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H.R. ll, THE PRIVATE MORTGAGE 

MARKET INVESTMENT ACT, PART 2 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

DECEMBER 7, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–91 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

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 

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 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

December 7, 2011 ............................................................................................. 1 

Appendix: 

December 7, 2011 ............................................................................................. 41 

WITNESSES 

WEDNESDAY, DECEMBER 7, 2011 

Calabria, Mark, A., Ph.D., Director, Financial Regulation Studies, Cato Institute ........................................................................................................................ 10

Fleming, Mark, Ph.D., Chief Economist, CoreLogic ............................................. 12 

Katopis, Chris J., Executive Director, Association of Mortgage Investors 

(AMI) ..................................................................................................................... 8 

Poole, William, Ph.D., Distinguished Scholar in Residence, University of Delaware ....................................................................................................................... 17 

Salomone, Tom, 2012 Director, REALTOR® Party Activities, National Association of REALTORS® (NAR) ........................................................................... 15 

Stevens, David H., President and CEO, Mortgage Bankers Association (MBA) 13 

APPENDIX 

Prepared statements: 

Calabria, Mark A. ............................................................................................. 42 

Fleming, Mark .................................................................................................. 52 

Katopis, Chris J. ............................................................................................... 59 

Poole, William ................................................................................................... 81 

Salomone, Tom .................................................................................................. 86 

Stevens, David H. ............................................................................................. 94 

(1) 

H.R. lll, THE PRIVATE MORTGAGE 

MARKET INVESTMENT ACT, PART 2 

Wednesday, December 7, 2011 

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

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

The subcommittee met, pursuant to notice, at 10:08 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Biggert, 

Hensarling, Neugebauer, Campbell, McCotter, McCarthy of California, Pearce, Posey, Hayworth, Hurt, Grimm, Stivers, Dold; 

Waters, Sherman, Lynch, Miller of North Carolina, Maloney, Donnelly, and Green. 

Ex officio present: Representative Frank. 

Chairman GARRETT. Good morning. The Subcommittee on Capital Markets and Government Sponsored Enterprises is called to 

order. For this hearing, as previously agreed to with the ranking 

member, each side will have 10 minutes for the purpose of making 

opening statements. And now, we will begin that. 

I recognize myself for 21⁄2 minutes as we begin this hearing on 

the Private Mortgage Market Insurance Act, Part 2. 

Today, the subcommittee is holding a second legislative hearing 

on the Private Mortgage Market Investment Act. The subcommittee held a hearing on this bill on November 3rd. Since then, 

I have been actively reaching out to and working with regulators 

and market participants and other members of this subcommittee 

to make improvements to the bill. I understand this is a very complex issue and I welcome another opportunity to hear from the public on the merits of this bill. 

Currently, the Federal Government is guaranteeing or insuring 

over 90 percent of the U.S. mortgage market. Everyone on both 

sides of the aisle and all market participants claim that they support efforts, then, to bring additional private capital back into the 

secondary mortgage market. 

There are two things that must be done to have private capital 

brought into this space: first, we must begin to roll back the government’s involvement in the housing market; and second, we must 

take actions to facilitate and increase investors’ interest in the secondary mortgage market. By facilitating continued standardization 

and uniformity within the marketplace, and increasing transparency and disclosure and providing legal certainty through the 

2 

clear rule of law, there will be a robust investor participation in the 

housing market without—and this is important—exposing the 

American taxpayer to trillions of dollars of additional risk. So the 

legislation we are discussing today essentially sets up a new qualified securitization market. 

The FHFA is tasked with establishing a number of categories 

and mortgages using traditional underwriting standards that have 

different levels of credit risk associated with each one of the categories. Also, they are responsible for creating standardized 

securitization agreements in this marketplace. So these 

securitization agreements will standardize the servicing contracts, 

modification process, and reps and warrants, all things that provide the investors the ability to put back nonqualifying loans. 

The legislation also removes one of the biggest regulatory impediments to private capital reentering the market by striking the risk 

retention provision under the current law. Now, I do agree that 

risk retention does have benefits, but the way it is currently being 

implemented will create a multitude of negative unintended consequences, we have been told. 

So to bring private investment back to our mortgage market, it 

is essential that the rule of law is clear, specific, and upheld; investor rights and contracts must be honored; and by facilitating the 

adjudication of disagreements between investors and issuers, clarifying the rules around the rights of first lien holders and preventing government-enforced loan modifications that could negatively impair investor returns, investors will return and have the 

certainty they need to reenter the marketplace and invest in our 

Nation’s housing market. 

Finally, in regard to additional transparency and disclosure, investors should be empowered and enabled to do their own analysis 

of the assets underlying the securities that they invest in. So by 

disclosing more detailed loan-level data, while protecting the privacy of borrowers, and by allowing more time for investors to study 

that information, investors will be able to conduct more due diligence and less reliance on the rating agencies. 

With all that being said, I look forward to today’s hearing and 

a panel engaging in a very productive debate with other members 

of this committee as we try to seek a solution to this very most important problem facing the country. 

With that, I will yield 4 minutes to the gentleman at the end of 

the row from Massachusetts. 

Mr. FRANK. The subject is obviously of great importance because 

any doubts about the centrality of a healthy housing market to our 

economy or at least—not the centrality but its being an important 

element has clearly been reinforced, and so we should be moving 

forward. And there are some elements of this bill where there will 

be some agreement, but there are a couple of things that I wanted 

to focus on that concern me. 

In particular, I am opposed to the notion of a complete repeal of 

a risk retention requirement. All the studies of the problems that 

led us to the crisis of 2007 and 2008 focused on the ability of people 

to originate loans without any real concern for the repayment rate, 

and to then pass them along to securitizers who also were not on 

the hook for failures. 

3 

The bill does empower the Federal Housing Finance Administration in effect to replace that with a series of fairly elaborate requirements and it is an interesting increase in the regulatory role 

for the FHFA. Mr. DeMarco has commented that it would require 

a FHFA very much like the current one, even if there was to be 

a complete abolition of the GSEs. But I don’t think that is an adequate substitute for risk retention. It is a reliance on government 

regulation, which has a role, but I still believe that the risk retention method is the best because it gives a market incentive to the 

direct participants. It is in the statute as a responsibility for the 

securitizer, with the securitizer legally allowed to work that out 

with the originator. 

I particularly note—and maybe I misread the bill—that what it 

seems to me the bill does is to repeal risk retention for all assetbacked securities, but proposes a substitute form of safety only for 

residential mortgages, so that asset-backed securities not dealing 

with residential mortgages are back to where we were. 

And as I read, whether it is Gillian Tett in ‘‘Fool’s Gold,’’ or ‘‘The 

Big Short’’ by Michael Lewis, that troubles me. I do not think a 

system in which people can make loans—and I will give you an example of a nonmortgage situation. Henry Kravis told me publicly 

at a meeting, that a few years before we had talked, he wanted to 

get some bank loans so he could buy a company. Obviously, he 

didn’t want to advertise it for too long; he didn’t want to bring in 

a lot of competitors, as I have noted. I think the favorite spectator 

sport of most American businesses is competition; they very much 

like to watch other people engage in it. As to being a player, sometimes that makes them a little nervous. But Mr. Kravis asked a 

group of banks on Friday afternoon—he told me to let him know 

by Tuesday if they would participate in this loan. He thought he 

was giving them too little time, but by Sunday, he was oversubscribed. He said, not wanting to look a gift horse in the mouth, he 

had asked one friend who had offered him a loan how he could 

have possibly done the diligence between Friday afternoon and 

Sunday to tell him that he would subscribe to the loan? And the 

answer was, ‘‘Oh, I just had to ask one question. I called in my people and asked them if we could sell the loan, and when they told 

me we could sell the loan, that is all the diligence I had to do.’’ 

Now, we will go back to that situation if we repeal risk retention 

entirely and put nothing in its place. 

We do have, it seems to me, an overreliance on the ability of the 

FHFA to do it, but at least there is a potential or proposed substitute for it there. But doing away with risk retention entirely in 

matters unrelated to residential mortgages and leaving no protection against that kind of risk-free lending seems to me to be a 

grave error. 

Chairman GARRETT. The gentleman yields back. 

The gentleman from Arizona is recognized for 11⁄2 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. I first want to give 

a gigantic thank you to my chairman for jumping in, wading into 

this. It is like the gigantic onion. Every time we peel one layer 

back, we find out there are dozens underneath it with more and 

more complications and details. 

4 

One thing I will particularly ask the panel to do is as you look 

at the Garrett bill in the outline, details, mechanics—and when 

providing those details a little less of here is how we used to do 

it, you know; in 2006, this is what the TBA market did, how it 

functioned; this is how correspondent lending worked. 

It is what do you believe that type of market is going to look like 

in the coming years. I am reading a number of articles where correspondent lending may shrink down dramatically. The mechanics 

of what would a to-be-announced market really look like if you and 

I were trying to create the design of future mortgage lending and 

securitization and keeping a safe, protected system working. 

So much of what my minute-and-a-half here is to ask all of you 

to reach into your thoughts, and provide us as much detail as you 

can so we can craft as quality a piece of legislation as possible. I 

yield back, Mr. Chairman. 

Chairman GARRETT. And the gentleman yields back. 

The gentlelady from California is recognized for 3 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. As you know 

and as you said, this is the second hearing we have had on your 

discussion draft to reform the private mortgage-backed securities 

market. I appreciate that this hearing is another opportunity to 

hear from stakeholders, particularly since the first hearing we had 

on this draft didn’t include the full range of industry perspectives. 

As I said at our last hearing a month ago, I believe that bringing 

certainty and uniformity to how mortgage-backed securities are underwritten, securitized, and sold is a useful goal. Again, I am also 

pleased that you recognize that government should have a large 

role in creating clear rules of the road for this market. Specifically, 

I appreciate that this bill includes reforms to the mortgage servicing industry, something I have been advocating for quite a long 

period of time. Servicer conflicts of interest clearly need to be prohibited. 

I also think that some of the disclosure requirements in this bill 

will be very useful in creating transparency, thus bringing confidence and certainty to the market. Such provisions, if they had 

been implemented earlier, could have prevented much of the litigation we see today between mortgage investors and entities that 

securitized and originated mortgages. 

However, with that said, I would like to reiterate my concern and 

disagreement with you, Mr. Chairman, on your goal of repealing 

the risk retention requirements in Dodd-Frank provisions included 

in this bill. More than that, I would like to again express my concern about how this bill fits with the larger context of GSE reform. 

The bill does not address whether or when Fannie Mae and 

Freddie Mac should be wound down. It says nothing about the 

transition to the new system. It is silent on all of the tough questions that Congress should be wrestling with. 

Mr. Chairman, do we even know if this bill will ever be marked 

up in full committee, or will it languish in subcommittee like the 

other housing finance bills we have considered? 

I raise these questions because I am concerned about how the 

Congress will move forward on this issue. I think we need to stop 

pursuing GSE reform in a piecemeal fashion. Currently, there are 

three comprehensive reform bills that have been introduced in the 

5 

Congress: one comprehensive GSE privatization bill from Representative Hensarling; and two bipartisan reform bills from my 

colleagues in California—one from Representative Miller and the 

other one from Representative Campbell. 

Clearly, if Representative Garrett’s bill were adopted, at least 

one of those comprehensive reform bills would need to supplement 

it in order for the country to transition to a new housing finance 

system. 

It is my belief that in addition to the reforms to private labor 

mortgage-backed securities contemplated in Representative Garrett’s bill, there should be some government role assuring liquidity 

for access to our mortgage market. So I would urge my colleagues 

to consider a bipartisan, comprehensive approach along those lines 

rather than continuing to pursue piecemeal reform. 

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

Chairman GARRETT. And the gentlelady yields back. 

We turn now to the gentleman from New York for 11⁄2 minutes. 

Mr. GRIMM. Good morning, everyone. Thank you, Chairman Garrett, for holding this hearing, and thank you to the witnesses for 

being here to testify. 

I think we can all agree that the current situation in the mortgage market is not sustainable over the long run. Currently, the 

United States underwrites or guarantees in one form or another 

over 90 percent of new mortgages. And while this could arguably 

have been necessary over the last several years in the wake of the 

financial crisis and the obvious withdrawal of private capital from 

the mortgage market, it is a situation that cannot continue indefinitely. 

It is of vital importance that we take seriously the need to create 

a workable framework where private capital will feel secure in returning to the U.S. mortgage market. I think we can all agree that 

the need to clarify issues surrounding underwriting standards and 

representations and warranties is critical in regaining that confidence in both the originators of mortgage securities as well as 

mortgage investors. 

However, I do acknowledge that there remain many differences 

of opinion on how to best go about achieving this goal, while realizing that the process of reducing the government’s role in housing 

finance is one that cannot be taken lightly. For example, in my 

hometown of New York City, real estate and related industries account for 25 percent of the economy. A sudden shock to an already 

battered real estate market would do great harm to that local economy. 

That is why I look forward to hearing our witnesses’ views on the 

legislation. And I do believe that your views will, when shared with 

us, aid us in the process of shaping a comprehensive solution going 

forward. And again, I thank you. I yield back. 

Chairman GARRETT. The gentleman yields back. 

The gentlelady from New York is recognized for 3 minutes. 

Mrs. MALONEY. Thank you. Thank you, Mr. Chairman. And welcome to the witnesses. I respect Chairman Garrett’s hard work, but 

on this bill, I do not support it and I have significant concerns. 

6 

An effort to restart the private securitization market is an important one, especially since we can’t continue to have 90 percent of 

the mortgages guaranteed by the government. I do support some 

parts of the bill, such as standardized documentation and mortgage 

servicing standards, but I am completely opposed to any repeal of 

the risk retention requirements of Dodd-Frank. The bill repeals all 

of the risk retention requirements for all securities, not just mortgages, which is the topic of the bill. 

Section 941 of Dodd-Frank would be repealed without providing 

any alternative other than giving discretion to the regulators. And 

that is exactly what happened leading up to the crisis of the ‘‘Great 

Recession.’’ Repealing 941 would remove the market mechanism in 

Dodd-Frank to make sure that securitizers don’t swindle investors, 

and it would return to us the attitudes and actions that led to the 

recession. At that time, no one cared about the quality of the loans 

they were making. That is how we got no-doc loans, how we got 

no information, no downpayment. The joke in New York was if you 

can’t afford your rent, go out and buy a house; it is so easy, they 

don’t ask you anything. They will sell you the house and turn 

around the next day and securitize the loan with no skin in the 

game. And it led us up to the crisis that we are now trying to recover from. 

I really do believe that risk retention is a key safety and soundness principle which, if anything, we should make stronger not delete, as this bill does. 

I also question why the FHFA is the regulator, and not the SEC. 

The SEC oversees securities and the bill exempts mortgage-backed 

securities from oversight, but does not replicate the SEC’s investor 

protections. If anything, Dodd-Frank directed the SEC to strengthen the MBS market. I don’t see how this bill provides any equivalent protections. 

So I look forward to the testimony and I do think we need to look 

at ways that we can reform the whole GSE process, but we should 

not do it in a way that weakens safety and soundness. I yield back. 

Chairman GARRETT. Mr. Dold is recognized for 11⁄2 minutes. 

Mr. DOLD. Thank you, Mr. Chairman, and I certainly want to 

commend you for your hard work and leadership on this issue 

which I believe is so very important for our economy and for American families. 

So far, the GSE losses have amounted to nearly $200 billion, and 

American taxpayers are already stuck with that bill. Things are 

likely, in my opinion, to get even worse. On top of that nearly $200 

billion in existing and indefinite losses, taxpayers are also effectively responsible for all the losses that will ultimately arise from 

over $5 trillion in existing total mortgage debt that the GSEs now 

own or guarantee. 

And even with taxpayers remaining exposed to this enormous 

and unsustainable liability, our housing market remains severely 

challenged. Private sector investors and lenders have been driven 

completely out of the market. Consequently, families struggle to get 

new mortgages to buy a home. Homeowners frequently can’t sell or 

refinance their homes, and house values continually decline. This 

situation is plainly unsustainable for taxpayers, for homeowners, 

for home buyers and, I would, argue for our economy as well. 

7 

Clearly, our mortgage financing system is badly broken, and I believe it must be fixed. Instead of a mortgage market dominated by 

the Federal Government and taxpayer guarantees, we need bold 

new solutions that will create the conditions for the private sector’s 

return to the mortgage financing market without the taxpayer 

guarantee. To create those private sector conditions, we need a 

legal framework that establishes and enforces uniform standards, 

transparency, and legal certainty for the private sector lenders and 

investors. 

So I look forward to hearing from our witnesses today and working with my Democratic and Republican colleagues to effectively 

address what I believe is a critical problem for our country. Thank 

you, and I yield back. 

Chairman GARRETT. The gentleman yields back. 

The gentleman from Texas is recognized for 11⁄2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. I would like to applaud you for your work on the Private Mortgage Market Investment Act, which is obviously designed to stimulate private investment in our mortgage market. 

We all know that today the status quo of government domination 

is totally unworkable and totally unsustainable. When we have 90 

percent of all originations and roughly 99 percent of all 

securitizations that are government-guaranteed, this cannot remain. It is an unacceptable risk for the American taxpayer at a 

time when their Nation is, unfortunately and regrettably, on the 

road to bankruptcy. 

Clearly, the private market cannot compete with government 

guarantees. It can’t be done. Even the Obama Administration has 

agreed and said, ‘‘Private markets should be the primary source of 

mortgage credit and bear the burden for losses.’’ 

So with the losses in Fannie Mae and Freddie Mac tipping the 

scales at roughly $200 billion, it is now time to begin winding down 

this financial commitment so the taxpayers are protected and private markets can begin to compete. Eliminating the governmentsanctioned duopoly of Fannie and Freddie is only part of the solution. We also have to cultivate the private mortgage market, and 

that is why this Act is a very important first step. 

The legislation also would repeal the risk retention provisions of 

Dodd-Frank, which are at odds with our attempts to reduce the 

government footprint in the housing market and have been universally panned as completely unworkable. 

I look forward to working with the witnesses, and I yield back 

the balance of my time. 

Chairman GARRETT. The gentleman yields back. 

We have two more speakers, for 45 seconds each. The gentleman 

from California is recognized for 45 seconds. 

Mr. MCCARTHY OF CALIFORNIA. Thank you, Mr. Chairman. I will 

therefore make it brief. It has been said that there are things about 

this bill on which there is agreement and things on this bill on 

which there is not. But I think the greater question is: Is this bill 

the solution to our housing finance crisis, and is this the comprehensive solution? I think the answer is clearly no; that bits of 

it may be a part, but that there is a lot more that needs to be done. 

And I will be interested in hearing from the panel on that point, 

8 

as I think you have heard other people say, is that there will be 

a lot more that needs to be done if we are to fix housing finance 

and thereby housing and thereby the economy. I yield back. 

Chairman GARRETT. The gentleman yields back. 

The gentlelady from New York for 45 seconds. 

Dr. HAYWORTH. I thank the chairman and I thank him especially 

for his work on this crucial issue. I note the presence of Peter 

Wallison here, whose dissent from the FDIC I recommend to everyone who may not have read it. The marvelous concept we are honoring here is that we are endeavoring as expeditiously as possible 

to remove the moral hazard that is implicit in a Federal guarantee 

of the mortgage marketplace. So by whatever means we can accomplish that crucial goal and put responsibility and trust back in the 

hands of those who confer mortgages and those who create securities, we will advance the prosperity of the American people. 

I look forward to your comments, and I think it is crucial that 

we continue this work with all due speed. Thank you, Mr. Chairman. 

Chairman GARRETT. That concludes the opening statements. 

And now, we will hear from the panel. Again, as I said before, 

thank you very much to the entire panel for coming here and sharing with us your two cents and answering any questions that will 

follow. You will each be recognized for 5 minutes. Your complete 

written statements will be made a part of the record. You can summarize your statement, hopefully, within 5 minutes. 

We will begin with Mr. Katopis from the Association of Mortgage 

Investors. 

STATEMENT OF CHRIS J. KATOPIS, EXECUTIVE DIRECTOR, 

ASSOCIATION OF MORTGAGE INVESTORS (AMI) 

Mr. KATOPIS. Thank you, Chairman Garrett. Good morning, 

Ranking Member Waters, and distinguished members of the subcommittee. Thank you for the opportunity for the Association of 

Mortgage Investors to testify on these important concepts and the 

proposed draft legislation. 

To make sure everyone is on the same page, let me briefly summarize some facts about the mortgage market that was. The U.S. 

mortgage market is awesome, $11 trillion of mortgage loans arising 

from three—and only three—sources; bank balance sheets which 

we know are full and stressed; the GSEs; and private capital 

through securitization. 

At its height, 60 percent of the mortgage loans were securitized. 

Today, that has ground to a halt. It is not our choice. Representative Schweikert runs around Arizona saying Mortgage Investors 

are on strike. We have billions we would like to put into the mortgage market, but we can’t for the reasons that are the purpose of 

today’s hearing. 

I just want to note for everyone’s benefit who Mortgage Investors 

really is. We are not just a bunch of investment companies; we 

partner with public institutions like pension funds, retirement systems, university endowments, unions, and life insurance companies. So we are working with Main Street to put money into the 

mortgage market. When we can’t, that hampers returns. It also 

9 

hurts people in your district like seniors, first responders, and others. So we are eager to work with you on solutions. 

We also feel it is abused by some of the big box servicers, as 

some people in your district. And we want to work with you on solutions to addressing elements of the mortgage crisis, and how to 

help distressed borrowers. 

So with that, let me talk about the bill and the text and I want 

to start by first sincerely commending you, Chairman Garrett, for 

acknowledging the issues facing Mortgage Investors. We are very 

humble that it seems you read our White Paper and took many of 

the issues from our White Paper and put those concepts into the 

legislative draft that we are looking at today. We would like to 

work with you on fine-tuning those concepts. 

As AMI has testified before, we testified in September, there are 

a number of issues that face investors, including the servicer conflict of interest, and the breakdown around reps and warranties. 

Our written testimony details extensively the problems investors 

are having with trustees whom we believe are not honoring their 

contractual obligations under the PSAs. They are not abiding by 

their common law obligations. So there are a number of concepts 

you touch on. We would like to work with you. The truth is, investors price risk; we cannot price the unknown. So to get back into 

the market, we need the clear rules of the road that were alluded 

to. We need certainty, transparency, and uniformity. We need the 

execution of contracts, rule of law. So we appreciate all the work 

the committee is doing. 

I want to say that the Investors do appreciate a role of government in the mortgage market to be a prudent regulator, to set 

standards, systems, and structures to move forward. We do not 

want to see government burden taxpayers with the liability around 

the unsound mortgages, so we appreciate your work in that respect, your work in leveling the playing field, and we also want to 

mention the work that you have done regarding leveling the playing field by eliminating the government subsidy and raising G fees 

with bills such as H.R. 1222. That is appreciated. 

But the staff has also encouraged me to drill down on some concepts that we would like to see fine-tuned in the bill. I just want 

to mention that we last year joined a number of financial services 

trade associations praising the FCC’s Reg AB, which did a number 

of things, including providing a cooling-off period, and enhanced 

disclosure, things that are included in this bill. 

In terms of skin in the game, in terms of protecting investors, 

one thing we would like to see is some entity policing the trusts. 

You have touched on that concept in this draft. Page 11 provides 

for an independent third party. We would like to work with you to 

refine that, among other things. I just wanted to highlight that. 

The SEC proposed something called the credit risk manager, 

which is sort of a supertrustee. We think that is a more robust regime to police trusts. So I would like to continue this dialogue with 

you at the appropriate time and work with you on a number of concepts to bring Mortgage Investors back to the crowd in private capital, including working on enhancing the plumbing of the mortgage 

finance system as well as fixing things like the national note recordation system, maybe a MERS II one day. 

10 

Thank you, and I am happy to answer any questions and take 

any comments. 

[The prepared statement of Mr. Katopis can be found on page 59 

of the appendix.] 

Chairman GARRETT. I thank you, and I appreciate the detail of 

your testimony in the past, and that you have provided to the committee today as well. 

Moving on—Dr. Calabria, welcome once again to the committee. 

STATEMENT OF MARK A. CALABRIA, PH.D., DIRECTOR, 

FINANCIAL REGULATION STUDIES, CATO INSTITUTE 

Mr. CALABRIA. Thank you, Chairman Garrett, Ranking Member 

Waters, and distinguished members of the subcommittee. Thank 

you for the invitation to appear at today’s hearing. I also want to 

commend the chairman for his efforts. 

While I believe we cannot replace our current mortgage system 

completely with private-label mortgage securities, I do believe the 

draft legislation before the committee is an important step. I would 

also prefer to see much quicker efforts to eliminate Fannie and 

Freddie. I do believe fostering alternatives in the interim is much 

better than doing nothing at all. I think we should bear in mind 

that as long as the heavy hand of subsidized government is tilting 

the scales, any private market solution is going to be hobbled. 

My testimony will focus on the discussion draft before the subcommittee. But I want to make some specific comments, that we 

should bear in mind that you can have too much standardization 

and too much uniformity. I like to have a little variety in the marketplace. I think we should have a diversity of options. I think one 

objective of our Federal mortgage policy should be to have a wide 

variety of options available to borrowers without unduly 

advantaging any particular product. 

The approach of Title I of the draft is that of standardizing mortgage pools by risk, and allowing those standardized pools to have 

an exemption from the registration requirements under the 1933 

Securities Act. I believe this is a reasonable approach to fostering 

a liquid market for private-label securities. 

And while I do question the expertise of the Federal Housing Finance Agency in the area of securities disclosure, I would prefer 

the SEC. With that said, I believe the structure of Title I and the 

involvement of FHFA is a reasonable interim step. Perhaps to keep 

it as an interim step, the subcommittee could include a reasonable 

sunset provision for the authorities under Title I. I would suggest 

something like 6 years. 

But moving on to what I think is maybe the most contentious, 

but certainly the most important part of Title I, is the repeal risk 

retention provisions of Dodd-Frank contained in section 1 or 2 of 

the discussion draft. I believe this is one of the more crucial provisions of the draft, and I strongly encourage its inclusion. I say this 

with all due respect to the effort that was put in by the Members, 

and the statements of the Members this morning, but I think that 

is built upon a false premise, which is that various participants did 

not obtain sufficient risk. For instance, the bulk of losses that 

Fannie Mae and Freddie Mac suffered are from the credit guarantees of their MBS. If Freddie and Fannie had not obtained that 

11 

credit risk, and instead flowed to the holders of the mortgagebacked securities, the taxpayer would be better off today. 

The same holds with the various off-balance sheet entities used 

by the largest commercial investment banks. The primary problem 

with these special investment vehicles was that the sponsoring 

bank did retain the credit risk rather than transfer it. 

So to summarize, one of the problems of our existing 

securitization model is it too often allows for securitization without 

the actual transfer of risk. I will also note that 100 percent retention of the credit risk did not prevent the S&L crisis. So, again, you 

can have all sorts of credit risk retention, but I don’t think that is 

a fix. Again, I would mention as well, if credit risk retention is 

such a great thing, why do we exempt FHA? If it is terrific, it 

should be for everybody, in my opinion. 

Moving on to Title II disclosure requirements for non-exempted 

securities, I quite frankly prefer to have these standards drafted by 

private market participants. As many of these ongoing private sector initiatives were mentioned at the previous hearing, I am not 

going to repeat them today, but I would only suggest that since 

these private efforts are currently under way, I believe Title II 

could be absolutely deleted completely without an adverse impact 

to the bill. 

Moving on to Title III, while the presence of a second lien is undoubtedly a risk factor, I have concerns about section 301(a) and 

301(b) as they would, in my opinion, rewrite existing contracts, 

something which I believe is always and everywhere harmful and 

destructive to the trust in our markets. I will note it does not matter whether a rewriting of a contract is meant to benefit the borrower or lender. For instance, I read section 301(a) as essentially 

a forced transfer from borrowers to servicers. So I would argue for 

deleting those sections. 

Regarding 302, while there are clearly substantial conflicts of interest to servicers of a second lien themselves or holders of a junior 

lien, I think a blanket prohibition on future interest by mortgage 

servicers is much too broad. There may well be situations where a 

junior interest held by servicers is beneficial to both junior and 

senior lien holder. So I think you need to rethink some modification 

to section 302. 

I again want to emphasize, I commend the chairman for his efforts. I think much of the modification of this bill would make it 

something that would work and a lot of sense. I also emphasize I 

can’t think of an issue that I think should be higher up on the priorities of the committee and the subcommittee than reform of our 

mortgage finance system. 

I would emphasize as well that I have worked on a number of 

pieces of legislation in my time, and read a number of pieces of legislation in my time, but I have yet to see a perfect bill. So I don’t 

think my criticisms should be taken to say we should not move forward. I do think the effort merits considerable consideration. 

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

42 of the appendix.] 

Chairman GARRETT. I thank you for your testimony. I also thank 

you for that last comment because I was getting a little worried as 

you were going along there. 

12 

Mr. Fleming, we appreciate you being with us today. You are recognized for 5 minutes. 

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

CORELOGIC 

Mr. FLEMING. Chairman Garrett, Ranking Member Waters, and 

distinguished members of the Subcommittee on Capital Markets 

and Government Sponsored Enterprises, CoreLogic appreciates the 

opportunity to submit its testimony regarding Congressman Garrett’s proposed bill addressing our country’s residential mortgage 

securitization market, the Private Mortgage Market Investment 

Act. 

My name is Mark Fleming, and I am chief economist of 

CoreLogic. CoreLogic is a leading provider of consumer, financial, 

and property information, analytics and services to business and 

government. Our company combines public, contributory, and proprietary data to develop predictive decision analytics, provide business services that bring dynamic insight to our customers in the 

residential mortgage origination, securitization, and servicing markets, as well as other private sector institutions in government. 

CoreLogic’s information resources include over 500 million historical real property and mortgage transaction records; monthly performance information on the vast majority of conforming as well as 

private-label securitized loans; insight in a majority of loan applications being originated today; and the Nation’s largest contributory 

mortgage fraud database. 

CoreLogic is supportive of the return of robust loan origination 

servicing, trading, and securitization markets as over 1 million 

users rely on CoreLogic to assess risk, support underwriting, make 

investment and marketing decisions, prevent fraud, and improve 

their business performance. 

Unfortunately, many of our customers are being severely impacted by the lack of liquidity that has pervaded the non-agency 

residential mortgage-backed securities market for several years. 

The housing market is beset by headwinds. The shadow inventory 

is currently 1.6 million units, or a 5-month supply. While down 16 

percent over a year ago, this is primarily driven by the declining 

rate of serious delinquencies. 

There are 22.1 percent, or 10.7 million mortgage households underwater in the third quarter, down from 23 percent in the second 

quarter, but primarily due to foreclosures as opposed to house price 

gains. There are 22 million, approaching half of all mortgaged 

households, who have either insufficient or negative equity; that is, 

greater than 80 percent current combined loan-to-value ratio. And 

many have well above current market interest rates. Negative equity will persist for years to come, taking more than 10 years in 

some markets for the average underwater borrower to regain positive equity. 

No one single policy or prescription can heal the housing market, 

but regulatory certainty, establishing underwriting uniformity, 

standardization of legal documents, and transparency is critical to 

the future of efficient allocation of private capital to finance mortgage assets. 

13 

Any resolution will require that the Private Mortgage Market Investment Act identifies as crucial: uniformity of underwriting 

standards of securitized assets; standardization of the 

securitization process; and granular loan-level understanding of the 

credit risk associated with residential mortgage-backed 

securitizations. 

The return of private capital to the residential mortgage market 

hinges on the return of liquidity, which in turn is dependent on at 

least four elements: trust in what is being offered; understanding 

of the product; sufficient information upon which risk-adjusted 

pricing can be agreed upon; and monitoring of the investments and 

purchases made. 

One of the greatest failures of the RMBS market was the mistaken belief that an upfront outlay for appropriate loan diligence 

was not worth the cost; that the ever-rising house price market 

would cover any deficiencies that may have existed in the loan underwriting process. 

Empowering investors with the necessary data to use the many 

solutions available today to better measure credit risk and perform 

appropriate levels of due diligence—that is, trust but verify—is 

critical to regaining the trust and understanding of what is being 

offered in the RMBS security. 

Had RMBS transaction participants employed even a few of the 

available diligence tools at the time of securitization, we believe 

substantial losses could have been avoided. 

Data and analytics providers to the securitization industry are 

actively making comprehensive information more available than 

ever before. With gains and technology in data mining and the incorporation of scientifically validated methodologies, these analytics 

will not only uncover deficiencies at the time of origination or 

securitization, but during the life of the loan and the security within which it resides. 

The ability of third parties and investors to independently assess 

the accuracy of issuer-provided information creates a framework for 

issuers that we believe can enhance the goal of skin in the game. 

CoreLogic is thankful to Congressman Garrett for his efforts in 

promoting rational securitization practices through his introduction 

of the Private Mortgage Market Investment Act. As provider of the 

transparency-based information that PMMIA calls for, we are encouraged by the recognition of how data and analytics can help 

lead the way toward the restoration of a liquid residential mortgage-backed securities market. 

Thank you. I will be glad to answer your questions. 

[The prepared statement of Dr. Fleming can be found on page 52 

of the appendix.] 

Chairman GARRETT. I thank you as well. 

Mr. Stevens, good morning and welcome. 

STATEMENT OF DAVID H. STEVENS, PRESIDENT AND CEO, 

MORTGAGE BANKERS ASSOCIATION (MBA) 

Mr. STEVENS. Good morning. Thank you, Chairman Garrett and 

Ranking Member Waters. 

While my written statement is far more comprehensive, I would 

like to open with some brief comments. The proposed Private MortVerDate Nov 24 2008 18:03 Jun 08, 2012 Jkt 072632 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\72632.TXT TERRIE
14 

gage Market Investment Act is aimed at achieving our shared goal 

of opening a pathway to a sustainable real estate finance system. 

As the MBA has consistently stated, the current environment in 

which the Federal Government owns, securitizes, or guarantees 

nearly every mortgage is both unsustainable and undesirable. I am 

pleased that we agree on the most important fundamental point: 

Private capital must be at risk, bearing the first loss, and private 

capital must be the primary source of liquidity for the mortgage 

market. 

I would also like to mention other features that MBA’s recommendations share with the legislation we are discussing this 

morning. For instance, we agree that the secondary market needs 

common standards, consistency, and transparency for all market 

participants in order to attract private capital. Your bill, Mr. Chairman, offers a way to accomplish these goals. 

By facilitating predictability and reliability, standardization 

helps investors measure the risk exposure, particularly in the TBA 

market. MBA also appreciates that the bill provides for the establishment of different classes of standardized mortgage properties. 

Safe, well-defined product standards help consumers compare financing options. For investors, the core market will establish performance standards for pricing purposes. 

I also want to comment on the bill’s repeal of Dodd-Frank’s risk 

retention requirements. A key issue for our residential and commercial members is this particular provision. Risk retention is a 

well-intended means for better aligning the interests of mortgage 

market participants, and the MBA was a leading advocate for establishing an exemption for safer Qualified Residential Mortgages, 

or QRM. Regrettably, the proposed rule with its QRM definition 

and creation of a premium capture cash reserve account, loan-tovalue requirements, and debt-to-income ratios is so deeply flawed 

that we seriously question whether it reflects congressional intent 

or can ever be successfully implemented. Until we see a final rule, 

it may be premature to call for repealing this provision, though I 

fear that day may not be far away. 

In my remaining time, Mr. Chairman, I want to turn my attention to the broader issue of GSE reform. Your legislation helps 

build a bridge to a future housing finance system, but determining 

what that system will look like is also of paramount importance. 

We believe the financial crisis proved that some form of government support is required to keep the mortgage market open during 

times of severe distress. 

The current dearth of activity outside of government-supported 

liquidity channels exemplifies the transient nature of private capital. When the market becomes unstable, private investors will exit 

and will be less apt to buy assets, even in good times, if they doubt 

their ability to sell them in bad times. 

To be clear, MBA believes the government’s role should be to promote liquidity for mortgage finance, not to provide the capital for 

it or absorb all the risk itself. 

MBA has proposed an FDIC-type insurance structure, fully funded by private capital, from risk-based fees on market participants, 

and limited to core mortgage products. As with the FDIC, taxpayer 

funds would only come into play if the capital of the securitizing 

15 

entity and the insurance fund were both exhausted. Again, like the 

FDIC, taxpayer funds would be returned as the fund is replenished. 

It is important to note that the absence of a guarantee does not 

mean that the government will not be forced to step in during a 

crisis. In fact, GSE securities have always stated they are not 

backed by the government. The most recent crisis has shown the 

government’s willingness to support even institutions that lacked 

an explicit guarantee. The taxpayer is better protected and the 

market will operate more efficiently if the rules of the road are 

clearly stated upfront, and government guarantees are clearly delineated and paid for before the crisis occurs. 

I want to conclude by mentioning that even though a new housing finance system may be years away, the steps we take today will 

influence the system’s ultimate design. With that in mind, it would 

be inefficient, if not downright wasteful, to dismantle portions of 

the existing infrastructure before a proven new structure is in 

place. The existing system, market practices, and human capital 

are the result of decades of effort, public investment, and billions 

of dollars of private capital. Retaining these assets through an orderly transition is in all of our best interests and will promote a 

smoother economic recovery. Thank you. 

[The prepared statement of Mr. Stevens can be found on page 94 

of the appendix.] 

Chairman GARRETT. Mr. Salomone? 

STATEMENT OF TOM SALOMONE, 2012 DIRECTOR, REALTOR® 

PARTY ACTIVITIES, NATIONAL ASSOCIATION OF REALTORS® 

(NAR) 

Mr. SALOMONE. Good morning, members of the Capital Markets 

Subcommittee. On behalf of the 1.1 million members of the National Association of REALTORS®, thank you for holding this important hearing on increasing private capital participation in the 

secondary mortgage market. 

My name is Tom Salomone of Coral Springs, Florida. I am NAR’s 

committee liaison for the issues of mobilization, political involvement, and REALTOR® political action committees. 

I have been a REALTOR® for more than 33 years, and I am the 

owner of Real Estate II and Real Estate II of Margate, both in 

Florida. The firm specializes in residential real estate. As with 

many of my colleagues who have testified before this committee in 

the past, my life, my passion, is real estate. 

REALTORS® agree with Chairman Garrett that greater transparency is needed in the trading of mortgage-backed securities. We 

believe that concepts within this legislation are a good attempt to 

bring stability and confidence back to the housing finance sector. 

The concept as posed in this legislation that focuses on standards 

and uniformity and transparency dovetail nicely within with NAR’s 

first principle for second mortgage market reform that states: An 

efficient and adequately regulated secondary mortgage market is 

essential to providing affordable mortgages to consumers. 

Also, REALTORS® agree an increase in private capital to the 

secondary mortgage market will help reduce the need for largescale government involvement in this portion of the housing fiVerDate Nov 24 2008 18:03 Jun 08, 2012 Jkt 072632 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\72632.TXT TERRIE
16 

nance sector. However, we do believe that even with the influx of 

private capital, it remains a role for the government and the conventional conforming space. Therefore, to restore confidence in the 

market, improve the efficiency and effectiveness of the housing finance system going forward, and to ensure the continued availability of mortgage capital under all economic conditions, concepts 

from this proposed legislation must be coupled with the comprehensive strategy for reforming the entire secondary mortgage market, 

including Fannie Mae and Freddie Mac. 

REALTORS® believe examples of bills that this legislation could 

be paired with are H.R. 2413, introduced by Representatives Gary 

Miller of California and Carolyn McCarthy of New York; and H.R. 

1859, introduced by Representatives John Campbell of California 

and Gary Peters of Michigan. 

REALTORS® believe that the secondary mortgage market 

should be reformed to strengthen it for the long term. In fact, we 

agree with lawmakers in the Administration that taxpayers should 

be protected, private capital must return to the housing finance 

market, and that the size of government participation in the housing sector should decrease if the market is to function properly. 

Those who advocate for constraining or removing entirely government participation from the secondary mortgage market need only 

to look to the current minuscule activity in the jumbo and manufactured housing mortgage markets to understand the implications 

of private capital as the sole participant in the secondary mortgage 

market. The result of this is a tightening of credit that has prohibited well-qualified borrowers from accessing funds required to purchase a home. 

Unique to the U.S. housing finance sector is the availability of 

long-term fixed mortgages like the 30-year fixed-rate mortgage. We 

believe that full privatization of the secondary mortgage market, 

even with the rules put in place by the Private Mortgage Market 

Investment Act, could foster mortgage products that are not adequately aligned with the needs and in the best interests of the Nation’s housing consumer. 

Ultimately, REALTORS® believe that moving to a fully private 

secondary mortgage market could make the affordable 30-year 

fixed-rate mortgage disappear. In fact, early NAR survey data 

shows that consumers who are now above the new lower GSE loan 

limit are experiencing significantly higher interest rates and the 

need for substantially larger downpayments in order to receive 

scarce mortgage funding. This is leading to a loss of interest in real 

estate. 

Finally, REALTORS® fear that in times of economic upheaval, a 

fully private secondary mortgage market will largely cease to exist, 

as has occurred in the jumbo and commercial mortgage markets. 

This would be fatal to the entire economy because the disappearance of affordable, predictable long-term mortgage funding would 

no longer be available, which would cripple the wide variety of industry supported by the residential housing market. 

In conclusion, the National Association of REALTORS® applauds 

Chairman Garrett’s efforts to bring back stability and confidence in 

the private-label mortgage securities market space. Again, we believe that this bill will be most effective if coupled with the legislaVerDate Nov 24 2008 18:03 Jun 08, 2012 Jkt 072632 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\72632.TXT TERRIE
17 

tion that supports the secondary mortgage market model that includes some level of government participation, while protecting the 

taxpayer and ensuring that all creditworthy customers have reasonable access to mortgage capital. 

Thank you for this opportunity to present our thoughts on the 

Private Mortgage Market Investment Act. The National Association 

of REALTORS® is anxious to work with the chairman and our industry partners on this thoughtful piece of legislation, which is an 

excellent first step toward finding a solution that best meets the 

needs of the U.S. housing consumer and the desire for homeownership. And I thank you. 

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

86 of the appendix.] 

Mr. SCHWEIKERT [presiding]. Thank you. 

Dr. Poole? 

STATEMENT OF WILLIAM POOLE, PH.D., DISTINGUISHED 

SCHOLAR IN RESIDENCE, UNIVERSITY OF DELAWARE 

Mr. POOLE. Mr. Chairman, and members of the subcommittee, I 

apologize for being so late. Allowing an extra 75 minutes was simply not enough for driving here from my home. 

Mr. SCHWEIKERT. Dr. Poole, may I beg of you to pull the microphone just a bit closer? 

Mr. POOLE. I am sorry? 

Mr. SCHWEIKERT. Pull the microphone closer if you can. 

Mr. POOLE. Is that better? Okay. 

I confess I am also a bit discombobulated from being in the traffic and the rain, even though I lived here for quite a while and 

should be used to that, but you get away from it after awhile and 

you forget just what it can be. 

Okay. I have a fuller set of comments for the record and those 

will be submitted. Probably the most relevant part of my background for this discussion is that for 10 years, I was President and 

CEO of the Federal Reserve Bank of St. Louis, and of course we 

had a lot of responsibilities not only for monetary policy, but for 

monitoring developments in the financial markets. 

I believe that the way that we ought to go is to move toward a 

fully privatized market in mortgage finance. I didn’t hear everyone 

here, obviously. I disagree with the position that says that we need 

to have a large government role. There are many capital markets 

that work just fine without a government role. Examples would be: 

automobile lending, another asset market; corporate finance; and 

mortgage markets in other countries. And what we are seeing 

today is the residue, the very unsatisfactory residue of decades of 

heavy Federal involvement. It is exceedingly strange that we talk 

about the need to have a Federal backstop when it was exactly the 

Federal backstop that created so much of the current problem, the 

financial crisis. 

The detailed specification that is in the draft bill, I quite frankly 

believe is the wrong way to go. It seems to me that is trying to design complicated products in Washington. I do not believe that 

Washington would try to design a computer or cell phone or a piece 

of complicated software, and I don’t understand why you should exVerDate Nov 24 2008 18:03 Jun 08, 2012 Jkt 072632 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\72632.TXT TERRIE
18 

pect that you would be able to design a mortgage instrument correctly and keep up with the times, which change. 

Moreover, here is the result: This is what I had in my latest refinancing of my mortgage. So this is the consequence: this document, 

pages and pages of fine print. It is a consequence of Federal involvement and State of Maryland involvement in the mortgage 

business. And as I read this draft bill it would deepen that—it 

would make this kind of document larger, and I don’t think that 

is the way we ought to be going. 

Let me also make just a few comments on Fannie Mae and 

Freddie Mac, and of course we have other GSEs to worry about in 

the housing space, as we put it, the 12 Federal Home Loan Banks, 

the FHA. 

Let me concentrate on Fannie Mae and Freddie Mac. What I believe ought to be done with those firms is to phase them out altogether. They ought to become artifacts of history and should no 

longer be active firms. It is not hard to design a process that will 

accomplish that end. Two things need to be done: first, the conforming loan limit needs to be phased down, not all at once, but 

over a period of years; and second, the securitization fees need to 

be on a schedule of increase. 

I would urge you to go that route, and I would also urge you to 

put those—phasing schedule into the law, rather than have it at 

the discretion of regulators. The discretion of regulators is very 

likely to be on the way. Some reason to stop—in fact, we have seen 

that already because there was a scheduled reduction in conforming loan limits. That has been suspended at least for the time 

being. 

Let me finish with a comment about the scale of the subsidies 

that have gone into housing. Those subsidies are very large. 

The way we ought to look at all the elements of our Federal 

budget is to ask whether we would be willing to ask Social Security 

recipients to accept a 10 percent reduction, let’s say, in their benefits, including current recipients. It has been 70 years since the attack on Pearl Harbor occurred. I have no doubt what the answer 

would have been 70 years ago. And in fact, we know that an enormous number of our citizens volunteered, and gave their lives in 

that cause. 

Do we really believe that subsidies for housing, for ethanol, for 

high-speed rail and so forth are—would we ask our citizens to give 

up Social Security benefits for those things? I don’t think so. 

Mr. SCHWEIKERT. Dr. Poole, I let you go over about a minuteand-a-half; I am sorry. 

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

of the appendix.] 

Mr. SCHWEIKERT. Should we start with a few questions just to 

sort of get our heads around the variety of information here? 

Mr. Fleming, from CoreLogic—with some of the discussions we 

have been having, everything from the risk retention to how do you 

make sure—if the underlying reason for risk retention is ultimately 

that we don’t want someone to not be able to keep their home, that 

we don’t want bad paper, ultimately, to be moving through the system, and ultimately the holder of the bond to be holding impaired 

paper. 

19 

CoreLogic’s ability to analyze data—we have had discussions of 

whether ratings on bonds are really the quality stamp for the bond 

investor, for the pension system, for the retiree who is going to buy 

the bond, or should we almost put a data field that is actually at 

the loan level that would allow risk analysis up and down, and how 

public should that data be? For someone like CoreLogic, you can 

demand that data be copy-written, be proprietary; or can we actually, through legislation, say here is the base field that you are 

going to have to disclose, and you may sell the algorithm. Give me 

your comments. 

Mr. FLEMING. Sure. I think there are two levels to it. One is the 

concept of risk retention in many ways is sort of trying to address 

the principal agent problem; that is, that we want to incent the appropriate behavior, the risk transfer behavior between principals 

and agents, and that is an important factor there. 

But we also believe that through the use of data and analytics 

that are available today and that have been available for a number 

of years, one can measure more dynamically through monitoring or 

surveillance types of techniques the performance of bonds, and let 

market forces drive pricing, right? It becomes a very straightforward process, where if a bond starts to perform away from expectations based upon the data, then the market can reprice that 

bond and sort of there is an enforcing mechanism in the pricing of 

those bonds and the recognition of the quality of the securitizers, 

the counterparty issuing those bonds, sort of counterparty risk rating kinds of programs can be done by investors. 

So that is why we believe strongly in the idea of the concept of 

the transparency of the data and it being something that is used 

to allow the markets to really drive pricing behavior and enforce 

good transparent risk management techniques. We already know 

and we do today use loan-level modeling and analytics. A lot of the 

loans that are in these securities are tied at the loan level and can 

be modeled and measured that way. So we believe in the idea of 

modeling those and having that data be available. 

In many ways, it is like the credit score that is attached to the 

loan application that passes its way through the process and is always a valuable piece of information throughout. The data and 

analytics that are attached to the loan at origination can be passed 

to the different parties along the way. 

There is the sort of information asymmetry problem that we had 

in the market of the past, which was that at each level of transfer, 

less and less information was being passed, right? And when you 

have markets— 

Mr. SCHWEIKERT. That is part of the discussion we keep having 

up here, is literally, do you create a number of data fields in a 

standardized format that are attached at the loan level and are always moving through? They are just there. So if you are the California Teachers Retirement System and you are considering buying 

into this bond, you can run your own risk analysis and it is actually at loan level. Am I going in the right direction? 

Mr. FLEMING. Yes. It exists today. So it is already out there and 

can be used and is used by market participants. 

Mr. SCHWEIKERT. Forgive me if I mispronounce it, Mr. ‘‘Katopis?’’ 

Mr. KATOPIS. ‘‘Katopis.’’ 

20 

Mr. SCHWEIKERT. Give me your understanding from your Association, from your view, the current QRM rules, risk retention, 

what do you think that—how that changes both your business and 

the availability for future homeowners to find credit? 

Mr. KATOPIS. Certainly, risk retention is a concept related to 

skin in the game. We do believe the best skin in the game is an 

effective reps and warranty regime that can be enforced. 

Mr. SCHWEIKERT. Could we stop right there? To that point, could 

I get a couple of comments of how many of you believe that a welldesigned reps and warrants mechanics is also every bit as important, or maybe even more effective? I just thought we would do a 

quick rundown. Yes? No? 

Mr. FLEMING. Yes. 

Mr. STEVENS. Absolutely. 

Mr. POOLE. I am sorry; I didn’t catch the question. 

Mr. SCHWEIKERT. A quick discussion of the reps and warrants 

mechanics actually in many ways provides as much quality coverage as a QRM or risk retention. 

Mr. Poole, would you turn on your microphone, please? 

Mr. POOLE. My view is that the government ought not to be in 

the business of designing this product, and I said that before. The 

market makes those judgments all the time, and I would not see 

a role for the government to force it down a particular direction. 

Mr. SCHWEIKERT. Mr. Katopis, I am sorry. One last, and then I 

am way over my time. 

Mr. KATOPIS. We think an effective reps and warranty regime 

would not necessarily rely on government enforcers, but you would 

have private—you would have all the pension funds. You would 

have CalPERS, the Carpenters Union, whoever runs your TSP, trying to make sure that there are economically viable mortgages in 

the trust. 

Mr. SCHWEIKERT. Thank you. 

Ms. Waters? 

Ms. WATERS. Thank you very much. 

I am going to call on Mr. Fleming again. Recently, I read an article from BankThink authored by you, ‘‘Mortgage Principal Can Be 

Cut Without Moral Hazard,’’ and you discuss quite thoroughly the 

possibility of principal mortgage deduction, which is a very controversial concept with some. And I notice, of course, in this legislation Chairman Garrett in one section here says, ‘‘Prevention of 

forced principal writedowns with respect to a securitized mortgage 

loan: No Federal department or agency, including the Board of 

Governors of the Federal Reserve System and the Bureau of Consumer Financial Protection, may require reduction in the principal 

amount owed on such mortgage loan.’’ 

I have been discussing with my staff, and you discuss somewhat 

in this article, the advantages of principal writedown and how they 

can be done in a creative way so as to reduce the cost to the banks 

and the taxpayers. I have also been discussing with my staff recent 

information about how Fannie Mae’s financial statements show 

that they are selling their REOs for around 55 percent of the unpaid principal balance of the mortgage. So isn’t it possible to reduce 

principal in a way that both helps the borrowers and reduces loss 

21 

to the taxpayers? I would like to hear your thoughts on that, Mr. 

Fleming. 

Mr. FLEMING. Sure. As you said, with the losses that the GSEs 

are suffering on foreclosures, foreclosure is a very expensive proposition from a loss perspective to the mortgage industry. And the 

concept of principal reduction is slightly different from, say, a 

cramdown concept of forcing it. It is the idea that it can be and 

should be considered as one of the many choices, and using the 

idea of sort of the net present-value testing of the value of a loan. 

It is consistently a choice that can be net present-value beneficial 

amongst all the other ones that are out there, other forms of modification, refinancing, short sales, all of these alternatives that are 

out there. Appropriately structured principal reduction can be a net 

present-value benefit, and therefore would be something that would 

be of value that would reduce losses to the investor in those loans. 

If it was a GSE loan, it would be the GSEs. 

So it is not that it should be forced, but it can be considered as 

one of the many options. The important aspect to take into account 

there is to address the moral hazard risk. And the best way to 

think about that is, we do it all day long in our daily lives with 

our auto insurance and our health insurance. They have moral hazard clauses in those contracts, too, and they address them through 

things like deductibles. 

So the key with doing principal reductions in the mortgage space 

is to have some kind of equivalent to the deductible concept to 

incent the appropriate behavior and mitigate or moderate the 

moral hazard. Something like a shared appreciation mortgage is 

one of the ones that is out there today being used effectively to do 

that. 

Ms. WATERS. And we are thinking about looking at that possibility with the shared appreciation. We think that makes a lot of 

sense. 

What about, again, the REOs? As I said, they are selling these 

REOs for about 55 percent of the unpaid principal balance of the 

mortgage. Should we not have anything in law that would prevent 

principal writedowns, allow them perhaps not to be forced but to 

be considered as a possibility? Because while there are some good 

things in Mr. Garrett’s bill, this section would prevent forced principal writedowns altogether. 

Mr. FLEMING. I think that gets more to the concept of honoring 

the contracts that are out there and making sure that the industry, 

particularly the private market, is going to enter an industry only 

when they can be assured that the contracts that are negotiated 

are withheld—or are held up. 

So, as I said, it is one of those ones where it is an option amongst 

many that, if done appropriately and objectively, can be of value. 

Any legislating or forcing one way or another gets away from the 

idea of letting the markets use the data and the analytic information that they have at their disposal to make the best decisions. 

Ms. WATERS. Yes, but there is so much discussion about how this 

crisis in our housing market is continuing to cause us so much economic displacement, and that if we are to revitalize this economy, 

we have to do something about the housing market. Wouldn’t principal writedown help us to stimulate the economy in some way? 

22 

Mr. FLEMING. Yes. I think in terms of, if you address the moral 

hazard risk and do it using these net present-value type of tests 

or models, yes, because negative equity is a significant drag on the 

housing economy and the economy as a whole today, and that is 

one of the fastest ways, if you will, to get rid of that negative equity risk. 

Negative equity reduces turnover, mobility. It reduces household 

sales demand. Currently, at the moment, it is locking people into 

their mortgages at higher interest rates, so it is not freeing up on 

their household balance sheet money that they could spend and 

consume otherwise. 

I think one of the benefits of the HARP II program will be that 

borrowers are being put into lower interest rates and that money 

is flowing back out through consumption expenditures. It doesn’t 

actually do anything significantly with regard to the housing market in terms of reducing equity risk or anything like that, but it 

is an economic stimulus in many ways. So ways to address reducing negative equity more quickly than time would do on its own, 

certainly would benefit. 

Ms. WATERS. Thank you. I would like to talk with you further 

about shared appreciation, because we are going to try and get our 

colleagues to agree to something. 

Thank you very much. I yield back the balance of my time. I am 

sorry; I have no more time. 

Mr. SCHWEIKERT. Mr. Grimm? And if we go fast enough, we will 

hopefully get a second round. 

Mr. GRIMM. Thank you, Mr. Chairman. Again, thank you to 

those testifying today. We we do appreciate it. 

Mr. Stevens, I believe your testimony notes that the alternative 

QRM proposal, which would require a 10 percent downpayment, 

would be as bad or even worse than the original 20 percent requirement. Obviously, that seems a bit counterintuitive. Why 

would reducing a downpayment requirement to 10 percent be 

worse? Could you please explain? 

Mr. STEVENS. First and foremost, I think the most critical variable we all have to pay attention to is the enormous role that the 

FHA is playing in the purchase market today, and that is singly 

driven by the fact that downpayment is the single biggest barrier 

to homeownership today. If you put the downpayment requirement 

at 20 percent, that guarantees, quite frankly, an outcome that we 

are going to have more mortgages using a government-subsidized 

outcome, as opposed to allowing any opportunity for private capital 

to come back into the markets. And it will make it very difficult 

for borrowers to have access to anything except a government-subsidized finance system. 

By reducing the downpayment to 10 percent, which is the alternative option, our concerns have to do with how capital markets’ 

execution will occur. In other words, a smaller market with only a 

10 percent downpayment requirement would leave a much smaller 

liquid market available to trade in the private market space. 

To put it another way and try to put it more simply, if the downpayment level was set at 10 percent, it means that anybody with 

less than 10 percent would have a difficult time getting any market 

execution, other than going to FHA, which would ultimately then 

23 

be under even greater pressure to do more purchase volume because it would be an illiquid market in that remaining space. 

So our view is that we don’t support a downpayment requirement 

in either proportion in the QRM rule. While respecting much of 

what is good in QRM, the concerns about putting these bright-line 

underwriting standards may ultimately become a barrier to engaging private capital back into the mortgage markets. And that is one 

of the things that I think we need to consider as we look at that 

rule. 

Mr. GRIMM. Continuing on that, given the uncertainty regarding 

the GSEs—I think you have stated it, but I want to make it clear 

what your opinion is. Is now the right time to change the structure 

of servicing compensation? 

Mr. STEVENS. We have looked at the proposed servicing standards that FHFA has put out for comment. We do not believe now 

is the time to change servicing compensation. And particularly to 

your question with the uncertainty in the housing finance system 

and the uncertainty in the housing recovery, changing servicing 

standards before we have even established servicing compensation, 

before we determine what servicing standards are, seems to me to 

be in reverse order. 

I think we first need to determine what are the servicing obligations going to be of the industry going forward, and then determine 

what compensation should be in accordance with that. To change 

that right now could even disrupt further the availability of mortgage credit to consumers across the country. 

Mr. GRIMM. Thank you. And I will open this up to the panel. We 

have just under 2 minutes. 

In your opinion, are we going down the same road, possibly, of 

some of the things we did with Dodd-Frank in the sense that we 

are giving too much authority to the regulators? FHFA, right now, 

you are talking about reps and warranties, credit and quality 

standards, underwriting standards. We can go on and on and on. 

Is there not enough definition, not enough clarity, and we are going 

to make the same mistake again? And I will open that up to the 

panel. 

Mr. KATOPIS. Congressman, let me make one comment on behalf 

of the investors who share the goal of crowding in private capital. 

Today with the contracts, the PSAs, we have 300 kinds of contracts 

out there with one commonality: They don’t really work. There 

needs to be standardization. And the conversation about whether 

FHA versus SEC is the better organization to create those standards is an open dialogue, but I think it is different than relating 

it to the Dodd-Frank experience. 

Mr. CALABRIA. I would say as an overall point, we are absolutely 

making the same mistakes that we seem to make after every housing boom and bust. You can go back and look at the things that 

were done after the savings and loan crisis, and in many ways they 

mirror what was done, with one exception: At least, we did have 

sort of a prompt, corrective authority regime that was put in, in the 

1990s that tried to reduce forbearance, because one of the problems 

in the marketplace today is we seem to be unwilling to shut banks 

when they need to be shut down. So this sort of extend-and-pretend 

that dominates the markets, we didn’t learn from that. 

24 

But I would say in many ways you really do need to limit some 

of the discretion of what the regulators can do. They had tons of 

discretion before the crisis and that simply did not work then. So 

I am very much concerned that we are repeating some of the same 

mistakes. 

Mr. FLEMING. I would just say I think we never really know for 

sure where we draw the line of balance between regulation or setting of standards, which is sort of the government role versus allowing the private market. And it is good that we can have the debate here to try and find those lines and know that probably, invariably, we get it wrong, and times change and it always needs 

to be revamped. 

Mr. GRIMM. I am going to yield back, and the Chair can decide. 

Mr. SCHWEIKERT. Thank you, Mr. Grimm. 

Mr. Frank? 

Mr. FRANK. Thank you. First, let me follow up with Mr. Katopis. 

You say you would prefer to leave the authority to the SEC rather 

than the FHFA; is that correct? 

Mr. KATOPIS. No, Ranking Member Frank. We share the goal of 

standardization— 

Mr. FRANK. I didn’t ask that. I am sorry, but we only have 5 minutes. You say here you would rather have the SEC, we believe the 

SEC responded. So did I misread this? 

Mr. Katopis. No, no. I think you are misconstruing it. We have 

supported the Reg AB proposal in the past. We like what the SEC 

put out in the past in terms of moving forward on the standardized 

reps and warranties. It is an open question. We have not decided 

whether— 

Mr. FRANK. So it is an open question for you. 

Let me ask Mr. Calabria. You lament the legislation restricting— 

to require the government to insist that people use the rating agencies. Remember, we don’t say people can’t use them on their own. 

I was a little surprised that Cato was in favor of the government 

insisting that private parties use it rather than leave it up to themselves. 

But having said that, let me ask you, would you evaluate the rating agencies’ role in rating these things in the past; and do we have 

any reason, if you don’t think that they did a good job, why they 

would be better? 

Mr. CALABRIA. I will reiterate, as I say in my written testimony, 

that ultimately we should be moving toward a world where we 

have far less reliance on the rating agencies. However, we are 

stuck in a bad world— 

Mr. FRANK. Okay. But answer my question, please. Again, I will 

repeat. I was struck that Cato is saying, ‘‘Hey, government, make 

them do it,’’ rather than what I thought— 

Mr. CALABRIA. With all due respect, I don’t believe anywhere in 

the testimony I say— 

Mr. FRANK. No. What we did was to say not that people couldn’t 

use the rating agencies, but that the government couldn’t require 

them to. And I would have thought Cato would have been with us 

in saying it is up to you; if you want to use the ratings agencies, 

use them, but the government can’t order you to do it. 

25 

Mr. CALABRIA. Nowhere in my testimony do I say that the government should require people to use— 

Mr. FRANK. I thought that is what— 

Mr. CALABRIA. What I talk about is there is the section in DoddFrank that the current—was it 4-something G that exempts rating 

agencies from Section 11 liability, and then once you have that, the 

ABS market shut down because— 

Mr. FRANK. So you don’t object to the part of the bill that says 

that no government agency should require people to use the rating 

agencies? 

Mr. CALABRIA. I absolutely agree with that part. We are on the 

same page. 

Mr. FRANK. Okay. I misread that. As to the rating agencies, how 

would you evaluate their past performance? 

Mr. CALABRIA. The rating agencies? 

Mr. FRANK. Yes. 

Mr. CALABRIA. Not good. 

Mr. FRANK. What reason do we have to think they will get any 

better? Is there any reason to think that, absent any government 

intervention, they will get any better? 

Mr. CALABRIA. Again, I want to move to a world where we 

have— 

Mr. FRANK. I am sorry, Mr. Calabria. That is a fairly straightforward question. Do you have any reason to think they will get 

better, absent some outside intervention? 

Mr. CALABRIA. I think if we don’t bring competition to that market, no. 

Mr. FRANK. Okay, thank you. 

Mr. Stevens, I know you don’t want to use downpayments and 

my letter—also no bright lines about debt-to-income or loan-tovalue. Let me ask you, looking back at the way residential mortgages used to be used, what in that system would you change? 

That is, how would you have us going forward be different than the 

way they were 3 years ago? It is a very specific question. 

Mr. STEVENS. Yes. I think what you put in— 

Mr. FRANK. No, no. How would you change it? 

Mr. STEVENS. We support what is in QRM that eliminates negative amortizing loans, interest only, balloons, extended loan terms, 

prepayment penalties— 

Mr. FRANK. You would get rid of the bad stuff. 

Mr. STEVENS. —understated income, no income verification, 

points and fee caps. You have owner-occupied restrictions. 

Mr. FRANK. Let me just ask, those all are in there to say that 

you need to comply with that to have a qualified mortgage. So from 

your standpoint, there should be no difference between the qualified mortgage and the Qualified Residential Mortgage. That is, if 

it meets the qualified test, then there should be no further restriction? 

Mr. STEVENS. That is actually not necessarily correct. 

Mr. FRANK. What is your position? 

Mr. STEVENS. We wouldn’t object necessarily if that was the outcome, but QRM— 

Mr. FRANK. Tell me what your position is. I am glad you wouldn’t 

object, but what would you be for? 

26 

Mr. STEVENS. A qualified mortgage allows second homes, investment properties, where QRM does not. 

Mr. FRANK. Okay. But people in my business, when we say we 

do not object, that means we don’t want to really tell you what we 

think, because ‘‘do not object’’ doesn’t mean what I think. What do 

you favor in terms of—are there any restrictions you would put on 

mortgages to qualify for no-risk retention, other than simply meeting the basic qualified mortgage test? 

Mr. STEVENS. I don’t consider the list of provisions that Congress 

passed in Dodd-Frank on the QRM standard is a small list. It is 

a significant— 

Mr. FRANK. No, I didn’t ask you that. So the answer is no, in effect? 

Mr. STEVENS. No, we support everything that— 

Mr. FRANK. No. If it meets the qualified mortgage test, then it 

would automatically get a QRM test as well? That is not a hard 

question. 

Mr. STEVENS. The QRM test, the qualified mortgage extends beyond that. 

Mr. FRANK. So I think saying that you don’t have any requirement to avoid risk retention or debt-to-income, loan-to-value, or 

downpayment, is really asking us for further trouble. 

Thank you, Mr. Chairman. 

Mr. SCHWEIKERT. Thank you, Mr. Frank. 

Mr. Dold? 

Mr. DOLD. Thank you, Mr. Chairman. 

Dr. Calabria, just starting with you, do you believe that the government should play any role in preserving the availability of credit during times of stress; and, if so, can the government do this 

through other means besides Fannie and Freddie? 

Mr. CALABRIA. I would say, ultimately, no. I do think we need 

to recognize that the Federal Reserve has set a precedent of buying 

$1 trillion-plus in mortgage-backed securities. The ECB has bought 

almost half a trillion in covered bonds. You have a catastrophic 

backstop in place both here and in Europe, so we shouldn’t deny 

that fact. But ultimately, I would want to even limit those abilities 

as well. 

Mr. DOLD. Can you just talk to me for a second about why it isn’t 

desirable to have a mortgage market where 90-plus percent of all 

the mortgages have some form of government support? 

Mr. CALABRIA. I think you lessen the incentive. Again, the whole 

structure of sort of risk retention and all these things is try to align 

incentives properly. But if you don’t have the downside, and you 

only have the upside and the taxpayer takes the downside, you 

have eliminated those incentives for proper underwriting. 

The way markets should work is mismanagement, bad products, 

should all go out of business. Companies should fail. They should 

get weeded out. Instead, when we save them and we keep them 

around indefinitely, you propagate and sustain bad practices. 

So certainly, part of the need for all of this regulation is because 

we continue to have a massive safety net for the financial system. 

We need to get rid of that safety net so these bad firms go out of 

business. 

Mr. DOLD. So you also believe that the GSEs underprice risk? 

27 

Mr. CALABRIA. Absolutely. And I think the fact that they have close to $160 billion in losses is proof enough. 

Mr. DOLD. Mr. Fleming, would you also agree that the GSEs 

underprice credit risk? 

Mr. FLEMING. I think that one of the reasons that private capital 

is not coming back into the marketplace is because the underpricing of risk makes it non-economically feasible for it. 

Mr. DOLD. And as we look at how big this is right now, Mr. 

Fleming, and the way to get around this, how do we best bring private capital back into the marketplace? How would you best do it? 

Mr. FLEMING. A lot of the things that are being talked about 

today are certainly there, the things I mentioned in my testimony: 

the creation of trusts; the honoring of contracts; the creation of 

some more standardization. I think there is a very clear benefit the 

GSEs provided to the mortgage market that is not really obvious 

in direct financial markets, and that is the creation of a very standardized and efficient process for origination of the loan all the way 

through to securitization. 

In principle, those concepts can be applied to the private marketplace to also create that level of efficiency which brings liquidity, 

which as we note today and have known even in a well-functioning 

housing market, the GSEs brought a lot of liquidity. And that is 

the key to what we are looking for in the private market. 

Mr. DOLD. Mr. Stevens, you have said, or at least you have written in your testimony, that you believe the necessary tools, materials, and expertise currently exist to begin building a bridge towards a more sustainable real estate finance system. What are 

those tools and why aren’t they currently being used? 

Mr. STEVENS. I think there are three interesting requirements 

that we continue to struggle with as we talk about the recovery, 

the housing finance system, and bringing finance into the marketplace. 

The first is to make sure that we have standardization in terms 

of the marketplace understanding what those standardized terms 

would look like. That exists currently in the TBA market in the securities issued by the GSEs. It also exists in Congressman Garrett’s bill. That is one of the provisions he is trying to protect, the 

expertise to design that. What is in that credit box for standardization clearly exists in the industry today. That can be defined 

through Congressman Garret’s bill, as it is with GSE production. 

The second is liquidity, to make sure there is enough capital 

coming into the system to create tradable currency, a security that 

markets will buy into. I think that comes a bit from standardization. And by creating large enough pools of standardized products, 

you can create liquidity. 

I can give you a detailed version of that. Fannie Mae MBS, which is trading $70 billion roughly per day, is right now trading 

a full point through Freddie Mac mortgage-backed securities because they trade such lower volumes of currency, it is a less liquid 

security today. We are already seeing price differential because of 

large liquid pools. 

Congressman Garrett’s bill could potentially ultimately resolve in 

testing whether we can create enough liquidity to have pricing 

power into that market. 

28 

The third then ends up being the backstop: Who has the capital 

markets’ guarantee behind the provision? We have traditionally— 

today, we rely on the government to give that triple A guarantee 

behind the security. That is what creates investors coming into the 

market. 

The question will be, under the provisions that are created in 

this proposed legislation, will there be investors willing to come in? 

Because the counterparty backstop won’t be the U.S. Government 

in that structure; it will be individual companies that have created 

those mortgages. And I think that is going to be the most interesting part about testing the viability of what is in this proposed 

legislation, if it ultimately comes to market, is can you bring the 

liquidity in simply based on having standardization in mortgage 

pools. 

Without question, the expertise exists in the housing finance system to help design those structures. The question will be, will the 

capital come into the market? And I think that is something that 

everybody here would be interested in finding out. 

Mr. DOLD. Thank you. I yield back. 

Mr. SCHWEIKERT. Mr. Lynch? 

Mr. LYNCH. Thank you, Mr. Chairman, and I want to thank all 

of the witnesses for coming and testifying and helping this committee with its work. 

For starters, I have to address Mr. Stevens, representing the 

Mortgage Bankers Association. I have a matter in my district, and 

I just need to put you on notice on this. Originally, Ms. Debra Still 

was supposed to testify in your stead. She is the new incoming 

chairman of the board of directors, as I understand, for the Mortgage Bankers Association. She is the principal for Pulte Homes. 

I have a couple of Pulte Homes projects in my district, a very bad 

situation where a number of carpenters, about 59 to 60 carpenters 

were hired on those projects, a number of them with questionable 

immigration status, by Pulte Homes through a subcontractor, 

Nunez Construction. 

To make a long story short, Nunez Construction, after the project 

was completed, skipped town. I think they may have gone back to 

Brazil, leaving about 60 carpenters in my district without pay 3 

weeks before Christmas. They are owed a total of about $150,000 

in wages. I hate to lay this on you, it is not your doing, but I have 

a feeling that the original witness was changed because I was 

going to confront her with this dilemma that I have. 

So, while it is not your matter, it is a reflection on the Mortgage 

Bankers Association, because she is the new Chair coming in. I 

have this, I am confronted with this, like I say, less than 3 weeks 

before Christmas, and I have all these folks owed a lot of money 

for wages and benefits. So that being what it is, I just want to put 

you on notice on that. 

With respect to the Private Mortgage Market Investment Act, I 

do want to just reiterate my concern about the elimination of risk 

retention. I think that if we go to a standard where we have warranties and representation clauses as our insurance in this matter, 

we are going to end up with a system that creates very well-written representations and warranty clauses. We won’t end up with 

29 

very well-constructed, asset-backed securities and mortgage-backed 

securities. That is my concern. 

And the reason that these bad toxic securities, mortgage-backed 

securities, went viral was because the way they were constructed 

and the way we have the law, it allowed people to escape liability 

if they just pushed them out the door. Just get them out. It doesn’t 

matter if they are exploding, just get them out the door. Once you 

get them out the door and they are in somebody else’s hands and 

they blow up, it is okay. You make your money, you push the product out the door. 

We can’t go back to that type of system. That is the concern that 

I have. And I don’t think that going to the representations and 

warranties standards, if you will, will cure that. 

I think we do have some common interest in the definition or the 

standard, the rule being proposed for QRMs, the Qualified Residential Mortgage. I think a 20 percent downpayment is too high. We 

are going to squeeze a lot of people out of that market, and we 

have to figure out a better combination, a better set of standards 

that brings people back in the market, allows the private market 

to take a much, much, bigger role, and moves the GSEs out to a 

more historic level with their involvement. 

But I think absent the elimination of risk retention, that is a bad 

idea. And we have to figure out a way to make sure people have 

skin in the game. Otherwise, we are going to go back to the bad 

old days. 

But on this other matter of how do you get that exemption, what 

are the standards for a QRM that give you that exemption, we 

have to make that much more realistic, much more workable in 

terms of how we get there. I agree that a 20 percent downpayment 

is too high. I like the idea of an 80 percent loan-to-value ratio. I 

think that creates a buffer so that we are not going into a negative 

position if we have a little dip in the real estate valuation market. 

There has to be a better way to do that. 

But Mr. Stevens, with respect to the risk retention argument, 

what are your proposals in terms of making sure that people do 

have that skin in the game going forward? 

Mr. STEVENS. So, very briefly, given the time constraints, I would 

say this: If you go back—I have been in this industry for 30 years. 

We did 5 percent downpayment transactions back in the 1970s for 

owner-occupied, primary residence, fully documented, safe and 

sound, fully amortizing mortgages. You protect all of those provisions in the Dodd-Frank QRM rule, which we support. 

When you throw in the downpayment provision, either 10 or 20 

percent, all that ends ends up doing is drawing a line that will directly impact first-time homebuyers, borrowers of color in this 

country, just the way the demographics work, and it draws a barrier that doesn’t necessarily reflect performance. 

And the one variable I would ask everybody to look at is the 

Freddie Mac and Fannie Mae owner-occupied, 30-year fixed-rate, 

primary residence, fully documented mortgage portfolio. The cumulative default rate on that portfolio is still in the very low single 

digits. It is the other stuff, the neg ams, the piggybacks, the 

subprimes. Those products ended up creating these 20-plus percent 

30 

default rates, which Freddie Mac and Fannie Mae also bought in 

their portfolios. 

You have done a great job, Members of Congress have, to create 

boundaries without drawing this arbitrary line in the sand that 

says 10 percent. So if you are a first-time homebuyer or you are 

a family without large inherited wealth, you are going to have to 

go to FHA, and we will have this separate but equal finance system 

as a result. 

So I think what Congress did in Dodd-Frank was outstanding as 

it relates to QRMs. It is what ultimately came out in the proposed 

rule from the six regulators that we take significant issue with, because we think that creates barriers that are unnecessary in this 

housing society. 

Mr. LYNCH. Thank you, Mr. Chairman. I yield back. 

Mr. SCHWEIKERT. Thank you. 

Ms. Hayworth? 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

A question, and Mr. Stevens, I apologize if this is redundant, but 

regarding the alternative QRM proposal for a 10 percent downpayment being as bad or even worse than the 20 percent, can you just 

explain the negatives of that? It seems to be a little counterintuitive otherwise. 

Mr. STEVENS. Sure. It is interesting, Dr. Poole actually made a 

very good point, which is we are designing very technical products 

through a political process, which makes this very complicated. But 

here is the essential premise: If you fully document a borrower for 

sustainability, the risk of default won’t vary with a 5 percent downpayment, or a 10 or a 20 percent downpayment. 

What happens is in the event something disrupts their lifestyle— 

job loss, etc.—your default risk then increases with a low downpayment because you don’t have enough equity to get out of a home. 

Those performance differences are actually fairly marginal. So if 

you look at actual performance with a 5 percent down loan or a 20 

percent loan, protecting for all the other provisions in Dodd-Frank, 

you actually get pretty good performing loans in both categories. 

The reality is the private sector has always underwritten these 

loans. 

So a 5 percent down loan, with mortgage insurance, has always 

had much tighter qualifying ratios required by the mortgage insurance companies, longer histories of job stability, higher credit score 

requirements, even sometimes restrictions on the type of property 

in order to ensure performance. Bigger downpayments get more 

flexibility. That is always handled on sort of a natural risk scale, 

the way underwriting has been done by the private sector. 

What QRM does is put just an arbitrary line in the sand that everybody gets treated the same. It takes away this nuance that really makes the credit markets work in this country for housing finance. 

Dr. HAYWORTH. Right. And what you are talking about fundamentally is bringing rational analytics back into the process, as 

opposed to a laudable but fiscally irresponsible, unfortunately, social goal which has ill-served our public. 

Dr. Calabria, was it you in January who testified as a member 

of a panel about the mortgage marketplace crisis at that time, and 

31 

I think—was it you I asked a question about the contribution of the 

GSE debacle to our national unemployment rate? I think it was 

you who said it contributed about 1 percentage point because people were underwater and couldn’t be mobile. 

Mr. CALABRIA. There is a fair amount of literature that says the 

higher your homeownership rate, the higher your structural unemployment. And this has been looked at across the country, and this 

has been looked at across States. 

And I want to emphasize it is not simply Freddie and Fannie. It 

is the broader array of things that we did to get higher homeownership rates and locks people in. 

Dr. HAYWORTH. Absolutely. I appreciate your argument, Mr. Stevens. It makes sense, and it really reflects back into the risk retention piece as well. If we put the trust and the responsibility in the 

hands of those who are conferring the loan or are making the investment, we will have more sense and more opportunity ultimately. Is that something that, as a principle, the panel would accept, and any specific comments? 

Mr. STEVENS. If I could, the one thing I would just caveat is what 

we have seen in this search for profit at any return without tested 

modeling, we have seen risks that occurred from the 2005, 2006, 

2007, and 2008 books where a lot of new products that had been 

untested with models were passed into the system and rated at levels that were clearly not appropriate with the sustainability factor. 

I think what CoreLogic and other companies bring to the table is 

if we can get more data and more transparency, we will do it better, with a better ability to price and evaluate risk in the marketplace. 

Dr. HAYWORTH. No question. And part of that is the ratings for 

government-backed securities were higher than was justified. Isn’t 

that a big part of the problem as well, fundamentally? 

Mr. CALABRIA. If I can make a point that I think is important 

to keep in mind—it doesn’t matter whether it is the market, it 

doesn’t matter whether it is government. We don’t know ahead of 

time everything we think we know. For instance, I helped draft, 

with many people in the room, the American Dream Down Payment. We put lots of provisions in there where we thought we could 

give downpayment assistance and it would perform well. It did not 

perform well. Sometimes, you just learn these things after the fact. 

My point here is that I do worry about having too much rigidity 

to the standards, because then you stick them in place, when you 

only later learn that they weren’t really the right standards that 

you wanted anyhow. So there has to be flexibility in the system. 

Dr. HAYWORTH. And you put unjustified faith in them, and that 

leads to a whole cavalcade of consequences. 

I know my time has expired. Thank you, Mr. Chairman. Thank 

you, panel. 

Mr. SCHWEIKERT. Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

One issue on which I have introduced legislation that is also an 

issue covered in Mr. Garrett’s legislation is servicers of mortgages 

in securitized pools, the beneficial owners are Mr. Katopis’ clients 

but not the servicer. But then the servicer is an affiliate of a bank 

that has second mortgages, second liens on the same property. And 

32 

that is an area that Mr. Garrett has said he would work with me 

on. 

I have asked before a panel of servicers, what is the advantage, 

if any, of being affiliated with a bank that might have second mortgages on the same property? And they kind of drew a blank. I 

think they eventually said something like, ‘‘Some people like to 

deal with just one bank for servicing their first mortgage and their 

second mortgage and their credit cards and everything else,’’ which 

did not seem like the most persuasive argument I have heard. 

Mr. Katopis, do you see any necessary—anything that requires 

the servicers to be affiliates of banks? Is there any reason the 

servicers should not—that the banks should not be required to spin 

off their servicing affiliates? 

Mr. KATOPIS. Thank you for that question, Congressman. I don’t 

know if you heard my opening statement. I was lavishing praise on 

some of the Members. Certainly, you are at the top of the list for 

being thoughtful about private— 

Mr. MILLER OF NORTH CAROLINA. You can repeat all that if you 

would like. 

Mr. KATOPIS. You got that? But let me say that we appreciated 

your legislation, and I cannot see a reason why these conflicts 

should continue. In fact, to the degree Members care about modifications and other issues in the housing ecosystem, it does seem 

odd. I think it would be very worthwhile for this committee or GAO 

to look at the mod rates when a servicer owns both the first and 

the second, rather than otherwise. 

So there are a number of conflicts. We think this is hurting private capital, it is hurting investors, and we appreciate yours and 

Chairman Garrett’s interests in this issue. 

Mr. MILLER OF NORTH CAROLINA. A second issue, one that Mr. 

Fleming talked about earlier in answer to questions, and it may 

have been covered in the opening statements as well, and also that 

Mr. Grimm discussed in his questions, is that the Garrett bill gives 

the FHFA pretty broad authority to develop servicing standards 

and loss mitigation procedures. But the FHFA has been reflexively 

against principal reductions to reduce loss, even in the face of studies that pretty clearly show, and Mr. Fleming said his analysis 

pretty clearly shows that there are many instances in which it 

would be far better; the loss would be far less if there was a principal modification, a principal reduction, rather than a foreclosure. 

I have introduced legislation that is modeled on the former Mac 

procedures that provides standards and requires principal modification when a mortgage is in trouble. 

Mr. Katopis or Mr. Fleming, have you looked at those standards? 

My understanding from the people I have talked to in Farm Credit 

is that they work fine. It is not a problem. It doesn’t create moral 

hazards. People don’t strategically—farmers don’t strategically default. They only get modified if they truly are in trouble. Should 

there be some standard in the statute, or should it be given to the 

discretion of the FHFA? Mr. Katopis? 

Mr. KATOPIS. Let me just start by saying that investors believe 

in a couple of things, including the truth and math. So to the degree that a writedown, a haircut, is a 30 percent loss versus a 60 

percent loss, we favor principal reduction in our work with the 

33 

AGs. We have talked about principal reduction. I think it needs to 

be done correctly. We have to do it on a case-by-case basis. You 

have to look at the borrower’s entire debt scenario. 

So while we have not reviewed your legislation, I will go back to 

our members and look at it. It is part of a solution, from what you 

are describing, but it has to be done correctly and mindful of many 

facts: the right discount rate; the MPV modeling has to be transparent. There are a lot of issues that go into that kind of analysis. 

Mr. FLEMING. I would just add, we have models and tools that 

do that math at the loan level, looking at the borrower’s whole 

credit history, assessing their willingness, assessing their capacity, 

and using the net present-value testing framework where the user 

can change the dial so that it is very transparent to do all of that, 

to make those decisions, to come up with the conclusion that a foreclosure 2 years from now is going to cost me ‘‘X’’ in losses but a 

short sale is going to cost me ‘‘Y,’’ and a principal modification or 

a principal reduction of this amount today will cost me ‘‘Z.’’ And ‘‘Z’’ 

is the lowest number, so therefore we should do it. 

Mr. MILLER OF NORTH CAROLINA. Thank you. 

Mr. SCHWEIKERT. Mrs. Maloney? 

Mrs. MALONEY. Thank you so much, Mr. Chairman. 

I would like to ask Mr. Salomone to follow up on what Mr. 

Lynch’s question was with the contractors not being paid, the carpenters. In New York, you are required to have a performance bond 

that would cover this. I know it wasn’t your company, but do you 

know if the company had a performance bond? 

Mr. STEVENS. Yes, the Pulte situation I am well aware of with 

Mr. Lynch, and we have tried to facilitate conversations. The 

woman, by the way, was not scheduled to testify today at all. But 

nevertheless, the issue is something that we are aware of. 

Mrs. MALONEY. But did they have a performance bond? That 

would cover it, wouldn’t it? 

Mr. STEVENS. Our member only runs a mortgage subsidiary. She 

is not on the board and did not work for the builder directly. This 

is a Pulte home builder issue in Massachusetts, as I understand it, 

and we are trying to facilitate as many conversations as we can between Congressman Lynch’s office and the Pulte Company. 

Mrs. MALONEY. Thanks. Listen, I want to go back to the whole 

risk retention deal and ask anyone on the panel who would like to 

comment on what would happen if it was totally repealed, if they 

repeal Section 941 without providing an alternative other than enhanced underwriting standards. It it would be just a narrow slice 

of the mortgage market. 

What do you see as the consequences of eliminating risk retention across-the-board, and how would the consequences vary, or 

would they vary with asset types? Anyone? 

Mr. POOLE. Let me jump in here very quickly. I am always in 

favor of reducing and getting rid of regulation, so I would support 

that. 

Mrs. MALONEY. I would like to ask Mr. Salomone, do you support 

repealing 941? 

Mr. SALOMONE. We don’t really have a position. But if it does remain, we would be in favor of— 

34 

Mr. SCHWEIKERT. Could I beg of you to do me a favor? You might 

have to either turn the microphone on or pull it closer. 

Mr. SALOMONE. I apologize. Like I said, we don’t really have a 

position on that, but if it did remain, we would be in support of 

Senator Isakson’s efforts around a Qualified Residential Mortgage 

exemption. 

Mrs. MALONEY. Mr. Stevens? 

Mr. STEVENS. This is a difficult subject. We believe actually what 

was approved in Dodd-Frank in Section 941 by Congress as it relates to protecting against—not requiring risk retention for certain 

loan features had merit. We think that the regulators went above 

and beyond what the legislation called for, and that is where the 

issues concern us directly about the availability of mortgage finance capital, particularly for first-time homebuyers and people 

who have less wealth in this country, and forcing them to an only 

solution being FHA or a government-sponsored program. 

So we have not called for the elimination of 941. In fact, we 

helped work on the language in supporting from a technical standpoint many, many months ago. 

Mrs. MALONEY. Dodd-Frank precluded from QRM loans risky 

characteristics such as balloon payments, negative amortization, 

and the like. And the Act leaves it to the discretion of the FHFA 

Director to decide. So how important are these loan features such 

as balloon payments, negative amortization, whether and how soon 

after origination the interest rate adjustments and prepayment 

penalties are in determining the default risk of loans? Are they important? Mr. Fleming? 

Mr. FLEMING. Yes. The features have had a variety of different 

names associated with them, but the features of those loan terms 

certainly add risk. And I think one of the biggest realizations for 

those who do the modeling of credit risk in the mortgage space 

today is that the layering of those risks actually was one of the reasons for the surprises of the delinquency rates; that each one alone 

may not be particularly risky, but the combinations of them together became significantly risky. 

There is a place and a time for many of these features in certain 

situations. For example, Alt A loans were a classic loan given to 

high-net-worth borrowers when they were first designed and originated, and it played a valuable role in the mortgage industry as 

a product. How they eventually became used is very different. 

Mrs. MALONEY. Thank you. I would also like to ask about the exemption that is provided for certain mortgage-backed securities 

from the SEC registration and oversight; but it does not, the draft 

bill, replicate the SEC’s investor protections. What are your comments on that? Are there any ways that they provide equivalent 

protections for investor protections? That is a serious thing to me, 

that they are repealing that requirement and yet not replacing it 

in any way. Is that not a concern, or is that a concern of the panelists? 

Mr. FLEMING. I would yield to other panelists here today on 

those comments. 

Mr. CALABRIA. While I think parts of Title I try to include provisions to replicate much of securities law, this is one reason why I 

do think that ultimately these provisions should be at the SEC. 

35 

But again I emphasize, I think having it at the FHFA for a number 

of years is a reasonable interim step to getting it to the SEC at 

some point. 

Mrs. MALONEY. Okay, my time has expired. Thank you. 

Chairman GARRETT. Thank you. And since I am back, I thank 

the panel. 

So I understand one of the issues has been the risk retention aspect, and I guess there is maybe unanimity, just as we are trying 

to get some degree of unanimity with regard to the legislation as 

well, as far as standardization and the underwriting and also on 

securitization. 

On this issue, it sounds to me from the testimony that maybe we 

have some sort of agreement on this as well. And that is to say 

that the risk retention piece that we currently have in current law 

of Dodd-Frank may not be the best way to provide for that assurance, and instead what we do here is by having specific and enforceable reps and warrants that you can replicate, if you will, that 

through this legislation. I think this may have been done, but since 

I wasn’t here and I am the chairman, I can do it again. 

I am going to run down the panel and just get your two cents 

on that piece. 

Mr. KATOPIS. The two-cent answer is yes. The best skin in the 

game is reps and warranties, and I can elaborate. 

Mr. CALABRIA. First of all, I would emphasize there was risk retention beforehand, so before this rule was ever put in place. The 

5 percent is arbitrary. I think leaving it to the marketplace to determine the appropriate risk retention on a product-by-product 

basis is a far better way to go. 

Mr. FLEMING. I would just add that monitoring, surveillance, dynamically updating the performance of the pools, basically bring 

market forces that can address some of the components of what 

risk retention is after. 

Mr. STEVENS. We understand the desire to have safe and sound 

mortgage underwriting. That is the thing we have to correct for. 

Our concern about the current way the risk-retention rules are provided, both with the qualified mortgage that the concept of rebuttable presumption will actually eliminate access to mortgage finance 

in the private sector for those that we are trying to protect through 

this process, and in the Qualified Residential Mortgage, we think 

that rule goes too far in eliminating capital even further. 

There is absolutely value in reps and warrants and repurchase 

risk, which institutions hold today, which is significant from a cost 

standpoint to institutions. There is a way to ultimately get to a 

safe and sound system without overregulating to a point where we 

eliminate access to capital for the consumers we are trying to protect. 

Mr. SALOMONE. As I mentioned before, if it is repealed we are 

okay with it, but we really have no position on it. But if it does 

remain in Dodd-Frank, then we will continue to support Senator 

Isakson’s efforts around the Qualified Residential Mortgage exemption. 

Mr. POOLE. We need to distinguish between two different aspects 

of stabilizing the financial system. One is designing the instruments, and I have already said where I come out on that. 

36 

The second is the constraints on the institutions, and let them 

design the instruments that they think work best in their business 

environment and their own customer base. We need stiffer capital 

requirements and so forth on the institutions. If we can stabilize 

the institutions, if we can do away with ‘‘too-big-to-fail,’’ we will 

solve most of the problems we have been talking about. 

Chairman GARRETT. Thank you. Mr. Katopis, did you want to 

chime in for a second? 

Mr. KATOPIS. Again, investors can price risk, but they can’t price 

the unknown. So it is not just the reps and warranties, it is also 

having that information accurate at the issuance level through the 

life of the security, through the wind-down, and have it enforceable. I think it is an important tool, because it doesn’t just help investors, but also our Main Street projects, whether it is CalPERS, 

the Carpenters Union. If people see there are defects in the mortgage pools and want to make sure there are returns for retirees, 

first responders, union people, then they have an extra tool to get 

back that skin in the game. 

Chairman GARRETT. Thanks. And the gentlelady from New York 

said that this bill would do away with the investor protection elements, equity protection elements with regards to the SEC. I would 

suggest that is not the case, that this bill would replicate them in 

the legislation. I see somebody nodding their head. 

Mr. CALABRIA. I would agree. I think you have added within 

Title I most of the provisions that would replicate the security protections. 

Chairman GARRETT. So, right now you have them over at the 

SEC. This would put them in the same protections here. 

Mr. STEVENS. I was going to say your bill clearly outlines standards for servicing and reporting, standards for modifications, standards for documentation. A lot of that is replicated. 

Chairman GARRETT. Great. The last question is for you, Mr. Stevens. Can you expound on your comments in your testimony about 

the need to ensure a safe harbor with regard to the QM, and if the 

rebuttal presumption option is selected, could that basically have 

a chilling effect on the whole mortgage market? 

Mr. STEVENS. Yes. I think the greatest challenge we have here 

with this particular rule on the qualified mortgage now is that 

without having a clear bright line that gives safe harbor to the industry, to the financial services industry to provide mortgage finance, we are going to see credit actually retreat even further from 

the private sector, leaving even more dependency on government 

programs such as FHA to fill that gap. There has to be a bright 

line in the QM rule for safe harbor. Rebuttable presumption will 

not be enough to get private capital back into those markets. 

Chairman GARRETT. That is a very important point. I thank the 

entire panel. 

Mr. Green is recognized for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the witnesses for 

appearing. 

Mr. Poole, you have made your position quite clear. You oppose 

any sort of government backstop; is this true? If you will kindly say 

yes, it would be appreciated. 

37 

Mr. POOLE. I do not favor a backstop in the form of Fannie Mae, 

Freddie Mac, and other such agencies. 

Mr. GREEN. Excuse me, I am sorry, I misunderstood you. What 

type are you inclined to support? 

Mr. POOLE. I believe that it is the responsibility of the Federal 

Reserve to maintain financial stability and liquid markets, and 

that should be a generalized responsibility, not market by market 

by market. 

Mr. GREEN. I see. Mr. Stevens, it is my belief that you differ with 

Mr. Poole. Is that a fair statement? 

Mr. STEVENS. That is correct. 

Mr. GREEN. Can you kindly explain why you differ with him in 

terms of the role of the government, please? 

Mr. STEVENS. The most simple way I can describe this is private 

capital is opportunistic. They will come into markets when they are 

strong, and they will exit markets when there is weakness. Our 

economy goes through cycles, and the role of the government backstop, outside of this enormous disruption that we just had over in 

the 2000 timeframe, has been to make sure that there is a continuous availability of mortgage capital in the United States for housing. 

So to have that backstop there has been extremely important to 

the housing system of this country. Clearly not at the size it is 

today; it has to shrink dramatically, and we need to work on those 

provisions and bring private capital back in. But to eliminate it in 

its entirety we believe would be unnecessarily and actually extraordinarily disruptive to access to housing. 

Mr. GREEN. What type of impact—and I will come to you in just 

a moment, sir—would it have on the product that would be made 

available if we do not have a role for the government? 

Mr. STEVENS. This is a debate that goes on. I spent the first 20 

years of my career working for a depository that held loans, did not 

sell them into the GSEs. We offered 30-year fixed-rate mortgages. 

We didn’t lock the rate for the consumer until typically a day before closing, so they couldn’t lock their interest rate in advance before buying a home. We obviously charged more for that product 

and required larger downpayments and prepayment penalties on 

those loans back in the day. The availability to have a fully 

prepayable 30-year fixed loan, while people may debate its merit 

over the last several decades when rates went from roughly 20 percent in 1980 to 4 percent today, may not have been as valuable as 

the period going forward when rates are going to 4 percent and rise 

over the next many years as the economy recovers. I think that is 

where the program may be actually more needed in this society. 

So the question is, can you safely offer a 30-year fixed-rate, or 

a long-term interest-rate-lock mortgage for consumers without 

some sort of organized finance system behind it? And I believe that 

is actually at the crux of much of the debate today. 

Mr. GREEN. Mr. Poole, out of fairness to you, I would like to give 

you an opportunity to respond, and then I will go to the others. But 

I would like to be fair to you. 

Mr. POOLE. I think the issue is very simple here. Yes, it is not 

a viable product in the market to offer a 30-year mortgage with no 

prepayment penalties, because it is very symmetric against the 

38 

lender. So if you charge the appropriate fees and if the consumer 

is willing to pay those fees, the interest rate, then that product will 

exist in the market. 

Mr. GREEN. I think you want to weigh in, Mr. Salomone? 

Mr. SALOMONE. Yes, it is kind of fun sitting between these two. 

Specifically, I would say that the impact on consumers is going to 

be higher rates, larger downpayments, and less financing choices. 

And I would agree with Mr. Stevens in the comments he made as 

well. 

Mr. GREEN. Hold on just a second, Mr. Poole. I am sorry. There 

was one other person who tried to get my attention. It seems that 

I have created a little bit of a concern here. Yes, sir, if you would? 

Mr. CALABRIA. I appreciate your commitment. I want to parse 

out something that Mr. Stevens was talking about, which is the 

picture he painted was the markets come in, fine, everything is 

great. And then boom, we get some bad shocks, something bad happens, and the market falls apart, and you need a backstop there. 

And I think what Dr. Poole is getting at: To what extent does 

the backstop help inflate the bubble to begin with? So if you have 

these backstops in place, particularly if they are there all the time, 

you run the risk of the bubble itself is higher, which means the 

bust itself is worse. So if you go to a system, as Dr. Poole suggested, where the Fed comes in, the Fed only comes in worst-case 

scenario, and they are not feeding the bubble. I think the very hard 

question to answer is, how do you structure a backstop that doesn’t 

add to the craziness and frenzy of the bubble in the first place? 

Mr. GREEN. Mr. Stevens? 

Mr. STEVENS. The only thing I would say in the few seconds you 

can actually speak in this context, is that the bubble that was created from the 2001–2007 period was in many ways contributed to 

by the private markets initially, with subprime mortgages, stated 

income loans, option ARMs, etc. 

The GSEs ultimately obviously participated in that, and that is 

because in the pursuit of shareholder value and the lack of oversight in terms of what they were able to do, had they been constrained to doing owner-occupied primary residence, 30-year fixedrate loans—which was always in their tradition—there would have 

been much less fuel provided to the private capital markets to put 

these products in the market in the first place. 

Mr. GREEN. I have to yield back the time I no longer have, but 

thank you very much, Mr. Chairman. 

Chairman GARRETT. The gentleman yields back after a great discussion. The gentleman from California is recognized for 5 minutes. 

Mr. SHERMAN. Yes, I think we have focused effectively on the 

history here. Real estate values were bid up to unsustainable rates 

by a new wave of effective demand. That is to say, not only could 

people who could afford to buy houses, buying houses; but people 

financed with subprime loans who were invited to overstate their 

income or not state their income at all, were invited to also bid on 

those homes. The prices went up and then the credit rating agencies said, since the prices are going up, nobody could possibly lose 

any money making these loans, because if somebody can’t afford 

their mortgage, they will simply sell the property at a profit. 

Therefore, we are going to give Triple A to Alt A. And, here we are. 

39 

What we can’t really allow in this economy is a sudden additional decline in the value of homes that will happen if some big 

piece of effective demand is removed. 

I would like to ask Mr. Salomone if—I would assume that if the 

buyers are told they can’t get 30-year fixed-rate mortgages, there 

will be a big chunk of demand that goes away. 

Mr. SALOMONE. I am glad you got to the point of buyers, because 

we have been talking about a lot of things, but not the individual 

buyer out there. I have had the opportunity to sit across the table 

for 33 years from buyers and sellers. I think one of the things that 

is really important, and Ranking Member Waters talked about it 

earlier when she was discussing the whole concept of reduction in 

principal, is the confidence that our American people have in the 

housing market today or the lack thereof. 

People today—I sit across from everyday people, and they want 

stability, they want security, and they want something that they 

know is going to be a constant, i.e., their mortgage payment. That 

30-year fixed-rate mortgage is so important in this country right 

now, and I can’t emphasize that enough. If that goes away, you are 

just—you think we have a problem now. If that 30-year fixed-rate 

mortgage goes away, we are going to be in a lot worse shape. 

And if I may, Ranking Member Waters, one of the things that 

we obviously as REALTORS® care about is keeping homeowners in 

their homes. I think that one of the things that we haven’t talked 

about today enough, or at all, is the confidence of the American 

people in the housing industry today. 

One of the questions that individuals have is, someone loses a 

job, and they have a payment on a property that is now underwater, and you talked about principal reduction. It is so frustrating 

for that homeowner to call his or her bank, get no good conversation going and say, hey, if we can just reduce by this little bit— 

and it doesn’t happen. And then, they find out that their house is 

sold in foreclosure for a third of what it would have been. 

Now, I don’t need to be a rocket scientist—and you can talk 

about all the data all day long—but those numbers just don’t make 

sense. So I think you are going down the right path, Ranking Member Waters. 

Mr. SHERMAN. My next question is for Mr. Stevens. If I understand you correctly, you think there are a lot of favorable provisions in the bill that we are discussing here, the current draft. Are 

there any concerns that you have, or what potential improvements 

would you suggest? 

Mr. STEVENS. I actually believe that the chairman’s bill is very 

thoughtful, and it is something that is interesting from an industry 

perspective, because it could theoretically create a pathway for private capital to engage in the market. If we are going to talk about 

getting private capital back in, we believe strongly that before we 

talk about moving the support much more from Freddie Mac, 

Fannie Mae, FHA, etc., we need to find a pathway to get private 

capital to reengage. And to that degree, we applaud the nature of 

this bill. 

There are questions about the role of the FHFA; about some of 

the servicing standard provisions that we would love to give more 

thoughtful response to; about how the oversight isn’t involved from 

40 

a regulatory standpoint. And I could parse through each of those. 

It would take too much time for this particular meeting, but I 

would be glad to give a follow-up with a more thorough review. 

Mr. SHERMAN. I will end with the comment that a lot of us are 

concerned about the Federal deficit. Some are concerned about the 

role that government plays. But I would like to point out that if 

we see a decline, a further decline in real estate values that hits 

the economy hard, and which drives up the deficit, it will obviously 

reduce tax collections. But then, we should remember that, like it 

or not, we own Fannie and Freddie. We are the insurers of many 

trillions of dollars of mortgages, and a decline in real estate values 

could cost the Federal Government many hundreds of billions of 

dollars. With that I yield back. 

Chairman GARRETT. The gentleman yields back. And that brings 

us to the conclusion of today’s hearing. Again, as I said in the very 

beginning, I really do appreciate everyone who came out to the 

hearing today. 

The Chair notes that some Members may have additional questions for the panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

Inasmuch as a number of you said you had additional insights 

into the weak sort of aspects to this legislation as we go forward, 

I would suggest if you haven’t already—and I know a lot of you 

have—that you talk to our staff members, zip any of your ideas 

over to us, and we will be glad to take a look at them. And with 

that, this hearing is adjourned. 

[Whereupon, at 12:15 p.m., the hearing was adjourned.] 

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A P P E N D I X 

December 7, 2011 

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