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THE IMPACT ON HOMEBUYERS 

AND THE HOUSING MARKET OF A 

CONFORMING LOAN LIMIT INCREASE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

MAY 22, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–114 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

May 22, 2008 ..................................................................................................... 1 

Appendix: 

May 22, 2008 ..................................................................................................... 37 

WITNESSES 

THURSDAY, MAY 22, 2008 

Brinkmann, Emile J., Ph.D., Vice President, Research and Economics, Mortgage Bankers Association .................................................................................... 21 

Cook, Patricia L., Executive Vice President and Chief Business Officer, 

Freddie Mac .......................................................................................................... 18 

Hamilton, Thomas, Managing Director, Barclays Capital, on behalf of the 

Securities Industry and Financial Markets Association (SIFMA) ................... 15 

Lund, Thomas A., Executive Vice President, Single-Family Mortgage Business, Fannie Mae ................................................................................................. 20 

Malta, Vincent E., Malta & Co., Inc., on behalf of the National Association 

of Realtors ............................................................................................................. 25 

Peters, Heather, Deputy Secretary for Business Regulation and Housing, 

State of California ................................................................................................ 22 

APPENDIX 

Prepared statements: 

Carson, Hon. Andre .......................................................................................... 38 

Maloney, Hon. Carolyn B. ................................................................................ 40 

Brinkmann, Emile J. ........................................................................................ 44 

Cook, Patricia L. ............................................................................................... 50 

Hamilton, Thomas ............................................................................................ 57 

Lund, Thomas A. .............................................................................................. 83 

Malta, Vincent E. ............................................................................................. 86 

Peters, Heather ................................................................................................. 94 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Statement of the National Association of Mortgage Brokers ........................ 113 

Miller, Hon. Gary G.: 

Letter to Chairman Frank and Ranking Member Bachus from Members 

who are part of the California Congressional Delegation ......................... 117 

Letter to the California Congressional Delegation from various groups ..... 119 

Sherman, Hon. Brad: 

Letter to Chairman Frank from various Members of Congress ................... 121 

(1) 

THE IMPACT ON HOMEBUYERS 

AND THE HOUSING MARKET OF A 

CONFORMING LOAN LIMIT INCREASE 

Thursday, May 22, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES

Washington, D.C. 

The committee met, pursuant to notice, at 10:04 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

Maloney, Watt, Sherman, Moore of Kansas, Capuano, Hinojosa, 

Clay, McCarthy of New York, Baca, Lynch, Scott, Green, Cleaver, 

Ellison, Perlmutter; Bachus, Castle, Biggert, Miller of California, 

Capito, Hensarling, Garrett, and Neugebauer. 

The CHAIRMAN. This hearing of the Committee on Financial 

Services will come to order. 

This is a very important topic. It is one that is clearly very much 

affected by actions this committee has taken and it is a matter of 

great interest to many members of the committee. 

It is also directly relevant to pending legislation because the 

issue of what the loan limit should be going forward for Fannie 

Mae, Freddie Mac, and the FHA is going to be decided in the next 

few weeks. 

The Senate committee has passed a bill that raises the limits 

somewhat. We have one that has raised them higher. We have the 

stimulus package which has raised them until December 31st. 

As I look at the two bills, I am very encouraged that the bill that 

passed 19–2 out of the Senate committee and the bill that passed 

this House are very, very close conceptually. I am confident that 

we are going to be able to resolve the differences, but this is one 

of the differences we will have to resolve. 

Today’s testimony is important both in terms of the current situation, but also could have an impact on what we do going forward. 

I will say that I was disappointed when the loan limit increase 

produced less activity than I had hoped it would. I understand 

there are reasons and I also believe that we are going to come out 

of this today with a strong argument against the yo-yo effect, and 

in fact, a strong argument for leaving them where they are. 

I did notice, for instance, that when we were debating this in the 

FHA modernization bill, when that became the one issue that prevented us from doing the FHA modernization, both the Secretary 

2 

of the Treasury and then-HUD-Secretary Jackson, agreed with us 

that it would be a mistake to drop the limits. 

In terms of just economic theory, the most variant price in America, I believe, is the house price. The immobility of housing means 

that you get greater geographic variance in that price than almost 

anything else, and having one set price could not have made sense. 

It had to be either too high or too low; there just was no way given 

the variations. 

What we have seen recently is a problem in the private market, 

and I think there has been a consensus that has been shared by 

many here, by the head of the Federal Reserve, who has been very 

active in this, and by the Secretary of the Treasury, that this is a 

time when public and quasi-public entities can work cooperatively 

with the market in unsticking things. 

We have a problem now. We had this problem in the loans above 

the limits, that they were not selling. 

We tell the story about the child who touches the stove and gets 

burned and then does not touch the stove again. We have had a 

situation in the credit markets where a number of very smart people bought things they should not have bought. 

Having bought things they should not have bought, they now 

refuse to buy things they should buy. We have this with 100 percent guaranteed student loans. I think you have to update unfortunately the story of the little boy such that the little boy touched 

the stove and got burned and now will not touch the stove or the 

refrigerator or the bathtub or the sink or the toilet. 

What we need to do is cooperatively work with people to get 

them back to touching white porcelain—just be a little more differentiating in which ones they touch. 

I think public/private cooperation plays a large role here. Ultimately, to the extent that we get out of the current situation and 

we get back to where the private market does this without as much 

involvement from the others, fine, although we should be clear that 

neither the FHA, Fannie Mae nor Freddie Mac displace the private 

market, but in fact work with it, multiply it in Fannie’s and 

Freddie’s case, by securitizing, although that is a particular issue 

that I would have now that I am going to ask people to address 

in the question period. It may not have been an initial issue. 

We now have in the Senate bill a provision that says even to the 

extent that they raise the loan limits, not enough in my judgment, 

those loans have to be securitized. 

I think that would just add to the current complication. I think 

they should have the option of securitizing, but not a mandate. 

We actually specifically addressed that issue in the stimulus and 

explicitly decided—I had a conversation with Secretary Paulson 

about it—not to require securitization. I think that even makes 

securitization harder. I think securitization will work better if it 

can be left to be done when it makes sense and not be mandated. 

That is something that we will want to address with people. 

I think we have a clear economic case now for raising the limits, 

but we still have to get to a later point. Maybe we will have resolved this. I do believe the bill will be signed by July 4th. I am 

now convinced that we will—I think we will now get a bill signed 

that is very close to what we have been doing. 

3 

I am going to make another bold prediction that we will not only 

get a bill signed, but we will get the whole bill signed. I think we 

will get a bill signed that has every title and every section. 

[Laughter] 

The CHAIRMAN. We have adopted a new procedure, you may have 

noticed, with the agriculture bill. It is called the reverse line item 

veto, in which we delete items before they get to the President. 

[Laughter] 

The CHAIRMAN. There is a great consensus. I am joined by my 

colleague from California, Mr. Miller, and others who care a lot 

about this. 

With that, I am going to call now on my Republican colleague for 

an opening statement. We have only one panel. This is a very important issue to people and I think this is going to be a very substantive hearing. 

Mr. Bachus? 

Mr. BACHUS. Thank you, Mr. Chairman, for holding this hearing. 

Obviously, the hearing deals with the current conditions in the 

jumbo mortgage market, something that concerns all of us. 

As the chairman mentioned, the bipartisan economic stimulus 

package which we enacted in February temporarily increased the 

conforming loan limit for Fannie Mae and Freddie Mac, raising 

that amount to $729,750 in certain high-cost areas. 

While those limits only apply to mortgages originated between 

July 1, 2007 and December 31st of this year, the GSEs are authorized to securitize these new jumbo conforming mortgages at any 

time during the life of the loan. 

The objective of this temporary increase in the GSE loan limits 

was to inject liquidity into the jumbo mortgage market at a time 

when investors’ aversion to risk had cost spreads between interest 

rates on those mortgages and mortgages eligible for purchase by 

Fannie Mae and Freddie Mac to widen alarmingly. 

Lower rates on jumbo mortgages would in turn help increased 

demand in high-cost markets where the fallout from the bursting 

of the housing bubble has been the most severe. 

While these beneficial effects have been slow to materialize, 

there have been some hopeful signs in recent days that liquidity is 

returning to the jumbo market as the GSEs ramp up their purchases of these mortgages and spreads between jumbo conforming 

and regular conforming loans narrow. 

A key question that this committee must ask, and I am sure the 

witnesses, particularly from Fannie Mae and Freddie Mac can shed 

light on this, is whether Fannie Mae and Freddie Mac will be able 

to continue to support the conforming mortgage market in a safe 

and sound manner, while assuming additional responsibilities in 

the subprime and jumbo markets. 

Although these higher loan limits for Freddie and Fannie may 

help to reassure mortgage lenders and stabilize local markets that 

have been battered by sharp price declines and record foreclosures, 

policyholders must be mindful that they are also increasing the 

risk for these two GSEs. 

Strong and well-capitalized GSEs are essential to the stability of 

the housing finance system and our financial markets generally, 

and that is why I remain committed to working with Chairman 

4 

Frank and our Senate counterparts to achieve comprehensive GSE 

reform this year. 

I think the GSE reform is one of the things that there is some 

unanimity over the need for. As Chairman Frank and I have expressed on many occasions, we just regret that component and the 

FHA component has not already passed and been signed by the 

President. 

I welcome the witnesses and look forward to your testimony. I 

thank you, Mr. Chairman, and yield back the balance of my time. 

The CHAIRMAN. I thank the gentleman. I would just say that the 

GSE reform has actually been a very bipartisan approach because 

we passed a very good version of it in the previous Congress under 

the chairmanship of Mike Oxley, and then we worked again and we 

got overwhelming votes. 

I know there was some controversy over the affordable housing 

fund. That is important to me but it is separate from the structural 

case of reorganization. If you look at just the reorganization, we 

have gotten close to 400 votes in a Republican-led Congress and a 

Democratic-led Congress. 

I share his view and I am hoping that we will finally get that 

one done by the end of the month. 

The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you, Mr. Chairman. Thank you for holding 

this hearing. It is important for us to understand the delays in the 

effective implementation of increased loan limits. It is even more 

important for these hearings to focus on making these loan limit 

increases for high-cost areas permanent. 

Unfortunately, at the Senate Banking Committee mark-up, they moved toward a limit of $550,000. This figure will deprive hundreds of thousands of people in high-cost areas in California and 

elsewhere of the benefits that the GSEs are supposed to provide 

consumers. 

I believe it is essential in any conference, formal or informal, 

that in arriving at a comprehensive housing bill, the House conferees insist on the House position to permanently increase the 

ceiling to $729,750 in the high-cost areas. 

A bill that does not achieve that goal I do not think will be acceptable to those of us who represent such areas. 

This country is very similar in so many ways from one place to 

another. The same stores at the same prices. Maybe you pay 5 percent more for a cheese dog here, a McDonald’s hamburger there. 

Even our weather. Maybe it is 10 percent hotter, 20 percent hotter 

in one place than another. 

Housing prices are the one thing that is dramatically different. 

In Pittsburgh, the median home price was $120,000 last year. In 

Omaha, $138,000. In Los Angeles, $589,000. That is a ratio of difference that makes the political differences between Oregon and 

Kentucky look like nothing. 

We cannot have one-size-fits-all. We knew that when these limits 

were created many decades ago. We recognized that Guam, Hawaii, 

and Alaska had to have higher limits. 

Now we realize there are 10 to 15 high-cost areas on the mainland of the United States, the lower 48, that need these higher limits as well. We are not talking about millionaires. We are talking 

5 

about teachers and police officers. Can they afford a modest three 

bedroom home anywhere in the L.A. metro area, and more importantly, anywhere in the 27th District? 

That is why we need to have the changes that we made in the 

Economic Stimulus Act made permanent. This committee and this 

House was wise enough to do so. As testimony we will hear today, 

this could mean $400 a month on somebody’s mortgage. That is important not only in this time of economic crisis, but in the years 

to come. 

I hope very much that the House insists upon its position and 

that the Senate sees the wisdom and we get this matter handled 

in a way that meets the needs of high-cost areas. 

I yield back. 

The CHAIRMAN. The gentlewoman from West Virginia, the ranking member of the Housing Subcommittee, is recognized for 3 minutes. 

Mrs. CAPITO. Thank you, Mr. Chairman. Thank you for holding 

this hearing. It is important for us to understand the consequences 

of our actions and with the passage of the stimulus package and 

the temporary increase in loan limits, we have an unique opportunity here today, I think, to see what impact these increases will 

have on the housing market. 

I supported the passage of the stimulus package and was able 

last week or more recently to get an amendment to temporarily 

raise those loan limits for VA loans, guaranteed loans, as well. 

The credit crunch has been affecting the Nation recently and it 

has been making it very difficult even for borrowers with stellar 

credit ratings to obtain loans for more than the conforming loan 

limit. 

In many expensive housing markets, as we have heard, including 

parts of my own district in West Virginia, this situation has put 

the American dream of homeownership on hold, particularly for 

those who are first-time homebuyers. 

Despite raising the conforming loan limits, the market has been 

slow to respond. Recently, there have been, I think, some encouraging signs. 

According to an article that appeared in the Washington Post on 

Saturday, just in the past 2 weeks, interest on the new conforming 

jumbo mortgages for amounts between $417,000 and $729,750 have 

come down enough to make a difference to borrowers. I hope this 

is a trend that continues. 

I look forward to hearing the panel. I thank the chairman for allowing me to give an opening statement. Thank you. 

The CHAIRMAN. The gentleman from Massachusetts, my colleague from the high-cost area. 

Mr. LYNCH. Thank you, Mr. Chairman. I want to thank the ranking member as well. 

I appreciate that we are having this hearing on the progress of 

efforts to expand the conforming loan limits. I represent a significant part of the City of Boston and the outlying suburbs, as the 

chairman mentioned. This is very important to the people that I 

represent. 

The gentleman has already noted—the gentleman from California—the disparity between regions here. The area that I repVerDate Aug 31 2005 16:25 Aug 15, 2008 Jkt 043701 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\43701.TXT TERRIE
6 

resent, the 9th Congressional District of Massachusetts, is enormously impacted. 

The questions I would like the panelists to help us with as we 

go forward today—I do appreciate your willingness to come forward 

and help the committee with its work, I really do—there seems to 

be several explanations of why the initial response was so slow. 

Number one, I guess I am curious, was it just a slow start with 

a new product, and is that now being rectified? I read a story several weeks ago in the New York Times that was enormously critical, and I will not repeat the quotes in the paper by some of the 

folks who are trying to deal with this, but they were extremely critical. 

Most recently, not a couple of days ago, a Washington Post article said that to the contrary, there may be some significant 

progress. 

I would like to hear about that. Also, I would like to hear from 

the panelists about what is sticking the throttle here? What is the 

problem that is causing the slow down? Is it in fact the inability 

of us to securitize these in a similar way as we do the previous conforming loans that are purchased? 

Is it the fact that these are not TBA eligible? What is the problem here that perhaps we did not foresee other than the difficult 

loan environment right now because of the housing crisis? 

Those are some of the things I would like to touch on. Again, I 

appreciate the panelists for coming and I appreciate the chairman 

for holding this hearing, and I yield back the balance of my time. 

The CHAIRMAN. The gentleman from California, Mr. Miller, who 

has an interest in this subject will be recognized for 3 minutes, 

which will be too little. 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

This is something that as you know we have been fighting for for 

about 5 years. We could see this coming in California, that liquidity 

was going to be a huge, huge problem in the marketplace, especially as the housing prices increased. 

In August of 2007, when Wall Street shut the money off, the 

market just plummeted. Loans were not available. 

We passed a stimulus package that increased those to about $727,000, which took a while to implement because FHA had to determine what the median prices were in areas, so it took a while 

to get going, but come December of this year, Mr. Chairman and 

Mr. Bachus, when the market changes again, and if we take GSEs 

and FHA out of the market in high-cost areas, unless Wall Street 

comes back, it is going to present the same result that occurred 

when Wall Street pulled out. It is just going to have a devastating 

effect on the marketplace. 

We have actually done something unusual, Chairman Frank. I 

have a letter signed by every Republican Member from the California Congressional Delegation supporting the concept of permanently increasing the loan limits to $729,750. 

Can I ask that this be introduced into the record? 

The CHAIRMAN. Without objection, it is so ordered. 

Mr. MILLER OF CALIFORNIA. From 19 Republican Members, 

which to get all 19 to agree to anything is a major task. Every 

Member of our Delegation understands that— 

7 

The CHAIRMAN. If the gentleman would yield, I would note that 

among those are four California Republican members of this committee. 

Mr. MILLER OF CALIFORNIA. Very true. In California, we face a 

problem; 21 of the top 25 basically least affordable housing markets 

in the United States happen to be in California. The other side is 

California is also the largest economy in this country. 

One goes hand-in-hand with the other. The concept of being discriminated against based on geography, and that is what California 

and high-cost areas like Boston and other areas are, because of 

where people live, they are not entitled to participate in lower rate 

mortgages that the GSEs provide and FHA provides that every 

other area in the United States that is not a high-cost area does. 

It seems unfair to me that if you are in a housing market where 

the median home price is $150,000, you can really go out and borrow almost triple, and we cannot even reach median in most areas. 

In fact, after the recession in 2007, the median home cost in California was $558,100, after the downturn occurred. 

What we are doing right now in injecting liquidity in the marketplace for GSEs is working. It took a while to implement. What do 

you do to a buyer in California and other high-cost areas that enters an escrow in mid-November and for some reason they cannot 

close that escrow by December 31st? They are going to lose that opportunity. 

The jumbo marketplace has dried up. Look at the jumbo marketplace. Only 18 percent of the jumbo marketplace in 2005 made 

fixed-rate 30-year loans. The fixed-rate loan for 30 years, 18 percent. GSEs, 82 percent of all the loans made were fixed-rate 30- 

year loans. They are saving between $280 and $471 a month in interest payments. High-cost areas should benefit from that also. 

What we did on the stimulus package should be made permanent. It is proving to work. Right now, we are in a housing crisis. 

Some people bought a home and things did not work out. A trigger 

kicked in. Their rates jumped up. They may have had problems 

with their jobs. They cannot make the payments. 

Today the programs that we have implemented through FHA, 

high-cost areas cannot participate in. We need to change that. 

Mr. Chairman and Ranking Member Bachus, I hope we stick to 

our guns that every high-cost area in a State should be treated like 

the rest of the States are. We need to make sure this is permanent. 

It is a long time coming. I think it is a victory we can be proud 

of if we can accomplish it. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman from California asked me to yield 

briefly, if there is no objection. 

Mr. SHERMAN. Yes, Mr. Chairman, I also have a similar and even 

more strongly worded letter that only has 12 signatures so far, but 

I would like unanimous consent to enter it into the record when 

the record closes, and by then, I will have more than 19. 

Mr. MILLER OF CALIFORNIA. Mr. Sherman, if I can help you circulate that, I would be happy to do so. 

The CHAIRMAN. If our competitive instincts over there can be restrained, yes, we will be happy to do that. 

8 

The gentleman from North Carolina wanted to be recognized to 

make a brief statement. 

Mr. WATT. Thank you, Mr. Chairman. I want to be recognized for 

two reasons. Number one, I was getting the impression that this 

was only a California and Massachusetts issue. I wanted to give a 

broader perspective to it. 

In fact, while none of the communities in my congressional district get impacted by this as it turns out, even Charlotte, which I 

represent a part of, there is a recognition that the housing market 

and the credit market is a national market more than ever before. 

I think this is extremely important even to those communities 

that may not qualify for the benefits of the jumbo mortgage. 

Second, I wanted to express some degree of encouragement and 

appreciation to the GSEs and to the capital markets for continuing 

their efforts to make this a reality because if Fannie Mae and 

Freddie Mac do not set up a structure to do this, then it really cannot be effectively played out, and I know they have made some extraordinary efforts to enable that to happen. 

If the market into which they sell these loans does not take some 

extra steps and get aggressively involved in making this play out, 

it will not happen. 

It takes the members of the Securities Industry and Financial 

Markets Association to work with the GSEs to make sure that 

these loans can get into the secondary market. While that process 

has been slow, I think there has been movement on that front that 

they need to be applauded for, and they need to be encouraged to 

continue that movement because if it does not continue, then we 

cannot pull this off even if we make this a permanent provision in 

the law. 

Mr. MILLER OF CALIFORNIA. Will the gentleman yield? 

Mr. WATT. I will be happy to yield. 

Mr. MILLER OF CALIFORNIA. One comment. I agree with everything you said, Mr. Watt. The benefit of this is that people in highcost areas are able to sell their home and in many cases move into 

areas that are not high-cost areas that are being impacted by the 

housing market today. 

You are correct. It is not just a high-cost area issue. It is a national issue. I thank you for your time. 

Mr. WATT. I thank the chairman for the time, and I yield back. 

The CHAIRMAN. The gentleman from New Jersey, Mr. Garrett, 

for 3 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman, Ranking Member Bachus, and all the members of the panel who are testifying. 

For the last several years, I have sat through numerous hearings 

of this committee and heard members and witnesses alike basically 

bemoan the fact that housing prices are just too high and people 

cannot afford anymore to buy their own homes. Now that the prices 

are coming down a bit to a more accurate and sustainable level, 

this Congress seems to be trying to prop those prices right back up 

to the unaffordable range. 

Most of the studies I have seen indicate that the spreads are still 

very large in the conforming jumbo market, and that due to the underwriting standards for those loans, the only people who are actuVerDate Aug 31 2005 16:25 Aug 15, 2008 Jkt 043701 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\43701.TXT TERRIE
9 

ally able to benefit are those who already have a mortgage and are 

able to refinance. 

The people that so many members claim to want to help, the 

first-time homebuyer, are really not able to benefit because they do 

not have the necessary downpayment available to them. 

If prices are coming down, should we be raising the conforming 

loan limits, much less keep them at the current level? 

It stands to reason that if housing prices are falling in these 

areas, especially areas like California and Nevada that have the 

largest housing cost increase, then we really should be looking at 

lowering the conforming loan limits. 

I have met with a number of economists and housing industry 

representatives on this issue. They inform me that when using appropriate underwriting standards, combined with a normal loan to 

value ratio, a family must make roughly $200,000 a year to afford 

a house around $700,000. 

I find it interesting that our colleagues across the aisle continue to advocate raising taxes on families making over $200,000 a year 

but they want to have the government help those very same people 

by subsidizing the cost of their house. 

Instead of allowing those families to keep more of their hardearned money and allow them to decide how they want to spend 

it, what we are doing is to tax those families more and then have 

the government turn around and try to help them buy a home. 

Just this last week, my Democrat friends voted to raise taxes on households and small businesses making $500,000 a year. They 

claim that these people are the super wealthy families and they 

should shoulder a higher burden of the tax burden. 

This week, they advocate to have the government insure those 

families’ homes to help them save a few bucks a month. 

I hope my friends across the aisle can better explain their rationale of why the government needs to take more money from hard 

working families that they say are too rich and then help those 

very same families insure their houses. 

I would like to again thank our panel for being here today, and 

I do look forward to your testimony. 

The CHAIRMAN. If the gentleman would yield, I would respond in 

part; according to the Congressional Budget Office, by raising the 

jumbo loan limit for the FHA, the Federal Government makes 

money. That is, they pay into the FHA more than the FHA pays 

out. 

Mr. GARRETT. Reclaiming my time, that is really not the point 

whether it is making money or not making money. 

If we really want to help the first-time homebuyer, then you have 

to look to see who the first-time homebuyer is, and is that somebody who makes over $200,000 or $250,000 a year. 

Mr. WATT. Would the gentleman yield? 

The CHAIRMAN. Would the gentleman yield to me? 

Mr. GARRETT. Let me just finish. 

The CHAIRMAN. I will recognize the gentlewoman from New 

York, but I will ask her to yield to me for 30 seconds. 

The gentleman from New Jersey often changes his arguments. 

Having made one, if it gets met, he gets another one. He talked 

about an— 

10 

Mr. GARRETT. Will the gentleman yield? 

The CHAIRMAN. No, I will not yield, just as the gentleman would 

not yield to me. The gentleman said there was this inconsistency 

with regard to taxation and he suggested that we were giving a 

subsidy—not suggested, he said we were subsidizing the upper-income people, that the government was subsidizing them by raising 

the jumbo loan limit. 

The fact is that the Congressional Budget Office certifies that by 

raising the jumbo loan limit, we make money for the Federal Government. There is no taxpayer subsidy. There is a taxpayer benefit. 

That is the argument the gentleman made. 

He then wanted to make another one, and he is entitled to do 

that, but the argument that we are somehow giving a taxpayer 

subsidy to the upper-income people in the jumbo loan limit is contradicted by CBO. 

Mr. WATT. Will the gentlelady yield to me to address his other 

issue, which is saving just a few dollars? If the gentleman would 

look at the difference between the rate on a jumbo loan of $418,000 

and a conventional loan of $417,000, the difference is $250 a 

month, not a dollar or two a month. 

The CHAIRMAN. The gentlewoman from New York. 

Mr. GARRETT. Would the gentlelady yield? 

Mrs. MCCARTHY OF NEW YORK. I would like to make a statement 

first. 

The CHAIRMAN. I will give the gentleman time at the end of her 

statement. 

Mrs. MCCARTHY OF NEW YORK. What I would like to say is that I live on Long Island; I certainly do not make $200,000 a year, although I feel I make a very good salary. With that being said, if 

the majority of people that I know have taken home equity loans 

out because they got all the credit that they needed, and yet those 

homes, and I will talk about my own house, I bought the house for 

$70,000. My estimated real estate is at $578,000. There is not a 

home in my area, and it is a tiny, tiny home, a 40-by-100 piece of 

property, and if I tried to sell that house tomorrow, I probably 

could not get $475,000. 

People have taken out home equity loans trying to build up because I have young families moving into the area, they are blue collar workers. They are not making the kind of money, over 

$200,000, so basically I am certainly going to fight to make sure 

that my constituents have the opportunity, if they have taken out 

one of these unfortunately predatory loans, and to be very honest 

with you, I did not think many of them did, but when we started 

looking at the map of what New York State is putting out, apparently in areas that we would have never suspected, we are seeing 

these kinds of foreclosures because young people have gone out and 

tried to buy a home in a middle-class neighborhood. We are not 

talking about rich people. 

With that, I yield to the gentleman. 

Mr. GARRETT. Part of the reason I did not yield is because I only 

have 3 minutes, and I know the chairman can have additional 

time. 

One of the points I was trying to make, and I tried to make a 

couple of points, was who are we trying to help? As the gentlelady 

11 

was saying, in order to buy these homes, you have to be making 

a substantial amount of money, around $200,000. 

It may be two income earners. It may be a police officer and somebody else, a wife, who is a nurse, each one making $80,000 or 

$90,000. The household income there is approaching $200,000. 

What I am told by that real estate market is that the general 

rule was that around 21⁄2 times your basic annual income goes toward the value of the loan you can afford—21⁄2 times $200,000 

comes out to $500,000 to $600,000. 

If that is who we are aiming for, that is my first question, who 

are we aiming for with this thing, is it people making around 

$200,000-plus who would be getting into this? 

Mrs. MCCARTHY OF NEW YORK. Reclaiming my time, if we are 

talking about a young couple, whether it is a police officer, a fireman, or a nurse, their combined salaries are not going to come anywhere near $200,000. Yet, to buy a starter home on Long Island, 

I am telling you, a nice little home, which I consider my home to 

be, you are talking anywhere from $475,000 to $550,000. That is 

a starter home. 

The CHAIRMAN. I am guilty. Let’s not get into a debate here. 

Let’s finish the opening statements. We will have plenty of time to 

debate it after our witnesses. 

Let me call on Mr. Neugebauer now to give a statement. 

Mr. NEUGEBAUER. I thank the chairman. I think one of the 

things that the marketplace needs now is just some certainty. We 

have done some things, the FHA reform, the GSE reform. We need 

to get those pieces passed. We need then for those regulators or the 

GSEs to give the GSEs the parameters of what the rules are going 

to be. We need to give FHA the relevancy of being able to be innovative and to keep up with the marketplace. 

These stop-and-go policies that we are trying to do here, while 

they are well-meaning, I think sometimes they cause more confusion in the marketplace when a marketplace really just needs more 

certainty. 

What we did know prior to this little hiccup that we have had 

in the housing and mortgage market is we had a very robust housing market, a very robust mortgage market. 

What my hope is, very quickly, Mr. Chairman, is that we get 

these passed and then we step back and let the marketplace begin 

to adapt and put this puzzle back together. 

I was thinking the other day, sometimes I sit down with my 

grandkids, and we get those 500 piece puzzles. It takes a little 

while to put that puzzle together. 

It is going to take a little while to put this marketplace back together because there are some uncertainties, some things happened 

that I can assure you probably will not ever happen again. There 

are some lessons learned. 

What I would hope is that while the chairman and I do not agree 

on all of the things we have been working on, I think the thing 

that we do agree on is that we need to bring this GSE bill, get that 

put in place, so that some parameters would be put in place so that 

the GSEs would be able to build a business plan around. 

The other is to make FHA more relevant so that they can price 

and develop products. I do not think it is our role to tell the marVerDate Aug 31 2005 16:25 Aug 15, 2008 Jkt 043701 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\43701.TXT TERRIE
12 

ketplace this is a jumbo, this is not a jumbo. This is the underwriting standards for this, this is not the underwriting standards 

for this. 

What I think we do is we put parameters on those entities, we 

hold them accountable, and if they start doing some things that affect the safety and soundness of that, you make changes. For us 

to have to come running to Congress to determine how big a loan 

I can make or what the term of that loan is going to be or what 

the underwriting standards can and cannot be for that, I think long 

term, it is a hindrance to the housing market and not necessarily 

a plus to the housing market. 

Mr. Chairman, I hope that as you and I have talked, maybe 

there is some chance that those changes will be made and we can 

let the market move on. 

The CHAIRMAN. I thank the gentleman. I just have one piece of 

advice. He does not need advice from me. As hard as that puzzle 

is for you and your grandchildren to put together, do not invite a 

Senator, then you will never get it put together. 

[Laughter] 

The CHAIRMAN. Well, maybe, but it will take a lot longer. 

We have 4 minutes remaining and I am going to split it between 

my two colleagues, the gentleman from Massachusetts for 2 minutes, and then the gentleman from New York for 2 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. Very quickly, maybe 

some of my colleagues do not understand it, but my hope is that 

everybody on this panel understands it, there are different regional 

markets that require different approaches. Some markets are more 

expensive. Some markets are less expensive. 

In all of the most expensive markets, incomes are higher as well. In my district, you could not possibly live on $10,000 a year. You 

cannot do it, I do not care where you live or how you live, you cannot do it. 

In my district, $50,000 is a lower-middle-income person. In an- other district, you can live like a king on $50,000. 

I am here today to hear why the market is not doing what we 

need it to do, which is to provide an opportunity for middle-class 

working people to own a home in a reasonable manner in the same 

way all across this country, from the rich markets to the poor markets. 

Why cannot the private industry, the private market, adjust to 

meet regional differences? That is what I am here to listen to. If 

my colleagues do not understand it, I am more than happy to invite 

any and all of them to my district to try to find a house for less 

than $500,000. If they can do it, I will help them invest. 

The CHAIRMAN. I thank the gentleman. With the indulgence, I 

miscalculated. The gentleman from Georgia is recognized. 

Mr. SCOTT. Thank you very much, Mr. Chairman. I appreciate 

that. I want to do several things here. First, I want to associate my 

remarks with those of Mr. Miller from California. I agree with you 

100 percent. You are absolutely right and I will certainly work with 

you on that. 

I am so glad to hear from you, Mr. Chairman, that the President 

is going to sign our housing bill, our mortgage bill. That is so important. 

13 

This country is in dire shape. I think there is a sense of urgency 

that is not resting where it ought to be. Nowhere is that sense of 

urgency more devastating, more impactful, than in my own district. 

Let me just tell you, Georgia as a State, ranks 8th in foreclosures 

at this very moment. In my own district which I represent, one of 

the fastest growing areas in this country, is the suburbs of Atlanta, 

which has been devastated by this crisis. One county alone, Clayton County in my district, ladies and gentlemen, has a foreclosure 

rate of nearly 2 out of ten; that is 20 percent. That is extraordinary. 

As we approach this issue, the hearts and the minds of the 

American people are literally breaking. They are hanging on by 

their fingernails. 

On top of that, Atlanta has just gone through a devastating pattern of thunderstorms and tornadoes that I am sure many of you 

have heard about and seen on the CNN reports. The estimated cost 

just to the housing loss is nearly $300 million. Just last evening, 

another storm came through. 

All of this is devastating to the area. I wanted to certainly make 

that point of how this mortgage meltdown and credit crunch is so 

devastating to my area and why I want to just use every opportunity I can to issue this cry of urgency. 

We need help in my home State of Georgia, particularly in my 

district. 

Mr. Chairman, I just want to get to what I think is the crux of 

the matter that I hope we can get to this morning. 

First, we have to answer this question: Why has it taken regulators, who were well aware of the subprime mortgage issue early 

on, so long to act, despite the clear evidence of problems in this 

market? 

Ladies and gentlemen, we have to solve that question. If we do 

not, so much of our other work will certainly be in vein. 

The other is as more and more creditors are cracking down on 

certain lending practices, which they are doing and it is good, we 

have to ensure that sound underwriting of these loans is rewarded. 

At the same time, we have to make sure that those players out 

there who continue to prey on individuals realize there are consequences, and while we make certain that credit continues to be 

available to those that qualify and are feasible candidates for home 

loans such as first-time homebuyers, lower-income households, and 

minority families in communities. 

As such, we must increase the conforming loan limit, but will increasing the conforming loan limit indeed have a positive effect 

which will be felt by many homeowners and homebuyers. 

Finally, would lifting the limits permanently be good policy and 

encourage first-time homebuyers to purchase and further staunch 

the flow of foreclosures? 

I think that is the crux. Thank you very much, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas is recognized for 3 

minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I believe it was 2 days ago that the front page of USA Today had 

a headline ‘‘Taxpayer Bill Leaps By Trillions.’’ 

14 

The first paragraph says, ‘‘The Federal Government’s long term financial obligations grew by $2.5 trillion last year, a reflection of 

the mushrooming cost of Medicare, Social Security.’’ It goes on to 

say that is now roughly $500,000 per household. 

I say that as background because I fear that we once again are 

looking at a situation where we may be adding more potential taxpayer liability and exposure. 

What we are speaking of today, I suppose the pressing problem, 

is to figure out how the GSEs can get involved with larger mortgages, as high as 24 times greater than the median income of every 

individual in the United States. 

We know that the conforming loan limits were increased in the 

recent tax rebate bill passed in February. I have several concerns. 

Number one, I am not sure it was a good policy to do this in the 

first place, given what the GSE charter is. 

Second of all, I have asked OFHEO to send me a map of which 

metropolitan areas, which geographic areas, would be impacted. I 

know it is a small map. Hopefully, everybody can see white and 

red. 

According to OFHEO’s definition, the vast majority of the country seems to be left out. California, it seems like they may do well, 

and then from the Washington metro area up along the Atlantic 

Seaboard, South Florida, and that is about it. 

I believe, according to OFHEO as well, that 60 percent of the 

counties that would benefit literally are in those three spots. 

Besides the benefits going to a limited number of people, I believe that this effort just takes the GSEs away from their core mission, further away from affordable housing for the middle- and 

very-low-income families. 

I am not sure it makes sense in the context of the mission. 

Some have said we ought to raise these conforming loan limits 

because many people are facing higher prices through no fault of 

their own. Ultimately, people choose to live in areas of high density. One of the reasons is because they may have higher incomes. 

They may actually vote for more onerous land use and zoning and 

other restrictions that can make land more expensive and thus, 

drive up the cost of housing. 

Already, the conforming loan limit right now, $417,000, a family 

would have to earn at least $130,000, which is twice the median 

family income in the country, and one that would be 50 percent 

higher, well under the $730,000 maximum limit, would serve families with incomes of up to $185,000, which ranks in roughly the top 

5 percent of all families in America. 

With increased systemic risk that is still on the books threatening a still weakened economy, I am not convinced this policy 

makes sense. I yield back the balance of my time. 

The CHAIRMAN. Our final statement will be from the gentlewoman from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. In the interest of 

time, I would just like to put my prepared statement in the record. 

The CHAIRMAN. Without objection, it is so ordered. 

Mrs. MALONEY. I would just like to briefly say that I am strongly 

in support of the conforming loan limit increases and would like to 

be associated with the comments of my colleagues on both sides of 

15 

the aisle who have spoken out on the need for liquidity in the housing market, certainty in the housing market, and the real difference that exists in our country in regional housing markets. 

I happen to represent a district in Queens and Manhattan with 

high housing costs. This is a very, very important issue to my constituents, and therefore to me. I fully support the increases and I 

fully support making them permanent. 

As the chairman pointed out, this is a taxpayer benefit. I would 

just like to conclude by saying that everyone knows we need to get 

liquidity in the market. This is one way to put liquidity into Fannie 

Mae and Freddie Mac. I think we should do it. It is going to help 

housing and it is not costing taxpayers money. It makes the system 

stronger, and would allow even my constituents to benefit from 

Fannie and Freddie and FHA loans. 

Thank you. I yield back. 

The CHAIRMAN. If the gentlewoman would yield just on that one 

point, let me add, one of the things that we consciously did in the 

stimulus, and I talked about this with the Secretary, we allowed 

the Fannie Mae/Freddie Mac piece to be retroactive to July 1, 2007, 

in the hope that some banks which had come up against their limits because they were loaned out and did not have the capital, 

could sell some of those loans to Fannie and Freddie freeing up 

capital, which could then be used for loans up and down the spectrum. 

We had hoped, and we still do, that loans that had been made 

in 2007 could now be sold and the selling of those loans would free 

up capital to make new loans to people all across the income spectrum. 

With that, we will begin the hearing, and I guess the witnesses 

have a sense of how engaged the committee is on this subject. I am 

going to begin with Mr. Thomas Hamilton, the managing director 

of Barclays Capital. He is testifying on behalf of the Securities Industry and Financial Markets Association. 

STATEMENT OF THOMAS HAMILTON, MANAGING DIRECTOR, 

BARCLAYS CAPITAL, ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. HAMILTON. Mr. Chairman, Ranking Member Bachus, and 

members of the committee, I am Thomas Hamilton, managing director of Barclays Capital, and I am responsible for our residential 

mortgage asset backed and commercial mortgage trading businesses. 

I am pleased to testify today on behalf of the Securities Industry 

and Financial Markets Association, where I serve as vice chairman 

of the mortgage backed securities and securitized products division’s executive committee. 

We commend Chairman Frank and Ranking Member Bachus for 

their leadership and efforts to address the problems we see today 

in the mortgage markets. 

We appreciate the opportunity to discuss the agency mortgage 

backed securities market, the most liquid secondary market for 

mortgage loans in the world. 

The agency market includes MBS issued by Fannie Mae, Freddie 

Mac, and Ginnie Mae. Specifically, I would like to discuss the toVerDate Aug 31 2005 16:25 Aug 15, 2008 Jkt 043701 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\43701.TXT TERRIE
16 

be-announced market, an action taken by SIFMA with respect to 

which loans are acceptable for inclusion in TBA-eligible MBS pools. 

SIFMA is pleased to contribute to the understanding of the situation that is complex, with many moving parts and few simple answers, but of incredible importance. 

A TBA is a contract for the purchase or sale of agency mortgage 

backed securities to be delivered at a future agreed-upon date. The 

actual identity of the mortgage loan pool is unknown, however, at 

the time of the trade. 

Actual mortgage pools are subsequently allocated to the TBA 

transaction upon settlement which may be one or more months 

after the trade date. Participants in the TBA market generally adhere to market practice standards commonly referred to as the 

‘‘TBA good delivery guidelines,’’ which are published by SIFMA 

through consultation with all its members. 

The overall market for agency-backed MBS’ is huge. It was about $5.9 trillion at the end of 2007. It is no exaggeration to say that 

the market is vital to the mortgage finance system and this country, especially now when other secondary market sources of financing are closed. 

This market has been successful for one main reason, homogeneity of collateral. Investors who participate in the TBA market 

are confident that even though they do not know the identity of the 

exact mortgage pool they will be delivered, they are comfortable 

that the pool composition and performance will be within a certain 

criteria. If this confidence is lost, the mortgage market will suffer 

greatly as loans become more expensive. 

Pools that contain loans which are not homogeneous with TBAeligible product are traded in what is referred to as a ‘‘specified 

pool market’’ or packaged in collateralized mortgage obligations or 

CMOs. This is not an insignificant market. Outstanding CMOs 

alone were over $1 trillion at the end of 2007. 

The bright light in all this recent turmoil has been the performance of the markets for agency MBS. These markets have remained 

stable, given the guaranteed nature of these products, and the generally more conservative underwriting standards employed by the 

GSEs and FHA. 

As Congress deliberated on an economic stimulus package several months ago, the issue of providing liquidity to the jumbo loan 

market by increasing the agency’s loan size limits became a matter 

of discussion. 

In January and February, SIFMA called together its buy and sell 

side members on multiple occasions to discuss the impending stimulus legislation. The legislation was viewed as extremely important 

both in the context of agency MBS markets as well as in the larger 

context of something that could counteract the contraction of the 

availability of credit to deserving borrowers more generally. 

SIFMA believed, and still believes, that this legislation could be 

an useful tool to help strengthen the mortgage markets. SIFMA 

also met with representatives from Fannie, Freddie, FHA, and 

Ginnie Mae. SIFMA realized that it must act quickly to minimize 

any uncertainty in the markets and to ensure that the GSEs and 

Ginnie Mae could implement their new programs as soon as possible. 

17 

On February 15th, SIFMA announced its intention to publish an 

update to the ‘‘good delivery guidelines.’’ The updates to the guidelines reflect a decision by SIFMA members to keep the maximum 

TBA-eligible original loan balance at $417,000. 

I will now discuss the rationale for this decision. The importance 

of the continued liquidity and smooth functioning of the current 

conforming loan market must be underscored in this time of broad 

disruption to financial markets. 

SIFMA views this arrangement as the most expeditious and least 

disruptive methodology currently available to facilitate 

securitization and secondary market activity for higher balance 

loans, bringing liquidity and rate relief to higher balance loan borrowers while not imposing additional costs or impairing the liquidity for loans falling within the pre-existing loan limits. 

As I mentioned, the TBA market depends on perceptions of homogeneity and the introduction of jumbo loans which have significantly different prepayment characteristics in any amount and to 

TBA-eligible pools would have reduced the perceived homogeneity 

of the market. 

Given that the TBA market is so essential, especially in this time 

of stress, market participants are very hesitant to change the rules 

in a manner that they believe is likely to have negative consequences for liquidity and thus for the much larger class of conforming borrowers. 

There is a second important point, the legislation is temporary. 

While the program effectively has a 9-month life expiring on December 31, 2008, preliminary estimates as to when this program 

would become operational were in the 2 to 3 month range. 

These estimates have proven to be accurate. Market participants 

are hesitant to change and disrupt functioning markets for a program that has an uncertain future. 

While rates of jumbo loans have not yet returned to ranges approaching historical norms since the passage of the stimulus package, the reason for this does not relate to the TBAs or lack of inclusion of jumbo loans into TBA-eligible collateral. 

Rather, lenders and agencies face operational challenges to implement these programs and the programs are not running full 

speed yet at this point. 

One major hurdle was calculation of loan limits. Previously, 

Fannie Mae and Freddie Mac and their lenders operated with a national loan limit. The stimulus package, however, implemented 

more complex MSA-based regimes which were essentially already 

used by FHA and Ginnie Mae, but foreign to the GSEs and their 

lenders. 

This is not to say that the programs will not have the intended 

effect. We believe they will. 

The most mortgage analysts expect jumbo rates to drop is approximately 50 basis points over conforming loans which will be 

quite an improvement, and in the last few weeks, we have seen 

first issuance of jumbo loans backed by Ginnie Mae and the continued build out by Fannie and Freddie Mac of their loan purchase 

programs, and small pools are circulating on the trading markets. 

18 

We believe the market is on the verge of relief from higher rates 

and have dropped a quarter point in the last month, and we expect 

that to continue as the GSEs and Ginnie Mae’s programs grow. 

SIFMA supported the stimulus package provisions which increased the conforming loan limits and continues to do so. SIFMA 

believes that the housing agencies can, do and will continue to play 

an essential role in the recovery of these mortgage markets. 

SIFMA believes the correct decision was reached regarding TBA 

eligibility of pools containing jumbo mortgages. The decision strikes 

the correct balance between providing increased liquidity and rate 

relief to jumbo borrowers while preserving the liquidity of the TBA 

market that provides lower rates to the conforming borrowers. 

We thank the committee and its chairman for the opportunity to 

provide this testimony and would be happy to answer any questions. 

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

57 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Hamilton. Next, we will hear 

from Patricia Cook, the executive vice president and chief business 

officer of Freddie Mac. 

STATEMENT OF PATRICIA L. COOK, EXECUTIVE VICE 

PRESIDENT AND CHIEF BUSINESS OFFICER, FREDDIE MAC 

Ms. COOK. Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee. Good morning. My name is Patricia Cook, and I am executive vice president and chief business 

officer at Freddie Mac. Thank you for inviting me here to testify 

on recent developments. 

The Economic Stimulus Act that Congress passed in February is 

working as you intended, to bring liquidity and lower prices to targeted parts of the jumbo market. 

When the President signed the Stimulus Act on February 13th, 

the jumbo market was largely frozen. The private investors who 

had typically financed jumbo mortgages had abandoned the market. Jumbo mortgages had become very expensive or even unavailable, creating significant hardships for borrowers in areas with 

high house prices. 

To help get money flowing, mortgage money flowing into these 

areas, Congress temporarily raised the dollar limit for mortgages 

that Freddie Mac can buy from $417,000 to a maximum of 

$729,750 in high-cost areas. 

Now rates on GSE-eligible agency jumbo loans are starting to 

come down, nearly to those on ordinary conforming mortgages, and 

mortgage money is increasingly available in high-cost areas. 

I want to briefly describe Freddie Mac’s perspective on three key 

matters: First, the prompt steps we took to implement this new authority; second, the reasons why consumers are starting to benefit 

from these actions; and third, the role of our retained portfolio and 

the need for changes in the TBA market if increases are made permanent. 

The legislation required HUD to identify high-cost areas eligible 

for the increased limits. Three weeks after the passage of the legislation, HUD identified 224 separate high-cost areas and OFHEO 

calculated individual loan limits for each of these areas. 

19 

Just 6 days later, on March 12th, we announced credit terms and 

pricing on agency jumbo loans that met our current credit specifications. 

On April 17th, we announced that we expected to be able to buy $10- to $15 billion of new agency jumbo mortgages originated by 

the end of the year. By putting a bid in the market, we increased 

liquidity, because the bid meant our customers not only knew that 

we would buy these mortgages, but also at what price we would 

pay for them. 

The lower agency jumbo rates we are starting to see in the market are in my view entirely attributable to the GSEs. After our 

April 17th announcement, we saw rates on these mortgages offered 

by some lenders drop as much as three-quarters of a point from 

late March. Rates on agency jumbos are now a full point below 

other jumbos, and only about 20 basis points or less above conforming mortgages; about the same difference as in the most favorable market conditions. 

We expect this pricing will be the market norm for agency jumbo 

mortgages originated through the end of the year. 

It took only about 60 days after passage of the stimulus package 

for consumers to start to realize the benefits of our presence in the 

market. Normally, the primary market needs 60 to 90 days of lead 

time to implement even ordinary market changes. Here, we implemented a fundamental market change in 2 months. 

The third and final point I would like to make is that we are able 

to provide this support because we can buy agency jumbo mortgages and hold them in our retained portfolio. 

Currently, there is little investor demand for securities backed by 

jumbo mortgages. By buying for our portfolio, we are able to price 

more aggressively and bring down rates for borrowers. 

In times of market turmoil, our authority to buy and hold mortgages in our portfolio helps us sustain demand and keep rates low. 

This is the strategy we are now using with agency jumbos. 

In the long run, however, this situation is not sustainable. Agency jumbo mortgages are not eligible for inclusion in to-be-announced or TBA securities and hence do not have the liquidity that 

keeps prices low in the traditional conforming market. 

This treatment is tenable when the adjustments are temporary. 

If Congress decides to increase the loan limits permanently, as the 

House did when it passed H.R. 3221 a couple of weeks ago, these 

mortgages will need to become eligible for TBA securities. This 

would give these mortgages a securitization execution with the liquidity to be broadly attractive to investors, but only if investors 

can count on our ability to use the portfolio to ensure a backstop 

bid. 

Moreover, prohibiting the GSEs from holding agency jumbos 

means those mortgages cannot be TBA. 

I hope my testimony has been helpful and I am happy to answer 

your questions. 

[The prepared statement of Ms. Cook can be found on page 50 

of the appendix.] 

The CHAIRMAN. Next, we will hear from Mr. Thomas Lund, the 

executive vice president, single-family mortgage business, for 

Fannie Mae. 

20 

STATEMENT OF THOMAS A. LUND, EXECUTIVE VICE PRESIDENT, SINGLE-FAMILY MORTGAGE BUSINESS, FANNIE MAE 

Mr. LUND. Good morning. Thank you, Chairman Frank, Ranking 

Member Bachus, and members of the committee for this opportunity to be here today. 

I have submitted my written testimony so in my short time this 

morning, I really want to make four or five key points to you. 

I think the first is that this committee for several years has recognized the need to expand the benefits of the conforming market 

to high-cost areas. When the economic stimulus package was 

passed, our goal at Fannie Mae was to be ready to take deliveries 

within 30 days of the time that HUD published the list of eligible 

high-cost areas. We met that goal on April 1st. 

Since that period of time, we have continued to expand our eligibility, improve our underwriting, and we have made significant 

pricing enhancements to make the programs more attractive. 

Despite that, we have done a limited amount of volume, about 

$80 million, through the month of May, and I believe this is really 

the result of two issues, as Patty just mentioned a minute ago, it 

is really about time. It takes us and our lenders time to bring the 

new product to market. It also takes time for consumers to apply 

for mortgages, get approved, have the lender close the loan, and ultimately deliver that loan into the secondary market. All and all, 

this can take anywhere from 60 to 120 days in that life cycle. 

The second issue really is the TBA market. It is the most efficient liquid market for mortgages in the world. These loans were 

not eligible for TBA and as a result, rates did not drop as quickly 

as people anticipated they might have. 

On May 6th, Fannie Mae announced that our portfolio would buy 

jumbo conforming loans at TBA-like rates even though they were 

not eligible for TBA. 

Since that announcement, mortgage rates on jumbo conforming 

loans have dropped from a high of about one and a quarter points 

above standard conforming rates to be virtually equivalent to the 

conforming rate market today. 

As you have heard earlier today, on a $700,000 loan, that represents about $400 in monthly savings to the average American 

family, and those are savings that are vitally important in times 

like this. 

We have committed to doing this through the end of the year, 

and this would not have been possible without our portfolio capability to buy these loans. 

Since the May 6th announcement, our lenders tell us that their 

pipelines of jumbo conforming loans have begun to swell. As a matter of fact, I called around to our top 10 lenders this week and they 

have told us they have about $3 billion in their pipeline as we 

speak, since this announcement has been made. 

We believe that it is beginning to work and starting to unfreeze 

the markets that we are attempting to get to. 

This pricing policy will last until the economic stimulus package 

runs out on December 31st. With a temporary loan limit through 

the end of the year, it is truly difficult to create a liquid market 

for these products. 

21 

In order for investors, SIFMA and others, to get comfortable with 

them as a TBA product, they want the certainty that permanence 

will provide, and we believe that would help make these savings 

sustainable, and I believe that this committee has recognized this 

under your leadership over the course of the last couple of years. 

I thank you for your time today and I look forward to any questions you might have. 

[The prepared statement of Mr. Lund can be found on page 83 

of the appendix.] 

The CHAIRMAN. Next, Dr. Emile Brinkmann, the vice president 

for research and economics of the Mortgage Bankers Association. 

STATEMENT OF EMILE J. BRINKMANN, PH.D., VICE PRESIDENT, RESEARCH AND ECONOMICS, MORTGAGE BANKERS 

ASSOCIATION 

Mr. BRINKMANN. Mr. Chairman, and members of the committee, 

thank you for the opportunity. 

My message this morning is that pricing in the jumbo loan market is improving as a result of actions taken by this committee, 

Congress, the White House, mortgage lenders, the GSEs, and FHA. 

The higher loan limits have allowed lenders to make loans to 

jumbo borrowers during a period of time when the secondary market remains effectively shut down for all but Fannie Mae, Freddie 

Mac, and Ginnie Mae securities. 

It has taken some time, however, since the passage of the bill, 

for us to see lower pricing in the jumbo market for a number of 

reasons. 

First, when the higher loan limits were announced by HUD at 

the beginning of March, the capital markets were caught up in developments at Bear Stearn. Broker-dealers on Wall Street who 

would normally bid on GSE securities and who would be expected 

to bid on these securities needed to conserve cash and could not 

commit to a price on a new security when they did not know if or 

for how much they would be able to sell it. 

Mortgage lenders could not commit to a lower rate on a mortgage 

until they saw what investors were willing to pay for that mortgage. 

Second, the pricing of the new GSE jumbo securities was complicated by the fact that there were different limits for different 

parts of the country, with different home price trends and different 

prepayment speeds, thus making it difficult to commit to a generic 

price. 

For example, loans in New York traditionally prepay at slower 

rates than loans in California, and are therefore worth more to investors. 

Third, the temporary nature of the higher loan limits makes the 

securities potential orphans in that new issuances will come to an 

end shortly after the end of this year. Pricing of securities is generally determined by the most recently issued securities where 

most trading takes place. 

In the absence of the prospective of new issuance, potential investors faced having to hold an illiquid security that they could not 

sell because they could not get a reference market price. Therefore, 

22 

they would demand a higher yield to compensate them for that 

illiquidity. 

What finally broke the log jam was the courageous move by 

Fannie Mae and Freddie Mac to simply announce a price at which 

they would buy jumbo loans that qualify for their programs. The 

establishment of a credible bid in the market has already led to 

greater interest among private investors. 

Keep in mind, however, that not every jumbo loan will be coming 

down in rate. The limited geographic coverage of the bill and the 

level of the loan limits exclude probably about half of the jumbo 

market that we saw for home purchases in 2006, and given the 

credit standards of the GSEs, credit standards that reflect the current environment, only about half of that number, it has been estimated, will actually qualify them for GSE purchase. 

Therefore, borrowers will still see a range of quotes for jumbo 

loans based on where they live, the amount of their downpayments 

and other credit factors. 

A jumbo loan in an area that is not designated a high-price area 

will likely cost more than an identical jumbo loan in high-price 

areas as determined by HUD. 

In addition, the jumbo loan market is not traditionally a 30-year 

fixed-rate market, with those loans making up roughly only a third 

of the jumbo market over the last 5 years. That has now changed 

with applications for fixed-rate loans making up about 70 percent 

of jumbo applications, but jumbo to conforming spreads on loans 

like 5–1 hybrids have not been as wide as those for 30-year fixedrate loans, so there are still good alternatives for jumbo borrowers. 

FHA-insured loans are also playing an important role. The demand for Ginnie Mae securities never really slackened and the efforts of FHA to roll out its program in risk based pricing has made 

FHA loans a cost-effective choice for many borrowers. 

I said at the beginning that the efforts to improve jumbo pricing 

are working. The Mortgage Bankers Association conducts a weekly 

survey of mortgage applications from around the country. As recently as March 2007, applications for jumbo loans made up 12.1 

percent of all applications. By March 2008, that jumbo share had 

fallen to only 4.4 percent; that was down from 12.1 to 4.4 percent. 

As of the first few weeks of May, however, that share has now 

increased to 5.8 percent, and we expect that percentage now to increase. 

Thank you very much, and I welcome your questions. 

[The prepared statement of Dr. Brinkmann can be found on page 

44 of the appendix.] 

The CHAIRMAN. Thank you. Next, we are pleased to have Heather Peters, the deputy secretary for business regulation and housing 

for the State of California. 

Ms. Peters? 

STATEMENT OF HEATHER PETERS, DEPUTY SECRETARY FOR 

BUSINESS REGULATION AND HOUSING, STATE OF CALIFORNIA 

Ms. PETERS. Good morning, Mr. Chairman, and members of the 

committee. Thank you for having me here. As you mentioned, I do 

oversee all business regulation and housing in the State of CaliVerDate Aug 31 2005 16:25 Aug 15, 2008 Jkt 043701 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\43701.TXT TERRIE
23 

fornia. I also have the privilege of chairing the Governor’s Task 

Force on Non-Traditional Mortgages. 

I have been asked to address three items here today: The demand for the new loans authorized by the Stimulus Act; the impact 

the competitive pricing would have on the California housing market; and the obstacles to those rates becoming competitive. 

On the issue of demand, nowhere is the demand stronger than 

in the State of California. Governor Schwarzenegger has repeatedly 

emphasized that the previous loan limits of FHA and GSEs has 

rendered them virtually irrelevant in our large cities. He has said 

no single issue is affecting California’s economy more than this one, 

of fair access to housing capital. 

We heard earlier in the opening comments that the median price of a home in Los Angeles is $589,200. We frequently hear use of 

the term ‘‘starter home,’’ and ‘‘starter home’’ here and ‘‘starter 

home’’ there can mean quite different things. 

For a starter home in Los Angeles, I want to emphasize, the lots 

are so small that they are measured in square feet, not acres. 

Seventy-seven percent of all California home sales last year exceeded the traditional FHA loan limits, and 69 percent of all California home sales last year exceeded the traditional GSE loan limits. 

Thanks to the hard work of this committee and the Senate on 

the Stimulus Act, I had the pleasure of appearing with then Secretary Jackson in Los Angeles as he announced the new median 

home prices. 

Thanks to that Act, 47 of our 58 counties now qualify for more 

than the traditional FHA loan limits, and 14 of our counties now 

qualify for the maximum loan limit of $729,750. 

Fourteen counties may not sound like a lot until you examine the 

population, but 21 million people live in those 14 counties, that is, 

half of the State of California’s population lives in counties where 

the median price justifies loan limits of $729,750; 21 million people 

is more than the population of every State in the Nation except for 

Texas. 

As you go on your break this holiday weekend, I would like you 

to think just for a moment of what you would be facing if your entire State had no access, virtually no access, to FHA or GSE loans. 

In assessing the impact, the impact is huge. Prior to the summer 

of 2007, 40 percent of all the sales in California were made with 

jumbo loans—since then, only 10 percent. Sales in California are 

down 24.5 percent year over year; that means 100,000 fewer homes 

have sold in California. 

We currently have 11.6 months of inventory on the market at the 

current rate of sales and we are adding to it every day with our 

REOs. 

Equally important, new construction is down 65 percent. Historically, normal levels of home building in California generates more 

than $70 billion in economic output, employing over half-a-million 

people, and providing nearly $5 billion in tax revenues. 

California has already seen a loss of $2 billion in tax revenues, 

and unlike Vegas, what happens in California does not stay in 

California. We are feeling it all across the Nation; the economic impact is huge. 

24 

Addressing the obstacles, I am very pleased to report that they 

are much fewer now than they were just a few weeks ago. Both the 

announcements of Freddie Mac and Fannie Mae and what they are 

doing in this regard have been applauded by the Governor and are 

wonderful first steps. 

Unfortunately, there are still external and internal factors that 

hinder the bringing of these loans to market in California and 

other high-cost loan markets. 

The external factors include the market logistics that we have 

heard about from SIFMA and the TBA market, and there is just 

not enough time to develop an efficient market between now and 

the end of the year. 

The yo-yo effect, as the Chair mentioned in his opening remarks, 

is significant and a market cannot develop without certainty. 

Internal factors that have not been mentioned are not just the 

interest rates but the differing underwriting guidelines. Underwriting guidelines by Fannie and Freddie applied to traditional 

$417,000 loans differ from the new loans: Downpayments are higher; FICOs are higher; and debt to income ratio restrictions are 

more strict. 

Even if we close the interest gap, there still remain barriers to 

California and other high-cost-loan States. 

These are new in name only. They are not new to California or 

to other high-cost States. We know how these loans perform. There 

have always been $500,000 loans, $600,000 loans, and $700,000 

loans. 

As the Chair noted in his opening remarks, we need to use that 

data, and the child needs to be taught they do not need to be afraid 

of touching every appliance in the home. 

One other procedural market issue I would like to bring up is on 

the FHA loans. You need to be FHA approved to originate a loan 

under the FHA programs. Unfortunately, in California, due to the 

virtual extinction of FHA, their loan volume in California had 

dropped by more than 98 percent. 

The FHA loans that were originated in California immediately 

prior to the crisis were less than 2,600 loans in the entire State of 

California. 

The problem is you have delivered the stimulus package that is 

bringing relief and the ability to get to FHA loans, but there is no 

one to write them. The brokers have let their approvals go because 

there were no loans to write. 

It takes 3 to 6 months for the brokers to get FHA loan approval 

to begin writing them again, right about the time this expires. 

They have apparently discussed this with HUD and have not been 

able to streamline that process. 

I thank you for the opportunity to address the committee. 

[The prepared statement of Ms. Peters can be found on page 94 

of the appendix.] 

The CHAIRMAN. Ms. Peters, I noticed four ears perking up, two 

over there, Mr. Miller, and two over here, Ms. Waters. I think you 

are probably going to see some joint intervention with HUD to see 

if we can speed up that process. Obviously, we would like to move 

as well. 

25 

Thank you. That is a very useful specific idea. I think my colleagues will be talking about trying to speed up that approval process. 

Our final witness is Mr. Vincent Malta, who represents Malta & 

Co., and he is here on behalf of the National Association of Realtors. 

STATEMENT OF VINCENT E. MALTA, MALTA & CO., INC., ON 

BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS 

Mr. MALTA. Thank you for inviting me to testify on the impact 

of higher loan limits for government-sponsored enterprises on both 

the housing market and consumers. 

My name is Vince Malta and I am a broker-owner of Malta & 

Company, a San Francisco-based real estate sales and management 

firm. I am also chair of the public policy coordinating committee for 

the National Association of Realtors. And on a personal note, I 

would like to thank Chairman Frank for addressing that committee 

last week at our legislative meetings and providing valuable and 

insightful information that was very well-received by our members. 

I also serve voluntarily on Fannie Mae’s National Housing Advisory Council. Today I am here to share the views of more than 1.2 

million Realtors who engage in all aspects of the real estate industry. Today’s hearing asks the question, why is it taking so long for 

the new jumbo conforming loan limits to reach homebuyers and 

homeowners? 

The truth is that it is not an easy or simple task. Implementing 

the new loan limits has been difficult for a couple of reasons. First, 

the authority is temporary, which raised questions for both lenders 

and investors on how to handle the loans. Second, new underwriting guidelines from both Fannie Mae and Freddie Mac have 

created some confusion about downpayment and other requirements. Difficulties aside, the fact remains that the new limits have 

not been in effect long enough to have a substantial effect on the 

housing market. 

In many States, lenders have only been able to make loans with 

the higher limits for a couple of months at most. Realtors believe 

that the new limits can have a substantial impact on the market, 

but only if we give them a real chance to live up to their promise. 

We estimate that a permanent increase in the loan limits could 

mean as many as 350,000 additional home sales, lower inventories, 

and a 2 to 3 percent increase in home prices next year. A boost in 

home prices could also reduce the number of foreclosures by as 

many as 210,000 by making it easier for consumers to refinance or 

sell. 

According to our estimates, the new limits would also enable 

more than 500,000 borrowers with loans above $417,000 to refinance to lower interest rates. This kind of stimulus is just what we 

need. Even when the housing market recovers, we believe higher 

limits will continue to play a vital role in giving families in highcost areas equal access to fair and affordable loans. Jumbo mortgages have become the primary option for large numbers of working class people who live and work in more expensive areas of the 

country like my home State of California—as stated by Ms. Peters, 

and so eloquently by Representatives Miller and Sherman—the 

26 

chairman’s home State of Massachusetts, and many States in between, including West Virginia, Ohio, Tennessee, Florida, New Jersey, New York, Connecticut, and Washington. In fact, 240 counties 

in 24 States and the District of Columbia benefit from the higher 

limits. Let’s not forget that raising the GSE limits could stimulate 

$35 billion in additional economic activity. That is good for every 

American, whether you own a home or not. 

Finally, without affordable alternatives available across the 

country, we could run the risk of another credit crisis at some point 

in the future. The House of Representatives already has included 

permanent, higher limits in H.R. 3221, the American Housing Rescue and Foreclosure Prevention Act of 2008. 

NAR wants to thank the chairman and other members of the 

committee for working so hard to include permanent, higher loan 

limits in this bill. We ask that you continue on this course in the 

coming weeks, and make the higher conforming loan limits permanent before they expire at the end of this year. Doing so is the right 

move for the housing market and the economy, and, more importantly, it is necessary to preserving the American dream. 

Thank you for the opportunity to testify today, and I will be 

happy to answer any questions you may have. 

[The prepared statement of Mr. Malta can be found on page 86 

of the appendix.] 

The CHAIRMAN. Thank you. 

I appreciate all the panelists who were very much on point. 

Ms. Peters, let me ask you, because you have both hands-on. You 

have heard one of the points raised, that this is going to go primarily to a very small slice of upper-income people, people making 

$200,000 or more. 

What will the income impact be? What kind of families are we 

talking about if we were to raise the loan limits in California as 

opposed to leaving them alone? 

Ms. PETERS. We are talking about basic working families in California, and we are not talking about millionaires. We are not talking about McMansions. For example, this weekend, I was out looking for a place to live, myself. I saw a one-bedroom condo, 768 

square feet, where the Realtor was telling me what a wonderful 

bargain it was now that the prices had dropped from $540,000 to 

$500,000. 

The CHAIRMAN. We have heard the numbers. But we are told, 

well, this is the rule of thumb that you would have an income of 

so much to buy that. My experience is that the problem in some 

of the areas that I represent is that thumb gets stuck in people’s 

eyes because like it or not, if they want to have decent housing for 

their families, and live within a reasonable distance of work, they 

have to go above that. So we are talking about people who aren’t 

making $200,000 a year, but are paying more of their income than 

we wish they had to. Would that be accurate? 

Ms. PETERS. Yes, very accurate. In California, the percentage of 

a family’s income that goes to meet housing requirements is far 

greater than that. Unfortunately, the prices in California have led 

people to reach further and further and go without many other necessities to be able to put a roof over their family’s head. 

The CHAIRMAN. Thank you. 

27 

I do appreciate all of the witnesses; I think all of you agree that 

the temporary nature of this is part of the problem, and, I appreciate that. 

Let me raise another issue, and that is the question of what is 

in the Senate bill and not in the House bill in the overall package, 

which is the requirement that all loans above the current limit be 

securitized. I would be interested in anybody’s comments. Mr. 

Hamilton, is this going to make good business for your people? Do 

you want to see that happen? 

Mr. HAMILTON. It doesn’t hurt us. You know, certainly, the industry, their interests are to get rates as low as possible for everybody across the credit spectrum and across the loan limit spectrum, 

whether the loan is securitized in a Ginnie Mae, Fannie Mae, or 

Freddie Mac security, or whether it’s a raw loan. I’m not sure it 

has an enormous impact either way. 

The CHAIRMAN. So, you are not advocating a requirement that 

there be securitization? 

Mr. HAMILTON. We would be indifferent. 

The CHAIRMAN. Let’s go down the panel, and that will be my last 

question. 

Ms. Cook? 

Ms. COOK. We are definitely not indifferent, and we think the requirement for securitization is a real issue for the success of the 

program going forward. You know, if you look at the situation right 

now, without a liquid market for securitized jumbos, for us to have 

to securitize them and sell them, it would completely undermine 

the objective of trying to keep rates low, because there isn’t a bid 

in the marketplace. It’s a circular argument. It’s important to preserve the ongoing availability and stability in that market to be 

able to purchase those loans when appropriate. 

The CHAIRMAN. You are talking about securitizing. You are not 

ruling out securitizing? 

Ms. COOK. No. 

The CHAIRMAN. Yes, Mr. Lund? 

Mr. LUND. And I would just add, if I could, you would create a 

separate class of security, and it would be the only security that’s 

conforming that couldn’t be put in the portfolios. Therefore, they 

would not be TBA eligible. And, once you take away that TBA eligibility, you add increased interest rate to the consumer. 

The CHAIRMAN. Dr. Brinkmann? 

Mr. BRINKMANN. One of the issues that goes without saying is 

not being able to get a street bid on these securities that would be 

created with these jumbos, so we do need the support of some other 

execution mechanism. 

The CHAIRMAN. Agreed, holding the portfolio. 

Mr. BRINKMANN. Yes, sir. 

Ms. Peters? 

Ms. PETERS. Yes, we advocate maximum flexibility in this uncertain time. 

The CHAIRMAN. Mr. Malta? 

Mr. MALTA. It would be the same and we would look at how they 

would affect rates in the long term, and we think negatively if that 

were required. 

28 

The CHAIRMAN. I am quitting while I am ahead, and I recognize 

the gentleman from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. I thank the chairman. 

Of course, he asked my questions, so that I think I heard from 

most of the panel that everybody is in agreement that this should 

be made permanent. Was there a dissenting opinion? 

Mr. Brinkmann? 

Mr. BRINKMANN. I believe our position is that we needed a program to carry us over until the markets began to work again. And 

our original idea for these limits, I think, was about a 2-year program, not to this year end, as well as more uniform limits across 

the country. So the MBA’s position is a little different. 

Mr. NEUGEBAUER. So your position is that the market will return 

to kind of the pre-bubble marketplace that in the private to nonGSE-backed that there would be a robust securitization market for 

those securities and would not necessarily need for Fannie and 

Freddie to be in that market? 

Mr. BRINKMANN. I think our position is that it has been very difficult to predict what the market was going to do from month-tomonth, much less 2 years out. But we thought that about a 2-year 

period would give us enough room to get this up and going again 

and bring the private market label back up to functioning. 

And, of course, if that happened, there would be the option of extending, but to try and operate in this environment and say this 

then requires a permanent new fix going forward is not something 

that we agree with. 

Mr. NEUGEBAUER. Over the years—I think I have shared before 

that I was in the home building business and housing business for 

a number of years and watched these markets go up and go down. 

And I have watched the issue on the GSEs recently and previous 

years, and I kind of have to relate it to Uncle Billy. You know, 

Uncle Billy is the guy that nobody wants to come to any of their 

parties, and they don’t invite him for Christmas until Uncle Billy 

wins the lottery, and then everybody wants Uncle Billy at every 

event. And I think that has kind of been the way with the GSEs, 

when things were kind of rocking along, people wanted to limit the 

ability of what GSEs could and could not do. 

When the marketplace began to get a little unstable, as it has 

done in years past, everybody is looking for Uncle Billy to be a part 

of the process; and, I think what I struggle with is how do we keep 

a normalcy and a consistency here, as I said in my opening statement, where we let the markets function along? We don’t have this 

in and out. 

Okay, now we want to raise the lending limits for GSEs. We 

want to raise the amount of loans they can hold in their portfolios, 

but as soon as things somewhat kind of settle down, we want to 

go back in and put the claims back on that process. And, so, I am 

trying to find a market-based solution to this where we are not up 

here and we are not knee-jerking back and forth. 

What is the right policy, Mr. Brinkmann? 

Mr. BRINKMANN. Maybe if you let me go a little bit beyond at the 

moment the housing market and give you another example, I also 

deal with commercial, multi-family lending. A large portion of that 

lending has been in the CMBS market, the conduit market. And 

29 

when we look at what the originations volumes were in that market for the first quarter—we will be putting out the number shortly—that indicate that the decline, year over year now, has been in 

excess of 95 percent. 

So that is an example of a market that has frozen. Do we expect 

that to remain frozen? No. And so when we look at the policy to 

say, okay, we know that eventually investors will then come back 

to this office. What do we need to do to encourage them to come 

back to give credible bids, to have the GSEs fulfill their role in supporting those markets in times of need. 

But I think there is a balance in the policy to say that they are 

there. They are given certain privileges. We expect certain things 

of them in terms of supporting the market. But they are not to be 

the market in all circumstances going forward. And, I guess, we 

don’t have a good answer to your question, at least I don’t this 

morning. 

But to say that maybe now is not the time to be establishing permanent rules going forward, which would be difficult, than to 

change if things didn’t develop. But maybe take more of an intermediate perspective that we know the markets aren’t functioning 

now. We have problems across the spectrum of lending, but that is 

rapidly as things changing, we may be seeing a different market 

6 months from now or a different market a year from now, which 

then perhaps would lead to different policy ideas. 

Mr. NEUGEBAUER. I thank the chairman. 

Ms. WATERS. [presiding] Thank you very much. 

I will recognize myself for 5 minutes. Let me welcome all of our 

panelists who are here today. Before I get to a question that I have 

for Mr. Lund, I would like to ask you, Ms. Peters: Could you explain to us the two ways that one can be a broker in California? 

As I understand it, we license brokers, but we also license companies that hire brokers that do not necessarily have to have individual license. And, if that is the case, have you found that those 

companies that have the license who hire people who do not have 

a license have created part of the problem that we have in the 

subprime meltdown? 

Ms. PETERS. Yes. Thank you for the question. 

California’s regulatory structure is unique and quite a challenge 

from my perspective. We do have a number of different ways that 

people can get involved in the mortgage business. The traditional 

mortgage broker as you use the term is licensed by the Department 

of Real Estate. That is, any licensed real estate agent in the State 

of California can use that license to broker loans. They owe a fiduciary duty to the people for whom they are brokering loans. 

We also have the Department of Corporations licensing companies under the California Finance Lenders Act and the Residential 

Mortgage Licensing Act. Both of those Acts allow finance lenders, 

non-depository lenders, such as Countrywide financial, New Century Financial, and so many others we have heard about, to have 

a corporate license. And then within that corporate license, they 

hired employees as any other corporation hires employees that are 

not individually licensed. 

As a practical matter in California, most of those companies are 

out of business. As a going forward matter, to prevent it from hapVerDate Aug 31 2005 16:25 Aug 15, 2008 Jkt 043701 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\43701.TXT TERRIE
30 

pening again in the future, we are examining the national licensing 

concept that is put forward by the CSBS and the Armour Association as well as the bills that are pending in Congress. 

Ms. WATERS. Well, thank you very much. And I was just questioning our staff, because I thought we had in one of our pieces of 

legislation tried to make sure that every person selling real estate 

would have a license, because we recognize that under Countrywide and AmeriQuest and some of these other places, a big problem was started. I am surprised it has taken California so long to 

correct that, and I would hope that, I will go back and take a look 

at what I think we have done and one of the pieces of legislation. 

But, I would hope that the State would move aggressively on that 

also. 

Let me go to Mr. Lund, because this is one area that I really 

want to learn a lot more about. 

We have heard that interest rate resets would not be as serious 

for some borrowers because of the Federal Reserve’s recent rate 

cuts. However, some borrowers have what is called the margin on 

their loans, which is the portion of the interest rate on an adjustable rate mortgage that is over and above the adjustment index 

rate. 

Can you explain what the margin is? What policies guide these 

margins and how these mark-ups affect homeowners with resetting 

interest rates? 

Mr. LUND. Sure. In reality, it is an adjustable rate mortgage. 

And, typically, what they will do is they will set a base rate, 

whether it be a Treasury, whether it be a LIBOR rate, and then 

they will set above that what the expected return would need to 

be above a risk-free rate. In some cases in the conforming market, 

that may be as little as 2 points. Where there is additional credit 

concerns, it may be 3, 4, or 5 points, and it can be very different. 

It is all very dependent on what the end investor requires in return 

to be able to make those mortgages to an individual borrower. 

You know, one of the things that we do advocate, as we heard 

one of the Members of Congress talk about a little bit earlier, is 

we believe that fixed rates are the appropriate product, particularly 

in times like this. And, ARMs have a place, but a fixed-rate product is a known payment for a 30-year or 15-year piece of time, and 

it allows borrowers to know going in exactly what their payments 

are going to be and not have any surprises along the way. 

Ms. WATERS. Yes, well, I would certainly agree with that. And 

as I have began to look at these margins, it appears that there is 

no rhyme or reason for the margin that is being charged by some 

of the loan initiators, and it could cause the reset to quadruple almost in some cases. And, if ARMs are to continue to exist, certainly 

I think there should be some kind of cap on margins. I am just exploring this now, but thank you for that information. 

With that, I will recognize the gentleman from California, Mr. 

Miller, for 5 minutes. 

Mr. MILLER OF CALIFORNIA. Thank you, Ms. Waters. 

Mr. Brinkmann, just for the record, I know you said you had a 

position in the opposition. 

31 

Mr. Chairman, may I introduce a letter for the record in support 

of this bill, from the California Mortgage Bankers Association, 

building associations, mortgage brokerss and Realtors? 

The CHAIRMAN. Yes. Without objection, it will be entered into the 

record. 

Mr. MILLER OF CALIFORNIA. Ms. Peters, thank you very much for 

coming and for your testimony. 

I represent parts of 3 of those 14 high-cost areas in California, 

and we have really, really, been battered. In the State of California, you know, revenues in 2007, were down about $2 billion to 

the State of California because of the impact on the housing industry. And I know the homebuilding industry creates about $70 billion of economic output for the State of California and we have just 

really been plummeted in recent years. 

I really think that my good friend, Mr. Hensarling, showed a 

chart. And I know many things are a matter of perspective, and he 

is my good friend. And he said the red areas are the only areas 

who are benefiting from this. I say the red areas are the only ones 

to have been excluded in the past. And I think that we have been 

discriminated against because we are high-cost areas. 

And we have had some really good testimony, but the conforming 

marketplace in the past, all the loans, about 82 percent of the 

loans, have been fixed-rate 30-year loans. Yet, when we are forced 

into the jumbo, the exotic marketplace, only 18 percent. And the 

other ones have been negative AMS, what triggers to 3 to 5 years, 

and that is what is killing California. 

My good friend, Ken Calvert, represents a city in Riverside County, where home prices that were normally $1,200,000, 3 or 4 years 

ago, are selling for $600,000 today. And part of the problem in communities like that in high-cost areas, when the prices drop down 

to $900,000, most bankers were not making loans, because the liquidity was gone. They had no money to lend. 

The comments you made, Ms. Cook, today, are everything I have 

tried to say in the past. In the entire panel, we have talked about 

since GSEs got involved in the marketplace, that loan rates have 

dropped between 100 basis points and 125 basis points. 

Would you like to please comment on that? I want to hear that 

again, because I have been saying the same thing. In California, 

what is killing us, because we are not able to participate in a good 

program, GSEs. And I really support the members who are able to 

have a mortgage marketplace who can qualify for those loans. We 

just haven’t been able to, but please speak to that. That is a huge 

savings to people. 

Ms. COOK. Yes, thank you for the question, and I would make 

two points. 

You know, in this environment, you have seen the GSEs demonstrate their unique ability to provide liquidity stability in the 

mortgage market. And, I think, throughout the crisis, the one thing 

that has been true is 30-year, fixed-rate agency mortgages have 

been broadly available. 

By increasing the loan limits for us, liquidity and stability that 

is available to conforming mortgages is extended to those conforming jumbos that now qualify. So as soon as you made that adVerDate Aug 31 2005 16:25 Aug 15, 2008 Jkt 043701 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\43701.TXT TERRIE
32 

justment, those same mortgage rates became available to the qualifying jumbos. 

Mr. MILLER OF CALIFORNIA. Let me ask you a question: You have 

underwriting criteria that you use for, let’s say, a home in the 

$400,000 marketplace. Do you use the same, identical, underwriting criteria as far as safety and soundness as you would use 

in the $700,000 marketplace? 

Ms. COOK. Yes, with one exception. If you look at the credit 

standards that we put out for the agency jumbos, they differ from 

the conforming space in a couple of dimensions. The one that probably can get the most attention is that our maximum LTV is 90 

percent, whereas, in conforming space, it is 95 percent. 

Mr. MILLER OF CALIFORNIA. So you are making it tougher for 

those in high-cost areas? 

Ms. COOK. A little bit, but I think the thing that we are trying 

to address from a safety and soundness perspective is that the 

agency jumbo market, as the map earlier demonstrated, is highly 

geographically concentrated. 

Mr. MILLER OF CALIFORNIA. Yes, it is. 

Ms. COOK. That poses some additional risks. In addition, those 

markets right now are actually declining in home prices, and, in 

order to make sure that that homeowner is in a sustainable position, we think it is prudent to consider. 

Mr. MILLER OF CALIFORNIA. But you are taking that risk into 

consideration, so this is not a big give-away. We are not trying to 

put the government at additional risk. We are trying to safeguard 

for that. True? 

Ms. COOK. And that is the second point I was going to make, 

which is that the underwriting standards reflect the appropriate 

safety and soundness considerations that we are going to balance 

against providing all the required financing. 

Mr. MILLER OF CALIFORNIA. I applaud you for that, because that 

is a huge consideration. 

You talked about securitization, and you said it has to do with 

success or failure. And my gleaning from that is that if we require 

securitization, we are putting the program at risk where if we want 

to make sure that it is a success, we treat them like every other 

loan. Is that not a fair statement? 

Ms. COOK. That is correct. 

Mr. LUND. I would add what has really happened over the course 

of the last year is that virtually all mortgage investors have pulled 

out of the market, really with the exception, almost, of Fannie Mae, 

Freddie Mac, and the FHA. And in the areas of the country in 

which you operate, there was no liquidity. 

So despite the fact that it might have been quoted as a pointand-a-half rate differential, it may not have had access, period. 

Mr. MILLER OF CALIFORNIA. In my area, many banks pulled out 

of the marketplace. They couldn’t make a loan. When we put the 

SIFMA package forward, those same banks went back into the 

marketplace making loans. A great comment by Ms. Peters was 

‘‘FHA in my district, between 2000 and 2005, dropped by 99 percent. That means for every 100 loans made in 2000, we made one 

loan in 2005.’’ 

33 

Do you believe this has had a positive benefit on the liquidity in 

the marketplace for homebuyers today, what we are doing? 

Mr. LUND. Well, I think if you don’t give the GSEs portfolios access to buy those securitizations, or those whole loans, it really 

won’t have an impact, until those investors in fact come back to the 

market, which they have not, yet. So I think to jump-start the market, you need to have the capability to have a portfolio. 

Mr. MILLER OF CALIFORNIA. And you have provided liquidity todate? 

Mr. LUND. That is correct. 

Mr. MILLER OF CALIFORNIA. Thank you. 

I yield back. 

The CHAIRMAN. Let me invite Members who want to vote, to go 

and come back. Maybe we can keep this going. There are going to 

be a series of votes. We will give everyone a chance. 

I have asked the witnesses to stay, so if members want to go and 

come back, maybe somebody will come back and take over. So if 

somebody wants to go right away, come back. I will try and pass 

on the baton. 

The gentleman from North Carolina is recognized. 

Mr. WATT. Thank you, Mr. Chairman. 

I actually think I want to ask a similar question to the ones that 

were raised by Mr. Miller from a safety and soundness perspective 

from the other side of the coin. Because one of the concerns that 

a number of constituents and people in my community raise is 

what impact will this have on my rate. They don’t understand how you can charge a rate for a $600,000 loan that is the same as a rate that you charge for a $200,000 loan. 

And their concern is that as a result of this jumbo mortgage that 

they don’t understand, there will somehow be some blended rate 

that will work to some disadvantage to them. I think that is the 

same issue on the borrower side as the safety and soundness issue 

on the lender side. 

But I wanted to get on the record your response to that so that 

people can be reassured. I hope that is what you were going to say: 

reassured that this is not going to have an adverse impact on people who have loans within the current, conventional mortgage limits. Any of the panelists, I think, could answer that, but I would 

be especially interested in hearing from Ms. Cook and Mr. Lund on 

that. 

Ms. COOK. Yes, thank you for the question. 

When you look at the difference in loan amounts, it is not just 

the loan amount that determines the credit quality of the borrower, 

right? There are a lot of characteristics that one looks at when they 

are underwriting a loan, including income ratios and a variety of 

other characteristics. In and of itself, a loan of $200,000, relative 

to $400,000, relative to $500,000, isn’t necessarily riskier. So identifying the loan size as the primary risk variable would be inappropriate. 

When you think about whether this change to include conforming 

jumbo loans will cost the average conventional conforming borrower today a higher rate; the key thing there is going to go back 

to the way we ultimately deal with the TBA eligibility and whether 

or not we can do it in a way that maintains the liquidity of that 

34 

market and maintains its effective trading in the marketplace 

which Mr. Hamilton addressed earlier. 

Mr. WATT. Perhaps that is the question I am asking. Can you do 

it in a way that maintains? 

Ms. COOK. Yes, I believe we can. 

Mr. WATT. Okay. I wanted to make sure I got a specific response 

to that, because otherwise what I hear you saying, it could potentially have, if you don’t have some adverse impact if you don’t 

maintain that model. 

Mr. Lund? 

Mr. LUND. We have not changed our pricing for our core primary 

business as a result of the incremental that was added as part of 

the economic stimulus package. As Ms. Cook said, we look at individual characteristics of borrowers. We look at the kind of loan 

products. All that goes into how we evaluate pricing for that and 

that is pretty standard. 

Mr. WATT. Is there anybody on the panel who has a different 

opinion on this? Everybody is nodding that they agree. 

Mr. Hamilton? 

Mr. HAMILTON. I would just want to make it clear that I think 

one of the things that is important now, what went into the decision by SIFMA to make these non-TB eligible was the main determinant of why we didn’t do that was that our main concern was 

not raising mortgage rates for the conforming borrower. 

Now, if there is an extension to the program, certainly, SIFMA 

is going to re-evaluate the TB-eligibility of these pools. But I think 

to make a statement to say, ‘‘We’re going to originate jumbo loans 

to make them TB-eligible and it’s not going to impact the conforming borrower,’’ is a touch of a stretch. We need to do a lot of 

work on that, and I think coordination between Fannie, Freddie, 

and securities industry membership can potentially make that 

work. But it’s not a turn-key operation by any stretch. 

Mr. WATT. But if you use the same criteria for these larger loans 

that you have been using for the conventional loans up to now, I 

mean, is that the key? Or, what are you saying? 

Mr. HAMILTON. I’m just saying that Ms. Cook is right, and size 

is not the only determinant. But I think they would also agree if 

the identical three credit borrowers came to the table and wanted 

a $200,000, a $400,000, and a $600,000 loan, I don’t think anyone 

would disagree that the $600,000 loan demands a higher rate. It 

is simple math. 

Mr. WATT. But if they came to the table with a $200,000, 

$400,000, and $600,000 loan, and they had $200,000 income, 

$400,000 income, and $600,000 income, and the same kind of credit 

profiles, why would the rate be higher? 

Mr. HAMILTON. It’s not a matter of credit at that point, but a 

matter of pre-payment. 

Mr. WATT. Same applicable principals, prepayment and otherwise applying. 

Mr. HAMILTON. Right. But if someone prepays a $600,000 loan, 

it costs a lot more money to be owed than on a $200,000 loan. So 

we just have to be careful about the eligibility of that and how we 

work that going forward. 

35 

Ms. COOK. Maybe one thing I would want to add in agreement 

with Mr. Hamilton is that we want to tread carefully on the TBA 

market because it is the core liquidity provider in the mortgage 

market right now. 

So when we look at TBA eligibility, we have to remain true to: 

One, that it is permanent; and two, that the homogeneity of the 

TBA market today is in large measure preserved while considering 

what small differences will emerge by including jumbos. 

The CHAIRMAN. I have to interrupt, because I was wrong. We 

have a series of votes. So, we will come back, and there will be a 

few more members. 

I actually will be gone about 20 minutes or so, so we will come 

back. I also ask unanimous consent to put into the record a statement from George Hanzimanolis, the president of the National Association of Mortgage Brokers, on this issue. Without objection, 

that will be put in the record. 

We will be in recess until after the roll call. 

[Recess] 

The CHAIRMAN. I am going to give members a few minutes. If no 

one shows up, then the hearing will be over. There was an unexpected privilege resolution that held us up a little, but I am told 

there is not going to be another vote, so we will just wait a few 

more minutes. 

If no members show up, I will adjourn with thanks to the panel. 

It has already been very useful. We are going to wait to see if there 

are others who have questions, but the one member whom I 

thought was coming back will not be coming back, so the hearing 

will conclude. 

I appreciate the testimony very much, and we will be obviously 

be in touch with others as well. 

[Whereupon at 12:43 p.m., the hearing was adjourned.] 

(37) 

A P P E N D I X 

May 22, 2008 

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