U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

72–623 PDF 2012

H.R. ll, THE PRIVATE MORTGAGE 

MARKET INVESTMENT ACT, PART 1 

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 

NOVEMBER 3, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–82 

( 

(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: 

November 3, 2011 ............................................................................................. 1 

Appendix: 

November 3, 2011 ............................................................................................. 65 

WITNESSES 

THURSDAY, NOVEMBER 3, 2011 

DeMarco, Edward J., Acting Director, Federal Housing Finance Agency 

(FHFA) .................................................................................................................. 9 

Deutsch, Tom, Executive Director, American Securitization Forum (ASF) ........ 35 

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

Inc. ......................................................................................................................... 37 

Ratcliffe, Janneke, Senior Fellow, Center for American Progress Action Fund; 

and Executive Director, Center for Community Capital, University of North 

Carolina at Chapel Hill ....................................................................................... 38 

Wallison, Peter J., Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute (AEI) ........................................................................... 40 

APPENDIX 

Prepared statements: 

DeMarco, Edward J. ......................................................................................... 66 

Deutsch, Tom .................................................................................................... 77 

Hughes, Martin S. ............................................................................................ 116 

Ratcliffe, Janneke ............................................................................................. 124 

Wallison, Peter J. ............................................................................................. 142 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Letter to Ranking Member Norm Dicks, House Committee on Appropriations, from the National Community Reinvestment Coalition (NCRC), 

dated October 31, 2011 ................................................................................. 154 

Letter to Ranking Member John Olver, Subcommittee on Transportation, 

Housing and Urban Development, from the National Community Reinvestment Coalition (NCRC), dated October 31, 2011 ................................. 156 

Letter to Chairman Hal Rogers, House Committee on Appropriations, 

from the National Community Reinvestment Coalition (NCRC), dated 

October 31, 2011 ........................................................................................... 158 

Letter to Chairman Tom Latham, Subcommittee on Transportation, 

Housing and Urban Development, from the National Community Reinvestment Coalition (NCRC), dated October 31, 2011 ................................. 160 

Frank, Hon. Barney: 

Letter to Chairman Scott Garrett and Ranking Member Maxine Waters, 

Subcommittee on Capital Markets and Government Sponsored Enterprises, from the National Association of Home Builders (NAHB), dated 

November 2, 2011 ......................................................................................... 162 

Westmoreland, Hon. Lynn: 

Written responses to questions submitted to Edward J. DeMarco .............. 163 

(1) 

H.R. lll, THE PRIVATE MORTGAGE 

MARKET INVESTMENT ACT, PART 1 

Thursday, November 3, 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 10:05 a.m., in room 

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

Members present: Representatives Garrett, Schweikert, Royce, 

Manzullo, Biggert, Neugebauer, Campbell, McCotter, Pearce, 

Posey, Hayworth, Hurt, Grimm, Stivers, Dold; Waters, Sherman, 

Hinojosa, Miller of North Carolina, Maloney, Moore, Donnelly, 

Peters, and Green. 

Ex officio present: Representative Frank. 

Also present: Representatives Westmoreland and Renacci. 

Chairman GARRETT. Good morning, everyone. I now call to order 

this hearing of the Subcommittee on Capital Markets and Government Sponsored Enterprises on the Private Mortgage Market Investment Act. We welcome everyone to this hearing today. 

We will begin with opening statements, and I will yield myself 

3 minutes to do so. 

Today, the subcommittee is holding a hearing on the Private 

Mortgage Market Investment Act. The legislative text is a product 

of many discussions that we have had, both formally—like the subcommittee’s recent hearing up in New York City—and informally, 

about the steps that need to be taken to bring private capital markets back to our Nation’s secondary mortgage market. 

Currently, the Federal Government is guaranteeing or insuring 

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

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

the secondary mortgage market. 

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

begin to reenter this space. First, we must begin to roll back some 

of the government’s involvement in the housing market. The subcommittee has already passed 14 bills so far this year with the intent of reducing the government’s footprint and setting the course 

for the abolishment of Fannie Mae and Freddie Mac. This is a key 

and vital part of getting private capital going again, because as 

long as the cheaper government option is available, that will be the 

route that is chosen. 

2 

Second, we must take actions to facilitate increased investor interest in this secondary market by facilitating continued standardization and uniformity within the market, increasing transparency 

and disclosure, and providing legal certainties through a clear rule 

of law. If we do that, there will be robust investor participation in 

the housing market without exposing the American taxpayer to 

trillions of dollars of additional risk. 

The legislation we are discussing today essentially sets up a new 

quasi-securitization market. The FHFA is tasked with establishing 

a number of categories, or mortgages, using traditional underwriting standards, that is, different levels of credit risk associated 

with each category. Also, the FHFA is responsible for creating 

standardized securitization agreements for this marketplace. 

Each securitization agreement will standardize the servicing arrangements of the loans, process the loans, go through a modified 

representation of warranties, and provide the investors the ability 

to put back in quality loans. Securities that meet this specific underwriting guideline for a category and contain the standard agreements will be eligible for exemptions from SEC registration. 

So this standardization and registration exemption will allow for 

a futures market as well in these qualified securities. And investors with varying credit risk appetites will then be able to buy 

these securities that meet these investment needs. 

Next, the legislation also removes one of the biggest regulatory 

impediments to private capital re-emerging. It does so by striking 

risk retention provisions from the Dodd-Frank Act. I agree that 

risk retention has benefits and we have talked about that. The way 

this is currently being implemented will create multitudes of negative unintended consequences in the marketplace. 

For one, I am not sure, really, when you think about it, what 

good the risk retention rule that we have right now will do if we 

exempt Fannie and Freddie and Ginny and loans with 

downpayments of 5 percent or more. That sounds like, if you consider it, just about every loan that is made out there. 

Also, Fannie and Freddie had risk retention previously and we 

see where that got us. So I believe that a better form of risk retention is an improved standardized regs-and-warrant system that includes a structure that ensures investors’ claims will be honored at 

the end of the day. 

The legislation also provides a much-needed fix to the QM, the 

Qualified Mortgage definition created by the Dodd-Frank Act. We 

ensure that loans that need this text laid out by the statute are 

able to qualify for a true safe harbor, instead of remaining subject 

to unnecessary and burdensome legal liability. And 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. 

So, by: first, facilitating the adjudication of disagreements between investors and issuers; and second, clarifying the rules 

around the first-lien holder’s rights; and third, preventing government-forced loan modifications that would negatively impact investors, investors will finally have the certainty that they need to get 

back into the market. 

3 

Finally, in regards to transparency and disclosure, investors 

should be empowered, if you will, and enabled to do their own analysis of the assets underlying the securities that they are investing 

in. So by disclosing more detailed loan level data, while at the 

same time protecting the privacy of the borrowers, and by allowing 

more time for the investors to study that additional information, 

investors will be able to conduct more due diligence and lessen 

their reliance on rating agencies. 

So that is a capsule, if you will, of what we are doing with this 

legislation. With regard to the Director’s testimony that we are 

about to hear, and the ongoing work over at the FHFA, let me just 

say to you directly, I think that you are doing a very good job 

under very, very difficult circumstances. And I know that you have 

been called upon by some more extreme elements asking that you 

allow for Americans basically to pay for other Americans’ mortgages. 

I appreciate the positions that you have taken, because you sit 

here and as you stand in your positions, you are basically the last 

wall, if you will, protecting the taxpayers from literally billions and 

billions and billions of additional losses over these entities. I thank 

you for the work that you have done. 

With that, I yield back. 

And I yield 2 minutes to Mr. Miller. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

There is a lot to like in Mr. Garrett’s bill. It is very similar to 

legislation that I have introduced in this Congress and in the previous Congress, as well: H.R. 1783, the Foreclosure Fraud and 

Homeowner Abuse Prevention Act of 2011. And the differences, for 

whatever reason, we have not yet worked across the aisle on this 

legislation, but I would certainly welcome the chance to. 

It appears that the differences that we have are not deep philosophical differences. There is no partisan divide. We are trying to 

do the same thing in a somewhat different way. But it seems to 

be a practical difference, not a philosophical difference. 

I certainly support the idea of standardizing contracts, like pooling and servicing agreements, making clearer and more transparent the underlying loan files and making sure that servicing 

standards are uniform. Those are all things that are in the bill that 

I have introduced. 

I certainly welcome the idea of amending existing laws to make 

the mortgage security market function like other asset securities 

markets. That appears to be the—we appear to be trying to accomplish the same thing in this respect, but the bill under discussion 

today would really just create an entirely new mortgage market, a 

secondary mortgage market from scratch when there appears to be 

a clear model for doing it and grant great discretionary power to 

FHFA to fill in the blanks when there is a model that appears to 

work. Any grants in an agency that we originally thought would be 

an oversight agency—remarkable powers over an important part of 

our economy. 

There are other provisions where the intent makes sense, but not 

exactly the way they go about it. I introduced legislation in the last 

Congress to prohibit servicers from being an affiliate from owning 

or any affiliate of the servicers owning secondary mortgages or secVerDate Nov 24 2008 15:46 Jul 05, 2012 Jkt 072623 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\72623.TXT TERRIE
4 

ond liens, where the servicers are servicing leans that are effectively owned by someone else, where the beneficial ownership is 

with someone else. 

This bill prohibits any servicer from holding a second mortgage, 

which goes beyond that conflict of interest, and it is not clear why 

it should, why it would not make more sense simply to make the 

prohibition, which I welcome generally, only where the servicer actually does not own the mortgages that they are servicing. 

It goes on. There are other issues where we are trying to get to 

the same place. We simply are taking different paths, but the paths 

are not incompatible at all. So I hope that there will be the opportunity to work on this issue across party lines. 

Thank you very much. I yield back. 

Chairman GARRETT. The gentleman yields back. 

And I will just say that, absolutely, and especially on some of the 

points that you have raised, this is a draft version of legislation 

here, we are not wed to some of the provisions in here on that last 

point, which is a very complicated issue, and we look forward to— 

it is not only complicated, but divergent views on exactly how you 

actually get to the end of the day on that—so look forward to working with it. 

The gentleman from Arizona, for 2 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

I would like to actually start this by thanking you, Mr. Demarco. 

You and your staff have, in many ways, almost been stunningly acceptable when we have had very technical questions, when we have 

just wanted to cut through some folklore. There are very few people 

in the bureaucracy I found here in Washington who will return a 

phone call that fast and be willing to be that detailed with it. So 

there is a great appreciation there. 

As I have shared many times with the chairman and many of the 

members here, my personal fixation is the proper pricing of risk, 

because I believe that the failure to properly price risk is actually 

what has caused many of the cascades we see around us today. As 

I am being told, Freddie Mac lost another $6 billion last quarter. 

We are basically suffering through sins of the past, but sins of not 

pricing risk. 

The other thing I do want to stand here and make clear is that 

I understand this was a draft bill. There are a lot of things in here 

I am excited about. There are a lot of things I am hoping as we 

hear testimonies we will ferret out and work through the details 

and the mechanics. 

But the number of folks who come to my office, Mr. Chairman, 

and talk about risk retention, particularly in asset-backed credit 

cards, automobiles, all those other things, and many of those markets actually held up surprisingly well. Maybe we should not be 

going where we are going. Are we going to ultimately do more damage to the economy and the ability to finance our future? 

And with that, Mr. Chairman, I yield back my time. 

Chairman GARRETT. The gentleman yields back. 

Mr. Peters, for 2 minutes. 

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

I think we all agree that the American housing market is severely depressed, which, in turn, is holding back our entire econVerDate Nov 24 2008 15:46 Jul 05, 2012 Jkt 072623 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\72623.TXT TERRIE
5 

omy. I believe that there is also widespread bipartisan appreciation 

for the fact that the existing GSE system is a failure. 

Allowing Fannie and Freddie to pass on massive profits to their 

shareholders and huge bonuses to their executives and employees 

while sticking taxpayers with losses was a huge mistake and it 

should never be repeated. 

However, given the importance of the housing industry to the 

larger economy, we need to make sure that we are moving forward 

with caution. Chairman Garrett’s proposed legislation is a constructive and helpful addition to the ongoing debate throughout the 

future of housing finance reform. I think the bill attempts to replicate some of the things that the existing GSEs do right. It will 

provide transparency and standardization that will make it easier 

for investors to have confidence in the market for private label securities. 

However, I am concerned that Chairman Garrett’s bill does not 

do enough to ensure that 30-year fixed-rate mortgages are affordable to the middle class. We should not abandon the system that 

has, for decades, made the American dream of homeownership a reality for millions of middle-class Americans just because irresponsible lending exploited a weakness. In fact, I think we should work 

to eliminate that weakness while strengthening the system. 

Representative Campbell and I have introduced legislation that 

would retain a limited role for government in the securitization 

markets to ensure that we would continue to have deep liquid secondary mortgage markets. My colleagues, Representative Miller 

and McCarthy, have also introduced bipartisan legislation on this 

topic, and I would hope as the subcommittee continues to debate 

these important issues, that those bills would also be given a full 

and thorough debate. 

Mr. Chairman, I think it is very important that these bills come 

before the committee and are subject to a hearing, and I look forward to you scheduling such a hearing in the near future. 

As a society, we value homeownership as a pathway to a better 

life. Therefore, it is appropriate that our country create opportunities so that we can extend the American dream beyond just the 

wealthiest Americans and ensure that owning a home remains affordable for the middle class. And I hope that we are able to accomplish that with this going forward. 

I yield back the balance of my time. 

Chairman GARRETT. The gentleman yields back. Thank you very 

much. 

Mrs. Biggert is recognized for 2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you for 

holding today’s hearing on your proposal, a discussion draft entitled, ‘‘The Private Mortgage Market Investment Act.’’ 

In March, Treasury Secretary Geithner testified before our committee and said, ‘‘The administration and Congress have a responsibility to look forward, reconsider the role government has played 

in the past and work together to build a stronger and more balanced system of housing finance.’’ I agree. 

Today’s draft is part of this committee’s deliberative dialogue 

about how to stabilize the housing market, reduce taxpayers’ liabilities, and facilitate a reentry of private sector capital for singleVerDate Nov 24 2008 15:46 Jul 05, 2012 Jkt 072623 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\72623.TXT TERRIE
6 

family and multiple-family housing. We have learned that, for private capital to assume an increased role in housing finance, investors need regulatory certainty, relief, and common sense. 

What they don’t need is rushed and unworkable rules like the 

QRM or unfair competition from Federal programs like Fannie 

Mae, Freddie Mac, or FHA. I look forward to today’s discussion and 

yield back the balance of my time. 

Chairman GARRETT. Mr. Frank is recognized for 6 minutes. 

Mr. FRANK. Thank you, Mr. Chairman. 

I would note that the ranking member is on her way— 

Chairman GARRETT. Oh, the gentleman is recognized for 5 minutes; the remainder of the time. 

Mr. FRANK. Yes, if the gentlewoman from California arrives, I 

will yield her part of that time; she may have been delayed. But 

I thank you for that. 

I appreciated, Mr. Chairman, that you said to the gentleman 

from North Carolina that this was a draft bill. The reason I say 

that, and I would yield some time for an answer, is we have been 

informed that a markup on the subject of securitization was scheduled for November 15th. But I would think, consistent with your 

saying this is a draft bill, that would not be for this bill. I would 

yield if you would—is there an intention to mark up this bill on 

the 15th? I would think, you having said it was just a draft, that 

was probably not the case, but I wanted to clear up the confusion. 

Chairman GARRETT. We are focused on this, on this bill. My comments with regard to the draft are just what we are talking about 

here. 

Mr. FRANK. My question is, is that—there was a markup scheduled by the committee for the 15th, I believe, in the subcommittee 

on securitization. My question is, is this legislation the subject of 

that markup? 

Chairman GARRETT. I don’t have a date certain on any markups. 

If I could that I do that, I would, but I— 

Mr. FRANK. I had a more specific—so that 15th date is not a 

markup date for this bill? 

Chairman GARRETT. I do not have a definite markup date for this 

bill from the committee chairman— 

Mr. FRANK. All right. I appreciate that, because then that clears 

it up, because we had been told there was a markup on the 15th 

on securitization, and there was an assumption it might be in this 

bill. But I take it from that now— 

Chairman GARRETT. Yes, I have not gotten— 

Mr. FRANK. Yes? 

Chairman GARRETT. I have put requests in to try to move things 

along. Well, not request, but I want to move things along— 

Mr. FRANK. I appreciate it, but the fact that you said it was a 

draft bill, I would think it would be unlikely. And I would also say, 

in light of this—and this is a very important topic, and I appreciate 

the tone so far, and I think we have some very important issues 

to grapple with. And I appreciate the kind of non-dogmatic tone of 

some of the testimony people recognize that there are questions 

here. 

I think, Mr. Chairman, my recommendation would be that we 

probably would want at least another hearing on this. I noticed 

7 

that we have one group of witnesses, and you don’t want to get too 

many witnesses and bore the heck out of each other, but we don’t 

have any direct lenders here. We don’t have a—and I would ask 

unanimous consent to put into the record at this point a letter from 

the National Association of Home Builders (NAHB) expressing 

some doubts about this. The NAHB looks forward to working with 

the subcommittee to strengthen and improve the draft legislation 

but remains concerned that the larger reform effort currently 

under way would remove all Federal support of the Nation’s mortgage market. 

And it says that, while NAHB supports the objective of the draft 

bill, we look forward to contributing thoughtful recommendations 

to enhance provisions. We remain concerned about dismantling all 

government backing. 

So I would assume at some point, we would want to hear from 

the home builders, the REALTORS®, and some of the direct lenders, as well as other groups that have an interest. And I would ask 

that this be put into the record. 

Chairman GARRETT. Without objection, it is so ordered. 

Mr. FRANK. And then I would also have some questions. I would 

say my major assumption of concern here is the repeal of 

securitization; I think risk retention; I think the ability to make 

loans and not have to stand behind them was a problem, and I 

think there was a—the proposal was to replace risk retention as an 

assurance here would affect with a fairly complicated set of regulations that would come from the FHFA classifying different mortgages. 

My own view was that there was a—we would be better off with 

risk retention because that makes one government policy and then 

leaves it to the market, leaves it to the lender to decide. I think 

we have a fairly elaborate set of rules here. I noticed in Mr. 

Wallison’s testimony that he had some questions about some of the 

specific restrictions that are put on who can do this and that. 

Frankly, at first glance it seems to me the solution that is in the 

bill as an alternative to risk retention is excessively elaborate and 

relies too much on the decision of regulators and the judgment of 

regulators and not enough on a market incentive. And I think risk 

retention does that. It does impose the basic retention, but after 

that it is entirely up the market. And that is one of the ones that 

I would hope we would pursue. 

And then the final question I have, Mr. Chairman, is where we 

stand in terms of housing finance legislation in general. We have 

14 bills, I believe, that have been approved by the subcommittee. 

And we all know that in April, the Majority criticized us for delaying subcommittee deliberation by 1 day, and we have still not gotten to full committee. 

So I guess would accept blame for 1 day’s delay, and the Majority 

takes the blame for about 7 months delay. And I think other people 

are interested. We had the Hensarling bill that was offered as an 

amendment to financial reform and where there was criticism for 

not being included. That bill is off in limbo somewhere. It was reintroduced and has never been mentioned. 

So I think there is a question. This is to replace the current 

GSEs, but I think there is interest in what the plans are for the 

8 

Majority to deal with the Hensarling amendment that abolishes 

Fannie and Freddie and the 14 bills, and maybe more to come, that 

make changes to Fannie and Freddie. I think it would be helpful 

if they at some point could be clarified. 

Chairman GARRETT. The gentleman yields back. Mr. Dold is recognized for 2 minutes. 

Mr. DOLD. Thank you, Mr. Chairman. Right now, through the GSEs, the taxpayers are effectively on the hook for over $5 trillion 

in total mortgage debt, and the GSEs are also responsible for nearly all new mortgages originated in this country since the financial 

crisis. And while taxpayers remain exposed to enormous and increasingly potential liability in our current financing system, our 

housing market remains severely challenged. 

This situation is plainly unsustainable for both taxpayers and 

the housing market participants. Instead of a mortgage market 

dominated by the Federal Government and taxpayer guarantees, 

we need new and creative solutions that create the conditions for 

the private sector’s return to our mortgage financing market without taxpayer guarantees. 

To create those private sector conditions, we must have a legal 

framework that establishes and enforces uniform standards, transparency, and legal certainty for the private sector lenders and investors. 

And I think Chairman Garrett’s discussion draft, which we are 

considering today, goes a long ways towards creating those private 

sector conditions. So I want to thank the chairman for his work 

and his leadership on this important issue, and I certainly look forward to hearing from our witnesses today. I yield back. 

Chairman GARRETT. We have just a minute-and-a-half left on our 

side. I will just claim a minute of that, and just to recoup where 

we are. So from one sense I get—some would suggest we are moving too quickly, and some other perspectives that some would argue 

that we are moving too slowly. 

I guess in comparison to the way that Dodd-Frank moved, which 

moved through the committee actually without even many subcommittee hearings and not through regular order, I guess we are 

moving at the appropriate speed because we are doing this through 

the subcommittee process and we are doing it through hearings 

and what-have-you. 

Comparatively, others say we are moving too quickly. We have 

had so far 17 hearings so far on housing finance. And the ranking 

member lists a number of organizations and groups and trade associations that would probably like to chime in on some of this legislation. 

By and large, each and every one of us has been able to be at 

the table where Mr. DeMarco is right now and have had the opportunity during the course of those 17 hearings to answer the questions from either side of the aisle at any particular facet of housing 

finance. 

Also, the question has been raised with regard to the other legislation that has been out there. Again, we have had 17 hearings for 

those pieces of legislation and others, the general topics of those to 

be discussed and to be questions raised to the members of the 

panel. 

9 

And I would suggest also that today, if anyone from either side 

of the aisle has questions on any other piece of legislation, Mr. 

DeMarco would be more than happy to discuss them, because he 

has already raised some of those points in his testimony. 

I think time on both sides has expired. And with that, I will yield 

to our first witness, Mr. Edward J. DeMarco, Acting Director of the 

Federal Housing Finance Agency. 

Again, I thank you very much for your work, and for your testimony today. 

STATEMENT OF EDWARD J. DEMARCO, ACTING DIRECTOR, 

FEDERAL HOUSING FINANCE AGENCY 

Mr. DEMARCO. Thank you. Chairman Garrett, and members of 

the subcommittee, thank you for having me here this morning. 

I am pleased that the subcommittee is beginning the serious 

work of considering housing finance reform options which will lead 

to the ultimate resolution of the Enterprises Fannie Mae and 

Freddie Mac. My written statement provides a brief review of some 

of FHFA’s work since I last appeared before you. I will focus now 

on the need for legislation. 

Placing the Enterprises into conservatorship was designed to 

maintain market stability while providing lawmakers time to consider the appropriate course for housing finance reform and the 

transition from the current Enterprise structure. Conservatorship 

is not a long-term solution, yet we just passed the 3-year anniversary of conservatorship. 

We all knew it was going to be difficult to develop a housing finance reform solution, but we must move forward on this process. 

As the conservatorships lengthen, FHFA must continually make 

decisions regarding investments in business platforms and human 

capital in the face of an uncertain future. 

To state the obvious, the key question in the debate on housing 

finance reform is the future role of government. We should be clear 

about this question at the outset. It seems safe to say that there 

will always be some portion of the mortgage market that will be 

assisted by government programs. 

In the future design of our housing finance system, careful consideration should be given to targeting subsidies to specific groups 

that lawmakers determine warrant that benefit. For example, the 

explicit government guarantees that the Federal Housing Administration and the Veterans Administration provide reflect policymakers’ judgments as to the public benefits from targeting certain 

eligible borrowers with those problems. 

Acknowledging that there will be a role for government, the next 

question is what type of structure is necessary to replace the activities that are currently undertaken by the Enterprises. There seems 

to be relatively broad agreement that the Government-Sponsored 

Enterprise model of the past where private sector companies were 

provided certain benefits and charged with achieving certain public 

policy goals did not work. 

That model relied on investors providing funding for housing at 

preferential rates based on a perception of government support. 

This perception proved true, and the cost to the American taxpayers is now more than $170 billion. 

10 

In place of this system, the chairman’s discussion draft would establish a functioning mortgage-backed securities market by replacing some of the standard-setting that the Enterprises provide today 

with a regulatory regime that sets those standards. This model 

would not rely on a government guarantee to attract funding to the 

mortgage market, but rather would look to standardization and 

rules for enforcing contracts to provide a degree of certainty to investors. 

The process of undertaking housing finance reform is difficult. 

The discussion draft is a thoughtful approach to a framework that 

does not rely on a government guarantee. In the end, lawmakers 

must decide what structure will provide a functioning housing finance market that does not place taxpayers at risk. 

Mr. Chairman, I would like to thank you for helping to move the 

housing finance reform discussion forward by offering your discussion draft and by holding this hearing. I believe that private capital 

markets can and should reclaim a prominent position in providing 

housing finance, and your draft proposal broadens the discussion of 

how that might be done. 

I recognize this subcommittee and the full committee have difficult and important decisions to make in the coming months, and 

FHFA looks forward to offering technical assistance to both the Administration and Congress as a consideration of policy alternatives 

proceeds. Thank you. 

[The prepared statement of Acting Director DeMarco can be 

found on page 66 of the appendix.] 

Chairman GARRETT. With 50 seconds to spare. Thank you. So I 

will begin. I yield myself 5 minutes myself to begin the questioning. 

Thank you for your testimony. 

Obviously, there is widespread disagreement from various factions with regard to what to do in general with regard to GSE and 

GSE reform, but I think there is pretty broad acceptance of the 

idea that we don’t want to have a system—one of the terms you 

mentioned—with an implicit guarantee going forward. 

So, you looked at our draft legislation. Basic question: Is there 

anything that you see in what you have before you that would create any implicit guarantee in this legislation? 

Mr. DEMARCO. No, Mr. Chairman. Based on the review I have 

been able to undertake to date, I don’t see how would one interpret 

or perceive an implied guarantee as a Federal taxpayer in the general framework that is outlined here. I believe it is pretty clear 

that this is putting investors on the hook for assessing and bearing 

mortgage credit risk. 

Chairman GARRETT. Okay. That segues into actually the next 

couple of questions. What we try to do here is to create a system 

where the FHFA is able to go out and set up uniformity, homogeneity in the securitization side and then the underwriting side. 

So let us just stop right there already and ask you if this were 

to occur, how do you see that playing out, if you will? How do you 

see those two aspects into fruition at the end of the day? And as 

to the point on the investors, what would you be doing to attract 

either a broad sector of investors interested in this or a narrower 

sector of investors in this? 

11 

Mr. DEMARCO. I think that we would certainly be striving to 

have a deep, sufficient, and liquid mortgage market. And so, we 

would want to attract a broad set of investors to that. 

I think that in the framework that your bill proposes, a key responsibility to FHFA would be in defining both the securitization 

structure and the classification of mortgages, that it be done in a 

way that allows for the market to reach that depth of liquidity and 

clarity about credit risk that would be necessary and appropriate 

to get efficient pricing of that credit risk by investors. 

So I would envision that we would undertake doing this classification process in a way in which we were striving to achieve relatively deep pools of homogeneous mortgages, so that investors 

could have confidence, both in the forward market that would be 

created, and then in the execution in the secondary market. And 

investors could understand the risk characteristics of particular 

groups of mortgages. 

Chairman GARRETT. Just a side note there, you mentioned the 

forward market. And what would be the benefit of creating that liquidity in the forward market? 

Mr. DEMARCO. Sir, it allows investors to be able to make commitments for investing in mortgages before the pools themselves 

are actually structured. But in order for investors to do that, there 

needs to be pretty good clarity and certainty regarding the characteristics of the mortgages that are being committed to be delivered 

into the marketplace. 

Chairman GARRETT. But even further than that—okay, that is 

from the investor’s side of the— 

Mr. DEMARCO. —from the borrower’s standpoint, it allows the 

borrowers to commit and the lender to commit to a borrower a 

mortgage rate that can be locked in during the process of completing the transaction. 

Chairman GARRETT. And speaking hypothetically, if this were in 

place today, and I know it is not today, but the depth of the pools 

as far as what is being offered, how would you see that growing 

over time? We know what happened with regard to the CLL right 

now and where that is, but were that to change, how does that 

change as far as the depth of each of these pools, as far as what 

they—the interests of the investors in it? 

Mr. DEMARCO. Part of what is to be determined really in the 

marketplace in this framework is how these securities would be 

broken up and offered to investors that were looking for particular 

characteristics. 

Chairman GARRETT. Okay. 

Mr. DEMARCO. But look, we have an almost $11 trillion singlefamily-mortgage market. If you get several groups of classifications, 

I think there would be great deal of depth and liquidity that would 

emerge in the marketplace, given the size of the overall market. 

Chairman GARRETT. That is an interesting point. And some people have raised some questions about this as we went through. I 

have a couple of seconds left, and a point on that is that you need 

that depth and you need that liquidity for the trade to occur and 

in order for the rates to be there, regarding the issue of the 30-year 

fixed and the rest; correct? 

Mr. DEMARCO. That is right. 

12 

Chairman GARRETT. And so, in the statute we could have picked 

it to say it is going to be one or it is going to be 22 of these categories. But you are really saying, at this point in time, that is not 

a statutory provision that you want to do; right? 

Mr. DEMARCO. I believe that is right. I believe that is sort of determined by getting feedback from investors and really from a 

whole set of stakeholders, so that we can get the most efficient 

grouping possible. 

Chairman GARRETT. Great. I appreciate it. 

I yield back. 

The gentleman from Massachusetts is recognized. 

Mr. FRANK. Thank you, Mr. Chairman. 

First, I will acknowledge that you and I have very different definitions of the regular order you mentioned in the subcommittee. I 

will say if you look at the procedures with regard to the Financial 

Reform Bill, there were more hearings, markups, amendments, recorded votes, and Floor time than any other bill I can remember. 

But I don’t believe it is regular order to have subcommittee consideration and then have 6 months go by and no committee consideration. 

Regular order assumes a progression. We have 14 bills, some of 

which were marked up in April in subcommittee, and there has 

been no sign that any of them are going to go to the full committee. 

And there is a—this bill is premised on the situation when there 

is no more Fannie and Freddie, but this committee has the power 

to deal with that and hasn’t moved on anything in that regard. 

So I don’t think, as I said, subcommittee alone is not regular 

order. That assumes a progression. We are getting late in the year, 

and I think the uncertainty is not helpful. 

Beyond that, I have a couple of questions. Mr. DeMarco, I note 

you said the conservatorship was appropriate. And that came from 

this committee in 2007, 2008 working with Mr. Paulson. 

One of the questions was, and the goal of course of the conservatorship, was to stop the bleeding to a great extent, and to try 

to preserve some function in the housing market without the losses 

that had preceded it. That essentially worked. I know that we don’t 

want to keep the conservatorship ad infinitum and you don’t want 

to be sentenced to a lifetime as the conservator. I appreciate that. 

Mr. DEMARCO. That is a fact, sir. 

Mr. FRANK. Has that essentially worked out? Would you say it 

is appropriate? 

Mr. DEMARCO. Mr. Frank, I believe it has. I believe we have 

brought the stability to the marketplace so that mortgage finance 

continues to operate fairly effectively during the duration of the 

conservatorship. 

Mr. FRANK. And I think you have done what we all can try to 

do and it is hard to do. And I give credit to Mr. Paulson and this 

committee, which did it. We worked together and with thanks to 

your predecessor and yourself. We always try in these things to be 

able to get the good things to happen and minimize the bad things. 

Is it correct to say we sort of reached it? That is, as we look at 

the losses, and we can’t be sure, it is only 3 years. But what is your 

estimate? What is the situation with the loans that have been 

made since conservatorship, or the purchases? What do you expect 

13 

the loss rate to be with the post-conservatorship acquisitions, as 

opposed to the previous ones? 

Mr. DEMARCO. I believe for both Enterprises, the postconservatorships books of business will be profitable books of business— 

Mr. FRANK. And I appreciate that. This committee did that in 

2007, 2008. 

Now, the next question is—you don’t want to be the conservator 

forever, but somebody is going to be doing something forever if this 

bill passes: ‘‘The Director of the Federal Housing Finance Agency 

shall for purposes of this section prescribe classifications for mortgages having various degrees of credit risk rating from a classification of mortgages having literally no credit risk to a classification 

of mortgages having substantial credit risk, with the goals,’’ etc. 

And then, it lists all these things. That is a pretty big job. 

So this bill contemplates an FHFA in perpetuity, and it is a— 

the Director, I believe, read the bill. That is a pretty big job for the 

Director. What kind of staff do you think this would require? What 

kind of a permanent operation would we need to undertake the responsibility given to the Director of the FHFA under this bill? 

Mr. DEMARCO. I certainly won’t say that I have worked through 

that. The bill is pretty new here. But I would note that FHFA 

today has approximately 520 employees. We are still growing, but 

I would expect that we have quite an examination workforce in our 

current structure, because the current structure is focused on an 

immense undertaking in making soundness examinations of Fannie 

and Freddie. 

This bill would replace that and there wouldn’t be that function 

going forward. So as far as the size, I am not sure how much it 

would change. I think we would see a change in the direction and 

principal elements of work, from safety and soundness examinations, to assessing the mortgage market and establishing standards. 

Mr. FRANK. So, all right, I think that is relevant. But people 

shouldn’t think, apparently, if this package were to go through and 

we abolish Fannie and Freddie and adopt this, that we would substantially see it go away. And I must say, my own concern is that 

it is a very specific set of ongoing sort of government intervention 

in the market. 

In addition to that, you would have to establish a variety of 

things. You would be described as mortgage default, delinquency, 

home documentation. And then you would do the standards servicing reporting, standards for modification. This is really a very significant government intervention in the mortgage market. 

That is why I said my—and I am saying it—is we are told it is 

more efficient or better than risk retention. I think risk retention 

has a greater simplicity. And I am concerned about the capacity of 

any Federal agency to take on the degree of supervision of the 

mortgage market on an indefinite basis that this bill calls for. 

I yield back. 

Chairman GARRETT. The gentleman yields back. 

The gentleman from Arizona? 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

14 

Part of this is also a chance to ask a couple of questions. Could 

you walk me through some of the assets that the GSEs hold right 

now in performing paper, in impaired paper, in actually the number of properties that they hold title to? 

Let us start there, because I have always been very curious if 

there are a number of assets there that would help you prime the 

pump, if they were sold without a guarantee, or—and just getting 

that pricing model? What would the market pay and what would 

the market absorb? 

Mr. DEMARCO. Right, right. So in broad strokes, the two compa- nies together have in order of magnitude $5 trillion worth of mortgages, single family and multi-family, that they either own and finance directly on their balance sheet, or that they provide guarantees to market investors. The financed portfolios of both companies 

are declining over time, and there is a minimum required shrinkage of those portfolios. 

I don’t know the exact number off the top of my head. Fannie Mae I think is on the order of a little over $700 billion right now, 

and Freddie Mac is in the $600 billion range. But those are shrinking over time. There is a change in the characteristic of that financed portfolio. It is moving less from whole loans in their own 

mortgage-backed securities, to being mortgages that have been purchased out of mortgage-backed securities, either for loan modification purposes, or because they are delinquent. 

Mr. SCHWEIKERT. I thank this gentleman, Mr. Chairman, Mr. 

Demarco. 

And so, just to make sure, let us take that $700— 

Mr. DEMARCO. Billion. 

Mr. SCHWEIKERT. —$700 billion. And those are ones where you 

hold the total paper? 

Mr. DEMARCO. Where we own the total paper. So not only do we 

have the credit risk on them, but we also have the market risk of 

having to bundle them and hedge that market rate risk. 

Mr. SCHWEIKERT. Oh, and then hedge that risk. 

Mr. DEMARCO. And then, you asked about REO properties? 

These are properties that they have title to because the property 

has gone through foreclosure. Currently, the count for that is a bit 

less than 200,000 properties. It is in the 190,000-or-so properties. 

Mr. SCHWEIKERT. Okay. 

Mr. Chairman, Mr. DeMarco, has there ever been—and forgive 

me, but I saw some article on this, but this is something that I 

didn’t follow up on—requesting pricing, saying, ‘‘Here is our portfolio of performing paper. Here is our impaired paper.’’ What would 

you market? What would you pay as for parts of this, with a guarantee and without a guarantee? 

Mr. DEMARCO. Yes, sir. 

In September, I gave a speech in which I was sort of looking forward to the next things on the horizon for us as conservator, things 

that I think are appropriate, both to our conservator mandate and 

to preparing to attract more private capital back into the mortgage 

market to reduce the taxpayers’ overall exposure. 

And at the time, I talked about two things. The potential for, or 

my expectation that we would continue to see gradually increasing 

guarantee fees. 

15 

But the second, and this goes to your question, was that we 

would work on engaging more loss sharing with private capital for 

the mortgage activity, the new mortgage acquisitions Fannie and 

Freddie are doing. There are two broad ways that I outlined in my 

remarks that could be done. 

One is to increase the depth of participation of private mortgage 

insurance companies providing insurance guarantees on mortgages. 

The other is that there are ways in the securitization process to 

break up pools of mortgages in a fashion you may sell a portion of 

the pool to mortgage investors, and do so without any Fannie or 

Freddie guarantee, and hence, without a taxpayer guarantee, and 

start to get a more true market price for the credit risk. 

So these are options that we are exploring. 

Mr. SCHWEIKERT. Mr. Chairman, Mr. DeMarco, any of that data 

coming in to you? Have you had anyone call you and say, ‘‘Hey, we 

would love to buy a few billion dollars and we will buy it without 

the guarantee, and here is what we are willing to pay on the 

yield?’’ 

Mr. DEMARCO. We have certainly invited that with respect to the 

disposition of REO and got a lot of public interest. And I believe 

as we prepare to move in a more formal sense on the risk sharing, 

we will get those kind of offers. 

I have informally had market participants suggest an openness 

to purchasing that sort of paper. 

Mr. SCHWEIKERT. Okay. Mr. Chairman, down to the last 30 seconds. 

Part of this—and I am very pleased with what you have been 

doing on the REO side. I am one of those who genuinely believes 

our real estate market will not come back in this country until we 

get these properties in people’s hands, whether they are investors 

or first-time home buyers. 

When you have a couple hundred thousand properties out there, 

we need to get those back into productive use. 

Thank you, Mr. Chairman. My time has expired. 

Chairman GARRETT. The gentleman yields back. 

Mr. Miller is now recognized for 5 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

Mr. DeMarco, in my opening statement, I spoke of the conflicts 

or potential conflicts of holding seconds and then servicing firsts 

held by others, beneficially owned by others. 

Do you see any—and I have asked the leading servicers, all of 

whom are affiliates, subsidiaries of the biggest banks, what business reason there was for that apparent, or at least that alignment 

of interests that are not identical which creates at least potential 

for conflicts. 

And all I got was that there were cross-marketing opportunities, 

which seemed to be not a particularly persuasive reason. Do you 

see any reason to have that alignment of interest? 

Mr. DEMARCO. I do, Mr. Miller. As a general proposition, I think 

one of the lessons to be taken from the last several years is the difficulties that second liens have posed for resolving problems with 

first liens. 

And I think the potential conflicts of interest need to be identified, and how seconds that come in after firsts, altering really the 

16 

risk characteristic of the first. All of these things need to be studied, and I think should be part of housing finance reform. 

Mr. MILLER OF NORTH CAROLINA. Okay. When you began your 

answer, I thought you were disagreeing with me, but you were in 

fact agreeing with me. You do not see a reason to have servicers 

of mortgages beneficially owned by others holding seconds on those. 

There is no— 

Mr. DEMARCO. I believe that is part of the conflict of interest. 

Whether there is another way of resolving that conflict by providing in law about what has to be done is another option. But as 

the way things stand now, I agree with you, sir. 

Mr. MILLER OF NORTH CAROLINA. Do you not have the market 

power? Could you just not by contract require that? I have been 

frustrated at the enormous market power of Fannie and Freddie of 

holding half the mortgages—of legacy mortgages—and having almost complete monopoly power with respect to new mortgages and 

the unwillingness to use that market power. Not statutory power, 

not regulatory power, but just market power. Why have you not required that by contract? 

Mr. DEMARCO. If the question is why I have not required by contract that second liens can’t come in or restrictions on who may 

make those second liens, rather than put legal counsel on the spot, 

I am going to believe that is legally within my ambit. But I will 

say, Mr. Miller, that I will go back and we will study that question. 

If I am incorrect in my answer, I will report back to you. 

Mr. MILLER OF NORTH CAROLINA. All right. And you and I have 

also discussed principal modification. And I have handed you, I 

think, a peer-reviewed economic study from the Federal Reserve 

Board of New York that shows that modifications that reduce principal lead to performing loans that reduce losses to mortgage holders. 

And I, again—Fannie and Freddie have been unwilling to reduce 

principal. There is now a pending settlement that may in fact not 

go through of Bank of America and the Bank of New York Mellon. 

And an essential part of that is that the investors in those mortgages are insisting that Bank of America give up servicing, kick 

out servicing where mortgages go into default to smaller servicers, 

higher-touch servicers, and that they reduce the principal to 

produce a mortgage that will not go through the hideous losses of 

foreclosure but is something that the homeowner can pay. 

Have you talked with the folks at PIMCO, or at BlackRock, who 

seem to have come to a different conclusion about what is in their 

best interest? 

Mr. DEMARCO. If I may pause for just a second, Mr. Miller. I 

wanted to check that my recollection was correct. Mr. Miller, my 

understanding of the proposed settlement agreement that you are 

referring to does not contain a mandate for principal forgiveness in 

it. 

It does actually contain some requirements that Bank of America 

and any sub-servicer that would result from this would service 

these loans according to the standards actually that we have developed at FHFA in the form of our Servicing Alignment Initiative to 

promote loan modifications and those sorts of activities. I don’t beVerDate Nov 24 2008 15:46 Jul 05, 2012 Jkt 072623 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\72623.TXT TERRIE
17 

lieve there is a mandate for principal forgiveness in there. But it 

does go to the servicing and the loss mitigation strategies we have. 

Mr. MILLER OF NORTH CAROLINA. The former Mac program does 

have in the statute I think, certainly in the regulations, not just 

underwriting standards, which would be a really good thing that 

we make mortgages to people who can actually pay it back in the 

future. The other didn’t work that well as a business model. 

But it also sets out procedures for when a mortgage goes into default and provides for principal modification. Have you looked at 

how that program has worked and whether that works? 

Mr. DEMARCO. I have not looked at that particular program; no, 

sir. I do understand that the chairman’s bill would have part of 

what we would establish in terms of standards—would in fact be 

loss mitigation protocol. That would be part of the servicing standards that would be developed so that market investors would have 

certainty about how a servicer was expected to minimize the investor’s loss in the event of a delinquency in the mortgage. 

Chairman GARRETT. I thank the witness, and the gentleman 

yields back. And Mrs. Biggert is recognized. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Nice to see you here, Mr. DeMarco. 

Mr. DEMARCO. Thank you. 

Mrs. BIGGERT. Question, does Fannie Mae and Freddie Mac and 

FHA’s dominance of the mortgage market allow for innovation in 

the private sector? We already heard about some of the businesses 

being shut down and jobs lost because they can’t complete with the 

taxpayer-backed government programs like FHA. So should we 

continue to allow the government-sponsored housing programs to 

compete and edge out the private sector? 

Mr. DEMARCO. To the first part with regard to innovation, I don’t 

believe that the model of having Fannie Mae and Freddie Mac in 

conservatorship is one really conducive to innovating new products. 

In fact, as a conservator I have said we are not introducing new 

products. 

So I think that the sort of market framework that would allow 

for innovation and introduction of new instruments and so forth 

would better happen outside of the realm we are in today. 

Mrs. BIGGERT. Okay. Then, in the White Paper, Treasury’s option 

one was a privatized system of housing finance with the government insurance role limited to the FHA, the USDA, and the Department of Veterans Affairs, assistance for narrowly targeted 

groups of borrowers. And that looks like a lot like the plan that Republicans have been promoting for a couple of years. And so, what 

is your view of option one? 

Mr. DEMARCO. I believe option one that the Treasury Department put forward is certainly a credible option. I believe that 

Chairman Garrett’s discussion draft is one of the first next developments, if you will, or refinements of Treasury’s option one in that 

it provides a basic framework for Treasury’s option one to be implemented legislatively. 

Mrs. BIGGERT. Okay. Then do you do believe that if FHFA creates mortgage buckets and defines the standards to fit into those 

buckets, the private sector will perceive that the mortgages in the 

buckets are implicitly guaranteed by the U.S. Government? 

18 

Mr. DEMARCO. No. That is not how I understand it would work 

in this bill, and I don’t see anything in the bill that should give 

that sort of assurance to investors. 

Mrs. BIGGERT. I think that is always something that we are really working to make sure that we don’t fall into maybe a trap like 

that again. And those are my questions. I yield back. 

Chairman GARRETT. The gentlelady yields back. 

Mr. Hinojosa is recognized for 5 minutes. 

Mr. HINOJOSA. I am next? 

Chairman GARRETT. You are. 

Mr. HINOJOSA. Good. Thank you. 

Chairman GARRETT. I am just looking past you at the same time 

and— 

Mr. HINOJOSA. Thank you very much, Mr. Chairman. 

Mr. DeMarco, how will the Private Mortgage Market Investment 

Act impact FHFA’s ability to effectively regulate and be conservator of Fannie Mae and Freddie Mac? 

Mr. DEMARCO. I would perceive this legislation as actually being 

in tandem with other legislation that has already been pending before the subcommittee and the full committee. I don’t believe this 

is intended to be undertaken with an ongoing indefinite conservatorship of Fannie and Freddie. I believe this is framed to be 

a replacement. How that transition works, I believe remains to be 

worked out. 

Mr. HINOJOSA. Does FHFA have the capacity and the expertise 

in-house to implement such a program that will go into effect no 

later than 6 months from the enactment? 

Mr. DEMARCO. Interestingly, Congressman, there are a number 

of things that we would be required to do in this legislation that 

in fact we are already doing. The Servicing Alignment Initiative we 

have undertaken as conservator of Fannie and Freddie to establish 

more robust and consistent and effective mortgage servicing standards is something that we are already well along with and has already—the implementation of it has begun. That would be a key 

component of what would go into the standard setting that the 

chairman’s discussion draft would have. 

Mr. DEMARCO. The second thing is I have already made clear 

that as conservator of Fannie and Freddie, I am working towards 

changing their securitization process so that mortgage market investors would have detailed loan level data on the loans underlying 

a pool. This is also a provision that is part of the chairman’s bill. 

This is something that we are working towards already. 

So I believe that there are certain things that we have under 

way already, and we certainly have the expertise in-house to be 

able to develop that. So I think some of the work we are doing in 

our current role fits well with what is proposed in the new role. 

Mr. HINOJOSA. What does the secondary mortgage market look 

like with no government guarantee on the long-term fixed-rate 

debt? 

Mr. DEMARCO. The long-term fixed-rate mortgages, I believe, 

look like one that is pricing the risk according to what it actually 

is. You will get a true market price of the risk, not just the credit 

risk, but the interest-rate risk associated with a long-term fixedrate asset by—the concept behind the grouping of mortgages is to 

19 

give greater homogeneity in the securitization process so that investors would understand, this is a class M-type of pool, this is a 

class-P type of pool, this is a class-S type of pool. 

And investors know what the key credit characteristic differences 

are between those different pools, and we would see that priced accordingly in the marketplace. 

Mr. HINOJOSA. In listening to the dialogue that you had with my 

friend and colleague Congressman Miller regarding the principal 

modification, and your response was principal forgiveness. There is 

a heck of a lot of difference. And what we have been discussing 

here in our committee is that, if we are going to be able to make 

it possible for the person who buys the house for $300,000, and 

then it drops in market value to $200,000, they still have an indebtedness for some part of $300,000. 

We are asking consideration of those modifications, and I need 

for you to give me some clarification because I am not clear on your 

response to Congressman Miller. 

Mr. DEMARCO. I will apologize to Congressman Miller if I misunderstood his question, and hence didn’t give an appropriate answer. But to your question, Congressman, about principal forgiveness, here is how I have looked at this as the conservator of Fannie 

Mae and Freddie Mac. I believe that we have an obligation to minimize taxpayer losses from the applicable business that they have. 

I also believe that we have an obligation. It is, in fact, in statute 

to be maximizing our efforts to avoid foreclosures, recognizing the 

net present value to the taxpayer. That is a statutory mandate that 

we have. 

So what we are doing in the loss mitigation space with Fannie 

and Freddie is that there is a whole protocol that is in place at 

each company that the mortgage servicers are supposed to execute 

on their behalf. What this protocol is about is when a borrower 

goes delinquent on their mortgage, there is supposed to be immediate outreach to that borrower to find out what the reason for the 

mispayment is. 

If the borrower is going to be incapable of continuing to make the 

full mortgage payment that they are obligated to, the first alternative we turn to is a loan modification appropriate for this borrower. The borrower committed to continuing to make a payment 

they can afford, and then they are committed to staying in the 

house. If so, that is the outcome we all want to see, and that is 

our first priority. 

The way we go about that, the first step is, in fact, following the 

precepts of the Treasury Department’s Home Affordable Modification Program, or HAMP. The HAMP program is designed to define 

what is an affordable payment. And it has been defined since the 

beginning as a payment that is equal to 31 percent of the borrower’s monthly income. So the notion is 31 percent of income 

would go to pay the mortgage. So there will be a series of modifications made to the mortgage to get the borrower into a payment of 

that size. 

We are, in fact, doing that, and Fannie Mae and Freddie Mac together have completed just under one million loan modifications. If 

the HAMP modification doesn’t fit the borrower, they don’t qualify, 

20 

Fannie and Freddie each have proprietary modifications that will 

address the particular situations of the borrower. So that is— 

Mr. HINOJOSA. I understand. 

Mr. DEMARCO. —what we are doing. But principal forgiveness in 

that context, we have found we can get the borrower to that payment without doing principal forgiveness, and we better protect the 

taxpayer by preserving an upside potential if the borrower is successful in their modification. 

Mr. HINOJOSA. I thank the gentleman for his answer. 

Mr. DEMARCO. Thank you. 

Chairman GARRETT. And I thank you. The gentleman yields 

back. 

The gentleman from California is recognized for 5 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman, and thank you, Mr. 

DeMarco. 

As was discussed earlier, there is general agreement that the 

conservatorship was the right thing to do in 2008. There is also 

general agreement that the conservatorship and that the current 

system is not the permanent solution and that we need to replace 

it with something. I think the question before us here today is 

whether or not this bill is the sole and sufficient replacement for 

Fannie and Freddie as opposed to some of the other alternatives 

that are authored by other members of this committee, including 

myself. 

So my first question for you would be, if Fannie and Freddie 

were to disappear tomorrow, and this bill were the sole replacement for that, is that sufficient? Could this PLMBS serve the entire marketplace? 

Mr. DEMARCO. It could not do it tomorrow. 

Mr. CAMPBELL. Why not? 

Mr. DEMARCO. Because this would take some time for standards 

to be developed and articulated. And in order to attract private 

capital and to build out the infrastructure to do the securitization 

that is proposed in this bill, private capital is going to want to 

know what these standards are, what the securitization requirements are going to be, and then make the necessary and appropriate investments in infrastructure and in risk management to be 

able to execute it. 

Over time, can that develop, and can that be implemented? If the 

market has certainty that these are the rules of the road, and if 

these rules of the road are not going to be changing every 3 

months, I believe that the private market can step in and do a 

great portion of what is currently being done by Fannie and 

Freddie. 

Mr. CAMPBELL. A great portion, I note. Okay. 

Let us talk about what would happen, do you think, to FHA and 

the Federal Home Loan Banks—to the volume through them—if 

Fannie and Freddie were gone and this was the sole solution? 

Mr. DEMARCO. FHA, even with Fannie Mae and Freddie Mac operating in conservatorship, really has an unprecedented volume 

today relative to any time in recent history. And I believe that for 

lawmakers, for you all to consider the housing finance system 

broadly, I would expect that consideration of FHA’s role here, 

21 

whether it expands, contracts, gets redefined as there are certain 

targets would be all part of what you all would figure out. 

Mr. CAMPBELL. Because if you left it alone they would—a huge 

portion of the market would probably go through FHA if Fannie 

and Freddie disappeared and you just had this in its place, 

wouldn’t you suspect? 

Mr. DEMARCO. I wouldn’t necessarily draw that conclusion, no. 

Mr. CAMPBELL. If there were no changes, if they could—they 

used to be the lender of last resort, and now they have become the 

lender of first resort for many people, particularly anybody with 

less than 20 percent down. 

Mr. DEMARCO. There are an awful lot of creditworthy borrowers 

out there who would, I believe, find market execution at an attractive price without having to go through FHA. 

Mr. CAMPBELL. Okay. This bill actually has a lot of government 

restriction and control over the marketplace. And one of the things 

that requires FHFA to do is to promulgate underwriting standards. 

Could this not be construed as a stamp of approval by FHFA, and 

therefore have you opened to litigation or to legal liability from investors were those portfolios to go bad in the future? 

Mr. DEMARCO. I believe that the discussion and careful review 

of the discussion draft on that point can and should continue. I 

would say, at first blush, it looks to me as though the bill is taking 

great pains to make clear that, in fact, is not permissible and that 

is not intended. 

Mr. CAMPBELL. That it is not permissible to—because you are essentially filling—under this bill, as I figure—the role of the bond 

rating agencies. 

Mr. DEMARCO. No, sir. I believe what we are doing is we are setting definitions and rules in terms of mortgages with this group of 

characteristics that will be classified as this class; rules with a different set of credit risk characteristics would be given this class 

title. And so, mortgage investors will know when an offering is 

made for this class, there is homogeneity about the risk characteristics. And then for this different class, there is homogeneity about 

the risk characteristics. 

And the interesting thing about— 

Mr. CAMPBELL. Can I stop you, sir, because my time is going to 

run out? 

Mr. DEMARCO. Certainly. 

Mr. CAMPBELL. I want to get to this last question. You are not 

just the Director of FHFA, but you are a noted economist. If the 

30-year fixed-rate mortgage were to vanish as a result of this—no 

government guarantee because the private market doesn’t want to 

accept the duration risk and the interest rate risk, etc., in addition 

to a credit risk—so if there were no 30-year fixed-rate mortgages, 

what effect would that have on housing prices? Because a lot of 

what we are talking about here is trying to keep—because if the 

housing market falls further, the economy will fall, and a lot of jobs 

will disappear, and that is what we don’t want to have happen. 

Mr. DEMARCO. Mr. Campbell, there is a predicate to the question 

I wouldn’t necessarily agree with, that the implication is this bill 

would cause that to happen. 

Mr. CAMPBELL. My question for you— 

22 

Mr. DEMARCO. But I understand. So the question is, if we suddenly outlawed 30-year fixed-rate mortgages, would there be an effect on house prices? There could be, but there could also be an effect on mortgage interest rates, which are also affecting house 

prices. And in some ways, this could—there are trade-offs there. 

There are a lot of borrowers who don’t use 30-year fixed-rate 

mortgages, and there are some borrowers for whom, in their particular circumstances, a 30-year fixed-rate mortgage is probably not 

the optimal instrument for them. 

Chairman GARRETT. I thank the gentleman from California for 

his questions. 

The gentlelady from California is recognized for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. And let me 

thank Mr. DeMarco for his presence here today, and thank you for 

inviting him to come and testify on your draft legislation. 

Title III of the discussion draft prevents Federal departments or 

agencies from engaging in forced principal write-downs. And I am 

not clear, looking at the bill, whether or not you are talking about 

a ban on principal write-downs as it applies to new loans or existing loans; however, and this is with respect to any securitized 

mortgage loan, you have stated, Mr. DeMarco, you said that given 

the calculations of FHFA, principal write-downs on Fannie Mae 

and Freddie Mac loans are not appropriate at this time. 

Even though you have qualified that by saying ‘‘at this time’’, do 

you think that a statutory prohibition on principal write-downs is 

appropriate, or should the Director of FHFA have the flexibility to 

pursue principal write-down to future data demonstrate that it is 

appropriate? 

The reason I ask this question is that—and it has been stated 

by my colleague, one of my colleagues—that many of us are very, 

very sympathetic to the homeowners who are underwater. And we 

really do believe principal write-downs make good sense. And we 

believe that principal write-downs will keep many of our homeowners in their homes, but for principal write-downs, they will end 

up perhaps being foreclosed on. 

So my question, again, is what I already kind of stated: Should 

this be in law? Should we ban or prohibit principal write-downs in 

law or would you like to have some flexibility in dealing with this 

issue? 

Mr. DEMARCO. At least with respect to the first part of the question, Ranking Member Waters, I believe it is equally legitimate for 

the Congress of the United States to legislate that the use of taxpayer funds to write down principal of other mortgages is an appropriate public policy and to provide for that. And I believe it is 

equally legitimate for the Congress of the United States to pass a 

law saying that is not an appropriate use of taxpayer money. 

I really believe that is, at this point, a question for lawmakers. 

I have made clear, given my current responsibility as conservator 

with the source of funding that I have today, my view of why I am 

not doing it. But I believe it is really up to lawmakers to make that 

sort of determination because we are talking about the use of taxpayer funds. And I believe that rightfully fits as a determination 

of lawmakers. 

23 

Ms. WATERS. All right. Let me just segue to another issue that 

I have talked with you about, but I guess I am interested in the 

timing now. I am, and I think other members are very pleased, 

about the request for ideas that you put out relative to disposal of 

the 300,000 REOs that you have on the books. Could you tell us 

something about the timing of that? How fast is this going to move 

and when can we see requests for proposals go out? 

Mr. DEMARCO. Right. So thank you for that. The subcommittee 

is aware that we recently made an important set of announcements 

regarding the HARP refinance program. I will say that the agency 

has been focused on that as the first priority. Now that work is just 

about complete, moving to this REO question and finalizing our review of these 4,000 submissions is our next priority. And I would 

hope to be at least making some positive movement forward over 

the next few months with that. I believe that we need to get going 

with it. 

Ms. WATERS. Thank you very much. I yield back the balance of 

my time. 

Chairman GARRETT. The gentlelady yields back. 

The gentleman from Florida, Mr. Posey? 

Mr. POSEY. Thank you, Mr. Chairman. Mr. DeMarco, first, I just 

want to say I applaud your written testimony, on page three where 

you say that you are going back and attempting to recover some 

compensatory damages. The question is, hopefully yes; or so, are 

any of the Federal law enforcement agencies working with you to 

recover some punitive damages? 

Mr. DEMARCO. I can only speak to the actions that I have taken, 

Mr. Posey. So what we have done is we have undertaken the lawsuits that are public, the complaints that are public. I am not in 

a position to speak for law enforcement agencies of the government. 

Mr. POSEY. So you are not aware that they are then? 

Mr. DEMARCO. I can’t speak for what law enforcement is doing, 

Mr. Posey. 

Mr. POSEY. I am not asking you to speak for what they are doing. 

I am asking you if you are aware if they are working with you, behind you, beside you, if they are aware of what you are doing and 

have an interest in it? 

Mr. DEMARCO. From time to time, sir, we are certainly approached by law enforcement about various things that they are reviewing and we always provide our full cooperation to law enforcement. So certainly, as a general matter, are there issues out there 

that law enforcement is pursuing in the mortgage area? The answer is yes. And we are providing our support to them when asked. 

Mr. POSEY. Okay. Do you notify law enforcement when you discover fraud as you attempt to recover damages here? 

Mr. DEMARCO. We have a mortgage fraud reporting regime at 

Fannie Mae and Freddie Mac. There is a great deal of reporting 

that is done. And they will oftentimes come back to us and ask for 

additional information or guidance— 

Mr. POSEY. Thank you. I think last time, we heard that the defense fees for the Fannie and Freddie executives were in excess of 

$162 million. Can you give us an updated number now? 

24 

Mr. DEMARCO. Not off the top of my head. I would be happy to 

provide it in writing. I suspect given the pace of this, it has not 

changed much since my last appearance. 

Mr. POSEY. I understand that since you were here, a court has 

ordered at least one of the executives to repay some bonuses that 

were apparently received and not deserved. Could that be viewed 

as any type of adjudication of guilt and maybe a reason for the 

American taxpayers to stop paying the defense fees for those 

crooks? 

Mr. DEMARCO. Mr. Posey, I am not aware of the particular issue 

or circumstance that you just described. So I would have to find out 

exactly what ruling was made that you are referring to and then 

I have to assess that. I am not aware of, off the top of my head, 

the ruling you are talking about. 

Mr. POSEY. Okay. I am going to make a couple of statements and 

ask you to tell me what is wrong with them. Number one, for about 

60 years, we have had FHA loans, 3 percent downpayment loans, 

which require an extra 0.5 percent mortgage insurance premium. 

And to a large extent, the extra 0.5 percent mortgage insurance 

premium has paid enough through its accumulation for the losses 

that have been incurred through the loans. So basically, it is been 

a pretty good, sound system. 

VA, which has no downpayment, only has a loss ratio of about 

2.5 percent, which is incredible, because of the great job they do 

at underwriting and working with their clients. So, I think that is 

one argument for not reinventing the wheel. I will ask for your 

comments in a minute. 

Number two, the mortgage bubble wasn’t caused by mortgage 

limits or low downpayments. I would wager that at least threequarters of the people in this room, if they follow the national 

trend, bought their home, at least their first home, on a 3-percentdown FHA loan and didn’t default on it, as most people didn’t. 

Most of the bubble and the crisis was caused by fraud enacted between the borrowers and lenders. And if we are to eliminate that 

fraud, the system should work without additional regulation, red 

tape and so forth. 

Can you see anything patently wrong with those statements? 

Mr. DEMARCO. I apologize. Certainly, mortgage fraud has been 

an important element of the debacle over the last several years, but 

I would not say that borrowers generally—let me set FHA aside. 

FHA actually had a very small book of business during this peak 

period, but I believe highly leveraged acquisitions of houses with 

zero percent down or close to zero percent down in fact was very 

much a contributing factor to the housing bubble and to the loss 

the taxpayers have absorbed. 

I would go further to your point about FHA and VA and say that 

these are certainly credible, explicitly government-guaranteed programs with targeted populations of eligible borrowers. And I believe it is every—I fully expect that wherever we end up in housing 

finance, we will continue to have robust FHA and VA programs. 

And one of the decisions for lawmakers is in a post-Fannie Mae/ 

Freddie Mac world whether there is consideration to be given in 

terms of altering in any way the program or eligibility of FHA or 

VA. 

25 

Mr. POSEY. Okay. I don’t want to cut you off, but I am running 

out of time here on my 5 minutes. 

Chairman GARRETT. Actually, you are over your time, so— 

Mr. POSEY. Can I have just one quick follow up? Thank you, Mr. 

Chairman. 

Chairman GARRETT. If there is— 

Mr. POSEY. It has been my impression that Congress pushed 

Fannie and Freddie to make many of the loans that we now regret. 

And I hold Congress culpable for that. Do you think that is a fair 

assessment? 

Mr. DEMARCO. I certainly think that Congress established certain circumstances that drove Fannie and Freddie, but I will not 

relieve the executives of those companies for making very poor and 

imprudent business decisions prior to conservatorship. 

Mr. POSEY. Thank you. 

Thank you very much, Mr. Chairman. 

Chairman GARRETT. The gentleman now yields back. 

The gentleman from California? 

Mr. SHERMAN. We have recently seen some bonuses at Fannie 

and Freddie. I wonder if you have a comment on that. 

Mr. DEMARCO. Yes, sir. I will say several things about the recent 

news. The first is that the compensation programs that are being 

reported about are the same compensation programs that have 

been in place since 2009, at the same levels that I have extensively 

testified about before Congress. 

And I will say that a number of executives have turned over at 

the companies. We seek in every instance to be bringing in new executives at lower compensation than their predecessors. And finally, I believe that this compensation problem will be solved fastest when Congress gets on with coming to a final resolution of the 

conservatorships. 

Mr. SHERMAN. This bill that we are talking about today is either 

a very small bill in its importance or a very large one. It is certainly useful to have standards of weights and measures for ounces 

and pounds. And it would be good to have federally-published 

standards for mortgage-backed securities. But this could be an 

enormous bill if it is somehow a step toward abolishing Fannie and 

Freddie and not replacing it with anything similar. 

What does the secondary mortgage market look like to you if 

there is no government guarantee of long-term fixed-rate mortgages? 

Mr. DEMARCO. As I said earlier in the hearing, I don’t see the 

FHA or VA going away. So I believe there will in fact continue to 

be guarantees of 30-year fixed-rate mortgages. And I further believe that in the construct that is here, it would certainly be an opportunity for mortgage investors to price and to be willing to accept 

30-year fixed-rate mortgages without a government guarantee. 

Mr. SHERMAN. What does it look like if—to the average home 

buyer right now, if they have a qualified loan, conforming loan, 

they are paying a certain rate of interest. How much higher is that 

going to be without the government guarantee? I know what it was 

in my area 5 years ago before mortgage-backed securities got an 

ugly name, but what kind of increase are we going to see for somebody who is borrowing and not borrowing from FHA or VA? 

26 

Mr. DEMARCO. That is a fairly complicated question, because one 

needs to be more specific about the borrower. But I can make a 

general observation for you, Mr. Sherman, that I think would be 

helpful, which is that we continue to have a mortgage market that 

is outside the Fannie/Freddie realm. 

And certainly looking, not just recently, but back at past history, 

suggests that we are on somewhat on the order of three-eighths to 

one-half of a percentage point greater on mortgage rates. But those 

borrowers also look like a different credit profile, it is not just— 

Mr. SHERMAN. Same credit profile. Let us say we were talking 

about 75 basis points, what does it do to the value of homes in this 

country if for the vast majority of buyers, the interest rate is threequarters of a point higher than it would be otherwise? 

Mr. DEMARCO. I don’t have an immediate answer for you on 

that, Mr. Sherman. Certainly, there is a connection between mortgage interest rates and house prices. And I would say that the incredible subsidization over a long period of time through Fannie 

and Freddie with affecting mortgage interest rates has been capitalized into the value of homes, inflating those values. 

Mr. SHERMAN. Do you have any evidence or studies that would 

disagree with what I have seen, which would be another 15 percent 

to 20 percent decline in the value of homes? 

Mr. DEMARCO. I don’t have studies to point to with regard to 

value— 

Mr. SHERMAN. Yes, you can. You don’t have anything that would 

disagree with that and what does it do to the national economy if 

every—if the average home in this country declines by 15 or 20 

percent over the next year as a result of action taken in this room? 

Mr. DEMARCO. Obviously, a substantial decline in house prices 

would not be good for the economy or for the taxpayer. But we will 

see how this actually evolves, what sort of transition there is, and 

so forth. 

Mr. SHERMAN. I yield back. 

Chairman GARRETT. Thank you, the gentleman yields back. 

The gentleman from New Mexico is recognized. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Mr. DeMarco—nice to see you. 

Just to kind of get the record straight, the last time you were 

here in committee, we had a little dust-up. And just to put it into 

the record, you came into the office and made a very professional 

presentation on the status of the institution. I appreciate that and 

still work from those notes. So thank you, and just to get that into 

the record. 

Mr. DEMARCO. I appreciate it. 

Mr. PEARCE. If we pursued just a little bit the line of questioning 

that Mr. Posey was on, what would be the definition of fraud? You 

were hesitant to say that a great percent of the loans are fraudulent. What would be the definition of fraud? And I will go ahead 

and give what I am thinking about. 

I have been in discussion with one of the bottom-line lenders 

from Wall Street, and her performance bonuses were based on 

kicking loans out the door. You have to get them in, and kick them 

out. And she wouldn’t compromise the standards. The other people 

sitting at the desks making loans were getting higher bonuses. Her 

27 

supervisor gets bonuses if they get bonuses. And so, she is under 

pressure to make the loans. Would that be, in your estimation, 

fraudulent? Or it doesn’t cross the ethical line, but it is up there? 

Mr. DEMARCO. As you have described it, I would not perceive it 

to be fraud, as long as credit characteristics are being appropriately 

reported to the buyer or investor in the mortgage. 

Mr. PEARCE. And I think where I am going with this is nowhere 

tricky, just any market is going to have that same pressure, whether it is this bill in front of us, or the market, frankly, that is operating toward you right now. It is a pressure that is going to be 

there. Is there any way to regulate that pressure? Is there any way 

to deal with it? 

It is not technically fraud, but if there are mortgages out there 

that are not going to perform as well, and they are not categorized 

that way in order to get their bonuses, that is a problem in the system that I don’t know how you get around, myself. 

Mr. DEMARCO. Certainly, incentive compensation programs can 

be looked at as creating either positive or adverse incentives for 

how credit markets are functioning. So, incentive comp programs 

are pretty critical here, whether we are talking about executives or 

whether we are talking about rank-and-file employees. 

But that the mortgage fraud issue generally can run quite a wide 

gamut of participants. It can involve appraisers. It can involve 

lenders. It can involve borrowers. It can involve companies that are 

actually pooling and securitizing mortgages. Fraud can occur at 

any number of places, including those. 

Mr. PEARCE. If we can switch gears for just a second, a continuing drumbeat of concern that I have from the small banks in 

New Mexico is that if we go to some private market, they will 

never get the rates of return that they can in the large markets. 

And that they are suspicious of movement away from—they don’t 

like the explicit guarantee, but the implicit guarantee. 

What reassurance could we give people in New Mexico—the lenders—that they are going to be okay? That the private mortgage 

market will actually provide liquidity to them? Is that a reassurance that is possible, and is it one that is advisable to give? 

Mr. DEMARCO. I think that is a great issue that concerns me a 

lot. I would answer it slightly differently. And that is, as we consider housing finance reform, whether it is the chairman’s discussions, or after any other framework that is put forward. 

One of the things that I would suggest policymakers and lawmakers alike should be assessing is: What does this framework 

offer to small and mid-size lenders, whether it is community banks, 

mortgage bankers, and so forth, to be able to be active participants 

in the mortgage market, so that we would have a more competitive 

marketplace; and one that it is not dominated, either at the mortgage origination point, or the mortgage servicing point—that it is 

not dominated by a handful of very, very large institutions? 

Mr. PEARCE. Okay. 

I yield back, Mr. Chairman. 

Thank you for your response. 

Chairman GARRETT. The gentleman yields back. 

And before we go to Mrs. Maloney, just for the edification of the 

gentleman from California, the gentleman raised a good question 

28 

with regard to the compensation issues and what needs to be done 

about that. 

The gentleman is reminded that we had legislation, H.R. 1221, 

the Equity in Government Compensation Act—that was actually 

sponsored by the full chairman of this committee—which would basically try to address that and suspend the current compensation 

packages for employees of Fannie and Freddie and establish a compensation system that is consistent with the executive schedule, 

which I guess would be a lot less than was out there. 

That passed the committee 27–6, I believe, however, the gentleman from California voted ‘‘no’’ on that piece of legislation. So 

just to set the record straight, we are trying to address that situation. 

And with that, I yield to the gentlelady from New York. 

Mrs. MALONEY. Thank you. 

And welcome, Mr. DeMarco. We appreciate your comments on 

what is the 15th proposal this subcommittee has reviewed in the 

area of secondary mortgage markets this year. 

I know that this question is not exactly on point with what we 

are reviewing today, but since you are here, I wanted to follow up 

on something I have been involved in with your office over the past 

several months. It concerns a recent story that was in the October 

19th issue of the New York Times, entitled, ‘‘Rush to Drill for Natural Gas Creates Conflicts with Mortgages.’’ 

And it has raised important questions about how many of these 

new gas leases on private property in many States that do not have 

a history of such leases, and how this will impact on mortgages. 

The article reports that there are concerns that these leases do not 

ensure compliance with certain standards set by a secondary lending institution. 

Earlier this year, I sent you and your staff questions on this 

area. And I appreciate your response. But your counsel’s response 

raises question in light of the recent Times story. The piece showed 

there seem to be conflicts between these gas leases and mortgage 

rules, which could become a problem with investors who may want 

to get rid of their mortgage-backed securities. 

And now that the technical defaults that these leases could create on mortgages, it may force Fannie or Freddie to buy these 

mortgages back. And if this happens, I assume it could be incredibly expensive for the U.S. taxpayers, since 90 percent of residential mortgages are owned by Freddie and Fannie. And so, many 

people have already signed these oil and gas leases. 

So my question is, as the regulator, what is FHEA doing to audit 

the score of such a threat? 

Mr. DEMARCO. Thank you, Mrs. Maloney. As you noted, my staff 

has been working with you and your staff to better understand this 

emerging issue and its implications, including its risks for Fannie 

and Freddie. And as you noted, we have provided one set of responses. With regard to the more recent development that you referred to, I will confess that I am not up to speed on that. 

And if you would indulge me, I would be happy to get a more 

fulsome response and to get back with you in your office regarding 

this latest development, and to make sure that we provide a full 

answer to your question. 

29 

Mrs. MALONEY. Thank you. Your agency’s letter said you were 

waiting to see what EPA determines about whether fracking is environmentally dangerous. And I believe that determination is irrelevant. Something does not have to be environmentally dangerous 

for it to negatively impact property values or violate mortgage 

rules. 

Just take the example of a landfill. It is not considered dangerous, but it definitely lowers the value of property. Most people 

would not like a landfill in their backyard. And regardless of what 

EPA and the studies find, most research says that drilling negatively impacts property values, and as the Times’ document showed 

clearly, drilling leases violate Fannie’s and Freddie’s rules. 

So the question remains, if FHFA or Fannie or Freddie are going 

to do an audit to see how many mortgages across the country have 

non-compliant leases on them. This is a serious issue. It could cost 

billions going forward. 

Mr. DEMARCO. So, Congresswoman Maloney, as I said, I will be 

very happy to go back and take a serious look at whether an audit 

is in order, whether that is feasible and practical, what it is we 

would expect to get out of it. I am sorry. I am just not prepared 

to do— 

Mrs. MALONEY. Following up, are there any efforts in FHFA to 

see how many mortgages in the United States are overlaid with 

noncompliant leases? Is there any effort to look at that? 

Mr. DEMARCO. I am being advised, Mrs. Maloney, that these 

leases which you are referring to may or may not be recorded. And 

so, our ability to be able to effectively gather this information is 

uncertain at the moment. But I am told that the staff is looking 

at this and will continue to, and I will be happy to follow up 

promptly with your office to advise you of where we stand. 

Mrs. MALONEY. Thank you very much. 

And my time has expired. Thank you. 

Chairman GARRETT. And I thank you, gentlelady. 

The gentleman from Texas? 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, for holding this 

hearing. And thank you for putting forth a very interesting proposal for bringing the private market back to mortgage finance. I 

think it is very important for the long-term stability of housing 

that we have a robust private financing market. 

Mr. DeMarco, thanks for coming again. You have maybe what is 

one of the most difficult but most important jobs in our country 

right now. I guess the taxpayers and you got some bad news this 

morning. It looks like Freddie needs another infusion of about $6 

billion. 

What I found troubling about that was that they lost $6 billion 

in the previous quarter, but you are—if you go back a year ago, 

they only list $4.1 billion. And with the amount of origination that 

they have, you would have expected, I think, for the earnings to 

start showing some improvement. So I found that troubling. I 

would assume that you do as well. 

Mr. DEMARCO. I certainly do, Congressman. 

I would say that a portion of these—so the breakdown briefly, 

there are three key contributors to this. One is, an additional increment of credit losses is continuing to reflect both the pre-conVerDate Nov 24 2008 15:46 Jul 05, 2012 Jkt 072623 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\72623.TXT TERRIE
30 

servatorship book of business and difficulty certain housing markets are having in stabilizing. 

It also reflects losses due to hedging in terms of a hedging of the 

financing risk of their retained portfolio, and then $1.6 billion of 

that is the dividend that is owed to the Treasury Department. 

Mr. NEUGEBAUER. So recently, on September 30th, the loan limit 

temporary increase it was granted expired, and so the new loan 

limits are in place. Has anybody done an analysis of how much 

that would affect overall origination to the GSEs for that to move 

from the 729 down to the—what is it? The 625 number? 

Mr. DEMARCO. I know we have how many mortgages, say, in the 

last year Fannie and Freddie had originated in that dollar range 

in the particular markets that were affected by the change in the 

loan limit. I am afraid I don’t have that number with me, but I 

could easily provide it. It is really not a huge number, but we can 

get that for you. 

Mr. NEUGEBAUER. In fact, it is a really small number. Would you 

agree with that— 

Mr. DEMARCO. I would say certainly relative to their book, it is 

a very small number. 

Mr. NEUGEBAUER. And so the question is—and Mr. Scott has a 

great proposal of bringing some certainty to the market—but what 

would be the incentive in the private market to originate anything 

in the current space that the GSEs are allowed to operate? What 

would be the incentive for the private market not to go ahead and 

let the Federal taxpayers guarantee that book of business long? 

Mr. DEMARCO. It is pretty hard to compete with the Federal Government and the degree of support that is being provided right 

now. 

Mr. NEUGEBAUER. So, if you are going to get the private sector 

back into the market, you are going to have to create some space 

for them to operate, because, really, there is no incentive below 

whether 625 for the private sector to originate anything that is not 

sent through the GSEs. 

Mr. DEMARCO. Right. It is hard to compete with a government 

guarantee, and so as long as there is a wide footprint for that, that 

is going to be a wide space in the market that would be hard for 

private participants to compete in, in terms of their financing. 

Mr. NEUGEBAUER. Do you think, though, that the fact that we 

did kind of create a little bit more space in the jumbo market by 

letting those limits expire gives us an opportunity to see; because, 

in fact, the private sector is operating in the jumbo space now. Isn’t 

that a good opportunity, though, to create a little additional space 

without really giving up a lot of origination, because, as you just 

said, it is a very small amount of origination? 

Mr. DEMARCO. It certainly is an opportunity to provide a modest 

amount of additional running room, if you will, for the jumbo market to be able to reestablish itself. 

Mr. NEUGEBAUER. And so you would support that? 

Mr. DEMARCO. I have remained faithfully agnostic on the question of what the loan limits should be, viewing that very much as 

a decision of lawmakers. But to your premise that, by having this 

well-announced in advance, gradual decline in loan limits in just 

31 

certain areas, does that create greater opportunity for the private 

sector to reestablish itself, the answer, I would say, is certainly yes. 

Mr. NEUGEBAUER. And so, here is a final question. I think recently we wrote you, and we would be anxious to hear your response, but with the fact that Freddie and Fannie, in certain 

spaces, basically have a monopoly on that origination space, what 

would be the reason to give certain originators different fees than 

others? Why would you have a spectrum there? You are not competing for the business; you are getting all of the business. 

Mr. DEMARCO. Right. That is a very fair question. And I would 

say two things: one, in fact, those gaps have been declining; and 

two, I said publicly back in September that what remains in that 

space is something that I am looking to eliminate. 

Mr. NEUGEBAUER. Thank you very much for your time. 

Mr. DEMARCO. Thank you, sir. 

Chairman GARRETT. The gentleman yields back. 

And the gentlelady is recognized for 5 minutes. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

And I do want to thank our guest for taking this time. 

I just first want to mention that I am really happy to see that 

you have filed lawsuits against these 18 financial institutions to recover the losses suffered by Freddie and Fannie and to seek compensatory damages for the losses that the Enterprises have suffered. 

There has been a lot of talk about the malfeasance, I guess, of 

Freddie and Fannie. But I think we too often forget that they were 

victims themselves of criminal activity. How much do you think 

you could recover from this, as compared to the exposure that 

Freddie and Fannie have? 

Mr. DEMARCO. I appreciate the question, but I am afraid that is 

something, given that I am in litigation, that is really impossible 

for me to answer— 

Ms. MOORE. Okay, thank you. 

Mr. DEMARCO. We are seeking to recover appropriate— 

Ms. MOORE. Okay, thank you. Right now, the FHFA is funded 

through the fees that the GSEs receive. You indicated earlier in 

your testimony that you need a considerable staffing-up in order to 

fill that TBA space. How would you—under this bill, how would 

you fund the GSEs? 

Mr. DEMARCO. I am not sure that there would be GSEs, but in 

terms of the funding for FHFA, I believe it is— 

Ms. MOORE. Right. 

Mr. DEMARCO. —something that is not determined by—in this 

bill, and so that would be something that would have to be figured 

out. 

Ms. MOORE. What— 

Mr. DEMARCO. It is a gap right now. 

Ms. MOORE. Is it a gap or a cavern? Is it a small gap, or is it 

a significant thing— 

Mr. DEMARCO. For me, it is in fact—to manage this budget, it 

is a significant thing, since I want to know where the funds are 

coming from. But— 

Ms. MOORE. How much does it cost right now to run it under— 

32 

Mr. DEMARCO. Our budget today is on the order of $180 million. 

So I am being told it is probably less than that. 

Ms. MOORE. Okay. 

Mr. DEMARCO. We are funded through assessments on Fannie 

and Freddie, but also assessments on the 12 Federal Home Loan 

Banks, because we have supervisory responsibility for them. 

Ms. MOORE. Okay, thank you. Right now, the investors in Fannie 

and Freddie securities are basically rate investors. But under this 

bill, they would have to add credit risk as well as the rate. Is there 

any indication that we would be able to attract these kind of investors in a totally privatized market without the GSEs? 

Mr. DEMARCO. That is quite right. We are in a rate market today 

because of the guarantees associated with Fannie and Freddie securities. What the pricing of this credit risk would be is going to 

depend on market appetite for credit risk, and then also with—it 

is also going to depend upon the clarity and resiliency of the standards and structures that are put in place. 

Ms. MOORE. And so, what would a borrower, a mortgage borrower, have to look like? It would be totally risk adverse to these 

investors? What is the risk tolerance in order to be able to raise 

the appropriate amount of funds? If we want our mortgager market 

to come back, we have to be able to fund mortgage-backed securities. 

What is your assessment of the tolerance for this credit risk in 

the private market only without a GSE? 

Mr. DEMARCO. I believe that there is certainly tolerance to sort 

of the private capital to fund this risk. But they are going to want 

to know: ‘‘What are the rules of the road, and do I have pretty good 

clarity into how to assess the amount of risk that I would be undertaking?’’ 

Ms. MOORE. Not NINJA loans, but what would be standard use, 

do you suspect? 

Mr. DEMARCO. The standards in terms of the underwriting 

standards? 

Ms. MOORE. Yes. 

Mr. DEMARCO. Yes. Actually, as—the discussion draft would require us to— 

Ms. MOORE. Would it be like 20 percent down? 

Mr. DEMARCO. No, I don’t understand the bill to require that 

sort of thing at all. I think the bill requires us to establish risk 

buckets, buckets of mortgages that are defined by their risk characteristics, and I would certainly— 

Ms. MOORE. Okay. My time is about to expire, and you are not 

going to answer this question. 

The largest mortgage insurer, the Mortgage Guarantee Insurance Corporation, is located in my district, the 4th Congressional 

District of Wisconsin. What impact do you think that this legislation would have on the mortgage insurance industry? 

Mr. DEMARCO. I think that is an interesting question, because I 

believe that there are some investors who may well look to having 

various forms of credit enhancement either on mortgages or on 

pools of mortgages, and I think it certainly creates a market opportunity for private guarantors to replace what is currently a Federal 

guarantor. 

33 

Ms. MOORE. Thank you so much. My time has expired. 

I yield back, Mr. Chairman. 

Chairman GARRETT. The gentlelady yields back, and I appreciate 

the gentleman’s answer. 

And of course, the gentlelady knows that is one of the variables 

that may be considered by the FHFA as well. 

Mr. McCotter is recognized for 5 minutes. 

Mr. MCCOTTER. Thank you, Mr. Chairman. I would like to start 

by yielding 30 seconds to my colleague from New Mexico, Steven 

Pearce. 

Mr. PEARCE. Thank you, gentleman, for yielding. Just in response to my good friend from the other side of the aisle who is 

talking about the negative impact of drilling on properties, if that 

was really the case, then you wouldn’t have any properties in my 

hometown—we have gas wells in back yards, in the front yards; we 

have them on the school grounds. In fact, it positively impacts the 

values of homes in our town. 

So when you are going to create a Fannie Mae dead zone if you 

limit loans to private residences in areas where they drill, so be 

careful in New Mexico. We don’t mind out there. Thank you. 

Mr. MCCOTTER. I am reclaiming my time. I have a question on 

economics and then a question about the past. The question is one 

our colleagues who talked about how the subsidizing of the Federal 

Government into the housing realm has helped to keep interest 

rates low, and that if all of a sudden, it went away, interest rates 

would climb back through the roof. 

My question is, having a rudimentary understanding of the law 

of supply and demand, wouldn’t it work that if the government 

subsidized the housing market purchases, that would mean they 

would be more available to more people? And the more people that 

there are for the limited number of houses, the higher the prices 

would go for those houses, which would then reduce the availability. Isn’t that pretty much how that would work? 

Mr. DEMARCO. In posing that sort of system in the short run, 

yes. And in the long run, you would see a change in the supply of 

housing. 

Mr. MCCOTTER. And you would see the prices come down, which 

would upset the homeowners but not necessarily the people purchasing them, which would then make the actual downpayments— 

because 3 percent of the asking price of the house would be lower 

than it would be at the governmentally-inflated rate. I just wanted 

to make sure that I actually had read the book in college that some 

might have skipped through. 

A practical question about the past would be, as you have stated, 

and I think everyone can see that in the operating of these entities, 

there were mistakes made by these boards and the people in 

charge of operating them. Is that a fair statement? 

Mr. DEMARCO. Yes, sir. 

Mr. MCCOTTER. And let me just say thank you very much for trying to go in there and fix it and working so well with us to do it. 

So this is not directed at you in any way. But just as a matter of 

curiosity, as well as public record, is there anywhere we can go and 

find just a very succinct list of who was on the boards and what 

34 

bad decisions these boards made; because these people made a 

whole lot of money to screw this thing up? 

And I think that under the concept of credit where credit is due, 

I know a lot of people who would like to thank them personally for 

their efforts. 

Mr. DEMARCO. Since these were public companies, certainly in 

their annual disclosures and annual reports, the leadership of the 

companies is a matter of public record. 

Mr. MCCOTTER. That is heartening. That is very heartening. I 

was also curious, since they are public companies, in those reports, 

is there anywhere we can find out how they managed to get these 

new jobs? These are important jobs. 

These aren’t just something that you would want to see go to a 

political crony who might not have the best of motivations or the 

best business acumen in terms of dealing with these things. So are 

those in there too? So you can say not only are these the people 

who should be credited with these decisions, this is also their compensation package, and here is how they were chosen to be on this 

board. 

Mr. DEMARCO. I believe that is available information. 

Mr. MCCOTTER. Can you send me the link and give me a nice 

little concise sheet of that so that I can share that with all the people in my district who are wondering why this thing got so bad so 

quickly, and people were compensated so much for so little? 

Mr. DEMARCO. We can provide you information from the public 

record. 

Mr. MCCOTTER. Thank you. I yield back. 

Chairman GARRETT. The gentleman yields back. I appreciate the 

gentleman’s question, and also learning about the book that he 

read in college, as well. But I used the footnotes. So I do appreciate, Mr. DeMarco, your being here today, and your candid and insightful answers to all of the questions. 

And I believe that is the extent of the questions, although the 

record, as I always say at the end of the hearing, is open for an 

additional 30 days for additional questions. And as we go through 

this, I am sure there will be additional questions. Again, I thank 

you for your testimony and time today, and also your work as well. 

Thank you. 

Mr. DEMARCO. Thank you so much, Mr. Chairman. 

[Brief recess]. 

Chairman GARRETT. Greetings, and still good morning. We actually were able to complete the first panel while still in the morning 

before 12 o’clock, so we are glad that we have ample time now for 

hearing the testimony from the second panel. And we welcome all 

of you. I know we are going to get our last panelist here before he 

comes up to testify. 

And so, we will begin with Mr. Deutsche from the American 

Securitization Forum. Welcome. Obviously, you are recognized for 

5 minutes. Your full written statement will be made a part of the 

record, and we look forward to your testimony this morning. 

35 

STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, 

AMERICAN SECURITIZATION FORUM (ASF) 

Mr. DEUTSCH. Thank you. Thank you very much, Chairman Garrett. My name is Tom Deutsch, and as the executive director of the 

American Securitization Forum, I very much appreciate the opportunity to testify here on behalf of the 330 ASF institutions which 

originate, structure, trade, service, invest, and serve as trustee for 

the preponderance of residential mortgage-backed securities created in the United States, including those backed entirely by private capital, as well as those guaranteed by public entities such as 

Fannie Mae, Freddie Mac, and Ginnie Mae. 

Let me begin my remarks with what I believe to be a very clear 

consensus proposition. There is very strong political and economic 

will in the United States today to decrease the overall level of Federal Government involvement in housing finance, and to have more 

private capital eventually replace many of the risks and rewards 

of that involvement. 

Given that 90-plus percent of mortgage loans made in America 

in the first half of 2011 were guaranteed by the GSEs, there certainly isn’t a shortage of opportunity to achieve that goal. To date 

though, Fannie Mae and Freddie Mac have drawn $169 billion in 

direct support from the American taxpayer through the Department of the Treasury since they were placed under conservatorship, and are predicted by the FHFA to draw a total ranging from 

$220 billion to $311 billion by the end of 2014. 

Given the substantial losses and the outsized role of the GSEs 

in today’s U.S. mortgage finance system, the ASF’s membership is 

strongly supportive of reducing the Federal Government and role 

in the mortgage finance system in America. 

While there is little opportunity for an overnight transition, there 

is a strong need to begin that transition over time and work as 

soon as possible to restore the long-term health of both the U.S. 

mortgage finance system, the U.S. economy, and the U.S. housing 

market. Reducing dependence on the public guarantees for new 

mortgage origination necessarily implies that private capital has to 

flow again into the mortgage market. 

Securitization is an absolutely essential funding mechanism for 

this to occur because bank portfolio lending will not be sufficient 

to meet overall consumer demand and reinvigorate the housing 

markets, particularly with the process of bank deleveraging and 

balance sheet reductions still under way, and with increased bank 

capital requirements on the horizon until Basel III. 

This then begs the question of whether the U.S. mortgage market—that has grown up for nearly a century now around the presence of a government guarantee—can be broken down and rebuilt 

with investor demand without the backing of the American taxpayer. 

Our recommendation is that Congress must begin incremental 

steps over a period of years to substantially reduce the government’s role in mortgage finance. And we commend you, Chairman 

Garrett, for proposing today’s legislation that works towards that 

goal. 

Other key areas that may also help incrementally reduce the 

government involvement is Congressman Neugebauer’s H.R. 1222, 

36 

which will eventually, and over time, increase the guarantee fee, 

which will equilibrate the GSE competition with private market 

competition. The recent lowering of loan limits also creates more 

ability for the private sector to begin to reinvigorate and creates 

more opportunity for the market to return. 

Finally, reducing or eliminating regulatory competitive advantages of the GSEs compared to the private label markets will also 

allow the private markets to better and on equal footing compete 

with the GSEs. 

But before turning to efforts that may be helpful in resuscitating 

the private mortgage market, let me first highlight that the 

securitization industry is experiencing what our professionals may 

colloquially describe as a death by 1,000 cuts. If you look on the 

last page of my written testimony, it is attachment A—or I believe 

it is up on the monitor here—you will see a bit of a dizzying chart 

that briefly sums up the myriad of regulatory efforts that are currently under way impacting securitization. 

Any one of these efforts may be appropriately benign in its own 

right, but when combined together in this great whole, they serve 

as an effective poison that will keep private mortgage securitization 

transactions from occurring in sufficient scale over time. 

I think this is extremely deadly to the mortgage securitization 

market, particularly in an effort to try to reduce the public guarantees on mortgage transactions. 

But because the GSEs are exempt from many of these rules, in 

particular such as the proposal to explicitly count the government 

guarantee as the 5 percent risk retention, these myriad new rules 

will further entrench the GSEs’ artificial advantages over the markets rather than ratcheting it away. 

Additional details on those issues may be found in our written 

testimony and various comment letters linked to in that testimony. 

But turning back to your proposals, Chairman Garrett, the key 

area you attempt to replicate in the private market—the TBA market—certainly additional efforts to create standardization in this 

market will go a long way in creating more private market capital 

flowing into the mortgage finance market. 

And particularly, as we have seen in the loan declines over the 

past month or so, we have seen private mortgage market originations replace what was formerly government guarantee. 

And, in fact, if you evaluate the numbers on that, you evaluate 

Senator Menendez’s proposal that came through the Senate, you 

will see that only approximately a $40-per-month increase in a 

$700,000 loan would occur because of those changes. 

Ultimately, I don’t think that is a massive or substantial increase 

in a private mortgage market over the government-guaranteed 

rate. So, ultimately, I do believe the private mortgage markets can 

substantially replace those roles. And over time, we look forward 

to working with the committee chairman to ultimately help that 

goal be achieved. Thank you. 

[The prepared statement of Mr. Deutsch can be found on page 77 

of the appendix.] 

Chairman GARRETT. Thank you. 

Mr. Hughes is recognized for 5 minutes. 

37 

STATEMENT OF MARTIN S. HUGHES, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, REDWOOD TRUST, INC. 

Mr. HUGHES. Good afternoon, Chairman Garrett, and members 

of the subcommittee. 

I am Marty Hughes, CEO of Redwood Trust, and I am honored 

to be here to testify today. Redwood has a long history as a sponsor 

and investor in private-label prime mortgage-backed 

securitizations, and we have done the only three newly issued private securitizations since the crisis began. 

We hope to do a fourth securitization in the next couple of 

months. I thought, just as an interesting frame of reference, Redwood Trust has 75 employees and only 25 are dedicated to this effort. So it can be done. 

My testimony is focused on the Private Mortgage Investment Act. 

But before I move to the main part of my testimony, I would like 

to address the ongoing government subsidies for the mortgage market. 

As I discussed in my previous testimony, government subsidies 

must be scaled back on a safe and measured basis to reduce and 

create a level playing field for the private markets to flourish. Despite the warning sounds from some, mortgages did not become instantly unaffordable to thousands of prospective home buyers when 

the limits were reduced on October 1st. 

We saw a smooth transition in the market to the new low conforming loan limits and, in fact, through the month of October, the 

difference in interest rates was less than half a point between the 

non-conforming and the conforming rate. 

I urge the committee to reject the attempts to raise the loan limits back up, as some have suggested, and give the private market 

additional opportunity to return to a sustainable state. 

Directing my attention specifically to the proposed legislation, we 

are just going to highlight a few things. And, overall, I would like 

to thank you for addressing the overall topic. It is the first omnibus 

bill that is going in to address all the different elements from servicing that are really investor concerns. 

My first comment is about second liens, which is one of Redwood’s major concerns, and a big concern of the investors in our 

securitizations. And we believe the steps taken in the bill are a 

good first step, but we think you need an additional step. 

The most important part of skin in the game is at the borrower 

level. If the borrower can remove their skin in the game after the 

first mortgage is given out, the likelihood of default on the first 

goes up significantly. 

This was a significant event in the crisis that led to losses. And 

it continues to be a significant event that keeps investors out of the 

market. They can do their loan-to-value analysis on day one, knowing what the amount of the first mortgage is. They can’t do analysis later on and catch up if all of a sudden, the credit profile of 

that borrower has changed. 

In terms of representations and warranties, incorporating mandatory arbitration, we think is great. We have incorporated it in all 

three of our deals. We haven’t had to use it yet. 

One other thought that we have in terms of the proposed legislation is the concept of having a third party identify all claims, and 

38 

let them be the one independent party to push through reps and 

warranties. 

In our deals, we are the credit risk manager, as holding the 

lower tranches of securities. 

So maybe the best protection for the higher tranches of securities 

is that the people on the bottom who were first in line to absorb 

losses are the ones to fight claims. Because our concern is, with an 

independent third party, there is not nearly as much incentive as 

there is for somebody at Redwood to fight claims for the protection 

of the senior lenders. 

If we turn our attention to servicers, prospective surveillance 

standards should be developed to govern when a trustee must investigate a servicer’s performance. There need to be defined events 

that require when actions need to be taken, whether it is excessive 

loan losses, modifications, or early-pay defaults. 

While we fully agree that servicers need to be accountable, we 

think the removal of the servicer and the transfer of the servicing 

is a difficult and time-consuming process; and probably very difficult for borrowers if they are in the middle of some type of loss 

mitigation. 

Really, what we think would make sense is to have the servicers 

have a ‘‘hot backup,’’ a special servicer that would work behind 

them, that is already in place. They would have the systems, the 

contact points, and it would be an easy transition to go from the 

primary servicer to the special servicer. 

So, in conclusion, I thank you for putting this bill forward. This 

bill is really important. There are a lot of facets to it. We do have 

some questions about some aspects, but we really applaud the efforts in moving it ahead. And thank you for beginning the process. 

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

116 of the appendix.] 

Chairman GARRETT. And thanks for your testimony. It raises 

more questions, but that is what we are here for. 

Ms. Ratcliffe is recognized for 5 minutes. 

STATEMENT OF JANNEKE RATCLIFFE, SENIOR FELLOW, CENTER FOR AMERICAN PROGRESS ACTION FUND; AND EXECUTIVE DIRECTOR, CENTER FOR COMMUNITY CAPITAL, UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL 

Ms. RATCLIFFE. Good afternoon, Chairman Garrett, and members 

of the subcommittee. 

I am Janneke Ratcliffe, senior fellow at the Center for American 

Progress Action Fund and executive director of the UNC Center for 

Community Capital. Thank you for the opportunity to comment on 

the draft Private Mortgage Market Investment Act, which addresses several challenges that must be overcome to restore a well-functioning system of housing finance in America. 

I am also a member of the Mortgage Finance Working Group, authors of a plan for responsible housing mortgage market reform. 

And though I speak only for myself today, my testimony does draw 

on our plan. 

Our proposal calls for private capital at risk to play a much 

greater role in the market than it does today. For that to happen, 

39 

investor confidence in non-guaranteed securities must be restored. 

And this bill lays out several steps that will be helpful to that end. 

Importantly, the bill recognizes that the Federal Government is 

critical to a well-functioning market, even the purely private part. 

Thoughtful oversight, implemented a decade ago, could have staved 

off much of the bubble and bust of the mid-2000s. And I am 

pleased to see the regulation of private mortgage-backed securities 

getting the congressional attention it deserves. 

Issues detailed in my written testimony that I will highlight are 

as follows: first, Congress should take steps to restore investor confidence so GSEs can stop serving borrowers who don’t need them. 

But some government role in ensuring liquidity and access remains absolutely critical for the bulk of the $11 trillion mortgage 

market. It would be unwise to pull the rug out from under the market by scaling back this support too quickly. 

As the draft bill suggests, standardization of products, terms and 

conditions is critical, and I particularly commend the proposal for 

demarking the 30-year fixed-rate mortgage category, which has 

been the building block of middle-class economic security in this 

country for more than 70 years. 

And I concur with Mr. Peters’ prior comments on the need to 

take additional steps to ensure it continues to be broadly available. 

Classifications of mortgage loans as called for in this bill should 

consider loan and channel factors that have been proven to affect 

risk. And though it is unclear how the categories will be set, is 

clear it will be a challenge to get it right. 

There is real risk that if the classification system is based on 

borrower factors, it could duplicate problems raised by the recent 

regulatory proposed QRM definition. Moreover, we must avoid repeating the mistake of consigning qualified borrowers with fewer 

resources to higher risks, higher costs, products, and channels. 

To Mr. Posey’s earlier point, my written testimony provides evidence of additional sustainable high loan-to-value lending to moderate-income families that has proven successful, even during this 

time of market turmoil, and I would be glad to provide more details 

during discussion. 

The bill’s transparency requirements and loan level disclosures 

are welcome changes to the PLS market. One open question is 

whether those standardization measures will go far enough to foster a private label TBA market. 

In the proposed private market, multiple loan classes, multiple 

issuers, and a lack of government guarantee may likely inhibit a 

TBA market, making this regime a useful complement, but necessarily a viable substitute to serve the entire conforming loan 

market. 

The bill’s measures to reduce conflicts of interest related to second liens are also welcomed. However, any provisions that limit the 

use of second liens should be constructed to favor legitimate downpayment assistance programs, which are so vital in so many communities’ economic recovery at this time, and allow households to 

make productive use of their accumulated housing wealth. 

There are certain provisions of the draft that should be reconsidered altogether. These include striking risk retention requirements, 

40 

standing government principal reduction initiatives, and easing 

qualifying mortgage rules. 

Other fundamental questions to be addressed include choosing 

the best regulator to fill the mandate, how the bill fits in with active GSE reform proposals, and other critical next steps toward a 

more responsible and comprehensive system of housing finance. 

Standardization and transparency as promoted by this draft bill 

are essential, but are not enough. 

A well-functioning mortgage market also requires broad and constant liquidity, stability, affordability, and consumer protection. In 

closing, I would like to commend the chairman and the other members of the committee for holding this hearing. 

As Congress and the Administration work to design a better system of housing finance, it is important to make sure the rules of 

the game are laid out clearly and fairly before anyone can be expected to start playing. 

I believe the Private Mortgage Market Investment Act as drafted 

is a helpful starting point for negotiating those rules. But it must 

be seen as only a first step towards comprehensive reform. And I 

look forward to your questions. 

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

124 of the appendix.] 

Chairman GARRETT. Thank you. 

Mr. Wallison, welcome back. You are recognized for 5 minutes. 

STATEMENT OF PETER J. WALLISON, ARTHUR F. BURNS FELLOW IN FINANCIAL POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE (AEI) 

Mr. WALLISON. Thank you, Mr. Chairman. 

My name is Peter Wallison. I am a senior fellow at the American 

Enterprise Institute, and I would like to make the following oral 

statement. I have also submitted a detailed written statement. 

There are three serious problems facing this country: unemployment; the Nation’s enormous debt; and the deplorable state of the 

housing market. 

All three are directly involved in the subject of today’s hearing. 

The proponents of a government role in the housing finance system 

don’t mention it, but continuing the government’s role in housing 

finance increases the Nation’s debt. There are $7.5 trillion of government agency debt, most of it Fannie’s and Freddie’s that is off 

budget, but still a burden to the taxpayers. 

We can reduce it by eliminating the GSEs over time and turning 

over housing finance to the private sector, like every other part of 

our economy. Securitization, which has worked well for 30 years 

and is almost universally used for credit cards and auto loans quite 

effectively, is a necessary source of funds for mortgages. This is because there are insufficient funds in the banking system to meet 

the housing sector’s needs. 

And banks have to raise capital levels, which causes them now 

to reduce their lending. Securitization also accesses a huge, currently untapped source of funds. Fixed-income investors, such as 

insurance companies and pension funds, have at least $13 trillion 

to invest and almost all of it now goes to corporates, some of it to 

41 

junk bonds. Institutional investors used to be major buyers of mortgages, but not after the GSEs came to dominate the field. 

The yields on GSE securities are just too low for the needs of 

these investors. Mortgages would diversify their risks, making 

them much more stable. It also provides funds for U.S. homeowners, a win-win situation if there ever was. A robust 

securitization market will bring in these institutional investors, 

and of course, if the housing market revives with more funding, unemployment will decline. 

Since the financial crisis of 2008, private mortgage securitization 

has almost been moribund. One of the major reasons is uncertainty 

about the government’s future role in the housing market, for example, whether Fannie and Freddie will continue to exist or some 

other government program will replace them. Few if any firms are 

going to invest in a securitization program if they understand or 

believe that they will be competing ultimately with the government. 

Beyond that, however, various provisions of the Dodd-Frank Act 

add substantially to the risks faced by securitizers. These are detailed in my prepared testimony, but I will name a few now. The 

5 percent risk retention idea gives a huge financial advantage to 

FHA and the GSEs. They can securitize any mortgage that is not 

a QRM without paying the large capital costs of holding a 5 percent risk slice indefinitely. 

Private mortgage securitizers simply can’t compete with this. 

Anyway, the whole 5 percent retention idea doesn’t work to reduce 

risk-taking, only a vertical slice through the pool will qualify for 

true sale treatment under accounting rules, and the vertical slice 

does not provide much incentive to avoid risk taking. 

Fortunately, the Garrett bill will repeal the risk retention provisions of the Dodd-Frank Act and substitute a more effective means 

for preventing deterioration of underwriting standards. By providing for minimum mortgage standards and securitization, it reassures investors and prevents the kind of mortgage meltdown that 

caused the financial crisis in 2008. 

The bill also goes some distance toward eliminating the nuclear 

bomb lodged in the QM provisions of Dodd-Frank. This creates a 

defense to foreclosure if a borrower claims that he received a mortgage he could not afford. The bill exempts prime mortgages from 

this provision and also provides for an exemption from the Securities Act for qualified securities based on prime loans. Other provisions require the standardization of documentation used in 

securitizations, including trust and servicing agreements, mandatory arbitration, and appointment of an independent trustee when 

a servicer has a conflict of interest with investors. 

All these provisions will encourage firms to enter the 

securitization business and institutional investors to buy and hold 

the resulting securities. There are many more reforms that I 

haven’t mentioned. Many of them are necessary, but not included 

in the bill. This legislation is an important start on the process of 

reviving the private mortgage market, controlling the U.S. debt, 

creating a growing housing market, and reducing unemployment. 

That concludes my testimony. Thank you. 

42 

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

142 of the appendix.] 

Chairman GARRETT. I thank the entire panel for all their testimony. I will now recognize myself for 5 minutes for some questions. 

Mr. Wallison, I think if I heard him right at the very beginning, 

the ranking member said that legislation would create a significant 

intrusion by the Federal Government into the housing mortgage finance market. As if we haven’t been a significant intrusion into the 

housing finance market for the last few years, i.e., the diagram 

that we just saw up on the screen. So, maybe we have gone too far 

even in this legislation and perhaps—and Mr. Wallison you sort of 

say that in your—at least at one point with regard to—we set out 

standards for the sponsors. 

Can you comment as to why you think we are going essentially 

then an overreach when we try to do that? Is that a— 

Mr. WALLISON. Mr. Chairman, I don’t think you are going too far. 

I think it is a good idea. 

Chairman GARRETT. Okay. 

Mr. WALLISON. I think it is a responsibility of Congress after 

what we experienced in 2008, to do something about the problem 

of gradual mortgage quality deterioration as a housing bubble 

grows. The proposal that was made in the Dodd-Frank Act and 

adopted there, the 5 percent retention, will not work. 

What will work is providing certain basic prime mortgage standards that would be available for securitizations. That will prevent 

the private market from going out of control, as it occasionally 

does, when bubbles begin to grow. 

Chairman GARRETT. I appreciate that. You are going down a 

slightly different road—maybe I didn’t ask my question clearly 

enough. We set also, besides the standards there for that, standards for the securitization; and then with the standards or certification, if you will, in the bill for the sponsors—for the issuers as 

well. 

I thought I read in your testimony that you said if we do that, 

we create impediments to folks coming in and being that. 

Mr. WALLISON. I am sorry. I didn’t understand your question. I 

am concerned about setting standards for securitizers because I 

don’t think they are necessary. I think especially if you are setting 

standards for the financial capabilities of securitizers, it adds cost 

for them, makes it less likely that more organizations will become 

securitizers, and thus reduces competition and the efficiency and 

innovation that will occur in that market. 

The really good thing about securitization is that the purchasers 

of mortgage-backed securities in securitizations are protected by 

the subordinated pieces in those securitizations, not by the quality—the financial ability to respond—of the sponsor or the 

securitizer. Now, I understand that some people may be concerned 

about whether they are financially responsible, but we have to create a balance here. 

What I am always afraid of is that government regulation, which 

always imposes costs, will keep many people out of the 

securitization business who could otherwise profitably engage in it. 

Chairman GARRETT. Okay, I have to think all these through. 

43 

Mr. Hughes, you started to—and maybe I just didn’t hear the 

next step with regard to the second lien provision? And you sort 

of said, ‘‘Okay, what we have in here is good,’’ but then you said, 

‘‘But, hey, there is a next step.’’ 

Mr. HUGHES. The second lien provision, I think there should be 

some limitation on a borrower’s ability to take out the second mortgage, all the way up front so that there would be a test. And it 

would be a test that the combined loan to value of a first mortgage 

combined with a second mortgage couldn’t be over 80 percent. 

Chairman GARRETT. Okay. 

Mr. HUGHES. There would be an approval by the first mortgage 

lender. So the first is not disadvantaged as a result of someone taking out a second mortgage. 

Chairman GARRETT. But can you walk me through in a realworld experience how that actually works? 

Mr. HUGHES. It requires an amendment to the Garn-St. Germain 

Act. 

Chairman GARRETT. It is hard. 

Mr. HUGHES. I know you mentioned—and everybody says it is 

impossible to amend it, but therein lies the problem. So I think 

there are ways to get there. But just being able to allow a borrower 

or another lender to hand out and give out another mortgage after 

the fact is very, very problematic for AAA investors. 

Chairman GARRETT. Mr. Wallison, on that point? 

Mr. WALLISON. In commercial lending, Mr. Chairman, the first 

lienor always has the right to approve whether there will be a second lien on the same property. In this case, if the first has the approval right and a second lien is proposed, the first always has the 

choice whether to decide to allow a second lien or not. If he decides 

not to, he runs the risk that the mortgage will be refinanced away 

from him. So there is a choice that is given to— 

Chairman GARRETT. Right. And I know what we have here but 

one of the tricks is the notice requirement, I guess, on how you do 

all this. And I guess you have to work faster; we have language 

here. I am out of time, but Ms. Ratcliffe, did you want to chime 

in on that point? No? Well, then, I thank the panel for the answers. 

Mr. Green is recognized. 

Mr. GREEN. Mr. Chairman, I know you are a stickler for time, 

but given that we don’t have a really long line today— 

Chairman GARRETT. I will give you an extra 15 seconds. 

Mr. GREEN. No, not for me. 

Chairman GARRETT. Oh. 

Mr. GREEN. My suggestion is that you be a little bit more liberal 

with yourself, and I am not going to object. So by unanimous consent, I would agree that you should finish your question. 

Chairman GARRETT. I very much appreciate that. I will yield to 

the gentleman if he has questions. We can go around again for another round. 

Mr. GREEN. All right. 

Chairman GARRETT. But that was very nice of you to offer. 

Mr. GREEN. Thank you, Mr. Chairman, and I thank the witnesses for appearing. 

Let me start with Mr. Deutsch. It is good to see you; it has been 

a while. 

44 

Mr. DEUTSCH. Yes. 

Mr. GREEN. And I would like to start because you mentioned that 

there would be an increase in the product, but that increase was 

not going to be exponential. Is this correct? 

Mr. DEUTSCH. An increase in the product of private mortgage securities? 

Mr. GREEN. Yes, sir. 

Mr. DEUTSCH. Yes. 

Mr. GREEN. And I am just curious as to how you arrived at, I think it was $40 for a loan at a value of, what was that value 

again, please? 

Mr. DEUTSCH. $700,000. A $700,000 loan, so— 

Mr. GREEN. A $40 increase. 

Mr. DEUTSCH. I will run through the quick math of how the conforming jumbo market has changed. On September 30th, obviously 

the loan limits went down from $729,000 to $625,000, approximately. If you were to look at yesterday’s mortgage rates, a jumbo 

conforming is about 4.5 percent; a loan that is a jumbo loan that 

is not conforming—that is the GSEs wouldn’t be willing to buy it— 

was about 4.5 percent. 

So it is about 25 basis points difference. Senator Mendez’s 

amendment would say that the rate on the conform launch should 

go up 15 basis points, that there should be an extra fee on it. 

So the difference you are looking at for conforming loans—conforming jumbo versus a nonconforming jumbo would be about 4.4 

percent with a government guarantee and 4.5 percent for the nongovernment guarantee, which on a $700,000 loan, works out to be 

about $40 a month. 

Mr. GREEN. Let me ask you this, we don’t find a lot of these 

loans being accorded in the market currently, do we? 

Mr. DEUTSCH. It is about 3 percent of all mortgages nationwide were in the $625 to $700— 

Mr. GREEN. My point is if there is some concern about the loan 

itself in terms of—cost doesn’t appear to be a factor. What would 

be the factor that causes these loans not to be a product that consumers are eager to purchase? 

Mr. DEUTSCH. I think consumers are eager to get loans in that 

band, if that is the price of the house that you are looking for. Obviously, there are not that many million-dollar homes out there 

that people are looking to purchase, but there are a substantial 

amount. 

Mr. GREEN. All right, let me move on and ask—let us see. 

I believe Mr. Wallison—is that correct, sir? 

Mr. WALLISON. Yes, sir. 

Mr. GREEN. Thank you. You have indicated that this would repeal the risk retention provision in Dodd-Frank and you indicate 

that would be a standard set for securities and, of course, there will 

be no Federal backstop any place in this process. Is that correct? 

Mr. WALLISON. Yes, that is correct. 

Mr. GREEN. Okay, let us start with the notion that there won’t 

be a Federal backstop. Is it your opinion that there will be a great 

demand for the products absent a Federal backstop? 

Mr. WALLISON. Absolutely. My discussion with people in the private sector, and also just simply thinking about it, would indicate 

45 

that once the Federal Government is out and there is no risk-taking by the Federal Government and no subsidy of government risktaking by the taxpayers, the private sector would be very happy to 

take mortgages and mortgage-backed securities that produce market-based yields. 

As I mentioned in my testimony, the fixed-income buyers of securities like insurance companies and pension funds really need market rate securities like mortgage-backed securities. They don’t have 

them to invest in now because of the domination of the market by 

the GSEs. 

When these mortgages become available through a private market, these buyers will step in and be major supporters of the mortgage market, which will help housing buyers, the housing market, 

and of course, give the buyers the diversification that they need. 

Mr. GREEN. I don’t know that I am going to adamantly differ 

with you, but I talked to a lot of people and—but most of the people 

that I talked to have a different opinion, so perhaps you and I 

should talk more and perhaps you can enlighten me to a greater 

extent— 

Mr. WALLISON. I would be happy to do that. 

Mr. GREEN. —but I just don’t find that is the case. 

One more thing, you do agree that part of the reason we are in 

the trouble that we are in now is because the originators were not 

concerned about whether persons were able to pay; they were just 

originating loans that they could pass on. 

Well, if we eliminate the risk retention, how will the standards 

prevent this from occurring again—just standards alone—because 

we had standards before? And this will be my last question, but I 

would like to hear your answer, given that we had standards before, and we had the risk passed on to others, even with standards. 

Mr. WALLISON. This is a much more complicated question than 

simply those transactions. 

What happened was that the government was interested in buying mortgages or having Fannie and Freddie buy mortgages irrespective of the quality of those mortgages, because Fannie and 

Freddie were required to reach certain quotas in the purchase of 

mortgages for people who were at or below the median income in 

the areas where they live. That created what would always happen 

when the government says, ‘‘We will buy whatever you can 

produce; we are not worried about the quality.’’ Those things are 

produced and that is how we got to the situation we are in. That 

is one of the reasons why I am very much afraid of returning to 

a market in which people are no longer interested in the quality 

of the mortgages that are being produced. 

That can also happen when a bubble develops in the housing 

market, because the tendency of a bubble is to suppress delinquencies and defaults, so mortgages and mortgage-backed securities look safer than they actually are. That also produces excessive 

demand for low-quality mortgages, which have high yields. 

What this bill would do, as I understand it, is set minimum 

standards for mortgages that can be securitized. They would be 

called prime mortgages. And if it is possible that can be done—and 

I gather that Mr. Demarco believes it is—we could avoid many of 

these problems of deterioration in mortgage— 

46 

Mr. GREEN. Would it surprise you to know that Dodd-Frank sets 

some minimal standards? 

Mr. WALLISON. I don’t know that I have seen in Dodd-Frank anything that requires a certain minimum standard. What DoddFrank is trying to do is to penalize people who do not securitize a 

Qualified Residential Mortgage (QRM). But a QRM, as now defined, at least by the regulators, is a mortgage that is far more of 

a prime mortgage than it needs to be. It is a much more difficult 

mortgage to obtain. 

There would be many, many mortgages that are not as high 

quality as the QRM has proposed, which could be securitized by the 

private sector or the— 

Mr. GREEN. So this bill lowers the standard? 

Mr. WALLISON. I don’t know that it would lower the standard, we 

haven’t seen what those standards would be, but it would probably 

involve less than a 20 percent downpayment. 

Mr. GREEN. Thank you, Mr. Chairman. You have been generous. 

I will wait for the second round. 

Thank you. 

Chairman GARRETT. Sure. Thanks. 

The gentleman from Arizona? 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Mr. Hughes, you are literally one of the only folks, I think in the 

market over the last couple of years, who has actually done an 

MBS securitization. 

What do you think the appetite is out there right now for mortgage-backed debt? 

Mr. HUGHES. I think the appetite out there is very high; having 

said that, it is going to require that you meet their standards. 

A lot of those standards are what are built into this bill and 

what we have put into the existing bills that are out there. We are 

not going back to the days where they are going to buy subprime 

securities. Where I really think there is the biggest securitization 

market is for prime—so to the extent that loans that look a lot like 

the Fannie and Freddie loans, I believe investors would buy on the 

private side, to the extent that you meet the criteria for transparency disclosures, fairness of collateral protection. 

Mr. SCHWEIKERT. Of properly packaged. 

Mr. HUGHES. Properly packaged. 

Mr. SCHWEIKERT. Okay. 

On the previous panel, Mr. Demarco talked about holding, what, 

almost a trillion dollars in mortgage debt. I am assuming that was 

both performing and nonperforming. 

If he were to come to you and say, ‘‘Here is $100 billion of performing GSE debt, but we would like to strip the Federal guarantee,’’ is there a hunger for that? Is that something someone like 

yourself would package in one securitization and sell? 

Mr. HUGHES. That is something that we would be interested in 

to the extent it is from current production. I don’t know that we 

would want to jump into the older loans. 

Mr. SCHWEIKERT. Okay, so 2009 and later? 

Mr. HUGHES. To the extent that there was a billion dollar pool, 

and the credit enhance point was five points on that pool, Redwood 

would absolutely consider—to the extent that it met the criteria 

47 

and if you look at the average criteria for the Fannie/Freddie pool, 

they look a lot like the Redwood-type pools except the loan size is 

more. 

Yes, we would buy them, and I think there is a pretty deep market to do that. 

Mr. SCHWEIKERT. And that is sort of an open question for anyone 

on the panel because I have been trying to get my head around the 

appetite for fixed-income mortgage-backed loans that would be lineage from really the last 3 years. So we know it is written at a readjusted real estate value, probably with a much tighter underwriting standard, and how much of that debt would be consumed 

even without a Federal guarantee. But at the same time, if it was 

consumed in different types of securitization, would that also help 

us build exactly what Chairman Garret is doing here is the flow 

in the system and the pipeline? 

Am I making a mistake somewhere? 

Mr. HUGHES. No. 

Mr. DEUTSCH. To jump in, I think there is a degree with Mr. 

Hughes, there is a significant appetite from investors for mortgagebacked securities. Ultimately, the question every investor will ask 

is, what is the price? And many if not any investor will buy the 

appropriate price or the price that they would be willing to purchase at. 

One of the key challenges of the last few years is sort of the price 

and sort of the supply/demand equilibrium has been off and that 

investors are demanding higher prices and want to see higher 

prices where they and where as issuers want to issue them at 

lower prices or lower yields and those are just starting to come into 

the equilibrium and you are seeing some transactions like Redwood 

come out into the marketplace. 

Mr. SCHWEIKERT. In my last minute-and-a-half, Mr. Demarco calls one of your members and says, ‘‘Hey, I have $100 billion of 

performing mortgage debt, I want to strip the Federal Government 

guarantee off of this,’’ what would be the barriers that you would 

see within the securitization world right now? Is there a reps and 

warrants issue? Where do I have an Achilles heel? 

Mr. DEUTSCH. The first question, as I indicated, would be the 

price. What is the price you are trying to sell me those at, and 

what do I value that as? 

In terms of the other barriers, reps and warrants, assuming that 

Fannie and Freddie have bought these, they have pretty stringent 

reps and warranty requirements in place so most investors would 

take those as appropriate reps and warranties there in place. Some 

may want some more repurchase requirements similar to what has 

been promulgated out into the market, but I think those loans 

would be able to be sold out into the secondary market again, just 

depending on what the price was. 

Mr. SCHWEIKERT. Ms. Ratcliffe, would you have any objection to 

seeing the GSEs right now at least offer some of their debt and see 

if they could literally go out in private places? 

Ms. RATCLIFFE. I think there would be a lot of benefits in at least 

getting price discovery. I think the questions you have to find out 

are—I don’t think there is an $11 trillion appetite. I think the 

questions that will come up are, ‘‘What price?’’ and ‘‘Using what 

48 

products?’’ and ‘‘For whom?’’ And so, I think that price discovery 

would help show what the real gap is. 

A lot of people refer to this 40 to 60 basis points difference facing 

jumbo borrowers in the fixed-rate market versus GSE execution. I 

think that is a little misleading because it is exactly the jumbo borrowers who can access that kind of product efficiently without any 

government support. So it is not surprising— 

Mr. SCHWEIKERT. Mr. Chairman, with respect to—actually, the 

price discovery is one of the things I have great interest in, because, in a weird way, this is also debt that has some performance 

history. So actually, it may carry somewhat of a premium on my 

credit risk side. But I have also been trying to do some quick calculations, saying, ‘‘Okay, if this debt from the last couple of years,’’ 

and with the Federal Reserve trying to move us out from the 

WAM, my 30-year interest rate is here today—there may be a premium to the GSEs right now on that debt from just a yield standpoint. 

All right. 

And thank you, Mr. Chairman. I am sorry I went over my time. 

Chairman GARRETT. It will be remembered. 

The gentleman from California? 

Mr. CAMPBELL. Thank you, Mr. Chairman, and thank you, panel. 

Mr. Hughes, your re-securitizations were often held up by a lot 

of people as an example of what could occur if there were no government guarantee in any segment of the market. I have a report 

from Business Wire here dated September 27, 2011. It talks about 

your last securitization. 

And it says, ‘‘The weighted average original combined loan-tovalue ratio is 64.2,’’ meaning an average 36 percent downpayment, 

‘‘and a weighted-average original FICO credit score of 773,’’ which, 

last I checked, I don’t have. So that is a very high down, very highcredit type of issuance you are making, correct? 

Mr. HUGHES. Correct. A couple of observations: If you were to go 

look at where Fannie’s and Freddie’s executions are, you would see 

750 FICO scores, and you would see a probably a 70 percent loanto-value. 

So they are not that dissimilar. And then probably the bigger 

comment is, with everything getting sold to the government or on 

a bank’s balance sheet, they are the only loans available for us to 

buy and securitize. 

If we had access to more loans, but there are no loans to buy. 

With 95 percent of them going to the government, we are constrained in what we can buy. 

Mr. CAMPBELL. Mr. Hughes, I find that also another from this is 

that the average balance is $793,000; so these are, as we say, not 

conforming loans. These are in the jumbo market. 

I come from the Newport Beach/Irvine area of Orange County, 

where my average house price is higher than this. So I can tell you 

there are plenty of people who are trying to buy houses and trying 

in the jumbo market without any government support, trying to 

buy houses with 20 percent down, trying to buy them sometimes 

with 40 percent and 50 percent down, and with FICO scores of 740 

and 715, and they can’t get a loan. 

49 

So I would suggest that—to say that you can’t find those loans— 

there have to be plenty of loans out there with lower FICO scores 

and lower downpayments than this. 

Mr. HUGHES. Redwood Trust is not an originator or a servicer. 

So what we do is align ourselves with banks, large mortgage companies, and then draw from their distribution network. So we can 

only draw in— 

Mr. CAMPBELL. Okay, but doesn’t that mean that somebody along 

the line, maybe because of the risk retention requirements, maybe 

because of your ability to sell into the secondary market, once these 

kinds of downs and these kinds of credit scores without a government guarantee, they are not—I have a Dow Jones report on the 

same thing from September 20, 2011, which says, ‘‘Redwood and 

lead manager Credit Suisse raised the coupon to 3.9 from the expected 3.6 set for investors. One of the speculators said investors 

are concerned about low yields they are being asked to accept to 

take the credit risk,’’ which, obviously, when there is a government 

guarantee, that credit risk is out of the equation. 

So that means that somewhere along the line— 

Mr. HUGHES. I would disagree with the conclusion for the reason 

that we went from 360 to 390, and I would point to the disruption 

in the financial markets and widening of credit spreads across the 

board. 

Mr. CAMPBELL. Okay, but back to my original point, there are 

plenty of people who would love to buy a house in the nonconforming market with 10 percent down or 20 percent down who 

don’t have this kind of credit score. Somebody along the line won’t 

make them loans. 

Somebody along, in the—or else you could package them and 

send them out, because there is no government competition there, 

or somebody else would do it. It just seems unreasonable for me 

when, in this area of the market, where there is no government 

competition, to say that the loan demand out—if you are the only 

one doing it, why isn’t somebody else doing 10 percent loans or 20 

percent loans down? 

Mr. HUGHES. I don’t know. 

Mr. CAMPBELL. Okay. Mr. Deutsch, I spoke to the American 

Securitization Forum, to your group, back in June. And I asked the 

group—there were 200 or so people there—whether they would 

transact in the TBA market without a government guarantee on 

the securitization. And I asked people to raise their hands. Not a 

single hand in the room went up. I then said, ‘‘Let me repeat it. 

Make sure you all understand: Will anybody in this room do it?’’ 

Not a single hand in the room went up, and I then said, ‘‘Let the 

record show that no hands went up.’’ 

Was that a totally nonrepresentative part of the American 

Securitization Forum, or how can we—if that is correct, how can 

we have a robust securitization market without a government 

guarantee if nobody is going to go into the TBA market with it? 

Mr. DEUTSCH. We certainly appreciate your participation at our 

annual meeting, Congressman Campbell. 

I would say the one key factor that was omitted from asking that 

question is what the price would be. As I indicated before, I don’t 

think you will get any investor to say they would be willing to 

50 

transact without knowing what the price is, what the yields would 

be, and I think that is where, if I was sitting in that audience, I 

wouldn’t raise my hand, because I would want to know and negotiate that price. 

Mr. CAMPBELL. Okay, then the question is: What is that premium? And I realize my time has expired. So I have lots more 

questions, but I think we are doing a second round. 

Chairman GARRETT. Sure. 

The gentleman from New York is recognized for 5 minutes. 

Mr. GRIMM. Thank you, Mr. Chairman, and thank you to our 

panelists. 

I appreciate you coming in and giving us your testimony today. 

Mr. Deutsch, can you just go into a little bit about how the GSEs 

underprice credit risk? 

Mr. DEUTSCH. I think what you see in the current market right 

now is the GSEs have what they have a guarantee fee that they 

charge to people selling into their securitizations effectively. You 

can look at various ways. 

I think FHFA has a good report out on how that guarantee fee 

is effectively underpriced so that if you sell a loan to Fannie and 

Freddie, and they will sell it out to mortgage-backed investors, 

when there are a higher delinquencies or defaults, particularly over 

the last few years. 

Over time, those aggregate to be more in terms of losses than 

their guarantee fees that they are charging, which is one explanation of why you had $169 billion flow to Fannie and Freddie from 

the U.S. taxpayer. 

Mr. GRIMM. Thank you. And one other question to you as well, 

I think it was you who mentioned, ‘‘Death by 1,000 regulatory 

cuts,’’ and, as you know, a lack of private securitizations. Can you 

just describe that a little bit, please? 

Mr. DEUTSCH. Sure. I think what we have seen over the course 

of the past couple of years, there is no question in our minds, in 

our membership’s minds, that additional reforms to securitization 

have been necessary, and we have been very supportive of things, 

even such as a basic risk retention requirement, as well as it 

doesn’t have bells and whistles like a premium capture cash reserve account and other items that aren’t called for in the DoddFrank Act. 

But those 1,000 cuts, when you add up so many different regulatory initiatives, it makes it very hard for private sector capital to 

flow back into this market, because if you are—think about if you 

are running your own business, you have 10, 20, 30 regulatory initiatives coming at you, you don’t know how they are going to come 

out—it is very hard to go to your boss and say, ‘‘Hey, we need to 

build up some infrastructure here. We need to build up and hire 

more staff, but we don’t know what is going to happen with Fannie 

and Freddie. We don’t know what is going to happen with these 

QRM rules. We don’t know what is going to happen exactly with 

Basel III.’’ 

It makes it very challenging to be able to build and run a business, and proud folks like Mr. Hughes, who have been able to come 

out in the market, get some transactions going, and be prepared for 

when the market does turn. 

51 

But I think most of our market participants would say that may 

be years down the road, particularly given the uncertainty around 

what will happen to Fannie and Freddie. 

Mr. GRIMM. Thank you. 

Mr. Hughes, I think you have been critical of QRM, and if you 

could, just very briefly describe to me what is wrong with the proposed QRM. 

Mr. HUGHES. We haven’t been that critical of QRM. Actually, for 

the whole risk retention, we are probably one of the few people who 

were in favor of the risk retention rules. 

But I would say, generally, where risk retention has come out in 

the proposals, and with premium capture and where it is going, it 

is just too cumbersome to actually make work. So I would say, from 

a Redwood standpoint, we would agree with the proposal, rely on 

representation to warranties rather than a narrow definition of 

QRMs. 

Mr. GRIMM. Okay. Thank you. 

I am going to throw this out to the panel. I have often said that 

the economy won’t fully recover and turn around and grow until we 

get the housing market turned around. I just think it is too big a 

sector. And if you could pick two things that you think that Congress should make paramount, maybe we will get those who 

haven’t spoken yet, what would they be? 

Ms. RATCLIFFE. I have one. 

Mr. GRIMM. Okay. 

Ms. RATCLIFFE. And it is a little theoretical here, but actually, 

a colleague, Phillip Swagel at AEI, I would sort of paraphrase what 

he has said, that we should recognize that whether there is an explicit or an implicit or an unstated government guarantee, the government is always going to step in to preserve markets. 

And so if you all could come around to making a confirmatory 

statement that you do see a role for some kind of limited government guarantee, at least in the foreseeable future, for supporting 

the middle of the market, or the sort of the conforming space that 

it is today, I think that would send a tremendous signal to the 

marketplace to begin planning ahead and moving forward with a 

comprehensive understanding of what the market is going to be 

like. Just sending that signal along and moving forward with figuring out how to structure that guarantee. 

Mr. GRIMM. Thank you. 

Go ahead, sir. 

Mr. WALLISON. I am glad to be able to point out that everyone 

at AEI does not agree. My view is the opposite, and that is, to the 

extent that we have any government involvement in the market, 

we will rekindle the kinds of problems that caused the financial crisis in 2008. 

What we ought to be sure that we do have is market discipline, 

with firms being able to fail, and firms that market poor quality 

mortgages bearing the costs of that, and/or the investors bear the 

costs of that. So I would strongly oppose any system where we introduce the government to support the housing market in any way. 

I think it can be done perfectly well by the private sector. 

Mr. GRIMM. My time has expired. 

Thank you. 

52 

Chairman GARRETT. The gentleman yields back. 

And without objection, we will do a second round. I would like 

to do it just for the dedicated people who are remaining here, but 

I am told I am not allowed to exclude other Members from coming 

in by sealing the doors, or what-have-you. But be that as it may, 

I will start the second round and then go through it. 

So from the testimony, what we hear is in one respect, and we 

have heard this before, that part of the issue is that it is a supply 

problem, and not a demand problem; that there is a demand out 

there. And there is a supply problem as far as the security from 

the underlying—from the lack of mortgages underneath them. 

But to the gentleman from California’s question, I think it was 

a good question. I think, ‘‘Why isn’t this happening above the conforming loan limits right now?’’ 

And Mr. Hughes, could it partly be in fact that with the bank 

balance sheets as they are, that the banks—and I see Ms. Ratcliffe 

is nodding her head—that the banks are just picking these things 

up, since these are the million dollar homes. And these are the 

ones—I will let either one of them—Ms. Ratcliffe, is that what is 

happening, do you think? 

Mr. HUGHES. That is, in fact, what is happening. 

Chairman GARRETT. And Ms. Ratcliffe agrees? Yes? 

So I guess that answers that piece of it. I can’t, obviously, explain what the particulars are in any anecdotal story as to why in 

certain cases, people aren’t getting the loans that they are looking 

for. I know I personally have a good credit rating score and I have 

a job, but I would not be able to, right now, much as I would like 

to, go and get a loan for $700,000, because I am on a fixed income. 

But to Ms. Ratcliffe, and anybody else on the panel as well, the 

issue here is—and I think what we are trying to do here is to 

change the focus from the focus by investors to being on from the 

credit rating of the United States, which is having problems by 

itself, to the credit ability of the borrower. Isn’t that really what 

we should be trying to do? 

Ms. RATCLIFFE. Peter and I can continue to have our debate forever, but it is not going to advance the market. And I think if we 

can say we are going to find a minimum appropriate role for government— 

Chairman GARRETT. Okay. 

Ms. RATCLIFFE. —as well as the responsibility for borrowers, and 

start moving towards structuring that— 

Chairman GARRETT. Right. 

Ms. RATCLIFFE. —that is what I am calling for here. Our plan 

at the Mortgage Finance Working Group foresees using mostly private capital in this sector with an FDIC-like model, where exhausting the balance sheets of the securitizers, the issuers, you would 

then have a pooled fund that you could go to and only super-catastrophic government guarantee. 

Chairman GARRETT. Yes. 

No one is suggesting that we would not—I think someone else 

testified to this—no one is suggesting that we are not having a government involvement in the housing sector, because even with this, 

if this was to happen tomorrow—and no one is suggesting that this 

is happening tomorrow—is that you would still have—who said it? 

53 

You would still have the FHA; you would still have the EVA; you 

would have Ginnie Mae; you would have the Federal Home Loan 

Banks; you would have the mortgage-interest-deduction aspect. I 

know that plays into how things finance in the sense that we support borrowing that way; right? 

And of course, there are probably a myriad of other Federal programs, I think some of which I guess Ms. Ratcliffe is referring to 

as far as supporting—supporting people as far as community programs and the like; so all of those would remain out there. 

So I guess that—and maybe to the point that Ms. Ratcliffe 

raised—to the extent that what would happen if you did something 

to send a signal to the marketplace, if you did something on top 

of that—and I guess, Mr. Wallison and I will open it to anybody 

else—what signal would it be if you say, well, we are going to continue to have a backstop to the marketplace? 

Would you get the same response then from your investors, Mr. 

Deutsch, as far as they are saying, well, we are going to wait and 

see then, until— 

Mr. DEUTSCH. I think if you are selling out securities to investors— 

Chairman GARRETT. Yes? 

Mr. DEUTSCH. —and you tell them that there is an implicit backstop, or they get the sense that there is an implicit backstop to 

those securitizations, that will make it more desirable to them. And 

the fact that they will be able to go back to the government if the 

government— 

Chairman GARRETT. So they will go there, as opposed to go over 

here? That they will go over to the government— 

Mr. DEUTSCH. Right. If you have a choice, if you are sold a private security and you are sold a public security, and they are at 

the same yield, you will choose the public security every day, because you have the U.S. Government as a backstop. Then, it becomes a quality covered bond by the U.S. Government. 

Chairman GARRETT. Right. 

Mr. DEUTSCH. But if you have just a private securitization out 

there, they will demand a little bit more yield, because they don’t 

have that backstop behind it. 

Chairman GARRETT. And Mr. Wallison? 

Mr. HUGHES. And to the credit backstop, there is a difference in 

liquidity as well. 

Chairman GARRETT. Right. 

Mr. HUGHES. So it is something they could readily borrow 

against to the extent that it is an agency security. 

Chairman GARRETT. Right, and that is what we are trying to do 

here is trying to get the liquidity up so that you can get all of the 

markets to give it to the market. 

Mr. Wallison, do you have a comment? 

Mr. WALLISON. I think that as soon as people believe that the 

government is going to remain in the market in some way through 

a guarantee, they are not going to put any investments—or put in 

the activity—to become securitizers, or work themselves into that 

field. It just doesn’t make sense if you think you are going to be 

competing against the government. 

54 

A government backstop will have exactly the same effect as the 

government actually guaranteeing, because it will just mean that 

the value of the government backstop is included in the risk profile 

and reduce the return. 

And because it reduces the return, private investors will not be 

particularly interested in it. So you have to really give the investors a signal, not only the securitizers, but also the investor market, that the government is getting out. And one way to do that, 

of course, is first to provide for the gradual winding down of Fannie 

Mae and Freddie Mac— 

Chairman GARRETT. Yes. 

Mr. WALLISON. —and then, give them assurance that no other 

government activities similar to Fannie and Freddie, whether implicit or explicit, is going to be put into place to replace them. 

Ms. RATCLIFFE. And with all due respect, if I could disagree with 

Mr. Wallison, I think staying stuck on this point is supporting the 

status quo with 90 percent of the market being supported by 100 

government guarantee. And the challenge is to figure how to limit 

the government guarantee so that there is a viable private sector, 

and so that the taxpayers are protected. And I think we can do 

that. 

Chairman GARRETT. All right. So just since you gave me the— 

so what is happening right now, there is an issue as far as that 

guarantee with regard to the conforming loan limit. You saw what 

happened in the Senate. 

The last question is for Ms. Ratcliffe: Should we be propping up 

the conforming loan limit, or should that be coming down? 

Ms. RATCLIFFE. If you read our plan, which you know, in the long 

run, we certainly see that the— 

Chairman GARRETT. But what about right now, because we 

have—as you said before—to get going. 

Ms. RATCLIFFE. No, I agree. And I think the difficulty here is exactly what I am talking about. Some of these incremental steps are 

very hard to execute without a clear idea of where we are headed. 

Chairman GARRETT. Right. 

Ms. RATCLIFFE. And where we are headed, the government 

should not be guaranteeing those high-end jumbo lines. 

Chairman GARRETT. So I will introduce for the record without objection the statement from the National Community Reinvestment 

Coalition, who on that point take the view that we need that direction to the marketplace, and we need for the conforming loans to 

start the trajectory down, as was put into law. 

Without objection, it is so ordered. 

Mr. Green is recognized. 

Mr. GREEN. Thank you. 

To make sure I understand where each witness is on this question—if you are of the opinion that there is no role for the Federal 

Government in this market, would you kindly extend a hand into 

the air? I think it will help me to see. 

No role at all for the Federal Government? All right. 

Let the record— 

Chairman GARRETT. Clarify in what market, when you are asking this? The Federal home loan housing market? 

Mr. GREEN. No, not the Federal home loan housing market. 

55 

Chairman GARRETT. I meant the Federal housing market, or just 

in guarantees? 

Mr. GREEN. In the market that currently allows for the government to have it—it was implicit, but we have made it explicit now 

with the GSEs. 

Chairman GARRETT. Okay. 

Mr. GREEN. Because FHFA owns the GSEs, so that is we are 

talking about. So, is it fair to say that the record will reflect that 

one person, and that would be Mr. Wallison, you— 

Mr. WALLISON. I am talking only about no government guarantees for middle-class prime borrowers. 

Mr. GREEN. Yes. 

Mr. WALLISON. There has to be a government program for lowincome borrowers. 

Mr. GREEN. Exactly. 

Mr. WALLISON. —and so, we don’t need the government in that. 

Mr. GREEN. And in your opinion, but you are the only one? I just 

want the record to reflect this is the case. 

Now, having that in the record, let me just say this. And I will 

get to you, Mr. Hughes, in just a second if I may, because my time 

is limited. 

I want to go to you, Ms. Ratcliffe. Let us talk about this. And 

I hate to use this term, ‘‘apples and oranges,’’ because it has become sort of a term that is not in good standing right now after 

some recent events and debates. But is it fair to compare the nonconforming with the conforming if we come to some conclusion 

about jumbos? Is it fair to use that for the entire market? 

Ms. RATCLIFFE. I think your point is perhaps the same, that the 

benefits of having a government guarantee are able to be quantified or modified by looking at the spread between what does the 

jumbo pay for a 30-year fixed-rate mortgage, and what does somebody getting a government-backed or government-supported GSE 

loan pay for a similar mortgage product. And that spread doesn’t 

look very big, and so people say there is really not that much value 

there. 

And my point would be that, again, it is true that borrowers with 

big downpayments and good incomes should be able to tap into 

that kind of credit at very efficient rates without a government 

backing. We need to find out where that line is, and not have the 

government supporting that part of the market. 

However, if you went deeper into the market, you would see, I 

think that these spreads seem much wider. And it is hard to know 

what that would be, because there is no real place to determine 

that. I also think that it is very unlikely that such a private market would provide the volume of 30-year fixed-rate mortgage finance that we are used to in this country. 

And so, that is a factor that is not necessarily covered in price, 

but certainly in the risk that the borrower is taking on. That is a 

higher cost to them, because they are talking on great risk. And 

we have seen the consequences of that. 

Mr. GREEN. Now, we haven’t always had the government involved in the market. At one time, in the absence of the government, we had these loans that would have big balloons—short payVerDate Nov 24 2008 15:46 Jul 05, 2012 Jkt 072623 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\72623.TXT TERRIE
56 

ment periods. People were not exactly eager to have their money 

on the line for 30 years. 

It was after Fannie and Freddie got into this market that we 

found that product, especially for middle-class people and working 

people. They were able to afford homes. 

Would you comment on this, Ms. Ratcliffe? 

Ms. RATCLIFFE. Yes, it is true that before FHA was introduced, 

there was a basically non-existent market for fixed-rate mortgages 

and there was more volatility. And some of the things we saw sort 

of repeated in the private market in the 2000s. 

But the nice thing about the 30-year fixed-rate mortgage is that 

the borrower knows what their payment is going to be over time, 

effectively, and what happens is, with even modest increases in 

their income, their debt-to-income improved and with even modest 

appreciation, their LTV automatically improves. And it creates an 

excellent source saving vehicle, right? Home equity is still a big 

portion of the retirement wealth in households retiring today, and 

that is largely thanks to the 30-year fixed-rate mortgage. 

So that product in and of itself makes it possible for more households to be able to get into homeownership and do so sustainably. 

We studied a portfolio of 50,000 mortgages made in the decade 

prior to the crisis. These mortgages were made by 30-some banks 

around the country. And generally, the median income of these borrowers was $30,000, and most of them put down less than 5 percent. 

About half of the credit scores at origination were below 680, and 

yet we have seen the default foreclosure rate on this program staying below 6 percent, even through this terrible crisis, which is 

much lower than you would see, for example, in the subprime market. And this is just one example that I have put forward where 

these borrowers all had 30-year fixed-rate mortgages that were 

prime priced and underwritten for ability to repay. 

When we looked at those sort of identical borrowers who were 

given different kinds of loan products, we see that those identical 

borrowers with different products had default rates that were 3 to 

5 times higher than those having the 30-year fixed-rate mortgages. 

So, that is the evidence about the additional stability of that product for— 

Mr. GREEN. And Mr. Hughes, onto you now. Thank you for being 

patient, but I do have a question, and of course, you may have an 

additional answer. But my question to you is, with reference to the 

QRM, are you of the opinion that it cannot be adjusted such that 

it would be suitable? 

Mr. HUGHES. I think with the QRM tied in with risk retention, 

tied in with premium capture, it would be very difficult to try and 

unbundle it in a way where you could really get something that is 

actionable for people who would be originating loans and then 

securitizing them. 

Mr. GREEN. My time has expired. Thank you. 

And thank you, Mr. Chairman. 

Chairman GARRETT. The gentleman from Arizona for 5 minutes. 

Mr. SCHWEIKERT. Mr. Chairman, with your permission, can we 

do a lightning round? Actually, you are the victims of the lightning 

round. 

57 

I would love to actually just throw out a couple of the mechanics 

within my understanding of trying to get to a securitization of 

MDS and all the things I hear about and just your quick comment. 

How much more definition has to be in regards to servicing standards, particularly on the impairment side? 

Mr. DEUTSCH. I think that there will be within private-label securities a lot more additional work that has to be done to pull in 

the servicing agreement to clarify the servicing standards. But a lot 

of that is going to be done through private market mechanisms for 

investors to get comfortable with how servicing will work on a goforward basis. 

Mr. SCHWEIKERT. Okay, on impairment? 

Mr. DEUTSCH. On impaired loans. 

Mr. HUGHES. Same question? 

I would agree with Mr. Deutsch. 

Ms. RATCLIFFE. Nothing to add. 

Mr. WALLISON. Nothing to add. 

Mr. SCHWEIKERT. Okay. How about on the TBA market? 

From a quick standpoint, how do you see it working under Chairman Garrett’s bill? 

Mr. DEUTSCH. For servicing standards? 

Mr. SCHWEIKERT. No, TBA, to be announced. 

Mr. DEUTSCH. I think for any private label security and private 

originations can replicate being able to rate lock borrowers. The 

price of replication will be a bit higher and doing it through the 

private markets. But it can replicate being able to lock borrowers 

in. 

The price of replication will be a bit higher doing it through the 

private markets. But it can replicate being able to lock borrowers 

in. But I think the real question for secondary market buyers is the 

liquidity of the securities without a government guarantee, is being 

able to move—you can call things homogeneous. Then they could 

be relatively homogenous mortgage loans. 

But once you start creating loan-level data in a secondary market 

for what would be TBA-type loans, without that government guarantee, then they start making differentiation between those loans, 

and that does impair liquidity, to an extent. 

Mr. HUGHES. I would say one of the things that we need to think 

through is: What is the proper subordination level? In addition, do 

you need these securities to be rated? I know we have tried to accomplish securitizations without ratings to just see if we can get 

investors together. It is very, very difficult. 

So I would say, in getting a liquid TBA market, we need to think 

subordination levels, and we need to figure out whether or not a 

rating will ultimately be attached to the security. 

Mr. SCHWEIKERT. Yes. 

Mr. Chairman, would you need that to be able to produce a 30- 

day forward or what would create that distribution— 

Mr. HUGHES. One of the things, as I tried to start out in my testimony that we are a little fuzzy on, is some of the ideas and thinking it through, and I think probably what we need to do is, from 

our side, is vet it more with investors, to just begin to socialize it 

and take it— 

58 

Mr. SCHWEIKERT. Yes, we would love that input, because I know 

that is something we are all talking about, asking, are we giving 

enough guidance to make sure that the private market is able to 

cover that need? 

Ms. RATCLIFFE. I totally appreciate the emphasis on the TBA 

market in this bill, and the emphasis on standards and granularity 

and categories and loan level data. The problem is there is a tension between these two things. 

If we do get to category ST, XYZ of loans, and you spread that 

across multiple issuers and with different subordination levels, and 

also the different—the nice thing about the Fannie/Freddie product 

is also 30-year fixed-rate mortgages, whereas, in the private-labeled sector, you see a little more complexity of instrument and 

cash flow. So I think it has sort of met its challenge. 

All of that said, I agree with Mr. Hughes that it is time to start 

exploring these things and trying some things out and see how 

they could be made to work. 

Mr. WALLISON. My understanding is there was a TBA market before there were Fannie and Freddie securities, and one will be created again by the private sector. The real issue in TBA market is 

simply liquidity. And that is why, to the extent that there are different classifications produced by FHFA here, that there not be too 

many. We would have relatively few classifications of prime mortgages that are securitized, which would allow some depth in that 

market. All you need is liquidity, and then it works. It has nothing 

to do, really, in my view, with a government credit. 

Mr. SCHWEIKERT. In our last 30 seconds, give me one or two 

changes you think need to be out there for the M.I. markets. 

Mr. DEUTSCH. For the which? 

Mr. SCHWEIKERT. Mortgage insurance. 

Mr. DEUTSCH. We don’t have any strong views on the changes in 

the M.I. market. 

Mr. SCHWEIKERT. Mr. Hughes? 

Mr. HUGHES. For the market that we are working with, private 

investors really the—there is very little M.I. that is applied to 

jumbo loans. So we don’t really have opinions on that. 

Mr. SCHWEIKERT. Ms. Ratcliffe? 

Ms. RATCLIFFE. I am not sure what I would do to change the M.I. 

market. I guess it is worth recognizing that—and we haven’t 

touched on this in the discussions of the bill, because it is really 

not in there. 

But another approach to improving the functioning of the market 

is not only to improve the pricing of risk, but to improve the levels 

of capital across the industry sectors that are decked against the 

kinds of risks people are taking and rationalize that to avoid adverse selection. 

And the mortgage insurance companies actually have a very interesting model for capitalization that requires them, if their 

stockpilers are—during good times and sort of countercyclical, and 

then they draw down those reserves during like this as we are seeing they are. 

They have paid some $27 billion or so in claims to Fannie and 

Freddie, saving their taxpayers that money. And actually, they are 

59 

allowed to fail. They are not too-big-to-fail. But that capital is being 

drawn down on. I think it is a model worth considering if they— 

Mr. WALLISON. Okay. I think mortgage insurance is extremely 

important if we want to bring in institutional investors, for example, because mortgage insurers will do their own underwriting. 

Mr. SCHWEIKERT. Are there a couple of changes you would make 

in today’s M.I. world? 

Mr. WALLISON. That I would make? No. M.I., of course, is regulated at the State level, and in most cases, it has worked pretty 

well. They have survived, with few exceptions, during this terrible 

financial crisis. 

So it is a regulatory system that has worked well so far, and we 

ought to make more use of it—especially when we have a situation 

where the rating agencies no longer have public confidence. Mortgage insurers can provide that confidence. 

Mr. SCHWEIKERT. Forgive me. I am way over my time. Mr. Chairman, thank you for your tolerance. 

Chairman GARRETT. Not at all. 

The gentleman from California? 

Mr. CAMPBELL. Thank you, Mr. Chairman. I guess I am the 

cleanup hitter here. And I am first going to make a couple of comments myself and then get to a few more questions. 

The chairman asked a question relative to a question I had posed 

before about, perhaps why in this jumbo market there weren’t a lot 

of lower down or lower credit loans. And by the way, I bring that 

up not because $800,000 loans are a norm by any means, but just 

that is completely unaffected by Fannie and Freddie and by a government market. 

But the answer that everybody gave was that the reason for this 

was bank balance sheets and so forth and so on, which, for those 

of us like myself and Ms. Ratcliffe, who believe there ought to be 

a limited government guarantee, explicit but limited, with lots of 

private capital up front, in order to provide the fungibility that you 

are looking for, Mr. Deutsch, and the liquidity that you are looking 

for, Mr. Hughes, those of us who believe that. 

The bank balance—that is exactly the point. That is exactly the 

point. The housing market is such a huge part of the economy. It 

is such a gigantic part of each individual’s, as was all discussed 

here, personal net worth, and in fact, their retirement savings. 

Banks are cyclical. Everything is cyclical. And when they want to 

loan to everybody, as we have seen, they will loan to anybody. And 

then, you probably don’t need government guarantee. 

But when they go off like they are, then what? Then, nobody can 

get a loan. Then, nobody can sell a house. And then, all kinds of 

problems happen. And it will be procyclical. It will make recessions 

into depressions and it will make booms into bigger booms. 

And that is why this kind of stability that I think Ms. Ratcliffe 

and I are seeking, which also provides that fungibility and that liquidity that Mr. Hughes and Mr. Deutsch are looking for, is the 

sort of thing that we ought to be adding here. 

But Mr. Wallison, let me just—because I had to bring up—you 

mentioned private mortgage insurance, and we haven’t mentioned 

at all the failure of PMI organization based in Mr. Schweikert’s 

State, and I know you believe governments can’t properly price inVerDate Nov 24 2008 15:46 Jul 05, 2012 Jkt 072623 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 K:\DOCS\72623.TXT TERRIE
60 

surance. Isn’t there an argument to say that PMI didn’t properly 

price private insurance either? 

Mr. WALLISON. One of the reasons government doesn’t properly 

price is that it doesn’t have the incentive to price properly. It has 

an incentive not to price risk, because that works better politically. 

But the— 

Mr. CAMPBELL. Whoa, whoa, whoa. Okay, well, there are a lot of 

things that government does that can work different politically 

than— 

Mr. WALLISON. Yes. 

Mr. CAMPBELL. —that is why you have to try and take that pricing out of our hands, because you are right; we will price it politically. That is not the right thing to do. But go on. 

Mr. WALLISON. I am just suggesting why it is that the FDIC and 

many other agencies that are supposed to be risk pricing their insurance don’t do it properly. But in the case of insurance companies, they have the incentive to do it. They do it by creating a reserve fund. The fund gets larger and larger over time, and that is 

what— 

Mr. CAMPBELL. But private mortgage insurance right now is 

under huge stress, right? 

Mr. WALLISON. Yes, but— 

Mr. CAMPBELL. —for the failure of PMI in the swaps market, it 

is under huge stress. And understand; I believe there ought to be 

private insurance. I am not saying there shouldn’t be. In fact, I 

think it is an important part of the market. But they have 

mispriced it. 

Mr. WALLISON. Well, yes. They mispriced it, but they are— 

Mr. CAMPBELL. Okay. Thank you. 

Mr. WALLISON. No, let me finish because I think it is important— 

Mr. CAMPBELL. I will get cut off, so let me. 

Ms. Ratcliffe, did you have a— 

What is that? All right. 

Chairman GARRETT. It is your time. We will allow it. 

Mr. CAMPBELL. If you want to give me more time, I will let him 

finish. 

Chairman GARRETT. Yes, I will give you—we are over time anyway, but I will give you the additional time so Mr. Wallison— 

Mr. CAMPBELL. Okay. Go ahead, then. 

Chairman GARRETT. Yes. 

Mr. WALLISON. The way that the insurance companies work is 

they create reserve funds, which they allow to grow over time. 

They are pricing for catastrophic circumstances by creating these 

funds. And by and large, that is how the mortgage insurance industry has worked. 

There are two or three which have been in trouble. But the rest 

of them are paying their claims right now, and will continue to pay 

their claims in the future. So they are the one area where we can 

be quite sure that mortgage risks are covered. 

Mr. CAMPBELL. You know that a lot of the loss before the Fannie 

and Freddie—we were just talking about it earlier—at least according to their press release, they are blaming on the fact that because 

61 

PMI failed, they now have to step in and cover a lot of the private 

insurance. 

Ms. Ratcliffe, you looked like you wanted to say something about 

the private insurance? 

Ms. RATCLIFFE. I did want to say that, as we have talked about, 

the M.I.s are a sort of force to hold capital by regulatory requirements. So that does kind of prevent them from pursuing the race 

to the bottom. 

And I think there was probably more of that, for example, in the 

main competitor to PMI, which was the purchase money second, 

those lenders really underpriced risk. And we have already talked 

today about the way that the private-label risk takers, mortgagebacked securities market really acted procyclically and failed to 

adequately price risk. 

So I think those might be better examples of those procyclical 

tendencies than M.I., which is like government-required to reserve 

countercyclical. 

Mr. CAMPBELL. Okay. Good point. 

And then, Ms. Ratcliffe, my last question will be to you, relative 

to—if there is no guarantee—so we have something like the bill 

that is before us and we go forward—we have talked about various 

things that may happen, the 30-year fixed-rate mortgage could disappear. 

There could be a big premium interest—the interest rates that 

people pay up could go up, the number of people who have the ability to get a loan could go down. There are any number of circumstances, and it could be all of those to some degree or whatever, if there were no government. 

If we have no Fannie and Freddie, there is no government support for the mortgage market, it is now just this bill in place, what 

do you see as that doing to housing prices, to the housing market, 

to whatever you think it might affect? 

Ms. RATCLIFFE. No, as a result of fewer mortgages being available, fewer fixed-rate mortgages being available, and costs necessarily increasing, it would obviously have a strong negative effect 

on the economy and on household wealth. And those obviously need 

to be taken into account. Moreover, I don’t think that those things 

are necessary. I think we can— 

Mr. CAMPBELL. I agree with you completely. And the other thing 

that all that will result in is a loss of lots and lots and lots of jobs. 

And when we are all debating about how to create jobs, the last 

thing we should be doing is putting in policies that will, without 

question, lose jobs. And I yield back. 

Chairman GARRETT. You answered a whole bunch of different 

criteria as to what would happen. Did you say what would happen 

if, under that scenario, the government does provide the guarantee 

and the government prices the risk wrong? What happens then? 

Ms. RATCLIFFE. I would hope we would not price the risk wrong. 

We have good benchmarks now for what that risk pricing should 

look like, and there are a number of things—government doesn’t 

have it—always the incentive to make a profit in pricing risk. 

They also don’t have the same incentive to chase profits and take 

less risk. And we saw the FHA basically pull away from the marVerDate Nov 24 2008 15:46 Jul 05, 2012 Jkt 072623 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 K:\DOCS\72623.TXT TERRIE
62 

ket rather than chase it during the peak of the bubble. And so, I 

think there are elements about government risk-taking. 

Chairman GARRETT. Just briefly, where are examples, historically, of where the government priced risks well? Is that like with 

blood or with the pension fund or—? 

Ms. RATCLIFFE. In some of those cases, government takes risks 

that the private sector is not willing to take on. 

Chairman GARRETT. Right, but the— 

Ms. RATCLIFFE. It takes those risks in order to facilitate the functioning of some other private sector. So if you really want to look 

at the whole cost-benefit equation, you have to take some of those 

other benefits and externalities into account. 

Chairman GARRETT. Yes. But at the end of the day, if they don’t 

price the risk, who pays? 

Ms. RATCLIFFE. The taxpayer. But, again, we do have pretty good 

markers now on what— 

Chairman GARRETT. Yes. 

Ms. RATCLIFFE. —crisis—what levels of capital you need to have, 

and what kind of pricing you would have. And that would definitely 

have to change from the old Fannie/Freddie. 

Chairman GARRETT. I am— 

Mr. CAMPBELL. Mr. Chairman, the existing bill would have the 

government setting underwriting standards. They might do that 

wrong, too. Anything the government does could potentially go 

wrong. 

Chairman GARRETT. Right. But if that happened, who would bear 

the burden, then, the taxpayer or the investor? 

Mr. CAMPBELL. The American economy, depending on where they 

set it— 

Chairman GARRETT. Yes. 

The gentleman from California has come back for the second 

round. 

And the gentleman is recognized. 

Mr. SHERMAN. I want to commend my colleague from California 

for pointing out the importance of not allowing the conforming loan 

limit to go down in high-cost areas. As to pricing risks, I point out 

that the FHA has done a good job. 

CBO does a pretty good job, whether it is in the international 

sphere with loans to foreign countries or OPEC insurance. And the 

idea that the Federal Government can’t price risk, CBO is a tough 

taskmaster, but they predict things that are just as hard to predict 

as downside risk. And, of course, they price risk as well. 

Now, Ms. Ratcliffe, if we didn’t have Fannie and Freddie, and 

you are the average homebuyer looking to buy a $400,000 home, 

how many more basis points are you going to pay? I know kind of 

what that answer was in 2006, back when mortgage-backed securities were very popular with the market. What are you going to pay 

now; any idea? And I have seen estimates of about 75 basis points. 

Do you have anything that would counteract that or contradict it? 

Ms. RATCLIFFE. I think there is no way to know in today’s marketplace what the average homebuyer would pay, if there was no 

form of government support in forming market at this time, maybe. 

Mr. SHERMAN. Could it be more than 75 basis points? 

63 

Ms. RATCLIFFE. Certainly, depending on the borrower’s characteristics, the loan amount being sought, and other— 

Mr. SHERMAN. So even people who are qualifying under today’s 

Fannie and Freddie tougher standards for a particular loan might 

be paying 100 to 125 basis points for that same loan? 

I see the person next to you nodding his head. 

Sir, do you have—? 

Mr. HUGHES. I think making the argument in the extreme, that 

Fannie Mae drops off the face of the earth the next day, and then 

what are the markets going to be like is not a rational— 

Mr. SHERMAN. I didn’t put it forward—the extremes as if there 

wouldn’t be a transition period and everybody would expect Fannie 

to exist and then the next—but let me go on with my limited time. 

So what happens to home prices in this country, Ms. Ratcliffe, 

if—I have seen estimates that we are talking about a 15 percent 

to 20 percent additional decline in home prices. Do you know of 

anything that contradicts that? 

Ms. RATCLIFFE. No, sir. 

Mr. SHERMAN. And this is maybe a little outside your expertise, 

but it is something that Mr. Campbell and I face all the time. 

What happens to the economy, particularly in places where people have so much of their life tied up in the value of their home, 

if we see another 15 percent or 20 percent decline? Are you aware 

of any studies on that? 

Ms. RATCLIFFE. I am not aware of any studies. I think we have 

discussed some of the impacts on, obviously, jobs and household 

wealth. 

I think one thing we haven’t talked about but is worth always 

keeping in mind is that today we are seeing a substantial loss of 

wealth in housing that is going to translate, especially as people 

draw down on their retirement accounts and other assets to keep 

paying mortgages that may be underwater, that at the—this is sort 

of kicking the can on down the road, to make it a retirement-savings problem— 

Mr. SHERMAN. And I point out, a lot of people think this only relates to folks who are looking to buy a home or looking to sell a 

home or looking to refinance a home. 

But what I point out to people in my area is if you are just planning to continue to live in my area, and you hear that the home 

down the street sold for $100,000 less than everybody expected, you 

are not going out to dinner after that unless the restaurant has 

golden arches on the front of it. 

So the effect on the overall economy in the San Fernando Valley 

of a decline in the home prices is something that affects the 90 percent of the people who aren’t buying, selling or refinancing. 

As to the bill, as I commented earlier today, I don’t know whether this bill is just designed to assist what might remain a niche 

market, and that is the non-government-involved mortgage-backed 

securities, or whether it is the first step in taking a radical step 

of pushing government completely out. 

So if this is just going to make the niche market more efficient, 

it would be hard to have any of us oppose it. But if it is the first 

step toward the calamity that I have discussed with Ms. Ratcliffe 

and others, you won’t find a lot of support on this side of the aisle. 

64 

Not a whole lot of—there will be some non-supporters on your 

side of the aisle, too, so with that, I yield back. 

Chairman GARRETT. The gentleman yields back, recognizing the 

calamity that we are in right now, because of the status quo of the 

GSEs, and the government backstop that has been provided to 

them. 

Without objection, I will enter into the record a letter from the 

National Association of Federal Credit Unions; seeing none, it is so 

ordered. 

I would like to very much thank this entire panel for all of your 

expert testimony and input and dialogue that we had going back, 

as with the first panel. 

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 response in the record. 

And, again, I thank the panel very much. The hearing is adjourned. 

[Whereupon, at 1:23 p.m., the hearing was adjourned.] 

(65) 

A P P E N D I X 

November 3, 2011 

66 


72623.001
67 


72623.002
68 


72623.003
69 


72623.004
70 


72623.005
71 


72623.006
72 


72623.007
73 


72623.008
74 


72623.009
75 


72623.010
76 


72623.011
77 


72623.012
78 


72623.013
79 


72623.014
80 


72623.015
81 


72623.016
82 


72623.017
83 


72623.018
84 


72623.019
85 


72623.020
86 


72623.021
87 


72623.022
88 


72623.023
89 


72623.024
90 


72623.025
91 


72623.026
92 


72623.027
93 


72623.028
94 


72623.029
95 


72623.030
96 


72623.031
97 


72623.032
98 


72623.033
99 


72623.034
100 


72623.035
101 


72623.036
102 


72623.037
103 


72623.038
104 


72623.039
105 


72623.040
106 


72623.041
107 


72623.042
108 


72623.043
109 


72623.044
110 


72623.045
111 


72623.046
112 


72623.047
113 


72623.048
114 


72623.049
115 


72623.050
116 


72623.051
117 


72623.052
118 


72623.053
119 


72623.054
120 


72623.055
121 


72623.056
122 


72623.057
123 


72623.058
124 


72623.059
125 


72623.060
126 


72623.061
127 


72623.062
128 


72623.063
129 


72623.064
130 


72623.065
131 


72623.066
132 


72623.067
133 


72623.068
134 


72623.069
135 


72623.070
136 


72623.071
137 


72623.072
138 


72623.073
139 


72623.074
140 


72623.075
141 


72623.076
142 


72623.077
143 


72623.078
144 


72623.079
145 


72623.080
146 


72623.081
147 


72623.082
148 


72623.083
149 


72623.084
150 


72623.085
151 


72623.086
152 


72623.087
153 


72623.088
154 


72623.089
155 


72623.090
156 


72623.091
157 


72623.092
158 


72623.093
159 


72623.094
160 


72623.095
161 


72623.096
162 


72623.097
163 


72623.098
164 


72623.099
165 


72623.100
166 


72623.101