue, and in the event of foreclosure could own the real estate collateral. The 

MCGEs will have standard corporate powers to raise debt and equity. Other than 

access to the related GG security they could issue, none of the corporate debt or equity the MCGEs issue would be guaranteed, either explicitly or implicitly, by the 

Federal Government. The MCGEs must be sufficiently capitalized to weather all but 

the most extreme credit events, and should report regularly to the satisfaction of 

the GG, Treasury, and the MCGEs’ regulator. 

Because the key mission of the MCGEs will be to guarantee and securitize mortgages through the program described, their portfolio holdings of mortgage assets 

would be limited to de minimis levels. Their portfolios would only be used to (a) aggregate allowable mortgages for securitization, (b) hold REO properties prior to disposition, and manage loss mitigation through foreclosure, modifications and other 

activities, (c) incubate mortgages that may need seasoning prior to securitization, 

(d) develop new mortgage products through a strictly limited level of research and 

development prior to the development of a full-fledged securitization market, and (e) 

fund highly structured multifamily mortgages that are not conducive to 

securitization. 

The number of MCGEs should be based on the goals of (a) competition, (b) strong 

and effective regulatory oversight, (c) efficiency and scale, (d) standardization, (e) security volume and liquidity, (f) ensuring no one MCGE becomes ‘‘too big to fail,’’ and 

(g) the transition from the current Government sponsored entity (GSE) framework. 

Initially, we would expect the number of MCGEs to be two or three. The regulator 

would have the ability to increase that number, through the granting of charters, 
31 

as the market develops. Intense competition along a number of dimensions would 

benefit borrowers and the market as a whole. The market would also benefit from 

standardization of the mortgage-backed security (MBS) structure so that investors 

can easily compare security offerings across MCGEs. 

The existing system extended an implied Federal backing to all the activities of 

Fannie Mae and Freddie Mac, including not only their mortgage guarantees, but 

also their portfolio investments, derivative counterparties and corporate bondholders. Some of those activities were clearly allocated insufficient capital, underpriced and under-supervised. In our proposal, the extent of Federal backing would 

be greatly constrained, making explicit what is guaranteed and what is not, and establishing mechanisms to properly capitalize, price and supervise those activities. 

It is important to reiterate that while the MBS in this model would be guaranteed 

by the Government, the MCGEs as institutions would not be. The corporate debt 

and equity issued by the MCGEs would be purely private. As with other firms, investors in MCGE equity and debt would accept the potential risk of failure and loss. 

For this reason, the MBA proposal recommends regulators charter enough MCGEs 

to establish a truly competitive secondary market, and to overcome issues associated 

with ‘‘too big to fail.’’ 

Government Guaranteed ‘‘Wrap’’ 

The Government guaranteed MBS issued by the MCGEs would carry a guarantee 

of timely interest and principal payments, would explicitly carry the full faith and 

credit of the U.S. Government and would be supported by a Federal insurance fund, 

funded by risk-based fees charged for the securities at issuance and on an ongoing 

basis. Due to similarities in responsibilities and likely structure, Ginnie Mae could 

potentially take on the responsibilities of the GG. 

The GG would be responsible for standardization of mortgage products, indentures and mortgage documentation for the core mortgage market. Minimum regulated fees would be established for ongoing servicing, surveillance and reporting. 

This would ensure standardization and liquidity throughout the core market. Each 

MCGE would individually issue GG securities under this standardized regime. 

These securities would carry the GG security-level guarantee backed by the MCGE 

loan-level guarantee; accordingly, the MCGEs will have approved and insured the 

underlying collateral. 

The mission of any federally related mortgage securitization and guarantee program should be explicitly limited to ensuring liquidity in the core mortgage market 

through the issuance and guarantee of MBS. This important mission should not be 

distorted by additional public or social housing policy goals. To the degree additional 

objectives and housing policies are desired, they should be pursued through FHA, 

VA, USDA, Ginnie Mae and direct Federal tax and spending programs, which 

should be adequately funded and supported to meet these important objectives. Potentially, a surcharge could be placed on the insurance premiums to accumulate an 

affordable housing fund. This surcharge should be tracked separately to ensure that 

the insurance fund is actuarially sound. 

While the full faith and credit of the U.S. Government should mean there will not 

be a need for a liquidity backstop, in times of extreme market distress liquidity 

could be provided to the GG securities market through Treasury and/or Federal Reserve purchases of GG mortgage securities. As a result, there would be no need for 

the MCGEs’ portfolios to take on the role of ‘‘liquidity providers of last resort.’’ 

Reform Recommendations of the Administration 

As was mentioned above, the housing finance reforms issued by Treasury and 

HUD included three possible restructuring options. The Administration’s first option 

would limit the Government’s role almost exclusively to the existing targeted assistance initiatives of FHA, VA, and USDA. The overwhelming majority of mortgages 

would be financed by lenders and investors and would not benefit from a Government guarantee. 

In the second option, targeted assistance through FHA and other initiatives would 

be complemented by a Government backstop designed only to promote stability and 

access to mortgage credit in times of market stress. The Government backstop 

would have a minimal presence in the market under normal economic conditions, 

but would scale up to help fund mortgages if private capital became unavailable in 

times of crisis. 

Compared to the first and second options, the third option creates a broader role 

for the Government in ensuring stability in times of market stress. Alongside the 

FHA and targeted assistance initiatives, the Government would provide reinsurance 

for certain securities that would be backed by high-quality mortgages. These securities would be guaranteed by closely regulated private companies under stringent 
32 

capital standards and strict oversight, and reinsured by the Government. The Government would charge the MCGEs a premium to cover future claims and would not 

pay claims until private guarantors are wiped out. 

MBA believes there are positive aspects of each of the Administration’s options. 

For example, as in option one we place a high value on having private capital bear 

most of the risk. As in option two we think the MCGE channel will naturally decline 

during good times, and expand during crises. In terms of form and function, option 

three closely resembles MBA’s recommendations. 

Other Liquidity Channels 

No formula for restructuring the housing finance system is complete unless other 

private and public liquidity channels are factored into the equation. In MBA’s recommendation, there would continue to be key roles for the fully private market, as 

well as for FHA, VA, USDA, and Ginnie Mae and the Federal Home Loan Banks, 

particularly as such roles evolve in support of public or social housing policy goals 

and objectives. MBA’s MCGE framework is not intended to be the entire market. 

It is meant to focus on a narrowly defined set of core mortgage products that should 

be available in all market conditions. 

We also believe it is appropriate to consider additional means of funding for mortgage credit as a part of the broader reform process, including potentially developing 

a legislative framework for a covered bond market. We will work with Congress to 

explore opportunities in this area. 

Loan Characteristics 

One issue that arises frequently during the housing finance reform debate is the 

question of the availability and pricing of long-term, fixed-rate financing. For decades, the 30-year, fixed-rate mortgage has allowed families to budget their finances 

and safely build wealth. In evaluating the options for a future housing finance system, we should consider carefully the implications of such options on the availability 

and pricing of those mortgages. 

Homeowners in the U.S. have come to view the 30-year, fixed-rate, self-amortizing, prepayable mortgage as the product standard. Payments are predictable and 

borrowers are protected from fluctuations in interest rates. From the borrower’s perspective, it is the simplest mortgage product available. If rates rise, payments are 

unchanged. If rates decline, borrowers typically have the option to refinance at no 

explicit cost. 

Although thought of as consumer friendly, from the standpoint of an investor, the 

30-year, fixed-rate, self-amortizing, prepayable mortgage is actually a very complex 

product. Borrowers refinance when rates drop, transforming a loan with a nominal 

30-year maturity to a short-term instrument. When rates increase, refinances disappear, extending the expected life of the loan. Banks and thrifts that fund themselves with deposits are not natural holders of 30-year, fixed-rate, prepayable loans, 

because they would inevitably be borrowing short and lending long. With the beginning of the U.S. MBS market in the early 1970s, it was discovered that investors 

were willing to bear the prepayment risk associated with these loans, so long as 

they were protected from the credit risk. From that point to today, with a few exceptions, most investors either did not have the capacity or the willingness to take on 

the credit risk, particularly given the uncertainty involved with systemic credit 

events such as the one we just lived through. 

The appeal of the 30-year fixed-rate mortgage in the U.S. is also a result of the 

role the GSEs play in the ‘‘To-Be-Announced’’ (TBA) market. As the name suggests, 

the defining feature of a TBA trade is that the underlying mortgage loans have not 

been identified and may not even have been originated on the trade date. Instead, 

participants agree only on a defined set of parameters of the securities to be delivered. This contrasts sharply with private-label MBS, whose loans must be originated 

before trading. The TBA market also significantly lowers the transaction costs associated with originating, servicing, and refinancing a mortgage. In addition, the TBA 

market provides an efficient way for lenders to hedge the interest rate risk involved 

in offering borrowers the ability to lock-in a rate for 30 days while closing on a 

mortgage. TBA prices, which are publicly observable, also serve as the basis for pricing and hedging a variety of mortgages that are not TBA-eligible, such as high-balance (i.e., ‘‘jumbo’’) loans not eligible to be purchased by the GSEs. TBA trading is 

thus a key link between the primary and secondary mortgage market and constitutes a major difference from nonagency or private-label MBS. 

It is also notable that long-term fixed-rate mortgages are unusual elsewhere in 

the world. A key reason for the distinctions in products between countries is differences in funding. Deposit funding dominates in most countries, while the U.S. is 

unique in terms of the importance of securitization. Over 60 percent of U.S. residen-
33 

tial mortgages have been securitized. The next closest countries are Canada, Spain, 

and the United Kingdom with 24 to 28 percent securitized. Therefore, in order to 

maintain the availability and affordability of the 30-year, fixed-rate mortgage, the 

U.S. needs a vibrant secondary market where investors can focus on and manage 

interest rate and prepayment risks, while being shielded from the uncertainties surrounding mortgage credit risk. 

MBA’s recommendations take care to ensure that capital is available to creditworthy borrowers in all communities. We believe formal establishment of the core 

residential mortgage market will set a benchmark for consumers, underwriters, investors, and others. For consumers, the presence of well-defined core mortgage products will provide a standard against which other products can be assessed. The core 

market will also provide considerable stability, ensuring that mortgage products of 

a known type will be available in all market conditions. For underwriters, the characteristics of the ‘‘well-documented, well-understood’’ mortgages of the core market 

will provide a known base for modeling and pricing risk. Variations would be considered a part of the non- core market and would operate outside of any taxpayer backstop. For investors, the core market will establish performance and pricing standards for use in GG MBS investing, and against which other investment options can 

be judged. 

It also must be remembered that the mortgage market and the GSEs support the 

financing of both single-family and multifamily properties, and that both serve important roles in housing our Nation. MBA’s recommendations are geared to both 

parts of the market. The same structure, rationales, and tenets apply to the Federal 

role in the core single-family and multifamily secondary mortgage markets. Even 

though the multifamily market had much lower default rates and stronger performance than the single-family ownership market during the recent downturn, it is also 

subject to liquidity crises. 

Transition 

Both MBA and the Administration’s recommendations recognize the importance 

of careful execution during the transition from the current to the future state of the 

housing finance system. The Administration’s report included actions that can be 

taken now to reduce the Government’s role and taxpayer exposure in the market. 

For example, they advocate for gradually increasing guarantee pricing at Fannie 

Mae and Freddie Mac, reducing conforming loan limits, and increasing down payment requirements. The Administration also plans to continue winding down Fannie 

Mae and Freddie Mac’s investment portfolios. 

While these actions may prove to be effective levers for adjusting the mixture of 

private capital and Government support, it is very important that any action take 

place in a careful and deliberate manner. Ignoring the consequences of interim actions and the pace of economic recovery could shock a still-fragile housing market, 

severely constrain mortgage credit for American families, and expose taxpayers to 

unnecessary losses on loans the institutions already guarantee. During the transition, it is also important that the operations of Fannie Mae and Freddie Mac continue to serve the market and the American people, including retaining the human 

capital necessary to effectively run both institutions. 

While a gradual transition to the new housing finance may be desirable, there are 

strong reasons to lay out a clearly defined future for mortgage finance as soon as 

possible. The uncertainty over the future policy environment is likely deterring the 

recovery by inhibiting the ability of businesses and investors to plan and move forward. 

The longer the uncertainty persists, the more difficult it becomes to retain and/ 

or recruit personnel with the necessary skill sets to execute financing. Both the multifamily and single-family markets are vulnerable in this regard. 

Regulators also should proceed with caution as they continue to implement the 

Dodd-Frank Act. One of our concerns is that the magnitude and scope of reforms 

poses challenges from a coordination standpoint. The scope of the Dodd-Frank Act’s 

new consumer protections, underwriting provisions, risk retention requirements, 

disclosure, liability and operational requirements is profound. Adding secondary 

mortgage market reforms to this equation will require the highest degree of care 

and coordination. 

One aspect of Dodd-Frank in particular that merits attention is the risk retention 

provision, including its exemption for qualified residential mortgages (QRM) and 

framework for commercial real estate MBS. The QRM is likely to shape housing finance for the foreseeable future and may even serve as a precursor for what the 

future GSE is likely to be eligible to securitize. An overly restrictive QRM definition 

that does not heed the Congressional intent will displace a large portion of potential 

homebuyers, which in turn will slow economic growth and hamper job creation. 
34 

MBA believes Congress can play a role in the transition by encouraging regulators 

to formulate a strategic theme to guide their actions going forward. For example, 

before attempting to attract private capital back to the housing finance market by 

increasing Fannie Mae and Freddie Mac’s guarantee fee, regulators should consider 

the extent to which risk retention rules may drive private capital away from the 

market. 

A narrowly defined Government role of guaranteeing credit risk at an actuarially 

fair price promotes liquidity and limits volatility in the secondary mortgage market, 

which makes it easier for homebuyers to obtain mortgages during normal economic 

times and mitigates the risk and consequences of volatility in the housing market 

and financial markets. This assumes that the Government can accurately assess 

what is an actuarially fair price. Mispricing the wrap premium by either over- or 

under-charging for the wrap has costs. 

Pricing risk is difficult for both the private sector and the Government. However, 

it is less difficult now than it was 5 years ago. At that time rating agencies and 

investors looked to ‘‘stress events’’ for which there were incomplete data and different market practices. Having just experienced the worst real estate downturn 

since the Depression, we now have vast amounts of data that can provide the basis 

for more robust and accurate risk pricing models. 

Experience has also shown that Governments intervene to protect depositors and 

prevent housing market collapses. Knowing this, MBA believes taxpayers are better 

served by clearly defining the boundaries of such intervention and collecting revenues up front rather than paying a lump sum ex post facto. 

Conclusion 

It is time to commit to a future housing finance system for the United States. The 

Administration, Congress, and the private sector share a responsibility to work together to build a stronger and more balanced system of housing finance. MBA looks 

forward to working closely with the Committee on this issue in the weeks and 

months ahead. Thank you again for the opportunity to appear before the Committee 

today. As MBA’s deliberations on these topics continue, we would welcome the opportunity to come back and update you on our work. 

PREPARED STATEMENT OF ARNOLD KLING 

PH.D. MEMBER, MERCATUS CENTER FINANCIAL MARKETS WORKING GROUP, GEORGE

MASON UNIVERSITY

MARCH 29, 2011 

Thank you, Chairman Johnson and Ranking Member Shelby, for inviting me to 

testify at the hearing today on the future of the housing finance system. 

My testimony can be summed up in three words: Just Say No. 

The time has come to say no to the mortgage lobby. Send them home empty-handed. Let ordinary Americans win one for a change. 

A coalition of real estate agents, Wall Street investment firms, mortgage bankers, 

community activist groups, and others spent the last 40 years lobbying to protect 

and expand subsidies for mortgage credit. They usually got what they wanted. And 

what did the American public get? We got a housing bubble, a financial crisis, a 

bailout, a recession, and millions of homeowners drowning in debt. 

That shameless coalition is back again, insisting that Government must provide 

a guarantee in the mortgage market. Just say no. 

This country is in a mess today because mortgage borrowing and mortgage lending were carried to excess. Given what we have just experienced, one would think 

that proposing a new Government guarantee to prop up the mortgage industry 

would be considered totally inappropriate. If a mob of people had gone through the 

town on a drunken rampage, committing reckless acts of vandalism, would the city 

officials be focused on trying to restock the bars? 

There is a way to guarantee reliability of mortgages that does not require a Government agency. The solution is for most borrowers to make down payments of 20 

percent, which was typical before the madness of the last two decades. Stop making 

so many loans where the down payment is just 2 percent (or less). At the risk of 

oversimplifying slightly, I would say that a loan with a 20 percent down payment 

is a good loan, and a loan with a 2 percent down payment is a bad loan. With good 

loans, the mortgage market does not need a Government guarantee. With bad loans, 

a guarantee can only come to grief. 

What should we say to someone who wants to buy a $200,000 house but has only 

$5,000 saved up? In most cases, we should say the same thing we would say if they 
35 

1 Arnold Kling, ‘‘Two Approaches to GSE Reform’’ (working paper no. 11-07, Mercatus Center 

at George Mason University, March 2011), http://mercatus.org/sites/default/files/publication/ 

wp1107-two-approaches-to-gse-reforml0.pdf. 

wanted $200,000 in poker chips in Las Vegas or $200,000 worth of stock. We should 

just say no. 

If it is in the public interest for more people to own their homes, then I would 

suggest coming up with policies that expand home ownership, rather than mortgage 

indebtedness. We should try to come up with programs that encourage people to 

save for down payments, rather than encouraging them to take on too much debt. 

Instead of trying to ensure that everyone has access to the mortgage equivalent of 

cheap alcohol, we should be helping people to drink less. 

Does the Government need to support the rental market? Then provide more generous housing vouchers to renters, rather than handing out subsidies that encourage 

indebtedness among landlords. Landlords, too, should have significant equity in 

their properties. Otherwise, at the first sign of trouble they will stop maintaining 

their buildings, allowing them to fall into disrepair and adversely impacting their 

tenants. 

These days, it seems as if everyone in Washington has a blueprint for restructuring the mortgage industry around some newly created institution or Government 

guarantee program. Just say no. 

This is the time of year when college basketball is on everyone’s mind. Imagine 

what would happen if during a game, a team were to go through a streak of terrible 

shot selection, falling way behind and leading the coach to call time out. A normal 

coach would say, ‘‘Settle down. Take the shots you know how to make, and stay 

away from low-percentage shots.’’ If instead he were a Washington policy wonk, he 

would say, ‘‘We need to restructure the whole team. No more two guards, two forwards, and a center. From now on we are going to use a bishop, three pawns, and 

a rook. Refer to the diagrams in this memo.’’ 

The mortgage industry equivalent of bad shot selection is bad loans. If the mortgage industry stops making bad loans, then Washington does not need to come in 

with a new playbook and a new set of roles that people have to learn to play. With 

good loans, the mortgage finance business will take care of itself. 

The most urgent need for housing finance policy today is to ration the use of Government-subsidized mortgage credit, which right now is excessive and out of control. 

I hope that as soon as tomorrow, Congress will enact legislation that narrows Government support to the single purpose of helping people purchase homes for their 

own use. Such legislation would prohibit Freddie Mac, Fannie Mae, and FHA from 

offering any support for loans to non- owner-occupied home borrowers, for cash-out 

refinances, for nonamortizing loan products, and for any other mortgage that fails 

to fulfill the purpose of helping households build up equity in their places of residence. 

These immediate steps should be followed by legislation that reduces the maximum loan amount eligible for purchase by, say, 25 percent each year. Loan limits 

for the agencies will permit private lenders to reenter the market. Once we create 

a playing field in which private lenders have a chance to compete, we can reassess 

the need for further Government intervention. My prediction is that we will find 

that the private sector is fully capable of taking care of the mortgage needs of real 

homebuyers. But in any event, we do not have to make that determination until we 

give the market a chance. 

As we reduce the role of Government agencies, we can monitor the behavior of 

the private sector and adapt our policies accordingly. If the private sector goes back 

to making bad loans, which I doubt will happen, we can regulate to stop that. If 

the private sector leaves gaps in accessibility to good housing, we can enact programs to address that. Those programs might consist of assistance targeted at specific needs, rather than generic subsidies to the mortgage industry. 

I understand why various interest groups want to have a Government guarantee 

for mortgages. Without a guarantee, it is possible that the secondary mortgage market will decline in importance or perhaps even disappear altogether. We might see 

the market revert to old-fashioned mortgage lending, where the bank keeps your 

loan until you finish paying it off. 1 I think that homeowners could live with that. 

I understand that it would be hard on the mortgage bankers, the Wall Street firms, 

the rating agencies, and the other special interests that count on the Government 

to prop up the secondary market. 

Just say no. 
36 

2 Arnold Kling, ‘‘Not What They Had in Mind: A History of Policies That Produced the Financial Crisis of 2008’’ (Arlington, VA: Mercatus Center at George Mason University, 2009), http:// 

mercatus.org/sites/default/files/publication/NotWhatTheyHadInMind%281%29.pdf. 

APPENDIX: CHARGING FOR RISK 

Some proposals for a Government guarantee envision charging a fee to private institutions that take advantage of the guarantee. This is much easier to do than it 

sounds. 

If the same fee were charged, regardless of mortgage characteristics, it would 

make the institutions that use the guarantee relatively less competitive in the market for low-risk loans and relatively more competitive in the market for high-risk 

loans. Thus, charging for the guarantee could very well have the perverse effect of 

encouraging institutions to take more risk. 

In theory, the solution is for the Government to charge a variable guarantee fee, 

one which is higher for loans with riskier characteristics. The agency administering 

the fee would develop ‘‘risk buckets’’ and charge different fees for loans in different 

buckets. 

However, even risk buckets can be manipulated in what is known as ‘‘regulatory 

arbitrage.’’ Many of the fancy new financial vehicles created in the decade leading 

up to the financial crisis were introduced in order to get high-risk assets reclassified 

into low-risk buckets. See my paper, Not What They Had in Mind: A History of Policies That Produced the Financial Crisis. 2
37 
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41 
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44 
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PREPARED STATEMENT OF MARK ZANDI 

CHIEF ECONOMIST, MOODY’S ANALYTICS

MARCH 29, 2011 

No one is comfortable with the Federal Government’s current outsize role in the 

housing and mortgage markets. Nearly all of the first mortgage loans originated in 

2010 were made by the Federal Government through the Federal Housing Authority, Fannie Mae, and Freddie Mac (see, Chart). Acting on behalf of taxpayers, the 

FHA is taking on much more credit risk than was ever envisaged for this institution, and Fannie and Freddie are operating in conservatorship, a kind of regulatory 

purgatory. While changing any of this quickly would disrupt the still-fragile housing 

market and economy, none of it is sustainable in the long run. 

This untenable situation is the result of the collapse of the private mortgage market during the financial panic. At its peak in 2005 in the midst of the housing bubble, the private market accounted for more than two-thirds of all originations. 

Powering private mortgage lending was securitization—the process of packaging 

mortgage loans into securities sold to global investors. Securitization was not new: 

The FHA, Fannie Mae, and Freddie Mac had been securitizing mortgages for more 

than 25 years. But during the housing bubble, securitization surged in both size and 

scope, incorporating a wider range of mortgages, including subprime, Alt-A, and option-ARM loans. Securitization also grew more complex and opaque, so that even 

the most sophisticated investors had trouble evaluating the risks. 

Critically, moreover, no participant in private mortgage securitizations had the responsibility for ensuring that the process worked. Mortgage banks and brokers originated loans but quickly sold them to investment banks, which packaged the loans 

into securities. Credit rating agencies assessed them, and in doing so may have unknowingly used faulty information provided by the investment banks. Investors who 

purchased the securities took the ratings largely on faith. And Government regulators provided little oversight, feeling the private market could regulate itself. Yet 

as the events of the past 3 years show, it clearly could not. Today, the private mortgage market is comatose. 

Administration’s Proposal 

The Obama administration in its recently released white paper appropriately argues that the Government should phase out Fannie Mae and Freddie Mac and significantly scale back its role in the mortgage market—not quickly, but over time in 
49 

1The Treasury white paper can be found at http://www.treasury.gov/initiatives/Documents/ 

Reforming%20America%27s%20Housing%20Finance%20Market.pdf. 2 A detailed description and analysis of the Moody’s Analytics proposal for a hybrid system 

is available at http://www.economy.com/mark-zandi/documents/Mortgage-Finance-Reform020711.pdf. 

The Moody’s proposal is similar to a number of other proposals; the most notable include a 

proposal by the Housing Policy Council of the Financial Services Roundtable (a group of 32 leading national mortgage finance companies) http://www.fsround.org/housing/gse.htm, the Mortgage Bankers Association http://www.mbaa.org/Advocacy/IssuePapers/CEML.htm, and the 

Center for American Progress http://www.americanprogress.org/issues/2011/01/pdf/ 

responsiblemarketforhousingfinance.pdf. 

a clearly defined way to allow the private market to revive. 1 A number of policy 

tools can help achieve this, including reducing conforming loan limits; raising insurance premiums and down payments on loans insured by the FHA, Fannie Mae, and 

Freddie Mac; and requiring Fannie and Freddie to shrink their loan portfolios. 

The Administration proposes three potential options for the mortgage finance system as the Government steps away: 

• Option 1 would limit the FHA to a small part of the mortgage market, fully 

privatizing the rest of the market with neither explicit nor implicit Government 

support. 

• Option 2 would limit the FHA to a small part of the mortgage market in normal 

times, leaving the rest to private lenders, but would provide a mechanism, 

which the Administration did not define, for the Government to significantly expand its role if the private market falters. 

• Option 3 would limit the FHA to a small part of the mortgage market in normal 

times, with private lenders making up the rest of the market, but the private 

market would be backstopped by explicitly priced catastrophic Government insurance. The Government would step in only after private investors were wiped 

out. 

Hybrid System 

Option 3 is similar to the hybrid private–public mortgage finance system Moody’s 

Analytics has proposed, as have others, including the Housing Policy Council, the 

Mortgage Bankers Association, and the Center for American Progress. 2 A hybrid 

system could take many forms, but the most attractive would retain several roles 

for the Federal Government—insuring the system against catastrophe, standardizing the securitization process, regulating the system, and providing whatever subsidies are deemed appropriate to disadvantaged households. Private markets would 

provide the bulk of the capital underpinning the system and originate and own the 

underlying mortgages and securities. 

The Government would provide catastrophic insurance on mortgage securities 

only after major losses, much as the FDIC insures bank deposits. The FDIC ended 

runs by scared depositors on U.S. banks during the Great Depression. Catastrophic 

mortgage securities insurance would eliminate runs by scared investors on the global financial system such as those in 2008, precipitating the Great Recession. 

Catastrophic insurance would ensure that mortgage credit remains ample in the 

bad times, and—assuming it is properly priced—at no cost to taxpayers. It would 

also reduce the odds of bad lending in good times, since the insurance would be offered only to qualifying mortgages or to others only at a high price. Since private 

financial institutions would put up the system’s capital, there would be significant 

incentive to lend prudently and, given the competition in a mostly private system, 

to innovate as well. 

A hybrid system is superior to the other options for the future mortgage finance 

system, resulting in measurably lower mortgage rates, greater credit availability for 

more homeowners, and preservation of the popular 30-year fixed-rate mortgage. It 

also will compensate taxpayers for the risk of backstopping the mortgage finance 

system—a risk that will continue to exist no matter what choices lawmakers make 

for reform. 

In a hybrid system, mortgage rates would be higher than they were before the 

housing crisis, but only because the previous system was undercapitalized. If the future system is capitalized sufficiently to withstand losses on defaulting mortgages 

that would result if house prices declined by say 25 percent—consistent with the 

price declines experienced in the current housing crash—mortgage rates would be 

approximately 30 basis points higher. Before the financial crisis, the mortgage finance system was capitalized to losses associated with a 10 percent decline in house 

prices. 
50 

Lower Mortgage Rates 

But mortgage rates in the proposed hybrid system would be almost 90 basis 

points lower than under a fully privatized system. This is a significant difference. 

The monthly principal and interest paid by a typical borrower who has taken out 

a $200,000 loan for 30 years at a 6 percent interest rate is $1,199 under the hybrid 

system. With a 90-basis point premium in the privatized system, the monthly payment increases to $1,317, a difference of $118, or nearly 10 percent. The difference 

in payments under the two systems would likely be even greater for borrowers with 

less than stellar credit or who are seeking loans with higher loan-to-value ratios. 

The greater the risk, the greater the rate premium under the privatized system. 

There are three fundamental reasons why mortgage rates will be lower in a hybrid system than they would be with full privatization: 

Explicit pricing: Advocates of a privatized market presume that the Government 

could credibly pledge never to intervene during a crisis. If private investors actually 

believed this, they would require larger returns on mortgage investments to protect 

against a catastrophic outcome. The cost of private mortgage insurance would therefore be higher. 

On the other hand, if investors believe the Government would bail out the market 

in a crisis, they will necessarily underprice the risk, leaving taxpayers exposed. History strongly suggests Government would not allow the housing market to fail; no 

matter what lawmakers pledge today, investors know political winds change in 

times of economic stress. Taxpayers will be better off if the Government explicitly 

acknowledges this likelihood and collects an insurance premium in exchange for its 

guarantees. 

Standardization: Under the current mortgage system, Fannie Mae and Freddie 

Mac mortgage securities are highly liquid instruments, largely because they conform 

to strict guidelines. Investors in these securities pay for this standardization, which 

helps ensure a robust secondary market. Private-label mortgage securities are not 

standardized—a Wells Fargo security trades differently than one from Citibank or 

another issuer. Markets in these individual securities are thus much thinner, with 

wider bid-ask spreads. 

Scale: Mortgage securitization has large fixed costs. Under a privatized system, 

each securitizer would bear the cost of operations, Administration, reporting, auditing, etc. A single Government-run securitization agency (a feature of most hybrid 

systems) would achieve economies of scale. The provision of insurance, including 

catastrophic risk insurance, also benefits from scale. 

Standardization and scale are more likely with Government coordination. Could 

industry participants come together to set tight standards on securities and achieve 

some economies of scale through clearinghouses? Possibly, but that hasn’t happened 

so far. The American Securitization Forum, which issues guidelines, has little authority to audit or enforce them. 

Preserving the Fixed-Rate Mortgage 

Homeowners would also benefit from the preservation of the popular 30-year 

fixed-rate mortgage, a type of loan that would quickly fade in a fully privatized system. The FHA introduced this type of mortgage after the Great Depression to forestall the mass foreclosures that occurred during that period. The current foreclosure 

crisis is a stark reminder of this benefit, as the bulk of recent foreclosures are on 

homeowners who had adjustable-rate mortgages. 

Financial institutions have historically found it very difficult to manage the interest rate risk in such mortgages: As the cost of funds changes, the rate received from 

homeowners remains fixed. The savings and loan industry collapsed largely because 

of the mismanagement of this interest rate risk during the 1980s, and even Fannie 

and Freddie got into trouble using inappropriate interest-rate hedging techniques to 

manage their earnings in the early 2000s. It thus is not surprising that 30-year 

fixed-rate mortgages are very uncommon overseas, where the interest rate risk resides with lenders with no support from the Government. Indeed, it is likely that 

a privatized U.S. market would come to resemble overseas markets, primarily offering adjustable-rate mortgages. 

Other Considerations 

Taxpayer bailouts would also be unlikely in a hybrid system, as homeowners and 

private financial institutions would be required to put substantial capital in front 

of the Government’s guarantee, and there would be a mechanism to recover costs 

if necessary. 

Given the fragile states of the U.S. housing market and economy, a transition 

from the current nationalized mortgage system to a hybrid system would take years 

and raise many issues, but these would be manageable. Given the expertise they 
51 

have acquired over the past several decades, the downsized Fannie and Freddie 

could become Federal catastrophic insurers. The transition would also involve establishing institutions and an infrastructure necessary to attract private capital. 

One potential weakness of a hybrid system involves moral hazard: If private investors believe the Government will bail them out if things go badly, they will take 

inappropriate risks. Moral hazard cannot be eliminated in a hybrid model, but it 

can be significantly mitigated. The system we support would require enough private 

capital to withstand massive losses—those associated with a 25 percent decline in 

house prices. The Government’s catastrophic insurance would kick in only if the 

losses were even greater, providing significant financial incentive for private investors to make sound lending decisions. 

It is also important to recognize that moral hazard exists even in a fully 

privatized system. Investors in such a system are likely to assume that in extreme 

circumstances the Government would still step in, congressional pledges to the contrary notwithstanding. Recent experience has only reinforced this belief, as the Government stepped in during the financial crisis to bail out the system. In the hybrid 

system plan, the Government’s backstop is explicit and paid for by private investors. 

Assertions that Wall Street banks and their associated financial institutions 

would fare better in a hybrid system than they would with full privatization are 

misplaced. In fact, Wall Street’s profits would likely be greater in a privatized system, which would be more fractured and less liquid, resulting in wider bid-ask 

spreads and thus bigger opportunities to profit from arbitrage. The need for ratings 

or other forms of credit analysis will also be much greater in a privatized system 

that is less standardized and not ultimately backed by the Government. 

Mortgage rates will be higher in the future than they were in the past and borrowers will face larger hurdles to obtain mortgage loans. Given the Nation’s fiscal 

challenges, the Federal Government cannot afford to continue large subsidies for 

home ownership. It is unclear that these subsidies were effective in any event, given 

the current foreclosure crisis. Nonetheless, it is critical that the mortgage finance 

system be better designed, or the costs for future prospective homeowners will be 

prohibitive, and the costs to taxpayers in the next financial crisis will be overwhelming. And if mortgage finance reform is done right, the American dream of 

home ownership will remain in reach for most. 

PREPARED STATEMENT OF JANNEKE RATCLIFFE 

SENIOR FELLOW, CENTER FOR AMERICAN PROGRESS ACTION FUND

MARCH 29, 2011 

Good morning Chairman Johnson, Ranking Member Shelby, and Members of the 

Committee. I am Janneke Ratcliffe, a Senior Research Fellow at the Center for 

American Progress Action Fund and the executive director for the Center for Community Capital at the University of North Carolina at Chapel Hill. 

Today I am especially honored to be asked to speak to you as a member of the 

Mortgage Finance Working Group. The members of this working group began gathering in 2008 to chart a path forward for the mortgage market. Our ‘‘Plan for a Responsible Market for Housing Finance’’ is the result. I will summarize our proposal, 

which is included in full in my written statement, but I speak only for myself in 

any views expressed here today. 

Our collective experience and the 3 years we spent hashing out these issues has 

made us well aware of the difficult challenge you now face. The immediate task is 

to restore confidence in the housing market but we are also convinced that, long 

term, housing can continue to be core to Americans’ prosperity and economic security, and the foundation of middle-class opportunity. To meet this mission, housing 

finance reform must meet three key goals: 

• First, provide broad access to reasonably priced financing for both home ownership and rental housing so that more families, including the historically underserved, can have safe and sustainable housing options to meet their needs. 

• Second, preserve the 30-year fixed-rate mortgage, which allows families to fix 

their housing costs, build assets, and plan for their future in an ever more volatile economy. 

• And third, ensure that lenders, large and small, in communities large and 

small, can competitively offer the affordable, transparent, safe mortgage loans 

that borrowers need. 

Our proposal achieves these goals by building on lessons from the past, both what 

went wrong and what was done right. 
52 

1Markus K. Brunnermeier, ‘‘Deciphering the Liquidity and Credit Crunch 2007–08’’, Journal 

of Economic Perspectives 23(1) (2009):77–100. 

Principles of a New System Based on Lessons Learned From the Past 

History has shown us that a housing finance system left to private markets will 

be subject to a level of volatility that is not systemically tolerable, given the importance of housing to the economy and to the American family. 

The past decade exposed flaws in our housing finance architecture. 1 The availability of mortgages was wildly cyclical, resulting in excessive mortgage credit during the housing boom, followed by a nearly complete withdrawal of credit when the 

bubble burst. The risk of many of the mortgages originated during the housing bubble was underpriced. At the same time, these mortgages were not sustainable for 

consumers, as low teaser rates and opaque terms masked their high overall cost 

over time. 

The housing bubble was driven by the development of a ‘‘shadow banking system’’ 

in which mortgage lending and securitization was largely unregulated and certainly 

undisciplined. In time, this system drew in the quasi-governmental entities Fannie 

Mae and Freddie Mac who increased their own overall risk during the ‘‘race to the 

bottom’’ that implicated almost all mortgage lenders during the 2000s. In particular, 

as Fannie Mae and Freddie Mac lost market share to private mortgage-backed securities issuers who were underpricing risk, the two mortgage finance giants lowered 

their own underwriting standards and increased their leverage in an attempt to 

compete. The result: Taxpayers were left exposed to major losses. 

The new system must be designed to avoid the same pitfalls in the future. Keeping this in mind, we built our proposal on five key principles: liquidity, stability, 

transparency, affordability, and consumer protection. 

First, There Must Be Broad and Constant Liquidity 

The new system needs to provide investors the confidence to deliver a reliable 

supply of capital to ensure access to mortgage credit for both rental and home ownership options, every day and in every community, during all kinds of different economic conditions, through large and small lenders alike. 

Broad and constant liquidity also requires effective intermediation between borrower demands for long-term, inherently illiquid mortgages and investor demands 

for short-term, liquid investments. The capital markets have therefore come to play 

an essential role in mortgage finance. But as the past decade so stunningly demonstrated, left to their own devices, capital markets provide highly inconsistent 

mortgage liquidity, offering too much credit sometimes and no credit at other times 

with devastating effects on the entire economy. 

To communities, liquidity means that lenders of all sizes can offer their customers 

in all communities beneficial mortgage products. Currently, an estimated 70 percent 

of all mortgage originations flow through four lenders—JPMorgan Chase Co., Bank 

of America Corp., Citigroup Inc., and Wells Fargo & Co.—all of which benefit from 

Federal deposit insurance and an perceived and unpaid too-big-to-fail guaranty. 

Without consistent and equitable access to a fairly priced secondary market, the 

country will be in danger of losing the services of community banks, credit unions, 

and other lenders that can meet the needs of their communities on a more tailored 

and targeted basis than these larger institutions. These many small but important 

financial institutions need a well-functioning secondary market so they can access 

the capital they need to originate more mortgages. 

To American families, consistent liquidity also means that developers will find 

capital to finance new and rehabilitated apartments and other homes so inadequate 

supply does not put decent rental options out of reach. It means that regardless of 

what community they live in, lenders will offer credit at a fair price. It means that 

families will be able to afford a long-term mortgage they can budget for without fear 

that interest rates will drive up their costs. It means they can put their hard-earned 

savings into a home with confidence that, whether the economy is up or down, when 

they need to sell, potential buyers will have access to credit from an array of competing lenders and the family will be able to sell their home at a fair market price. 

Second, Any New System Must Foster Financial Stability 

Stability is achieved by reining in excessive risk taking and promoting reasonable 

products and sufficient capital to protect our macro economy and household economies from destructive boom-bust cycles. A totally private mortgage market is inherently inclined toward extreme bubble-bust cycles, which cause significant wealth destruction that brings with it devastating repercussions not only for homeowners and 

lenders but also for neighborhood stability, the larger financial system, and the 

broader economy. 
53 

Private mortgage lending is inherently procyclical. Mitigating that tendency requires strong, consistently enforced underwriting standards and capital requirements that are applied equally across all mortgage financing channels for the long 

cycle of mortgage risk. As we saw in the previous decade, capital arbitrage can 

quickly turn small gaps in regulatory coverage into major chasms, causing a ‘‘race 

to the bottom’’ that threatens the entire economy. 

Stability for the market requires sources of countercyclical liquidity even during 

economic downturns. For families, stability means that they will not experience wild 

fluctuations in home values, allowing them to plan financially for their families, 

education, businesses, or retirement. 

Third, Transparency and Standardization Will Support These Other Principles 

Underwriting and documentation standards must be clear and consistent across 

the board so consumers, investors, and regulators can accurately assess and price 

risk and regulators can hold institutions accountable for maintaining an appropriate 

level of capital. 

During the housing bubble, the housing finance system experienced a seismic shift 

toward complex and heterogeneous products that could not be understood by consumers at one end of the chain to securities that could not be understood by investors at the other. The lack of transparency and standardization set the stage for adverse selection because the issuers knew more than the investors. 

Because the state of the whole secondary market affects the pricing of each packaged pool of mortgages in it, a safe and liquid securitization market can only exist 

if investors have access to information about all mortgage-backed securities in the 

market place. A private mortgage-backed securities market will not reemerge unless 

investors are convinced these issues have been resolved. Secondary market transparency and standardization lower costs and increase availability. 

For borrowers, standardization and transparency means that they can make good 

choices from among well-understood and standard mortgage products. The mortgage 

products they can choose from are not so complex that their consequences are hidden. 

Fourth, The System Must Ensure Access to Reasonably Priced Financing 

for Both Home Ownership and Rental Housing 

Liquidity and stability are essential to affordability and, for most families, the 

lower housing costs produced by the modern mortgage finance system over the past 

half century (before the recent crises) facilitated wealth building, enabling them to 

build equity, save, and invest. This contributed to the building of a strong middle 

class and has been an important guiding concept in modern U.S. housing finance 

policy—and a key component of the American socioeconomic mobility of the 20th 

century. 

A pillar of this housing system is affordably priced long-term, fixed-rate, fully selfamortizing, prepayable mortgages, such as the 30-year mortgage. The long term of 

this loan provides borrowers with an affordable payment while the fixed-rate, the 

option to prepay, and self-amortization features provide the financial stability and 

forced savings that are critically important to most families, while retaining the opportunity for mobility. 

Multifamily rental housing also gains stability from long-term, fixed-rate financing. Banks and other lenders, however, are reluctant to offer long-term, fixed-rate 

mortgages to homebuyers or multifamily mortgage borrowers unless the lenders 

have a consistently available secondary market outlet. In the absence of Government policies designed to explicitly support long-term, fixed-rate mortgages, it is 

likely that this type of mortgage would largely disappear from the U.S. housing 

landscape or become unaffordable to the Nation’s middle class, which has been so 

effectively served by 30-year residential mortgages, and to the Nation’s many renters who rely on multifamily property owners’ ability to finance and refinance their 

apartment buildings. 

One of the most important accomplishments of the modern U.S. housing finance 

system is the broad availability of mortgage credit, but the benefits of this system 

have not been equally shared by all qualified households. Who is qualified for home 

ownership? We have ample evidence that many households who may not fit the ‘‘20 

percent down, established credit, 30 percent debt-to-income’’ model can become successful long-term homeowners, when given access to well-underwritten, affordable, 
54 

2David Abromowitz and Janneke Ratcliffe, ‘‘Homeownership Done Right: What Experience 

and Research Teaches Us’’, (Washington: Center for American Progress, 2010), available at 

http://www.americanprogress.org/issues/2010/04/pdf/homeownershipldonelright.pdf. 3Lei Ding and others, ‘‘Risky Borrowers or Risky Mortgages: Disaggregating Effects Using 

Propensity Score Models’’, Working Paper (UNC Center for Community Capital, 2010), available 

at http://www.ccc.unc.edu/abstracts/091308lRisky.php. 

fixed-rate financing. 2 For example, at UNC, we follow a portfolio of nearly 50,000 

mortgages made by banks across the country over the decade preceding the crisis; 

loans made under affordable housing and CRA programs. The median borrower 

earned $30,792 a year, more than half of them had credit scores of 680 or below, 

and 69 percent put down less than 5 percent on their home purchase. Some of the 

conversations going on now suggest they were not qualified. But as of today, less 

than 5 percent of these loans have experienced foreclosure. Their delinquency rate 

is a fraction of that of subprime mortgages. In fact, the households have on the median, and over the period, managed to build more assets than through any other 

available mechanisms. They were able to do so because they had access to prime, 

fixed-rate, long-term amortizing mortgages that they could afford to repay. 3

Liquid, stable, and affordable financing must also be more available for multifamily and rental housing because it results in more affordable and stable rents. 

The housing opportunity ladder begins with access to stable rental housing in reach 

of good jobs, where households can pay their rent and still have money left over to 

begin saving. It is projected that the shortage in affordable rental housing is only 

going to be exacerbated in the wake of the foreclosure crisis. Over the next 30 years, 

we may need to add more than 40 million new housing units of all types to meet 

the demand. We cannot get on track without a strong rental housing finance system. 

Access to affordable credit does not mean that people should stretch to purchase 

more house than they can afford. It does mean that home ownership’s benefits of 

forced savings and wealth appreciation are available to those with sustainable incomes and strong credit history without regard to race or geography. It also means 

that there is enough supply of quality rental housing appropriate for individuals 

and families so that rents charged are affordable—meaning housing costs are no 

more than 30 percent of incomes. 

Finally, The System Must Support the Long-Term Best Interest of All Borrowers and Consumers and Protect Against Predatory Practices 

The purchase of a home is a far more complicated, highly technical transaction 

than any other consumer purchase and occurs only a few times in a consumer’s life. 

Mortgage consumers are at a severe information disadvantage compared to lenders. 

In addition, a mortgage typically represents a household’s largest liability. A mortgage foreclosure therefore has outsized consequences for the borrower. As the current crisis so sadly demonstrates, mortgage foreclosures also deliver devastating 

consequences to communities, the financial markets, and the broader economy. 

During the housing boom, unregulated and often predatory subprime lending not 

only failed to maintain or promote sustainable home ownership opportunities but 

also established a dual credit market where factors other than a borrower’s creditworthiness—such as race or neighborhood location—determined the type and terms 

of the mortgages available. All too often, families were denied the best credit for 

which they qualified because their communities were flooded with unsustainable 

mortgage credit—in part because secondary market pressures created incentives to 

make and sell these loans instead of the safer, lower-cost products. 

How the Goals of Our Proposal Support These Principles 

In order to support these fundamental policy principles, our proposal for a new 

housing finance system sets out to achieve four key goals: 

• Preserve the availability of 30-year fixed-rate mortgages, which allows families 

to fix their housing costs and better plan for their future in an ever more volatile economy. 

• Provide access to reasonably priced financing for both home ownership and 

rental housing so families can have appropriate housing options to meet their 

circumstances and needs. 

• Ensure that a broad array of large and small lenders (such as community 

banks, credit unions, and community development financial institutions) have 

access to secondary market finance so they can continue to provide single and 

multifamily mortgage loans in every community around the country. 
55 

• Address the continuing concerns of underserved borrowers or tenants whose 

housing needs may require some direct Government support. 

The Importance of the 30-Year Fixed-Rate Mortgage 

One important reason why the 30-year fixed-rate mortgage is superior to other 

mortgages is that it provides cost certainty. A U.S. household with a 30-year fixedrate mortgage always knows what its mortgage payments will be. Because shorterduration products are basically designed to be refinanced every 2 to 7 years, homeowners with these types of loans face significant risks that interest rates may rise, 

making their home payments unaffordable after that initial 2 to 7 year period expires. 

This is true even when interest rates are stable or declining. Adjustable-rate and 

short-term mortgages expose borrowers not only to ordinary interest-rate risk but 

also to the risks that they may not be able to refinance when they need to, due to 

adverse changes in market conditions. 

The 30-year fixed-rate mortgage insulates borrowers against these risks since 

their payment streams are fixed. If we transitioned to an economy where the 30- 

year fixed-rate mortgage was no longer the dominant mortgage product, Americans 

would face the risk of losing their home every time they refinanced, due to rising 

interest rates or an unavailability of refinancing options, even if they otherwise 

could have been able to make their payments. 

The ‘‘Plan for a Responsible Market’’ ensures that the 30-year fixed-rate mortgage 

remains a widely available, efficiently priced choice for all qualified homeowners. 

An Appropriate Government Role 

History and experience shows that a Government role is necessary for a smoothly 

functioning mortgage market. 

Prior to the introduction of the major housing and finance reforms of the 1930s 

(which established the Federal Housing Administration, the Federal Home Loan 

Bank System, the Federal Deposit Insurance Corporation, and Fannie Mae, among 

others), the United States had a mortgage system that closely resembled the purely 

private system conservatives are arguing for today. From our contemporary perspective, this system was a total failure, demonstrating the perils of calls to ‘‘reform’’ 

the mortgage system back into a purely private endeavor. 

Residential mortgages prior to the 1930s had many of the same features as the 

unregulated mortgage loans of the 2000s, with products similar to the subprime 

mortgages and so-called Alt-A mortgages—then as in the 2000s they were short 

term (typically 5–10 years), they were interest only, they carried a variable rate of 

interest, and they featured ‘‘bullet’’ payments of principal at term (unless borrowers 

could refinance these loans when they came due, they would have to pay off the outstanding loan balance). 

Moreover, mortgages in this earlier era had high down-payment requirements, 

typically more than 50 percent, and were offered at rates much higher than the ones 

we take for granted today. They were effectively confined to a very narrow band of 

Americans, with a much higher percentage of home purchases being cash only. As 

a result, home ownership was far less attainable than it is today, with a home ownership rate of 43.6 percent in 1940. 

Some have asserted that the significant development of the financial sector since 

the 1930s means that a purely private mortgage system could effectively serve the 

mortgage needs of Americans today. They point to the nascent recovery in the socalled jumbo mortgage markets, an area that lacks any Government support because these mortgages are for the high end of the housing market, as evidence supporting the idea that the purely private markets can capably serve the mortgage 

markets. 

This argument is fundamentally flawed for a number of reasons. First, it ignores 

the enormous size of the U.S. mortgage market, which currently has some $11 trillion in residential mortgage debt outstanding. The fact that the purely private markets may be able to meet the mortgage needs of a narrow, wealthy slice of homebuyers does not mean that they will be able to meet the mortgage needs of all Americans. 

Second, and relatedly, this argument ignores the limited investor appetite for 

long-term debt investments—the type of investments that fund home mortgages— 

in the absence of a Government backstop. While investor demand for long-term sovereign debt is enormous, totaling many trillions of dollars for U.S. Treasuries alone, 
56 

4 Bryan J. Noeth and Rajdeep Sengupta, ‘‘Flight to Safety and U.S. Treasury Securities’’, The 

Regional Economist 18(3) (2010):18–19, available at http://www.stlouisfed.org/publications/re/ 

articles/?id=1984. 5 Joint Economic Committee Majority Staff, ‘‘From Wall Street to Main Street: Understanding 

How the Credit Crisis Affects You’’ (2008). 

the demand for privately issued long-term mortgage obligations that don’t carry a 

Government backstop is small in comparison. 4

Without a Government backing, there is unlikely to be sufficient investment capital to fund the $11 trillion in U.S. residential debt outstanding, let alone to fund 

longer-term mortgages, such as the 15-year to 30-year fixed-rate mortgages that 

dominate the U.S. mortgage market. Almost certainly, the removal of the Government’s role in the mortgage markets would result in sharp reductions in the availability of mortgage credit and an immediate transition to short-duration mortgages, 

such as the 2-year and 3-year adjustable-rate mortgages that dominated the purely 

private subprime and Alt-A markets during the 2000s. 

Finally, this position ignores the highly cyclical nature of private mortgage lending. One of the major weaknesses of exclusively private mortgage lending is the unavailability of mortgage credit during housing market or economic downturns as 

lenders become highly risk averse. This in turn can quickly lead to a ‘‘vicious circle’’ 

where a lack of available mortgage credit exacerbates the housing downturn, accelerating price declines and causing more mortgage defaults, which then leads to an 

even greater risk aversion on the part of lenders to provide credit. 5

The inability of a purely private mortgage finance system to meet the housing 

needs of a modern economy is also evident from the experience of developed economies around the world. While the exact particulars vary from country to country, 

every advanced economy in the world relies on significant levels of Government support, either explicit or implicit, in their mortgage markets. 

Proposals that recommend complete privatization of the housing finance system 

(or privatization with occasional Government intervention) would not achieve stability and they, in fact, would expose families and taxpayers to even more risk. 

These radical privatization proposals would present as extreme a change in the 

housing finance system as we have witnessed since the 1930s and would leave the 

U.S. economy vulnerable to the kind of boom-bust cycle that unfettered private market forces caused then and again in the last decade. They also would result in some 

stark consequences for American families. 

The predominant form of finance would be in the form of loans with shorter durations and higher costs, putting more households at greater financial risk. The 30- 

year fixed-rate mortgage would not be available under terms affordable to most families. Rental housing would be less available and more costly, even as there would 

be greater demand for it. Finally, fewer working families would have access to the 

asset-building potential of home ownership, and this pillar of the economic mobility 

that has characterized the American economy until recently would be lost—and with 

it part of the American Dream. 

History has shown us that a purely private market will not work. Similarly, we 

know that the current overreliance on Federal Government intervention is 

unsustainable. Private capital must be encouraged to bear as much of the load as 

possible in our housing finance system going forward, but that is different from saying the market must be ‘‘privatized.’’ 

The proposal does induce private capital back into the system and structures an 

appropriate Government role to ensure that the broader housing policy goals are 

satisfied. 

Features of the ‘‘Plan for a Responsible Market for Housing Finance’’ 

Let me now describe the key features of the ‘‘Plan for a Responsible Market.’’ The 

reforms and enhanced consumer protections enacted in the Dodd-Frank Act were an 

essential first step as is proper implementation of that law. The proposal of the 

Mortgage Finance Working Group creates a system that preserves the traditional 

roles of originators and private mortgage insurers, but assigning functions previously provided by the Government-sponsored enterprises, or GSEs, Fannie Mae 

and Freddie Mac, to three different actors—issuers; chartered mortgage institutions, 

or CMIs; and a catastrophic risk insurance fund, or CRIF. 

Issuers will originate or purchase and pool loans; issue mortgage-backed securities, or MBSs; and may purchase credit insurance on MBSs that meets certain 

standards from CMIs. 

CMIs also will be fully private institutions not owned or controlled by originators. 

They will be chartered and regulated by a Federal agency and their function would 
57 

be to assure investors of timely payment of principal and interest only on MBSs 

that are eligible for the Government guarantee. 

The CRIF would be an on-budget fund (similar to the FDIC’s Deposit Insurance 

Fund) that is run by the Government, and funded by premiums on CMI-guaranteed 

MBSs. In the event of the CMI’s financial failure, the explicit guarantee provided 

by the CRIF would protect only the interests of holders of only qualified CMI securities. 

The Government would price and issue the catastrophic guarantee, collect the premium, and administer the fund. The fund would establish the product structure and 

underwriting standards for mortgages that can be put into guaranteed securities 

and the securitization standards for MBSs guaranteed by the CMIs. The Government would also establish reserving and capital requirements for CMIs, and these 

would be at higher levels than those held by Fannie and Freddie. 

It is important to note that under our plan, there would be several layers of protection standing ahead of any taxpayer exposure. Borrower equity, the CMI’s capital, and in some cases private mortgage insurance all would stand ahead of the 

CRIF. All of these private sources of funds would need to be exhausted before the 

CRIF would have any exposure to loss. 

We believe this system will serve the needs of the vast majority of households 

that are looking for the consistent availability of affordable credit and predictable 

housing costs that can be achieved through a limited Government market backstop. 

This system will serve the vast majority of households seeking consistent, affordable credit and predictable housing costs that can be achieved through a limited 

Government backstop. We also include new mechanisms to see that the benefits of 

this system are made available in a fairer and more equitable way than ever before 

and to prevent the problem of a dual market where certain classes of borrowers and 

communities are relegated to separate, unequal markets. These mechanisms prohibit the CMIs from ‘‘creaming the market’’ and require them to extend the benefits 

of the system to all qualified borrowers, including those historically underserved. 

Further, to effectively serve those underserved borrowers or tenants whose housing 

needs require greater Government support, our plan proposes two parallel strategies: (1) establishing a new ‘‘market access fund’’ to provide responsible credit support and research and development funds to promising new products that close market gaps, and which would complement the Affordable Housing Trust Fund and 

Capital Magnet Fund established by the Housing and Economic Recovery Act of 

2008; and (2) revitalizing the Federal Housing Administration, or FHA. 

Ensure Nondiscriminatory Access to Credit 

CMIs in the new housing finance system would be responsible for providing an 

equitable outlet for all primary market loans meeting the standards for the guarantee, rather than serving only a limited segment of the business, such as higherincome portions of that market. 

This obligation would have four parts: 

• CMIs would be expected to roughly mirror the primary market in terms of the 

amount and the geography of single-family low- and moderate-income loans 

(other than those with direct Government insurance) that are securitized and 

are eligible for the CMI guarantee. They would not be allowed to ‘‘cream’’ the 

market by securitizing limited classes of loans. This assumes that the primary 

market will be appropriately incentivized through the Community Reinvestment Act, which requires banks and thrifts to serve all communities in which 

they are chartered, including low- and moderate-income communities, consistent with safe and sound operations. 

• CMIs that guarantee multifamily loans would be expected to demonstrate that 

at least 50 percent of the units supported by securitized multifamily loans during the preceding year were offered at rents affordable to families at 80 percent 

of the relevant area median income, measured at the time of the securitization. 

• CMIs would be required to provide loan-level data on securitizations to the Government (which will be required to make these data public) that are no less robust than those of the Public Use Database currently produced by the Federal 

Housing Finance Administration. 

• All CMIs would participate in a yearly planning, reporting, and evaluation process covering their plans for and performance against both the single-family and 

multifamily performance standards and Government-identified areas of special 

concern, such as rural housing, small rental properties, and shortages created 

by special market conditions such as natural disasters. 
58 

6FHA’s history of service to low-income and minority communities has not, however, been 

without controversy, as in some communities and in some time periods, racial covenants, block 

busting, fraud, and other abuses by realtors, lenders, and other program participants that FHA 

failed to prevent have led to neighborhood deterioration. See, Sean Zielenbach, ‘‘The Art of Revitalization: Improving Conditions in Distressed Inner-City Neighborhoods’’ (New York: Garland 

Publishing, 2000). 7For example, one idea that has been proposed for the market access fund has been to capitalize an equity pool that would purchase participations in local and State ‘‘shared equity’’ home 

ownership funds, providing scale to this affordability product that has been greatly successful 

in smaller settings but which lacks access to the secondary capital markets and is thus otherwise limited in the funds it has access to. The two major barriers to scale for this product have 

been a large degree of heterogeneity in local products and a lack of standard performance data. 

The leveraging of market access fund capital would clearly address these hurdles and allow 

shared equity to achieve a larger scale, potentially accessing the secondary markets in time. 

Like all other secondary market participants, CMIs would be required to abide 

by nondiscrimination and consumer protection laws. Substantial underperformance 

by a CMI could lead to fines and possible loss of its CMI license. 

Market Access Fund 

Some groups of borrowers and certain types of housing have not been well served 

by the system of the past. Rules against discriminatory lending and anticreaming 

provisions, such as those we have proposed for CMIs, will help, but are likely to 

be insufficient to fill all the gaps. 

These gaps are especially important to fill in the aftermath of the housing crisis, 

where many communities saw equity stripped by subprime lending. Moreover, the 

larger economic downturn has hit underserved communities most heavily. These 

places most in need of capital to rebuild will be the last to get it from a private 

market left to its own devices. 

Certainly, direct subsidies are critical where deep Government support is needed, 

such as for low-income rental housing. In addition to existing programs like Section 

8, the low-income housing tax credit, and HOME, a fully funded National Housing 

Trust Fund will help meet these needs. But beyond cash grants to support affordable housing, we need the entire housing finance system to provide access to credit 

for affordable rental housing and home ownership. Mortgage insurance provided by 

FHA and other similar programs brings private capital into underserved communities, but under these programs, a taxpayer insurance fund takes on almost all of 

the credit risk. Lenders who make FHA loans get fee and servicing income but they 

have very little capital at risk. Thus, FHA insurance ensures loans are available to 

markets and borrowers that private capital will not serve. 6

CMIs are unlikely to make loans that they perceive as too risky or that might 

provide below-market rates of return. But this sector cannot be allowed to see itself 

as having no responsibility to serve low- and moderate-income communities, communities of color, and communities hard hit by the foreclosure crisis and other adverse 

conditions, claiming that the risks are inconsistent with their fiduciary duty to 

shareholders. The result could be a two-tiered system of housing finance, with FHA 

as the primary vehicle serving low- and moderate-income communities and communities of color and taxpayers absorbing all the risk, and private capital serving only 

the middle and upper parts of the market. 

The market access fund offers a way to help CMIs and other private actors meet 

their obligations to serve the entire market. 

Loan products that can successfully and sustainably meet underserved housing 

needs can eventually access the capital markets—if they can first gain a record of 

loan performance and market experience. Past examples include home improvement 

loans and guaranteed rural housing loans, as well as loans made less risky by quality housing counseling. 

A market access fund would provide a full-faith-and-credit Government credit subsidy to cover part of these risks to enable entities including CMIs and nonprofit and 

Government (such as State housing finance agency) market participants to develop 

and establish a market for these innovative products. Examples of new products 

might include lease purchase loans, energy-efficient or location-efficient loans, 

shared equity loans, and loans on small multifamily properties. 7 The fund could 

also make available research and development funds (grants and loans) to encourage initial development of such products. 

The market access fund would provide ‘‘wholesale’’ Government product support 

on a risk-sharing basis, in contrast to the retail, 100 percent insurance offered by 

the Federal Housing Administration. The fund would be required to meet specific 

performance goals relating, for example, to financing for housing in rural areas or 

places with high foreclosure rates, unsubsidized affordable rental housing, and man-
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8 Office of Policy Development and Research, U.S. Housing Market Conditions (Department 

of Housing and Urban Development, 2010), available at http://www.huduser.org/portal/periodicals/ushmc/fall10/histldata.pdf. 9 Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage 

Insurance Fund Fiscal Year 2010 (Department of Housing and Urban Development, 2010), 

available at http://www.hud.gov/offices/hsg/rmra/oe/rpts/actr/2010actrlsubltr.pdf. 10 Ibid. 11Department of Housing and Urban Development and Harvard University’s Joint Center for 

Housing Studies, ‘‘Creating a New Federal Housing Corporation’’, (1995), available at http:// 

babel.hathitrust.org/cgi/pt?view=image;size=100;id=mdp.39015034895089;page=root;seq=3. 

ufactured housing. And the fund’s credit subsidy would only be available for products on a shared-risk basis, meaning that other capital would need to be at risk as 

well, providing both market discipline and an opportunity for these actors to learn 

how to serve underserved markets well. This in turn would pave the way for private 

capital to ‘‘mainstream’’ the products, increasing sustainable home ownership and 

affordable rental housing, and eventually reducing or eliminating the need for public 

support. 

The market access fund would be funded by an assessment on all MBS issues. 

A portion of the assessment would go to the National Housing Trust Fund (for direct 

subsidy) and to the Capital Magnet Fund (for credit programs by Community Development Finance Institutions), as established under the terms of the Housing and 

Economic Recovery Act of 2008. It is important that the assessment be levied on 

both those issues guaranteed by CMIs and those without CMI guarantees to ensure 

that the responsibility to support better service to underserved markets primarily 

through private finance is supported by the jumbo market as well as the middle 

market. 

By sharing the risk of loss, the market access fund makes it easier for private 

capital to serve underserved communities. Without this mechanism, there is a significant risk that the taxpayer will continue to stand behind too large a segment 

of the housing market through FHA/VA and a two-tier housing finance system will 

develop. 

The market access fund will help CMIs and other private actors meet their obligations to serve the entire market while simultaneously providing the market discipline of private risk capital for new products that serve underserved communities. 

And it will do so while limiting the Government’s role and exposure to risk. 

Revitalized and Improved FHA 

The role of the Federal Housing Administration as an essential countercyclical 

backstop has been demonstrated by its performance during the recent housing and 

financial crises. While it insured only 3.3 percent of single-family mortgages originated in 2006, by 2009, after private capital fled the housing market, its market 

share increased to 21.1 percent. Over the past year, FHA provided access to credit 

for about 40 percent of purchase mortgages. 8 In 2009, FHA insured 60 percent of 

all mortgages to African-American and Hispanic homebuyers, and mortgages for 

more than 882,000 first-time homebuyers. 9 Earlier in the economic and financial 

crises, these percentages were even higher. 

FHA reported in November 2010 in its annual report to Congress that, under conservative assumptions of future growth of home prices, and without any new policy 

actions, FHA’s capital ratio is expected to approach the congressionally mandated 

threshold of 2 percent of all insurance-in-force in 2014 and exceed the statutory requirement in 2015. In other words, if correct, FHA will have weathered the worst 

housing crisis since its creation in the aftermath of the Great Depression and will 

have done so without costing taxpayers a dime. FHA’s market share was small during the worst of the crisis and, while it is sustaining significant losses from loans 

insured prior to 2009, better-performing loans are now helping to stabilize its financial position. 

FHA, however, lacks the systems, market expertise, and nimbleness one would 

hope to see in an institution with more than $1 trillion of insurance-in-force. 10 Its 

product terms and many practices are prescribed by statute with such specificity 

that it makes prudent management of an insurance fund extremely difficult. 

In 1994, the Joint Center for Housing Studies at Harvard teamed up with FHA 

Commissioner Nic Retsinas to conduct a series of public hearings and study the future of FHA. Their report and recommendations concluded that Congress should reinvent FHA as a Government corporation, under the direction of the secretary of 

the department of housing and urban development, with strict and independent 

oversight of its performance in serving underserved markets and maintaining financial soundness, but greater flexibility in product design to meet those ends. 11
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12 HUD Reinvention: From Blueprint to Action (Department of Housing and Urban Development, 1995). 13The Millennial Housing Commission, ‘‘Meeting Our Nation’s Housing Challenges: Report of 

the Bipartisan Millennial Housing Commission Appointed by the Congress of the United States’’ 

(2002), available at http://govinfo.library.unt.edu/mhc/MHCReport.pdf. 

The Harvard proposal would have created a new Federal Housing Corporation 

with far greater flexibility in procurement and personnel policies in order to 

jumpstart the transformation to a more business-like agency with a public purpose. 

The proposal was adopted by President Clinton in a HUD Reinvention Blueprint released in March 1995. 12 Similar recommendations were endorsed by the Millennial 

Housing Commission in their report submitted to Congress in May 2002. 13 Each 

time, market, political, and inertial forces resulted in no action. 

The thrust of these recommendations is on the mark. Most significantly, under 

these proposals, FHA could design loan products to help meet the needs of underserved markets. The FHA would need to charge premiums designed so the insurance funds would be actuarially sound. These products would be subject to independent credit subsidy estimates approved by the Office of Management and Budget 

and additional private market-like measures of risk. And the overall portfolio of insurance would be required to maintain adequate capital reserves to continue to protect taxpayers from insurance losses, as FHA has done since the Great Depression. 

Other reforms would let FHA pay salaries at levels paid by the banking regulatory agencies, as comparable financial market expertise must be attracted to better protect taxpayers from the risks inherent in insurance. And procurement and 

budget flexibility would make it easier for FHA to use insurance fund resources to 

develop new systems and procure them more easily to better assess and manage 

risk in the insurance fund. 

It is time to revisit these ideas. It is now evident that FHA is indispensable for 

economic stability and housing market equity. In light of its continued importance, 

we should ensure that FHA has the tools it needs to best meet underserved housing 

needs and provide countercyclical liquidity while doing what works to protect taxpayers optimally from any risk. 

Conclusion 

From the 1930s to the 2000s, the United States enjoyed a vibrant, stable, housing 

market that evolved to provide mortgage money at all times, in all parts of the 

country, for sustainable home ownership and rental housing. The system was not 

perfect but it contains valuable lessons for us as we look to rebuild. By applying 

those lessons to meet the goals outlined in this testimony, you have the opportunity 

to build a system that rebalances housing choices and works better for more households and more communities than the system that has been in place for the last 

70 years. 

Thank you for inviting me to talk about the work my colleagues and I have done 

and I would be happy to answer any questions. 
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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

ARNOLD KLING WEB BLOG SUBMITTED BY CHAIRMAN JOHNSON 
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STATEMENT SUBMITTED BY THE INDEPENDENT COMMUNITY 

BANKERS OF AMERICA 

On behalf of its nearly 5,000 member banks, ICBA is pleased to submit this statement for the record for this hearing on ‘‘Public Proposals for the Future of the Housing Finance System.’’ 

Community bank mortgage lenders have a great deal at stake in the future of 

housing finance in this country. Community banks serve the mortgage credit needs 

of rural areas, small towns, and suburbs across the Nation, and the secondary markets are a significant source of capital in support of this lending. Our members need 

a financially strong, impartial secondary market that provides equitable access and 

pricing to all lenders regardless of size or volume. We’re grateful to Chairman Johnson for convening this hearing. 

With regard to the Administration’s recent report to Congress, ‘‘Reforming America’s Housing Finance Market,’’ we were encouraged to see the Administration recognize that smaller lenders and community banks serve their communities more effectively than larger lenders. Access to credit for these communities, along with the 

related imperatives of preserving a competitive market for credit and minimizing 

consolidation, are all criteria the Administration uses in evaluating proposals for remaking the Government’s role in the secondary mortgage market. In this respect, 

we support the analysis provided by the Administration. 

The Administration’s report considers three broad approaches to secondary market reform: 

• Nearly complete privatization of the housing finance system, with Government 

assistance for targeted groups of borrowers; 

• A privatized system with a Government guarantee that becomes effective only 

during times of crisis, supplemented by Government assistance for targeted 

groups of borrowers; and 

• A privatized system with catastrophic Government reinsurance buffered by private capital, in addition to Government assistance for targeted groups of borrowers. 

Even the third catastrophic reinsurance option would entail a more circumscribed 

role for the Government in the housing market, emphasizing private capital as the 

primary source of mortgage credit and the first to bear losses. The Administration 

report has effectively shifted the debate; the spectrum of viable options ranges from 

narrow Government involvement to virtually full privatization. Government’s historical role in housing is off the table. The Administration’s report also indicated that 

it will reduce the conforming loan limits, raise guarantee fees to allow private-sector 

securitizers to be more competitive and raise down payment requirements, among 

other steps to shrink the Government’s role in housing that don’t require congressional approval. Wherever we end up, it will look significantly different than the 

precrisis Fannie and Freddie. ICBA welcomes this new reality as an appropriate response to the moral hazard and taxpayer liability of the old system. Our members 

are prepared to adapt and thrive in an environment of limited Government involvement. 

A housing finance system with a smaller Government footprint, properly designed, 

can preserve the vital role of community banks. The worst outcome, for community 

banks and consumers, would be a system dominated by a few large, too-big-to-fail 

banks (TBTF), with community banks forced to the sidelines. 

Such an outcome would simply replicate the moral hazard that prevailed under 

Fannie Mae and Freddie Mac. To allow a small number of large banks to dominate 

the secondary mortgage market would create a new variety of moral hazard, just 

as pernicious as the old variety. These dominant lenders, driven by quarterly earnings and dividends to unacceptable risk taking, would become too-big-to-fail because 

the market would know full well that the Government would bail them out (as it 

did in 2008) rather than let the housing market collapse. These lenders would in 

effect become privatized ‘‘Fannies’’ and ‘‘Freddies,’’ with all the benefits and the 

risks that come with TBTF status. Privatization is not enough to cancel out moral 

hazard, which lies in the concentration of risk, and especially risk in the housing 

market because it occupies such a central place in our economy. These same TBTF 

banks are also the largest mortgage servicers and are responsible for much of the 

foreclosure mess, including the mishandling of America’s military families. Any solution that fuels this consolidation is only setting up the financial system for an 

even bigger collapse than the one we’ve just been through. 

To address these concerns, ICBA has set forth its own proposal for reform that 

would replace Fannie Mae and Freddie Mac with lender-owned cooperatives. We believe that this proposal would protect taxpayers from another bailout, ensure equal 
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1 ICBA’s cooperative model is similar to a proposal favorably analyzed by the New York Federal Reserve and the Government Accountability Office. It is also similar to a proposal put forth 

by the National Association of REALTORS®. 2 In a TBA trade, participants agree to exchange a given volume of mortgage backed securities 

at a specified date and at an agreed-upon price. This allows lenders to sell mortgages forward 

before they are even originated. Because it facilitates hedging of interest rate risk, the TBA 

market also allows lenders to offer borrowers an interest rate ‘‘lock’’ for as long as 90 days. TBA 

trades are based on an assumption of homogeneity among the securities that will actually be 

included in the MBS. This assumption is facilitated by standardization in the underwriting of 

mortgages and by a Government guarantee, implied or explicit. 

access and pricing for lenders of all sizes, deter further consolidation, ensure liquidity during periods of market stress, preserve the significant benefits of the ‘‘to-beannounced’’ (TBA) market, and minimize disruption in the market by providing for 

the direct transfer of Fannie Mae’s and Freddie Mac’s infrastructure to the new coops. 

ICBA Proposal for Secondary Mortgage Market Reform1

Cooperative governance would ensure broad access and deter excessive risk taking 

Fannie and Freddie would be restructured as cooperative entities owned by mortgage originators who purchase stock commensurate with their loan sales to the coops. This is similar to the capitalization of the Federal Home Loan Banks (FHLBs) 

and provides a capitalization source that can be adjusted based on market conditions and risk profile and performance of the co-ops’ book of business. Members 

would have an incentive to transfer only soundly underwritten loans to the co-ops 

because any losses would adversely affect their capital investment. 

The co-ops would be governed on a one-company-one-vote basis. Big banks would 

not be allowed to dominate the new co-ops. Further, directors would be appointed 

to represent various sizes and classes of members, while a minority number of seats 

would be reserved for outside independent directors with financial expertise. 

The advantage of this form of governance is that all co-op members would enjoy 

open and equal access and benefits in terms pricing, regardless of their origination 

volume. This would prevent industry consolidation and preserve access to credit for 

the millions of small town and rural borrowers served by community banks. The 

housing market is best served by a large and geographically dispersed number of 

lenders. The co-ops would be required to provide liquidity to all home mortgage markets on a continuing and equitable basis. Guarantee fees and reinsurance fees would 

be set by the co-op boards and would be the same for all members. However, mortgage originators with substandard loan performance would be subject to additional 

surcharges and restricted access until their loan performance improved. 

A limited scope of conservatively underwritten products would be eligible for sale to 

the co-ops 

The co-ops would guarantee a limited range of conservatively underwritten products: 15- and 30-year fully amortizing mortgage loans that meet the definition of 

‘‘qualified residential mortgage’’ (QRM) and adjustable rate mortgage loans that 

meet the QRM definition, would be exempt from risk retention requirements. Loans 

that fall outside of the QRM definition would require risk retention by the originator and additional risk to the co-ops would be priced accordingly. These provisions 

would shield the co-ops from excessive risk. 

The co-ops would only be engaged in the secondary market and would be barred 

from operating in the primary market. They would not unfairly compete with mortgage originators. 

A privately capitalized guarantee fund would insulate taxpayers 

Mortgage-backed securities issued by the co-ops would be guaranteed by a fund 

capitalized by co-op members as well as 3rd party guarantors. Resources would be 

set aside in good times to prepare for challenging times. The Government would provide catastrophic loss protection, for which the co-ops would pay a premium. This 

guarantee, fully and explicitly priced into the guarantee fee and loan level price, 

would not only provide credit assurances to investors, sustaining robust liquidity 

even during periods of market stress, but—a point less often noted—it would enable 

the co-op securities to be exempt from SEC registration and trade in the ‘‘to-be-announced’’ (TBA) forward market. 2 Without the TBA market, which allows lenders 

to sell loans forward before they are even originated and to hedge their interest rate 

risk during the rate ‘‘lock’’ period, the 30-year fixed rate loan as we know it and 

on which our housing market is based will become a rarity. Though the co-ops would 

be ultimately backstopped by the Government, private capital from members and 
127 

private reinsurers would absorb all but catastrophic losses; Government reinsurance 

funds and ultimately the taxpayer would be well insulated. 

Easy Transition From Fannie Mae and Freddie Mac 

The infrastructure of Fannie and Freddie—including their personnel, systems, 

automated underwriting engines—would transfer to the new co-ops. This is an essential feature of the proposal as it would minimize disruption in the market and 

reduce the cost of the transition to the new system. 

The outstanding debt and securitizations of Fannie and Freddie would maintain 

the current guarantee. 

Strong Supervision 

The Federal Housing Finance Agency (FHFA) would regulate and supervise the 

co-ops. FHFA would be responsible for setting and monitoring capital levels based 

on market conditions, portfolio performance and overall safety and soundness. 

FHFA would approve all new mortgage products purchased by the co-ops. 

Closing 

Private entities will succeed Fannie Mae and Freddie Mac; that much is all but 

settled. Still to be determined is what form those entities will take—instruments of 

Wall Street or those in which community banks and large banks are equally represented and communities and customers of all varieties are served. 

ICBA looks forward to working with this Committee, the Administration, and our 

industry partners to enact our proposal or another proposal that meets our criteria 

and is in the best interest of the communities we serve. 

Thank you. 

(129) 

PUBLIC PROPOSALS FOR THE FUTURE OF 

THE HOUSING FINANCE SYSTEM—PART II 

THURSDAY, MAY 26, 2011 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:26 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. 

We will excuse ourselves for an executive session when we get a 

quorum. 

In the meantime, I would like to thank our witnesses for coming 

before the Committee to discuss their ideas for the future of America’s housing finance system. As promised in the Committee agenda 

I released earlier this year, housing finance reform is one of my top 

priorities. The Committee has held three housing hearings in addition to the Subcommittee hearings held by Senator Reed and Senator Menendez. I anticipate at least one hearing on housing finance 

reform each work period for the rest of the year. 

Our housing market continues its fragile recovery. In our efforts 

to reform the housing finance system we must take care not to disrupt that recovery. Witnesses testified in a previous hearing that 

without Fannie Mae, Freddie Mac and FHA providing liquidity, 

many families that could afford a home would not be able to get 

a mortgage in the current economic environment. 

However, the Government’s current dominant role in the market 

is unsustainable long term. This Committee must explore ways to 

bring private capital back to the market while also ensuring that 

credit remains available. As I have said before, there are other 

questions we must answer when considering the future of the housing finance system: 

How will we preserve the availability of affordable, 30-year, 

fixed-rate, prepayable mortgages? 

Should all lenders have equal access to the secondary market? 

Will a new structure provide equal access for all qualified borrowers and market segments—including rural areas—to the mainstream housing finance system? 

Will a new system maintain stable, liquid, and efficient mortgage 

markets for single-family and multifamily housing? 

How will a new structure protect taxpayer dollars? 
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We must find workable solutions that preserve the option of responsible home ownership for future buyers and provide adequate 

financing for multifamily construction for those who prefer to rent 

rather than to own a home. I look forward to hearing the suggestions of our witnesses. 

With that, I will turn to Ranking Member Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. Thank you for calling this hearing. I think it is very important. 

Today, as the Chairman has said, the Committee will continue 

its examination of proposals for reforming our Nation’s housing finance system. I do not believe there is any dispute that our housing finance system is broken. Since 2006, housing starts have fallen by 67 percent, while existing home sales have fallen by nearly 

13 percent in just the last year alone. 

Likewise, home prices continue to decline in most markets. The 

latest median price of an existing home is more than 17 percent 

lower than just 2008. Our once dynamic and innovative housing 

market is now stagnant and damaged, crippled by regulatory uncertainty. Unfortunately, when market participants should be focusing on reviving our housing markets, Washington has forced 

them to vote countless hours and millions of dollars to navigating 

the scores of new regulations imposed by the Dodd-Frank legislation. 

Accordingly, it should be no surprise to anyone that our housing 

market has not rebounded since the passage of the Dodd-Frank 

Act. By some measures, it is even worse because our private markets have been almost completely replaced by Government programs. 

Last year, the Federal Government accounted for 96 percent of 

all mortgage-backed securities issued. Yes, 96 percent. In effect, 

Fannie and Freddie and FHA now occupy what used to be the private secondary mortgage market. And as a result, nearly all of the 

risk in our housing market is being transferred from private capital 

to the American taxpayer. I believe this is a wholly unacceptable 

situation. 

Today we will hear from two very different points of view, I believe, on how to address this situation. One side will argue that our 

mortgage market needs the Federal Government to continue guaranteeing mortgages in one form or another. This means that the 

American taxpayer will continue to guarantee mortgage-backed securities while collecting a guarantee fee. It is not surprising that 

certain segments of the housing market advocate such a model. 

Most businesses, not just housing, like Government subsidies if 

they can get them, and the housing market and the housing industry is no different. However, the Federal Government does not have 

a good track record on pricing risk and, thus, subsidies are not 

without cost. Indeed, Secretary of the Treasury Geithner warned 

this Committee in March, when he stated, and I quote, ‘‘Guarantees are perilous. Governments are not very good at doing them, 

not very good at designing them, not very good at pricing them, 

and not very good at limiting the moral hazard risk that comes 

with them.’’ These are the words of our Secretary of the Treasury. 
131 

Given the combination of these difficulties, I believe we cannot 

assume a Government guarantee of mortgages can be achieved 

without risk to the taxpayer. And while a Government guarantee 

may be a good deal for the housing industry, it could be a very bad 

deal for the taxpayer. 

The other side of the argument raises concerns with the Federal 

Government’s domination of the mortgage finance market. We have 

heard from many witnesses over the years that the Government 

must remain engaged in the market because of concerns with private sector capacity. We must ask, however, whether the reduced 

role of the private sector is a result of market conditions or conditions created by Government policies. 

Surely we should answer this critical question before we draw 

any conclusions about the wisdom of continued Government involvement in the mortgage market. 

Mr. Chairman, I agree that many factors must be considered as 

we proceed with reform. I maintain, however, that protecting the 

American taxpayer must continue to be our number one priority. 

Thank you. 

Chairman JOHNSON. Before I introduce our witnesses, would 

other Members like to make very brief opening statements? Senator Reed. 

[No response.] 

Chairman JOHNSON. Senator Vitter. 

STATEMENT OF SENATOR DAVID VITTER 

Senator VITTER. Thank you, Mr. Chairman. I just want to echo 

many of Senator Shelby’s comments. As many folks, including me, 

said many times last year, Dodd-Frank did not address one of the 

largest root causes of our recent crisis, and that is, Government 

housing policy, certainly including major problems at Fannie Mae 

and Freddie Mac. 

This has come to light more and more with each passing week. 

Several months ago, JPMorgan issued a report that reexamined, 

based on new statistics and new information, the significance of 

this cause, and they basically said in very clear terms, we want to 

update our opinion and say that Government housing policy was a 

primary cause of the policy in light of reclassification of loans and 

new information that is now available. 

Research from Ed Pinto at the American Enterprise Institute, a 

former chief credit officer at Fannie Mae, showed that there were 

27 million subprime and other risky mortgages in the system when 

the housing bubble began to deflate in 2007. That was an aggregate value of over $4.5 trillion, 50 percent of all the mortgages in 

the United States. 

Peter Wallison I think had it correct when he said that, ‘‘Although there were many contributing factors, the housing bubble 

of 1997–2007 would not have reached its dizzying heights or lasted 

as long, nor would the financial crisis of 2008 have ensued, but for 

the role played by the housing policies of the U.S. Government over 

the course of two Administrations.’’ 

So I am glad that this Committee is finally focusing on what was 

the largest—not the single but the largest—cause of the size and 

length of the bubble and the resulting crisis. And I encourage us 
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to listen to this testimony, take in more information, and most importantly, act so that this Government policy does not continue and 

does not cause these enormous problems again in the future. 

Thank you, Mr. Chairman. 

Senator WICKER. Mr. Chairman? 

Chairman JOHNSON. Yes. 

Senator WICKER. I have a prepared an opening statement. Because of the hour I ask that it be included in the record at this 

time. 

Chairman JOHNSON. It will be received. 

I will remind my colleagues that we will keep the record open for 

7 days for additional statements and questions. 

I would like to welcome and introduce the witnesses that will 

testify here today. 

Our first witness is Ms. Terri Ludwig, who is president and CEO 

of Enterprise Community Partners, Incorporated. Enterprise is a 

national nonprofit provider of capital that specializes in the creation of affordable homes and rebuilding communities. Ms. Ludwig 

has been with Enterprise since 2009 and began her tenure as CEO 

in January of this year. 

Our second witness is Mr. Ron Phipps, president of the National 

Association of REALTORS®. The NAR is America’s largest trade 

association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries. Mr. 

Phipps appeared before this Committee earlier this year, and we 

welcome him back. 

Senator Reed, do you have any comments? 

STATEMENT OF SENATOR JACK REED 

Senator REED. Thank you very much, Mr. Chairman. I want to 

welcome Ron personally. Ron has been a great business and community leader in Rhode Island for 31 years. We were delighted 

when he was elected president of the National Association of REALTORS®. He has great insights. He has testified before the Committee previously, and I look forward to his testimony this afternoon, so thank you, Ron, for joining us. 

Thank you, Mr. Chairman, for allowing me to speak. Thank you. 

Chairman JOHNSON. Our next witness, Mr. Mark Parrell, is executive vice president and CFO of Equity Residential. Equity Residential focuses on the acquisition, development, and management 

of high-quality apartment properties within the U.S. Before serving 

as the company’s executive vice president, Mr. Parrell served as 

senior vice president and treasurer, a role which put him in charge 

of capital markets, mortgage servicing, and tax and treasury functions for the company. 

We welcome Mr. Greg Heerde to the Committee, who served as 

the managing director of Aon Benfield, a company that is the industry leader in placing treaty and facultative reinsurance. In his 

role at Aon Benfield, Mr. Heerde is responsible for assisting in the 

development of global strategy and advising the company in new 

insurance company formations, capital raising, and M&A transactions. 

Next we have Mr. Martin Hughes, who is the president and CEO 

of Redwood Trust. Redwood Trust is a real estate investment trust 
133 

which manages finances and invests in real estate assets. Mr. 

Hughes has served in his current role at the company since 2009, 

before which he served as co- chief operating officer and CFO. 

Our final witness on the panel is Mr. Barry Rutenberg. Mr. 

Rutenberg is the first vice chairman of the board for the National 

Association of Home Builders. The NAHB has more than 160,000 

members assisting their association to provide and expand safe, decent, and affordable housing opportunities for all consumers. Mr. 

Rutenberg has been active in the NAHB leadership structure at 

the local, State, and national levels throughout his career, serving 

on the board of directors since 1980. 

Ms. Ludwig, please proceed. 

STATEMENT OF TERRI LUDWIG, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, ENTERPRISE COMMUNITY PARTNERS 

Ms. LUDWIG. Chairman Johnson, Ranking Member Shelby, and 

distinguished Members of the Committee, thank you for inviting 

me to testify today, and thank you for holding these hearings on 

the challenging yet critical issue of how to reform our housing finance system. 

My name is Terri Ludwig, and I serve as the president and CEO 

of Enterprise Community Partners. Enterprise is a national nonprofit organization that works across the country to provide affordable housing and strengthen communities. 

Prior to joining Enterprise, I worked in the private sector for 20 

years in investment banking. I partnered with groups like Enterprise, using capital markets to efficiently invest in affordable housing and community development. This experience has taught me 

that public–private partnerships are critical to bringing capital to 

working families and vulnerable populations. 

I came to work for Enterprise because it is an organization that 

believes having a safe and affordable place to call home is an essential platform to help people achieve stability and a better life. 

Enterprise works in places ranging from small rural towns to 

large urban centers and from Native American tribes to suburban 

job centers. During the past 30 years, Enterprise has invested more 

than $11 billion in communities. With our partners we have built 

and preserved nearly 300,000 homes, catalyzed economic development, and strengthened entire neighborhoods. 

Enterprise has provided financing and development expertise to 

create affordable home ownership opportunities, but our primary 

focus is on providing quality, affordable rental housing. 

I want to talk briefly why affordable rental housing is so important. The number one thing to take away from my testimony today 

is that any new housing finance system must focus on stability, liquidity, and affordability for this housing stock. 

As the financial crisis has shown, America needs a full range of 

housing options. Multifamily rental housing is increasingly important for people at all income levels. But for low- and moderate-income families, the need for affordable rental housing is acute. 

Housing costs consume two-thirds of the lowest-income families’ 

household budgets, leaving only about $500 a month to cover basic 

needs, like food, health care, transportation, and clothing. And 

there is not a single county in the United States where a minimum 
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wage worker can afford a one-bedroom apartment at local fair market rent. We believe that the public and private sectors play important roles in meeting these needs. 

To be clear, we do not support the status quo, but any new system should consider the 11 million apartments that Fannie Mae 

and Freddie Mac have helped to finance and their historic role as 

a major investor in the low-income housing tax credit program, 

which has financed 90 percent of all affordable rental housing. 

Each year, this generates 140,000 jobs and $1.5 billion in State and 

local taxes. 

Since the financial crisis, the GSEs have been one of the only 

sources of financing for affordable housing, purchasing 84 percent 

of all multifamily loans in 2009. Let me emphasize that this portfolio has performed extremely well, with less than a 1-percent foreclosure rate between 2005 and 2009. Compared to the single-family 

portfolio, the performance is quite dramatic. 

You will hear a lot about numbers and percentages today, but 

what really matters is helping real families with real needs. 

Jordan’s Gate is a development in rural Opelika, Alabama. It is 

home to 48 working families earning up to 60 percent of the area 

median income, which is only about $13,200 a year. There is a 

child care center on-site providing a safe place for children while 

their parents are at work. Fannie Mae and Freddie Mac have invested in low-income housing tax credits and provided debt financing to make Jordan’s Gate possible. Without support from the Government-supported secondary market, Jordan’s Gate and much of 

the other housing that we have helped to create would likely not 

exist. 

We ask that six principles should guide your deliberations as you 

consider changes to the housing finance system. 

Number one, the Government must continue to play a role in 

providing liquidity and stability for affordable housing in all communities, including hard-to-serve markets, such as rural, and economically distressed areas. 

Number two, the Government’s role should be focused and targeted at affordable and workforce housing, including both rental 

and home ownership. We must also maintain the flow of capital to 

upgrade and finance an aging multifamily rental housing stock. 

Three, mortgage financing should remain available for creditworthy borrowers in all communities. 

Four, secondary markets that enjoy Government support and 

guarantees should have an affirmative obligation to finance affordable housing, including in rural and underserved areas. Assessments on mortgage-backed securities may be needed to fund affordable housing and community development activities. 

Five, the low-income housing tax credit is an important source of 

equity investment in affordable multifamily housing. No changes to 

the housing finance system should negatively impact important improvement programs like this credit. 

Six, credit channels for multifamily housing must remain open 

while we transition to a new system. 

In closing, I would like to thank you for the opportunity to testify 

today. Enterprise very much looks forward to working with you as 

you consider housing finance reform, and I welcome any questions. 
135 

Chairman JOHNSON. Thank you, Ms. Ludwig. 

Mr. Phipps, please proceed. 

STATEMENT OF RON PHIPPS, PRESIDENT, NATIONAL 

ASSOCIATION OF REALTORS®

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

Shelby, and Members of the Committee. Thank you for inviting me 

to testify this morning. 

My name is Ron Phipps. I am the 2011 president of the National 

Association of REALTORS®. I am proud to be an active part of a 

four-generation, family owned residential real estate business in 

Rhode Island. I am testifying today on behalf of the 1 million REALTORS®, the 75 million Americans who own homes, and the 310 

million Americans who require shelter. 

REALTORS® agree that the existing system failed and reforms 

are needed. We appreciate that the Committee is heeding Treasury 

Secretary Timothy Geithner’s and the Ranking Member Shelby’s 

warnings and cautions that a Federal housing policies must adequately be assessed and proper homework must be done before action is taken. 

As you consider the future of the Federal housing policies, we 

ask you to keep in mind the immense value that sustainable home 

ownership provides to this country and to American citizens. 

Right now, the mortgage markets are not working as they should 

and change is required. However, REALTORS® believe that the 

GSEs’ housing mission, and the benefits that are derived from it, 

played a vital role in the success of this Nation’s housing system 

and continue to play that role today. 

Had there been no secondary market when market entities, like 

Fannie Mae and Freddie Mac, when the private market capitals 

reached their financial crisis, the American housing market would 

have come to a complete halt, throwing our Nation into an even 

deeper recession than we did see. We need only look at the current 

state of affairs in the commercial and jumbo market to see how bad 

it would be. 

For this reason alone, REALTORS® believe that pure privatization of the secondary mortgage market is unacceptable; rather, 

NAR supports the creation of secondary mortgage market entities 

that include some level of explicit Government participation but 

protect the taxpayer and ensure that all creditworthy consumers 

have reasonable access to affordable mortgage capital. Moreover, 

these entities should provide a wide range of safe, reliable mortgage products such as 30-year or 15-year fixed-rate loans, traditional ARMs, and other products that have stood the test of time. 

Let me be clear. REALTORS® agree that the reforms of our 

housing system, including GSEs, are required to prevent a recurrence of the housing market meltdown. However, we caution that 

significantly limiting the Government’s role in housing finance will 

foster mortgage products that are more in line with business goals 

than in the best interests of the Nation’s housing policy or the consumer. This action coupled with other unnecessary implementing 

rules that further curtail access to mortgage credit—for example, 

raising down payments have stark ramifications for the overall 

economy. 
136 

This leads me to the second significant concern that realtors 

have today, and that is, the definition of a qualified residential 

mortgage. QRMs, or risk retention requirements of the Dodd-Frank 

requirement, are expected to have basically lower rates and fees 

than other non-QRM products. REALTORS® believe that Federal 

regulators should honor the intentions of Senators Isakson, Hagan, 

and Landrieu by crafting a qualified residential mortgage exemption that includes a wide variety of traditionally safe, well-underwritten products such as 30-, 15-, and 10-year fixed-rate loans as 

well as 7–1 and 5–1 ARMs, and also loans with variable down payments or flexible down payments that require mortgage insurance. 

A very narrow QRM policy that does not heed their intention will 

displace a large number of potential homeowners. 

As noted in a recent American Banker article, 69.5 percent of all 

loans originated in 2009 would not qualify under the new proposed 

QRM standards. 

Moreover, an analysis of QRM by CoreLogic indicates that boosting down payments in 5-percent increments has only a negligible 

impact on the default rates, but significantly reduces the potential 

pool of borrowers. Further, a narrowly drawn QRM ignores the 

compelling data that demonstrates that sound underwriting, such 

as documentation of income, and use of traditional mortgages have 

a larger impact on reducing default rates and higher down payments. Saving for a down payment has always been a major obstacle. The Center for Responsible Lending indicates it will take 8 

years for the average family earning $50,000 to come up with a 10- 

percent for a $150,000 mortgage. It will take them 13 years to 

come up with 20 percent. 

Every decision that we make today regarding the housing finance 

system will have a significant impact on the ability of future generations to purchase homes. Moreover, these decisions will have a 

profound impact on our Nation’s economy. 

I thank you for the opportunity to present our thoughts. As always, the National Association of REALTORS® stands ready, willing, and able to work with you and our partners to make a future 

brighter for Americans. REALTORS® believe that housing is not a 

partisan issue, nor is it simply in the common interest. We really 

believe that it is in our national interest. 

Thank you. 

Chairman JOHNSON. Thank you, Mr. Phipps. 

Mr. Parrell, please proceed. 

STATEMENT OF MARK J. PARRELL, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, EQUITY RESIDENTIAL, ON BEHALF OF THE NATIONAL MULTI HOUSING COUNCIL AND NATIONAL APARTMENT ASSOCIATION 

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

Shelby, and distinguished Members of the Committee, my name is 

Mark Parrell. I am the Executive Vice President and Chief Financial Officer of Equity Residential. My company is the largest publicly traded owner of apartments in the United States and we are 

also a large borrower from the GSEs, Fannie Mae and Freddie 

Mac. I am testifying today on behalf of the National Multi Housing 
137 

Council, NMHC, and its joint legislative partner, the National 

Apartment Association, NAA. 

I appreciate the opportunity to present the industry’s perspective 

on the role of Fannie Mae and Freddie Mac in the multifamily market and the benefits they produce from that presence. I will also 

explain why the private market alone cannot meet the industry’s 

current and future capital needs. 

First, a little background on our industry. Rental demand is 

surging because of changing demographics and new economic realities. More than four million members of the echo boom generation 

will turn 18 each year for the next decade, creating tremendous demand for housing. While there may be an oversupply of single-family housing, the Nation could actually see a shortage of multifamily 

housing as early as 2012. 

Apartments are more than shelter. I would point out they are 

also a big economic powerhouse. We produce about $120 billion as 

an industry in rental revenues annually and we employ about 

550,000 in managing apartments. Apartments also produce important societal benefits. They are environmentally sustainable, resource and energy efficient, and help create a mobile workforce 

that can relocate for job opportunities, and that is something I 

think is especially important in this recovery. 

I highlight these things to help you understand why it is so important that Congress consider the unique needs of the apartment 

industry as you pursue reform options. Solutions that work for single family will not necessarily work for multifamily. Our sector 

warrants its own specialized analysis. To that end, let me share 

with you what works and what does not work in the current GSE 

system. 

While the problems in the single-family sector are widely acknowledged, when it comes to the GSE’s multifamily programs, 

much works. Let me be clear. I am not here to defend the GSEs 

or to suggest that they continue in their current form. I simply 

want to highlight the multifamily elements that are working and 

working at no taxpayer expense. In fact, many of the single-family 

housing reform proposals look a lot like the existing multifamily 

system, private capital taking a significant first loss position and 

the Government’s involvement ebbing and flowing with changes in 

the availability of private capital. 

The existing GSE multifamily housing finance system has attracted enormous amounts of private capital, helped finance millions of units of market-rate workforce housing, and all of this 

without direct Federal appropriations. It has filled a critical gap 

when private capital disappeared and ensured liquidity was available to refinance maturing mortgages. 

In stark contract to the GSE single-family business, the multifamily programs were not part of the meltdown and are not broken. 

Overall loan performance remains strong, with delinquency and default rates at less than 1 percent. They have outperformed CMBS, 

commercial banks, and even FHA. In addition, since entering conservatorship, the multifamily portfolio has produced approximately 

$2 billion in profit for the Federal Government. 

The most recent crisis underscores the need for a capital source 

that will be available in all markets at all times, not just in New 
138 

York City, but also in Sioux Falls, South Dakota, and Birmingham, 

Alabama. The GSE’s share of the multifamily market has varied 

considerably over time, increasing at times of market dislocation 

and scaling back during healthier economic times. 

A federally backed secondary market is also critical to refinancing the estimated $300 to $400 billion of multifamily mortgages that will mature by 2015. Unlike residential mortgages, 

which are typically for 30-year terms, most multifamily mortgages 

are for periods of seven to 10 years and do not fully amortize. 

Without the GSEs’ multifamily programs in the latest crisis, 

there would have been widespread foreclosures of otherwise performing apartment properties because owners would not have been 

able to refinance maturing mortgages. Property upkeep would have 

suffered and fewer units would have been built. 

Finally, I would like to share a little known fact about the units 

financed by Fannie Mae and Freddie Mac over the last 15 years. 

Fully 90 percent of these units, more than 10 million in total, were 

affordable to families at or below the median income for their community without requiring Federal appropriations and at no taxpayer risk. In other words, workforce housing for teachers, nurses, 

and first responders. 

In conclusion, the liquidity provided by the Government-supported secondary multifamily mortgage market lowers the cost of 

capital to borrowers, which encourages the construction of more 

multifamily housing. This increased supply forces owners to provide this market-rate housing at a rent level that makes it more 

affordable to the Nation’s workforce. Without it, higher interest 

rates and debt service costs would mean fewer multifamily units 

and higher rents. 

I once again ask Congress, as it looks at reforming the housing 

finance system, that it do nothing that would jeopardize the construction, financing, and availability of multifamily housing. 

I thank you for this opportunity to present the views of NMHC 

and the National Apartment Association. 

Chairman JOHNSON. Thank you, Mr. Parrell. 

Mr. Heerde, please proceed. 

STATEMENT OF GREG HEERDE, MANAGING DIRECTOR, AON 

BENFIELD AND AON BENFIELD SECURITIES 

Mr. HEERDE. Good morning, Chairman Johnson, Ranking Member Shelby, and Members of the Committee. I am Greg Heerde, 

Managing Director of Aon Benfield and Aon Benfield Securities, 

and I am here today to discuss the role of private capital in supporting lenders’ credit risk through the provision of mortgage insurance. 

Aon Benfield is the world’s largest reinsurance intermediary, and 

Aon Benfield Securities is an investment banking firm providing 

advisory services to insurance and reinsurance companies, including capital raises, risk transfer securitization, and mergers and acquisitions. 

Private mortgage insurance provides protection to lenders, investors, and most importantly, taxpayers by standing in the first loss 

position in the event that a borrower stops making payments. Private mortgage insurance also expands home ownership by allowing 
139 

qualified borrowers with less than the 20 percent prescribed down 

payment to purchase a home. Private mortgage insurance is also 

an alternative to the Federal Housing Administration mortgage insurance program. 

Mortgage insurers underwrite the underlying quality of the prospective borrowers’ creditworthiness and the supporting collateral, 

and thereby ensuring higher quality mortgages are issued. This 

protects not only the lenders and investors, but the prospective borrowers by ensuring that the home is affordable at the time of purchase. 

Private mortgage insurers also have clear incentives to mitigate 

losses once loans become in default. As foreclosure results in the 

highest likelihood of lost payment under the insurance policy, mortgage insurers’ goals are to work with borrowers to avoid foreclosure 

and keep them in their homes. 

U.S. private mortgage insurers have already paid approximately 

$25 billion in losses during the current housing downturn without 

Government or taxpayer support. The largest beneficiary of these 

payments has been and will be Fannie Mae and Freddie Mac, 

thereby reducing a material amount of exposure to the taxpayer. 

Reinsurance is another form of capital available to the insurance 

industry. Reinsurers’ capacity stands ready to be deployed more 

broadly going forward to support the U.S. mortgage insurers. Aon 

Benfield estimates that global reinsurance capital totaled $470 billion at December 31, 2010, representing a 17 percent increase over 

2009 and the largest amount of capital in the history of the industry. 

Private reinsurers also play an important role in supporting 

mortgage insurance in a number of other countries, including Australia, Canada, and the United Kingdom. These countries have 

mortgage finance systems that are each unique with varying Government roles, but it is important to note that private reinsurance 

plays some part in all of these. 

Since the beginning of the financial crisis, new capital has come 

into the sector in the form of a new start-up mortgage insurer and 

as significant contributions to existing carriers. To date, approximately $8 billion of new capital has been raised. 

In addition to the capital that was raised, Aon Benfield Securities represented a qualified management team in 2009 seeking to 

form a new mortgage insurance company. This plan was ultimately 

shelved as the capital providers witnessed the substantial growth 

of the Federal Housing Administration, coupled with the uncertainty surrounding the future of Fannie and Freddie, which was 

viewed as weakening the demand for the mortgage insurance product and, therefore, the need for new companies. 

There were other efforts during the same period to introduce new 

mortgage insurance companies in various forms, some of which received indications that they would not receive approval from 

Fannie and Freddie to write business, resulting in these efforts 

being shelved, as well. 

If a decision is made to reduce the role of Fannie over time, and 

that decision results in increased demand for private mortgage insurance at commercially responsible terms, we are confident that 

sufficient private capital would be available to support that in-
140 

creased demand. Reinsurers are also eager to underwrite new 

risks, and reinsurance capacity is clearly available to support the 

mortgage insurers by providing capacity that will allow them to insure more loans as the housing market rebounds and demands for 

mortgage insurance grow. 

As consideration is given to the reduced Government role in supporting mortgages, another area that will require private capital is 

in covering earthquake exposure. GSEs currently require underlying mortgages to be insured against most perils, including fire, 

hurricane, and flood, as applicable. No such requirement exists for 

the earthquake peril, representing a multi-billion-dollar subsidy 

currently provided by the taxpayers. Private capital retaining the 

underlying mortgage risk is likely to require all underlying insurable risk to be covered. We are pleased to report that there is 

ample insurance and reinsurance capacity to absorb this risk. 

In closing, as this Committee considers proposals impacting the 

future of the housing finance system, we are encouraged to report 

that private capital providers have upheld their commitments 

made through the mortgage insurance channel and additional private capital is available to inject fresh capital as needed. Thank 

you. 

Chairman JOHNSON. Thank you, Mr. Heerde. 

Mr. Hughes, please proceed. 

STATEMENT OF MARTIN S. HUGHES, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, REDWOOD TRUST, INC. 

Mr. HUGHES. Good morning, Chairman Johnson, Ranking Member Shelby, Members of the Committee. I am Marty Hughes, CEO 

of Redwood Trust. I sincerely appreciate the opportunity to testify 

here today. My testimony is narrowly focused on what is it going 

to take to bring back private financing for residential mortgages. 

By way of background, Redwood is not a bank, is not an originator, and is not a servicer. We have a long history of sponsoring 

and investing in prime jumbo mortgage-backed securitizations. As 

part of our business model, we have always held risk retention. We 

hold the bottom tranches. In regulatory parlance, we have held a 

horizontal slice. 

We have completed the only two private transactions backed by 

new issue residential mortgages since the freeze began. We hope to 

complete two more transactions by year end. Our two transactions 

were quickly and well oversubscribed. It did not happen by accident. 

We work with AAA investors, insurance companies, banks, lenders, to meet their needs. Their needs are pretty straightforward. 

Enhanced transparency—they want skin in the game, safe and 

simple structures, and strong and enforceable representations and 

warranties. We believe, based on the success of these transactions, 

but beyond that, in conversations with fixed-income investors who 

are awash with liquidity looking for safe, attractive investments, 

we believe that they will come back into the private prime jumbo 

space. The speed at which they come back is the biggest question. 

In my opinion, the biggest impediment to the speed coming back 

is the outsized role of the Government in supporting 90 percent of 

the U.S. mortgages. It is crowding out the private sector. There is 
141 

no sense of urgency, especially by traditional bank securitizers. 

They can sell 90 percent of their originations to an attractive Government bid and then easily retain the remaining 10 percent. 

There is just no financial urgency to get anything moving. 

We would note, postcrisis, the ABS markets for credit cards, auto 

loans, and now commercial loans are up and working and functioning, while the private residential markets barely have a pulse. 

If we look at how they recovered, it is success breeds success. 

Issuance velocity leads to more issuance velocity. There are just too 

few prime loans available to securitize to gain any velocity. 

Government subsidies need to be scaled back to allow the private 

markets to flourish and to reduce the burden on taxpayers. We are 

ready to securitize any prime loan of any size once the playing field 

has been leveled. 

We strongly advocate moving ahead with the Administration’s 

plan to safely and on a measured basis and begin to test the private market’s ability to step into the breach. It is going to take a 

period of time, we believe 5 years, but we believe if loan limits are 

reduced, if guarantee fees are moved up to market rates, it will 

allow the private sector time to gain standardized practice procedures and, most importantly, confidence. 

There are other impediments. We need to get through regulatory 

reform and know the rules of the road. Servicers have some fence 

mending to do. They need to rebuild confidence. We need uniform 

standards for servicers that clearly set out their responsibilities, 

the procedures they are supposed to follow, and how to resolve conflicts of interest. Securitization sponsors are going to have to follow 

best practices as demanded by AAA investors. They are going to 

have to develop, adopt, and they are going to have to embrace it. 

That is the only way you are going to end up getting the trust 

back. We would say the recent Redwood Trust transactions provide 

a pretty good road map. 

One kind of gaping hole that is still out there is the unresolved 

threat from second mortgages. It is a significant factor that led to 

the housing and mortgage crisis. The first and most important level 

of skin in the game is at the borrower level. If the borrower can 

immediately withdraw their skin in the game through a second 

mortgage, it greatly increases the risk of default on the first mortgage. Left unchecked, we believe this would be a very disappointing 

result for investors. 

In terms of mortgage rates, we do believe as the Government recedes, mortgage rates will go up. We believe they will go up modestly, in our opinion, perhaps 50 basis points. In our deal, the 

fixed-rate loans were 50 basis points above the conforming rate, 

but really, it is not just looking at that deal. It is also talking to 

investors. Again, they are awash. There is $2.5 trillion in fixed-income funds searching for yield. To the extent that they have confidence that private-label residential mortgages are there and they 

can buy them and they can earn a premium over agency securities, 

we believe there would be a very active market. Done correctly, a 

wind-down of the Government’s role can be replaced by a smarter, 

less risky private-label market. 

Thank you for allowing me to testify. 

Chairman JOHNSON. Thank you, Mr. Hughes. 
142 

Mr. Rutenberg, please proceed. 

STATEMENT OF BARRY RUTENBERG, FIRST VICE CHAIRMAN 

OF THE BOARD, NATIONAL ASSOCIATION OF HOME BUILDERS 

Mr. RUTENBERG. Chairman Johnson, Ranking Member Shelby, 

and Members of the Committee, thank you for the opportunity to 

testify today. My name is Barry Rutenberg and I am NAHB’s 2011 

First Vice Chairman of the Board and a builder from Gainesville, 

Florida. NAHB represents 160,000 corporate members representing 

for sale and rental housing as well as remodeling. 

NAHB strongly supports efforts to modernize the Nation’s housing finance system, including reforms to the Government Sponsored Enterprises Fannie Mae and Freddie Mac. NAHB believes 

strongly that a Federal backstop is needed to ensure the continued 

availability of affordable mortgage credit, specifically 30-year fixedrate mortgages and affordable financing for multifamily housing. 

The housing finance system is under a cloud of uncertainty. For 

over a year now, NAHB has been actively involved with Congress 

in discussions on changes to the financing framework for homebuyers and producers of housing. Since then, Congress has passed 

the Dodd-Frank Act. Regulators are now busy implementing this 

massive law that has the potential to reduce the availability and 

increase the cost of housing credit. In addition, Congress and the 

regulators are piling on layers of regulations in an attempt to plug 

gaps in the system of mortgage regulation and prevent a recurrence of the recent mortgage finance problems. 

Caught up in the wave of uncertainty, criticism has been directed 

toward the Federal Government’s role in housing finance markets 

through the FHA and the housing GSEs. Currently, these sources 

of housing finance account for nearly all mortgage credit flowing to 

homebuyers and rental properties, yet this is exactly the role that 

these systems were designed to fill during times of economic uncertainty. And even with the current heavy dose of Federal backing, 

fewer mortgage products are available and loans are being underwritten on much more stringent terms. 

This is not an arrangement that can continue indefinitely and 

there is no clear picture of the future shape of the conforming conventional mortgage market. One thing is clear. Certainty must be 

returned to the housing market. 

The housing landscape has been little changed during this period, as the housing market remains extremely weak. In fact, while 

economic growth has been weak by historic standards for an economic recovery, housing performance has been even weaker. Unlike 

the last two economic recoveries, when at this point in the recovery, housing had already grown 25 and 45 percent to lead the country out of recession, housing is still down 18 percent since this recession ended in June 2009. 

Adding to the current housing crisis, decisions about comprehensive structural reforms to the U.S. housing finance system are 

stuck in a quagmire, despite the Administration’s recent report outlining options for reforming the housing finance market. 

There is a way forward. Recently, NAHB has joined a coalition 

with 15 other organizations that developed principles for restoring 

stability to the Nation’s housing finance system. These principles 
143 

highlighted the need for a continuing and predictable Government 

role in housing finance, to promote investor confidence, and ensure 

liquidity and stability for home ownership and rental housing. 

NAHB believes that it is critical that any reforms be well conceived, orderly, and phased in over time. 

In contrast, proposals offered by some would effectively wind 

down the operations of Fannie Mae and Freddie Mac without offering a clear vision for the future of the housing system. We need a 

thoughtfully designed path for a transition to the new framework 

that will not disrupt the housing market even further and push the 

Nation back into a deep recession. 

America’s home builders urge policy makers and the Administration and Congress to move forward comprehensive GSE reform legislation that seeks an appropriate Federal role to maintain a 

healthy mortgage marketplace for single and multifamily housing. 

Housing can be a key engine in job growth that this country needs, 

but it cannot fill that vital role if reform legislation moves forward 

that does not include a predictable Government role in the secondary mortgage market to preserve financial stability in the market and maintain a stable housing sector. 

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

your questions. 

Chairman JOHNSON. Thank you, Mr. Rutenberg. 

Mr. Phipps and Mr. Rutenberg, one of the ways that the Administration and others have suggested to reduce Government involvement in the housing finance market is by increasing the down payments required by Fannie Mae and Freddie Mac. How would this 

impact future borrowers and current homeowners? Mr. Phipps. 

Mr. PHIPPS. Senator, part of the frustration that we as REALTORS® have is that when you look at the modeling, down payment 

does not necessarily prevent or preclude default. If you look at programs like VA in particular, in which you can have 100 percent financing, it has one of the lowest rates of default across the board. 

What we know is that if you use rigorous underwriting standards 

and have traditional predictable mortgage instruments, meaning— 

30 years is a great instrument because the consumer knows what 

they are getting into. By definition, you will have better outcome. 

Our concern is when we look at the analysis of increasing from 

the down payment at 3.5 or 5 percent or 10 percent to a 20 percent 

threshold, you are going to preclude many, many borrowers from 

being able to finance to be able to obtain mortgages. As I said in 

my opening statement, that is a huge problem. 

The other footnote is that when we talk about the amount of 

money down, we ignore the fact that the consumer typically has to 

come up with more than the 3.5 or 5 or 10 percent down. They 

have something called closing costs, which can be 3 to 5 percent 

more, plus prepaids. Those are insurance, taxes, et cetera. So there 

is more money in the dynamic. 

But suffice it to say that if we really make it particularly difficult, we retard the recovery of the housing market and we make 

it harder for people to get in that first rung of home ownership. So 

we really disagree with it. 

Chairman JOHNSON. Mr. Rutenberg. 
144 

Mr. RUTENBERG. Thank you, Mr. Chairman. Not only is it the 

first rung to move up, the first-time buyer, but it is also the move 

up, because if the first-time buyer cannot sell his house after several years, then they cannot move up. So there is a chain that 

interacts all the way up and down. 

The qualified residential mortgages that have been envisioned 

from the Dodd-Frank bill, we have been told by some of the Senators that the current version is not exactly what they had expected it to be. It has a great possibility of unsettling it. I have 

seen estimates that 50 to 65, 70 percent of the mortgages that were 

approved last year could not be approved under the new rules, and 

I keep hearing that the newer mortgages are performing much better as far as any delinquencies and being paid on time. 

There are different provisions in them. Not only is there the 20 

percent, which may take 10 to 15 years to accumulate, but you now 

have a 20 percent PITI provision, 36 percent for total debt. You 

cannot have had any kind of miss on your credit for 60 days late 

in the previous 2 years. It has an unsettling, and I believe that one 

of the reasons that housing is not selling better now is a lack of 

confidence and uncertainty. As we can work together to make it 

more certain, then the market will return. It will help stabilize our 

housing market and our housing values. 

Chairman JOHNSON. Ms. Ludwig and Mr. Parrell, the Committee 

has talked about the need for a capital source that will be available 

to all markets at all times. Can you elaborate about what you think 

would happen to availability and price of rental housing in America, such as New York City, compared to Aberdeen, South Dakota, 

if there were not a Government backstop or guarantee for multifamily financing? Ms. Ludwig. 

Ms. LUDWIG. Certainly. Thank you. That is a really important 

question for the work that Enterprise does directly, and we feel 

that it is critically important to ensure that all communities have 

access to credit, and in our work, one of the important places we 

work is in rural communities. We think that in this case, if we 

move to a wholly private system, that certain underserved markets 

may not be effectively served. And when we think about those markets, we think about places like rural America. We also think about 

certain segments of our population. 

But the liquidity and the stability provided by the GSEs have ensured that all these communities, rural, suburban, urban, have all 

had access to credit. So, for example, we provided about, at Enterprise, almost a billion dollars worth of capital to rural communities. 

Much of that was in partnership with GSEs in some form, whether 

it was through the debt financing or through the Low-Income Tax 

Credit, and so we think it is vitally important, particularly in communities that do not have as active capital markets, that we make 

sure that there is some sort of Government backstop. 

Chairman JOHNSON. Mr. Parrell. 

Mr. PARRELL. I would just follow up on the prior speaker’s comments. From personal experience, I can tell you that the private 

markets are ready and willing to take credit risks, specifically the 

life insurance companies and a few other sources, as it relates to 

certain popular coastal markets like Washington, DC, Boston, New 

York, Southern California, Seattle, and Northern California. 
145 

We just recently tried to refinance a 15-year-old property in 

Scottsdale, Arizona, a very nice asset, pretty low leverage, about 60 

percent of the value, and had absolutely no takers from the life insurance companies after soliciting bids from 40 of them. One of the 

GSEs will finance that asset for us. When we did the same thing 

in the San Francisco Bay area with about 20, 25-year-old properties, we had no difficulty whatsoever obtaining excellent life insurance company interest. 

So the private market is there, but it is very selective. And not 

only would it ignore, in my view, or mostly ignore Aberdeen, South 

Dakota, it would ignore a great deal of other places, like Fresno, 

California. And they are interested right now in a very specific subset of markets, and they have been interested in a subset, that specific subset, for quite a while. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you. 

I was interested in what Ms. Ludwig said in her testimony about 

multifamily, and the default rate was basically 1 percent as opposed now to 11.5 percent in single-family homes. Is that because 

of more skin in the game, more down payment, better underwriting 

standards and so forth? Because that is a big difference there. 

What are we all interested in? I think we are interested in providing opportunities for home ownership. It will not be for everybody. We pushed all that probably too much and pushed people 

into homes that they could not afford with nothing down. I think 

that day is gone. 

But I do believe—and I think Mr. Phipps has a different opinion—that there is a connection, a correlation between putting 

something down, putting skin in the game on anything, and the 

likelihood of default, because the more risk if it goes to the taxpayers or if it is in the private market, which we are trying to 

produce, they are going to look at risk because they are managing 

risk, you know, as they—what is the likelihood of default. Isn’t that 

what we are really getting at? And if we are ever going to create 

another private market like we had. I thought for a long time, before it was all abuse and misused, that securitization was good for 

America, and Fannie Mae and Freddie Mac were not the only people involved in that, as you well know. But it was abused and misused, and we are where we are today, which is a bad situation. We 

understand the plight of housing. We have got just too many 

houses, you know. There has to be an equilibrium between supply 

and demand, and it is tough on everybody around it. 

But what is wrong with some skin in the game, Mr. Phipps? 

What is wrong with a down payment? This is anecdotal, but I remember many years ago when my wife and I were very young, and 

we were going to build a house. We wanted as much down payment 

as we could rake and scrape to keep the payment low because we 

had no intent of walking from it. You know, the underwriting 

standards were tough. It was a conventional loan and so forth. But 

what is wrong with skin in the game? 

Mr. PHIPPS. Senator, the—— 

Senator SHELBY. Because we are thinking about the taxpayers 

right now. Since Fannie Mae and Freddie Mac are basically the 

only people in this game right now, the secondary market. 
146 

Mr. PHIPPS. The short answer is there is skin in the game when 

you have 3.5 to 5 percent down. That is skin in the game, and, 

frankly, the house itself, the asset, is skin in the game. When most 

American families in our opinion get housing, they want to have 

sustainable home ownership. The lessons—if you look at the performance of the mortgages and the underwriting that has happened in the last 2 years, we have analyzed the risk, and the fact 

that the default rate now is negligible versus what we had go on 

in the 3- to 5-year period of ridiculous underwriting or nonunderwriting or blind underwriting, we have corrected for that. 

We look to have confidence in the market, and the consumer is 

looking right now and watching what we are doing here and watching the things with great anxiety that housing values are not stabilized in their market area. The sources of money are very limited 

and very difficult. They want to have confidence that we figured it 

out and we have identified a measured risk for the future. 

Senator SHELBY. How do we bring back an appetite in the private market for mortgage-backed securities? I think that is what 

we all need because, my God, you would have greater opportunities. But how do we do that? 

Mr. PHIPPS. We are for that—I think from our perspective what 

we do is we create the principles by which we engage; we acknowledge the need for an explicit Government guarantee, and we create 

other entities that are successors that will not make the mistakes 

that Fannie and Freddie made. I think that is really what we are 

looking—— 

Senator SHELBY. So you are not advocating here that you want 

a Government guarantee for everything in the real estate industry 

bills, are you? 

Mr. PHIPPS. No. What we are looking for is the backstop, Senator. 

Senator SHELBY. OK. 

Mr. PHIPPS. The ultimate protection. But we are looking for private markets and private capital to step back into the market. 

Senator SHELBY. But it has not come yet, has it? 

Mr. PHIPPS. It just has not come, and in the interim, the housing 

market lives on this river of capital, we need that capital for transactions to happen, for houses to be built, for there to be a future 

of housing and also a future for American home ownership. 

Senator SHELBY. But isn’t it basically true, whether we like or 

not, that we have got in a lot of areas a glut of real estate. Let us 

be honest about it. And we are going to have to absorb that. The 

market always absorbs the excess. Maybe it is very painful to all 

of us—to me, to you, and to a lot of participants. But isn’t it going 

to have to be absorbed? 

Mr. PHIPPS. It will have to be absorbed—— 

Senator SHELBY. To get an equilibrium? 

Mr. PHIPPS. We want to get back to equilibrium, and, frankly, as 

we move along and resolve issues like QRM, et cetera, so that the 

consumer knows what the rules of the road are, then I think they 

will step in and absorb that excess inventory. 

Senator SHELBY. Mr. Hughes, what is your opinion or what is 

your judgment on the impact on interest rates if the conforming 

loan limits were gradually reduced? Gradually reduced. 
147 

Mr. HUGHES. So if we look for the next scheduled reduction, 

which is 725 to 625—729 to 625, it represents 2 percent of the market today. The difference in the loan rates for the jumbo conforming rate is 4.75; the jumbo rate you can get at a bank today 

with similar underwriting is 5 percent. So there has been a lot said 

that mortgage rates are going to skyrocket. The payment that a 

mortgage person would make today on a $720,000 mortgage at today’s rate would be $3,765. If we rolled back the limits to 625 and 

that has to seek financing from a bank, the payment would go up 

by $109. 

Senator SHELBY. It would also depend on what you put in the 

down payment, wouldn’t it? 

Mr. HUGHES. Correct. 

Senator SHELBY. I mean, you know, if you are getting a big loan, 

say $700,000 or $650,000, that is a pretty good size loan for the average American, whether it is in Alabama, South Dakota, or Montana, or maybe not in certain areas of California or New York or 

Miami, you name it. But should that be our housing policy up here 

to worry about the people at the upper end that can access the 

market, can put their own money in without a Government guarantee? 

Mr. HUGHES. I think that market should be supported by the private sector. It is $720,000—you are talking about a $900,000 

house. I do not believe that is a house that should be subsidized 

by taxpayers. 

Senator SHELBY. Thank you. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and thank 

you all for your testimony. 

I wanted to keep dwelling on this issue of the potential impact 

of a qualified residential mortgage line at 10 or 20 percent. I must 

say that in my work in affordable housing, developing affordable 

housing, and my former work with Habitat for Humanity working 

with low-income families striving to become homeowners, what I 

often saw was that folks who were renting and paying at that time, 

20 years ago, $500 to $700 a month in rent could buy a house for 

$500 to $600, and that was before they got any tax benefits, and 

they took enormous, enormous pride in the fact that they finally 

had the stability and a piece of the American dream, that they had 

ownership, that they could decide what color to paint the house, 

they could decide what rhododendrons and azaleas they were going 

to plant in the yard. And the attitude of the children changed with 

the notion of the parents saying, ‘‘No, you cannot do that because 

we have to fix it. There is no landlord to call to fix it.’’ 

This is my deep concern, that we are going to throw the baby out 

with the bath water, and that essentially what has happened is we 

had predatory mortgage practices with ‘‘liar loans’’ and prepayment 

penalties that locked people into predatory loans and steering payments that encouraged originators to put people into predatory 

loans. And we fixed all that, and now that we fixed it, we are looking and analyzing the data—and I really appreciate the analysis, 

Mr. Phipps, that you all have gone through to compare mortgages 

that met certain standards. And as I understand it, when you 

looked at that situation and said, OK, let us see what happens with 
148 

different down payments when we have fair mortgages, where 

there is documented income, where it is either a fixed rate or a 7- 

year ARM, when there is no negative amortization, no-interest 

loans, no balloon payments, 41 percent debt to income, private 

mortgage insurance if it is over 80 percent loan to value, and you 

found a very small impact on the amount of the down payment on 

the default rate. 

Am I capturing that correctly? 

Mr. PHIPPS. Exactly right. 

Senator MERKLEY. So I was doing a little back-of-the-envelope 

number here, and I think you found in the vicinity of a 0.02-percent increase in the default rate. 

Mr. PHIPPS. Correct. 

Senator MERKLEY. So the basic setup is this. Let us say we have 

a million people buying homes, and by increasing the down payment from 5 to 10 percent, we proceed to have 10 percent fewer 

families—or I think the range you had was 7 to 15, but I am taking 

kind of the center point. So 100,000 fewer families gained access 

to home ownership because you are going to have 2,000 more defaults. Basic math. 

So I was trying to capture the profit on those 100,000 successful 

homeowners versus those 2,000 defaults, and I will be happy to 

share the numbers later, but let me just say it is more profitable 

for the banking industry to have those 100,000 owners and it has 

very little impact on the interest rate, and we will have families 

that will be successful in all kinds of ways because of their ability 

to be homeowners. So I appreciate your analysis. 

Mr. PHIPPS. Correct. And the piece that I would add, too, is that 

home ownership is in the national best interest because the average family that owns a home, all 75 million of them, even after the 

market corrections, have a family net worth of about $180,000. The 

average family with obvious demographic difference that rents a 

house has a family net worth of $4,600. So we want self-reliance. 

Home ownership should be something that is a priority in our national agenda. 

Senator MERKLEY. Well, absolutely, and many of the families I 

was working with in the early 1990s were buying homes. At that 

point the market price in the community for your basic home was 

around $60,000. Those homes are $250,000 to $300,000 today. 

Those families are in a completely different position. They have 

come close to now paying off their loans, and while they will still 

have taxes, it is cheaper than renting the rest of their life. 

And I think about the basic plan in America. We have very few 

employment settings anymore that have a defined benefit pension; 

that is, after you retire you will get X amount per month. So families are relying on buying a home, having that equity, and getting 

Social Security, and as two fundamental principles, and we cannot 

allow the mistakes we made with mortgages over the last 10 years 

to drive us down the road. 

And I would really like to note that we have got to tackle this 

issue of foreclosures at the same time because not only are the 

families being affected when a family is unable to stay in the home, 

but the market—how can the market recover if there are empty 

houses being sold at fire-sale prices? Of course, Oregon makes a lot 
149 

of lumber. Who is going to buy lumber if you are not building 

houses? We have a huge nursery industry, but people buy plants 

when they buy homes. 

So there has been an enormous focus on Wall Street and fixing 

institutions. We have got to work to make sure that the mechanics 

of mortgages work for homeowners. 

I have gone over my time. I had lots of questions, but I will yield 

back to my colleagues. Thank you. 

Chairman JOHNSON. Mr. Heerde, your testimony states that the 

private insurance market and reinsurance market could fill the role 

of a Government guarantee. If there were no Government backstop 

and the private mortgage insurance provided the backstop, what 

would the insurance cost? 

Mr. HEERDE. Well, the insurance market would set the rate 

based on the underlying risk of the mortgages. So when you look 

at the factors, and listening to the testimonies of the other witnesses as well, there are a number of factors, including down payment, past credit history, earnings to—debt-to-earnings ratios and 

so on. Those rates would be set based on the predictable default 

pattern of the underlying borrower. 

Chairman JOHNSON. Reinsurance stepped in after Hurricane 

Katrina to assist insurance companies. Given that the housing 

market is a multi-trillion-dollar market, would reinsurance be able 

to cover that amount in the event of another financial crisis like 

the one we just experienced? Mr. Heerde. 

Mr. HEERDE. We believe that reinsurance could play a role. The 

likely outcome of a wind-down or decline in Fannie Mae and 

Freddie Mac and more loans being held on the balance sheets of 

the financial institutions, the underlying product would likely 

change significantly in that the banks would probably not ultimately require loan level mortgage insurance but, rather, maintain 

an acceptable level of risks on their own balance sheet and buy 

portfolio coverage. That would change the dynamic of the coverage. 

But because of the role the insurers and then, therefore, reinsurers 

would ultimately need to play, it would raise up their retention and 

it would probably provide more coverage at a higher level than the 

current system of individual loan level protection. 

Chairman JOHNSON. Mr. Hughes, before the crisis, did Redwood 

securitize subprime loans? And what was the reason behind that 

decision? 

Mr. HUGHES. Prior to the crisis, Redwood did not securitize any 

subprime loans. We have been in the prime jumbo space since that 

period of time. 

Chairman JOHNSON. Would your investors be interested in deals 

that were backed by loans that did not have extremely low LTVs? 

Mr. HUGHES. I think the investors would buy the loans today 

that are getting sold to Fannie Mae and Freddie Mac. Those loans, 

the loan-to-values for those, you know, everybody thinks are here 

and that there is 5 percent down. The loan-to-value on a jumbo securities offer by Fannie Mae today is 68 percent. So, yes, I think 

the prime market, in order to come back and private investors to 

come back, there is going to have to be a down payment. I do not 

think that 20 percent is what the private markets are going to re-
150 

quire, but that is where Fannie and Freddie are today. It is a different market than where the FHA is. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. I would like to address this to, I guess, all of 

you, but I was thinking about the home builders and the real estate people probably know this better than I. I am interested in 

this. 

A lot of people, we have seen—I have known a lot of them 

anecdotally—they will buy more than one home. They will be owing 

money on all of them. They will have a home that they live in. 

Some of them buy a home at the beach in the South. Some buy a 

home in the mountains. I have known some that own the heck on 

all of them. But, you know, they are living a pretty good life, I 

guess. 

Does the down payment apply in the mortgage—this 700, does 

that apply to if I want to buy a second home, so to speak? Mr. 

Rutenberg. 

Mr. RUTENBERG. Senator Shelby, it has been my experience—— 

Senator SHELBY. I am just interested in what the policy is. 

Mr. RUTENBERG. It has been my experience that there are different down payments for secondary homes than there are for primary homes. There are different down payments for jumbo loans 

than there are conforming loans. 

Senator SHELBY. OK. And what are those down payments? It is 

not 3 percent for your second home, too, is it, or 3.5? 

Mr. RUTENBERG. Right. 

Senator SHELBY. I hope not. 

Mr. RUTENBERG. I do not know the policy. I can tell you that my 

customers who are buying jumbo are normally putting down 30 

percent. My customers who are buying—— 

Senator SHELBY. And what is the default rate in say, the jumbo 

loan area? 

Mr. RUTENBERG. I will defer to someone else who has that data. 

Senator SHELBY. OK. Mr. Hughes. 

Mr. HUGHES. At least on the two transactions we have recently 

done, there are currently no losses, no delinquencies at all. 

Senator SHELBY. Mr. Phipps, tell me what—if I wanted—let us 

say I owned a—I did not own but I was buying a home, and I 

bought one and I put 5 percent down. 

Mr. PHIPPS. For your primary residence? 

Senator SHELBY. Yes, primary residence. And then, say, 3 years 

later I found me a place at the beach or the mountains, somewhere 

else, what would I have to pay down to buy that house? 

Mr. PHIPPS. My experience is that for a second home or a third 

home, you are typically looking at between 25 and 35 to 40 percent. 

The criteria is much more rigorous for nonprimary residence just 

by definition. I do not know what the default rate is, but I know 

it is more rigorous. In my market area, if you do not have 20 percent or 25 percent for the second home, you are going to be looking 

to the current owner to provide some assistance. 

Senator SHELBY. OK. Thank you. 

Chairman JOHNSON. The Committee did not reach a quorum at 

this hearing and, therefore, we did not vote on the nomination of 

Mr. Timothy Massad as was planned. We will attempt to hold this 
151 

vote off the floor, off the Senate floor, before we leave for recess. 

The Committee clerk will send a message to alert Senators and 

staff regarding this vote. 

Thanks again to all our witnesses for being here with us today. 

Reforming our housing finance system cannot take place without a 

thoughtful and intelligent dialog encompassing many different 

views and proposals. Your testimony today further helps the Committee as we continue to analyze the complex issues regarding the 

future of housing finance. 

I look forward to the ongoing discussions with my colleagues here 

today as we continue to work toward creating a stable and sustainable housing market for American families. 

This hearing is adjourned. 

[Whereupon, at 11:41 a.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 
152 

PREPARED STATEMENT OF SENATOR ROGER F. WICKER 

I am glad we are having this hearing today to examine the state of U.S. housing 

finance. Housing remains an essential component of our economy, and I am convinced our Nation will not recover entirely from its economic struggles until the 

housing sector recovers. As we go forward, we must learn from the economic crisis 

of 2008 and promote policies that do not put taxpayers at risk. 

As we learn from the 2008 crisis, I believe we must significantly reduce the role 

of Government in housing. Indeed, the Government has a poor track record in its 

involvement in housing finance. To date, the failure of Fannie Mae and Freddie Mac 

has cost U.S. taxpayers over $150 billion. The companies, which are in Government 

conservatorship and owned by the Government, could need additional taxpayer dollars to remain solvent. Laudable attempts by the Government to ‘‘solve problems,’’ 

often create entirely new problems themselves. For example, I believe that intentions of promoting ‘‘affordable housing’’ eventually led us down the path of pushing 

homeowners into subprime mortgages. This worked temporarily. However, once the 

interest rate on these mortgages reset, these homeowners could no longer afford 

their mortgage payments. In this case, excessive Government involvement encouraged borrowers to over-borrow and lenders to over-lend and played an important 

role in Fannie Mae and Freddie Mac’s failures. 

This short-sighted and risky approach resulted in increased foreclosures across 

the Nation. In response to concerns about this trend, I supported legislation when 

I was a member of the House of Representatives in 2005 and 2007 to increase oversight of these dangerous markets. Both bills passed the House but were never considered by the Senate. 

As we examine the housing finance, the question before us is this: What is the 

role of the private market and what, if any, is the role of Government? As this Committee considers housing reform, I hope we consider the need to limit Government 

involvement and promote the private sector. 

PREPARED STATEMENT OF TERRI LUDWIG 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, ENTERPRISE COMMUNITY PARTNERS

MAY 26, 2011 

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

thank you for the opportunity to testify this morning. I am Terri Ludwig, president 

and chief executive officer of Enterprise Community Partners (Enterprise). Enterprise is a national nonprofit organization that creates opportunities for low- and 

moderate-income people through fit, affordable housing and diverse, thriving communities. For nearly 30 years, Enterprise has provided financing and expertise to 

organizations around the country to build and preserve affordable housing and to 

revitalize and strengthen communities. Enterprise has invested more than $11 billion to create more than 280,000 affordable homes and strengthen hundreds of communities across the country. 

Enterprise is a long-time provider of permanent debt financing, specializing in af- fordable multifamily rental housing. We have originated $560 million in loans on 

more than 17,000 affordable apartments and houses. We work with the Federal 

Housing Administration (FHA), Fannie Mae and Freddie Mac, and private lenders 

and partners. We are an FHA Multifamily Accelerated Processing (MAP) lender and 

Ginnie Mae issuer, a Special Fannie Mae Delegated Underwriting and Servicing 

(DUS) lender, a Freddie Mac Targeted Affordable Housing lender, and a U.S. Department of Agriculture Section 538 lender. In all of these programs, Enterprise underwrites and services loans on rental housing and either sells the loans to one of 

these entities or finances it with mortgage backed securities. This provides additional capital allowing us to undertake additional lending and development activities. 

We greatly appreciate the leadership and initiative of Chairman Johnson, Ranking Member Shelby, and other Committee Members in convening these hearings and 

pressing for a thorough and comprehensive review of the housing market. Reforming 

the housing finance system in the wake of the recent financial crisis is of critical 

importance. The issues at hand are complex and have significant implications for 

the housing sector, the financial markets, and the broader economy. 

For 20 years, I worked in the private sector in investment banking, partnering 

with groups like Enterprise and using capital markets to efficiently invest in affordable housing and community development. This experience taught me that public– 

private partnerships are absolutely critical to bringing capital profitably to working 

families in low-income communities. In countless communities across the country— 
153 

1 Joint Center for Housing Studies of Harvard University. America’s Rental Housing (2011). 

2Mortgage Finance Working Group, Center for American Progress; JCHS Rental Housing 

(2008). 3 Census Bureau. 2009 American Housing Survey; JCHS (2008). 

4MFWG CAP paper, p.9. 

rural, urban and suburban—the combination of public and private financing is effectively producing quality affordable housing. 

Enterprise strengthens communities by bringing public and private capital together to meet local needs. We work in communities that range from small rural 

towns to large cities, from Native American tribal communities to suburban job centers. We know that housing is more than just a physical building—it is the place 

where people build their lives, create networks, and send their children to school. 

Secure housing is best provided in communities with a diverse mix of affordable and 

market rate housing options; access to jobs and support; and strong commitments 

to the environment and civic participation. We work on holistic housing solutions 

so that people can live close to work or public transportation, in healthy and safe 

housing and in safe and vibrant communities. 

We know that housing needs are not homogeneous. People in rural communities 

have different needs then those in urban centers. Some families need secure rental 

housing while others can benefit from sustainable home ownership. At Enterprise, 

we focus on local and community needs. We have helped to create communities with 

both stable home ownership opportunities for families and affordable and safe rental 

housing. 

As the financial crisis has shown, America needs a spectrum of housing options. 

During the past 10 years, many borrowers had unsustainable home loans. The consequences have been disastrous. Millions of homeowners are underwater on their 

mortgages. Irresponsible lending coupled with high unemployment has led to unprecedented foreclosure rates and vacant homes creating neighborhood blight. This 

crisis is undermining decades of progress that Enterprise and our national and local 

partners have made in revitalizing neighborhoods and bringing economic development, jobs and community safety improvements to underserved and low-income 

communities. 

As the pendulum swings back to a more balanced housing policy and more homeowners look to the rental market, either out of choice or necessity, it is critical that 

Congress and the Administration ensure that affordable housing is available—this 

means ensuring that there is a stable source of capital and liquidity for affordable 

home ownership and rental housing. 

In considering the next stage of housing finance and the Government’s role in it, 

we must maintain adequate capital flow, liquidity, and stability for the multifamily 

mortgage market, both subsidized and unsubsidized. Any shift away from the current GSE structure must be done carefully and must ensure that viable affordable 

housing options—both home ownership and rental—exist in all communities. We 

must do no harm and take time to truly understand the consequences of housing 

finance reform on all borrowers and communities and all market segments. We urge 

Congress to consider how any new structure will impact the availability of credit 

to affordable housing and to ensure access to capital for all communities. This does 

not mean that we support the status quo. However, the GSEs have played a critical 

role in ensuring the availability of capital for affordable housing—through their loan 

purchases and securitizations as well as their investments in the Low Income Housing Tax Credit. 

The Nation’s Serious Affordable Housing Needs 

The need for affordable rental housing is acute. The Government cannot walk 

away from all Government support of this market segment. We must think carefully 

before proceeding with a quick wind down of the GSEs without a successor financing system in place. 

To begin, consider that in the United States today, there are 38.6 million units 

of rental housing, 1 and 32.6 million of those units are unsubsidized. Sixty percent 

of the unsubsidized rentals are in properties with four units or fewer. 2 Forty percent of households—12.3 million in all—are in unsubsidized buildings with more 

than five units. By contrast, the United States has 6 million units of subsidized 

rental housing. 3 One-third of these subsidized units are in properties with less than 

four units, and 4.5 million of the subsidized rental stock is in buildings with more 

than five units. More than 16 million units, or 47 percent, of rental housing are in 

buildings with 5 or more units, with more than 40 million people living in this housing. 4
154 

5 Robert Dewitt, NHMC and NAA. House Financial Services Committee Hearing on the Future of Housing Finance. March 23, 2010. 6Michael Bodaken, National Housing Trust. House Financial Services Committee Hearing on 

the Future of Housing Finance. September 29, 2010. 7 National Council of State Housing Agencies. 

8 Buzz Roberts, ‘‘Strengthening the Low Income Housing Tax Credit Investment Market’’. 

Cascade: Federal Reserve Bank of Philadelphia. Fall 2009. 

Eighty-three million people—a full one-third of the U.S. population—are renters. 

Only 25 percent of those eligible to receive housing subsidies actually receive any 

form of assistance. Thirty-eight percent of renters are cost-burdened, meaning they 

spend more than 50 percent of their monthly income on rent. And this number continues to grow: according to HUD, this population increased by 1.2 million, or 20 

percent, between 2007 and 2009 alone. In general, renters have lower incomes than 

homeowners. The annual median income of a rental household is $28,400, while the 

median income for homeowners is $60,000. Half of all renters earn less than 

$25,000 a year, and a quarter live below the poverty line. There is no county in the 

United States in which a minimum wage worker can afford a one-bedroom apartment at the fair market rent. 

The current stock cannot meet the demand for affordable housing, and the need 

continues to grow. According to the National Multi Housing Council, there will be 

an additional 6 million renter households between 2008 and 2015. Construction of 

and investment in multifamily properties has been severely curtailed amid the housing market crash. Multifamily housing starts in 2009 were just over 100,000, well 

below the annual average of 300,000 between 1995 and 2004. According to the Joint 

Center for Housing Studies at Harvard University, in 2009 there were 10.4 million 

extremely low-income renter households and only 3.6 million units affordable to 

those renters. Existing rental housing is older, and much is in need of rehabilitation 

and repair or outright replacement. There has been a steady loss of affordable units. 

Financing Affordable Housing in the U.S. 

This data demonstrates the tremendous need and demand for affordable housing 

in this country. Both the public and private sectors have critical roles to play in the 

affordable rental market. Without support from the GSEs, much of the supportive, 

affordable, and workforce housing built in the past decade would not exist. The 

GSEs have been a constant and reliable source for the much-needed liquidity for the 

multifamily housing sector. They have been a long-term, reliable source of financing, 

especially for complex real estate developments in hard-to-serve areas, including 

rural and Native American communities. 

Since 1996, the GSEs have provided more than $535 billion in multifamily mortgage debt to finance more than 11 million apartments. During the past 2 years, the 

GSEs have provided $94 billion in mortgage debt for affordable housing at a time 

when many other capital sources have left the market. 5 According to the Center for 

American Progress, the GSEs purchased more than 84 percent of all multifamily 

loans originated in 2009 alone. 

According to the Joint Center for Housing Studies’ recent report ‘‘ . . . The only 

net additions to outstanding multifamily debt since 2008 have come from Fannie 

Mae, Freddie Mac, and the FHA . . . while the volume for all other financing 

sources combined dropped by $40 billion.’’ We understand that private sector capital 

must be brought back into the rental housing market. 

As the single-family market has struggled in recent years and even under Government conservatorship, the GSEs’ multifamily portfolios have performed well and are 

profitable. Between 2005 and 2009, Fannie Mae and Freddie Mac’s share of delinquent or foreclosed single family loans rose from approximately 3 percent to 11.5 

percent. During the same period, the GSEs’ share of delinquent or foreclosed multifamily loans remained at less than 1 percent. 6

Fannie Mae and Freddie Mac have played a critical role in the Low Income Housing Tax Credit market. During the past decade, the LIHTC program has produced 

90 percent of all affordable multifamily housing in the United States. 7 Annually, 

this program generates 140,000 jobs and $1.5 billion in State and local taxes and 

other revenues. Before the financial crisis, the GSEs provided 40 percent of LIHTC 

investments, producing countless rental homes. But the financial crisis has meant 

the withdrawal of Fannie Mae and Freddie Mac, along with other financial institutions, from the LIHTC market. The shock of this caused investments in LIHTC to 

drop by 50 percent in 2008 from the $9 billion invested in 2007. 8 This has meant 

serious challenges for the affordable housing industry as we seek to preserve and 

build housing affordable to working families and vulnerable populations, including 

homeless Americans, seniors, and those with disabilities. While the private market 
155 

has moved in somewhat, the market remains volatile and there is a serious and real 

need for a stable entity to weather the storms of the market. 

I would like to take a moment to explain what these numbers mean for some of 

your constituents. Jordan’s Gate, located in rural Opelika, Alabama, provides 48 affordable rental homes for families earning up to 60 percent of the area median income—a little more than $13,000 a year. It was made possible in part by permanent 

debt originated by Enterprise and purchased by Fannie Mae, as well as Low Income 

Housing Tax Credit equity that was purchased in part by Freddie Mac through an 

Enterprise multi-investor fund. Residents have access to playgrounds and computer 

centers. Importantly, residents also have access to a day care center, providing a 

safe place for children while their parents are at work. Were it not for the support 

from the Government-sponsored secondary market, this development and many others would not exist. 

Principles for Housing Finance Reform: Liquidity, Stability, and Affordability 

Any new housing finance system must provide liquidity, stability, and affordability. Access to capital for underserved communities—whether small rural towns, 

tribal communities, or low-income urban neighborhoods—must be preserved. In general, we believe that the Government should have a role, albeit more limited, in the 

housing system. 

CDFIs, small community banks, credit unions, regional banks, large national 

banks, State Housing Finance Agencies, the Federal Home Loan Bank System, and 

national intermediaries are all needed in a robust housing finance system. Any new 

housing finance system should ensure choices and access to capital for all communities and for all lenders. A return to the redlining of the 1970s is not acceptable— 

no one should have to pay more for a mortgage because they live in a certain place. 

Our guiding principles are as follows: 

• The Government must play a role in housing finance to ensure liquidity, stability, and affordability. 

• The Government’s role should be focused and targeted on affordable housing, 

including both rental and home ownership housing. 

• Mortgage financing should be available to creditworthy borrowers in all communities. Rural areas and economically distressed areas should have access to capital for affordable sustainable home ownership and rental housing through both 

the primary and secondary markets. 

• Secondary market entities that enjoy Federal support should carry an affirmative obligation to finance affordable and sustainable homes and to reach underserved people, markets and needs, including low- and moderate-income people; 

low-income communities and rural areas; and our most vulnerable populations. 

• Responsible, sustainable mortgage products are critical to ensuring that all 

Americans have access to affordable home ownership. 

• FHA provides an important mechanism for Government involvement in the 

housing market, particularly as a countercyclical resource available to take on 

risk that the private sector cannot or will not. However, to ensure a robust secondary mortgage market and appropriate risk-sharing, other ways to provide 

mortgage securitization are necessary. Further, changes are needed in structure, personnel rules, and risk-sharing programs to make FHA an optimally effective provider of capital for affordable housing. 

• A small assessment on mortgage-backed securities should be used to fund affordable housing, through mechanisms such as the National Housing Trust 

Fund and the Capital Magnet Fund, and through risk sharing and credit enhancements to leverage participation in meeting specific needs through secondary market investments. 

• Any new housing finance system must ensure a purposeful presence in the market for multifamily housing. We cannot rely on the private sector alone to provide financing or to continue to invest in the Low Income Housing Tax Credit 

(LIHTC) and other proven, efficient public–private programs. 

• Credit channels for multifamily housing must remain open during the transition period between the current and any future system. 

Conclusion 

Any movement from the current GSE structure must be done carefully and over 

time to avoid a further weakening of the housing market. The GSEs are imperfect 

partners, but served an important role in providing access to credit that would oth-
156 

erwise not be available. We are working to develop more specific recommendations 

for the future of the housing finance system. 

However, we are clear on the three main principles that should serve as the basis 

for any new system: (1) maintaining liquidity for the multifamily mortgage market; 

(2) doing no harm to the aspects of the housing finance system that are working; 

and (3) protecting affordability and the underserved. Our principles outline the most 

important considerations from Enterprise’s perspective as a national intermediary 

that has invested in affordable housing and community development for nearly 30 

years. Above all, we support a housing finance system that provides liquidity, stability, and affordability. We look forward to working with you as you further consider changes to our housing finance system. I appreciate the opportunity to testify 

and look forward to your questions. 

PREPARED STATEMENT OF RON PHIPPS 

PRESIDENT, NATIONAL ASSOCIATION OF REALTORS®

MAY 26, 2011 

Introduction 

On behalf of the 1.1 million members of the National Association of REALTORS®

(NAR), thank you for holding this hearing on the need to reform our Nation’s secondary mortgage market infrastructure. 

My name is Ron Phipps, and I am the 2011 President of the National Association 

of REALTORS®. I am proud to be part of a four-generation, family owned residential real estate business in Rhode Island. As I have mentioned to you during prior 

testimony, my passion is making the dream of home ownership available to American families. I am proud to testify today on behalf of the more than 1.1 million REALTORS® who share that passion, and the 75 million Americans who own homes 

and the 310 million Americans who require shelter. 

REALTORS® agree that the existing housing finance system failed and that reforms to our secondary mortgage market are needed. We applaud the Committee’s 

caution as you take up this very important and complex issue. You are truly heeding the words of Treasury Secretary Timothy Geithner and the Committee’s Ranking Member, Senator Richard Shelby when they said earlier this year that ‘‘ . . . 

Federal housing policies must be adequately assessed, and proper homework must 

be done before action is taken.’’ 

Housing Mission and the Secondary Mortgage Market 

REALTORS® are fervent in their belief in ‘‘free markets,’’ and the need for private 

capital to reduce the Federal Government’s financial support of the housing sector 

if the housing finance system is to right itself. However, REALTORS® are also practical and understand that in extreme economic conditions, private capital will retreat from the market, requiring the participation of entities that will participate 

in the marketplace regardless of economic conditions. The Government-sponsored 

enterprises (GSEs) were created to support this specific mission within the secondary mortgage market, and any replacements must meet this criterion as well. 

Future secondary mortgage market entities must be created with this mission as 

their basis in order to ensure that citizens will always have access to affordable 

mortgage capital. 

REALTORS® agree that taxpayers should be protected, open-ended bailouts 

should end, private capital must return to the housing finance market, and that the 

size of the Government participation in the housing sector should decrease if the 

market is to function properly. Where we disagree with some is ‘‘how’’ these aspirations should be accomplished. When reviewing current legislation that effectively 

constrains, or shuts-down, Fannie Mae and Freddie Mac and relies only on private 

capital to operate the secondary mortgage market (e.g., S. 693, the ‘‘GSE Bailout 

Elimination and Taxpayer Protection Act’’), one need only examine the miniscule activity in the jumbo and manufactured housing mortgage markets in order to understand the implications of just having private capital form the foundation of the 

housing market. In both instances, mortgage capital became nearly nonexistent, 

which prohibited qualified borrowers from access to the funds required to purchase 

a home. 

Congress chartered Fannie Mae and Freddie Mac to expand home ownership and 

provide a solid foundation for our Nation’s housing financial system. Unlike private 

secondary market investors, Fannie Mae and Freddie Mac remain in housing markets during downturns, using their Federal ties to facilitate mortgage finance and 

support home ownership opportunity for all creditworthy borrowers. 
157 

REALTORS® believe that the GSEs’ housing mission, and the benefits that are 

derived from it, played a vital role in the success of our Nation’s housing system, 

and continue to play that role today. Without Fannie Mae and Freddie staying true 

to their mission of providing affordable mortgage capital during the current market 

disruption, there would have been a more serious disruption to the market. 

Since being placed in conservatorship, NAR has closely monitored the impact of 

the current market turmoil on both Fannie Mae and Freddie Mac. As previously 

mentioned, REALTORS® are extremely aware that the role of the GSEs is crucial 

to housing consumers’ ability to obtain fair and affordable mortgages, which stimulate real estate transactions, and thus the overall U.S. economy. 

As the market turmoil reached its peak in late 2008, it became apparent that the 

role of the GSEs, even in conservatorship, was of utmost importance to the viability 

of the housing market as private mortgage capital effectively fled the marketplace. 

As you can see from the above chart, if no Government-backed entity existed as 

private mortgage capital fled to the side lines, the housing market would have come 

to a complete halt and thrown our Nation into a deeper recession, or even a depression. 

REALTORS® believe that reform of the U.S. housing finance system must be a 

methodical, measured, and comprehensive effort based on practical market experience, and not just theory. 

Earlier this year, NAR signed onto an industry letter that espouses the fundamental principles that we all believe are required to ensure a viable secondary mortgage market going forward (see, Appendix). NAR believes that the industry letter’s 

basic principles, in concert with our own, form a good foundation on which the secondary mortgage market can be reformed. NAR’s principles are as follows: 

Key GSE Reform Points Based on NAR’s Principles 

• An efficient and adequately regulated secondary market is essential to providing affordable mortgages to consumers. The secondary market, where mortgages are securitized and/or combined into bonds, is an important and reliable 

source of capital for lenders and therefore for consumers. 

Without a secondary market, mortgage interest rates would be unnecessarily 

higher and unaffordable for many Americans. In addition, an inadequate sec-
158 

ondary market would impede both recovery in housing and the overall economic 

recovery. 

• We cannot have a restoration of the old GSEs with private profits and taxpayer 

loss system. The current GSEs should be replaced with Government chartered, 

nonshareholder owned entities that are subject to sufficient regulations on product, revenue generation and usage, and retained portfolio practices in a way 

that ensures they can accomplish their mission and protect the taxpayer. 

• Government-chartered entities have a separate legal identity from the Federal 

Government but serve a public purpose (e.g., the Export-Import Bank). Unlike 

a Federal agency, the entities will have considerable political independence and 

be self-sustaining given the appropriate structure. 

• The mission would be to ensure a strong, efficient financing environment for 

home ownership and rental housing, including access to mortgage financing for 

segments of the population that have the demonstrated ability to sustain home 

ownership. Middle class consumers need a steady flow of mortgage funding that 

only Government backing can provide. 

• The Government must clearly, and explicitly, guarantee the issuances of the entities. Taxpayer risk would be mitigated through the use of mortgage insurance 

on loan products with a loan-to-value ratio of 80 percent or higher and guarantee or other fees paid to the Government. This is essential to ensure borrowers have access to affordable mortgage credit. Without Government backing, 

consumers will pay much higher mortgage rates and mortgages may at times 

not be readily available at all (as happened in jumbo and commercial real estate 

loans) 

• The entities should guarantee or insure a wide range of safe, reliable mortgages 

products such as 30- and 15-year fixed-rate loans, traditional ARMs, and other 

products that have stood the test of time and for which American homeowners 

have demonstrated a strong ‘‘ability to repay.’’ 

• For additional safety, sound and sensible underwriting standards must be established for loans purchased and securitized in MBSs, loans purchased for 

portfolio, and MBS purchases. 

• The entities should price loan products or guarantees based on risk. The organization must set standards for the MBS they guarantee that establish transparency and verifiability for loans within the MBSs. 

• Political independence of the entities is mandatory for successful operation (e.g., 

the CEOs will have fixed terms so they cannot be fired without cause, they 

should not be allowed to lobby, and the authorities should be self-funded—no 

ongoing appropriations). 

• In order to increase the use of covered bonds, particularly in the commercial 

real estate arena, the entities should pilot their use in multifamily housing 

lending and explore their use as an additional way to provide more mortgage 

capital for residential housing. The entities should be allowed to pave the way 

for innovative or alternative finance mechanisms that meet safety criteria. 

• There must be strong oversight of the entities (for example, by the Federal 

Housing Finance Agency—FHFA or a successor agency), that includes the providing of timely reports to allow for continual evaluation of the entities’ performance. 

Private Capital Participation, But Not a Fully Private Secondary Mortgage 

Market 

REALTORS® believe that full privatization is not an effective option for a secondary market because private firms’ business strategies will focus on optimizing 

their revenue/profit generation. This model would foster mortgage products that are 

more aligned with the business’ goals (e.g., based upon significant financial risk-taking) than in the best interest of the Nation’s housing policy or the consumer. This 

situation, we believe, would lead to the rescinding of long-term, fixed-rate mortgage 

products (e.g., 30-year fixed-rate mortgage products), and an increase in the costs 

of mortgages to consumers, or both. 

According to research by economist Dr. Susan Woodward, there is no evidence 

that a long-term fixed-rate residential mortgage loan would ever arise spontaneously without Government urging. Dr. Woodward points out that a few developed 

countries have encouraged the use of amortizing long-term loans, but in all instances (save for Denmark), the loans have adjustable rates and recast every 5 

years. She goes on to indicate that the United States is unique in supporting a residential mortgage that is long-term, amortizing, fixed-rate and prepayable, and that 

Americans have come to view this product as one of their civil rights. Dr. Woodward 
159 

1Qualified Residential Mortgage Coalition, ‘‘Proposed Qualified Residential Mortgage Definition Harms Creditworthy Borrowers While Frustrating Housing Recovery’’, May 2011. 

points out that in early 2000, when Former Federal Reserve Chairman, Alan Greenspan, hinted at its abandonment, the public outcry was such that he eagerly abandoned that position. 

Second, the size of the U.S. residential mortgage market is also a consideration. 

Currently, the U.S. residential mortgage market stands at $10.6 trillion, with the 

GSEs owning or guaranteeing $5 to $6 trillion of mortgage debt outstanding and 

providing capital that supports roughly 70 percent of new mortgage originations. 

REALTORS® believe that it is extremely unlikely that enough purely private capital—without Government backing—could be attracted to replace existing mortgage 

funding, assume the GSEs market share, or make mortgage lending available in all 

types of markets. 

Finally, our members fear that in times of economic upheaval, a fully private secondary mortgage market will largely cease to exist as has occurred in the jumbo 

mortgage, the commercial mortgage, and the manufactured housing mortgage markets. When the economy turns down, private capital understandably flees the marketplace. Should that happen in the residential mortgage market space, the results 

for the entire economy—because of the plethora of peripheral industries that support and benefit from the residential housing market—would be catastrophic. 

Reasonable Qualified Residential Mortgage Definition 

Another issue that will dramatically impact the future of housing finance and the 

secondary mortgage market is the definition of what constitutes a qualified residential mortgage (QRM). NAR believes that Federal regulators should honor the intentions of the concept’s authors, Senators Isakson, Hagan, and Landrieu, by crafting 

a qualified residential mortgage (QRM) exemption from the risk retention requirements of the Dodd-Frank Act that includes a wide variety of traditionally safe, well 

underwritten products such as 30-, 15-, and 10-year fixed-rate loans, 7–1 and 5–1 

ARMs, and loans with flexible down payments that require mortgage insurance. A 

QRM policy that does not heed their intention will displace a large portion of potential homebuyers, which in turn will slow economic growth and hamper job creation. 

Strong evidence shows that responsible lending standards and ensuring a borrower’s ability to repay have the greatest impact on reducing lender risk. A balance 

must be struck between reducing investor risk and providing affordable mortgage 

credit. Better underwriting and credit quality standards will greatly reduce risk. 

Adding unnecessarily high minimum down payment requirements, overly stringent 

debt-to-income ratios, and onerous payment performance criteria, will only exclude 

hundreds of thousands of homebuyers, despite their creditworthiness and proven 

ability to afford the monthly payment, because of the dramatic increase in the 

wealth required to purchase a home. 

According to a white paper compiled by a cross-section of housing and consumer 

lending groups titled, ‘‘Proposed Qualified Residential Mortgage Definition Harms 

Creditworthy Borrowers While Frustrating Housing Recovery of Housing’’ (2011): 1

The impact of the proposed rule on existing homeowners is also harmful. 

Based on data that the coalition received from CoreLogic Inc., nearly 25 

million current homeowners would be denied access to a lower rate QRM 

to refinance their home because they do not currently have 25 percent equity in their homes (Table 2). Many of these borrowers have paid their 

mortgages on time for years, only to see their equity eroded by a housing 

crash and the severe recession. Even with a 10 percent minimum equity 

standard, more than 16 million existing homeowners—many undoubtedly 

with solid credit records—will be unable to obtain a QRM. In short, the proposed rule moves creditworthy, responsible homeowners into the higher cost 

non-QRM market. 
160 

As now narrowly drawn, QRM ignores compelling data that demonstrate 

that sound underwriting and product features, like documentation of income and type of mortgage have a larger impact on reducing default rates 

than high down payments. 

A further analysis of data from CoreLogic Inc. on loans originated between 

2002 and 2008 shows that boosting down payments in 5 percent increments 

has only a negligible impact on default rates, but it significantly reduces 

the pool of borrowers that would be eligible for the QRM standard. Table 

2 shows the default performance of a sample QRM based on the following 

attributes of loans: Fully documented income and assets; fixed-rate or 7 

year or greater ARMs; no negative amortization; no interest only loans; no 

balloon payments; 41 percent total debt-to-income ratio; mortgage insurance 

on loans with 80 percent or greater loan-to-value ratios; and maturities no 

greater than 30 years. These QRM criteria were applied to more than 20 

million loans originated between 2002 and 2008, and default performance 

is measured by origination year through the end of 2010. 

As shown in Tables 2 and 3, moving from a 5 percent to a 10 percent down 

payment requirement on loans that already meet the defined QRM standard reduces the default experience by an average of only two- or threetenths of 1 percent for each cohort year. However, the increase in the minimum down payment from 5 percent to 10 percent would eliminate from 7 

to 15 percent of borrowers from qualifying for a lower rate QRM loan. Increasing the minimum down payment even further to 20 percent, as proposed in the QRM rule, would amplify this disparity, knocking 17 to 28 percent of borrowers out of QRM eligibility, with only small improvement in 

default performance of about eight-tenths of one percent on average. This 

lopsided result compromises the intent of the QRM provision in DoddFrank, which is to assure clear alignment of interests between consumers, 

creditors and investors without imposing unreasonable barriers to financing 

of sustainable mortgages. 
161 

Importantly, this analysis takes into account the impact on the performance 

of the entire cohort of defined QRMs that would result from moving from 

a 5 percent minimum down payment on QRMs in that cohort, to a 10 percent and a 20 percent minimum down payment. As such, it shows the broad 

market impact of a QRM with a 5 percent down payment requirement compared to a QRM with a 10 percent or 20 percent down payment requirement, rather than simply comparing default risk on 5 percent down loans 

to 20 percent down loans. Clearly, moving to higher down payments has a 

minor impact on default rates market-wide, but a major adverse impact on 

access by creditworthy borrowers to the lower rates and safe product features of the QRM. 
162 

NAR is concerned that a narrowly defined QRM will also require severe 

tightening of FHA eligibility requirements and even higher FHA premiums 

to prevent huge increases in its already robust share of the market, adding 

additional roadblocks to sustainable home ownership. 

Lastly, saving the necessary down payment has always been the principal 

obstacle to buyers seeking to purchase their first home. Proposals requiring 

high down payments will only drive more borrowers to FHA, increase costs 

for borrowers by raising interest rates and fees, and effectively price many 

eligible borrowers out of the housing market. 
163 

Mortgage Loan Limits 

NAR strongly supports making permanent the GSE and FHA mortgage loan limits that are currently in effect. The GSEs and FHA have played a critical role in 

providing mortgage liquidity as private financing has dried up. The current loan 

limits are set to expire in just a few months, on September 30, 2011. In early 2010, 

when the limits temporarily expired, many communities saw dramatic declines in 

mortgage liquidity. More than 612 counties in 40 States and the District of Columbia saw their limits fall. The average decline in the loan limits was more than 

$51,000. 

In today’s real estate market, lowering the loan limits and changing the formula 

on which they are calculated further restricts liquidity and makes mortgages more 

expensive for households nationwide. FHA and GSE mortgages together continue to 

constitute the vast majority of home financing availability today, which makes it 

particularly critical that the current limits be extended. Without the additional liquidity created by maintaining these loan limits at current levels, families will have 

to pay more to purchase homes, face the possibility that they will not be able to 

obtain financing at any price or find it more difficult or impossible to refinance problematic loans into safer, more affordable mortgages. 

GSE Dividend Payments 

Since August 2010, NAR has requested that the punitive dividend payments 

placed on the GSEs be reduced from 10 percent to 5 percent, in line with other Federal financial support recipients. Such a move is necessary in order to relieve the 

unnecessary drag that this assessment imposes on the housing industry’s recovery. 

We believe that reducing the current punitive dividend will enhance the GSEs’ ability to eliminate losses, which will be further enhanced as the housing markets continue to stabilize and recover. This will give the GSEs the flexibility to adjust their 

underwriting standards to take into account reasonable lending risks, which will 

benefit the consumer and the entire economy, without further risk of additional cost 

to the consumer. 

More importantly, it makes no apparent sense for the Treasury Department to 

transfer amounts to the GSEs so they, in turn, will have enough money to make 

the dividend payment back to the Treasury. If the GSEs were not required to pay 

the 10 percent dividend, which significantly increases each of their quarterly losses, 

it would reduce the amount of capital Treasury is called upon to provide them. It 

would make more sense to charge the GSEs an amount equal to the Treasury bor-
164 

rowing cost, or borrowing cost to the GSEs based on the current Federal assurance 

that they will maintain a positive net worth. Both of these amounts are far less 

than 10 percent. 

Conclusion 

The National Association of REALTORS® supports a secondary mortgage market 

model that includes some level of Government participation, but protects the taxpayer while ensuring that all creditworthy consumers have reasonable access to 

mortgage capital so that they too may attain the American Dream—home ownership. We believe that the key points that we mentioned will help Congress and our 

industry partners design a secondary mortgage model that will be in all of our Nation’s best interest today, and in the future. 

I thank you for this opportunity to present our thoughts on reforming our housing 

finance system, and as always, the National Association of REALTORS® is at the 

call of Congress, and our industry partners, to help continue the housing and national economic recovery. 
165 

APPENDIX 
166 

PREPARED STATEMENT OF MARK J. PARRELL 

EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, EQUITY RESIDENTIAL, 

ON BEHALF OF THE NATIONAL MULTI HOUSING COUNCIL AND NATIONAL APARTMENT ASSOCIATION

MAY 26, 2011 

Chairman Johnson, Ranking Member Shelby, and distinguished Members of the 

Committee, my name is Mark Parrell, Executive Vice President and Chief Financial 

Officer of Equity Residential. Equity Residential (EQR) is an S&P 500 company focused on the acquisition, development, and management of apartment properties in 

top U.S. growth markets. Equity Residential owns or has investments in more than 

450 properties with 117,286 units in 17 States and the District of Columbia. I am 

testifying today on behalf of the National Multi Housing Council (NMHC) and its 

joint legislative partner, the National Apartment Association (NAA). 

NMHC and NAA represent the Nation’s leading firms participating in the multifamily rental housing industry. Our combined memberships are engaged in all aspects of the apartment industry, including ownership, development, management, 

and finance. NMHC represents the principal officers of the apartment industry’s 

largest and most prominent firms. NAA is the largest national federation of State 

and local apartment associations, with 170 State and local affiliates comprised of 

more than 50,000 multifamily housing companies representing more than 5.9 million apartment homes. 

I appreciate the opportunity to be here today to present the industry’s perspective 

on the role of the Government Sponsored Enterprises (GSE), specifically Fannie Mae 

and Freddie Mac, and how the multifamily market works and is different than the 

single-family market. I will also discuss the benefits derived from the GSEs’ presence in the multifamily market and why we believe there will be a continued need 

for Federal involvement even after they are phased out. 

Before I do that, however, allow me to describe some key aspects of the apartment 

market and how the changing demographics will demand a continued flow of capital 

into this sector if we are to meet the future housing needs. 

Currently, one-third of Americans rent their housing, and nearly 14 percent—17 

million households—call an apartment their home. Americans are changing their 

housing preferences. Married couples with children represent less than 22 percent 

of households, and that number is falling. By 2030, nearly three-quarters of our 

households will be childless. Echo boomers are starting to enter the housing market, 

primarily as renters, and baby boomers are beginning to downsize, and many are 

choosing the convenience of renting. Rental housing offers them a maintenance free 

lifestyle with amenities, social opportunities and often walkable neighborhoods. In 

this decade, renters could make up more than half of all new households—more 

than 7 million new renter households. Because of these changes, University of Utah 

Professor Arthur C. Nelson predicts that half of all new homes built between 2005 

and 2030 should be rental units. 

Apartments are not just shelter. They are also an economic powerhouse. The aggregate value of this apartment stock is $2.2 trillion. Rental revenues from apartments total almost $120 billion annually, and management and operation of apartments are responsible for approximately 550,000 jobs. Moreover, the construction of 

apartment communities in the last 5 years has added an average of 210,000 new 

apartment homes per year, providing jobs to over 270,000 workers. 

Finally, apartments also produce societal benefits; not only are they environmentally sustainable, resource- and energy-efficient, they also help create a mobile 

workforce that can relocate to pursue job opportunities. 

I highlight these important changes in housing choice, supply and demand as well 

as the economic and social contributions apartments make to society to encourage 

Congress to consider the unique needs of the apartment industry as you pursue reform options. 

The bursting of the housing bubble exposed serious flaws in our Nation’s housing 

finance system. However, fixing the single-family housing finance system should not 

come at the expense of the much smaller and less understood, but vital, multifamily 

sector. The GSEs’ multifamily programs did not contribute to the housing meltdown, 

and without adequate attention to this segment of the housing market we risk becoming collateral damage. We believe a fully functioning secondary market, backstopped by the Federal Government is absolutely critical to the multifamily sector 

and our industry’s ability to continue to meet the Nation’s demand for market-rate, 

workforce and affordable housing. 

I have been invited here today to talk about what works in the current GSE system of mortgage finance. Regardless of what you hear and read relative to the per-
167 

ceived evils of the GSEs and their contribution to the housing meltdown, when it 

comes to financing multifamily housing, quite a lot works. Let me be clear, I am 

not here to defend the GSEs or to suggest that they be continued in their current 

form. However, I would like to highlight for the Committee those elements of the 

system that worked well for multifamily lending and, most importantly, at no cost 

to the taxpayer. It is our hope that these elements of success can be incorporated 

into whatever you design to replace Fannie Mae and Freddie Mac. 

Multifamily Performance: A Success Story 

It is hard to imagine a success story coming out of the worst housing crash in 

recent history, but the performance of the GSEs’ multifamily portfolio stands in 

stark contrast to that of the single-family business. In short, the multifamily programs were not part of the meltdown and are not broken. 

Overall loan performance remains strong with delinquency and default rates at 

less than 1 percent, a tenth of the size of the delinquency/default rates plaguing single-family. They have outperformed CMBS, commercial banks and even FHA. In addition, since the Federal Government placed the GSEs in conservatorship, the multifamily portfolio has managed to net approximately $2 billion in profit for the Federal Government. 

Not only are the GSEs’ multifamily programs operating in a fiscally sound manner, they are doing so while offering a full range of mortgage products to meet the 

unique needs of the multifamily borrower and serve the broad array of property 

types. This includes including conventional market rental housing, workforce rental 

housing and targeted affordable (e.g., Project-based Section 8, properties subsidized 

by State and local Government and Low-Income Housing Tax Credit (LIHTC)) properties. 

The GSEs’ multifamily programs adhere to a business model that includes prudent underwriting standards, sound credit policy, effective third-party assessment 

procedures, risk-sharing and retention strategies, effective loan portfolio management, and standardized mortgage documentation and execution. In short, the GSEs’ 

multifamily models hit the mark. They have attracted enormous amounts of private 

capital; helped finance millions of units of market-rate workforce housing without 

direct Federal appropriations; sustained liquidity in all economic climates; and ensured safety and soundness of their loans and securities. As a result of the liquidity 

provided by the GSEs, the United States has the best and most stable rental housing sector in the world. 

Federal Credit Guarantee: Meeting the Needs When Private Capital Disappears 

This most recent crisis underscores the need for a capital source that will be 

available in all economic climates. In the last 2 years, the GSEs have provided $94 

billion in mortgage debt to the apartment industry when virtually every other 

source of capital left the market. They served a similar role during the 1997–1998 

Russian financial crisis and in the post-9/11 recession of 2001. 

Their share of the multifamily mortgage market has varied considerably over 

time, increasing at times of market dislocation when other sources of capital are 

scarce and scaling back during times when private credit is widely available. For 

example, when private capital left the housing finance market in 2008, the apartment industry relied almost exclusively on Fannie Mae, Freddie Mac, and FHA/ 

Ginnie Mae for its capital sources. 

If not for the GSEs’ multifamily programs, I would most likely be telling a different story today. It would be one of higher default and delinquency rates because 

owners would be unable to secure capital to refinance maturing, but otherwise performing, mortgages. The consequences for renters nationwide would have been severe. Multifamily may only represent 10 percent on average of the GSEs’ mortgage 

debt, but the GSEs currently provide nearly 90 percent of multifamily mortgage capital. 

Historically, the apartment industry enjoys access to mortgage capital from a variety of credit sources, each with its own focus, strengths, and limitations. In addition 

to the GSEs, these sources include commercial banks, life insurance companies, 

CMBS, and pension funds. Prior to the financial crisis, these combined capital 

sources provided the apartment sector with $100–$150 billion annually, reaching as 

high as $225 billion to develop, refinance, purchase, renovate, and preserve apartment properties. 

We are encouraged by the thawing in the private capital markets and support a 

return to a marketplace dominated by private capital. But even in healthy economic 

times, the private market has not been able or willing to meet the full capital needs 
168 

of rental housing. The following highlights some of the capital sources, limitations, 

and level of participation in the multifamily market: 

• Banks are limited by capital requirements and have never been a source of 

long-term financing. They currently hold 31.2 percent of outstanding multifamily mortgage debt. Between 1990 and 2010, they provided 24 percent 

($136.49 billion) of the total net increase in mortgage debt but have provided 

limited amounts of capital to the industry since the financial crisis. 

• Life insurance companies target very specific product, i.e., newer, luxury highend properties. They tend to enter and leave the multifamily market based on 

their investment needs and economic conditions. They currently hold just 5.6 

percent of outstanding multifamily mortgage debt. Between 1990 and 2010, 

they accounted for just 3 percent ($18.3 billion) of the net increase in multifamily mortgage debt. 

• FHA has exceeded its capacity to meet the sector’s capital demands and their 

capital targets construction lending. FHA/Ginnie Mae currently hold 14 percent 

of outstanding multifamily mortgage debt. From 1990 to 2010, they accounted 

for 10.7 percent ($59.6 billion) of the total net increase in mortgage debt. 

• The private-label CMBS market is unlikely to return to the volume and market 

share it reached a few years ago. It peaked at 16.5 percent of the market ($17.6 

billion a year) in the housing bubble years of 2005–2007. The CMBS market 

now holds 12.2 percent of the outstanding multifamily mortgage debt. 

• While covered bonds might provide some additional liquidity to apartment borrowers, they are unlikely to provide the capacity, flexibility, and pricing superiority necessary to adequately replace traditional sources of multifamily mortgage credit, including the GSEs. 

Federal Credit Guarantee Creates Workforce Housing Without Federal Appropriations 

It is important to note that nearly ALL of the multifamily funding provided by 

the existing GSEs helped create workforce housing (not just the capital they provided to properties designated ‘‘affordable’’). Fully 90 percent of the apartment units 

financed by Fannie Mae and Freddie Mac over the past 15 years—more than 10 million units—were affordable to families at or below the median income for their com-
169 

munity. This includes an overwhelming number of market-rate apartments that 

were produced with no Federal appropriations, and with virtually no risk to the taxpayer. 

The ability to serve renters at or below area median income is dependent on the 

liquidity provided by the Government-supported secondary multifamily mortgage 

market. It lowers the cost of capital to borrowers who provide workforce market-rate 

housing. Without this support, interest rates and debt service costs would rise, rents 

would increase to cover these costs, and fewer renters would be able to enjoy the 

pricing at area median income levels. 

Not only does the presence of a Government-supported secondary multifamily 

mortgage market lower the cost of capital, it also works to leverage private capital 

to support affordable housing. We are convinced that removing the Government 

guarantee of multifamily mortgages or mortgage-backed securities will put the supply of affordable housing at risk. Other capital sources will simply not fill the gap, 

and with a severe supply shortage already existing in many markets and steadily 

forecasted to worsen, vacancy rates will most certainly decrease and rents will rise. 

This most recent crisis underscores the need for a capital source that will be available in all markets, whether it is New York City, Sioux Falls, South Dakota, or Birmingham, Alabama, and at all times. 

Multifamily Loan Maturity Risk Depends on Active and Functioning 

Securitization and a Secondary Market 

A federally backed secondary market is critical not only for the long-term health 

of the industry but also to help refinance the estimated $300–$400 billion in multifamily mortgages that will mature by 2015. Unlike residential mortgages, which are 

typically for 30-year terms, most multifamily mortgages are for a period of 7 to 10 

years. This ongoing need to refinance apartment mortgages makes it imperative for 

the industry to have access to reliable and affordable capital at all times, in all markets and in all market conditions. 

When credit markets have been impaired for reasons that have nothing to do with 

multifamily property operating performance, the federally backed secondary market 

has ensured the continued flow of capital to apartments. As I mentioned earlier, 

without this source of liquidity during the most recent and prior financial crises, 

performing properties could have been pushed into foreclosure or bankruptcy when 

their loans matured. The disruption in the housing system in such a scenario would 

be potentially devastating to millions of renters and the economy as a whole. 

Growing Importance of Rental Housing, Experts Forecast Supply Shortage 

As noted previously, the U.S. is on the cusp of a fundamental change in our housing dynamics. Changing demographics and new economic realities are driving more 

people away from the typical suburban house and causing a surge in rental demand. 

Tomorrow’s households want something different. They want more choice. They are 

more interested in urban living and less interested in owning. They want smaller 

spaces and more amenities. And increasingly, they want to rent, not own. Unfortunately, our housing policy has yet to adjust to these new realities. 

Our society is changing in meaningful ways that are translating into new housing 

preferences. Beyond just changing demographics, there is also a much-needed 

change in consumer psychology underway that favors more long-term renters in the 

future. The housing crisis taught Americans that housing is shelter, not the ‘‘sure 

thing’’ investment once believed. That awareness is freeing people up to choose the 

housing that best suits their lifestyle. For millions, that is an apartment. 

While there may be an oversupply of single-family housing, the Nation could actually see a shortage of multifamily housing as early as 2012. The shortage is particularly acute in the area of workforce and affordable housing. The Harvard Joint Center for Housing Studies estimates a nationwide affordable housing shortfall of three 

million units. (Addendum II of my testimony provides further information on the inherent affordability of apartments.) 

This context is particularly important in understanding why it is vital that as 

Congress looks to reform housing finance, it do nothing that would jeopardize the 

construction, financing, and availability of multifamily housing. Without a functioning securitzation process and a backstop of Government credit support for multifamily mortgages or mortgage-backed securities to ensure a steady and sufficient 

source of capital going forward, the apartment industry will not be able to meet the 

Nation’s housing needs and Americans will pay more for workforce housing. 

I am attaching the NMHC/NAA ‘‘Key Principles for Housing Finance Reform’’ as 

Addendum I of my testimony. 
170 

1Source: GSE SEC filings. This does not include write downs of Low-Income Housing Tax 

Credit holdings that the firms have been prohibited from selling and liquidating. 

National Housing Policy 

In closing, I would like to take a moment to address our national housing policy 

more broadly. I feel it underscores the importance of explicitly considering the multifamily component in a restructured secondary mortgage market. 

For decades, the Federal Government has pursued a ‘‘home ownership at any 

cost’’ housing policy, ignoring the growing disconnect between the country’s housing 

needs and its housing policy. We have seen the devastating effects of such a policy. 

If there is a silver lining in this situation, it is the opportunity we now have to learn 

from our mistakes and rethink our housing policy. Housing our diverse Nation 

means having a vibrant rental market along with a functioning ownership market. 

It’s time we adopt a balanced housing policy that doesn’t measure success by the 

level of home ownership. 

I thank you for the opportunity to present the views of NMHC and NAA. 

ADDENDUM I: KEY PRINCIPLES FOR HOUSING FINANCE REFORM 

The apartment industry urges you to consider the following key points for inclusion in any reform measure: 

1. Do No Harm: Preserve Multifamily Lending Programs 

The multifamily sector produces the vast majority of this Nation’s affordable, 

workforce housing. Therefore, there is an appropriate public mission for the Government to provide an effective financing system to ensure the Nation’s housing needs 

are met. In addition, the multifamily sector, and more specifically the GSEs’ multifamily programs, did not contribute to the housing meltdown. Therefore, as policy 

makers ‘‘fix’’ the problems in the single-family sector, they should not do so at the 

detriment of the multifamily industry. 

2. Protect the Taxpayer: Look to Proven Multifamily Models 

The taxpayer is footing the bill for the breakdown of the single-family housing sector, and that should never happen again. The GSEs’ multifamily programs can serve 

as a model for a reformed housing finance system. They have performed extraordinarily well and have less than a 1-percent delinquency rate. Historically, they 

have been well capitalized, have covered all their losses through the loss reserves 

they collected and have earned a profit. Even during conservatorship, the GSEs’ 

multifamily programs have earned net revenues of $2 billion. 1 Their success is the 

result of strong business models that use retained risk and stringent underwriting 

criteria. 

To protect the taxpayer going forward, these models should be carefully studied 

for a broader application within the larger housing finance system. Specifically, the 

Government must ensure strong regulatory oversight. It should consider implementing some level of retained risk by mortgage originators and servicers and adequate capital standards to fund loan-loss reserves. These steps would preserve the 

strong mortgage loan performance and track record seen in the multifamily sector 

and protect the taxpayer. 

3. Federal Government Involvement Necessary and Should Be Appropriately Priced 

Even after we transition to a new housing finance system, there will be an ongoing need for an explicit Federal Government guarantee on multifamily mortgage securities and portfolio-held loans. Over the past 40 years, there have been numerous 

occasions when the private sector has been unable or unwilling to finance multifamily loans. There is a legitimate concern that the private sector cannot be counted 

on, from both reliability and capacity standpoints, to consistently finance the majority of multifamily borrowers’ needs. Hence, it is hard to envision a reformed housing 

finance system without some form of Federal credit enhancement. However, that 

credit should be priced at an appropriate level that reflects the mortgage risk and 

the value of the Government’s credit enhancement, and in such a way that it complements, but does not unfairly compete with, private debt capital. 

4. Liquidity Support Should Be Broad and Available at All Times, Not Just 

‘‘Stop-Gap’’ or Emergency 

Any Federal credit facility should be available to the entire apartment sector and 

not be restricted to specific housing types or specific renter populations. Narrowing 

any future credit source would remove a tremendously important source of capital 

to a large portion of our industry, namely market-rate developers who actually pro-
171 

vide a large volume of unsubsidized workforce housing. Such a facility should also 

be available at all times to ensure constancy in the U.S. housing market throughout 

all business cycles. It would be impossible to turn on and off a Government-backed 

facility without seriously jeopardizing capital flows. 

5. Mission Should Focus on Liquidity, Not Mandates 

The public mission of a federally supported secondary market should be clearly 

defined and focused primarily on using a Government guarantee to provide liquidity 

and not specific affordable housing mandates. Such mandates create conflicts within 

the secondary market and are partially responsible for the housing crisis because 

of the distortions the mandates introduced into the GSEs’ business practices. Instead of mandates, the new housing finance system should provide incentives to 

support the production and preservation of affordable multifamily housing. Absent 

incentives, the Government should redirect the affordability mission to HUD/FHA 

and the Low-Income Housing Tax Credit program. 

6. Retain Portfolio Lending While Expanding Securitization 

Securitization must be used to attract private capital for multifamily mortgage 

capital. However, unlike single-family loans, multifamily loans are not easily 

‘‘commoditized.’’ Without the ability to hold some loans in portfolio, multifamily 

lending activities will be significantly curtailed. In addition, securitizing multifamily 

loans is not always the best way to manage credit risk. Portfolio capacity is also 

required to aggregate mortgages for a structured securities sale. 

7. Create Certainty and Retain Existing Resources/Capacity During the 

Transition 

To avoid market disruption, it is important that policy makers clearly define the 

role of the Government in a reformed system and the timeline for transition. Without that certainty, private capital providers (e.g., warehouse lenders and institutional investors) are likely to limit their exposure to the market, which could cause 

a serious capital shortfall to rental housing. In addition, during the transition years, 

we believe it is critical to retain many of the resources and capacity of the existing 

GSEs. The two firms have extensive personnel and technology expertise as well as 

established third-party relationships with lenders, mortgage servicers, appraisers, 

engineers, and other service providers that are critical to a well-functioning secondary market. 

We appreciate the opportunity to present the views of the apartment industry and 

look forward to working with you to build a world-class housing finance system that 

meets the Nation’s changing housing needs while also protecting the taxpayers. 

ADDENDUM II: THE INHERENT AFFORDABILITY OF APARTMENTS 

Many areas of the country are suffering from a severe shortage of workforce and 

affordable housing. In February 2011, the U.S. Department of Housing and Urban 

Development (HUD) found that ‘‘worst case housing needs’’ grew by nearly 1.2 million households, or more than 20 percent, from 2007 to 2009 and by 42 percent since 

2001. ‘‘Worst case housing needs’’ are defined as low-income households who paid 

more than half their monthly income for rent, lived in severely substandard housing, or both. The increase in the extent of worst case housing needs represents the 

largest 2-year jump since HUD began reporting this segment of the rental market 

in 1985. 

A separate study by the Harvard University Joint Center for Housing Studies 

found that falling incomes and the Great Recession have pushed both the number 

and share of renters facing severe cost burdens (those spending more than 50 percent of income on rent and utilities) to all-time highs and that nearly half of all 

renters face at least moderate housing cost burdens. 

The growing incidence of renter payment burdens reflects a growing shortage of 

affordable and workforce housing and underscores the importance of ensuring a continued capital flow to the rental housing industry because apartments are inherently affordable. 

An NMHC/NAA-commissioned study by MPF Research examined 5.6 million 

apartment units (without direct Federal subsidy) and found that 94 percent of the 

units surveyed were affordable to households earning 100 percent of area median 

income (AMI). Fully 85 percent were affordable to households earning 80 percent 

of AMI, and 60 percent were affordable to those earning 60 percent of AMI. 
172 
173 

PREPARED STATEMENT OF GREG HEERDE 

MANAGING DIRECTOR, AON BENFIELD AND AON BENFIELD SECURITIES

MAY 26, 2011 

Good morning Chairman Johnson, Ranking Member Shelby, and Members of the 

Committee. I am Greg Heerde, Managing Director of Aon Benfield and Aon Benfield 

Securities, and I am here today to discuss the role of private capital supporting 

lender’s credit risk through mortgage insurance. Aon Benfield is the world’s largest 

reinsurance intermediary, and Aon Benfield Securities, Inc., is an investment banking firm providing advisory services to insurance and reinsurance companies including capital raising, risk transfer securitization, and mergers and acquisitions. Combined, we have a high level of visibility into all forms of capital available to support 

the mortgage insurance industry. The goal of this testimony is to communicate: 

1. The significant role that private mortgage insurance currently plays in supporting residential housing transactions and the stabilization of the housing 

market postcrisis; 

2. The role for private reinsurance to support the mortgage insurance market; 

3. The availability of additional private capital in various forms to support the 

future of the housing market as needed. 

1. Role of Private Mortgage Insurance 

Private mortgage insurance provides protection to lenders, investors, and most 

importantly, taxpayers by standing in the ‘‘first loss position’’ in the event that a 

borrower stops making mortgage payments. When a borrower defaults, private 

mortgage insurance pays the lender or investor 20–25 percent of the loan amount, 

mitigating a significant (and in many cases all) portion of the loss on the loan. Private mortgage insurance also expands home ownership by allowing qualified borrowers with less than the 20 percent prescribed down payment to purchase a home. 

Private mortgage insurance is an alternative to the Federal Housing Administration 

(FHA) mortgage insurance. Key differences from the FHA coverage include private 

mortgage insurance is generally lower cost, as it covers the top portion of the loan 

whereas FHA insurance covers 100 percent of the loan, and private mortgage insurance is available on a wider variety of loans with no maximum loan amount. 

Mortgage insurers underwrite the underlying quality of the prospective borrower’s 

creditworthiness and the supporting collateral thereby ensuring higher quality 
174 

1Source is Mortgage Insurance Companies of America reports. 

2Source is Mortgage Insurance Companies of America reports. 

mortgages are issued. This protects not only the lenders and investors but the prospective borrowers by ensuring that the home is affordable at the time of purchase. 

Private mortgage insurers also have clear incentives to mitigate losses once loans 

are in default. As foreclosure results in the highest likelihood of loss payment under 

the insurance policy, mortgage insurers’ goals are to work with borrowers to avoid 

foreclosure and keep them in their homes. 

The mortgage insurance industry in the U.S. is over 50 years old and has paid claims in a variety of adverse economic cycles. For example, more than $6 billion 

of mortgage insurance claims were paid in the 1980s, when the U.S. experienced 

double-digit interest rates and inflation. Similarly, in the early 1990s, mortgage insurers paid more than $8 billion of losses primarily in California and the Northeast. 1

U.S. private mortgage insurers have already paid approximately $25 billion in 

losses during the current housing downturn, without Government or taxpayer support, and the annual loss payments continue to climb. The largest beneficiary of 

these payments has and will be Fannie Mae and Freddie Mac, thereby reducing a 

material amount of the exposure to the taxpayer. U.S. mortgage insurers are currently meeting their insurance obligations and most continue to write new mortgage 

insurance business, supporting the stabilization of the housing sector. In short, U.S. 

mortgage insurance is acting exactly as intended and continuing to pay significant 

losses without Government support in the wake of the most severe housing downturn in U.S. history. 

2. Role of Reinsurance 

Reinsurance is another form of capital available to the insurance industry. Reinsurance is the transfer of insurance risk by an insurance company to a third party 

referred to as a reinsurer. Transferring insurance risk reduces the total amount of 

volatility the insurer is exposed to, and therefore the amount of capital required to 

absorb that volatility. Reinsurers, for example, have paid some losses associated 

with the current housing crisis. 

Despite these losses, reinsurance capacity stands ready to be deployed more 

broadly going forward to support U.S. mortgage insurers. Aon Benfield estimates 

that Global Reinsurer Capital totaled $470 billion at December 31, 2010, representing a 17 percent increase over 2009 and the largest amount of capital in the 

history of the reinsurance industry. The total represents a full recovery following 

losses from natural catastrophes such as Hurricanes Katrina, Rita, and Wilma in 

2005 and earthquakes in Chile and New Zealand in 2010. Reinsurers in 2011 to 

date have experienced additional losses from earthquakes in Japan and the second 

New Zealand event, along with severe weather in the United States. The Aon 

Benfield Aggregate, which is a subset of Global Reinsurer Capital (representing approximately 53 percent of the total), currently has reported loss estimates from first 

quarter events totaling $12.4 billion, with some companies still to comment on the 

extent of their exposures. However, Aon Benfield believes the losses to date fall 

within expected annual income and therefore will represent an earnings loss event 

rather than a capital loss event for the reinsurance industry. 

Private reinsurers also play an important role supporting mortgage insurance in 

a number of other countries including Australia, Canada, and the United Kingdom. 

These countries have mortgage financing systems that are each unique, with varying Government roles, but it is important to note that private reinsurance plays 

some part in all of them. 

3. Availability of New Capital To Support the Housing Sector 

The insurance industry by its nature protects against various sources of volatility. 

Through adequate risk pricing and risk selection, the industry is able to achieve a 

level of diversification required to produce acceptable returns to capital providers. 

Following each major insured loss from man-made and natural catastrophes, reinsurers have brought material new and lasting capacity to the market. For example, 

after hurricane Katrina, over $30 billion of new capital was raised to form new insurers and reinsurers. This capital meant that insurers were able to continue renewing policies that they would have otherwise not been able to renew. 

Since the beginning of the financial crisis, new capital has come into the sector 

in the form of a new start-up mortgage insurer and as significant contributions to 

support existing carriers. To date, approximately $8 billion of new capital has been 

raised, 2 which by industry standards could enable the sector to support $200 billion 

of insurance exposure. In addition to the capital that was raised, Aon Benfield Secu-
175 

1 2011 Mortgage Market Statistical Annual, Volume I , p. 19. 

rities represented a qualified management team in 2009 through early 2010 seeking 

to form a new mortgage insurance company. This plan was ultimately shelved as 

the capital providers witnessed the substantial growth of the FHA during the period 

coupled with the uncertainty around the future of Fannie and Freddie, which was 

viewed as weakening the demand for mortgage insurance and therefore the need for 

new companies. Ultimately, the capital providers concluded that the existing mortgage insurers and the introduction of the one new company formed were sufficient 

to satisfy current and short term future demand. There were other efforts during 

the same time period to introduce new mortgage insurance companies in various 

forms, some of which received indications that they would not receive approval from 

Fannie and Freddie to write business resulting in those efforts being shelved as 

well. As such, a transparent path to achieving approval from Fannie and Freddie 

would further encourage private capital investment. 

If, as a result of the review of various proposals for the future of the housing finance system, a decision is made to reduce the role of Fannie and Freddie over time, 

and that decision results in an increased demand for private mortgage insurance at 

commercially responsible terms, we are confident that sufficient private capital 

would be available to support that increased demand. Should the demand be sufficient to warrant the introduction of new mortgage insurance companies, and the 

necessary approval of qualified new mortgage insurers be attainable, we are equally 

confident that capital would form such new entrants. In addition, such a change in 

dynamics would likely result in more innovation in the underlying mortgage insurance product, which may ultimately result in a more competitive product as a benefit to both lenders and borrowers. 

As indicated above, reinsurers are enjoying record levels of capital while total reinsurance premiums over the past few years have declined. Given the greater capital base chasing fewer premium dollars, reinsurers are eager to underwrite new 

risks. The lack of such new exposures has resulted in reinsurers returning capital 

to shareholders in the form of dividends and share buybacks (the companies comprising the Aon Benfield Aggregate returned $17.6 billion, or approximately 73 percent of their 2010 net income to shareholders). Reinsurance capacity is clearly available to support mortgage insurers by providing capacity that will allow them to insure more loans as the housing market rebounds and demands for mortgage insurance grow as well as to limit mortgage insurers exposure to severe losses and help 

ensure the ability of the mortgage insurance market to effectively meet a range of 

potential future loss scenarios. Mortgage insurance is generally not highly correlated to most other significant reinsurance exposures and therefore represents an 

attractive source of diversification for the industry. 

Concluding Remarks 

As this Committee considers proposals impacting the future of the housing finance system, we are encouraged to report that private capital providers have 

upheld their commitments made through the mortgage insurance channel, and additional private capital is available to inject fresh capital as needed. Further, reinsurers stand ready to assist in mitigating a portion of the mortgage insurance risk 

as long as prudent underwriting standards and reasonable pricing characterize the 

marketplace. 

PREPARED STATEMENT OF MARTIN S. HUGHES 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, REDWOOD TRUST, INC. 

MAY 26, 2011 

Introduction 

Good morning Chairman Johnson, Ranking Member Shelby, and Members of the 

Committee. My name is Marty Hughes, and I am the CEO of Redwood Trust, Inc., 

a publicly traded company listed on the New York Stock Exchange. I appreciate the 

opportunity to testify regarding the Future of the Housing Finance System and look 

forward to responding to your questions. 

Overview 

My testimony is focused on restoring a fully functioning private-sector residential 

mortgage finance market. Currently, about 90 percent of all new mortgage originations rely on Government support. 1 Given the fact that there is $9.6 trillion of out-
176 

2Federal Reserve Flow of Funds of the United States, Fourth Quarter, Tables L.217 and 

L.218. 

standing first mortgage debt, 2 this level of public subsidization is simply not sustainable. That being said, reducing the current level of governmental support, 

whether immediately or gradually over time, will have severe consequences for the 

housing market if the private sector is not prepared to step in with investment capital to replace a diminished level of Government backing. 

The consequences of failing to attract sufficient private-sector capital to this market include a contraction in the availability of credit to homebuyers, an increase in 

mortgage rates, and continued decreases in home prices. Furthermore, these consequences in the housing market may have broader negative effects on the overall 

economy. 

The main sources of private-sector capital that previously financed residential 

mortgages include banks, mutual funds, pension funds, and insurance companies. 

For the nonbanks, the transmission mechanism for providing this financing was 

through their investments in triple-A rated residential mortgage-backed securities 

(RMBS). My testimony will recommend how to bring these ‘‘triple-A investors’’ back 

to this securitization market, thereby enabling the Government to reduce its role 

in the mortgage market without negative consequences. 

I realize that this and other hearings may devote considerable attention to ideas 

for new Government guarantees of mortgages in a post-GSE world. My testimony 

today is not focused on discussing these different alternatives. That debate may continue for years. My focus is on steps the Government can take today to spur a full 

return of the private mortgage securitization market. A broad return of the private 

market may also help the Committee to realize that it has more policy options on 

the Government’s future role, or nonrole, than would appear in today’s Government 

dominated market. 

Background on Redwood 

Redwood commenced operations in 1994 as an investor in residential mortgage 

credit risk. We are not a direct lender or mortgage servicer. Our primary focus has 

been on the prime jumbo mortgage market, or that portion of the mortgage market 

where the loan balances exceed the limits imposed by Fannie Mae and Freddie Mac 

(the ‘‘GSEs’’) for participation in their programs. Similar to the GSEs, Redwood also 

provides credit enhancement, but our focus is on the prime jumbo mortgage market. 

We provide credit enhancement by investing in the subordinate securities of privatelabel residential mortgage securitizations, which enables the senior securities to obtain triple-A ratings. From 1997 through 2007, Redwood securitized over $35 billion 

of mortgage loans through 52 securitizations. 

Recent Securitization Activity 

In April 2010, Redwood was the first company, and is so far the only company, 

to sponsor a securitization of newly originated residential mortgage loans without 

any Government support since the market froze in 2008. The size of that first transaction was $238 million. In March 2011, we completed a second securitization of 

$295 million, and we hope to complete two more securitizations this year. 

Completing these transactions required that we address the concerns and interests of triple-A investors who, in the wake of the financial crisis, had lost confidence 

that their rights and interests would be respected and, consequently, that their investments would be safe and secure. We worked hard to regain their trust by putting together transactions that included even more comprehensive disclosure, better 

structure, and a new enforcement mechanism for representation and warranty 

breaches. In addition, Redwood retained meaningful exposure to the transaction’s 

future performance—i.e., through risk retention or ‘‘skin-in-the-game’’—and, in 

doing so, aligned our interests with those of investors. Investors responded with significant demand to acquire the triple-A rated securities, as evidenced by the fact 

that the first offering of those securities was oversubscribed by a factor of six to one. 

The second securitization was also quickly and fully subscribed. 

To be clear, Redwood Trust has a financial interest in the return of private sector 

securitization for residential mortgages. We hoped that our decision to securitize 

loans in 2010 would demonstrate to policy makers that private capital would support well-structured securitizations that also have a proper alignment of interests 

between the sponsor and the triple-A investors. We are proud of our history of sponsoring residential mortgage securitizations and our more recent role in helping to 

restart the private securitization market, and are pleased to have the opportunity 

to share our insights and observations with the Committee. 
177 

3 2011 Mortgage Market Statistical Annual, Volume II, p. 31. 

4Data from Banxquote. The average spread from 2000 through April 2011 is 0.46 percent, 

which includes 2008 and 2009 when the average spread increased to 1.25 percent during the 

financial crisis. 

The Private Mortgage Securitization Outlook for 2011 

The outlook for nongovernment or private-label residential mortgage 

securitization volume backed by newly originated mortgage loans (new 

securitizations) in 2011 remains very weak by historical standards. Year-to-date 

through April 30, 2011, only one new securitization totaling $295 million has been 

completed, and that was our deal. We hope to complete two more securitizations in 

2011 and securitize between $800 million and $1.0 billion for the year, and to build 

upon that volume in 2012. There are no good industry estimates for new private 

securitization volume in 2011, as the market is still thawing from its deep freeze. 

While we would welcome other securitizations in 2011 to provide additional thirdparty validation of the viability of securitization, the yearly volume will almost certainly be a small fraction of the $180 billion average annual issuance completed 

from 2002 through 2007, when the market began to shut down. 3

Major Hurdles to Private Mortgage Securitization Activity 

Before I outline the major impediments to reviving private residential mortgage 

securitization, I would like to comment on the often cited lack of investor demand 

or interest as the primary reason for the dearth of private MBS issuance. We 

strongly disagree. Today, there is a vast amount of global investment capital from 

bank balance sheets, insurance companies, and mutual funds to non-U.S. financial 

institutions, hedge funds, and even real estate investment trusts searching for ways 

to generate safe, attractive risk-adjusted returns. 

Based in part on the success of our two recent mortgage securitizations and ongoing discussions with triple-A investors, we have confidence that the private market 

will invest in safe, well-structured, prime securitizations that are backed by ‘‘good’’ 

mortgage loans. We consider ‘‘good’’ loans as loans on properties where the borrowers have real down payments, capacity to repay, and good credit. Well-structured 

securitizations will be those that meet the new demands of triple-A investors around 

disclosure transparency, alignment of interests, loan quality, structural investor protections and standards for servicer functions and responsibilities. To the extent 

these criteria are met, we believe that over time, traditional triple-A investors in 

private residential securitizations will regain their confidence and return ‘‘en 

masse.’’ 

Some market participants have been very vocal about the potential negative impact on mortgage rates as a result of the proposed new regulations and/or the phase 

out of the GSEs. Recent news articles have speculated that mortgage rates will rise 

dramatically, by as much as 300 basis points. We do not agree. Worldwide competition for returns is too great to allow such a rise in mortgage rates, assuming their 

safety conditions are met. 

We do believe residential mortgage rates could rise modestly—by perhaps 50 basis 

points—as the Government withdraws from the market. We note the average spread 

between the conforming and jumbo market from 2000 through 2007 prior to the financial crisis was 31 basis points. 4 The Government support effectively subsidizes 

borrowing rates and it is reasonable to expect these rates to rise somewhat as the 

subsidy is withdrawn. We nevertheless expect borrowing rates to remain attractive. 

On May 24, 2011, for loans with comparable prime quality underwriting, 3D-year, 

fixed-rate conforming mortgage rates were 4.625 percent, conforming jumbo rates 

were 4.75 percent, and private jumbo rates were 5.00 percent. We note the spread 

between conforming and nongovernment guaranteed or private jumbo mortgages 

was only 0.375 percent. 

For context, in our most recent deal, the average mortgage interest rate for 30- 

year fixed-rate loans backing the securitization was 0.46 percent above the Government-guaranteed rate. As the number and diversity of loans available for private 

label securitization increases, thereby lowering risk, it is possible that residential 

mortgage rates could rise by less than 50 basis points relative to Government rates. 

1. Crowding Out of Private Sector 

As a result of the financial crisis, through the GSEs and the Federal Housing Administration (FHA), the Government has taken the credit risk on about 90 percent 

of the mortgages originated in the U.S. without passing on the full cost of the risk 

assumed. Government subsidies must be scaled back to permit a private market to 

flourish. We note that postcrisis, the private asset-backed securities markets for 

auto loans, credit cards loans, and now commercial real estate loans are up and 
178 

5The weighted average original loan-to-value and FICO scores for the loans guaranteed by 

Fannie Mae in 2010 and the first quarter of 2011 were 69 percent and 763, respectively, per 

the company’s First Quarter Credit Supplement. The weighted average original loan-to-value 

and FICO scores for Redwood’s securitizations (SEMT 2010-H1 and SEMT 2011-1) were 59 percent and 771. The average loan size for Fannie Mae was $212,793 and for Redwood was 

$957,945. 6 According to the National Mortgage News citing the Federal Housing Finance Administration’s Mortgage Market Note. Fannie Mae and Freddie Mac originated just over $30 billion of 

conforming jumbo loans in 2010, compared to $1.57 trillion of total industry originations. 7Federal Reserve H.3 report dated May 19, 2011. 

8S&P/Case-Shiller Home Price Index press release dated April 26, 2011. 

functioning, while the private-label RMBS market barely has a pulse. The difference 

is the pervasive below-market Government financing in the residential mortgage 

sector that is crowding out traditional private market players. 

Critics will argue that Redwood’s transactions were backed by unusually high 

quality jumbo mortgage loans and are therefore not representative of the market. 

We disagree on this point as the loans backing our two securitizations had similar 

loan-to-value and credit scores as the loans guaranteed by Fannie Mae since the beginning of 2010. 5 In fact, that argument proves the point that the Government is 

crowding out private label securitizations, by maintaining an abnormally high conforming loan limit and by subsidizing the guarantee fees that the GSEs charge 

issuers. No private sector securitizer can compete with that—we can only securitize 

the small volume of prime quality loans beyond the Government’s reach. We are 

ready to purchase and securitize prime mortgage loans of any loan amount, and can 

do so at an affordable rate once the Government creates a level playing field. 

2. No Financial Urgency To Challenge the Status Quo 

We note that keeping the status quo effectively prevents the creation of any sense 

of urgency to restore private securitization, especially by traditional bank 

securitization sponsors. These major banks benefit by selling 90 percent of their 

mortgage originations into a very attractive Government bid, and they have ample 

balance sheet capacity to easily portfolio the remaining jumbo loans and earn an 

attractive spread between their low cost of funds and the rate on the loans. There 

is simply no financial incentive at this juncture for banks to sell loans through a 

nonagency securitization. 

During the onset of the financial crisis, it was essential for the Government to 

increase its support of the mortgage market. Today, that crisis level of support and 

the ongoing burden on taxpayers to support 90 percent of a $10 trillion market is 

simply untenable. We strongly advocate that the time has come to more broadly 

demonstrate the private market’s ability to replace Government-dependent mortgage financing, and do so on a safe and measured basis to prevent negative consequences to the housing market. 

The first step would be to allow the scheduled reduction in the conforming loan 

limit in high cost areas from $729,750 to $625,500 to occur as scheduled in September 2011. This reduction would represent only about 2 percent of total industry 

originations, a conservative first step. 6 The potential lenders for the mortgages over 

$625,500 are the same lenders, mainly banks, who are currently providing loans 

over $729,750. With $1.5 trillion of excess liquidity in the banking system, 7 there 

is certainly ample liquidity in the banking system to enable banks to step into the 

breach, while financing through private residential mortgage securitization regains 

its footing. 

Additionally, the Administration should follow through on its plan to increase 

guarantee fees to market levels over time to eventually level the playing field between the private market and the GSEs. A gradual Government withdrawal from 

the mortgage market over a 5-year period will enable time for a safe, attractive, robust private label market to develop. 

As the housing market begins to recover, we support further measured reductions 

on a periodic basis in the conforming loan limit as a means to increase the share 

of the mortgage market available to the private sector. We note that with housing 

prices now down in excess of 30 percent from their peak in mid-2006, 8 it would 

seem logical to consider reducing the conforming loan limit by a similar amount 

over time. 

3. Regulatory 

In the wake of the Dodd-Frank Act, there are many new regulatory requirements 

and market standards out for comment, but they are not yet finalized. The resulting 

uncertainty keeps many market participants out of the market. Once the rules of 
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the road are known, market participants can begin to adjust their policies, practices, 

and operations. 

A. Dodd-Frank Act Implementation Overview 

We recognize joint regulators had a very difficult task in establishing, writing, 

and implementing the new rules as required by the Dodd-Frank Act. Before noting 

some specific concerns, we would like to offer some high level observations on the 

joint regulators’ notice of proposed rulemaking on risk retention (NPR). 

The NPR as written has some technical definitional and mechanical issues that 

need to be fixed. In particular, how the premium capture account works. This issue 

has been the source of much debate market participants. We are hopeful that appropriate corrections will be made after all comment letters are received and reviewed. 

We also note that regulators took a well intentioned approach to crafting a new 

set of risk retention rules to cover the entire mortgage securitization market—i.e., 

both the prime and subprime markets. In theory, this comprehensive approach 

should be a more expedient method for restarting securitization. However, there are 

complex differences between the prime and subprime markets and their unique 

securitization structures that make it very difficult to apply a one-size-fits-all set 

of new rules. 

The details are too complex for this testimony, but to over-simplify, the proposed 

rules are effectively subprime centric. While the rules do a good job of addressing 

and deterring abuses relating to subprime securitization structures, they are overly 

and unnecessarily harsh when applied to prime securitization structures. This is 

meaningful since prime loans are approximately 90 percent of the overall market. 

If the proposed rules are adopted as written, prime borrowers whose loans are financed through private securitization will face unnecessarily higher mortgage rates. 

In Redwood’s comment letter to the NPR, we intend to propose a more tailored 

approach that would keep intact the necessary safety protections, but eliminate the 

unnecessary structural inefficiencies that would lead to higher prime mortgage 

rates. 

We believe that focusing first on restoring the prime segment of the market in 

a safe yet efficient manner would bring the greatest benefit to the largest number 

of stakeholders (borrowers, lenders, investors, and taxpayers) and would become 

more effective and productive than attempting to craft one all-encompassing regulatory solution that is likely to be challenging given the complexities of the 

nonprime segment of the market. 

B. Form of Risk Retention 

We are strong advocates of requiring securitization sponsors to retain risk in 

order to properly align their interests with those of investors. We support the intent 

of the joint regulators’ NPR on this issue. In fact, it has always been Redwood’s operating model to retain the first-loss risk in our securitizations. 

The NPR proposes four forms of risk retention: (1) a horizontal slice consisting 

of the most subordinate class or classes; (2) a vertical slice with pro rata exposure 

to each class; (3) a combination of horizontal and vertical slices; and (4) a randomly 

selected sample of loans. 

Redwood believes the most effective form of risk retention is the horizontal slice 

and that other forms are much less effective. The horizontal slice requires the sponsor to retain all of the first-loss securities and places the sponsor’s entire investment 

at risk. Only that approach will provide the required incentive for a sponsor to ensure that the senior securities are backed by safe and sound loans, which will benefit borrowers as well as investors. 

The other forms of risk retention result in substantially less of the sponsor’s investment in the first risk position, which reduces the incentive to sponsor quality 

securitizations. Over time, we believe investors will vote on the best form of risk 

retention and reward sponsors that retain horizontal ‘‘skin-in-the-game.’’ 

C. Qualified Residential Mortgages 

We support the intention of the proposed definition of a qualified residential mortgage (QRM), but we believe it is a bit too restrictive. We support the concept of 

‘‘common sense’’ underwriting, similar to the standards used by the GSEs for so 

many years prior to the period leading up to the credit bubble. These standards resulted in low credit losses for many years. 

D. Servicer Functions and Responsibilities 

We believe that the well-publicized mortgage servicing issues are an impediment 

to broadly restarting private residential mortgage securitization. Beyond the issue 

of lost documents and foreclosure practices, servicers have been on the front lines 

throughout the recent crisis. Focusing more narrowly on their role in the 
180 

securitization structure, they have sometimes been placed in the position of having 

to interpret vague contractual language, ambiguous requirements, and conflicting 

direction. In their role, they are required to operate in the best interest of the 

securitization and not in the interest of any particular bond holder. In practice, 

without any clear guidance or requirements, they invariably anger one party or another when there are disagreements over what is and is not allowed—with the result of discouraging some triple-A investors from further investment in RMBS. We 

propose that uniform standards governing servicer responsibilities and conflicts of 

interest be established and that a credit risk manager be established to monitor 

servicer performance and actions. We have discussed this servicing issue in greater 

detail and have proposed recommendations in our ‘‘Guide to Restoring Private-Sector Residential Mortgage Securitization’’, which is available on our Web site. 

4. Second Mortgages 

If we really want to restore a safe securitization market, we also need to address 

second mortgages. One of the significant factors that contributed to the mortgage 

and housing crisis was the easy availability of home equity loans. Plain and simple, 

the more equity that a borrower has in his or her home, the more likely that borrower will continue to make mortgage payments. Home equity loans often result in 

the borrower having little or no equity in their homes. 

Although the proposed QRM standard will encourage lenders to originate loans 

to borrowers who have a minimum 20 percent down payment, there is no prohibition against the borrower immediately obtaining a second mortgage to borrow back 

the full amount of that down payment. The addition of a second mortgage that substantially erodes the borrower’s equity and/or substantially increases a borrower’s 

monthly debt payments increases the likelihood of default on the first mortgage. 

Many of the current regulatory reform efforts are centered on creating an alignment 

of interests between sponsors and investors through risk retention or ‘‘skin-in-thegame.’’ However, the first and most important line of defense is at the borrower 

level. If the borrower can take his or her own ‘‘skin’’ out of the game through a second mortgage, what have we really accomplished? The answer is very little. We believe any failure to address borrower skin-in-the-game will be very discouraging not 

only to private-label RMBS investors, but all mortgage investors. 

To prevent the layering of additional leverage and risk, it is common in other 

forms of secured lending (including commercial and corporate lending) to require either the consent of the first mortgage holder to any additional leverage or to limit 

the new borrowing based on a prescribed formula approved by the first mortgage 

holder. We recommend extending this concept to residential mortgages. 

Specifically, we recommend enactment of a Federal law that would prohibit any 

second mortgage on a residential property, unless the first mortgage holder gives 

its consent. Alternatively, a second mortgage could be subject to a formula whereby 

the new combined loan-to-value (based on a new appraisal) does not exceed 80 percent. 

Conclusion 

Looking ahead to the long-term future of housing finance, I see a number of 

positives emerging: safer mortgages that borrowers can afford, the return of loan 

loss rates to historically low norms for newly originated prime loans, and private 

capital willing to fund residential mortgages at affordable rates for borrowers 

through responsible, safe securitization. The first step is to give the private sector 

a chance by following through on the Administration’s plan to reduce the conforming 

loan limits and increase the GSE’s guarantee fees to market rates at a safe and 

measured pace. 

Thank you for the opportunity to testify before the Committee today. I would be 

happy to answer your questions. 

PREPARED STATEMENT OF BARRY RUTENBERG 

FIRST VICE CHAIRMAN OF THE BOARD, NATIONAL ASSOCIATION OF HOME BUILDERS

MAY 26, 2011 

Introduction 

Chairman Johnson, Ranking Member Shelby, and Members of the Senate Banking Committee, I am pleased to appear before you today on behalf of the National 

Association of Home Builders (NAHB) to share our views on the long-term future 

of the housing finance system. We appreciate the invitation to appear before the 

Committee on this important issue. 
181 

My name is Barry Rutenberg and I am NAHB’s First Vice Chairman of the Board 

and a home builder from Gainesville, Florida. NAHB represents over 160,000 member firms involved in building single family and multifamily housing (including participants in the Low Income Housing Tax Credit program), remodeling, and other 

aspects of residential and light commercial construction. Each year, NAHB’s builder 

members construct about 80 percent of all new housing in America. 

Credit is the life’s blood of the housing sector. A reliable and adequate flow of affordable funds is necessary in order to achieve the Nation’s housing and economic 

goals. Establishing a finance system that provides liquidity for the housing sector 

in all markets throughout the economic cycle is a prerequisite to achieving housing 

policy objectives. In fact, achieving affordability in credit for single and multifamily 

housing reduces the resources required to address the Nation’s housing needs. A 

stable, effective, and efficient housing finance system is critical to the housing industry’s important contribution to the Nation’s economic performance and to the 

achievement of America’s social goals. 

The housing finance system currently is under a cloud of uncertainty. The Federal 

Government, through the Federal Housing Administration (FHA) and Fannie Mae/ 

Freddie Mac, is currently accounting for nearly all mortgage credit flowing to homebuyers and rental properties. Even with the current heavy dose of Federal support, 

fewer mortgage products are available and these loans are being underwritten on 

much more stringent terms. In addition, Congress and the regulators are piling on 

layers of regulations in an attempt to plug gaps in the system of mortgage regulation and to prevent a recurrence of the mortgage finance debacle that is still playing 

out. 

This is not an arrangement that can continue indefinitely and there is no clear 

picture of the future shape of the conforming conventional mortgage market. One 

thing that is clear is that the status quo cannot be maintained. Policy discussions 

are underway on what should become of Fannie Mae and Freddie Mac following the 

current, still-indefinite conservatorship period, and what, if anything, should change 

in the structure and operation of the Federal Home Loan Banks (FHLBanks). A key 

consideration is how to get from the current structure to a future arrangement without undermining ongoing financial stabilization efforts and disrupting the operation 

of the housing finance system. 

NAHB has been actively involved in discussions on changes to the financing 

framework for homebuyers and producers of rental housing. In the past year, NAHB 

has developed a detailed plan outlining our thoughts on the future of the housing 

finance system and shared this extensively with Congress. In the meantime however, Congress has passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Regulators are now busy implementing this 

massive law that has the potential to reduce the availability and increase the cost 

of housing credit. The housing landscape has seen little change during this period 

as the housing market remains extremely weak and decisions about the future of 

the housing finance system are stuck in a quagmire, despite the Administration’s 

recent report outlining options for Reforming America’s Housing Finance Market. 

NAHB strongly supports efforts to modernize the Nation’s housing finance system, 

including reforms to the Government-sponsored enterprises Fannie Mae and 

Freddie Mac. We cannot go back to the system that existed before the Great Recession, but it is critical that any reforms be well-conceived, orderly, and phased in 

over time. Short-term proposals to reduce the support Fannie Mae and Freddie Mac 

provide for the housing finance system represent a piecemeal approach to reform 

that would disrupt the housing market and could push the Nation back into a deep 

recession. These proposals, along with similar plans announced by the Obama administration in February, show that many policy makers have clearly forgotten 

housing’s importance to the economy. 

America’s home builders urge policy makers in the Administration and Congress 

to consider the potential consequences of their proposals. Do not move forward with 

policies that would further destabilize a housing market that is already struggling. 

Housing can be the engine of job growth this country needs, but it cannot fill that 

vital role if Congress and the Administration make damaging, ill-advised changes 

to the housing finance system at such a critical time. 

NAHB’s testimony today will expand on these thoughts within the context of current housing market conditions and other recent developments affecting the housing 

finance system. 

Housing Market Conditions 

The housing market has not experienced the same tentative growth path that the 

rest of the economy is experiencing. Overall economic growth has been weak by historic standards for an economic recovery, but housing’s performance has been even 
182 

weaker. Unlike the last two economic recoveries, when housing grew 25 and 45 percent at this point after the end of the recession, housing is still down 18 percent 

since the end of the recession in June 2009. 

The early months of 2011 have not provided any positive news for housing. New 

home sales have been stuck at record lows since the expiration of the homebuyers’ 

tax credit in April 2010. 

Housing construction has reflected the poor sales performances as total building 

permits in 2011 have been the lowest on records going back to 1960. Single family 

housing starts have been among the lowest ever recorded. 

House prices continue to fall in many locations as foreclosed and distressed sales 

continue to absorb what little demand there is. Oddly, low mortgage rates and very 

affordable house prices should be a stimulus to home buying, but the consumer remains uncertain about future Government moves against housing. Mortgages are affordable, but credit standards and down payment requirements are keeping many 

potential homebuyers out of the market. 

Proposals To Reform the Housing Finance System 

In February, the Obama administration released its report on Reforming America’s Housing Finance Market (Report). As required by the Dodd-Frank Act, the Report provides recommendations for ending Fannie Mae and Freddie Mac’s conservatorship and the proper role of the Federal Government in the Nation’s housing 

finance system. The report lays out a path toward transition that will significantly 

reduce the Government’s role in housing finance by winding down Fannie Mae and 

Freddie Mac and, over time, restoring the private sector’s role in mortgage finance. 

The Administration stresses that the transition should be a careful and deliberative 

process that will take several years to implement. 

During the transition, the Administration proposes a number of steps to reduce 

Government support including lower loan limits, increased down payment requirements and higher fees for conforming and FHA-insured mortgages. As Fannie and 

Freddie’s role in the housing market is reduced, FHA’s presence would be scaled 

back to its precrisis role as a targeted provider of credit access for low—and moderate income and first-time homebuyers. Program changes at FHA would ensure 

that the private market—not FHA—would pick up new market share as the Fannie/ 

Freddie role is reduced. Reforms at the FHLBanks would include restricting member banks to only one FHLBank, capping the level of advances for any institution 

and reducing the FHLBanks’ investment portfolios. 

The Administration proposes three options for the long-term framework of the 

housing finance system, but does not endorse a specific option: 

• Option 1 would establish a privatized system of housing finance with Government support limited to assistance by FHA, USDA, and VA for a narrowly targeted group of borrowers. 

• Option 2 is a similar to Option 1, but would provide a Federal Government 

guarantee for private mortgages that would be triggered only during time of 

economic stress. 

• Option 3 would permit the Government to provide catastrophic Federal reinsurance for the securities backed by a targeted range of mortgages that are already 

guaranteed by private insurers. 

NAHB believes that changes to the housing finance system should be comprehensive, coordinated, and undertaken in a careful and deliberate manner that does not 

unnecessarily disrupt the struggling housing recovery. While we support housing finance reform, and look forward to working with this Committee and Congress on 

broad reform efforts, we have serious concerns on several of the legislative proposals 

put forward so far in the 112th Congress. 

On March 31, 2011, legislation was introduced by Senators John McCain (R-AZ) 

and Orrin Hatch (R-UT), S. 693, the GSE Bailout Elimination and Taxpayer Protection, that would effectively wind down the operations of Fannie Mae and Freddie 

Mac without offering a clear vision for the future housing system and a thoughtfully 

designed path for a nondisruptive transition to a new framework. NAHB opposes 

S. 693, as well as identical legislation introduced in the House earlier this year, 

H.R. 1182, introduced by Representatives Jeb Hensarling (R-TX) and Spencer Bachus (R-AL). Similarly, NAHB is opposed to the growing list of legislative proposals 

introduced by members of the House Financial Services Committee that are aimed 

at reducing the activities of Fannie Mae and Freddie Mac absent comprehensive reform that would continue to provide a Federal backstop ensuring a reliable and adequate flow of affordable housing credit in all economic and financial conditions. 

While NAHB agrees that private capital must be the dominant source of mortgage 

credit, the future housing finance system cannot be left entirely to the private sec-
183 

tor. The historical track record clearly shows that the private sector is not capable 

of providing a consistent and adequate supply of housing credit without a Government backstop. NAHB therefore believes that it is premature to begin dismantling 

the current housing finance system, as represented in both these legislative approaches, until there is a clear vision for the future of the housing finance system. 

NAHB is nevertheless pleased to see new legislative efforts being introduced and 

developed in the House of Representatives that would take a very different tack 

from the proposals mentioned previously. Recently bipartisan legislation, H.R. 1859, 

was introduced by Representatives John Campbell (R-CA) and Gary Peters (D-MI), 

which would replace Fannie Mae and Freddie Mac with five private companies that 

would issue mortgage-backed securities and have Government backing. This approach differs greatly from the previously mentioned proposals that would move towards full privatization of the GSEs and slowly diminish Federal support for the 

current housing finance system. Similarly, NAHB is aware of legislation currently 

under development by Representative Gary Miller (R-CA) that would likewise include a predictable Government role in the secondary mortgage market to preserve 

financial stability in the market and maintain a stable housing sector. 

NAHB views the introduction of H.R. 1859, as well as the direction of Rep. Miller’s legislative proposal, as a very positive development as the debate on the future 

of the housing finance system moves forward in the 112th Congress. In addition to 

NAHB’s own detailed proposal on how a future housing finance system can be structured (outlined later in this statement), NAHB looks forward to working with all 

members of the House and Senate to move forward comprehensive GSE reform legislation seek an appropriate Federal role to maintain a healthy mortgage marketplace. 

NAHB Position on Housing Finance Reform 

Key Principles 

NAHB has had a strong and longstanding interest in the maintenance of an efficient secondary mortgage market and the role of the GSEs in facilitating the flow 

of capital to housing. NAHB, along with a number of other housing and financial 

trade associations, including some that are on this panel, have developed Principles 

for Restoring Stability to the Nation’s Housing Finance System, which were released 

on March 28. We believe the following principles should help guide efforts to restore 

and repair the Nation’s housing finance system: 

• A stable housing sector is essential for a robust economic recovery and longterm prosperity. Housing, whether through home ownership or rental, promotes 

social and economic benefits that warrant it being a national policy priority. 

• Private capital must be the dominant source of mortgage credit, and it must 

also bear the primary risk in any future housing finance system. 

• Some continuing and predictable Government role is necessary to promote investor confidence and ensure liquidity and stability for home ownership and 

rental housing. 

• Changes to the mortgage finance system must be done carefully and over a reasonable transition period to ensure that a reliable mortgage finance system is 

in place to function effectively in the years ahead. 

We agree with the Administration that private investment capital is critical for 

a robust and healthy mortgage marketplace, and the current Government-dominated mortgage system is neither sustainable nor desirable. As critical as it is to 

attract private money to the mortgage markets, an appropriate level of Government 

support is essential to preserving financial stability. To facilitate long-term fixedrate mortgages, affordable financing for low- and moderate-income borrowers, and 

financing affordable rental housing—particularly during times of crisis and 

illiquidity—it is important to establish a clearly defined role for the Federal Government in developing effective insurance and guarantee mechanisms. While the goal 

should be to move toward a largely private secondary market, the private and public 

sectors should work as partners in creating a variety of financing options to ensure 

that safe, stable, and affordable financing is available to all creditworthy borrowers. 

NAHB Proposal for New Secondary Market System 

NAHB believes that it is crucial for the Federal Government to continue to provide a backstop for the housing finance system to ensure a reliable and adequate 

flow of affordable housing credit. The need for such support is underscored by the 

current state of the system, where Fannie Mae, Freddie Mac, the FHLBanks, FHA 

and Ginnie Mae are the only conduits for residential mortgage credit. NAHB feels 

the Federal backstop must be a permanent fixture in order to ensure a consistent 
184 

supply of mortgage liquidity as well as to allow rapid and effective responses to 

market dislocations and crises. 

A workable system must be established to perform the basic roles served by 

Fannie Mae and Freddie Mac. These GSEs should not be converted to Government 

agencies, nor should their functions be completely turned over to the private market. Last year NAHB presented this Committee a proposal recommending major 

changes in the structure and operations of the secondary mortgage market. The operation of the new secondary market for conforming conventional mortgages is illustrated in the diagram attached to this statement. 

NAHB’s proposal is similar to the Administration’s third option for the long term 

structure of the housing finance system. Key features of NAHB’s proposal are summarized below. 

• Private entities, called conforming mortgage conduits, would purchase and 

securitize mortgages but would receive no direct or implicit Federal Government 

support. 

• The Federal Government would guarantee the timely payment of principal and 

interest of the mortgage-backed securities issued by the conforming mortgage 

conduits. 

• Conforming mortgage conduits would have significant capital requirements 

(minimum and risk-based requirements) and also would be required to contribute to a fund to cover losses on the mortgages they pool and sell. 

• Therefore, the Federal Government would incur only catastrophic risk beyond 

the risk covered by securitizers’ capital and fund. 

• Primary mission of conforming mortgage conduits would be to provide mortgage 

market liquidity through securitization activities. 

• These conduits would be permitted to maintain limited portfolios to facilitate 

transactions as well as to hold loans that do not have a secondary market outlet. 

• Conforming mortgage conduit activities should be directed at a broad range of 

housing market needs to enable Americans at all income levels to achieve decent, safe, and affordable housing. (No specifics on affordable housing requirements.) 

• Conforming mortgage conduits would deal in mortgages with well-understood 

and reasonable risk characteristics (including standard 30-year fixed-rate loans, 

ARMs, and multifamily mortgages). 

Impact on the Federal Home Loan Bank System 

Discussion of housing finance system reform has focused almost exclusively on the 

future of Fannie Mae and Freddie Mac. While this is understandable given the magnitude of problems facing those companies, their open-ended line of support from the 

U.S. Treasury, and their ongoing operation under conservatorship, attention must 

also be accorded to the FHLBank System. 

NAHB also views the FHLBank System as an essential component of the U.S. 

housing finance framework that has served as a key source of liquidity for institutions providing loans to homebuyers and home builders as well as credit for community and economic development. The FHLBanks are significantly different from 

Fannie Mae and Freddie Mac in structure and operations and these differences 

should be acknowledged and respected during the consideration of the future structure of the housing finance system. 

NAHB urges policy makers to undertake any changes to the housing finance system in a manner that will not diminish the favorable cost of funds for the 

FHLBanks or impair the role of the FHLBanks in supplying liquidity to institutions 

providing mortgage and housing production credit, support for community and economic development, and resources to address affordable housing needs. The 

FHLBanks should continue their current activities to serve as an ongoing key liquidity source for institutions providing housing credit. 

Transition Considerations 

The housing sector is struggling to regain its footing and begin contributing to a 

recovery in economic output and jobs. The current environment is rife with instability and uncertainty. Many markets throughout the country, however, have returned to a position where consumers are shopping for new homes and housing production can begin to move back to more normal levels. 

It is critical that the housing finance system facilitate this emerging recovery 

rather than stifle it. Under these circumstances, finding a means of moving to a new 

secondary market framework may be as great, or greater, a challenge as developing 
185 

the new conforming conventional secondary market structure. NAHB urges Congress to carefully consider and address the short-term, unintended consequences 

that could occur during the transition to a new housing finance system. 

Any changes should be undertaken with extreme care and with sufficient time to 

ensure that U.S. homebuyers and renters are not placed in harm’s way and that 

the mortgage funding and delivery system operates efficiently and effectively as the 

old system is abandoned and a new system is put in place. Every effort should be 

made to reassure borrowers and markets that credit will continue to flow to creditworthy borrowers and that mortgage investors will not experience adverse consequences as a result of changes in process. 

Impact on 30-Year Fixed-Rate Mortgage 

NAHB believes that any new housing finance system must support the continued 

availability of the 30-year, fixed-rate mortgage (FRM). Borne out of the Great Depression, the 30-year FRM has played a pivotal role in helping to increase the national home ownership rate so that today two out of three Americans own a home 

of their own. 

It has become an industry standard for several reasons: 

• Affordability. These loans are geared toward affordability; 30-year terms lock in 

low monthly payments, allowing households with average incomes to comfortably budget for their home loan. 

• Inflation protection. Knowing their monthly housing costs will remain the same 

year in and year out regardless of whether interest rates rise provides households with a sense of financial security and also acts as a hedge against inflation. 

• Long-term planning. Many young buyers know that as their incomes rise, their 

housing costs will stay constant and become less of a burden, enabling them to 

prepare for other long-term obligations, such as college tuitions and retirement 

savings. 

• Tax advantages. In most instances, all of the interest and property taxes borrowers pay in a given year can be fully deducted from their gross income to reduce taxable income. These deductions can result in thousands of dollars of tax 

savings, especially in the early years of a 30-year mortgage when interest 

makes up most of the payment. 

The key to the sustainability of the 30-year FRM is a securitization outlet because 

originators (banks and thrifts) do not have the capacity to hold such long-term assets which are funded with short-term deposits. Fannie Mae and Freddie Mac provided the securities vehicle along with an implicit Government guarantee for investors. It is not clear whether a private housing finance system would be capable of 

supporting this type of product without some Government backing. At a minimum, 

the cost of 30-year FRMs would increase under a private system. 

The Administration’s Report analyzes the impact of its three options on the cost 

and availability of the 30-year FRM to assess the impact of each option on the housing finance market. Option 1 would likely eliminate the 30-year FRM for non-FHA 

mortgages. Under Option 2, the 30-year FRM could be preserved, but would be very 

expensive. The 30-year FRM would be most likely to survive under Option 3, but 

it would be more expensive than at present. 

As the private market transitions to assume a greater role, a strong Federal backstop is necessary to maintain a stable and adequate supply of credit for homebuyers 

and ensure that the 30-year FRM remains readily available to first-time homebuyers and working American families. Otherwise private financial institutions will 

turn the 30-year mortgage into a luxury product, with high interest rates, fees, and 

down payments that would price millions of middle-class households out of the market. 

Multifamily Financing 

The focus of the discussion on the future of housing finance reform largely has 

been on single-family home ownership. Less attention has been paid to the multifamily rental housing segment of the housing finance system, even though almost 

one-third of Americans live in rental housing, and demand for rental housing in the 

future is expected to increase. 

In particular, NAHB estimates that the aging of the ‘‘echo boom’’ generation will 

result in demand for between 300,000 and 400,000 multifamily housing units on average per year over the next 10 years. The timing of this demand will depend on 

the pace of economic recovery, but the housing needs of these households will not 

be postponed indefinitely. The current average pace of multifamily housing starts 

of less than 120,000 annually is insufficient to meet this demand. Production of mul-
186 

tifamily housing will undoubtedly increase above the current extraordinary low levels. It is important that the financing mechanisms to support that production are 

available. 

In spite of the crisis affecting single-family housing, the multifamily sector has 

performed well. Multifamily loans held or guaranteed by Fannie Mae and Freddie 

Mac have very low default rates, and both businesses are profitable. In addition, the 

multifamily business of the GSEs finances a wide range of multifamily rental properties, which provide housing for very-low to middle income households. The FHA 

multifamily mortgage insurance programs also fill a need in the multifamily rental 

market, although its loan volume capacity is limited. 

Private market sources of capital for multifamily financing are not available for 

all segments of the multifamily market. Life insurance companies tend to focus on 

large projects in the strongest markets and typically serve the highest income 

households. Once they meet their own portfolio investment targets, life insurance 

companies retract their lending. Banks do not provide long-term financing and are 

subject to significant restrictions in terms of capital requirements. While the commercial mortgage backed securities (CMBS) market was significant at one time, it 

has not recovered from the financial crisis and is not expected to resume its past 

levels of volume. 

These facts point to the need to maintain a viable, liquid, and efficient secondary 

market for multifamily rental financing where the Federal Government continues 

to play a role. In addition, the secondary market must be structured to ensure that 

the appropriate range of products is available to provide the capital needed to develop new and preserve existing rental housing, as well as to refinance and acquire 

properties. An adequate flow of capital will ensure that demand for rental housing 

is met and that affordable options are available for a range of households. 

As we suggest for the single family market, on the multifamily side, the Federal 

Government should provide an explicit guarantee of the timely payment of principal 

and interest on securities backed by conforming conventional mortgages, in the 

same manner that Ginnie Mae now provides guarantees for investors in securities 

representing interests in Government-backed mortgages. Again, the Federal Government should only be called on to support the conforming conventional mortgage 

market under catastrophic situations when the capital and self-funded insurance resources of private secondary market entities are exhausted. 

However, multifamily loans do not lend themselves to standardization as easily 

as single-family loans, which points to the need to retain the ability to hold some 

volume of multifamily loans in portfolio. 

NAHB Concerns With the Administration’s Proposal for Multifamily Financing 

The Administration’s report emphasizes that Americans must have access to a 

range of affordable housing options, whether they own or rent. The report notes that 

renters face significant affordability challenges and says that the housing finance 

system must promote liquidity and capital to support affordable rental options that 

alleviate high rent burdens on low-income households. 

The report states that, in the near term, the Administration will begin to 

strengthen and expand FHA’s capacity to support both lending to the multifamily 

market and for affordable properties that are underserved by the private market. 

Options include risk-sharing with private lenders and development of programs 

dedicated to hard-to-reach segments, such as small rental properties. However, 

NAHB believes that the current structure, staffing levels and resources available to 

the FHA may not be sufficient to take on such additional responsibilities, nor does 

FHA have the institutional flexibility to respond to the range of market needs quickly and efficiently. If the role of FHA is to change, much more discussion is needed 

in this regard. 

Of particular importance, the report states that the Administration is committed 

to finding more effective ways to provide financing for small rental properties, underserved markets and rural areas. NAHB is pleased that this proposal is included 

in the report, as financing for such properties continues to be a challenge. 

However, NAHB is concerned that less thought has been given to a future financing system that will meet the needs of moderate- and middle-income renters. The 

Administration acknowledges that Fannie Mae and Freddie Mac have developed expertise in providing financing to the middle of the rental market, where housing is 

generally affordable to moderate income families. But the Administration does not 

suggest any alternatives to this model, nor does it set forth a viable transition plan 

as Fannie Mae and Freddie Mac are wound down. NAHB believes that it is critical 

to find ways to maintain funding to this segment of the market, and more thought 

needs to be devoted to solving this aspect of the housing finance system. 
187 

Also of concern to NAHB is the continued heavy reliance on nonprofit partnerships to address the needs of low- and moderate-income renters. Unfortunately, 

there has been a long-standing bias favoring nonprofits for expertise on these issues. 

This has been true in this and other Administrations. NAHB believes the criteria 

in selecting program participants should be based on their competence and capacity 

for producing housing in the most cost-effective way. For-profit businesses are successful, and the Government should look to partner with for-profit businesses when 

appropriate. 

Recent Regulatory Developments—QRM 

Of great concern to NAHB at present are the credit risk retention rules required 

by Section 941 of the Dodd-Frank Act, which were unveiled on March 29, 2011, by 

the six agencies charged with implementing that section of the law. NAHB believes 

the proposed rules contain an unduly narrow definition of the important term 

‘‘Qualified Residential Mortgage’’ (QRM), featuring a minimum down payment of 20 

percent, which would seriously disrupt the housing market by making mortgages 

unavailable or unnecessarily expensive for many creditworthy borrowers. By stipulating such a large down payment for a loan to be considered a QRM, the Administration and Federal agencies are preempting congressional efforts to reform the 

housing finance system by imposing a narrow and rigid gateway to the secondary 

mortgage market. 

This extreme proposal could not have been put forward at a less opportune time. 

The housing market is still weak, with a significant overhang of unsold homes, and 

an equally large shadow inventory of distressed loans. A move to a larger down payment standard at this juncture would cause renewed stress and uncertainty for borrowers who are seeking or are on the threshold of seeking affordable, sustainable 

home ownership. We believe a more balanced QRM exemption is imperative in light 

of the enormous potential impact it would have on the cost and availability of mortgage credit at this precarious point in the housing cycle. 

Risk retention is intended to align the interests of borrowers, lenders and investors in the long-term performance of loans. This ‘‘skin in the game’’ requirement, 

however, is not a cost-free policy option. Borrowers who can’t afford to put 20 percent down on a home and who are unable to obtain FHA financing will be expected 

to pay a premium of two percentage points for a loan in the private market to offset 

the increased risk to lenders, according to NAHB economists. This would disqualify 

about 5 million potential homebuyers, resulting in 250,000 fewer home sales and 

50,000 fewer new homes being built per year. Such a drastic cutback would have 

a disproportionate impact on minorities and low-income families who are struggling 

to achieve the dream of home ownership. 

The exclusion of FHA and VA and, at least temporarily, Fannie Mae and Freddie 

Mac from the risk retention requirement provides some short-term cushion to the 

impact of the proposal but that relief would be short-lived and is eroded by the 

tighter underwriting and higher costs already imposed by those agencies. Further 

exacerbating the situation, the Obama administration has announced its intention 

to shrink FHA’s share of the marketplace, lower FHA and conventional conforming 

loan limits, and further increase fees on FHA, Fannie Mae, and Freddie Mac home 

loans. These changes, combined with the effects of an overly restrictive QRM, would 

make it even more difficult for buyers to access affordable housing credit. 

It appears to NAHB that the agencies did not give sufficient weight to statutorily 

required considerations in formulating their QRM proposal, which directed that the 

definition be based on objective, empirical data rather than subjective presumptions. 

The statute also requires a multifactor approach to establishing the parameters of 

the QRM in order to promote sound underwriting practices without arbitrarily restricting the availability of credit. The agencies have admitted that they deliberately 

selected an extremely conservative approach to create a very limited QRM basket. 

Creating an inordinately narrow QRM exemption would cause significant disturbances in the fragile housing market. Today’s credit standards are tougher than they 

have been in decades. As a result, credit availability is extremely tight even for very 

well qualified borrowers. NAHB strongly urged the banking regulators to consider 

the negative ramifications of setting further limits on the availability of credit 

through a comparatively narrower QRM exemption. Under the proposed standard, 

millions of creditworthy borrowers would be deemed, by regulatory action, to be 

higher-risk borrowers. As a result, they would be eligible only for mortgages with 

higher interest rates and fees and without the protections required by the statutory 

QRM framework that limit risky loan features. 

An overly restrictive QRM definition also would drive numerous current lenders 

from the residential mortgage market, including thousands of community banks, 

and enable only a few of the largest lenders to originate and securitize home loans. 
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This sharp dilution of mortgage market competition would have a further adverse 

impact on mortgage credit cost and availability. 

A QRM definition that is too narrow would prohibit many potential first-time 

homebuyers from buying a home especially if the definition includes an excessively 

high minimum down payment requirement. Repeat buyers and refinancers also 

would be adversely impacted if the QRM includes exceedingly high equity requirements. In other words, the important goal of clearing historically high foreclosure 

inventory—a necessary condition for a stabilized housing market—will be undermined. 

The purpose of the QRM is to create a robust underwriting framework that provides strong incentives for responsible lending and borrowing. Loans meeting these 

standards will assure investors that the loans backing the securities meet strong 

standards proven to reduce default experience. The exemption also will keep rates 

and fees lower on QRMs, which will provide incentives for borrowers to document 

their income and choose lower risk products. In turn, the market will evolve to establish the appropriate mixture of QRM to non-QRM borrowing. 

The majority of industry participants (lenders, home builders, realtors, mortgage 

insurers) and the sponsors of the QRM language in Dodd-Frank support a broad 

QRM definition that would encompass the bulk of residential mortgages that meet 

the lower risk standards of full documentation, reasonable debt-to-income ratios and 

restrictions on risky loan features. In addition, most believe that loans with lower 

down payments that have risk mitigating features, most notably mortgage insurance, should be included in the QRM exemption. 

NAHB recommends the broadest criteria possible should be utilized in defining 

a QRM exemption that will ensure safe and sound operation of the mortgage market 

while accommodating a wide range of viable mortgage borrowers. 

Given the substantial impact that the QRM rule will have on the availability and 

costs of mortgage credit for years to come, a thorough response to the Proposed Rule 

will require significant data development, analysis, and validation that cannot reasonably be completed by the June 10, 2011 comment deadline. For this reason and 

others, NAHB joined with 14 other organizations representing consumers and the 

real estate and financial services industries to request an extension of the comment 

deadline. Specifically, we asked that the comment deadline on the QRM proposal 

be synchronized with that of the rulemaking on the Ability to Repay and Qualified 

Mortgage provisions under Dodd-Frank so that comments are due no earlier than 

July 22, 2011. NAHB respectfully requests the Committee’s support for this request 

and urges the Committee to encourage the regulatory agencies that drafted the 

QRM rule to grant the extension of the comment deadline. 

Conclusion 

Thank you for the opportunity to participate in this important and timely hearing. 

NAHB looks forward to working with all stakeholders to develop an effective as well 

as safe and sound means to provide a reliable flow of housing credit under all economic and financial market conditions. 
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190 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM TERRI LUDWIG 

Q.1. In your testimony, you call for continued Federal support of 

the secondary mortgage market to help provide affordable housing 

and lower cost mortgage financing in all markets. 

Can you unequivocally state that your plan has accounted for all 

of the risks that led to a taxpayer bailout of Fannie Mae and 

Freddie Mac? In other words, can you tell us with any certainty 

that if your plan was adopted that taxpayers would not once again 

have to bail out the mortgage industry? 

A.1. In my testimony before the Senate Committee on Banking, 

Housing, and Urban Affairs, I urge Congress not to fully withdraw 

from the housing market and to look at ways to continue support 

for affordable rental housing options. Enterprise Community Partners has not endorsed a specific plan for reform of the housing finance system; however, given the large role that the Governmentsponsored enterprises have played in multifamily affordable housing, we believe that there needs to be some Federal role in this 

market. 

We agree with you that any system established to provide guarantees must better protect taxpayers and the Federal Government. 

Unlike the single-family sector, the multifamily portfolio of the 

GSEs has performed incredibly well, with low default rates and 

continued profitability. This is not to say that the Government’s involvement should remain as is, but that guarantees in the multifamily sector have worked well, and should be continued at some 

level. We understand that risks and benefits need to be considered 

and weighed, and results should be transparent. Any guarantees 

should be paid for, and the fees should be risk based, so that taxpayers are protected. We look forward to working with you to ensure that any new system protects taxpayers while helping to support affordable housing. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM MARTIN S. HUGHES 

Q.1. In your testimony you discuss how the Federal Government is 

crowding out the private sector from the secondary mortgage market by aggressively expanding the market share of the GSE’s and 

FHA. You point out that ‘‘postcrisis, the private asset-backed securities markets for auto loans, credit cards loans, and now commercial real estate loans are up and functioning, while the privatelabel RMBS market barely has a pulse.’’ 

In other words, the markets with the least Government involvement have been the fastest to recover and return to normal. 

What lessons do you think this Committee should learn from this 

situation as we embark on housing finance reform? 

A.1. The old saying goes, ‘‘Necessity is the mother of invention.’’ If 

you really need to figure something out—figure it out. Without a 

Government-backed financing alternative, participants in the nonresidential ABS markets were motivated to restart private financing through securitization. 

When you look at how these ABS markets recovered, you see 

that success has bred further success and issuance velocity has led 
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1Source: Wells Fargo Securities, ‘‘Changing Dynamics in Commercial Real Estate Investments’’, May 19, 2011. 

to further velocity. These ABS markets restarted slowly allowing 

industry practices to evolve and investor trust and confidence to 

gain momentum. For example, the first postcrisis CMBS transaction for $716 million was completed in June of 2010. Industry estimates for 2011 CMBS issuance volume are approximately $50 billion. 1 In addition, AAA credit spreads have tightened. It’s been a 

win for borrowers and investors. 

We are the first to acknowledge that the RMBS market faces 

comparatively far more complex regulatory and investor issues. 

Having acknowledged that, it is also the case that there is little financial urgency on the part of RMBS market participants to 

prioritize solving the issues and developing best practices to woo 

back AAA investors. Major banks now benefit from selling 90-plus 

percent of their originations into an attractive, Government-subsidized bid and can easily portfolio the remainder. There are too 

few loans outside the Government’s reach to allow the private 

RMBS market to develop. Until the Government levels the playing 

field, by decreasing the size of mortgages eligible to be purchased 

by Fannie Mae and Freddie Mac and increasing their guarantee 

fees, the current status quo is at risk of becoming institutionalized. 

That would mean practices which were originally intended to be 

temporary will become the new normal, the high burden on taxpayers will persist, and the private sector’s ability to finance home 

mortgage borrowing through securitization will further atrophy. 

Q.2. In your testimony you address the perception that there is not 

adequate investor demand in the private MBS market. This critique is often cited by those arguing for the continuation of a Government guarantee. 

Based on your experience, is there an investor appetite for private mortgage-backed securities? 

What are the most important policy changes that would further 

encourage investors to return to the private MBS market? 

A.2. We would agree that there are many angry residential AAA 

investors and some have sworn they will never again buy a privatelabel RMBS. Against that backdrop, today, there is over $2.5 trillion in fixed income funds. Investors are awash with investment 

capital in search of safe, attractive, risk-adjusted yields. We believe 

there would be significant investor demand to invest in private 

RMBS (and earn a premium over agency securities) provided their 

rights are protected and their demands for safety, alignment of interests, and transparency are met. 

There is already a robust dialogue and debate going on regarding 

implementing the Dodd-Frank Act provisions that require a definition of a qualified residential mortgage loan (QRM) and the implementation of risk retention rules. We believe that if a common 

sense definition of a QRM is established and if meaningful risk retention rules are implemented, it will go a long way towards 

incenting strong mortgage loan underwriting. 

However, it will take more than the Federal regulators getting 

these two concepts right to attract investors back to this market. 

We believe several additional changes to law and regulation are 
192 

needed in order for investors to return to this market en masse. A 

high level summary of these key additional policy changes is outlined below. Discussion of other suggested changes is set forth in 

our recently published Guide to Restoring Private-Sector Residential Mortgage Securitization. 

Proposed Changes to SEC Regulations Governing RMBS 

Issuance 

Expand disclosure requirements to include: 

• Increased transparency and investor access to data as contemplated by the SEC’s proposed amendments to Regulation 

AB 

• Disclosure of variances from specified industry standard loanlevel representations and warranties 

• Clear disclosure regarding: 

• The servicer’s role, responsibilities, and compensation 

• Any servicer conflicts of interest 

• The process for identifying potential breaches of loan level 

representations and warranties and the dispute resolution 

process for resolving any alleged breaches 

• Disclosure of the resolution of borrower defaults, including the 

servicer’s analysis of the relative merits of foreclosure, short 

sale, and loan modification 

Condition the use of Form S-3 registration statements on: 

• Transaction documentation that: 

• Incorporates specified industry-standard terms and 

securitization structures that are straightforward and already familiar to securitization investors 

• Utilizes standardized robust loan-level representations and 

warranties that the various Federal regulatory agencies have 

approved (with the Fannie Mae/Freddie Mac standard representations and warranties to be considered by the regulatory agencies as a model) 

• Includes binding arbitration, nonbinding predispute mediation, or a similar nonjudicial process, as a dispute resolution process for any disputed claim of a breach of loan-level 

representations and warranties 

• A credit risk manager being appointed to monitor the servicer’s 

compliance with transaction documentation and periodically 

report to securitization investors 

Proposed Federal Legislation 

Enact Federal legislation to: 

• Standardize servicing standards and duties to investors 

• Resolve any uncertainty relating to documentation of mortgage 

assignments and the use of MERS, which legislation would respect State law governing liens on real estate and subject 

MERS to Federal regulation 
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• Give first mortgage holders the ability to contractually limit 

the ability of borrowers to reduce the equity they have in their 

home through a second lien loan or home equity line-of-credit 

without the consent of the holder of the first mortgage lien 

In addition to the proposals I’ve listed above, there is another 

step the Government can take to help bring investors back to this 

securitization market: establish and adhere to public criteria that 

govern emergency interventions into the mortgage market and at 

whose expense such interventions will be made. Investors are skittish about this market not only because of the well-documented 

shortcomings of many of the participants in this market during the 

housing boom, but also because of a concern that future Government intervention into this market will unfairly be at their expense. For example, in the recent past, the Government created incentives for servicers to modify mortgage loans. Investors rely on 

servicers to fairly evaluate the relative merits of modifications vs. 

foreclosures and object to interventions of this kind by the Government. 

Q.3. Many of the plans discussed here today incentivize borrowing 

through Federal guarantees and other subsidies. Some experts 

have argued that if the Federal Government is to subsidize home 

ownership, it should be done through direct, on-budget subsidies 

reducing the price of the home to the buyer, not by making the borrowing of additional money more attractive. The former approach 

would seem to have the added benefit of making the resulting 

mortgages more liquid in the secondary market, as lower LTVs 

would be more attractive to investors. 

Mr. Heerde and Mr. Hughes, how would policies that encourage 

lower LTV loans affect the markets in which you work? 

A.3. Investors have an appetite for high quality loans. The size of 

a borrower’s down payment is a key determinant in the quality of 

a mortgage loan over its life. The higher the down payment (i.e., 

the lower the loan-to-value ratio), the more likely any losses to investors will be low or nonexistent. Borrowers with more equity in 

their homes are better credit risks, all things equal. 

Demand for securitizations backed by higher quality loans will be 

stronger than demand for securitizations backed by loans that are 

not quite as high quality. If there is stronger demand, investors in 

AAA-rated RMBS backed by higher quality loans are likely to be 

willing to accept slightly lower yields on their AAA-rated securities. 

Competitive market forces should translate these lower investment 

yields into lower mortgage rates for good borrowers. 

Once the RMBS markets begin functioning again, investors will 

supply capital to a variety of types of borrowers over time. Borrowers who represent lower risk will get lower mortgage rates. We 

think securitization will provide capital to a range of borrowers. 

However, as part of this securitization market coming back to life 

and investors rebuilding their confidence in it, we expect high down 

payments will help facilitate investment in newly issued private 

label mortgage-backed securities. 
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM BARRY RUTENBERG 

Q.1. Secretary Geithner warned this Committee of the difficulty in 

having the Government guaranteeing mortgage-backed securities. 

He cautioned: 

. . . guarantees are perilous. Governments are not very 

good at doing them, not very good at designing them, not 

very good at pricing them, not very good at limiting the 

moral hazard risk that comes with them. 

Do you agree with Secretary Geithner? 

If not, on what basis do you believe that the Government can accurately price risk? 

A.1. NAHB observes that neither the private nor the Government 

sector did a very good job pricing risk in the run up to the housing 

crisis. Both sectors should use the lessons learned from the current 

crisis to develop better pricing mechanisms. There is no reason why 

the Government sector could not develop a pricing mechanism that 

is at least as accurate as the private sector. 

Q.2. Many of the plans discussed here today incentivize borrowing 

through Federal guarantees and other subsidies. Some experts 

have argued that if the Federal Government is to subsidize home 

ownership, it should be done through direct, on-budget subsidies 

reducing the price of the home to the buyer, not by making the borrowing of additional money more attractive. The former approach 

would seem to have the added benefit of making the resulting 

mortgages more liquid in the secondary market, as lower LTVs 

would be more attractive to investors. 

Mr. Rutenberg, do you feel it is preferable to subsidize debt over 

equity? 

A.2. NAHB believes that it is crucial for the Federal Government 

to continue to provide a backstop for the housing finance system 

to ensure a reliable and adequate flow of affordable housing credit. 

NAHB feels the Federal backstop must be a permanent fixture in 

order to ensure a consistent supply of mortgage liquidity as well as 

to allow rapid and effective responses to market dislocations and 

crises. The Federal Government should provide an explicit guarantee of the timely payment of principal and interest on securities 

backed by conforming conventional mortgages, in the same manner 

that Ginnie Mae now provides guarantees for investors in securities representing interests in Government-backed mortgages. However, the Federal Government should only be called on to support 

the conforming conventional mortgage market under catastrophic 

situations when the capital and self-funded insurance resources of 

private secondary market entities are exhausted.