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THE FUTURE OF HOUSING FINANCE: THE 

ROLE OF PRIVATE MORTGAGE INSURANCE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

JULY 29, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–149 

( 

(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 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 29, 2010 ..................................................................................................... 1 

Appendix: 

July 29, 2010 ..................................................................................................... 47 

WITNESSES 

THURSDAY, JULY 29, 2010 

Goldberg, Deborah, Hurricane Relief Program Director, the National Fair 

Housing Alliance .................................................................................................. 16 

Ratcliffe, Janneke, Associate Director, University of North Carolina Center 

for Community Capital, and Senior Fellow, Center for American Progress 

Action Fund .......................................................................................................... 11 

Rodamaker, Marti Tomson, President, First Citizens National Bank, Mason 

City, Iowa, on behalf of the Independent Community Bankers of America 

(ICBA) ................................................................................................................... 9 

Sanders, Anthony B., Distinguished Professor of Finance, George Mason University, and Senior Scholar, The Mercatus Center ........................................... 13 

Sinks, Patrick, President and Chief Operating Officer, Mortgage Guaranty 

Insurance Corporation, on behalf of the Mortgage Insurance Companies 

of America ............................................................................................................. 7 

Taylor, John, President and Chief Executive Officer, the National Community 

Reinvestment Coalition (NCRC) ......................................................................... 14 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 48 

Goldberg, Deborah ............................................................................................ 50 

Ratcliffe, Janneke ............................................................................................. 60 

Rodamaker, Marti Tomson .............................................................................. 68 

Sanders, Anthony B. ........................................................................................ 81 

Sinks, Patrick ................................................................................................... 89 

Taylor, John ...................................................................................................... 101 

(1) 

THE FUTURE OF HOUSING FINANCE: THE 

ROLE OF PRIVATE MORTGAGE INSURANCE 

Thursday, July 29, 2010 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 2 p.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Sherman, Hinojosa, McCarthy of New York, Baca, Miller of North Carolina, Scott, 

Perlmutter, Donnelly, Adler; Garrett, Manzullo, Biggert, Capito, 

Hensarling, Neugebauer, Posey, and Jenkins. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. Without objection, all members’ opening statements will be made a part of the record. 

We meet today to continue our hearings about the future of housing finance. As we work to reform this complex system, we must 

learn more about private mortgage insurance and determine 

whether to make changes related to this product. We will therefore 

examine the structure, regulation, obligations, and performance of 

mortgage insurers. 

Since its creation more than a century ago, private mortgage insurance has, without question, allowed countless families to 

achieve the American dream of homeownership. It has also worked 

to safeguard taxpayers by providing a first layer of protection 

against foreclosure losses for lenders and for mortgages securitized 

by Fannie Mae and Freddie Mac. 

Over the years, the industry has had to respond to significant 

economic changes. During the Great Depression, inadequate capital 

reserves and an inordinate amount of mortgage defaults drove 

every mortgage insurer into bankruptcy. As a result, the private 

mortgage insurance industry disappeared for more than 2 decades. 

Many, including me, feared the recent collapse of the housing 

bubble could produce a similar result. For a while, the industry teetered on the brink of extinction. Some mortgage insurers also 

sought, but never received, direct TARP assistance. 

We had good reason to worry. Historically, about 4 percent of 

mortgages guaranteed by mortgage insurers go into default in an 

average year. During this crisis however, approximately one in 

2 

three mortgages made in 2006 and 2007 and insured by mortgage 

insurers are expected to go into foreclosure over the life of the loan. 

As a result, some estimate the industry will lose between $35 billion and $50 billion when all is said and done. 

Nevertheless, it appears the industry will survive because of 

some economic luck, many regulatory waivers, and its distinctive 

capital structure. In particular, mortgage insurers maintain contingency reserves of 50 cents on every premium dollar earned for 10 

years. Thus, they build up capital in good times in order to pay out 

claims in rocky financial periods. 

While these countercyclical reserves are unique to the mortgage 

insurance industry, they provide an important model for Congress 

to consider in reforming the structure of the housing finance system. If Fannie Mae and Freddie Mac had held similar reserves, 

both Enterprises may have weathered the recent financial hurricane much better. 

Still, the industry’s performance has been far from perfect during 

this crisis. Some have questioned whether mortgage insurers held 

enough capital. Because they had to seek regulatory forbearance 

and curtail underwriting, this reduction in new business has probably slowed the recovery of our housing markets. 

Others have raised concerns about whether mortgage insurers 

have increased the government’s cost related to the conservatorship 

of the Enterprises. Specifically, mortgage insurers only pay claims 

on foreclosed homes. They have no affirmative obligation to prevent 

foreclosures. As a result, Fannie Mae and Freddie Mac, rather than 

mortgage insurers, have often had to bear the financial losses related to loan modifications. Mortgage insurers exist to provide the 

first level of protection against losses and should not evade their 

responsibilities by contractual technicalities. We must review this 

arrangement. 

We also need to explore the present credit enhancement requirements under the charters of Fannie Mae and Freddie Mac. While 

the standard U.S. mortgage insurance policy indemnifies against 

losses created by a default in an amount equal to the first 20 to 

30 percent of the lost loan principal, an Australian policy covers 

100 percent of the home loan amount. 

Additionally, we should examine the consumer protection issues, 

the State regulation of the industry, and its indirect Federal regulation. The problems of Fannie Mae and Freddie Mac resulted, in 

part, from the competing mandates of two regulators. As we reform 

our housing finance system, we may therefore want to streamline 

the oversight of mortgage insurers. 

In sum, all options for reforming our housing finance system are 

on the table, including those related to private mortgage insurance. 

I anticipate a fruitful and productive discussion around these and 

other issues today. 

I now recognize the gentleman from New Jersey for 4 minutes. 

Mr. GARRETT. I thank the Chair and I thank the witnesses. And 

I thank the Chair for holding this important hearing on the PMI, 

or the private mortgage insurance industry. Now, unfortunately, 

because of the current Federal Government policies, their role right 

now is very limited, almost nonexistent. 

3 

If I could direct your attention, following yesterday’s chart, to the 

chart over here, this chart illustrates the percentage amount of 

new high loan to value, or LTV, loans that PMI writes and the percentage that the government backs. Currently, the Federal Government, as you see in the chart there, which you can say is the taxpayer, is underwriting 99 percent of every high LTV mortgage 

through FHA and GSEs. And so, this level of taxpayer support for 

the mortgage market, you must admit, is completely unsustainable 

and also unwise. 

We constantly hear that the government has to play this large 

role because the private sector is unable or maybe unwilling to reenter the market and provide the needed capital. But if you look 

at the details, you will see that is false. Over the last 2 years, private mortgage insurance companies have raised roughly $7.5 billion in new capital that could support $260 billion in new high LTV 

loans. However, the current marketplace only allows the PMI industry to support between maybe $40 billion or $50 billion of such 

loans. 

So what are some of the specific factors preventing more private 

capital from returning to the mortgage market through the private 

insurance? First are the changes in the loan limits for FHA that 

were made during the financial crisis. 

So if I could now direct your attention to my second chart, you 

will see that, before the crisis, the GSE loan limits were $417,000 

and the FHA loan limits varied from 48 percent to 87 percent of 

the GSE limits based on the area median price. Now, after the 

changes, the FHA loan limits vary from 65 to 175 percent of that 

$417,000 house price number. So most of the attention in the debate over loan limits centers on the top-line limit in the high-cost 

areas, as you see on the chart there. 

Now, while that is important, it is not the only area where the 

private market is being basically squeezed out. And as you can see 

on the chart, down there at the bottom, the changes that were 

made essentially increase the loan limits for the FHA in the lowercost areas, as well. What does this mean? This means that in areas 

where housing is less expensive, say in Nebraska, where the average median home price is $150,000, the FHA can insure loans up 

to $271,000. And that is almost 100 percent more than the average 

price in that low-cost area. 

So you have to ask yourself, why should the taxpayer be insuring 

mortgages that are almost double the average median home price 

in those lower-cost areas? And this is after mortgage prices have, 

I would just note, declined by 30 percent over the last 3 years. This 

area is prime territory for PMI to become more active while we roll 

back the taxpayers’ support and liability. 

Another way that the government is prohibiting the return of 

private capital to our mortgage market is a rule instituted by the 

Federal Housing Finance Agency, and that is the loan level price 

adjustment. You see, when these fees were implemented, it was a 

turbulent time in the economy when housing prices were declining, 

particularly in distressed areas. However, it is 2 years later now, 

and we are seeing some encouraging signs that house prices are 

stabilizing, in addition to the fact that loans are being originated 

4 

today at full documentation, amortized, and being prudentially underwritten. 

What I have been told is that Fannie and Freddie are not reserving these fees, so they are not providing any additional stabilizing 

effect. And I think these fees need to be given more attention, and 

Congress should more closely examine how these fees are pushing 

more people to FHA loans and away from conventional mortgages. 

Finally, just 2 months ago, Treasury Secretary Geithner told 

Congress, ‘‘The government’s role in the housing finance system 

and level of direct involvement would change,’’ and that, ‘‘The Administration is committed to encouraging private capital to return 

to the housing market.’’ However, as you can see from my first 

chart, if he and President Obama are serious about restoring the 

housing market and relieving the taxpayer of the risk—and that is 

a pretty big risk, all the blue area—they must return to traditional 

and more responsible methods of financing. 

The current loan limits, coupled with new and arbitrary fees by 

the GSEs make it impossible for the private capital to compete in 

the market. And this is exactly the opposite of what we want. The 

government has created a perverse incentive to provide private 

capital from being used in this market and relieve some of the burdens. 

So, Mr. Chairman, if we don’t make changes, the FHA and GSEs 

will continuing to service a radically disproportionate share of the 

market, and they will collapse under their own weight, and we will 

face another taxpayer bailout from the GSEs and FHA. We need 

to shift the burden of mortgage finance off the backs of the American taxpayer and back onto the private investor. 

With that, I thank you, Mr. Chairman. 

Chairman KANJORSKI. The gentleman’s time has expired. 

We now recognize the gentleman from California, Mr. Sherman, 

for 3 minutes. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

First, I should congratulate the survivors. To think that you 

could be in the business of insuring real estate loans in America 

at this time and still be here shows, as I think the chairman pointed out, perhaps some luck, but it also shows that both the regulators of the industry and the participants in it were prepared for 

the thousand-year flood. Very few other entities in our country are 

prepared for the thousand-year flood or even the hundred-year 

flood. 

Right now, the taxpayers are involved in the real estate market 

to a greater degree than in the past. Taxpayers are, therefore, taking an extraordinary percentage of the risk. I look forward to returning to a more traditional level of taxpayer involvement. 

And while I don’t think that we can return to 2007, in terms of 

who can get some sort of mortgage, we don’t want to return to 1920 

either. And so, as the taxpayers play less of a role in absorbing the 

risk, we don’t want to say, as in some European countries, ‘‘Wait 

till you have a 40 percent downpayment, and then you can buy a 

home.’’ Therefore, there is a need for a robust private mortgage insurance industry. 

One way to make sure that it is robust is to turn to the financial 

regulatory reform bill, where we require that the securitizer retain, 

5 

I believe it is 5 percent, of the risk in that pool, unless the pool 

consists of plain vanilla, safe, not-risky, not-possibly-risky mortgages. 

Regulations have to be written that define what is ‘‘plain vanilla.’’ I suggest that plain vanilla includes both American vanilla 

and French vanilla—that is to say, that it includes not only mortgages which by themselves meet the criteria, but mortgages that 

meet the criteria of low risk to the investors when one factors in 

the fact that private mortgage insurance applies to some or all of 

the loans in that pool. 

To do otherwise would be to ignore economic reality, but, worse 

than that, it would be to deny a route to homeownership that does 

not put the taxpayer at risk. And certainly, we want the lowest 

possible taxpayer risk with the best possible opportunities for people to acquire a home. 

I yield back. 

Chairman KANJORSKI. The gentleman’s time has expired. 

We will now hear from the gentlelady from West Virginia, Ms. 

Capito, for 2 minutes. 

Mrs. CAPITO. Thank you. 

I would like to thank Chairman Kanjorski and Ranking Member 

Garrett for holding this hearing today. I look forward to hearing 

from our witnesses on the current status of private mortgage insurance and how we can work together to get a more vibrant private 

mortgage market, or to restore one, in any event. 

As my colleagues know, over the last few years, the Federal 

Housing Administration has dominated the residential mortgage 

market, providing federally backed mortgage insurance to borrowers. While FHA does have a role to play in the market, I am 

very concerned—we have had hearings, and I have made numerous 

statements about my concern over this recent expansion in market 

share, especially when the FHA is struggling financially. In order 

to have a healthy residential mortgage market, we must reduce 

FHA’s market share and restore the private market. 

Earlier this year, the House passed much-needed FHA reform 

legislation that I believe will make significant improvements to the 

FHA program. While more reform may be needed, the legislation 

that we authored will give the FHA the ability to charge higher 

premiums. And this is important not only for the health of the 

FHA capital reserve fund, but it could also have the effect of leveling the playing field between FHA and the private mortgage insurance industry. 

I also have concerns with sections of the recently adopted DoddFrank financial reform bill and the effect it will have on the return 

of the private mortgage market. Included in this large package is 

a section requiring risk retention for mortgages but an exemption 

from this requirement for FHA mortgages. I was able to insert an 

amendment that will study the effect of this dichotomy and what 

effect it would have on the private mortgage market. I look forward 

to seeing these results to see if there is an unfair advantage for 

FHA and to level that playing field. 

Again, thank you, Mr. Chairman, for the hearing, and I look forward to the witnesses’ testimony. 

6 

Chairman KANJORSKI. I thank the gentlelady from West Virginia. 

And now, we will hear from the gentleman from Georgia for 2 

minutes, Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

It is difficult to deny that the American dream remains today to 

own a home. That is the American dream. However, once that goal 

is achieved, it has become increasingly harder for some Americans 

to hold on to their homes and avoid foreclosure. Indeed, right now, 

as we speak, the foreclosure pipeline is full and getting overflowing. 

More access to mortgages, and thus homeownership, often coming to fruition due to use of private mortgage insurance is, ideally, 

a positive aspect of the current system. However, with job instability and unemployment rates reaching over 10 percent in much 

of the country, many Americans are finding it difficult to hold on 

to their homes despite their initial success. 

And when a homebuyer has less than 20 percent as a downpayment for their home, they are required to purchase a PMI policy, 

private mortgage insurance. This permits an individual the ability 

to afford a home who otherwise could not purchase a home. However, the use of subprime mortgages and jumbo loans contains obvious risk, namely traditionally higher default rates. And about a 

third of the mortgages made in 2006–2007 and insured by PMI’s 

providers are expected to go into foreclosure during the life of the 

loan. 

We need to ensure that risky mortgages that are unsafe to potential lenders are avoided. The American dream of owning a home is 

something that I hope most Americans will certainly someday see 

fulfilled, but without the excessive risk that come with the use of 

certain PMIs. I hope to learn more about what PMIs are doing to 

reduce mortgage defaults and to protect potential homeowners. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much. 

We will now hear from the gentleman from Texas, Mr. Hensarling, for 3 minutes. 

Mr. HENSARLING. I thank you, Mr. Chairman. 

Private mortgage insurance is clearly a rarity in our mortgage 

market: a private-sector solution for a private-sector challenge that, 

number one, actually worked, seemingly free of Federal handouts, 

bailouts, and also an industry that survived this market turmoil in 

relatively good shape, and also—I don’t know how—it managed to 

survive competition with the GSE oligopoly. 

It seems like ancient history now, but there was a time, very recently in America’s history, where one could actually get a mortgage on a home without having to go through their Federal Government. But now we know that Fannie and Freddie, which were 

left untouched, if nothing else, affirmed in the recent Dodd-Frank 

financial regulatory bill, now control roughly three-quarters of the 

new loan originations. FHA, whose own capital reserve losses are 

currently 75 percent below its statutory minimum, has roughly 20 

percent of the market. We don’t need to have a Ph.D. in economics 

to know that this is neither healthy nor sustainable. 

7 

Again, private mortgage insurance has been an exception to the 

rule. It has been a very valuable, consumer-friendly, private-capital-backed tool, sold in a competitive market, that allows Americans to buy a home, and keep a home, without exposing taxpayers 

to risk. And this is a market, I think, that we would want to see 

flourish. 

Again, it appears, relatively speaking, to have weathered the recent economic crisis well. And, as I said earlier, these companies 

did not succumb to the temptation to take TARP money, bailout 

money from the Federal Government. And, in fact, we see that this 

is an industry that is back to raising capital in the private market, 

showing again that private-sector competition can work if we allow 

it to work. 

But, clearly, the private mortgage insurance market faces challenges. They were articulated very well by our ranking member 

from New Jersey. And so I continue to lament and decry the fact 

that this committee has yet to take up any type of reform of Fannie 

and Freddie, notwithstanding the fact that we have $150 billion of 

taxpayer-spent money, trillions of dollars of exposure. They continued to flourish, and yet we need this market to flourish. 

There is an old saying, ‘‘If it ain’t broke, don’t fix it.’’ Please don’t 

bail it out; just let freedom work and allow this market to flourish. 

I yield back. 

Chairman KANJORSKI. Thank you very much. 

We will now go to our panel. 

Thank you very much for being present today. And, without objection, your written statements will be made a part of the record. 

You will each be recognized for a 5-minute summary of your testimony. 

Our first witness will be Mr. Patrick Sinks, president and chief 

operating officer of the Mortgage Guaranty Insurance Corporation, 

testifying on behalf of the Mortgage Insurance Companies of America. 

And I would like every panelist to respond to Mr. Hensarling’s 

opening remarks. Is there no further need for a secondary market? 

Shall we just allow the existence of financing of mortgages to be 

made in the tradition prior to the 1929 crash? If you could give 

that answer, it would be very helpful, because we are certainly 

thinking about that. 

So, Mr. Sinks, start off, if you will. 

And I would like to hear this panel say that the government 

should get out of supporting the secondary market and probably do 

away with any involvement in the mortgage market other than you 

folks doing it all in the private sector. That would be a welcome 

relief for me, because I anticipate it would probably save me the 

next 2 years of my life. 

STATEMENT OF PATRICK SINKS, PRESIDENT AND CHIEF OPERATING OFFICER, MORTGAGE GUARANTY INSURANCE 

CORPORATION, ON BEHALF OF THE MORTGAGE INSURANCE 

COMPANIES OF AMERICA 

Mr. SINKS. Let me go with my prepared remarks, and I will get 

to answering your question. 

8 

First, thank you, Mr. Chairman, and Ranking Member Garrett. 

I appreciate the opportunity to testify on behalf of the Mortgage Insurance Companies of America, the trade association representing 

the private mortgage insurance industry. 

Mortgage insurance enables borrowers to responsibly buy homes 

with less than a 20 percent downpayment. Many of these borrowers 

are first-time or lower-income homebuyers. Since 1957, private 

mortgage insurance has helped 25 million families buy homes. 

Today, about 9 percent of all outstanding mortgages have private 

mortgage insurance. 

This afternoon, I would like to make four important points. 

First, mortgage insurance is essential to ensuring mortgages are 

both affordable and sustainable. These goals are not mutually exclusive, and such loans are vital to the housing recovery. 

Mortgage insurance is in the first-loss position on individual 

high-ratio loans, and, as a result, private-sector capital is at risk. 

If a borrower defaults and that default results in a claim, mortgage 

insurers will typically pay the investor 20 to 25 percent of the loan 

amount. 

Because we are in the first-loss position, mortgage insurers’ incentives are aligned with both the borrowers and the investors. As 

a result, mortgage insurers work to ensure that the home is affordable both at the time of purchase and throughout the years of 

homeownership. 

My second point: The mortgage insurance regulatory model 

works. The mortgage insurance regulatory model has been in place 

for over 50 years. This model has enabled the industry to write 

both new business and meet its claim obligations through many 

different economic environments, including some severe housing 

downturns such as we are currently experiencing. 

The most important element of the model is that it requires capital to be maintained through one of three reserves, known as the 

contingency reserve. Private MIs are required to put 50 percent of 

every premium dollar into a contingency reserve for 10 years so 

adequate resources are there to pay claims. This, in effect, causes 

capital to be set aside during good times such that it is available 

in bad times. It serves to provide capital in a countercyclical manner. 

Since 2007, the private mortgage insurance industry has paid 

over $20 billion in claims. In fact, mortgage insurers have paid 

$14.5 billion in claims and receivables to the GSEs, which is equivalent to 10 percent of the amount taxpayers have paid to the GSEs 

to date. 

My third point: The private mortgage insurers are well-capitalized and can help with the housing recovery. Not only does the MI 

industry have ample regulatory capital, but it has attracted capital, 

even during these difficult times. We have raised $7.4 billion in 

capital through new capital raises and asset sales, and a new entrant has raised a further $600 million since the mortgage crisis 

began. 

In fact, based on industry estimates, the MI industry has sufficient capital to increase our total insurance exposure by $261 billion a year for the next 3 calendar years. If this additional volume 

would be realized, it would mean that approximately 1.3 million 

9 

additional mortgages would be insured in each of those years. 

Many of these new, prudently underwritten insured mortgages 

would go to low- and moderate-income and first-time homebuyers. 

My final point: Mortgage insurers are committed to helping borrowers stay in their homes. Because mortgage insurance companies 

have their own capital at risk in a first-loss position, we have very 

clear incentives to mitigate our losses by taking action to avoid 

foreclosures. We have a long history of working with servicers and 

community groups to help keep borrowers in their homes. 

Mortgage insurers have fully participated in the Administration’s 

loss-mitigation programs and other programs. These combined efforts have resulted in over 374,000 completed workouts from 2008 

through the first quarter of 2010 by the MI industry, covering 

$73.8 billion in mortgage loans. 

In summary, the private mortgage insurance model has worked 

over many years. We have capital sufficient to meet the needs of 

the market, and we plan to continue to play a crucial role in the 

future of housing finance. 

Thank you for this opportunity to testify, and I will be happen 

to answer any questions. 

[The prepared statement of Mr. Sinks can be found on page 89 

of the appendix.] 

Chairman KANJORSKI. Thank you. 

We will now have our next witness, Ms. Marti Rodamaker, president of the First Citizens National Bank of Iowa, testifying on behalf of the Independent Community Bankers of America. 

Ms. Rodamaker? 

STATEMENT OF MARTI TOMSON RODAMAKER, PRESIDENT, 

FIRST CITIZENS NATIONAL BANK, MASON CITY, IOWA, ON 

BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF 

AMERICA (ICBA) 

Ms. RODAMAKER. Thank you very much, Chairman Kanjorski, 

Ranking Member Garrett, and members of the subcommittee. 

First Citizens National Bank in Mason City, Iowa, is a nationally 

chartered community bank with $925 million in assets. I am 

pleased to represent the community bankers and ICBA’s nearly 

5,000 members at this important hearing on ‘‘The Future of Housing Finance: The Role of Private Mortgage Insurance.’’ 

Residential mortgage lending, supported by conservative underwriting, is a staple of community banking, and mortgage insurance 

is an indispensable risk-management tool. The MI business model 

has been tested by the housing crisis, with repercussions for all 

participants in the lending process. I expect that it will emerge 

from the crisis looking significantly different than it has in the 

past, as a result of business imperatives but also as a result of policy decisions made by Congress. 

Any reform of MI must be made in coordination with the reform 

of other elements of housing finance, notably the GSEs. ICBA 

hopes to participate in all aspects of housing finance reform. Our 

members and their customers have a great deal at stake in the outcome. 

MI is used by lenders to insure mortgages of greater than 80 percent loan to value. It enables lenders to reach those borrowers who 

10 

cannot make a 20 percent downpayment, which is a sizable portion 

of today’s market. These borrowers include the younger, first-time 

homebuyers who have traditionally used MI, as well as current 

homeowners who don’t have enough home equity to sell and make 

a 20 percent downpayment on their next home. 

Most Americans have also experienced a drain in their savings 

accounts, depleting yet another source of downpayments. MI will be 

used to serve a broader segment of homebuyers than ever before. 

Without MI, the housing recovery will take longer. With MI, the recovery can be managed prudently. 

From the lenders’ perspective, perhaps the most significant function of MI is to allow for the sale of high loan-to-value loans to 

Fannie or Freddie, who require insurance for such loans. Fannie 

and Freddie provide secondary market access and critical funding 

to community bank mortgage lending. Lenders who hold high LTV 

loans in portfolio also require mortgage insurance because our regulators apply a higher capital charge to uninsured high LTV loans. 

In sum, the only practical means of making high loan-to-value 

loans, whether they are sold or held in portfolio, is with the credit 

enhancement provided by MI. If prudently underwritten, high loanto-value loans can’t be made, the market will take longer to recover, consumer options will be more limited, and banks will have 

fewer lending opportunities. 

Unfortunately for all parties, the MI market was severely disrupted during the housing crisis, and the MI companies have tightened their underwriting requirements in response to the market 

conditions. As a consequence, MI underwriting has fallen out of 

lockstep with GSE underwriting. 

Before the crisis, approval by Fannie or Freddie implied approval 

by the insurer—a linkage that greatly facilitated the loan processing. The breakdown of this linkage has impeded the recovery. 

We need to achieve a new consensus in which lenders, mortgage insurers, and Fannie and Freddie are all using the same underwriting and appraisals standards. This new consensus may not be 

achievable until the housing market stabilizes. 

In addition to tightening the underwriting of new loans, the MI 

companies are also disputing some claims. Denied MI claims on defaulted loans sold to GSE have become increasingly common and 

generally result in a buy-back request from Fannie or Freddie to 

the original lender. 

While some of these claim denials are supportable, many are 

based on questionable challenges to the original underwriting or 

appraisal. As a banker, I understand the reality of higher defaults 

and losses during difficult economic times. It is part of the price of 

doing business. However, high levels of denied claims and GSE 

buy-back requests have put an additional strain on all market participants, including community banks. 

In closing, ICBA appreciates the opportunity to participate in 

this subcommittee’s review of MI. The recent dislocation in the MI 

industry has only underscored the critical role that it plays in 

housing finance. Restoration of a strong and competitive MI industry will be a critical part of the housing recovery. 

We would be pleased to comment on any proposals to reform MI 

that emerge from this subcommittee, and we hope to have the opVerDate Nov 24 2008 17:44 Dec 01, 2010 Jkt 061853 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\61853.TXT TERRIE
11 

portunity to share our views on other aspects of housing finance reform, as well. 

Thank you. 

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

68 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Ms. Rodamaker. 

Next, we will hear from Ms. Janneke Ratcliffe, associate director 

of the University of North Carolina Center for Community Capital, 

and senior fellow at the Center for American Progress Action Fund. 

Ms. Ratcliffe? 

STATEMENT OF JANNEKE RATCLIFFE, ASSOCIATE DIRECTOR, 

UNIVERSITY OF NORTH CAROLINA CENTER FOR COMMUNITY CAPITAL, AND SENIOR FELLOW, CENTER FOR AMERICAN PROGRESS ACTION FUND 

Ms. RATCLIFFE. Good afternoon, Chairman Kanjorski, Ranking 

Member Garrett, and members of the subcommittee. I am Janneke 

Ratcliffe, associate director at the UNC Center for Community 

Capital and a senior research fellow at the Center for American 

Progress Action Fund. I am honored to have the opportunity to 

share my thoughts about the role of private mortgage insurance, an 

industry that plays a key part in facilitating homeownership. 

Indeed, a discussion on the role of private MI must begin by 

stressing the importance of giving families the opportunity to buy 

homes when they have not yet accumulated enough wealth to make 

a big downpayment, which is what private mortgage insurance exists to do. 

To put that in context, to make a 20 percent downpayment on 

the median home sold in the United States in 2009 required 

$34,000, which is more than the annual earnings of 35 percent of 

U.S. households. When done right, high loan-to-value mortgages 

are essential for the U.S. housing system to offer opportunities and 

a pathway to the middle class. And the best way to put this opportunity within reach for more first-time and minority and low-income households is to reduce the downpayment barrier. 

Many of us started up the homeownership ladder with a modest 

downpayment and a loan made possible because of some form of 

mortgage insurance, be it private or a Federal Housing Administration or Veterans Administration program. In an average year, in 

fact, between a quarter and a third of all the mortgages made are 

to families with less than 20 percent equity. And among these are 

the families who will later buy another house, perhaps yours or 

mine. 

We have ample evidence that the risks associated with high LTV 

lending can be managed. One example is the Community Advantage Program that has funded affordable mortgages to 50,000 

lower-income, low-downpayment borrowers nationwide. The results: 

Defaults are low, and the median borrower accumulated $20,000 in 

equity through the end of 2009. 

This is just one example of how high LTV lending makes sense 

for lenders and for households when done right, in this case 

through fixed-rate, 30-year amortizing mortgages underwritten for 

ability to repay. 

12 

The private mortgage insurance industry provides on a larger 

scale another answer to the right way to support high loan-to-value 

lending. An industry built on insuring mortgages with low 

downpayments has weathered the mortgage crisis, paid substantial 

claims without Federal support, and even managed to attract new 

capital. 

Three principles contribute to this outcome. First, as we have 

heard, are the countercyclical reserving requirements imposed by 

State insurance regulators. These days, we hear a lot about regulatory failures, but here is one story of regulatory success. The system of State regulation, combined with Federal oversight, played a 

critical role in maintaining systemic stability, and its principal elements should be preserved. 

Second are the standards set by mortgage insurers themselves, 

because their interests are aligned with keeping the borrower in 

the home. From underwriting through foreclosure prevention, they 

live or die by whether they get this right. 

And a third virtue of the mortgage insurance industry lies in its 

role as a pooler of risk. Mortgage insurance companies smooth risk 

out more efficiently, across multiple lenders, across securities, regions, and by reserving across time periods. In this way, they bring 

efficiency and stability to the entire system. 

But mortgage insurance only covers a portion of the high loanto-value loan market. During the bubble, less regulated alternatives became increasingly cheap relative to the institutional 

monoline sources, both primary mortgage insurance and FHA. 

Lack of consistent oversight enabled risk to be laid off where no or 

low capital requirements existed. 

At the time, this looked like innovation, but in hindsight it was 

recklessness. The lesson learned is that an effective mortgage finance system must consider total system capital at risk on each 

loan, inhibit capital arbitrage, and prevent a race to the bottom. 

Justifiably, private mortgage insurance has special consideration 

in the GSE charter and is a qualified residential mortgage factor 

to offset risk-retention requirements. But this implies that this industry will play a critical role in determining who gets access to 

homeownership. This is no small concern because today, barriers 

are actually growing, particularly for those households and communities hit by the full cycle: first, by lack of access to capital; then, 

by subprime lending; then, by foreclosures; and now, by income 

losses and tight credit. Rebuilding will require the affirmative involvement of all market participants. 

Going forward, PMI insurance should have an important role in 

the market, but let me suggest three provisos. First, policymakers 

should maintain a level regulatory playing field, one that considers 

long-term, systemwide risk-taking capacity. Second, mortgage insurers must be held accountable to public policy goals of enabling 

access to safe mortgage products under affordable and transparent 

terms that do not unfairly handicap some market segments. Finally, recognizing that some markets may still go underserved, it 

is important to ensure alternative channels exist for innovation 

and expanding constructive credit to those markets. 

Thank you for the opportunity to testify, and I look forward to 

your questions. 

13 

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

60 of the appendix.] 

Chairman KANJORSKI. Thank you, Ms. Ratcliffe. 

Next, we will hear from Mr. Anthony B. Sanders, distinguished 

professor of finance at George Mason University, and senior scholar 

at The Mercatus Center at George Mason University. 

Mr. Sanders? 

STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED PROFESSOR OF FINANCE, GEORGE MASON UNIVERSITY, AND 

SENIOR SCHOLAR, THE MERCATUS CENTER 

Mr. SANDERS. Mr. Chairman and distinguished members of the 

subcommittee, my name is Anthony B. Sanders, and I am a distinguished professor of finance at George Mason University and a senior scholar at The Mercatus Center. It is an honor to testify before 

you today. 

The Federal Government purchases or insures over 90 percent of 

the residential mortgages originated in the United States. The proliferation of government programs for homeownership purchase 

and insurance of low-downpayment loans by the GSEs and tax incentives for homeownership were largely responsible for the housing bubble that occurred in the 2001 to 2006 period. 

The problem is that public policy and risk management are intertwined, resulting in bubbles and devastating bursts. And the most 

vulnerable households are the ones who are most often hurt. The 

affordable housing crisis cycle must be broken. 

Even though trillions of dollars were pumped into the housing 

market during the last decade, homeownership rates rose from 67.8 

percent in 2001, peaked at 69 percent in 2004, and declined down 

to 67.4 percent in 2009, less than where they started in 2001. The 

United States has comparable homeownership rates to other G–7 

countries, even though they do not have entities like Fannie Mae 

and Freddie Mac. 

Given that there is a reasonable housing alternative in the form 

of renting, rather than owning, it is time to rethink the crisis cycle. 

We can break the cycle by getting private mortgage insurance and 

banks back in the game and downsize the government involvement 

in the housing finance area. 

The problem is that the Federal Government offers explicit guarantees on residential mortgages, which makes it difficult for the 

private sector to compete. This crowding-out phenomenon is exacerbated by the raising of the loan limits after the stimulus for the 

three GSEs to $729,750 in certain areas, which has effectively 

crowded out the private insurance market. 

My recommendations are as follows: 

Fannie Mae, Freddie Mac, and the FHA must downsize their 

market shares to open up the market for the private sector again. 

This can be done in the short run by curtailing the government 

purchase and insurance of low-downpayment mortgages and a lowering of loan limits to pre-stimulus levels at first and then a gradual phaseout of government insurance. 

Second, alternatives to Fannie Mae and Freddie Mac, such as 

covered bonds and improvement to private-label securitization, 

must be implemented. 

14 

In order for capital to return to the market, it is necessary to restore confidence. The newly created Bureau of Consumer Financial 

Protection is generating significant uncertainty in the minds of investors as to how this agency will function. Congress should pass 

clear guidelines and provide assurances that limit the reach of this 

new agency. 

Fourth, the long-run structure of Fannie Mae and Freddie Mac 

must be resolved as soon as possible. However, true changes are 

not possible if the Administration and Congress insist that there 

must be an explicit guarantee. I do not see any way that the explosive combination of public policy and prudent risk management can 

work together. It failed in the housing bubble and crash, and nothing has been done to prevent this from occurring over and over 

again. 

Thank you for the opportunity to share my thoughts with you. 

[The prepared statement of Dr. Sanders can be found on page 81 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Sanders. 

We will now hear from our next witness, Mr. John Taylor, president and chief executive officer of the National Community Reinvestment Coalition. 

Mr. Taylor? 

STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE NATIONAL COMMUNITY REINVESTMENT COALITION (NCRC) 

Mr. TAYLOR. Thank you, Chairman Kanjorski, Ranking Member 

Garrett, and other distinguished members of this subcommittee. 

And congratulations to those members of this subcommittee who 

voted for and passed the Dodd-Frank regulatory reform bill. I think 

that effort was owed to the American public and bodes well for consumers across the land. 

Private mortgage insurance also serves a vital part of America’s 

system of mortgage finance by protecting lenders from losses associated with mortgage defaults. Done responsibly, private mortgage 

insurance can help those working their way up the economic ladder 

to achieve the American dream of homeownership. Coupled with 

the Community Reinvestment Act, private mortgage insurance can 

help underserved people, including minorities, to gain access to 

safe, sound, and sustainable mortgages. 

Today, the business of mortgage finance has become the business 

of the Federal Government. Without FHA, VA, Fannie Mae, and 

Freddie Mac, most mortgage lending in America today would not 

occur. NCRC is very concerned that the Federal Government is increasingly positioning itself as the sole gatekeeper to homeownership and mortgage lending in America. And much of this is done 

with the requirement of a government guarantee. 

It is imperative that we increase the role of the free market in 

producing and securitizing mortgages. The private mortgage insurance companies assist in this goal while remaining unsubsidized, 

without TARP funds—not that they didn’t apply—and without government guarantees. 

The capitalization and reserve requirements placed on private 

mortgage insurance companies by the government is a perfect exVerDate Nov 24 2008 17:44 Dec 01, 2010 Jkt 061853 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\61853.TXT TERRIE
15 

ample of how government regulation, coupled with free-market enterprise, can result in healthy and profitable business. In spite of 

our great recession and the collapse of the mortgage banking sector 

in America, all the private mortgage insurance companies remain 

standing, indeed have even expanded their ranks. 

Having said all this, there are some improvements that I hope 

this subcommittee and the Congress might consider making to this 

industry. 

First, regulation of the private mortgage insurance industry occurs on a State level. We believe the industry and consumers would 

be better served by having Federal standards regulating this industry. Consumers, in particular, would benefit from having these new 

standards under the purview of the new Bureau of Consumer Financial Protection. 

Second, data currently available on the performance of the private mortgage insurance companies is limited and raises more 

questions than it answers. The FFIEC prepares disclosure, aggregate, and national aggregate data reports on the private mortgage 

insurance activity. To their credit, the private mortgage insurance 

companies voluntarily provide data on the disposition of applications for mortgage insurance using some categories of information 

used on the HMDA, the Home Mortgage Disclosure Act. 

In preparation for this hearing, NCRC analyzed the voluntarily 

provided data. There is enough evidence of disparity in the mortgage insurance access between Whites, Blacks, and Hispanics to 

suggest that Congress should enhance the data collection and increase the transparency on the performance of this industry. 

This data collection should be mandatory and include data on 

cost of premiums and amount of losses incurred by the various private mortgage insurance companies. Such additional information 

will assist us all in determining whether the denial disparities are 

based on sound business practices or have some basis in discriminatory practices. This will ensure fairness in that industry. 

NCRC would recommend that the Bureau of Consumer Financial 

Protection make recommendations on reasonable pricing standards 

that the private mortgage insurance company industry can employ 

to ensure that premiums are not keeping working-class, responsible 

borrowers out of the homeownership market. 

Further, we should explore the possibility of the lender sharing 

in the cost of the private mortgage insurance, since the benefit of 

insurance really directly accrues to the lender. 

Next, when a homeowner has reached the 20 percent equity 

threshold of ownership in their home, there should be a seamless 

and automatic allowance for borrowers to withdraw from the mortgage insurance product that is no longer necessary for these borrowers. Currently, some lenders do a better job than others at 

alerting consumers about their having reached that 20 percent 

threshold. 

Finally, the appraisal methods, including automated valuation 

models, used by many private mortgage insurance companies ought 

to be scrutinized. We should learn once and for all from the injury 

done to our system of mortgage finance by shoddy, quick, and inaccurate appraisals. 

16 

In conclusion, private mortgage insurance is vitally important to 

our national system of mortgage finance and can help refuel our 

economy by expanding opportunities for safe and sound mortgage 

lending to those who do not have the ability to make a 20 percent 

downpayment. 

Let me close by saying, to answer your question, Mr. Chairman, 

I do believe we need a federally sponsored securitization sector. 

And I think that what is prohibiting, really, the private sector from 

being successful today, more than anything, more than anything 

we will talk about today, is the fact that people no longer trust foreign governments, companies’ pension funds. They don’t trust 

America now to come and invest in here. We have to change that. 

And I think the law you just passed, more transparency, more 

accountability, sends a very strong message to the world that it is 

safe to come back and reinvest in America. Because the banks and 

everybody else do not have the money unless we have investors. 

So hopefully, we are beginning to turn the corner and say to the 

world, our economy is stable, we are bottoming out on housing 

prices and housing values, and there is more accountability, it is 

safe to come back to America and reinvest in America’s economy. 

And I think that is going to help to, as much as anything, boost 

the private sector in being able to provide mortgages and to have 

the mortgage insurance companies support that. 

[The prepared statement of Mr. Taylor can be found on page 101 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Taylor. 

Our last witness will be Ms. Deborah Goldberg, hurricane relief 

program director of the National Fair Housing Alliance. 

Ms. Goldberg? 

STATEMENT OF DEBORAH GOLDBERG, HURRICANE RELIEF 

PROGRAM DIRECTOR, THE NATIONAL FAIR HOUSING ALLIANCE 

Ms. GOLDBERG. Thank you, Mr. Chairman. 

Chairman Kanjorski, Ranking Member Garrett, and members of 

the subcommittee, I want to thank you for the opportunity to testify here today on behalf of the National Fair Housing Alliance. 

In the face of our current foreclosure crisis, some say that we put 

too much emphasis on homeownership. We at NFHA take a different view. We continue to believe that homeownership, done 

right, can be a viable path to building wealth and economic security. It is one of our most promising tools for eliminating the enormous racial and ethnic wealth disparities in our country. 

But we need to understand how to make homeownership both 

achievable and sustainable, and also understand clearly the forces 

that have worked to undermine sustainability in recent years. Only 

then can we avoid repeating our past mistakes. 

In this context, we believe that private mortgage insurance has 

a very important role to play in expanding access to homeownership for those with limited wealth, particularly people of color. The 

requirement for a 20 percent downpayment on a mortgage is a big 

barrier for many people who could otherwise be very successful 

homeowners. Private mortgage insurance makes it possible for 

families with limited wealth to put less money down and still get 

17 

a mortgage. This benefits the homeowner, the lender, the investor, 

and, of course, the private mortgage insurance company. 

You asked whether additional consumer protections are needed 

with respect to the private mortgage insurance industry. And one 

concern for us is the fact that PMI is sold directly to the lender and 

not to the borrower. This means that borrowers can’t comparisonshop for the best deal. It also gives insurers an incentive to make 

the product as profitable as possible for their customers, the lenders, rather than as cost-effective as possible for borrowers. 

A situation like this calls out for greater transparency and oversight than we have now in the private mortgage insurance market. 

In other markets, this kind of situation has opened the door to adverse practices and discriminatory treatment. And we urge the subcommittee to make sure that is not happening in this market. 

Another issue of great concern to us, from both a fair-housing 

and a broader consumer perspective, is the use of credit scores for 

underwriting and pricing private mortgage insurance. We have 

long had concerns about the impact of credit-scoring models on people of color, who have lacked access to the kind of mainstream financial services that help boost scores. 

Recently, we have seen credit scores drop even when consumers 

continue to make all of their payments on time, as lenders lower 

credit limits in order to minimize their risk exposure. And research 

suggests that certain loan features—research that one of my copanelists has done—certain loan features, such as prepayment penalties and adjustable interest rates, along with loan distribution 

channels, are more important in explaining loan performance than 

are borrower characteristics. 

But credit-scoring models do not make this distinction between 

risky borrowers and risky products. This places borrowers of color, 

whose communities have been targeted for risky products, at a tremendous disadvantage. 

We urge the subcommittee to look at this question in more detail. 

It has profound implications for the future, not just for access to 

PMI, but also for many other aspects of people’s lives. 

The Federal Government has a unique relationship to the PMI 

industry, having done quite a bit to create a market for this product. One example that has been cited by several of my co-panelists 

is the charter requirement that prohibits the GSEs from purchasing loans with LTVs above 80 percent unless those loans carry 

a credit enhancement. 

The recently enacted Dodd-Frank Wall Street reform bill also 

creates a carveout for private mortgage insurance. As a result, it 

is our view that the Federal Government has both an opportunity 

and an obligation to make sure that the industry operates in a 

manner that is fair and nondiscriminatory. 

In particular, Congress, the public, and ultimately the industry, 

as well, would all benefit from having access to more detailed information about how private mortgage insurers operate. This includes 

information about underwriting standards and also where, to 

whom, and at what price mortgage insurance is being offered. 

It could also include information about the impact of mortgage 

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18 

closure. This is a question the subcommittee raised, but there is no 

publicly available information on which to base an answer. 

Better data on a range of issues related to private mortgage insurance and its impact on the housing finance system would put 

us all in a better position to have an informed debate about what 

the system of the future should look like. You can make such data 

available, and we urge you to consider doing so. 

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

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

50 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Ms. Goldberg. 

I guess I am the first one on the firing pad today, so let me go 

back and just see if I can pick up. 

Could everybody on the panel, just have a show of hands, who 

would support a secondary market? 

Okay. 

Oh, a slow ‘‘yes.’’ 

Mr. SANDERS. Clarification. 

Chairman KANJORSKI. I think the impression that I received, at 

least, from the opening statement of Mr. Hensarling, was that we 

ought to really do away with the secondary market and government involvement therein. And I think there is a large portion of 

the American population who are taking that sort of tea-party effect—I am sorry, I didn’t want to suggest that comes from a particular element—but that they follow that thought process. 

And on the other end— 

Mr. GARRETT. Constitutionalist? Is that the word you are looking 

for? 

Chairman KANJORSKI. Constitutionalist? I did not see that in the 

Constitution, but you may be right. 

This morning, I had the pleasure of sitting in on a briefing from 

Dr. Shiller and Dr. Zandi, which went over and explained the real 

estate market for the last 40, 50, 60 years, or perhaps 100 years, 

which was quite revealing and interesting, insofar as the bubble 

that occurred in 2006 to about 2009 was extraordinary and a onetime deal in the last 100 years. Other than that, real estate was 

in a relatively staid and standard position without great fluctuation. 

And, quite frankly, neither one of them attributed any particular 

action to that, other than the changing from risk investment in the 

stock market in equities to risk investment in the real estate market, for one reason or another. And they looked at it as the bubble 

in the early 1990’s and late 1990’s and then moving into real estate 

in the 2004 or 2005 period. 

That all being said, everybody is trying to do a postmortem here 

and find a guilty party. I thought we had one, but that slow motion 

of the hand said we did not. 

In reality, I think we all have to accept the fact that the real estate market is a fundamental part of the American economy. If the 

real estate market doesn’t stabilize and then improve, we do not 

have a great deal of hope for stabilization of unemployment and for 

a good recovery to the middle-class economy that we were blessed 

with for almost 20 years. 

19 

Would the panel agree? And if you disagree, speak up as to what 

your disagreement is. 

Nobody heard my question, so they don’t know whether they 

want to commit. 

Does George Mason want to speak to that? 

Mr. SANDERS. Oh, the guy from George Mason, yes. Thank you. 

I agree, the real estate market is a fundamental part of the U.S. 

economy. I disagree with Mr. Shiller and Mr. Zandi. Again, if you 

look clearly at the evidence, when we pumped trillions of dollars 

into the housing market over the 2000’s and we, at the same time, 

lowered downpayment requirements, rates fell, etc., you were going 

to get a housing bubble, period. 

And I don’t understand why I haven’t talked with Mr. Shiller before about this, and— 

Chairman KANJORSKI. If I may interrupt you for a second, 

though, not too far from where you are sitting, if you moved over 

to Ms. Ratcliffe’s position, about 5 years ago Alan Greenspan testified before our full committee, and he was sitting right in her seat. 

And he said he was not worried at all about a real estate bubble; 

it just was not going to occur, did not occur, and it was nothing for 

us or anyone else in the country to worry about. 

That was in 2005. Precipitous, because at that precise moment 

very strange things were beginning to happen in the real estate 

market, and all of us were a little worried. But, not having the expertise of Dr. Greenspan, we relied on him for his expert opinion. 

Subsequent to that, he has apologized for having been deadwrong on the issue. And I think that shows a big man and a good 

man, but, nevertheless, he was wrong. 

You do not feel that he was wrong? Or do you feel it does not 

matter? I am not sure I get the— 

Mr. SANDERS. Oh, do I think Alan Greenspan was wrong? Two 

reasons: one, he confessed he was wrong; and two, when all of us 

looked at the housing prices going up like this, and simultaneously 

Freddie and Fannie’s retained portfolio is going up about the same 

speed, we all knew that something has to give. 

Why Mr. Greenspan didn’t choose to recognize that is—who 

knows? Maybe he thought it was a new plateau. But I can guarantee you other people at the time were scared about what was 

going on in the market. 

Chairman KANJORSKI. Yes, sir? 

Mr. TAYLOR. Chairman Greenspan was the ultimate libertarian. 

And perhaps he was locked into that ideology as a way of not being 

able to respond to what was going on. 

The real estate market is absolutely an important part of our 

economy, but we need a system of checks and balances. And if we 

learn nothing else from this hearing today, it is the system of 

checks and balances over the mortgage insurance industry that required capitalization of 25 to one. Fifty cents of every premium dollar that came in was put into a reserve so that they could survive. 

Mr. Hensarling said earlier—I am sorry he is not here; I wanted 

to get to agree with most of what he said, and that is a rare occurrence for me—that it appears the MIs somehow weathered the 

storm. It wasn’t ‘‘somehow.’’ It was because we had regulation that 

required them to be adequately capitalized. 

20 

Had we done that with the rest of the industry, and if there was 

enough oversight of the rest of the industry, we could have avoided 

a lot of the problems and still had a healthy real estate practice. 

Chairman KANJORSKI. So I am supposed to conclude that regulation may sometimes be a good thing? 

Mr. TAYLOR. Yes. 

Chairman KANJORSKI. In this era, I do not often hear that. 

Ms. Ratcliffe, you were shaking your head. Do you agree with 

that position? 

Ms. RATCLIFFE. I entirely agree. There are a couple of dimensions that are worth exploring. One is the issue of regulatory capital requirements being inconsistent across the industry that led 

lending to occur in places there were no capital or very cheap capital requirements that led to much of the bubble. 

One of the great ironies, I think, given the discussion we are 

having today, is the issue of AIG who, in their credit default swap 

business helped inflate the bubble and needed substantial billions 

of dollars of government support. They are the parent company of 

a mortgage insurance company who followed these capitalization 

rules when they took credit risk on mortgages. Right there within 

one company, you see this example of capital arbitrage that we 

need to make adjustments for in this. Thinking about the secondary market reform, we have to think beyond whatever quasigovernment agency you have to the rest of the playing field. 

Chairman KANJORSKI. Should there be a bar to the nexus of 

those two companies in the same structure? 

Ms. RATCLIFFE. I’m sorry? 

Chairman KANJORSKI. Should there be a bar to having a nexus 

or relations between those companies existing in the same structure? 

Ms. RATCLIFFE. Again, I think if we set common capital requirements, that wouldn’t necessarily be necessary. 

Mr. SINKS. If I may take a shot at that, not speaking on behalf 

of AIG, but speaking on behalf of the mortgage insurance companies, I would submit there is a bar. 

The mortgage insurance companies are controlled by the State 

insurance departments, and they have the ability to control what 

goes in and out of that company. So despite the fact it was part 

of the very broad AIG organization, I would submit, again in a general sense, that capital was, in fact, walled off and the policyholders were protected. 

Chairman KANJORSKI. Very good. I now recognize the gentleman 

from New Jersey, since I have also taken additional time. 

Mr. GARRETT. Thank you, Mr. Chairman. 

Let me start, a quick show of hands, how many think anyone 

who wants to get a loan, a home loan, should have to, in one way 

or other, go through the Federal Government, rely upon the Federal Government? 

Okay. 

And how many think that the Federal Government should essentially be backstopping or underwriting where we are, around 99 

percent of loans, high LTV loans or otherwise? 

Good. So somewhere in between then. All right. 

21 

On your point, Mr. Taylor, that Mr. Greenspan is the ultimate 

libertarian; I don’t know. A lot of people now in retrospect say his 

monetary policy was one of the reasons that brought us to that 

bubble that Mr. Sanders was speaking to before. And I think most 

libertarians would say that the central bank should not be playing 

that role. But you can debate that. 

Professor Sanders, you saw that chart, that is the chart. The 

blue is showing where 99 percent of the high LTVs are being underwritten by you and I, and everybody else in the room, the American taxpayer. Is that where we want to be? Are you concerned 

about this? 

Mr. SANDERS. The answer is it is not where we want to be, and 

we should be extremely concerned about this. Again, the same 

thing I said before, if Genworth or MGIC or one of the other private mortgage insurance companies want to go out and underwrite 

a 3 percent down mortgage, and they are going to do it and suffer 

the consequences of their folly if it fails, so be it. 

Again, as I said, Fannie, Freddie, and the FHA have this combustible joint process where they are doing public policy and risk 

management. And guess which one wins out, so we end up with a 

market capture of 99 percent. 

In addition, although you didn’t bring it up, if we take a look at 

the percentage, 99 percent and over LTV occurring now, you have 

all of the GSEs, doing about 40 percent of their business, is low 

LTV lending. 

Once again, I sympathize with all of the people who say that 

they would like to see homeowners get that. You just have to understand, that is bubble creating. That creates another one of these 

incredible wave-type effects, and it is not good for the stability of 

the economy. 

Mr. GARRETT. Mr. Taylor, you talked about the adverse market 

fees? 

Mr. TAYLOR. Am I going to get to respond this time? 

Mr. GARRETT. Yes. You discussed the adverse market fees that 

the GSEs are charging. Can you elaborate on the fees and what 

that all means? 

Mr. TAYLOR. Yes. They have defined that they get to charge 25 

basis points in addition to what they define as adverse markets 

anywhere in the country. We are actually quite concerned about 

that. 

Mr. GARRETT. Why? 

Mr. TAYLOR. Because we think it is unfair. The notion that because somebody lives in a declining market, that somehow they 

have to pay a premium seems fairly anti-American to me. You 

ought to be able to judge the person on their capability, their individual financial status, and their creditworthiness and so on, not 

by the neighborhood they necessarily live in. In fact, that is precisely why we created the Fair Housing Act and other laws to prohibit these kinds of discriminatory practices just based on geography. 

Mr. GARRETT. What would the GSEs say if they were sitting next 

to you? 

Mr. TAYLOR. That they have an incredibly bad balance sheet, and 

they are doing everything they can to create strong, positive cash 

22 

flow that will, when they separate out all of those bad assets, leave 

them standing. 

Mr. GARRETT. Two points. Your one point you make is: Yes, that 

may be true, but they are making it on the backs of those people. 

That is your point. 

Mr. TAYLOR. I agree, yes. I agree with my point. 

Mr. GARRETT. I just wanted to get that out. 

The second point here is, how are they using those fees? 

Mr. TAYLOR. I think they are using it to create profitability for 

the GSEs, and hopefully sustain themselves into the future. I’m not 

sure if that is getting at your point. 

Mr. GARRETT. Yes. You can make the argument, hey, we have a 

bad balance sheet and we want to put this aside as reserves. 

Mr. TAYLOR. They are also concentrating on the safest and the 

easy to make—they have raised their credit scores in terms of who 

they are willing to make loans to. They are doing stuff that essentially is survival stuff for them. 

Mr. GARRETT. Ms. Ratcliffe? 

Ms. RATCLIFFE. I wanted to add that not only is it not fair to 

apply those kinds of pricing factors, but it is procyclical. That is exactly what we have been talking about. If you layer additional costs 

on in weaker times and take them out in good times, you end up 

exacerbating upsides and downsides. 

Mr. GARRETT. I didn’t think about that part of it. Thank you. 

Chairman KANJORSKI. In fairness, before I recognize the next individual, the chart was beautiful, Mr. Garrett, except I do want to 

indicate it is misleading, because I think the chart showed 99 percent or 97 percent, but this morning, Inside Mortgage Finance released facts and information to indicate that it has fallen from 97 

percent to 82 percent, and that was an extraordinary period of time 

that it went up to 97 percent. So I don’t think we should allow the 

impression that it has been and continues to be at 97 percent. 

Mr. GARRETT. These are LTV loans, high LTVs. I think they are 

still at 99 percent. Overall, it has come down, but not the high 

LTV. 

Chairman KANJORSKI. We will check it out. Would it be surprising if they stay up and everything else goes down? 

Mr. GARRETT. No. That is part of the consequence, and that is 

part of the concern. 

Chairman KANJORSKI. We will check. 

Mr. GARRETT. You put your chart over there. And we will have 

our chart here. 

Chairman KANJORSKI. We will have the war of charts. With that, 

Mrs. Capito? 

Mrs. CAPITO. Thank you, Mr. Chairman. 

Mr. Sanders, in my opening statement, I mentioned concerns I 

have. I am the ranking member on the Housing Subcommittee, and 

we worked on the FHA reform bill, and have been trying to work 

on, with the Administration’s help, the FHA capital reserve fund. 

As you know, FHA has played a much, much larger role in mortgage insurance than probably historically. I don’t know that, but I 

assume it is close to that. Have you looked at the announced 

changes on the premium changes and do you think this will have 

23 

any effect on FHA market share and open up some of the private 

markets? Do you have an opinion on that? 

Mr. SANDERS. First of all, I also want to point out, not to pick 

on Mr. Taylor, but when he mentioned Fannie and Freddie have 

horrible balance sheets, we should ask ourselves: And how did they 

end up with horrible balance sheets? 

What is happening right now is, true, Freddie and Fannie have 

increased their standards for purchasing loans. However, the FHA 

has jumped in and filled the void so the whole point is, we still 

have tons of these low-downpayment loans being made. It just 

shifted. The FHA is now growing faster than Fannie and Freddie. 

But having said that, I think that the proposed legislation on the 

FHA is a very good thing. I think the fee schedules make a lot of 

sense. I think even the FHA would agree that they would like to 

actually have higher downpayment standards. Absolutely. They 

have some data. They can see how this can happen again. 

Mrs. CAPITO. They did raise some of their downpayment requirements for those with FICO scores of 570 or 580. 

Mr. SINKS. 580. 

Mrs. CAPITO. They raised them up to 10 percent. So I think that 

is a recognition by the FHA. In your opinion, that may not be 

enough. 

Mr. SANDERS. Baby steps. The direction is great. I love to see it. 

However, once again, I keep trying to make this clear, the more we 

rely on low-downpayment loans, while it is very satisfying for many 

households, and I appreciate it, the slow rental market, it is inflationary in housing prices. 

And again, and I want to make this point, I appreciate what the 

FHA and Fannie and Freddie have done. On the other hand, if you 

are sitting out in Las Vegas, California, Florida, etc., you have a 

3 percent down loan, which you were encouraged to do, housing 

prices fall 20 percent, how did we help out homeowners by encouraging them to take out a low-downpayment mortgage? These 

households are devastated. 

Again, we have to rethink shoving everyone into low downpayment. To say that the housing market is now stable and will never 

go up again, like Mark Zandi says, I think that is ridiculous. We 

have set the table. Warning, we have set the table for another 

lurch and crash. I don’t want to see that again, and I don’t think 

anyone in here really wants to see that either. But I think the FHA 

is a good step forward. 

Mr. SINKS. If I may, first of all, the housing prices have dropped 

significantly in the markets that Mr. Sanders alluded to. And there 

is a sense, and Mr. Zandi, for instance, will forecast the drop a little more. But our sense of it at the Mortgage Insurance Companies 

is that the worst is over in terms of the price drops. From peak to 

trough, the worst is over, we believe. 

The other thing is, I would not overemphasize the importance of 

downpayment. It is a criteria, and the example used is an important one. However, there are a number of factors that led to what 

happened. 

We talked about low interest rates and we talked about how easy 

it was to get a mortgage. But also things like instrument types, 

24 

subprime mortgages, reduced doc loans, things of that nature. It 

was much more than downpayment. 

High-ratio lending can be done properly. It doesn’t necessarily 

equate into high risk. What you have to be careful of is layering 

risk, where you only have 3 percent down, you have 580 FICO 

score and a BPI of 45 percent, when you layer all of those things 

in, that is when you walk into a problem. So downpayment is an 

important criteria, but we would submit it is not the only criteria. 

Mrs. CAPITO. Excellent point. Thank you. 

Ms. GOLDBERG. If I may add a comment to that, one of the other 

things we saw in the dramatic increase in the subprime lending 

and other kinds of exotic lending was a misalignment of interest 

between the borrower and the folks on the other side of the table, 

where people on the other side of the table were getting paid tremendous amounts to put folks in loans that were not sustainable, 

that had these many layers of risk that several of us have talked 

about. So it is not like it happened organically. There were profit 

motives and strong market forces driving people into those loans 

when they were not really in their own best interest. 

Mrs. CAPITO. Thank you. I would add this to that, coming from 

a State like West Virginia which has some of the highest homeownership in the Nation and some of the lowest foreclosure rates, we 

don’t have the bubble of the real estate. We have responsible borrowers who, when they sit down to pay their bills, they pay their 

mortgage. That is the first check that they write. And so, there is 

an element of personal responsibility here that sometimes I think, 

not to say this is the only thing, and certainly there are people out 

there taking advantage of other people, absolutely. But the borrower has to take responsibility here. 

Part of my frustration has been in some of the foreclosure modifications when we were doing the trial modifications, there was 

such pressure to get people into trial modifications, they weren’t 

even taking documentation on those. That just exacerbates the 

problem. 

We all want to keep everybody in a home, but at the same time, 

we can’t keep repeating the same mistakes that have led folks to 

be thrown out of their homes and have led to this crisis. I just 

wanted to make that point. But I appreciate your remarks. 

Mr. TAYLOR. Mr. Chairman, if I may comment, I do think personal responsibility is important, and I think everybody needs to 

understand that and needs to live by that. 

But I think when you see almost 10 million Americans in a situation where they are facing foreclosure, it is not like the American 

public overnight became personally irresponsible about purchasing 

things and going into homeownership. What really changed is not 

the desire for homeownership or the individual personal responsibility of taxpayers or voters, what really changed is the malfeasance of the industry willing to make loans that they didn’t care 

what happened to them because all they cared about was the fee. 

There wasn’t the regulatory apparatus that ensured integrity 

and ethics in the industry. That and the piggybacking, as I think 

Mr. Sinks said, it is the layering of all of these different things on 

these loans—interest rates, options, payments, changing exploding 

loans, no documentation, all of these things that they were actually 

25 

willing to make loans to people they knew didn’t have an ability 

to pay. That is what changed. The industry before that was pretty 

good at making loans to people who could afford to pay them back. 

It wasn’t that all of a sudden, the American public became irresponsible. That is my perspective. 

Chairman KANJORSKI. Thank you, Mrs. Capito. 

We will now hear from the gentlelady from New York, Mrs. 

Maloney. 

Mrs. MALONEY. Thank you, Mr. Chairman. Following up on the 

gentleman who just spoke, that what was happening was that no 

responsibility was in the process, but just fee-generated activity, 

could you elaborate? So it was more or less like a casino, and could 

you elaborate more? And are the safeguards put in the bill adequate with the 5 percent securitization and skin in the game and 

bringing everyone under regulation, does that, in effect, end these 

types of abuses, in your opinion? 

Mr. TAYLOR. I think the bill will go a long way towards addressing a lot of the abuses. I think what will be important is the real 

independence of the Bureau of Consumer Financial Protection and 

its oversight and ability to respond to things. 

Look, I think what we had was an industry gone wild on Wall 

Street that had so much money that was looking for a home. And 

America had a reputation, you buy these CDOs mortgage-backed 

securities, you could get good rates of return, and we had rating 

agencies that were willing to slap AAA ratings on 80 percent of the 

high-cost loans. AAA rating on 80 percent of the high-cost loans. 

And you had appraisers— 

Mrs. MALONEY. And these mortgage-backed securities had no insurance behind them, and did the public know that, that there was 

no— 

Mr. TAYLOR. The public, I remember sitting with some of the 

agencies before the crash and asking them, how could they be rating these things at triple A ratings, and sitting across the table, 

they would tell me, we are not really a due diligence agency. 

Mrs. MALONEY. Then what were they? 

Mr. TAYLOR. I don’t know. I think they were agents of the investment banks because that is who paid them. That is the fundamental problem. I know in the bill, you have language in there to 

recommend what to do with these agencies. 

But listen, it was top to bottom. It was appraisers. It was brokers. It was everybody getting fees, and nobody with the ability to 

step in and say, we can’t have this kind of stuff because it is not 

sustainable, it is predatory, and it is going to cause problems for 

everybody, not only homeowners, but the investors. The investors, 

they are thinking they were buying American triple rated securities that are going to give them double digit, maybe high single 

digit rates of returns, safe as gold. That is what happened up and 

down the line. 

Hopefully, what you have in passing this financial reform, and 

God bless you for supporting it, is that you are putting sanity back 

into this industry, accountability, and you are protecting the American consumer in the process. And hopefully, we will get back to 

the business of banking in which they made loans to people who 

could actually afford to pay them back. 

26 

Mrs. MALONEY. Mr. Sanders, did you want to comment? 

Mr. SANDERS. Thank you. Before we take the rating agency 

punching bag approach, I want to point out that a lot of investors 

bought many of these securities, and they didn’t even take time to 

do due diligence and take a look because all of the loan files were 

available. They could have done their own modeling. I know this 

for a fact. 

Instead they just jumped in, said triple A rated, I will buy it, and 

then after they lost money, they said, ‘‘Oh, my gosh, those damn 

rating agencies.’’ 

From the street, and I am sure if you had Mr. Zandi in here 

again, most people on the street know rating agencies—ratings 

don’t mean much. They have a 6-month lag when things go back. 

I put the onus on the buyers. Buyer beware. Remember that one. 

I think a lot of times they substituted in a quick decision when 

they didn’t do proper due diligence, and now they want their pound 

of flesh for doing it. 

Mr. TAYLOR. So, personal responsibility of investors. 

Mrs. MALONEY. I began this morning at a meeting, a briefing 

that Chairman Frank had on housing, and he had several economists there. And Mr. Zandi, who was the economist for Senator 

McCain, testified that housing is roughly 25 percent of the economy. If we don’t have a robust housing market, then we are not 

going to have a recovery and our recovery is still somewhat fragile. 

One thing that the private mortgage insurance does is help us finance housing and thereby help us dig our way out of this recession. 

Would anyone like to comment on the way that the private mortgage insurance business successfully raises millions of dollars for 

us to finance housing which under the new guidelines is following 

investment principles? Would anyone like to comment on that? 

Mr. SINKS. On behalf of MICA, I would say, first of all I think 

the attraction of capital to the industry that we have experienced 

in the last couple of years is a realization that prudent underwriting has returned. While we have the legacy of the older business and how that develops, first and foremost, prudent underwriting has returned. I think that goes a long way towards it. 

I also think that the industry has taken numerous steps. One of 

the key values that we bring, and perhaps lost sight of during a 

period of time but now bring again is a second set of eyes. We like 

to use the term ‘‘friction.’’ In other words, there is a second set of 

eyes looking at that loan, looking at that loan file to make sure 

that it meets the criteria and to make sure that the loan is proper 

and people can afford the loan, not only at the time they originate 

the mortgage or day one when they move in the house, but 3 or 

4 or 5 years later they can stay in that home. So in many respects, 

it is back to basics. That is what it is. 

Mrs. MALONEY. Back to basics. That is a good ending. My time 

has expired, but Mr. Taylor has a comment. 

Mr. TAYLOR. It is more than a second set of eyes. It is having 

skin in the game. The MIs know that if that mortgage goes bad, 

they lose. So they will make sure it is a good loan. That is critical 

because they have financial skin in the game. 

Mrs. MALONEY. My time has expired. I thank the gentleman. 

27 

Chairman KANJORSKI. The gentleman from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

I appreciate the rehashing. We have had a number of hearings 

where we rehashed what happened. I kind of am more interested 

in where we go from here because that is what is going to drive 

the economy, how to get these markets back functioning again and 

somehow divorce the taxpayers from having to subsidize and backstop these financial markets. 

Mr. Sinks, one of the things that people are kicking around is 

how we get the securitization market back operating again, and 

certainly the mortgage insurance industry plays an important part 

of that in the primary origination. One of the things that is being 

kicked around a little bit is instead of Fannie and Freddie basically 

securitizing and guaranteeing those portfolios, possibly there is 

room for private entities to do that. 

So instead of MI, you have SI, securitization insurance. Do you 

think that the industry would embrace a concept where there was 

another piece of business there where you would not only be, the 

private mortgage insurance on the underlying mortgages, but also 

on the securitization piece? 

Mr. SINKS. We would embrace it obviously if done correctly. In 

fact, we have in the past. We did insure private label securities 

over many, many years. I think the challenge and our position on 

it is, and we used to ask ourselves this at MGIC, many years in 

the boom time, is Wall Street patient capital? And they have proven that very well, they are not patient capital, for a variety of reasons. 

So to answer your question directly: Would we entertain it? Yes. 

However, we do believe the government needs to play a role because that ensures liquidity. And as long as there is liquidity in the 

market, again with proper oversight, with transparency, and the 

proper regulators, we are better and more in line with kind of a 

combination of private partner. And by that, I mean two different 

securitizers, not the Fannie Mae ownership. 

Mr. NEUGEBAUER. People talk about how we need the government for liquidity. To me, liquidity is saying, if you need me to loan 

you some money against your securities for a period of time, I will 

do that. That provides liquidity. 

But then there is another piece of that. Some people say, we need 

the Federal Government to step in and take some of the risk with 

us. Certainly, I don’t embrace that concept. 

We had a private securitized market before the crisis. We need 

to figure out a way to restore it. As Professor Sanders said, we 

need the industry to be willing to take risks, do their due diligence 

and make sure that understand what they are buying. But we also 

need to make sure that we don’t take away the tools for some of 

those entities that are willing to make a market for those securities, to protect some of that risk. And that comes with hedging and 

derivatives. 

When we talk about liquidity, are we talking about for the Federal Government to take some of the credit risk when you say that? 

Mr. SINKS. We are talking in particular about liquidity to be able 

to move money in the secondary market, the capital markets. It is 

28 

not so much taking credit risk. I think that is the role the private 

mortgage insurance companies can play. As I reported earlier, we 

have great capacity to be able to do it. That doesn’t mean that the 

new entity, the new GSE wouldn’t be exposed. It would depend on 

the layer of private mortgage insurance coverage you have. 

So on our terms, it would be more along the lines of the ability 

to transfer capital from those originating loans to this entity or into 

the secondary market and free up capital to make more loans. 

Mr. NEUGEBAUER. Ms. Rodamaker? 

Ms. RODAMAKER. From a community bank’s perspective, I would 

wholeheartedly agree with that. As we originate loans, we need an 

avenue to sell those into the secondary market to free up capital 

to originate more real estate mortgages. 

We sell about 60 percent of our mortgages that we originate in 

our communities. We retain 100 percent of the servicing. We still 

manage those accounts and those customers, but we have to have 

a vehicle to get that sold and generate the liquidity. 

It does help us manage our interest rate risk because we sell our 

long-term fixed-rate mortgages. However, we utilize the same underwriting as if we were holding those loans in portfolio, and assume that credit risk even though we have sold it to Freddie Mac. 

I think that is true of most community banks. We are not looking 

to sell a credit risk; we are looking to generate liquidity. 

Mr. NEUGEBAUER. I think that is important. I think everyone 

agrees that we need to get the secondary market back functioning 

again. Otherwise, we won’t have much of a housing market if we 

don’t have housing credit. And it will be difficult for us to address 

the Freddie and Fannie issue if we don’t have an alternative because it has been pointed out that they are the only game in town 

right now, on top of FHA. 

I want to encourage the panel, as we begin to address Fannie 

and Freddie, we have to also I think simultaneously be addressing 

how we get the private securitization market back, started again, 

because otherwise we will be creating a very difficult situation to 

bring up any kind of a housing recovery, and really I think a longterm economic recovery for our country. I encourage, if you have 

some ideas, we will be listening. 

I yield back. 

Chairman KANJORSKI. Thank you. The gentlelady from New 

York, Mrs. McCarthy. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. I 

apologize that I had to leave. I had constituents coming in that I 

had to see. 

I am hoping that the question I want to ask hasn’t already been 

asked. Mr. Taylor, when I read your testimony, you indicated that 

the mortgage insurance can play a crucial role to help troubled 

homeowners. Can you further explain the proposed partnership of 

the industry with the Administration and explain how further we 

can work along towards economic recovery? If you have answered 

that, I have another question. 

Mr. TAYLOR. I have, unfortunately, had to be fairly consistently 

critical of the lack of success of the Administration’s HAMP program, considering that 390,000 people got permanent modifications 

out of the 4 million goal that they set for themselves, from over 16 

29 

months of running the program. So, it has been difficult that I 

have had to take that position. 

I have tried to look for creative things that can be done. I think 

one of them is the role that mortgage insurance companies could 

play because what is coming now, as of October 1st, is the principal 

reduction, the call for principal reduction by the lenders on these 

mortgages to see whether that can save enough borrowers from 

going into foreclosure. And perhaps the role that the mortgage insurance companies could play is to offer mortgage insurance for 

those borrowers who are under 20 percent of value, loan to value, 

and perhaps encourage some of those lenders to be dropping the interest, and if necessary, principal, to reach a point where they are 

comfortable there will be mortgage insurance in play so if this redefaults, which is a concern for a lot of lenders, if there is a redefault, that there is somebody who can cover some of those defaults. 

I think the mortgage insurance companies, it is new. It is novel. 

I think the mortgage insurance companies, I urge them to work 

with the Administration and work with the lenders to see whether 

they can play a role in helping me make HAMP more effective. 

The final thing I will say on that is unless and until there is a 

mandatory requirement for lenders to participate in the HAMP 

program, as long as it is voluntary, we are going to see the poor 

numbers that we are seeing in that program. 

Ms. GOLDBERG. If I may just add one comment to that, because 

I think the mortgage insurance industry really deserves credit for 

stepping forward early on in this HAMP process, to recognize the 

fact that mortgage insurance exists on the loans, could be effectively the thumb on the scale, tipping the balance in the equation 

about what is going to be the best return for the investor towards 

going to foreclosure because that is when the claim, the mortgage 

insurance claim, is traditionally paid. 

I have been in a number of meetings with people from the industry and people from the government where they said this is a potential problem. We need to make sure that it doesn’t happen. I 

think they have been trying very hard to work with servicers and 

to work with Treasury to prevent that from tipping the balance unfairly because it is not in their interest; it is not in the borrower’s 

interest, and it is certainly not in the community’s interest to have 

the fact that there is a mortgage insurance policy on a loan, make 

it go to foreclosure, when it could otherwise have been saved. 

Maybe Mr. Sinks can speak to this. 

It is my understanding that they have been trying to work with 

servicers to do some kind of preclaim advance or a partial payment 

that would tip the balance toward loan modifications. It is very 

hard to know how that is working or how widespread the take-up 

from the servicing industry has been on that possibility. 

Mrs. MCCARTHY OF NEW YORK. We had a briefing this morning 

by Moody’s, and they brought up the same exact points that you 

are bringing up. So the criticism has been out there. Mark Zandi 

gave us a great briefing. If something is not working, then obviously we have to try to fix it. 

Mr. Sinks, do you have anything to add to that? 

30 

Mr. SINKS. I would add, we have done a great deal, the mortgage 

insurance companies, in working with servicers, and in certain 

cases, working directly with borrowers, to try to keep people in 

their homes. As we reported earlier, our interests are very much 

aligned with the servicer and the borrower, so it is important that 

we do that. The programs have evolved over the last couple of 

years. I think they got off to a relatively slow start, but we are now 

seeing more and more programs where the consumer’s monthly 

payment is being reduced and that makes a big difference in keeping them in their home. So we are actively engaged there. I think 

there are 16 different programs we are involved with. 

In addition to that, I know many of the MI companies that actually place people on site at the servicers such that those loans that 

contain mortgage insurance are getting the attention that they deserve, and we can work them as quickly as we possibly can. 

Mrs. MCCARTHY OF NEW YORK. One of the things—I am sorry, 

my time is up. 

Chairman KANJORSKI. I recognize the gentlelady from Illinois, 

Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you for having this hearing. 

Mr. Sinks, in your testimony, you say that PMI has saved taxpayers billions of dollars. Do you think that we should require PMI 

on all loans in excess of 70 percent loan to value? 

Mr. SINKS. I wouldn’t lock in necessarily on loan to value; but I 

would tell you that we are prepared to go as deep as necessary and 

as is prudent, as long as we can protect the policyholders in our 

capital support. We certainly would entertain that idea. 

Mrs. BIGGERT. Some people say FHA’s market share has increased because the private mortgage insurers have pulled back. 

Do you agree with that? Is this a reason for FHA’s increased market share? 

Mr. SINKS. I think there are a variety of reasons for the increase 

in market share. I think as the crisis developed in 2007 and 2008, 

we adjusted, ‘‘we’’ being the private mortgage insurance companies, 

adjusted our underwriting criteria to reflect the market conditions 

at that point in time. Since then, as the market has started to recover a little bit, we have adjusted those accordingly. So our underwriting guidelines have adjusted as markets have changed. 

But the other key reason why the FHA is getting the market 

share they are, first and foremost, they generally have pricing 

lower than we do. They have proposed, and I think it has been approved in the House, that their pricing will increase, and hopefully 

later this year that will happen. That will make the private mortgage insurance companies much more competitive. 

In addition, and it was alluded to earlier by members of the 

panel, Fannie Mae and Freddie Mac have added adverse market 

fees. They have loan level price adjustments to try to rebuild their 

capital base that has made the conventional market less competitive. So if a borrower looks at a monthly payment between the 

FHA and the private execution, more often than not, they are going 

to do FHA. It is just simply the borrower picking the best execution 

for them. 

Mrs. BIGGERT. Thank you. 

31 

Ms. Ratcliffe, in the aftermath of the financial crisis, the government seems to have taken a dominant role in the single family 

mortgage market. The Federal Reserve has invested $125 million 

in mortgage-backed securities, Treasury has injected $145 billion to 

Fannie and Freddie, and now the FHA insures more than 20 percent of all new mortgages. In your opinion, is it appropriate that 

the government commit such extensive resources to support the 

housing market? 

Ms. RATCLIFFE. Is it appropriate to what they have done, obviously it seems like in the heat of the moment, and the crisis, certain steps had to be taken. Whether every single investment and 

dollar put up, I think if I could turn your question a little more to 

the future and answer a question that has sort of been in the air 

here all day, whether going forward there should be some place for 

government in the secondary market. 

Mrs. BIGGERT. I guess I would ask then, is that investment sustainable over the long term? 

Ms. RATCLIFFE. The current level seems inappropriate and 

unsustainable over the long term. 

Mrs. BIGGERT. What strategies would you suggest then for the 

private sector’s role in the mortgage market? 

Ms. RATCLIFFE. The private sector ought to play as big a role as 

it can while the mortgage industry can function to meet the public 

policy goal. To some extent, that may require some form of government support to build investor confidence and create constant liquidity and ensure access to standardized mortgage products, particularly the fixed-rate, long-term amortizing mortgage that is the 

staple of the U.S. market. 

But to the extent that the private sector, and mortgage insurance 

is a perfect example of that, the first loss position is on the private 

sector. They have skin in the game. They set the standards and 

they know the customers and the borrowers and the mortgage 

lenders. So the government role should be minimized. What we 

have proposed are things like private mortgage insurance, much 

more capital in front of whatever would replace the GSEs, and 

something like an FDIC fund before you even would touch a catastrophic government wrap. 

Mrs. BIGGERT. Mr. Sinks, to go back and maybe play on that, can 

you elaborate for us, you said, I think, that the mortgage insurance 

industry is very well regulated by the State insurance regulators. 

Are you concerned that there might be inefficiencies and burdens 

of having to deal with the different regulations and requirements 

among the States? Or do you still think this is the best way to go? 

Mr. SINKS. We still believe in the State regulatory model. It has 

worked successfully, as we have said. It has worked in good times 

and bad times. There are mortgage insurance companies over time, 

going back to the 1980’s, for instance, that are no longer in the 

business because of regular steps, and addressed the situation. It 

is kind of a sense that the model works very well, and we don’t 

need to fix it. If it is not broke, don’t fix it. 

Mrs. BIGGERT. Thank you. I yield back. 

Chairman KANJORSKI. Thank you very much, Mrs. Biggert. 

We have now run out of our first round of questions. I am sure 

members would have additional questions if we allow it. 

32 

So, without objection, I am going to start a second round. We 

have this bright, anxious, participating panel here, so why not tap 

them. 

My first question would be, looking to the future, how many of 

you would recommend getting the government totally out of the 

secondary market and out of the real estate market? 

Okay, George Mason has one vote, and five to the contrary. 

Let us start with you, Mr. Sanders. Why are you so convinced 

that it is not advantageous for the entire American economy to 

keep the real estate market relatively flat and not highly cyclical 

that would cause this great fluctuation? Or do you see that there 

would not be fluctuation, because if you do an analysis from the 

late 1920’s until 2004, 2005, the real estate market has been a tremendously flat, stable market, and it only bloated with the bubble 

right at the end. What are we to think if we go to a total private 

market again, why should we not be returning to the days prior to 

1929 when it was a very, very fluctuating market? 

Mr. SANDERS. Mr. Kanjorski, I have seen that same study by Bob 

Schiller. What is misleading about that is that is a national portfolio of housing. There have been regional bubbles in housing markets all throughout time: Boston; Houston; and Denver. That was 

the source of my quote in the New York Times where I said don’t 

put lower-income households in low-downpayment mortgages. You 

are going to hurt them because housing markets, by definition, can 

be bubblish. 

Now, having said that, I would disagree with what Mr. Taylor 

said. He said, Wall Street gone wild. I would say, government gone 

wild. We went through a period where government pushed housing 

over the cliff. And what did we get? We got a bubble; we got a 

burst; and we have a lot of heartache and pain. It almost crashed 

the banking industry and the private mortgage insurance companies ratings are not as high as they used to be. That is the downside of it. 

Having said that, can’t we at least begin to withdraw the government support and go back and let the private mortgage insurance 

companies or the banks take risks they think are reasonable? 

Chairman KANJORSKI. I do not have any question with that. Certainly we have to change the formula, perhaps how much government involvement there is. But to listen to the purists’ argument, 

it is quite disturbing to me because you are willingly putting at 

risk, it seems to me, the entire economy of the United States since 

housing represents 25 percent of the economy. If we stay in the 

state we are in right now, there is literally little or no hope for recovery. That is a heck of a price to test against an economic theory, 

free market concept. I am glad you are able to make that price and 

argument, but would you want us to tie all of the support funds 

that the Federal Government supplies to your university based on 

that so if you are wrong, your university gets wiped out? 

Mr. SANDERS. Absolutely, for the following reason: We are the 

only country that has Freddie Mac, Fannie Mae, and this extensive 

subsidization of the housing market. We got there because of that. 

You are right, if we suddenly removed it, it would be like a drug 

addict coming off of a heroin shot. We would probably have a terrible time afterwards. We need sort of a methadone period, where 

33 

we withdraw it over time, say 3 to 5 years. But eventually, we have 

to let a target, let the private sector make bets and pay the price 

if they are wrong. 

Chairman KANJORSKI. And I can understand that argument, but 

how do you justify what happened when securitization by Fannie 

and Freddie really substantially lessened in 2006, 2007, and 2008, 

and the private market of Wall Street took over, and the descriptions Mr. Taylor made of these people being on all one side of the 

transaction, getting their commissions and profit, that occurred 

when Wall Street was doing the securitizations, not when the government-sponsored agencies were doing it. 

Mr. SANDERS. Again, I have seen that argument made before. 

Just using my hands because I don’t have graphs, the housing bubble did this; at this point, Freddie and Fannie pulled out of the 

market and let the private sector come in. That is icing on the 

cake. This market was bubbled and was overheated before the private sector stepped in with the securitization, the private label 

market you are talking about. 

Mr. TAYLOR. That is not true. 

Mr. SANDERS. Yes, it is. 

Mr. TAYLOR. Three years ago, FHA only had 3 percent market 

share. 

Mr. SANDERS. We are talking Fannie and Freddie. 

Mr. TAYLOR. Let’s talk Fannie and Freddie. Mr. Chairman, 

Fannie and Freddie in 2001 had $2.7 trillion worth of market share 

of these mortgages. By 2003, they lost a trillion dollars worth of 

market share to this so-called free market, it was free to abuse and 

do whatever they wanted, a trillion dollars of market share, that 

is when Freddie and Fannie got into this both feet, arms, legs, the 

whole body. That is when they really followed the market into this 

subprime abyss. But even then they had limits, and they wouldn’t 

take no-documentation loans and they wouldn’t do certain things 

that the market was still doing and willing to do. So let’s be clear. 

We were led down this abyss, all of us, by a market gone wild. 

It wasn’t low-income people. You look at the people who are in 

foreclosures, it is not just low-income people. It is all sorts of income levels. They keep blaming low-income people. I don’t know 

what is going on with George Mason. It is simply not what has 

happened in America to this housing bubble. It wasn’t created by 

low-income people. In fact, low-income people originations amounted to less than 10 percent of all the mortgages that were done in 

this malfeasant lending period. It had very little to do with lending 

to low-income people. 

Mr. SINKS. I would agree with what Mr. Taylor said here. 

When Wall Street came in and it created or extended the ‘‘exotic 

products’’ and Fannie and Freddie started to lose share, that is 

when they reacted. That goes to the private-public ownership of 

Fannie and Freddie, which is a different topic. But they were responding, trying to play to their shareholders, and they grew their 

share; and, therefore, accepted riskier loans dramatically. 

The flip side of that, and it goes back to something I spoke earlier about, is Wall Street patient capital, the answer is flat out no 

because they have a profit motive. As Mr. Garrett pointed out earlier with his charts, they disappeared and now the government has 

34 

99 percent of it, or 83 percent, whatever the right number is. So 

the pendulum swung completely the other way. And to your point, 

Mr. Chairman, as much as we want to see the FHA and the GSEs 

back off a little bit, we wouldn’t have a housing market today if 

they weren’t there because the private capital market sure isn’t 

stepping in. 

Ms. GOLDBERG. Mr. Chairman, in addition, it is important to 

stop blaming the low-downpayment loan made to low- and moderate-income people because I think there is a lot of evidence that 

those loans done properly actually perform quite well, and are very 

stable over time, at least when the economy is not going whacko, 

because unemployment now is obviously driving foreclosures at a 

level that it hasn’t before. 

I think it is important to be clear about what are the kinds of 

loans that have caused this crisis, and what are the kinds of loans 

that haven’t, and not just say every loan with a low downpayment 

is a bad loan that is destined to go back. 

One other piece related to that, one of the critical roles for the 

Federal Government and its involvement in the secondary market 

and direction of the primary market is to make sure that lending 

is done fairly so people, not just low- and moderate-income people, 

people of color, families with kids, women, people with disabilities, 

that they have access to mortgage credit in a fair and equitable 

manner, and in a safe and sound basis, which if we go a little ways 

back in history, we know is not the case with a market left to its 

own devices. So in terms of that kind of equity, and how we make 

sure people are treated fairly and have fair access, the government 

has a really critical role to play as well. 

Chairman KANJORSKI. I really need an explanation for the record 

and that is why I have encouraged you all to go back to what 

caused this thing. I am firmly convinced that we need to find some 

way of defining some of the important causes we agree upon. Apparently, here on this panel, we have five witnesses who would 

agree this is not all of the government’s fault, and one witness who 

says the solution to this would be going back totally to a free market system. Now this panel and the Congress has to write new 

rules and regulations and decisions need to be made as to whether 

we have a secondary market. And if so, who is responsible to encourage it, what kind of subsidization should be made for housing, 

if any, and should we get involved at all? It seems to me we cannot 

get back to that unless we get more uniform agreement as to what 

some of the basic causes for the crash were. And then leading off 

that, what are some of the solutions or cures we can put in place 

to prevent some of these things. 

One question, because we just recently passed the Regulatory Reform Act, do you think we have totally failed in doing the right 

thing there and we should have done nothing? 

Mr. SANDERS. The Regulatory Reform Act? 

Chairman KANJORSKI. The Dodd-Frank bill. 

Mr. SANDERS. It is all about systemic risk, etc. We don’t know 

what is going to be in the new agency that has been formed up that 

is going to moderate the markets. And it didn’t mention Fannie 

and Freddie. Congressman Frank says we are going to do this. I 

say to my friend, Mr. Taylor, and I gave this presentation in front 

35 

of Mr. Frank, I said we have pumped $8 trillion in money, guarantees and loans into this mortgage market prior to the private sector 

getting involved. That is bubblish. By the way, I am not saying 

that the private sector didn’t make some mistakes. Absolutely, 

there were. But what I am saying is, without the public sector’s 

prodding into housing so heavily, we may not have seen that. 

Would the market have responded that way had they thought there 

wasn’t this huge demand for it? Because remember, I took it out 

of my testimony for Mr. Taylor. I wish I had put it in. Take a look 

at the housing prices in cities. In some major cities, housing prices 

quadrupled during this bubble period. How do we get affordable 

housing people into those? There is only one way to do it, 3 percent 

down. And again, I understand that. But that is bubblish. 

Chairman KANJORSKI. But we were all worried about the tulips. 

Mr. SANDERS. You are absolutely right. The private sector 

screwed up. 

Chairman KANJORSKI. I would like to go on, but I have to let Mr. 

Garrett have some of the time. 

Mr. Garrett? 

Mr. GARRETT. So the last exchange was I guess interesting and 

telling that here we are, ending in July, and we still don’t know 

what was the underlying cause, at least have a consensus on what 

was the underlying cause of the economic morass we were just in. 

Why that is curious and maybe a little ironic is several weeks ago, 

we just passed a 2,300 page bill fixing the problem. When we were 

in this room and I was sitting over there and it was the first day 

of the first joint conference committee, House and Senate conference committee, and we were ready to start voting on the bill 

and I asked, may I have a show of hands of anyone in the room 

who actually has read all 2,300 pages. No one raised their hand on 

the committee. So what you had was no one actually having read 

the bill. And as we have seen in this last few minute dialogue, we 

still don’t have a consensus as to what was the cause of it. We have 

a commission that is out there that is going to be coming up with 

their interpretation, after exhaustive studies and talking to experts 

like you and others to tell us what the cause was. That, I understand, is not going to get back to us until some time at the end 

of the year. But here we are already implementing a bill, 2,300 

pages, and to what end. A couple of you already made the comment 

that what we need is certainty, and we need to get capital back 

into the marketplace. 

In the last week or so, it was reported in the Wall Street Journal 

that Ford was trying to get more capital into the system. And how 

did that work for them, as Dr. Phil would say. Not too well. It 

wasn’t because of anything that Ford did, it wasn’t because of anything that the private markets did, it was all because of this illconceived, not thought out what the ramifications of the bill is, and 

those are not my words, I am sort of paraphrasing Senator Dodd 

when he said we have see how this bill passes before we see how 

it all plays out. 

We saw how it played out with Ford. Thank goodness Mary Shapiro was able to come back and fix that situation in a band-aid sort 

of approach for 6 months. Think about how much uncertainty there 

is there. Think of with the SEC, we don’t even know how many 

36 

regulations that they have to promulgate. I know someone is saying it is 95 regulations, somebody else says it is 102 regulations at 

the SEC. We don’t know how many regulations they have to promulgate. How can anyone say we have just brought certainty to the 

marketplace? 

We have brought uncertainty into the marketplace, and that is 

just going to be a detriment for a time to come for your industries 

and the rest. 

I think what all of us want, whether it is the free markets or otherwise, is proper allocation of capital. That is the best way for any 

economy to perform, is if you have the proper allocation of capital. 

You have had a misallocation when the government encourages to 

go in one way when it shouldn’t. I will concede with Mr. Taylor and 

others that there were mistakes made all of the way around, private sector, public sector, individuals, investors, and the like. But 

you have to, I think, agree that a lot of this was prompted by government activity. 

I think Ms. Goldberg was saying it is not the low-income loans 

and what-have-you, and I think some of the documentation sort of 

points that out. But you have to see what the government did on 

this to encourage the high income. Remember what the Federal Reserve up in Boston said several years ago just prior to the collapse, 

they published a report that says, what, that when you do the underwriting, you no longer have to look at traditional valuations, 

you no longer have to look at income sources, you can consider welfare payments as a proper source of income in the consideration of 

developing risk assessment and the like. 

They were talking about low-income loans in the urban areas, 

but what happened right after that or some time after that, they 

said if you don’t have to look at those for low-income loans, okay, 

because there are no longer the traditional values that banks used 

to use, you would probably say should we be looking at welfare 

payments as a proper source of income for a bank loan, you would 

say probably not. But the Federal Reserve of Boston was saying it 

was okay to consider it. So if it is okay for the Federal Reserve of 

Boston to do it on that loan, then you had Bear Stearns and others 

come out on the private sector saying, hey, we must be able to do 

it on the middle income and the upper income levels as well. And 

that then skewed the marketplaces. 

Ms. Goldberg, you talked a little bit about the downpayment aspects and what-have-you. Is the percentage of downpayment an appropriate indicator of risk? 

Ms. GOLDBERG. Sir, if I can take a second and speak to your previous point briefly, one thing on welfare payments, it is often true 

that people who get welfare don’t have the income to support a 

mortgage, but it is a steady stream of income. And I am not familiar with the Federal Reserve of Boston’s paper on this topic, but 

I suspect that is what they were getting at. I don’t think you would 

find community advocates suggesting that should be the only underwriting criteria. I think we all want to see that loans are underwritten, looking at the borrower’s ability to repay the loan. So it 

is not just are you getting welfare as a criterion for deciding whether you are eligible or should be eligible for a loan or not. There are 

a lot of factors that go into it. 

37 

Several panelists have spoken, what we saw in the unregulated 

part of the private market was risk layering with lots of different 

loan features that together contributed to tremendous risk, loans 

that were not sustainable, and were not underwritten to the borrower’s ability to repay. 

Having said that, I forgot what your question was. 

Mr. GARRETT. Is downpayment an appropriate indicator of risk? 

Although now, you say that welfare payments may be appropriate. 

Ms. GOLDBERG. I will say that I don’t believe my organization 

has a position on the level of downpayment that ought to be required. But I think we would say that we think it is a good idea 

for people to have a downpayment and to have, as a borrower, 

some skin in the game. However, just like with high-income people 

and lower-income people, that should not be the only factor that is 

evaluated in deciding whether someone is a good credit risk, and 

whether the loan product that is being offered to them is the appropriate product for them. 

Mr. GARRETT. Do you have an answer? 

Ms. RODAMAKER. When we talk about the downpayment, that is 

absolutely one aspect that we use of underwriting. We have gone 

through and we study every loss, every foreclosure, everything that 

happens in our mortgage market. The most common cause of foreclosure in our market is divorce, and you can’t use that in underwriting. 

Mr. GARRETT. This is not the committee that deals with that. 

Ms. RODAMAKER. Right. When a couple comes in and applies for 

a mortgage, they are happy. When they start making payments, 

maybe that is when they become unhappy. 

Chairman KANJORSKI. So all we have to do is outlaw divorce. 

That is the solution. 

Mr. GARRETT. Just a technical question, Mr. Sinks. 

When the person comes in and makes their application to the 

bank, to your colleague to your left, you are doing all of your underwriting and then paperwork, if she is hooked up with one of 

your clients and they are doing that, what percentage of the cases 

that she will be sending, applications that will be coming in for 

PMI, are accepted on average and what percentage are not? Or is 

it accepted all of the time with just a higher premium? 

Mr. SINKS. I will speak on behalf of MGIC because I don’t know 

the industry statistics, but historically, we would have rejected the 

application probably 2 or 3 percent of the time. In this environment, because we are so cautious, that number is closer to 25 percent. 

Mr. GARRETT. But normally it is 2 or 3 percent? 

Mr. SINKS. Yes. As you came through the 1990’s and 2000 decade, it would be 2 to 3 percent. As the market changed, and we had 

to adjust our underwriting guidelines accordingly, it is probably in 

the neighborhood of 25 percent. The primary reason for that is because of concerns over valuations. It is not the credit score. You can 

verify income and things like that. It is really about the value of 

the property; is that appraisal good. And in certain markets, in 

Iowa, it is just fine. But in other markets, we still have concerns 

about those. I would expect that over a period of time to revert to 

the mean. 

38 

Mr. GARRETT. I will close, I know a couple of you made the comment as for the need of additional information and uniformity in 

regulation, and your suggestion was along the line with what the 

GSE has done in the past. Rest assured, the Frank-Dodd bill takes 

care of all that. We now have an Office of Financial Research that 

will get every single piece of information that anyone can possibly 

conceive of in that agency, and they will be a new systemic risk 

regulator all unto themselves. 

So every bit of information that you have ever been looking for, 

and any information as far as uniformity will come from them and 

the CFPA, because ultimately, there is no limitation on their power 

of information and there is no limitation as far as their power for 

setting some of the standards you need and inasmuch as these are 

consumer financial products, we have just created everything you 

need in this bill. So I will close where I began. We don’t understand what caused the problem, but we have solved it. 

Chairman KANJORSKI. I guess that office will be able to tell us 

just who is going to get divorced. 

The gentlelady from New York, Mrs. McCarthy. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman, for 

having a second round. I wish we always had more time to have 

an open debate. I always feel bad for the witnesses—5 minutes. 

You travel from all over, and you get 5 minutes. It is not enough 

for some of us. We would like to go back and forth with questions. 

Again, I am going to go basically back to the Moody’s report that 

we got this morning. We might not have solved all of the problems, 

but going back when we started doing the financial reform, the 

goal was certainly not to put anybody out of business, but obviously 

there had to be some rules and regulations. I always said if I could 

legislate morality, we wouldn’t be dealing with a lot of the things 

that we are doing, mainly because so many of these corporations 

knew what they were doing. They had been warned by their inner 

controls, and they ignored it because the money was so good coming in. Having said that, I have absolutely no qualms that what we 

did was the right thing. Is it perfect, there is no such thing as a 

perfect bill coming out of Congress. I don’t care if you are Republican or Democrat, it just doesn’t happen. That means we do corrections as we go along. This committee spent a year-and-a-half going 

section by section by section, and working hard trying to get it 

right. I am not going to speak about the Senate. I didn’t agree with 

a lot of things that the Senate did. With that being said, I certainly 

think that we have put Wall Street and some of the financial industry on notice. We are going to be watching you. 

For anyone who was planning on retiring, or those of us who actually grew up with parents who came from the Depression and 

saved so that I would be ready for my retirement, to see that wiped 

out when I did nothing wrong, and millions of other people in the 

same boat; and yes, the homeowners. And I agree, going back in 

2002, 2003, 2004, this subcommittee, with a Republican chairman, 

saw that the subprime and the unlicensed mortgage brokers, what 

they were doing in this country was wrong. We had a good bipartisan bill that I believe could have possibly prevented a lot of 

things that happened in the housing market. And it came out of 

this committee with a good vote. It was never allowed on the Floor. 

39 

Everybody wants to blame this side of the aisle, believe me, we 

tried and a number of Republicans tried back then. With that being 

said, and we solved those problems with unlicensed subprime mortgage brokers going from State to State, they are not going to be 

able to do that any more. And I think that is a good thing. 

With that being said, and again, I also know we are going to 

have hearings in September on Freddie and Fannie, basically going 

a little deeper on exactly what went wrong, and we have a lot of 

information on that already. But I want to go back to why this 

hearing is being held. Again, I apologize if it was talked about during the 20 minutes I was gone. If any of you have any ideas about 

the regulatory or legislation changes that must occur for the private mortgage insurance market to be able to play a larger role in 

the repair of our housing market, because again that is what we 

are going to be dealing with, I would certainly take your comments. 

Mr. SINKS. I will give the first shot. To make us more competitive 

and bring more private capital or more private exposure, and kind 

of bring that chart that Mr. Garrett had back into balance, the first 

thing we need to do is get the FHA prices back in line and commensurate with the risk that they are taking on. They are underpriced from where the private industry is right now. They have 

new pricing proposed. We know that we expect it to happen. That 

will clearly expand the pie, if you will, for the private mortgage insurance sector. 

In addition to that, they are planning on loan dollar limits that 

are a little higher than they should be, we believe. Those dollar 

limits need to be adjusted. And finally, as I alluded to earlier, the 

conventional market which is Freddie and Fannie, they have a series of fees on their loans as they attempt to rebuild their capital 

base that make the private execution versus an FHA execution less 

competitive. What it comes down to is when you add in the FHA 

having lower prices, and the fees that the GSEs have on the conventional side, when the consumer gets a piece of paper in front 

of them that says which is the lowest mortgage payment every 

month, it is, far and away, the FHA these days. 

The private mortgage insurance industry, as we alluded to earlier, has been able to raise billions of dollars worth of capital, and 

we have the capacity to do it. We are ready, willing, and able as 

an entire industry. And each company is ready, willing, and able. 

We just can’t compete in the market with that kind of pricing, and 

we can’t control that pricing. So that would be the primary influence on what we need. 

Mrs. MCCARTHY OF NEW YORK. Just to follow through, and I 

don’t remember who mentioned it when I was listening to the testimony, the appraisals, the appraisals of homes going back a number 

of years ago. I used to have the real estate people coming in and 

saying, what is going on here? I had a woman who basically came 

in, she was buying a home that she certainly couldn’t afford and 

the house was appraised much, much higher than what it was ever 

worth. And there was no money down. One of the new exotic pieces 

to get people to buy homes. She herself backed out. She wouldn’t 

be part of it because she thought it was fraudulent. How do we get 

the appraisals to be honest? You bring three appraisals in, and I 

saw that with my son and daughter-in-law. One was the top end, 

40 

which nobody in the neighborhood had; their house was not any 

better, if anything, it wasn’t updated as some of the other houses. 

And then a really, really low price. I know everybody goes high, 

low, and then in the middle. But how do you know you are getting 

a good appraisal because, you are the insurance, do you use different appraisers? 

Mr. SINKS. Yes, we do. We have an approved list of appraisers. 

This is an issue that has been around certainly since the private 

mortgage insurance industry has been around. As I said earlier, 

you can verify income, verify FICOs, but that appraisal is the great 

unknown. It plays havoc when the market is rising. When you see 

California double in value over a period of time, or it can have an 

impact when values are dropping. When you look at Detroit and 

you see values dropping and someone is trying to buy a home, and 

what is that house really worth? 

I think what needs to be done is, most importantly, it needs to 

be done locally. You need to have trust in people who are in those 

local markets and truly understand it. In addition to that, you have 

to have some other checks and balances, whether it is automatic 

valuation models and things like that might not be the exact answer, but it gives you a reasonableness check on what that appraised value should be. 

Mr. TAYLOR. First and foremost, in FIRREA you mandated there 

be independence between appraisers and financial institutions, and 

that never happened. Countrywide had their own appraisal shop. 

Citi, a number of these financial institutions owned the appraisal 

units. Yes, the guy who ran the mortgage department didn’t oversee the appraisers, but they worked for the same company. There 

has to be independence in those businesses, so there is an arm’s 

length transaction. 

Furthermore, there has to be the independence so you can make 

an appraisal and the lender simply doesn’t turn around and never 

do business with you again. There has to be a process that allows 

for fairness, mediation, and oversight that protects the appraisers 

from giving honest appraisals. 

Finally, it has to be in person. These automatic valuations have 

proven not to be very effective. Yes, they work some of the time, 

but they don’t work a lot of the time. We used to have people come 

into the house, look at what was going on in that house, not just 

sit in front of a computer and theorize what the value might be. 

One of the biggest overlooked groups in this crisis, this foreclosure crisis, was the appraisal industry. And a lot of the ones who 

tried to stand up and be independent, they are gone because businesses, banks, stopped doing business with them until they got appraisers who did what they said. You absolutely must fix this. I 

think in the financial reform bill, there is language that allows 

oversight for this to happen, and it is critical going forward that 

we really address this problem. 

Ms. GOLDBERG. If I can add one note to that, I completely agree 

about the need for additional oversight. I want to caution you that 

while I also agree appraisals in many cases helped to fuel the rise 

of housing prices in a way that didn’t make sense, and bore no relationship to reality, appraisals can also work on the opposite end, 

41 

to harm neighborhoods where property values are undervalued, 

underpriced. 

One of the footnotes in my testimony, I give some of the history 

of the appraisal industry predating FHA and applying to FHA 

where appraisers were actually trained that you could judge the 

value of the neighborhood based on who lived there. And there was 

a listing of different racial and ethnic groups according to whether 

they helped inflate property values or sustain property valuation, 

or whether they diminished property values. While those standards 

have been dropped from the industry, the effect of that really institutionalized kind of racial approach to valuing property. It is not 

really erased from the industry, and we need to make sure that 

kind of discrimination is not happening in appraisals, as well as 

the artificial inflating of the property values at the other end of the 

scale. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. I 

thank all of you for coming in and enlightening us. 

Chairman KANJORSKI. Now the gentleman from Illinois, Mr. 

Manzullo. 

Mr. MANZULLO. Thank you. Can anybody on the panel advise me 

if private mortgage insurance had anything to do with the collapse 

of the real estate market? 

Mr. SINKS. The literal collapse of the market? 

Mr. MANZULLO. Yes. Did you do anything wrong in your industry, Mr. Sinks? 

Mr. SINKS. Sure, we did. I think we are one participant amongst 

many. We were talking earlier about perhaps we haven’t figured 

out exactly what went wrong. I think fundamentally, what went 

wrong was that basic principles of risk management were done 

away with. There was no fear in the market. People had different 

motivations, whether it be the government wanting to house all of 

America, whether it wanted to be Wall Street to make a buck as 

quick as they possibly could. I think everybody who was in that 

food chain from borrower to servicer, and investor at the end, 

played some role. 

Mr. MANZULLO. The big problem is that the Fed has always had 

the authority to do two things: number one, govern instruments; 

and number two, determine the underwriting standards. At least 

as to those banks that the Fed covered. It wasn’t until October of 

last year that the Fed came out with a written rule that said, voila, 

you had to have written proof of your earnings. Whenever MI was 

purchased, if this is within the purview of your knowledge, Mr. 

Sinks, how far did MI go? Did you actually look at closing statements? Or you just got an order to provide insurance based upon 

salary and the value of the property? 

Mr. SINKS. We did look at the documents. We do underwrite the 

file and provide the second set of eyes. What happened, I think in 

a sense was that as the market expanded, as Freddie and Fannie 

took on a greater role, they expanded the underwriting criteria 

under which they would buy loans. The old idea of 38 percent— 

Mr. MANZULLO. Did that influence your issuance of mortgage insurance? 

Mr. SINKS. Yes, it did. The reason it did was because competitively, and we touched on it earlier, what happened was there was 

42 

an expectation within the lending community, which is our customer base, that if Freddie and Fannie had underwriting guidelines, and I am going to use an example of 45 percent debt to income ratio, then private mortgage insurance, you need to play in 

that game. For us to remain competitive in that environment and 

be able to participate in the market, we stretched our underwriting 

guidelines. We reviewed the file, but we allowed the guidelines to 

expand due to competitive pressures. 

Mr. MANZULLO. Let me go to a second area. On the appraisers, 

we have heard horror stories from many lenders back home. I remember reading in the Post some time ago where an appraiser 

from Richmond came to appraise a townhouse, or a stand-alone 

house in Alexandria, Virginia. And we are getting people from Chicago who are driving to Rockford, Illinois, 80 miles to the west, who 

know absolutely nothing, nothing, I mean, nothing about Rockford, 

that are giving appraisals. And the Realtors are scratching their 

heads and saying: Where did these guys come from? They came 

from Chicago. 

The home valuation code of conduct, we had the hearings on 

that. I looked at that. I have been through probably a thousand 

real estate closings myself as a private attorney. In fact, I started 

practicing before RESPA, and we actually had more honest closings 

before RESPA. There are eight people at HUD working day and 

night on trying to revise RESPA at any given time. 

Now you have a situation where you have an out-of-town appraiser come in, and he doesn’t know the fact that there are rumors that the highway may be expanded in front of the house, or 

he reads the newspaper and hears about the city council which 

may exercise powers of condemnation and taking a parcel of property, he knows nothing at all about the locality, and yet he is presumed to be dishonest simply because he is local. That is going to 

really hurt the real estate recovery as far as I am concerned. John, 

you are nodding your head. It may be the first thing you and I 

agree with in a long time. Do you agree with that? 

Mr. TAYLOR. The second thing, actually. The lack of government 

oversight in the Fed to put out rules that prohibited these practices. 

Mr. MANZULLO. There you are, John. 

Mr. TAYLOR. Yes, I totally agree. It is all about local and having 

that person who really knows the property, and it is all about that 

person having the independence from not being overly influenced 

by the broker or the lender. 

You do that, build that, which is what you supposedly built with 

FIRREA when you created this separation, and we will clean up 

this mess with the appraisers, notwithstanding Debbie’s comments 

about making sure that it is not done in a discriminatory fashion. 

Mr. MANZULLO. The mess is done now. The Realtor goes out 

there. It is not hard nowadays to get comparables. When I started 

practicing law, no one had heard about the Internet. You had to 

research it the old-fashioned way at the courthouse. And that was 

always interesting because in Illinois, we had the green sheets. The 

green sheets would tell you which portion of that real estate was 

actually attributed to personal property. 

43 

Mr. Chairman, I wanted to bring that up because I just don’t 

think when the GSEs and FHA adopted the HBCCs by reasons of 

Attorney General Cuomo somehow forcing them to do that, that is 

going to help in the real estate recovery; do you agree with that, 

John? 

Mr. TAYLOR. I don’t know about Attorney General Cuomo being 

the one who forced them into that position, but I agree that we 

need local. These appraisal management companies I think are not 

a good model to get accurate appraisals. We need inside; somebody 

needs to go into the house, and somebody needs to know the neighborhood and know what is going on. I think that will get us back 

to sane, accurate valuations. 

Mr. MANZULLO. Do the rest of you agree with Mr. Taylor’s statement? 

Good. On that note, I will end. 

Chairman KANJORSKI. Thank you. 

If I may comment, the regulatory reform bill contained about 200 

to 300 pages of revolutionary ideas about appraisals and how we 

handle them. And the bill did not take 18 months; it took 6 or 7 

years of bringing that about. 

I think we are going to go on for another hour-and-a-half. No, 

Mr. Garrett has reined me in. I got carried away. A lot of times 

when we get down to a few members, we get extended questioning 

periods. I appreciate the response and the back-and-forth nature of 

the panel. I was hoping we could get everybody to join hands and 

say we agree on everything, but we probably have failed. We will 

try that next time, or we will come down hard on the universities 

again. 

Mr. SANDERS. If I may make one closing remark on my behalf, 

Mr. Garrett asked the question, and I wanted to provide some clarity on it. At one point, believe it or not, I was an advocate for 

Fannie, Freddie, and the FHA. Unfortunately, something happened 

at the beginning of the last decade. Freddie and Fannie were the 

gold standard for underwriting, 20 percent down, we don’t need private mortgage insurance for 20 percent down. Everybody believed 

Freddie and Fannie was right on target. FHA was small. 

A question for you: What happened? Why did Freddie and 

Fannie balloon in size and why did the FHA balloon in size? I 

think if you are trying to look at a source of what happened in the 

housing market, why not look at that? 

Chairman KANJORSKI. I don’t blame the Bush Administration for 

selling real estate at any price. 

I think Mrs. McCarthy put her hands on it. We can sit here forever and blame one political party or another political party, or one 

Congress or another Congress, or one President or another President. The reality is, I would hope we can get to a common understanding of what happened because until you identify a problem, 

it is hard to come up with a solution, and we really do have on both 

sides of the aisle a gross disagreement on what really fundamentally caused this problem. 

I am hoping when the Commission gets done, we will come closer 

together on that issue. Regardless of what happened and what did 

cause it, it is not going to cure a thing. The future is going to cure 

something, and I think we should take on the rewriting of what 

44 

happens to lessen the opportunity. We will never stop risk and we 

will never stop ridiculousness in a free market society, and we 

should not, but we can do things to improve it. 

The one impression that I may have left that I want to remove, 

I think the mortgage insurance market has played a very good role 

in real estate in the United States. But we have to recognize that 

for 2 decades after the Great Depression, it disappeared. And sometimes market situations will not cause it to come about and come 

back when there is such a tremendous disruption. 

I really do believe Fannie and Freddie fulfilled a great function 

in our society in the period from the war on until we lost control 

of them for one reason or another and they went overboard. But 

they are manmade institutions and therefore correctable and lend 

themselves to solutions or something similar to an enforced solution. 

I think what is important, if we can bring the temperature down 

and get serious, and I am inviting my friends on the right side to 

join us in that, and I don’t mean right side, it is on my right. What 

disturbs me the most, and I will shut up after that, is that we have 

been through a real trauma in the country and the average family 

has been through a real trauma, and at this point, there is a lot 

of fear in those families and they are looking for more level heads 

to prevail. Sometimes we in the Congress do not provide the right 

image for that level head. I am hoping now we can get down to 

being levelheaded. If we can, we can solve this problem. I think we 

are on our way to the solution to the problem. I am absolutely convinced of that. The faster it happens, the better off we are. 

I agree with Mr. Zandi. And the fact he work for Moody’s and 

was a Republican and supported Mr. McCain for President, that 

may be good. Because he did that, he probably should be more reliable to my friends on the other side. Notice I didn’t say ‘‘right.’’ He 

basically said we are not going to really resolve this problem on 

real estate until we resolve the unemployment problem. 

Conversely, the real estate problem is going to stabilize the 

whole economy for a pretty good picture into the future. I tend to 

agree with that. So I say regardless of what side of the aisle we 

are on, let’s get on with the work. 

Let me say, thank you all very much. I was a little annoying and 

snippy to all of you. I didn’t intend to do that, to be that way. I 

was trying to extract out of you some good comments, and we certainly got some. Mr. Sanders, you and I sparred very well. I appreciate that, with a good sport. 

Mr. SANDERS. Mr. Kanjorski, after today’s panel, I am changing 

my name to George Mason. 

Chairman KANJORSKI. I had a much stronger comment than 

that, but I did not use it. Thank you all very much. We hope you 

still make your planes and trips back. You have done a great service. It is one of the elements that we are going to take up as we 

are going through the reformations of the GSEs and other problems 

of establishing a better focus for real estate in the country. Thank 

you very much. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the record will remain open for 30 days for 

45 

members to submit written questions to today’s participants and to 

place their responses in the record. 

Before we adjourn, the following will be made a part of the 

record: a letter from Essence Guaranty to Secretaries Geithner and 

Donovan regarding reform of the housing finance system. Without 

objection, it is so ordered. 

The panel is dismissed, and this hearing is adjourned. 

[Whereupon, at 4:35 p.m., the hearing was adjourned.] 

(47) 

A P P E N D I X 

July 29, 2010 

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