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A LEGISLATIVE PROPOSAL TO 

PROTECT AMERICAN TAXPAYERS 

AND HOMEOWNERS BY CREATING A 

SUSTAINABLE HOUSING FINANCE SYSTEM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

JULY 18, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–40 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

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 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 18, 2013 ..................................................................................................... 1 

Appendix: 

July 18, 2013 ..................................................................................................... 103 

WITNESSES 

THURSDAY, JULY 18, 2013 

Calabria, Mark A., Director, Financial Regulation Studies, the Cato Institute . 13 

Calhoun, Michael D., President, the Center for Responsible Lending ................ 78 

Deutsch, Tom, Executive Director, the American Securitization Forum (ASF) . 76 

Holtz-Eakin, Douglas, President, the American Action Forum ........................... 10 

Howard, Jerry, Chief Executive Officer, the National Association of Home 

Builders (NAHB) .................................................................................................. 73 

Levitin, Adam J., Professor of Law, the Georgetown University Law Center ... 11 

Loving, William A., Jr., President and Chief Executive Officer, Pendleton 

Community Bank, on behalf of the Independent Community Bankers of 

America (ICBA) .................................................................................................... 70 

Sheppard, Janice, Senior Vice President, Mortgage Compliance, Southwest 

Airlines Federal Credit Union, on behalf of the National Association of 

Federal Credit Unions (NAFCU) ........................................................................ 72 

Stevens, Hon. David H., President and Chief Executive Officer, the Mortgage 

Bankers Association (MBA) ................................................................................. 75 

Wallison, Peter J., Arthur F. Burns Fellow in Financial Policy Studies, the 

American Enterprise Institute (AEI) .................................................................. 9 

Zandi, Mark M., Chief Economist, Moody’s Analytics .......................................... 15 

APPENDIX 

Prepared statements: 

Calabria, Mark A. ............................................................................................. 104 

Calhoun, Michael D. ......................................................................................... 119 

Deutsch, Tom .................................................................................................... 126 

Holtz-Eakin, Douglas ....................................................................................... 141 

Howard, Jerry ................................................................................................... 148 

Levitin, Adam J. ............................................................................................... 172 

Loving, William A., Jr. ..................................................................................... 191 

Sheppard, Janice .............................................................................................. 196 

Stevens, Hon. David H. .................................................................................... 212 

Wallison, Peter J. ............................................................................................. 227 

Zandi, Mark M. ................................................................................................. 240 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hensarling, Hon. Jeb: 

Written statement of the American Bankers Association (ABA) ................. 252 

Written statement of Federal Financial Analytics, Inc. ................................ 262 

Written statement of the Credit Union National Association (CUNA) ........ 267 

Written statement of the Mortgage Insurance Companies of America 

(MICA) ........................................................................................................... 273 

Written statement of the National Multi Housing Council (NMHC) and 

the National Apartment Association (NAA) ............................................... 277 

Written statement of the National Association of REALTORS® ................. 281 

Page

IV 

Miller, Hon. Gary G.: 

Written statement of the California Association of REALTORS® ............... 299 

Moore, Hon. Gwen: 

Written statement of the American Hospital Association (AHA) ................. 303 

Watt, Hon. Melvin L.: 

Financial Times article entitled, ‘‘Oxley hits back at ideologues,’’ dated 

September 9, 2008 ........................................................................................ 306 

(1) 

A LEGISLATIVE PROPOSAL TO 

PROTECT AMERICAN TAXPAYERS 

AND HOMEOWNERS BY CREATING A 

SUSTAINABLE HOUSING FINANCE SYSTEM 

Thursday, July 18, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 1:04 p.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, Miller, Bachus, 

Royce, Capito, Garrett, Neugebauer, McHenry, Campbell, Bachmann, Pearce, Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, 

Duffy, Hurt, Stivers, Fincher, Stutzman, Mulvaney, Hultgren, 

Ross, Pittenger, Wagner, Barr, Cotton, Rothfus; Waters, Maloney, 

Velazquez, Watt, Sherman, Meeks, Capuano, Clay, Lynch, Scott, 

Green, Cleaver, Moore, Ellison, Perlmutter, Himes, Peters, Carney, 

Sewell, Foster, Kildee, Murphy, Sinema, Beatty, and Heck. 

Chairman HENSARLING. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. 

Before recognizing Members for opening remarks, I want to 

make a statement about process. We are starting this hearing at 

1:00 as opposed to our usual 10:00. That was at the request of the 

ranking member, who brought to my attention the Nelson Mandela 

birthday celebration. And certainly, I was in accord with her recommendation. So that is why we are starting at 1:00. The bad 

news is we will undoubtedly be interrupted by votes. And this is 

a two-panel hearing. So ahead of time, I wanted to apologize to 

Members and apologize to panelists, particularly those in the audience who are on the second panel, because I cannot tell you the 

exact time that the second panel will convene. But, hopefully, you 

will call this, as I do, an excused tardiness in the beginning of this 

hearing. 

At this time, I will recognize myself for opening remarks for 5 

minutes. 

Today, the Financial Services Committee meets in its 12th hearing over the last 6 months on the need to create a sustainable 

housing finance system. By the end of the hearing, our committee 

will have heard from more than 50 witnesses on the subject since 

January. Americans clearly deserve a better housing system, one 

that protects homeowners and taxpayers, so that every American 

2 

who works hard and plays by the rules can have opportunities and 

choices to buy homes they can actually afford to keep. One that 

protects hardworking taxpayers so they never again have to bail 

out corrupt Government-Sponsored Enterprises like Fannie Mae 

and Freddie Mac, whose top managers engaged in extensive accounting fraud to trigger huge executive bonuses for themselves. 

America needs a housing policy that is sustainable over time, not 

one that causes endless boom/bust cycles in real estate which harm 

our economy. Regrettably, such a commonsense and responsible 

system is not in place in America today. Today, taxpayers have 

been forced to pay nearly $200 billion for the bailout of Fannie Mae 

and Freddie Mac. Today, taxpayers remain on the hook for more 

than $5 trillion in mortgage guarantees, roughly one-third the size 

of our economy. Today, the Federal Government has a virtual monopoly on the housing finance system that is unwise, unfair, and 

unsustainable. 

Today, Washington elites decide who can qualify for a mortgage. 

That puts homeownership out of reach for millions of creditworthy 

American families. That is not fair. Americans truly deserve better. 

The proposal we will discuss today will give Americans the better, 

fairer, and sustainable housing finance system they deserve. It is 

called the PATH Act because it Protects American Taxpayers and 

Homeowners. The PATH Act ends the bailout of Fannie Mae and 

Freddie Mac by gradually winding them down over a 5-year transition period. On their best day, they delivered 7 to 25 basis points 

interest rate advantage to home buyers and could only deliver a 

mediocre rate of homeownership. Contrasted with almost $200 billion of bailout, wrecked lives of 

those who lost their homes, artificially driving up the cost of principal, and helping bring the economy to its knees, Fannie and 

Freddie did little to help the home buyer but an awful lot to hurt 

the taxpayer and the economy. 

The PATH Act also protects taxpayers and homeowners by finally codifying what most everyone claims the FHA was designed 

to do, and that is, an agency that was intended to help first-time 

home buyers and those with low and moderate incomes. But instead, today they can insure millionaires’ mortgages for homes valued as high as $729,750. In many sections of my district, that is 

a mansion. 

The mission creep has overextended FHA. Today, it is broke, 

unsustainable, and projected to need its own taxpayer bailout, just 

like Fannie and Freddie. An unsustainable, bankrupt FHA will 

help no one. The PATH Act puts it on a sound footing. 

The PATH Act tears down barriers to private capital and frees 

home buyers from a government-dominated system that puts again 

Washington elites in control of deciding who can and cannot buy 

a home. Washington should not steer our citizens into mortgages 

that may not be right for them, nor should Washington prevent 

them from taking out mortgages of their choosing. Reforms in the 

PATH Act increase competition, enhance transparency, and give 

consumers more freedom to choose the mortgage that is right for 

them as long as the terms are fully disclosed and understandable. 

Witnesses at our previous hearings have warned that regulations 

coming down the pike could increase mortgage interest rates 1 to 

3 

4 percentage points, lead to fewer home sales, and deter community banks from making mortgage loans. Core logic is that only half 

of today’s mortgages would comply with the bureaucratic DoddFrank rules that could go in effect in just 177 days. Again, this is 

wrong and unfair. 

Now, a significant number of Members in this room have said 

they want to end Fannie and Freddie, they want a new system, but 

they want to do it up until it is time to actually do it. Nearly 5 

years after the bailout of Fannie and Freddie, I asked my friends 

on the other side of the aisle and in the Administration, if you don’t 

like our plan, where is your plan? Some say the plan will end the 

30-year fixed-rate mortgage. But it exists today without a government guarantee, and many of these same naysayers are the ones 

who said we have nothing to worry about with Fannie and Freddie, 

let’s roll the dice. Thus, their track record on predictions is not an 

enviable one. 

Some say this plan would end the Federal guarantee for the 

housing finance system. Yet FHA, the Federal Home Loan Banks, 

the VA, and the rural housing programs are still there. Some say 

the PATH Act is ideological. But it seems to me that those who defend the status quo of a government-run monopoly, complete with 

taxpayer bailouts, economic crises, and mediocre rates of homeownership are the ones that are being ideological. It is past time to protect taxpayers and homeowners. It is time to pass the PATH Act 

today. As I have stated publicly before, it is my intention to mark 

up the PATH Act before the House adjourns for the August district 

work period, and I look forward to this hearing. 

At this time, I yield 5 minutes to the ranking member. 

Ms. WATERS. Thank you, Mr. Chairman. 

While I am appreciative that you are holding this hearing today, 

I am deeply disappointed in the radical and unworkable discussion 

draft that is before us today as well as the lack of interest in making this a bipartisan effort. 

Mr. Chairman, it did not have to be this way. We have on the 

table a bipartisan housing finance reform proposal in the Senate. 

During the last Congress, we saw numerous bipartisan reform proposals here in the House. But this bill you have put forward, with 

zero input from Democrats, is obviously a non-starter among all 

the individuals who have a stake in a healthy housing finance system. It is an unrealistic proposal based on the notions of ideological 

academics whose ideas have no real audience or weight outside of 

certain members on this committee. We Democrats here on this 

committee have authored principles that guide our consideration of 

this discussion draft as well as all proposals to reform our markets. 

To put it plainly, the ‘‘Path to Nowhere Act’’ fails all of them. To 

take them one by one: 

The proposal would be bad for America’s middle-class, ending the 

affordable 30-year fixed-rate mortgage and making it a product 

only available to a tiny subset of lower-income FHA borrowers, or 

to the richest households getting jumbo loans. 

The proposal would be bad for investors, expecting them to accept all the credit risks on U.S. mortgages, but removing key protections in our securities laws and excluding them from the management of this new utility. 

4 

The proposal would be bad for community banks and credit 

unions, with the new utility presenting them with tremendous 

challenges, access in the capital markets, and severely undercutting the FHA. The proposal also leaves them in the dust with a big 

bankcentric covered bond proposal that requires them to pick up 

the tab if these bonds bankrupt the deposit insurance fund. 

The proposal would be bad for consumers, repealing the predatory lending provisions in the Wall Street Reform Act and inviting 

unscrupulous subprime lenders back in the market. 

The proposal would be bad for renters at a time when vacancy 

rates are at an all-time low and American families increasingly 

need access to rental options. The proposal abolishes the trust 

fund, eliminates the GSE’s role in multi-family housing, and makes 

the FHA multi-family program an administrative nightmare in 

which no lender would want to participate. 

And finally, the proposal would be bad for taxpayers, codifying 

an implicit guarantee on our housing market instead of making the 

guarantee explicit and paid for by the industry as other bipartisan 

proposals suggest. 

When the Republican experiment in extreme privatization ultimately fails, we will see a future Administration come into Congress asking for us to clean up the mess this bill created. And, finally, your proposal would be a disaster for the American housing 

market, which drives nearly 20 percent of our Nation’s GDP. 

Mr. Chairman, I stand ready to work with you if you want to get 

serious on housing finance reform or regulatory relief for our Nation’s community banks and credit unions. But, to be candid, this 

proposal is a failure on all accounts and for all stakeholders. And 

given that this draft bill undercuts both the homeownership and 

rental market, I am not sure where my Republican counterparts 

expect middle-class American families to live. I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from New Jersey, the Chair of the Capital Markets Subcommittee 

and the chief author of the PATH Act, for 2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman, for holding this important hearing, and thank you for your hard work and also for the 

hard work all of the staff put into the legislation. I am very pleased 

this committee the is addressing one of the underlying causes of 

the financial crisis: the oversubsidization and misallocation of credit through Fannie and Freddie. 

But the hemming and the hawing and the gnashing of teeth by 

my friends across the aisle maybe is a little bit surprising given all 

the compromises you will find in this draft. Over the last 2 years, 

our friends on the other side have set forth a number of demands 

that must be included in any GSE reform measure. Now that we 

have listened to them and introduced legislation that specifically 

addresses each of those concerns, I see it is still not good enough. 

See, first, they demand that GSE reform be comprehensive. You 

would be hard-pressed to find anyone who says the package before 

us today is not comprehensive. 

Second, they demanded that reform ensure all financial institutions have access to the secondary mortgage market. So we compromised and ensured that they have access to the mortgage marVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
5 

ket through a different government-sponsored entity, the Federal 

Home Loan Banks. Included in the bill are several provisions 

which directly authorize Federal Home Loan Banks to aggregate 

loans for community banks and credit unions. 

Next, they demanded we retain some method for the government 

to play a countercyclical role in the market to ensure continued access to credit during times of market uncertainty. We compromised 

again, and included a provision in Title II that allows the FHA to 

do just that. Then, they demanded that we ensure the government 

continue to provide direct support for first-time and low- and moderate-income home buyers. So we compromised again, and made 

changes to FHA to preserve its important role in the marketplace 

of serving those people most in need. 

And finally, they required we preserve the availability of the 30- 

year fixed mortgage. We compromised yet again and included language to facilitate a new marketplace that will replicate the deep 

and liquid market enjoyed by investors today that allowed for the 

continued widespread availability of a 30-year fixed mortgage. 

Mr. Chairman, I commend you on your hard work on this legislation, your willingness to compromise and address their concerns, 

and your moving forward on this important debate. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, Mrs. Maloney, for 11⁄2 minutes. 

Mrs. MALONEY. I thank the chairman for starting this important 

conversation. And while the chairman’s bill includes vague language about maintaining the 30-year fixed-rate mortgage, wishing 

doesn’t make it happen. The bill would virtually eliminate the 30- 

year fixed-rate mortgage by making it unaffordable and inaccessible to middle-class Americans. 

According to Moody’s economist Mark Zandi, this bill would raise mortgage rates by at least 90 basis points, or $130 a month. That 

is a great deal of money over 30 years. This is not only unacceptable, it is unnecessary, because there are proposals such as the bipartisan Corker-Warner bill that would reserve the 30-year fixed 

affordable mortgage, and also protect taxpayers. Under their bill, 

taxpayers would have multiple layers of protection. 

First, private investors would have to take the first 10 percent 

of any losses. If the losses exceed 10 percent, then an industry 

guarantee fund similar to the FDIC would kick in and be able to 

bear losses even greater than the losses Fannie and Freddie suffered during the recent housing bust. Only then, in a catastrophic 

crisis, worse than 2008, could the government potentially be asked 

to provide a backstop. And even then, there is a clawback to the 

industry-guaranteed fund that would reimburse and protect the 

taxpayer. 

The housing market accounts for 20 percent of our overall entire 

economy. And the affordable home is part of the American dream. 

So it is absolutely critical that we work together in a bipartisan 

way to get this right to protect the taxpayer and the affordable 

home for Americans dreams. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Texas, Mr. Neugebauer, Chair of the Housing and Insurance 

Subcommittee, and another co-author of the PATH Act, for 2 minutes. 

6 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, for holding this important hearing. And, most importantly, thank you for driving the 

House finance reform debate on behalf of taxpayers and homeowners. 

Today, we are discussing the PATH Act, a commonsense and 

pragmatic reform measure of which I am proud to be a cosponsor. 

After 12 hearings and multiple conversations with stakeholders, we 

have put together a framework for a dynamic, healthy, and stable 

housing market. The PATH Act is a transformative piece of legislation that will bring our housing markets into the 21st Century and 

allow our housing finance system to function without the unprecedented government intervention that we have seen in recent years. 

The PATH Act will do three things. First, it will end the costly 

bailouts of Fannie and Freddie by phasing them out over a 5-year 

period. Second, it will right-size FHA by clearly defining its mission 

to ensure that the agency is focused on serving first-time home 

buyers and low- to moderate-income borrowers. And lastly, it will 

facilitate increased investor interest in the secondary mortgage 

market by removing impediments to private capital and defining a 

clear set of rules for securitization in the future. 

Now, I know some of my colleagues want to gloss over the cronyism and the Enron-style accounting and the outright financial 

fraud that allowed Fannie and Freddie to generate a subprime crisis. They would like to extol the virtues and the benefits of GSEs 

and propose to simply place a Band-Aid on the current government-centric housing system. But these calls remind me of a saying 

we have back in Texas, ‘‘You can put your boots in the oven, but 

it doesn’t make them biscuits.’’ This basically means that you can 

say what whatever you want to about these entities, but they are 

what they are. Let me remind my colleagues exactly what the system delivered for the American people: $16 trillion in wealth destruction; and $200 billion in taxpayer bailouts, all in the name of 

homeownership, in which, by the way, we rank 17th in the world. 

I know that it is human nature to resist change. I get it. Change 

is difficult. But in the case of housing finance, not to change is 

fatal. I urge all of my colleagues to support the PATH Act so that 

we can finally have of a 21st Century housing finance model that 

protects taxpayers and helps homeowners. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, Ms. Velazquez, for 11⁄2 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Chairman, while I understand the need to reform the housing finance system, I am extremely troubled by the proposal before 

us. The PATH Act removes the main source of viability in the 

multi-family market, the government guarantee. This will unduly 

impact many New Yorkers who rely on rental housing because of 

high homeowner costs. New York State is home to very tight rental 

markets. In fact, vacancy rates in Manhattan decreased to 1.83 

percent in the last year. We need more rental housing options to 

keep up with the demand. Yet this proposal does the opposite: reducing liquidity; increasing building costs; and driving up working 

families’ rent. 

As the ranking member of the House Small Business Committee, 

I am also concerned about the bill’s impact on small businesses. 

7 

Even though my community is a short subway ride to Wall Street, 

it is our credit unions and community banks that working families 

rely on for a loan. These are the exact institutions that this proposal will crowd out of the mortgage market. 

Mr. Chairman, we need a system that leads to stable, affordable 

housing. However, this bill is a path to nowhere. It does not protect 

anyone; indeed, it eliminates housing options for working families 

and excludes small businesses from the market. Thank you, and I 

yield back. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from West Virginia, the Chair of the Financial Institutions Subcommittee, and also a co-author of the PATH Act, for 1 minute. 

Mrs. CAPITO. Thank you, Mr. Chairman. Thank you for the hearing. This an issue that we need to address and we want to address. 

And I thank the chairman for his hard work. 

As we have heard before, the focus of this discussion draft is protecting consumers and protecting taxpayers. I am especially 

pleased that this legislation reforms the secondary mortgage market and also provides much-needed reforms for FHA that we have 

discussed time and time and time again in this committee. The 

FHA is an extremely important component of the Nation’s finance 

system. And the reforms here will focus on first-time home buyers 

and those with moderate and low incomes and will ensure that the 

FHA is serving its core mission in future generations. 

The PATH Act also will end the bailouts of Fannie and Freddie. 

As a Nation, we cannot return to a system that allows private entities to enjoy the profits in a bull market and then sticks the taxpayers with the bill in a downturn. Moving towards a privatized security—secondary mortgage markets will prevent this from happening in future housing cycles. 

Finally, there are critical provisions in Title IV that ensure small 

banks and credit unions will have access to the secondary mortgage 

market. These provisions provide significant release and certainty 

for these institutions that are extremely important in the relationship banking that they do every day in communities. I yield back. 

Thank you. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Massachusetts, Mr. Capuano, for 2 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. Thank you for having 

this hearing. Mr. Chairman, look, everybody today is going to pontificate an awful lot. I guess it is pontification day. And I would 

really rather avoid as much as possible. So for our panel members, 

here is what I am interested in: What will this bill do to the average person who wants to buy a home? Simple. Please don’t talk in 

basis points or market. Here is what they want to know: Will they 

have access to an affordable, standard, fixed 30-year mortgage at 

rates they are currently seeing without massive downpayments? 

That is really what it is all about. All of this is just 

hyperventilating to make ourselves sound smarter than we really 

are. 

What we are interested in is does this bill work. And, honestly, 

I have my doubts. We have only had it for a couple of days, and 

we are trying to pore through it, trying to get as much information 

as we can. The information I have at the moment is that the anVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
8 

swers to all the questions I just said is probably no. I know full 

well you won’t know it. But they won’t have access to a standard 

30-year mortgage. There might be 30-year mortgages, but no one 

I know will be able to afford them. 

So, for me, I would like to limit these panel comments to—I 

know you are all 10 times smarter than I will ever be, but you 

don’t have to prove it today. Speak in small words, words that we 

understand, words that I can explain to my constituents at home, 

and to me, to figure out what this bill does to America. And to assuage my fears as I enter this that the 30-year mortgage is gone, 

the downpayments will skyrocket, and that my average homeowner, based on my brief numbers, would have to pay $40,000 

more over the life of a 30-year mortgage, if they could get one, on 

a $200,000 mortgage, which in my district is a small mortgage. We 

have high values. 

So, my time is up. But please, again, you don’t have anything to 

prove to me. Small words. Thank you. 

Chairman HENSARLING. Today, we have two panels of witnesses. 

Mr. CAPUANO. Between your accent and mine, we have to have 

a translator. 

Chairman HENSARLING. I concur. 

Today, we have two panels of witnesses. At this time, we will 

welcome our first panel of distinguished witnesses. 

Peter Wallison is the Arthur F. Burns Fellow in Financial Policy 

Studies at the American Enterprise Institute. He previously served 

as General Counsel to the U.S. Treasury Department, and was a 

member of the Financial Crisis Inquiry Commission. Mr. Wallison 

is the author of several books, including a 2004 work on Fannie 

Mae and Freddie Mac. He holds law and undergraduate degrees 

from Harvard. 

Douglas Holtz-Eakin is the President of the American Action 

Forum, and is the former Director of the Congressional Budget Office. He also previously served as an economic advisor to President 

Bush 41. He, too, was a member of the Financial Crisis Inquiry 

Commission. He earned his Ph.D. from Princeton and holds an undergraduate degree from Denison University. 

Adam Levitin is a law professor at the Georgetown University 

Law Center where he teaches bankruptcy, commercial law, and financial regulation. He earned his law and undergraduate degrees 

from Harvard, and a master’s degree from Columbia. 

Mark Calabria is the Director of Financial Regulation Studies at 

the Cato Institute. We welcome him back as a previous Congressional staffer. He has also served as the Deputy Assistant Secretary for Regulatory Affairs at HUD, and has held a variety of positions at Harvard’s Joint Center for Housing Studies, the National 

Association of Home Builders, and the National Association of REALTORS®. He earned his Ph.D. from George Mason University. 

Last but not least, Mark Zandi is the Chief Economist at Moody’s 

Analytics where his research focuses on macroeconomics, financial 

markets, and public policy. Dr. Zandi also has written a number of 

books on the economy, including at least one on housing finance. 

He holds his Ph.D., master’s, and bachelor’s degrees from the University of Pennsylvania. 

9 

I believe all of you have testified before our committee before. 

You will each be recognized for 5 minutes to give an oral summary 

of your testimony. And without objection, each of your written 

statements will be made a part of the record. After each of our panelists have finished—as I warned earlier, votes may interrupt us. 

But at some point, each Member will be recognized for questioning 

for 5 minutes apiece. 

Mr. Wallison, you are now recognized for your testimony. 

STATEMENT OF PETER J. WALLISON, ARTHUR F. BURNS FELLOW IN FINANCIAL POLICY STUDIES, THE AMERICAN ENTERPRISE INSTITUTE (AEI) 

Mr. WALLISON. Thank you, Mr. Chairman. 

Chairman Hensarling, Ranking Member Waters, and members of 

the committee, although there seems to be a near consensus in 

Congress that Fannie and Freddie should be eliminated, there is no 

agreement on what should replace them. Since the financial crisis 

in 2008, almost every plan that has been put forward in Washington has involved one or another ingenious way to wind down 

Fannie and Freddie while keeping the government involved in 

housing finance. This reflects, in my view, a kind of delusion that 

Fannie and Freddie were bad but government’s involvement in 

housing finance is somehow good. In reality, Fannie and Freddie 

did what they did, and became insolvent doing it, because they 

were backed by the government. 

If Congress adopts another plan for the government to back 

housing finance, we will end up in the same way, with a mortgage 

meltdown, a major recession, taxpayer losses, and millions of families losing their homes. The last point finally got to a former chairman of this committee, Barney Frank, who said in 2010, ‘‘I hope 

by next year we will have abolished Fannie and Freddie. It was a 

great mistake to push lower-income people into housing that they 

couldn’t afford and couldn’t really handle once they had it.’’ 

It is easy to see why government does this. Every Member of 

Congress wants to do something for his or her constituents. Congress spends because the voters like it. All the better then when 

the benefits for constituents do not involve spending. Fannie and 

Freddie are examples of this. Because they were controlled by the 

government, they could be forced to provide a government guarantee for subprime and other risky mortgages, so that financial institutions and others would buy these mortgages when, in any 

other world, they would not think of taking such a risk. This was 

a taxpayer gift to constituents who did not have the financial resources or the credit records to get a mortgage, but the reduced underwriting standards that Fannie and Freddie were compelled to 

use inevitably spread to the whole market. 

There were no appropriations or increases in the debt until the 

whole system crashed because of risky mortgages in 2008, and millions of surprised and angry Americans lost their homes. 

Housing finance is a particularly good example of how Congress 

likes to spread the government benefits around. In the 2000s, it 

also made sure that wealthy constituents, people who were buying 

million-dollar homes, could get the benefits offered by the GSEs 

and FHA. If Congress adopts another plan for government-backed 

10 

mortgages, this will happen again. The Corker-Warner bill is an 

example of the many proposals that will eliminate GSEs, but put 

another government program in its place. Investors will be protected, but the government insurance program that would replace 

Fannie and Freddie will eventually be pressured by Congress to 

make the same risky mortgages that brought the financial system 

down in 2008. 

We should recall that FHA started its life requiring 20 percent 

downpayments. Now, it requires 3 percent downpayments and 

needs a government bailout. 

This story should tell all of us that the bill now before this committee makes practical sense. It would take the government out of 

most of the housing finance market, but it would still provide for 

a new and very prudent FHA for first-time home buyers. It winds 

down Fannie and Freddie over 5 years, terminates the affordable 

housing goals, creates a utility to organize and standardize the private securitization market, and clears away obstacles to the revival 

of private securitization. 

I have some suggested improvements for this bill detailed in my 

written testimony. But on the whole, it will eliminate the repetitive 

cycles of failure that have been the story of the housing finance 

market in the past. Instead of yet another government program 

and another meltdown in the future, the PATH Act would open the 

way for the private sector to do for housing finance what it has always done for the rest of the American economy, that is, innovate 

and cut consumer costs. It is the first hopeful sign that Congress 

isn’t mired in ideology but can learn from history and practical experience. Thank you. I look forward to your questions. 

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

227 of the appendix.] 

Chairman HENSARLING. Dr. Holtz-Eakin, you are now recognized 

for your testimony. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, THE 

AMERICAN ACTION FORUM 

Mr. HOLTZ-EAKIN. Thank you, Mr. Chairman, Ranking Member 

Waters, and members of the committee. It is a privilege to be here 

to discuss the PATH Act today. I look forward to your questions. 

Let me say four things briefly, with short words, to begin. First, 

I applaud action. For anyone who has looked at the crisis and 

watched events since the crisis, the inability of Congress to move 

forward on genuine reform of the GSEs has been a frustration, and 

to begin reform is to make a real step toward the ultimate recovery 

of the U.S. housing market. And so I am thrilled to see the bill 

under discussion, and I hope we see legislative action and law making in our future. 

Second, I think there is a broad consensus that Fannie Mae and 

Freddie Mac should be phased out. And the winding down on this 

bill is a desirable action. They were at the heart of poor mortgage 

origination, which was a key part of the 2008 financial crisis. Their 

structure guaranteed that the bad mortgages and the mortgagebacked securities were disseminated widely through the financial 

system, and the interconnectedness guaranteed that taxpayers 

were required to step in and keep them from failing. Not only are 

11 

these facts well understood by experts and by the members of this 

committee, they are very well understood by the American public. 

And the evidence from polling and other sources is that the American public believes that they should no longer have a future in 

American housing finance either. And I am thrilled that this bill 

would wind them down. 

The third thing I think is admirable is the fact that the FHA reforms are taken in a coordinated fashion with the other GSE reforms. In too many efforts on both sides of the Congress, these are 

done in separate silos and don’t recognize that we have, in fact, 

seen one government backstop substitute for another at different 

times, and that we ought to have a single, coherent strategy for 

backstopping the low-income Americans who need help getting into 

the housing that we believe they deserve. And the coordination, the 

targeting toward a more appropriate footprint for the FHA, and the 

steps taken to threaten its solvency and protect it—the taxpayers 

from its exposures at present are all desirable steps in this legislation. 

And then, lastly, I want to applaud the broad array of efforts to 

bring private capital back into mortgage finance in the United 

States. We simply cannot go forward with 80 to 90 percent of housing finance running through the Federal Government. The private 

sector is imminently capable of providing large-scale finance. As 

Mr. Wallison mentioned, it does so in every other sector of the 

American economy. We can be relied on to do so and do so in an 

innovative and consistent fashion in housing finance. The steps 

taken to clarify, and in some cases slow down, recent rule making 

will allow that to happen, as opposed to impede it. And I would encourage the committee to keep a focus, 100 percent, on attracting 

private capital. That in the end will be the best solution to all of 

the problems we have experienced over the past several years. 

Thank you for the chance to be here today, and I do look forward 

to your questions. 

[The prepared statement of Dr. Holtz-Eakin can be found on 

page 141 of the appendix.] 

Chairman HENSARLING. Professor Levitin, you are now recognized for 5 minutes. 

STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, THE 

GEORGETOWN UNIVERSITY LAW CENTER 

Mr. LEVITIN. Chairman Hensarling, Ranking Member Waters, 

and members of the committee, good afternoon. 

The housing finance market does badly need reform. But the 

PATH Act is the wrong path to take. The PATH Act would recreate 

the worst features of the housing finance market during the housing bubble: predatory lending; unregulated securitization; and toobig-to-fail banks. I detail these and other problems in my written 

testimony. 

My remarks today will focus on the key feature of the PATH Act, 

a proposal to privatize the housing finance system. Privatizing the 

housing finance system has several problems. First, there is not 

sufficient capital willing to assume credit risk on U.S. mortgages. 

Currently, there is $6 trillion in interest rate risk investment in 

the U.S. housing finance system. There is no reason to believe that 

12 

these rate risk investors will transform into credit risk investors. 

If they do, the yields they will require will substantially raise mortgage costs, thereby depressing housing prices. 

Privatization could leave the housing finance system without sufficient capital. In plain language, that means higher rates and 

higher downpayments for your constituents. The PATH Act, therefore, is a risky gamble with the entire U.S. economy, based on ideology, not evidence. 

The second problem with the private housing finance system is 

that the products available would change. If the PATH Act were 

law, it would be difficult for most American families to obtain 30- 

year fixed-rate mortgages or to lock in interest rates in advance of 

closing. 

The 30-year fixed is not the best product for all home buyers, but 

it is a consumer-friendly product that is particularly well-suited for 

financial stability. It has been a bedrock of post-war American 

homeownership. The availability of the 30-year fixed is also heavily 

a function of Federal backing of the housing finance system. While 

it is true that one can find a 30-year fixed in the private jumbo 

market, as Mr. Wallison likes to note, the truth is that jumbo 30- 

year fixed-rate mortgages are rare. Jumbo mortgages are a small 

part of the housing finance market, and most jumbo mortgages are 

adjustable rate. 

Fixed-rate jumbos are less than 4 percent of the entire housing 

finance market, and not all of those are for 30-year terms. Instead, 

the massive evidence is that private lending markets do not generate widespread availability of long-term fixed-rate loans. And 

this is because the interest rate risk is too great, as Mr. Loving 

from the ICBA explains in his written testimony. Thus, 30-year 

fixed-rate loans are also a rarity in the totally private commercial 

real estate market, and they did not exist before the entry of the 

Federal Government into the housing finance space. 

Similarly, the PATH Act would make it difficult for most American families to lock in interest rates in advance of closing. The 

ability to get a preclosing rate lock is a substantial benefit to the 

entire U.S. housing market. American home buyers are able to lock 

in rates in advance because of the To Be Announced (TBA) market. 

This is a market in forward contracts on GSE MBS. A TBA market 

requires tremendous liquidity, and that liquidity requires a high 

degree of interchangeability among MBS. GSE MBS has that high 

degree of interchangeability because they entail uniform credit risk 

for investors, namely, none. 

The PATH Act would produce private label MBS with all types 

of variation in credit risk that would make a TBA market impossible. While there is a TBA market for jumbos, it is a—you can get 

a rate lock on jumbos, it is only because that rate risk can be 

hedged in the GSE TBA market. The jumbo market piggybacks on 

the existence of the federally-backed market. Thus, the PATH Act 

would make it impossible for most Americans to get preapproved 

for a mortgage at a particular rate before shopping for a home. 

The third problem is that the PATH Act encourages riskier lending. Not only does the PATH Act repeal key anti-predatory lending 

laws, but it recreates the unregulated securitization markets that 

could produce the housing bubble and financial crisis. The PATH 

13 

Act creates an optional, privately owned but regulated 

securitization utility. It is questionable whether banks will find 

that the benefits of the utility outweigh its costs. Because the utility is merely optional, the utility will have to compete with unregulated securitization by banks for market share. The result could 

well be a race to the bottom in underwriting standards that increases the likelihood of government bailouts. 

In an ideal world, I would unequivocally prefer to see the U.S. 

housing finance system financed entirely with private capital. The 

government’s involvement in the U.S. finance system does carry 

with it serious concern of moral hazard and politicized underwriting. Yet, proposals like the PATH Act that would eliminate any 

government guarantee from the housing finance system are not a 

solution. Every developed economy either has an explicit or implicit 

guarantee of its housing finance system because housing is too important to the economy and social stability for any government to 

let the market collapse. Accordingly, we need to proceed by thinking about how to structure an explicit government guarantee realistically so as to minimize moral hazard rather than pretending 

that we can simply have a private market and ignoring the implicit 

guarantee that will always exist in that market. The PATH Act is 

not the right act for reforming our housing finance system. Thank 

you. 

[The prepared statement of Dr. Levitin can be found on page 172 

of the appendix.] 

Chairman HENSARLING. Dr. Calabria, you are now recognized for 

5 minutes. 

STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL 

REGULATION STUDIES, THE CATO INSTITUTE 

Mr. CALABRIA. Chairman Hensarling, Ranking Member Waters, 

and distinguished members of the committee, I thank you for the 

invitation to appear at today’s important hearing, and I also want 

to express my delight to be among so many friends on both sides 

of the aisle. It truly is a pleasure to be back here. The committee 

will note from my biography that I have spent the last 2 decades 

involved in various aspects of housing and mortgage finance policy. 

Let me be very clear that I believe housing is a critical component 

of our economy; moreover, I believe that housing is one of the basic 

necessities of life, if not the most important necessity of life. So, to 

be very clear, I do have a stake in a healthy mortgage finance system. 

Without stable, decent, and affordable housing, many other goals 

in life become quite difficult if not impossible to achieve. With that 

in mind, I would submit that our current system of mortgage finance has not facilitated the dream of affordable, accessible homeownership. Our current system has largely encouraged families to 

become highly leveraged and highly indebted, leaving both them 

and our greater economy at risk. 

Our current system has not resulted in long-term gains of homeownership. You can look at the Census data, it is pretty clear. Nor 

has our current system provided financial stability, which should 

be obvious. The recent recession and the accompanying 8 millionplus job losses were a direct result of our current mortgage finance 

14 

policies along with other policy mistakes. Were we to choose to retain the current system or to make only cosmetic changes, we guarantee, let me emphasize, we guarantee a repeat of the recent recession. 

It is far past time we recognize the failures of our current system 

and move toward a better system that effectively serves homeowners and taxpayers. Fortunately, in my opinion, such a system 

need not cost the taxpayer nor endanger our economy. Affordable— 

in contrast to what my good friend Adam has said—fixed-rate financing is available in other parts of our financial system. Jumbo 

mortgages today trade at rates, and you can get at rates comparable to the conforming, in my opinion, having about 40, 50 percent of the jumbo market is not rare. I think it is actually quite 

common. 

You can get affordable fixed-rate financing in the auto market. 

And if you look at the recession, auto sales followed a similar trend 

downward as the housing market, yet auto sales recovered years 

ahead of the housing market, despite a lack of direct government 

support from auto purchases, with the exception of Cash for 

Clunkers. 

So, let me be crystal clear. We can’t have affordable, long-term 

mortgages without the support of Government-Sponsored Enterprises. In my opinion, claims to the contrary are pure fiction. 

Elimination of Freddie and Fannie would also have limited impact 

on homeownership rates. Let me emphasize that the Nation’s 

homeownership rates reached levels comparable to those today before we witnessed even having a secondary mortgage market. That 

is a fact. I would be happy to give you cites for the data. In fact, 

the initial growth period of the secondary mortgage market, between 1982 and 1992, was a time of declining homeownership 

rates. 

Let me turn now to the Protected American Taxpayers and 

Homeownership Act, the PATH Act. Let me commend the Chair 

and the committee staff on their efforts. I would also say I have 

followed the actions of this committee for close to 20 years. And let 

me say, I think this is without a doubt the most balanced, thoughtful, and logical piece of legislation I have ever seen come before the 

committee. I recognize it is a low bar. We urgently need to eliminate Fannie Mae and Freddie Mac. The PATH Act charts a course 

for doing so. 

I will note that even if the PATH Act was passed into law as 

written, our mortgage market would be characterized by extensive 

government support. Yes, the PATH Act helps create a freer mortgage market, but it does not create a free one. My one complaint 

would be that the PATH Act does not go far enough and contains 

too many compromises. For instance, I would suggest to the committee that an additional 5 years of conservatorship for Fannie and 

Freddie is unnecessary. I think at most, a 2-year lead time for 

FHFA would give a sufficient time to prepare for a receivership. 

The reduction in GSE and FHA loan limits should also be accelerated. A loan limit of 525, 500, as ultimately envisioned by the 

PATH Act, still covers around 90 percent of the U.S. housing market. 

15 

In my opinion, a more reasonable number would be closer to 200. 

Our mortgage finance system has long been a massive, regressive 

subsidy to America’s wealthiest families. And while I commend the 

new income-targeting requirements for the FHA retained in the 

PATH, I believe we can do a lot more to ensure that what subsidies 

are provided are targeted to those in need. 

Lastly, I want to commend the committee’s inclusion of reforms 

to stop abuses of eminent domain. While I would extend these provisions far beyond the mortgage market to protect all homeowners 

from having government steal their homes, I think the included 

provisions are an important first step. 

So, again, let me close by commending the Chair for his efforts 

to take our mortgage market in a more rational and sustainable direction. I would certainly say I have yet to see a perfect piece of 

legislation. This is certainly not one. I don’t expect to ever see a 

perfect piece of legislation. I certainly think there are changes that 

could be made, but I think this is a terrific start. 

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

104 of the appendix.] 

Chairman HENSARLING. The Chair will note the call of votes on 

the Floor. So, we will listen to Dr. Zandi’s testimony, I will take 

the liberty of taking my 5 minutes to ask questions, and then when 

we return, if it is acceptable, the ranking member can ask her 

questions at that time, and then Members may leave when they 

feel it necessary. I hope everybody stays for Dr. Zandi’s testimony. 

Dr. Zandi, you are now recognized for 5 minutes. 

STATEMENT OF MARK M. ZANDI, CHIEF ECONOMIST, MOODY’S 

ANALYTICS 

Mr. ZANDI. Thank you, Mr. Chairman, Ranking Member Waters, 

and the rest of the committee for the opportunity to be here. I am 

an employee of Moody’s Analytics, but these are my views and 

opinions, not those of Moody’s. You should also know that I am on 

the board of directors of MGIC, which is one of the largest private 

mortgage insurance companies in the country. And I am also on 

the board of directors of the Reinvestment Fund. That is one of the 

largest CDFIs in the country, and also has a stake in all of this. 

I have three points to make. The first point is, I do want to congratulate the chairman and the other members of the committee 

who worked on this, particularly the staff. This was clearly a very 

significant piece of work, with a lot of moving parts and a lot to 

digest. And to be frank, I haven’t been able to digest it all. But it 

is significant. And I agree with the word ‘‘comprehensive.’’ It is a 

comprehensive effort. And I think that is laudable, because I don’t 

think we can consider solving the problems posed by Fannie and 

Freddie without considering the housing finance reform system in 

its entirety. That involves FHA reform, and it involves getting private capital in more through the banking system and through the 

private residential mortgage securities market. So, that is all good. 

The part on covered bonds, I enjoyed that very much. I think 

that is a very appropriate place to look for additional capital. I 

think there is a lot more work that needs to be done there to make 

this a workable proposal, but I think that is a good direction to 

head. 

16 

And as the chairman knows, I have long been skeptical of the 

QRM rule as currently written. And I am hopeful the Federal Reserve will address those issues before the end of the year. So, this 

isn’t necessary for part of GSE reform. But the first point is, I 

think this is a significant piece of work. 

My second point is that the vision in the PATH for the private 

mortgage finance, that the private mortgage finance system would 

be the primary provider of credit, is not viable. It is not viable for 

three reasons. The first reason is it will lead to much higher mortgage rates. By my calculation, and there are a lot of assumptions, 

obviously, that go into these calculations; you need to vet them 

very carefully. But for the typical buyer, home buyer in today’s 

market, and today’s market is a pretty tight market, the quality of 

the borrower is very high relative to the average market. But for 

the typical borrower today, by my calculation, this will—if the 

PATH was passed in its entirety, it would raise mortgage rates by 

90 basis points. So, that is .9 percentage points, that is $130 per 

month for the typical borrower. For the borrower who is not as 

high quality through, say, an edge of the qualified mortgage box 

which is being used to find eligible mortgages, it will be measurably higher than that. And in times of stress, in times of recession, 

even typical recessions, it would be even higher than that. 

So, this is very costly. One of the key reasons for this is a lack 

of liquidity in this market that, with no government, explicit government guarantee. The To Be Announced market, the TBA market, this is absolutely critical to a well-functioning housing financial system, this has to be preserved. This will not be preserved 

under the vision that is in the current PATH plan with regard to 

privatization. It will not work. 

Now, I understand there are other elements of the plan that try 

to address this issue. You clearly understand this is an issue. The 

common securitization platform is a good idea. But I am very skeptical that there will be any takeup on that platform. There are 

some benefits, but there are also costs. And there is no compelling 

reason for anyone to move to the platform. 

The second reason this isn’t viable is that the 30-year fixed-rate 

loan will become marginalized in this system. In our current system, three-quarters of the mortgage loans are fixed-rate. We can 

debate the merits of fixed-rate loans. But I think Americans like 

them, and we should preserve that. I think in the PATH, it would 

be closer to 20 to 25 percent of mortgages would be 30-year fixed. 

And finally, when push comes to shove, the government is going 

to step in. When times are tough, the government is going to step 

in. And we need to recognize that and charge for that. And if we 

don’t do it up front, it is going to cost taxpayers a lot more. 

The third point I want to make, and it is a very quick point, and 

I will just state it, is I do worry about access in this proposal, access for small banks and community banks. I know you try to address it through the Federal Home Loan Bank System. I don’t 

think it is adequate. And for access for disadvantaged homeowners. 

I think we need to do more for them in the context of a bill like 

this. 

Thank you for your time. I really appreciate the opportunity. 

17 

[The prepared statement of Dr. Zandi can be found on page 240 

of the appendix.] 

Chairman HENSARLING. The Chair will now recognize himself for 

5 minutes for questions. And again, to Members, votes are taking 

place on the Floor right now. 

Dr. Zandi, in listening to your testimony, you said in your opinion, as you have examined the PATH Act, you believe that it could 

drive up interest rates 90 basis points, 9/10ths of 1 percent; correct? 

Mr. ZANDI. Yes, that is correct. 

Chairman HENSARLING. And you also mentioned in your testimony your earlier concern about premium capture. You have been 

on the public record saying that the premium capture reserve account could increase interest rates not 90 basis points, but 100 to 

400 basis points. Do you still stand by your earlier statement? 

Mr. ZANDI. I do, yes, sir. That is under the—the current way the 

QRM and premium capital— 

Chairman HENSARLING. So one current regulation of the status 

quo, in your opinion, could drive up interest rates 1 to 4 points in 

the entirety of the PATH Act, you believe may drive up interest 

rates 9/10ths of 1 percent. Is that correct? 

Mr. ZANDI. That is correct. For the typical borrower, the borrower in the middle of the distribution. 

Chairman HENSARLING. Next question: You recently wrote in 

Moody Analytics, it is dated July 13th, that under the PATH Act 

the FHA would account for no more than one-fifth of the mortgage 

market on average, which is 20 percent. Historically, prior to the 

crisis, it has averaged 10 to 15 percent. 

Mr. ZANDI. Right. 

Chairman HENSARLING. So what do you consider to be the optimum footprint of FHA if the PATH Act leaves it larger than its historic average? 

Mr. ZANDI. I don’t have a number for you. And I really—I think 

the FHA’s key role is providing affordable credit to first-time borrowers, lower-income households, as envisioned in the PATH plan. 

And I also think in the Path plan, one good element to the plan 

is that it allows the FHA to expand its footprint in times of economic crisis. I think that is appropriate. But I don’t have a number 

for you. 

Chairman HENSARLING. Okay. Thank you. I want to read from 

a Financial Times article dated Tuesday, which is entitled, ‘‘U.S. 

Jumbo Loan Rates as Cheap as Standard Mortgages.’’ ‘‘The rates 

on mortgages for expensive U.S. homes are converging with loans 

on government-subsidized loans. The difference between the average jumbo rate and the standard rate on a 30-year fixed-rate mortgage—so this is 30-year fixed to 30-year fixed—has been 20 basis 

points or less, two-tenths of 1 percent, in 6 of the past 7 weeks.’’ 

We have heard some who say that under the PATH Act you 

could still find a 30-year fixed, but the delta would be such that 

it could not be affordable. What do you make of this Financial 

Times article, Dr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. These are the facts on the ground. I do think 

they call into question the blanket claim that we can’t have a 30- 

18 

year fixed-rate mortgage in the absence of the current government 

backing. 

Chairman HENSARLING. Dr. Calabria, did you want to chime in? 

Mr. CALABRIA. Let me say, I very much agree. I am going to disagree with my friend Mark here. 

When you look at the jumbo market today, it is 60, 70 percent 

fixed-rate. So it is not clear to me why would assume that you are 

going to have 25 percent of it be fixed-rate if you got rid of that 

government guarantee. So, again, the fact that you can get affordable 30-year fixed-rate financing in the jumbo market is proof that 

it can be done. It is done. 

Chairman HENSARLING. We have observed in 2 of the last 3 decades that we have had serious housing bubble pops that precipitated economic crises. One of the things we are attempting to do 

with the PATH Act is ameliorate these boom-bust cycles. I know 

this is something that you had studied, Mr. Wallison. Do you believe that the PATH Act as currently drafted would help ameliorate 

those cycles? 

Mr. WALLISON. I do, Mr. Chairman. Private markets very seldom 

result in the kind of bubbles that we confronted, for example, in 

2007 and 2008. That bubble was 9 times larger than any housing 

bubble we had ever had. The biggest before that was about 10 percent. In 2008, the bubble was about 90 percent. 

Now, that was because of the fact that the government had 

begun to pour a lot of money into the housing market and the government was not concerned about the risks. In a private market, 

the lenders become concerned about the risks as the prices go up. 

The government had no concern about that, and that would be true 

under any government-backed program. 

Chairman HENSARLING. My time has now expired. 

Again, votes are on the Floor. With apologies to our audience and 

our panelists, this committee will stand in recess until immediately 

after this vote series, approximately 2:30. 

[recess] 

Chairman HENSARLING. The committee will come to order. The 

Chair now recognizes the ranking member for 5 minutes. 

Ms. WATERS. I would like to direct my question to both Adam 

Levitin and Mark Zandi. The question-and-answer document that 

was released by the proponents of this discussion draft claim that 

the affordable 30-year fixed-rate mortgage will continue to exist 

even without a government guarantee. Though they offer little by 

the way of evidence to support this claim, does the language in the 

bill specifying that the new mortgage utility needs to include for 

securitization a 30-year, fixed-rate mortgage actually mean that 

the middle-class borrowers will have access to their product on affordable terms? The Republican Q and A document then pivots and 

says that most Americans shouldn’t have 30-year fixed-rate mortgages anyway because homeowners typically move after 7 years. 

Can you discuss the benefits of the 30-year fixed-rate mortgage, 

including how the predictable payment helps families with financial planning? Are loans that amortize on a 15-year schedule affordable for most American households? 

Let me start with Mr. Levitin. 

19 

Mr. LEVITIN. Thank you very much, Congresswoman. In the Q 

and A that the Majority produced on this bill, they give an example 

of the difference between a $400,000 30-year fixed-rate mortgage 

and a $400,000 15-year fixed-rate mortgage, and the example is 

meant to illustrate that with a shorter mortgage term, principal 

gets paid down faster, and that is true, but what is not stated in 

the example is the effect on the monthly payment for that homeowner. Using the numbers from that example, the homeowner’s 

monthly payment would go up almost $1,000 by going from a 30- 

year fixed-rate mortgage to a 15-year fixed-rate mortgage. 

Now, when you figure that the average—the median American 

family has an income of about $55,000, adding $12,000 in mortgage 

payments a year just isn’t feasible. Even for a family who is earning double the median, $100,000, adding $12,000 in mortgage payments just doesn’t work. So, if the availability of 30-year fixed-rate 

mortgages decreases, that means there are going to be people who 

are just kept out of the housing finance market and that is really 

going to be a problem. 

Ms. WATERS. Thank you. Mr. Mark Zandi? 

Mr. ZANDI. Yes. The debate about the 30-year fixed-rate loan is 

a legitimate debate. I can see both sides of the argument, but my 

sense is that at the end of the day, it is a product that is very good 

for American households. It is really a question of who bears the 

interest rate risk, the homeowner, the household, or the financial 

system, the folks making the loans, and I think we decided as a 

nation, at least since the Great Depression, that it is better that 

the risk resides in the financial system and it is best handled 

there, and I think that is appropriate. 

So I think we should work really hard to preserve the 30-year 

fixed-rate loan as a mainstay of the American mortgage finance 

system. And to second Adam’s point, this is very key to affordability. If you can extend the payments over 30 years, it makes the 

loans much more affordable. 

One last quick point: We are unique in the world in having a 30- 

year fixed-rate loan. The rest of the world does not have a 30-year 

fixed-rate loan, and that is largely because of the way we have organized our system and because of the government guarantee. 

Ms. WATERS. Taking a page out of Congressman Green’s book, he 

has sometimes asked a question of all of the panelists at one time, 

and it doesn’t require everybody to talk but simply to raise your 

hand. How many think we should preserve the 30-year mortgage? 

If you think so, would you raise your hand? 

[Show of hands.] 

Mr. HOLTZ-EAKIN. I don’t understand the question. 

Ms. WATERS. I beg your pardon? 

Mr. HOLTZ-EAKIN. I don’t understand what the question means. 

You can have a mortgage. 

Chairman HENSARLING. Microphone, please, Doctor, we can’t 

hear you. 

Mr. HOLTZ-EAKIN. Congresswoman, I am not sure I understand 

what the question means. You can have a 30-year mortgage, it can 

be at a fixed-rate, you can have no penalties for prepayment, you 

can have at what rates, there are lots of— 

20 

Ms. WATERS. We are talking about a 30-year fixed-rate mortgage. 

That is what we are talking about. I know that there are lots of 

products. Some of them sound like 30-year fixed-rate mortgages, 

but they are not, and I am simply just asking a basic question 

about the 30-year fixed-rate mortgage. It is not complicated. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, for 5 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. So, some people say— 

and I will direct this to start with Mr. Wallison—that if there is 

less of a government guarantee in the housing market, there will 

not be enough investor demand to support the market. That is 

what some people say. Now, I spent some time digging down into 

the question, and I want to discuss with you and the panel what 

I found, and I will use, as been requested, some basic language 

here as we look at Fannie and Freddie. 

I am going to talk about supply and demand. On the supply side, 

when you wind down Fannie or Freddie and eliminate them, you 

have to ensure that there are significant pieces to fill the pie that 

they leave open. Under this legislation, we have a variety of mechanisms, as you know, that have filled the pie. There is a new qualified securitization market that is established under the bill, there 

is a new U.S. covered bond market under this bill, there is an enhanced and more transparent private label market, there is an initial room on bank balance sheets through regulatory changes provided under the bill, there is an expanded role of the Federal Home 

Loan Banks provided under the bill, and there is a restructured 

and a solidified FHA Ginnie government guarantee issue and 

structure under the bill as well. So when you add all these up, 

these new and enhanced supply channels, I believe you are getting 

very close to equaling the current space that Fannie and Freddie 

occupy. 

Now, I heard in regards to the demand side, many supporters of 

a large government role in the housing market, including on the 

panel, Professor Levitin, talk about how there are certain so-called 

rate buyers out there who don’t want any credit risk and they 

won’t participate in the market without a government guarantee. 

And Dr. Zandi mentions that, too, in some of his assumptions. 

Mr. Levitin actually, not only in his written testimony speaks to 

this specifically, and he identifies what he is talking about. He specifically gives examples. He talks about the Norwegian pension 

funds and states that they are ‘‘unlikely to seek to assume credit 

risk or mortgages in a consumer credit market that they do not 

know intimately.’’ I am sure you remember that. 

The pension fund that he is referring to is the Government Pension Fund Global. It is the largest sovereign wealth fund in the 

world with roughly $730 billion in assets under its management, 

and since he referred to it, I thought I would dig it up and see 

what he is talking about. And I have a part of the Norwegian pension fund here in my hand. This is part of the Partners Group 

which spells out their guidelines that he is talking about, which I 

assume he knows about. 

What does it say as far as their intentions? They say they will 

involve themselves with securities such as lower unrated tranches 

21 

of pre-existing securitized or structured debt instruments such as 

mezzanine debt or others that have that feature. In other words, 

they will engage in credit risk, contrary to your testimony. 

Now, to make sure that the Norwegian fund was not an outlier, 

I examined the next biggest fund that is out there, a sovereign 

wealth fund. That is the Abu Dhabi Investment Authority, which 

is over $600 billion in assets under management, and I did some 

research there on this fund, and one of the things that popped up 

was a recent article—a Google search is all you had to do—and 

they have in here that they are basically doing $200 million in Indian real estate. Now, I know that Abu Dhabi is closer to India 

than it is to the United States, but I assume if they are going to 

go over there investing it, they will be looking over here as well. 

Now, another class of rate investors that frequently gets mentioned by some commentators who won’t theoretically buy U.S. 

mortgage bonds without a government guarantee are foreign central banks, and this in fact is one of the three assumptions that Dr. 

Zandi uses, that he used in his numbers to get to the 90 basis 

points. 

So, what I did there, I looked up to see whether that is true as 

well and I found a article from April of 2013 from Bloomberg News 

that reports that foreign central banks are actually loading up on 

equities, and as you well know, equities have far more credit risk 

associated with them than what we are talking about here. 

The potential rate investors it mentions also are insurance companies, pension funds and diamonds. So I think if you do an analysis as I have done here—which didn’t take too long—of their investments, there are plenty of products with credit risk in their 

portfolio. 

So, Dr. Wallison, or Mr. Wallison, would you like to address that 

as to whether there is enough appetite to fill the rest of the pie as 

we seem to see that there is? 

Mr. WALLISON. I am glad that you almost called me ‘‘Dr.’’ 

Wallison. I am the only one on this panel who doesn’t deserve that. 

In any event, the way the private market works is there are groups 

within the economy that do want to buy securities that do not involve credit risk, and of course, they would be clustered around 

government agencies of various kinds. 

So the fact that it is now true that certain banks and foreign 

banks and so forth are buyers of Fannie and Freddie securities 

doesn’t mean that there isn’t an economy out there made up of 

many other kinds of financial institutions, life insurance companies, private pension funds that need the kinds of private securities 

that pay good yields to invest in. 

Mr. GARRETT. We are— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Mrs. 

Maloney, for 5 minutes. 

Mrs. MALONEY. Thank you. I would like to ask Mark Zandi some 

questions on the FHA section of the bill. 

Supporters of this bill claim that FHA would play a countercyclical role by increasing lending during times of economic downturn and cushioning the housing market, but under this bill the 

FHA would only be permitted to lend to a limited segment of the 

22 

market and could not backstop the mortgage-backed securities 

market. Without a government backstop, wouldn’t the mortgagebacked securities market be vulnerable to investor runs in times of 

financial stress? And I am interested in any other comments you 

may have on the FHA portion of the bill. 

Mr. ZANDI. Yes, that is a good point. Another concern about a 

privatized system as envisioned in the PATH is that it does leave 

the system open to runs. The banking system was subject to runs, 

deposit runs, prior to the formation of the FDIC. We established 

the FDIC to provide deposit insurance, and that has worked marvelously well. We haven’t had a run on the banking system since 

the Great Depression. 

My worry would be that in a system which has no explicit catastrophic government backstop, we would see runs in the mortgage 

securities markets in times of stress, and that would impair the 

system and result in much higher interest rates, particularly for 

borrowers with lower credit quality, and it would be quite damaging not only to the housing market but also to the financial system because the U.S. mortgage market is such a large part of the 

global financial system, and obviously to our economy as well. So, 

I think that is a very reasonable concern. 

The PATH does recognize this as an issue and tries to allow the 

FHA to help step in the void, and I think there is credit due. It 

tries to provide that kind of cyclical entry point for the government, 

but I would be concerned that it is inadequate and would not be 

sufficient to forestall runs throughout the barter system and we 

would have problems, yes. 

Mrs. MALONEY. All right. You also stated in your testimony that 

the underlying bill would increase mortgage rates by roughly 90 

basis points and that this was a conservative estimate, and I would 

like to allow you time to respond to some of the issues raised by 

my colleague, Mr. Garrett, and also, if you use less conservative assumptions, how much could mortgage rates realistically rise under 

this bill? 200 basis points? 300 basis points? If you could elaborate 

and comment on this section? 

Mr. ZANDI. Sure. The 90 basis point estimate is based on the typical borrower in the current credit environment. That is a borrower 

with a 20 percent downpayment, that is a borrower with a 750 

credit score, which as you know is very high. The median credit 

score in the Nation is about 720, and it also has a borrower with 

a debt-to-income ratio, a front-end debt-to-income ratio of 31 percent, so this is a pretty high-quality borrower. So, it is 90 basis 

points in a normal economic environment for that typical borrower. 

For a borrower who is on the edge of the credit spectrum but is 

still a Qualified Mortgage (QM) loan, let’s just say that is the definition of the credit box we are using here, in a stressed environment, let’s say a typical recession since World War II, not the 

Great Recession, say the average typical recession, it could result 

in interest rates that are almost double that, so it would be quite 

significant. And it goes to my point about the 30-year fixed-rate 

loan. At that kind of an interest rate, when you raise rates that 

much, it is unaffordable, and therefore you won’t have borrowers 

who take on a 30-year fixed-rate loan. They just can’t afford it, and 

23 

therefore, the share of the market that is 30-year fixed would decline quite substantively. 

Now, the question that—would you like me to go on, or would 

you like me to stop? I can go on for 5 hours or 5 minutes. 

Mrs. MALONEY. I want to move on to another issue that you have 

raised in testimony. You testified that and related industries were 

25 percent of our overall economy. Other economists say it is 20 

percent. Some make it higher, some make it lower. It is important. 

How important is this, getting this bill right and making sure that 

housing is available to middle-class buyers to our overall economy? 

Mr. ZANDI. It is vitally critical that we get this right. We can’t mess this up because there is $10 trillion in U.S. mortgage debt 

outstanding. Just for context, there is $40 trillion in credit market 

debt in the United States. It is a big part of our financial system. 

If we mess this up, we are going to mess up our financial system 

and we are going to mess up the barter economy. There is no doubt 

that we have to get this right, and I applaud this kind of intellectual debate because we are not going to get it right unless we have 

this kind of debate. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair recognizes the gentleman from Texas, Mr. Neugebauer, 

Chair of the Housing and Insurance Subcommittee. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, and I thank the 

witnesses for being here this morning, this afternoon, I guess, now. 

Mr. Zandi, you mentioned in your testimony that the cost of FHA 

insurance would likely rise because of the required changes in the 

premium policy and the doubling of its reserve fund from 2 to 4 

percent. Do you know what the FHA’s capital ratio was in 2005? 

Mr. ZANDI. In 2005? I don’t recall, no. 

Mr. NEUGEBAUER. We have a chart. Let me just put that chart 

up here. 

Mr. ZANDI. That was a trick question. 

Mr. NEUGEBAUER. And so it was—in 2005, it was 6.5 percent, the 

capital ratio, and as you can see from there, it went up to 7.38, 

6.97, and I guess the other question is, was the premium at that 

particular time lower or higher than it is now? 

Mr. ZANDI. I believe it is higher now, but I don’t know for sure, 

no. 

Mr. NEUGEBAUER. So, I guess the question is, do we think that 

a higher capital ratio is a harmful thing? Or why would a more solvent entity cause the rates to go up when in fact we are asking this 

entity to go from—actually what we would like for it to do is move 

away from a minus 1.44 percent capital ratio to a 4 percent, 

which—and I believe you said that you sit on the board at MGIC; 

is that correct? 

Mr. ZANDI. Yes, I do. 

Mr. NEUGEBAUER. Yes. So would MGIC be underwriting any 

mortgage insurance today if they had a capital ratio of minus 1.44 

percent? 

Mr. ZANDI. No, they would not, sir. 

Mr. NEUGEBAUER. Would they be underwriting anything at 2 

percent? 

Mr. ZANDI. No, it wouldn’t be with us. 

Mr. NEUGEBAUER. Yes. So— 

24 

Mr. ZANDI. Yes. I don’t disagree with you. I am not arguing with 

you. I would not disagree about your points about the FHA. I 

would like to stipulate that. 

Mr. NEUGEBAUER. But you are saying that you think that the 

premiums would have to go up to be—to go to that level? 

Mr. ZANDI. All I am saying is that under the provisions of the 

legislation—let me preface this by saying one thing: This is a very 

complicated part of the bill, with a lot of moving parts, and as I 

said in my testimony, I have to digest all of it, so I was opaque for 

a reason. But my sense of it is it would result in higher premiums, 

but I am not saying that is a bad thing or a good thing. That was 

just a description of what would happen. 

Mr. NEUGEBAUER. The point I would make here is they have had 

higher capital ratios with lower premiums in the past, and see how 

that is stopped, so the argument that the premiums are going to 

go up to reach this goal is not necessarily validated by history. 

Mr. ZANDI. And we can go through the arithmetic, but yes, it is 

possible. 

Mr. NEUGEBAUER. This is to Mr. Calabria and Mr. Wallison, we 

have had 12 hearings and we have heard a lot of perspectives from 

a lot of different groups about the impact on housing to move to 

strengthen FHA, the potential impact on housing to—if we begin 

to wind down Freddie and Fannie, but the people who keep getting 

locked out of this discussion are the taxpayers. It is the taxpayers 

who have been making their house payment, and then they ended 

up making up for the fact that some of their friends and neighbors 

didn’t make theirs, to the tune of $200 billion. As you look at this 

bill, the two of you, is this going to be a better deal for the taxpayers? 

Mr. WALLISON. Yes, I think it is. What this bill does is create a 

much more prudent FHA, one that has to stand on its own 2 feet 

without the support of the taxpayers, although the taxpayers are 

ultimately going to be behind it, but there are sufficient provisions 

in this legislation that would reduce what the FHA does so that it 

only is covering low-income buyers of their first home. That would 

be exactly the right thing that we ought to encourage through this 

system. And if we can help low-income people to make their first 

purchase so that we can bring them into the housing market, that 

would be the way the FHA would be working best without any 

threat to the taxpayers. 

Mr. NEUGEBAUER. Thank you. Mr. Calabria? 

Mr. CALABRIA. Let me say, I very much believe that the responsibility of the committee, in my opinion, is to look out for the good 

of the entire American public, and that doesn’t just mean borrowers, renters, lenders, whatever; it is everybody. And as a borrower, if you give me a 90-cent subsidy and then take a dollar out 

of me as a taxpayer, I am worse off, I am not better off, so that 

is one point. 

The other point I would make is if you pass that subsidy on to 

me through my friends in the lending industry, the real estate industry, they are not going to give me all of it. They are going to 

take part of that. If you want to subsidize homeowners, cut them 

a check directly. 

25 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, Mr. 

Watt, the President’s nominee to be Director of the FHFA whose 

nomination was approved by the Senate Banking Committee earlier this morning, and if the gentleman—in the words of Mr. 

Cleaver yesterday—would like to be eulogized, I am sure he will let 

the rest of the committee know. 

The Chair yields to the gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman, and I think I am going 

to—in everybody’s interest—pass on the opportunity to ask questions, but I didn’t want to pass on the opportunity to commend the 

Chair for starting this discussion. It is a discussion that is long 

overdue and there are lots of moving parts we have to get through, 

and I suppose I am not supposed to say anything facetiously, but 

Mr. Calabria mentioned the possibility that the FHFA might be 

put out of business earlier than 5 years. That possibility was mentioned at the Senate hearing also, and a lot of people thought I 

would be offended by that notion, but the truth of the matter is 

that would be an indication that we have gotten through this discussion and to a point in the future where we would have a housing system that has been approved in the political process. 

So in that sense, I would certainly welcome that. I said that to 

the Senate, and I say that to Mr. Calabria, also. So with that, I 

can either yield my time to somebody else or yield back. 

Chairman HENSARLING. Since the gentleman yields back and effectively did not use his time, the Chair will instead recognize the 

gentleman from New York, Mr. Meeks, for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. Let me ask Mr. Levitin— 

I believe you testified that an overwhelming majority of investors 

in the U.S. secondary mortgage market are not credit risk investors. So, do you see any emerging appetite to assume this risk by 

any major private sector source of capital, and what could be the 

risk premium or capital charges that could be imposed for assuming this risk? 

Mr. LEVITIN. This is one of the really scary unknowns about any 

attempt to privatize the housing finance system. I would hope that 

everyone could agree that the first rule of housing finance reform 

should be to do no harm, and we don’t know how much transfer 

there will be of investors who currently are interest rate investors 

into being credit risk investors. To maintain current housing prices, 

to keep the system functioning as it is, we need $6 trillion of rate 

risk investors to transform into credit risk investors. 

It may well be that many rate risk investors are willing to take on credit risk, but if it is only $5 trillion, not $6 trillion, that is 

going to have a serious effect on housing prices. It is going to push 

them down. And to the extent that we have that transfer from rate 

risk investors to credit risk investors, those investors are taking on 

new risk and they are going to be charging for it. I don’t know exactly how much that is going to increase housing prices. Dr. Zandi 

has some estimates of that, but it is going to cause the cost of a 

mortgage to go up. 

Mr. MEEKS. Speaking of that, Dr. Zandi, let me ask you this: 

Many small community banks and credit unions rely heavily on the 

secondary market to sell up to 60 percent of the originated mortVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
26 

gage loans, and with the elimination of GSEs and the formation of 

a national mortgage market utility, what do you think would happen to these institutions’ access to a secondary market? 

Mr. ZANDI. That is a good question. It is an open question, I 

think. The PATH Act, from my reading, tries to address this in two 

ways, this concern you have: the first is to the utility and telling 

the utility, you have to take all comers on equal terms; and the second is to use the Federal Home Loan Bank System as an 

aggregator of loans from small banks. 

Now, the way the legislation is written, I would be nervous about 

both entry points. The utility is not compelled to follow through, 

and there is not—more importantly, there is no—it is not compelled—there is no compelling reason why mortgage companies 

would use the utility. It is not clear to me why they would do it, 

and so I don’t think you have a lot of people moving through the 

utility. And using the Federal Home Loan Bank System, it might 

work, but the Federal Home Loan Banks are not compelled in the 

legislation to do it, and I think even if they wanted to do it, and 

maybe it could work, it probably, because the small lenders aren’t 

on the same—there is a potpourri of them, they are all doing different things at different times in different ways, the Federal 

Home Loan Banks would probably have to backstop the reps and 

warranties to make it work. They would have to do some other 

things to make the loans coming to them from the small community banks on the same equal footing with the large banks to make 

it work in a reasonable way for the small banks. 

So, bottom line, I am not sure. I am skeptical that the way it is 

written would actually work. Maybe the legislation could be rewritten in a certain way to address these concerns and make it more 

viable, but as written, I would be concerned about it. 

Mr. MEEKS. Thank you. 

Mr. CALABRIA. If I could only clarify some of the discussion. The 

special risk about the 30 years, the interest rate risk has been alluded to. It is important to keep in mind that Fannie and Freddie 

provide a guarantee of the credit risk. Now, more often than not, 

how it functions is, let’s say Bank of America sells 1,000 mortgages 

to Fannie Mae, buys back the mortgage-backed security holding 

those 1,000 mortgages, Bank of America brings back that interest 

rate risk on its own books. It transfers the credit risk to Fannie 

Mae. So again, what is special about the 30-year mortgage, by and 

large, in a securitization model, is that interest rate risk is transferred on to the final investor. 

So unless we are envisioning a model where Fannie and Freddie 

maintain very large portfolios, because that is the only time where 

they maintain interest rate risk, otherwise it is passed on, and 

what I finally want to end with is the Democrat principles that 

were released earlier today say, we want to charge a fair price but 

with adequate revenue to cover the risk, so I think everybody is of 

a consensus here that this should be paid for one way or another. 

So even in this, rates go up. 

Mr. MEEKS. Is it the concern, though, that based upon this, it 

seems as though that not only will rates go up, but the individuals 

would have to have almost 20 to 30 percent down and not able— 

27 

and an adjustable rates where we just got out of that problem. I 

am out of time. I have to yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair recognizes the gentlelady from West Virginia, Mrs. Capito, the Chair of the Financial Institutions Subcommittee. 

Mrs. CAPITO. Thank you, Mr. Chairman. This question is for Dr. 

Holtz-Eakin on how the market utility is envisioned to work as proposed to set uniformed standards for securitization. Do you believe 

that a standardized platform would provide the market with a certainty that it would need about the terms of an agreement? 

Mr. HOLTZ-EAKIN. Frankly, I have some ambivalence about the 

utility as it is written. I think there is tremendous value to standardization. I think, and there is great role in the legislation for providing that standardization. I am less enthusiastic about government-sanctioned monopolies of any type. 

Mrs. CAPITO. Government-sanctioned what? I didn’t— 

Mr. HOLTZ-EAKIN. Monopolies, single entities of any type, and so 

I have some ambivalence about how this might play out in practice. 

The standardization, I wholly applaud. That is a very important 

step, something that I think would allow securitization broadly to 

function very effectively. 

Mrs. CAPITO. Thank you. This is for Dr. Calabria. I represent a 

rural area, and my great independent banker is going to be on the 

next panel, Mr. Loving from Pendleton Community Bank, and he 

holds his mortgages on the books in his community bank. Do you 

think that without the government guarantee, more institutions 

will be moving in that direction, where they keep their mortgages 

on their portfolio, and is that a bad thing? 

Mr. CALABRIA. I generally do think that without the Fannie and 

Freddie structure, you would have more portfolio lending. Quite 

frankly, I think that’s a positive. I included a graph in my testimony. Before 1980, and again, you need to keep all the failures of 

the savings and loan industry in mind. We don’t want to repeat 

that either, but I think you get better mortgage modification, for 

instance, you get a better knowing of the borrower when you have 

a problem with your mortgage, you can go to your lender, they 

have it, you have that discussion, you get a workout. 

I think a lot of the problems in the most recent crisis was an outcome of the securitization model, which we embraced, and as I 

mentioned, we previous pretty much had reached the homeownership rates we have today when securitization was irrelevant, so it 

is hard for me to see the last several decades of securitization as 

actually having brought a lot of good, other than in my opinion 

transferring risk to the more highly leveraged parts of the system. 

So, I think we should reconsider a broad portfolio model. I will 

say, I think a private TBA market certainly has a place. I think 

covered bonds has a place, but at the end of the day, going back 

to a lender makes it, keeps it, is responsible for it, I think you get 

better quality lending out of that. 

Mrs. CAPITO. Thank you. And this is a bit of a statement and 

then a question for Dr. Zandi. We talked about the 30-year fixedrate mortgage. That is important to me. In the place where I live, 

we have lower incomes, and we have lower property values, and 

you absolutely gauge whether you are going to be able to do this 

28 

or not on whether you can meet your monthly obligation, and in 

a State like mine which has lower socioeconomics, we do meet our 

obligations. We have some of the highest homeownership in the entire country, and so that can be achieved. 

But my question is—we have had hearing after hearing on this 

QM. There is a study out there by CoreLogic that says the mortgages that were written in 2010, under the QM, 52 percent of those 

mortgages would not qualify for a QM. So that is 52 percent of 

folks who got a mortgage under those standard—under those underwriting, and in this market now, with a QM, would be unable 

to access the mortgage market. That, to me, is an enormous red 

flag, and so if—I don’t see how we are going to have do no harm 

and keep a 30-year mortgage rate when we are going to be cutting 

out half of the people under the Dodd-Frank Act, under the auspices of protecting the consumer when the consumer, many of them 

are in Mr. Loving’s bank who are farmers and rural and folks who 

don’t met the metrics of a QM, they are the ones, those are the 

families, the young families who aren’t going to be able to buy that 

first house. 

There is a bank in Wheeling, West Virginia, which underwrites 

a program where the first-time home buyer doesn’t have to put 

down a downpayment. It is a charity program that was established 

by a trust 30 years ago. They are out of it. They are not going to 

be able to do it. So I would like to know what your response to 

something—to these folks are going to be, these 52 percent. 

Mr. ZANDI. I would say a few things. First, I think the intent of 

QM is a good intent. We want to make sure that borrowers can afford the mortgages that they are taking on. I think we can all 

agree. 

Mrs. CAPITO. Right. 

Mr. ZANDI. And I think that we do want some criteria for determining that, and it would be helpful if they are clearly defined and 

articulated, and I think that is the intent and purpose of QM. 

Second, I would say with regard to its implementation, I think 

there are some reasonable concerns about how tight QM has been 

defined. I think actually the Consumer Financial Protection Bureau (CFPB), the keeper of the rule, has relaxed some of the key 

constraints on QM over time and much of the industry feels comfortable with those. 

Mrs. CAPITO. I think I have just lost my time. Thank you. 

Mr. ZANDI. I had a third point, but it was the best one actually. 

Chairman HENSARLING. Maybe in the next round. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Capuano, for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. I actually found your 

testimony very interesting and intriguing. I didn’t disagree with almost anything anybody said. A couple of things you said, Mr. 

Calabria, but pretty much nothing else. Especially, Mr. HoltzEakin, I agreed with pretty much everything you said. The generic 

goals are the same. The question is, okay, what does this bill do 

to those goals, and I only have one segment to look at things. 

I can’t find any models that I think are comparable with the 

United States today that I can really look at a purely private market, and the only thing I can look at is the United States prior to 

29 

1930, 1933, and in that market everything I found, the history is 

a little vague, tells me that we had about the same rates we have 

today, give or take, but with a 50 percent down, 5-year payment, 

which pretty much came out to double any monthly mortgage anybody would have, rough numbers. And in today’s world, the average person who qualifies, which I agree, there are fewer people who 

qualify. And by the way, before I forget, I want to echo 100 percent 

the comments that were made by the previous speaker. If the QM, 

the QRM, the ABC, XYZ, anything ends up turning 50 percent of 

the potential market away, that is a wrong goal, that should be addressed immediately, and I haven’t had an answer to that by some 

people. That is a different hearing. 

But under today’s market, just based on some work I did today, 

the average mortgage that is available today to the qualified person, which is most people, most people who are looking to buy a 

house, for a 30-year fixed is 41⁄2 percent, that comes out to $1,013 

a month, which is still out of the range for a lot of people, but it 

is there. 

I can’t imagine taking that $1,000 and turning it into $2,000 a 

month, and so I need to go back to my original opening statement. 

Mr. Wallison, do you think that this bill, as currently drafted, 

would provide 90 percent of the people who are currently getting 

a mortgage today with access to a fixed 30-year mortgage in the 

41⁄2 percent range with a 10 percent downpayment, roughly, do you 

think this bill achieves that goal? 

Mr. WALLISON. I think this bill could very easily achieve that 

goal, and in fact, right now, Wells Fargo is offering a 30-year jumbo 

fixed-rate mortgage for 41⁄4 percent—less than the conforming loan. 

Mr. CAPUANO. Jumbo. 

Mr. WALLISON. A jumbo. 

Mr. CAPUANO. Who qualifies for jumbo? Tell me that again. 

Mr. WALLISON. A jumbo is a mortgage that is over and above— 

Mr. CAPUANO. I understand that, but who qualifies? 

Mr. WALLISON. Who qualifies? 

Mr. CAPUANO. Could my mother qualify for one of those? 

Mr. WALLISON. Of course. I don’t know your mother, but I assume she’s— 

Mr. CAPUANO. I think not, but that is beside the point. 

Mr. WALLISON. —a person who meets her obligations. 

But the point— 

Mr. CAPUANO. Would most of my constituents qualify for that? 

Mr. WALLISON. Of course, because when you have— 

Mr. CAPUANO. Really? 

Mr. WALLISON. When you have a market in which there is a lot 

of private competition, those rates will be kept low by the competition. 

Mr. CAPUANO. The one thing that is interesting to me is that one 

of your colleagues came in and dramatically demanded that we get 

rid of the 30-year mortgage in favor of a 20-year mortgage, and if 

we did that at the same rates, you are basically adding another 

$300 a month to it, but that is beside the point. 

Ms. Levitin, do you think that this bill would allow a typical, as 

we understand it today, 30-year mortgage to be available? 

30 

Mr. LEVITIN. I do not think that under the PATH Act a 30-year 

fixed-rate mortgage on affordable terms would be available to most 

home buyers. 

Mr. CAPUANO. Mr. Holtz-Eakin, do you have an opinion on this? 

Mr. HOLTZ-EAKIN. I do, and respectfully, I don’t think it is the 

right question. 

Mr. CAPUANO. You don’t have to think it is the right question. 

I just want you to answer it. 

Mr. HOLTZ-EAKIN. But respectfully, you just said there was a 

consensus that we have to change from where we are now, and so 

the mortgages that you are comparing to are ones which are vastly 

subsidized, have all sorts of opaque risks, and have left the taxpayer— 

Mr. CAPUANO. That is all well and good. But my average constituents are not interested in that. They just want to know if they 

can get a mortgage and their kids can. 

Mr. HOLTZ-EAKIN. I hope they are interested because it is costing 

them a lot of money. So the question will be, in whatever new system we have, will they have access to an affordable mortgage, and 

the answer to that is yes. 

Mr. CAPUANO. Are they going to have access to a mortgage that 

is in the range of what they have now? Because ‘‘affordable’’ is not 

an objective term. Would you agree with that? 

Mr. HOLTZ-EAKIN. ‘‘Affordable’’ is not an objective term, but I believe there will be a well-functioning mortgage market under the 

PATH Act that will give your constituents the housing finance they 

need. 

Mr. CAPUANO. So, thank you for not answering it, but close 

enough. I am trying to avoid this ideological philosophical statement so that I can go home and tell people yes or no. 

Mr. Zandi, do you think that the mortgage that my average constituents can get today will still be available under the PATH Act? 

Mr. ZANDI. No, I don’t. Going to the jumbo market, it is—the 

loans in that market current—especially today are incredibly high 

quality. I love Peter’s—I only have 7 seconds left, so— 

Mr. CAPUANO. Use it well. 

Mr. ZANDI. I have a good story for you. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Chairman HENSARLING. And Mr. Zandi, your timing isn’t the 

greatest. 

The Chair now recognizes the gentleman from California, Mr. 

Miller. 

Mr. MILLER. Thank you, Mr. Chairman. Mr. Zandi, I am not 

going to ask you, because you are wearing some kind of dart on 

your chest or something out there. 

Mr. ZANDI. I am used to that. I grew up in a big family. 

Mr. MILLER. It is very tough to determine what is happening in 

the marketplace because the marketplace is not normal today. The 

quotes that we had about the jumbo loans being competitive, 70 

percent loan-to-value, 750 FICO scores and stable for 3 years, you 

look at the conforming mortgage, $75 billion is being bought each 

month by the Fed, so it is almost impossible to look at anything 

today and say that is the norm and this is where we go from. 

31 

My only concern is will financing be available for homeownership. Remember back in 1983, remember how bad that was. I had 

major lenders telling me that you will never see a fixed-rate 30- 

year loan again. That proved, thank goodness, not to be true, but 

the prime rate was 21.5 then. Fannie and Freddie made some horrible, horrible mistakes, but in 2008 the default rate for the jumbo 

marketplace was greater than Freddie and Fannie’s even, so everybody in the marketplace made horrible mistakes. They made loans 

they shouldn’t have made. They made them to people they 

shouldn’t have made them to, and we ended up with a mess on our 

hands. First, $2.7 trillion lost in mortgage—default market, $180 

billion was lost by Fannie and Freddie which they owned a bunch 

of it, but that is still $180 billion they should not have lost. So 

there is no excuse for any of it, but what do we do today is my concern. 

Mr. Holtz-Eakin, you wrote an article last year stating that 

should another housing bust occur, Congress will intervene in some 

way. I think that is probably a reasonable statement, and yesterday, Fed Chairman Bernanke echoed that if we don’t define the 

role of government, won’t it cost taxpayers more in the end. So, 

there are some red flags that we need to look at and say what do 

we do. 

My question to you is without a guarantee, what happens in time 

of crisis, and we need to worry about crisis. Will investors be there 

to purchase mortgage-backed securities and will interest rates tend 

to rise? 

Mr. HOLTZ-EAKIN. It is a very good and a difficult question, and 

I have struggled with it. 

Mr. MILLER. Even the committee. 

Mr. HOLTZ-EAKIN. A lot of it is an issue of a Federal backstop. 

The focus today has been on what will a 30-year fixed-rate mortgage look like. That is one way to think about it, but the second 

way to think about it is what is the cheapest taxpayer protection 

we can get, because if you do believe that in a— 

Mr. MILLER. I think Freddie made a horrible mistake. 

Mr. HOLTZ-EAKIN. —major crisis Congress will intervene, will 

that be more expensive than something that is a backstop price 

now. That is a fair question— 

Mr. MILLER. And my concern is— 

Mr. HOLTZ-EAKIN. —that I worry about. 

Mr. MILLER. —as your statement here last year and Chairman 

Bernanke’s is the government is probably going to end up being 

there, and that is a huge concern if we don’t define some role and 

purpose for them. But numbers bother me, and I say, let’s look at 

the market today. What is the private sector doing? 

Banks own about $1.5 trillion of wrapped mortgage-backed securities. Foreign holders own approximately 1 trillion of wrapped. 

The Fed owns $1 trillion of wrapped. Insurance companies, State 

and local investment funds own about a trillion between them in 

wrapped. So you have about $4 trillion in residential mortgages to 

buyers who don’t buy unwrapped mortgages, and I am looking at 

a huge sector of the economy that is buying only wrapped. 

Mr. Levitin, you have kind of gotten by unscathed. I will direct 

this one to you. Can you, as an academic, tell this committee and 

32 

the American people that the market participants are wrong in 

what they are doing today and that some other fashion is right? 

Mr. LEVITIN. That they are wrong in only buying wrapped? 

Mr. MILLER. Yes. 

Mr. LEVITIN. No, I can’t say that. I think a mortgage investor 

right now should rightly have a lot of concern about credit risk on 

any loans that are being originated, and therefore would want 

wrapped securities. 

Mr. MILLER. Any of you, there is no definition of the TBA market. That is a huge concern for me out there because there is no 

front and there is no rear. You have your microphone up, go for it. 

Mr. CALABRIA. Let’s keep in mind that part of the existence of 

a TBA market is because Fannie and Freddie have 1933 Securities 

Act exemptions, so you could craft those sort of exemptions for a 

TBA market that allows you to sell that forward. 

Mr. MILLER. But if we don’t do that on the front end, the back 

end connecting the person who wants to buy a house to the person 

who wants to buy the loan could be problematic. 

Mr. Zandi, you touched on that briefly. The bull’s-eye is back on 

you at the conclusion. I have 30 seconds, so what do you think 

about the TBA market? Is it necessary? Is it something that’s— 

Mr. ZANDI. Yes, I think that is a very important part of our mortgage housing finance system. It provides liquidity, it keeps rates 

much lower than they otherwise would be, and we need to preserve 

that under all circumstances. 

Mr. MILLER. So, Freddie and Fannie made huge mistakes, no 

doubt. I’m not defending Freddie and Fannie, something has to 

change, but there are some holes that bother me, and TBA is one 

of them, and the wrapped on the investment side is the other, and 

Mr. Chairman, thank you for the time. I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Georgia, Mr. Scott, for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. Zandi and Mr. Levine, I kind of want to direct my questions 

to you. Is that right, in the middle, is it Levine or— 

Mr. LEVITIN. Levitin. 

Mr. SCOTT. Levitin. All right. I am really worried about this bill. 

It sort of reminds me of like a Darth Vader, sort of a dark star that 

kind of sends us on the dark side, because, Mr. Zandi, you mentioned this because it sends us back, all the way back 80 years to 

the Great Depression. We have had a need to respond, and I have 

listened to this discussion, and nowhere in this discussion have we 

considered the plight of the American people, the struggling homeowner, the person out there, the fact that we need to admit the 

truth here that this bill not only sends us back past 80 years, back 

to 1934 when the National Housing Act was put in place, where 

we knew we needed a government backing for housing. 

And now in this rush to declare this war on Fannie and Freddie, 

we are losing sight of that human quality, the middle-class. And 

I really would like—I have 3 minutes, and I would like for the two 

of you to really stress how this definitely, without question, will 

cause havoc to the 30-year fixed mortgage rate, which is the crucible that allows people to be able to have an affordable payment 

schedule and how refusal of this will send them into the arms of 

33 

predatory lenders, of prime selection, and of some of the very 

things that caused the trouble in the first place. 

Please tell us, without question, that this bill will end for those 

people, the vast majority, the 30-year mortgage rate and impact of 

that. 

Mr. LEVITIN. Congressman, we have never seen a private mortgage lending market produce long-term fixed-rate mortgages on 

any scale. We have several examples of these markets. We have 

the current jumbo market, which does produce some fixed-term, 

fixed-rate mortgages, but not on a large scale. The much higher 

percentage of jumbos are adjustable-rate and fixed-rate. We have 

the commercial mortgage market which generally does not produce 

loans much longer than 10 years in duration, and we have the predepression housing finance market, which was totally private and 

the standard product there was a 3- to 5-year fixed-rate loan where 

it was not amortized. It was interest only. They were called bullet 

loans, because at year 5, you had to bite the bullet. Either you 

could pay the entire principal or you had to roll it over, and if markets were frozen, if your credit was damaged, or if rates had simply 

gone up, you might lose your home. 

Mr. SCOTT. But I want to—what I am after is, will not this cause 

havoc to the—I am not worried about the rich folks. They are going 

to go get their house. They are not worried about that. We have 

to worry about the middle income and the lower income and will 

not this, in effect, end that 30-year fixed mortgage for them in 

large measure? Yes or no? That is what I am after here. 

Mr. LEVITIN. It is going to make it much harder for them to get 

affordable 30-year fixed-rate mortgages. 

Mr. SCOTT. All right. Mr. Zandi, your comments on this, please. 

Mr. ZANDI. Yes, I would agree with that. It is going to make it 

a lot more difficult for lower- and middle-income households with 

lower credit scores, less of a downpayment, more disadvantaged 

folks who don’t fit quite in the box for a 30-year fixed-rate loan. 

Mr. SCOTT. And in addition to that, will not it make it more difficult for those poor little community banks and those credit unions 

who could fill in the gap here under this legislation, would be very, 

very hurtful to them? 

Mr. ZANDI. Yes, but let me just say that I think the legislation 

is sensitive to that concern. It is just a matter of getting the mechanics right to address that concern, so it is not a matter of intent. It is a matter of can we get this workable in the framework 

that has been put forward in the legislation. 

Mr. SCOTT. But it is the bottom line that you all agree that this 

bill, as structured, needs to be fixed or else it will do tremendous 

damage to the middle-class and the lower-income people. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, Mr. 

McHenry, the Chair of the Oversight and Investigations Subcommittee. 

Mr. MCHENRY. Thank you, Mr. Chairman. Thank you for having 

this important hearing, and for a great panel of witnesses. I think 

it is a deep ideology we hear from my colleagues on the other side 

of the aisle that says only government can provide this type of 

product and otherwise it would simply not exist in nature. 

34 

It is wholly ridiculous on its face that that is in fact not what 

a new market would look like without the government intervention. In fact, Mr. Zandi, to—a quote the chairman referenced before 

about QRM and the premium capture rule, and you stated before, 

quote, as a result of the way the premium capture rule is stated, 

the mortgage rate impact to borrowers would be significant, on the 

order of an increase of 1 to 4 percent. 

Now, I am bringing this up because many of us believe that 

Dodd-Frank is going to drive up the cost of lending, especially in 

the mortgage marketplace. And Mr. Zandi, you said as much in the 

response to the chairman at the beginning. And so, let’s talk about 

that. Walk me through your thinking on this, why the reforms that 

we have and a part of this legislation actually will end that, right, 

and that is beneficial in your view, Mr. Zandi, is it not? I am sorry, 

Dr. Zandi. 

Mr. ZANDI. Yes. Specifically on QRM. As QRM and the premium 

capture rule are written, it would be, I think, a mistake because 

it would raise mortgage rates considerably, particularly for households with lesser credit scores, more disadvantaged groups, so I 

think as currently written, it would be a mistake. 

Now, having said that, the Federal Reserve, which is the keeper 

of that rule, understands this and has been working quite hard 

over the last couple of years—I think it has been at least 2 years 

since they introduced the rule—to address these concerns, and they 

are going to rule on this, at least it is my understanding, by the 

end of the year, so let’s take a look at it, and they understand— 

because I have gone back and forth with spreadsheets and they understand the concerns. 

Mr. MCHENRY. Right. So we are dealing with this legislation. Do 

you think this is a beneficial provision that we have in the bill? 

Mr. ZANDI. I think it is almost irrelevant because by the time 

this bill gets anywhere or any other bill gets anywhere, this will 

be— 

Mr. MCHENRY. No, no, no, but today. We are talking about today. 

If you are telling us as Congress to hang out for 6 months, we are 

not Members of the Senate. We don’t do that well in the House. 

Mr. ZANDI. If I were king for the day, I would say I understand 

the intent of QRM, I understand the intent, but it does not—it is 

skin in the game, the logic is straightforward. If you have skin in 

the game, therefore you are going to make better quality mortgage 

securities. I am on board with that. I just don’t think the QRM 

rule, as it is currently defined, will accomplish that. That is all. 

Mr. MCHENRY. Right. Thank you. 

Mr. Calabria, when we talk about the impact of Dodd-Frank on 

mortgage-backed securities, rather than making it a more robust, 

more liquid market, it actually has the opposite effect; is that your 

view? 

Mr. CALABRIA. I would very much agree. I think the provisions 

in Dodd-Frank are going to do more to restrict mortgage credit 

than anything in the PATH Act. I also want to mention to Congressman Capuano’s question, 2 or 3 years from now, nobody is 

going to get a mortgage for 41⁄2 percent under any system because 

of what the Federal Reserve is going to do. So, you should have 

raised that yesterday with Ben Bernanke. That is the place to go. 

35 

Mr. MCHENRY. Okay. So the cost of mortgages has more to do 

with Federal Reserve policy? 

Mr. CALABRIA. And I would also emphasize, if you look at the difference between choices in say Europe between fixed-rates and 

short-rate financing, it has far more to do with the conduct of monetary policy. We have talked repeatedly about interest rate risk. 

The prime source of interest rate risk in this country is the Federal 

Reserve. 

Mr. MCHENRY. Sounds like a good way to articulate for the Taylor Rule for monetary policy. 

Mr. Wallison, when we talk about the PATH Act, in the provisions that are there to entice and attract private capital to the 

MBS market, do you think that is sufficient, do you think those are 

proper for us to have in this legislation? 

Mr. WALLISON. Yes, I do. The one thing to realize is that in the 

private sector, people are compensated for taking risks. The idea 

that there isn’t enough capital in the private sector to replace government-supported capital such as with Fannie Mae and Freddie 

Mac is, of course, wrong, because the rest of our economy is financed entirely by people who do take risks in order to make loans. 

And if you are looking at institutional lenders, insurance companies and pension funds, have about $13 trillion that they do not invest by and large today in government-backed instruments. They 

are looking for risk-based instruments. 

Mr. MCHENRY. And finally, only half of today’s mortgage originations would meet Dodd-Frank requirements. 

Chairman HENSARLING. You are out of time. The time of the gentleman has expired. The Chair now recognizes the gentleman from 

Massachusetts, Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I want to thank the panel as well for your willingness to help us 

out on this. Dr. Zandi, I had an opportunity to read your testimony 

last night. I think you did a great job. Very balanced. But you have 

raised some very real concerns about what might happen to mortgage rates if we went through with the PATH bill as is written. 

There is a formula here that you have used which describes at 

least what the minimal impact might be, and that would be, I believe, under certain conditions to raise mortgage rates by 90 basis 

points. Is that correct? 

Mr. ZANDI. That is correct. For the typical borrower in the current mortgage market, it would be about 90 basis points, under the 

assumptions that are laid out clearly in the testimony. 

Mr. LYNCH. But there are other parts of your testimony where 

you talk about the inability to quantify the tangible risks that 

might be increased because of the lack of a government backstop. 

And I was just trying to add that in if there was any sense of what 

you thought that might bring us to above the 90 basis points. 

Mr. ZANDI. I took a crack at estimating that. This brings up a 

broader point. And that is, we are going to have a debate about the 

impact of this legislation and other legislation on mortgage rates 

and the 30-year fixed and mortgage credit availability. It is really 

an empirical question. It is going to be very difficult to answer. 

Given that, we have to be very careful that we don’t, as Adam said, 

do anything that harms the current system. It is like—I am not 

36 

going to have as good a metaphor as the Congressman from Texas 

with the boot and the oven, but if you are standing on a cliff, you 

want to make sure there is some water underneath you if you dive 

off. 

Mr. LYNCH. Right. 

Mr. ZANDI. And I am very concerned that under the legislation, 

we will be diving off a cliff, and we don’t know what is underneath 

us. 

Mr. LYNCH. Right. Here is my problem. You are describing a 90 

basis point increase under average conditions here with an average 

buyer when the time at which we actually need the backstop and 

we need the system to hold firm is under the direst or the most 

calamitous market conditions. That is when we need the backstop 

to be there. Have you thought about—in the past, we have seen 

private capital flee when market conditions are unfavorable. So 

what does that say about the ability of private capital to replace 

a government backstop under those conditions? 

Mr. ZANDI. That is a very good point. So my sense, just to give 

you the sense of magnitude, is that if you took a borrower who is 

at the edge of the QM credit box, that is kind of the box we have 

defined as we are going to lend into in general, in a stressed environment, let’s call it a typical recession, since World War II, not 

the Great Recession, just a typical recession, that for that borrower 

the impact on mortgage rates in the vision presented in the PATH 

plan for privatization would probably be double the 90 basis points, 

closer to double, so closer to 180 basis points. I am giving too much 

precision to this because there are so many assumptions. But that 

kind of gives you kind of order of magnitude, yes. 

Mr. LYNCH. Okay. The other—in your testimony you also talk 

about the covered bond piece of this. And you made some—I think 

it was your testimony talked about some of the—the use of covered 

bonds in Europe and how the government backstop there really is 

what made the covered bond work. Talk about that. 

Mr. ZANDI. Yes. The covered bond market works in Europe as 

well as it does because the financial system is dominated by toobig-to-fail banks. And in Europe, there really is no significant debate about too-big-to-fail. That is taken as a given, very different 

from here, where we are working really hard, Congress, the Administration, and regulators, to reduce too-big-to-fail risk. But in Europe, if Deutsche Bank gets into trouble—just picking a name of 

the air—the German population, the policymakers are going to be 

behind and backstop Deutsche Bank. So the guarantee, in a sense, 

the government guarantee in Europe is through the banks and the 

banking system and that is how— 

Mr. LYNCH. Right. And large banks, not just—that is not just a 

bank—the banks are increasingly large there to make that covered 

bond work. 

Mr. ZANDI. Correct, yes. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Westmoreland. 

Mr. WESTMORELAND. Thank you, Mr. Chairman. And thank all 

of you for being here and going through this process. 

37 

The CFPB put out a statement trying to tell the consumers about 

not paying the minimum on a credit card, saying, pay your debt off 

quicker. Because if you pay the minimum, you are just—the debt 

is just going to continue to build. And so, they recommend paying 

the most you can. 

If you compare that to if you look at a home loan, let’s say of 

$100,000 at 5 percent interest, a 30-year fixed-rate, it is going to 

be about $550 a month, and a 15-year would be about $800 a 

month. You would pay total interest of $93,000 on a 30-year, and 

$42,000 for the interest on a 15-year. So is this something that you 

would—is the 30-year fixed something that is making it so easy for 

people to assume all this debt rather than getting a shorter-term 

loan? Anybody? 

Mr. WALLISON. All right. I will pick that up. Yes, indeed, you are 

pointing to something very important. And that is the question of 

leverage. People who take a 30-year fixed-rate loan or any kind of 

30-year loan are in a position where they are not actually accumulating any equity or very much equity in the house for the first 6 

or 7 years. Most people then move after 6 or 7 years. So they 

haven’t accumulated much. 

The question always comes down to this: What is the monthly 

cost in relation to the size of the home. And what we are doing 

with 30-year mortgages, by reducing the monthly cost with less 

amortization, we are encouraging people to buy bigger homes. 

What people should be thinking about is the same thing you mentioned with the credit card. And that is, they should be buying a 

house that enables them to get equity as soon as possible, and that 

is with a shorter term, not with a 30-year term, and to pay as 

much of the principal as they can in terms of the size of the home. 

We don’t necessarily have to persuade people to buy the biggest 

home they can possibly buy with whatever they have available to 

spend on a mortgage. 

Mr. HOLTZ-EAKIN. That was beautifully said. And I just want to 

emphasize the flip side to that transaction is lenders who have private capital risk are going to take the argument Peter just made 

and give good counsel to borrowers and say, this really isn’t the 

house you should be buying, it is too much. And in a system that 

used private capital just to screen risks to make sure wise decisions are being made you will get better information on both sides 

of that transaction. 

Mr. LEVITIN. I would agree with everything that has been said 

so far. But I would add in this. The credit card analogy is problematic for two reasons. Number one, credit cards are now pretty much 

all variable rate, and that means that the consumer is taking on 

the risk that interest rates can go up. With a fixed-rate mortgage, 

it may be advantageous not to prepay sometimes. On the other 

hand, you can prepay your credit card whenever you want, you can 

pay off the whole balance, you don’t have to pay the minimum. 

That gives you an option. That option is really valuable because 

you might have an unexpected expense in a month when you don’t 

want to have a make a larger payment. The 30-year fixed-rate 

mortgage basically builds in that option. You can always prepay. 

You can make that larger payment, pay down the debt. And that 

38 

is often the smart thing to do, but you have the flexibility. And 

that is one of the real consumer benefits of the 30-year fixed-rate. 

Mr. CALABRIA. I want to make a broader point about this sort 

of—all of this takes context in obviously the housing market. So 

let’s even think about the height of the bubble in 2006, 2007. We 

added less than 2 percent to the total stock of housing. So part of 

the problem here is that supply is relatively fixed in the short run. 

And if Adam and I are bidding against the same house and you 

keep raising the amount we can borrow, one of us is just going to 

bid higher and higher. This is great for the home seller, great for 

the real estate industry. It is not so great for Adam and me. And 

a better world would be Adam and I agree we are not going to bid 

each other up. Unfortunately, we are in a bad equilibrium. So how 

do you get past this where people who are struggling don’t have to 

bid higher and higher prices for housing? At the end of the day, 

a lot of these subsidies in the mortgage market just go to the seller 

of the house, not the buyer. 

Mr. WESTMORELAND. Mr. Zandi, I am not trying to keep you from 

answering. But I would like to say that if these—if it did come 

about that the shorter-term mortgages came out, people could still 

buy houses. They just might not be able to buy as big a house as 

what they want. And the same thing with credit card debt; it depends on what your limit is. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Clay. 

Mr. CLAY. Thank you, Mr. Chairman. And I thank the panel for 

being here today. 

The discussion draft we are considering today repeals the affordable housing goals and the trust fund, it eliminates the GSE’s role 

in multi-family housing, and it would make the FHA multi-family 

program an administrative nightmare, making it similar to the 

Section 8 program by setting income limits and requiring annual 

recertifications of income. 

Can you talk about the cumulative impact this would have on 

multi-family housing rents across the United States? And wouldn’t 

it be a mistake to undertake such a dramatic divestment to multifamily housing at a time when vacancy rates are at an all-time low 

in many years and when we expect the demand for rental housing 

to surge due to demographic trends? Let me start with Mr. Levitin. 

Mr. LEVITIN. Let me start with this: There is definitely a need 

to rethink the affordable housing goals. And I would say in conjunction with that also the Community Reinvestment Act. Both of 

those are dated in many ways. But rethinking is not the same as 

getting rid of them. And I am not ready to make prescriptions 

about what they should look like, but I would say that whatever 

is done should apply marketwide, not simply to a securitization 

utility or the GSEs, but duties to serve should apply across the entire housing market, that we should have a level playing field that 

ensures affordable access to all Americans in that way. 

As far as the rental market goes, there is a real concern right 

now that if we make—if we tighten up credit availability for multifamily, we are going to see real problems in the rental market. As 

people lose houses in foreclosure, they don’t just disappear. Instead, 

39 

they become renters. And we are seeing an increase in demand for 

rental housing as homeownership rates have fallen. And it is very 

important that we ensure that there is both adequate supply of 

rental housing and of housing to buy. 

Mr. CLAY. Thank you. Mr. Calabria? 

Mr. CALABRIA. Let me try and take a couple of these things. First 

of all, in the trust fund, I am generally a believer that these things 

should be done through the appropriations process, keeping in 

mind the various problems that the appropriations process has. But 

my read of the Constitution is if you want to spend money out of 

the Treasury, it has to come from appropriations. There is accountability. 

Second, in terms of the multi-family FHA, a lot of what this is 

does mirror, for instance, the low-income housing tax credit. If you 

want to get a low-income housing tax credit for property, there are 

income restrictions. Currently, in terms of—we give insurance to 

multi-family properties and ask nothing from the lender-developer 

in return. In my neighborhood on U Street here in Washington, I 

have seen a number of multi-family FHA signs. And I can tell you 

those properties are not serving low-income poor. So I think they 

should give back if we are going to give them to get FHA insurance. 

Mr. CLAY. So that is why you agree with the annual recertifications of income? 

Mr. CALABRIA. I don’t think you need to do it on annual basis; 

5 years is probably sufficient. 

Mr. CLAY. Okay. Dr. Zandi, any comments? 

Mr. ZANDI. Yes. I think there is a role for an explicit catastrophic 

government guarantee for multi-family mortgages for two reasons. 

One, the multi-family mortgage market is subject to runs, and it 

does shut down in times of extreme stress. We saw that in the 

Great Recession. Without Fannie Mae and Freddie Mac’s guarantee, the market would have completely shut down, and that 

would have ended construction activity and caused vacancies to 

fall, and rents to rise. 

Second, and I think also very important, is that the flow of multifamily mortgage capital to rural areas and non-large urban areas 

is constrained, particularly the lower-income households, and the 

middle-income households. And I think there is a role to try to help 

facilitate the flow of credit to those parts of the multi-family market. I think that this is something we need to think about very 

carefully. I think there are changes that need to be made in how 

we do this. But I think the principles should be that there should 

be some backstop there as well, yes. 

Mr. CLAY. Thank you for that response. 

Mr. Wallison or Mr. Holtz-Eakin, any comments? 

Mr. HOLTZ-EAKIN. I would just like to make the point that I 

think if you look at the multi-family history, the credit risk is probably lower. They performed much more through the crisis and the 

need for a government backstop and everything is less than whatever you believe it is on the other side in the single-family. 

The place where I would express concern, without knowing 

how—again this is going to be an empirical question—is liquidity 

in that market after reform. And that will be interesting to watch. 

40 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Royce. 

Mr. ROYCE. Thank you, Mr. Chairman. 

I think the panel here would agree that one of the reasons we 

are looking at an alternative model is because we have experience 

with what happened with the GSE model and how that did help 

lead to a ballooning of the market and in terms of what it did— 

and with respect to moral hazard, it was a serious problem. Part 

of the problem with creating something which is a public-private 

partnership is in this case, the profits accrue to the benefit of the 

shareholders and the management at the GSEs, right? Whereas 

the risks, which you could see coming, which the regulators could 

see coming, because they came to us. I had legislation in 2004 and 

in 2005 that tried to regulate those institutions for systemic risk, 

so that we could do something about the portfolios. The portfolios 

were then about $1.6 trillion. Fannie and Freddie had moved away 

from their historic model of securitization. Now they were taking 

on this enormous new risk, and so much of that was subprime. And 

the government’s stamp of approval on that also bled into the private market. So this was a problem. 

So today, what is the proposed solution here? It is to take lowand moderate-income home buyers and keep them in a GSE, have 

the FHA do and first-time home buyers and so forth, and then try 

to bring the private capital back into the market by slowly drawing 

down and making space for private capital to come in. And it would 

seem to me if we wanted to adequately price risk going forward, 

we would have to devise something for that end of the spectrum, 

for people who are better off, where the risk is borne—where the 

market indicates what the risk should be. 

The other advantage of this is we still have $1.2 trillion in those 

portfolios. And, as you know, economists are still pretty worried 

about the quality of that $1.2 trillion and what that is going to 

mean in terms of eventual losses. So the other thing the legislation 

tries do is slowly ratchet down or at least codify the reduction at 

15 percent a year. 

There is one thing here that is still missed. In my original legislation, working with the Fed, what we were trying to do was also 

look at the Federal Home Loan Bank, because that is sort of the 

forgotten GSE. You can have a problem with some of the largest 

financial institutions accessing the window there. And basically, 

you would have some of the same questions that you have here in 

terms of moral hazard. That is not really addressed in the legislation. 

But in terms of what I have laid out here, if members of the 

panel would like to respond to those observations, I would be happy 

to hear your thoughts. 

Dr. Calabria, would you like to begin? 

Mr. CALABRIA. I would be happy to. But let me take just a moment and say I was there at that time and I very much do commend your efforts in the past and think if we had listened to you 

we would be in much better shape today. So I think that needs to 

be appreciated. I also remember that at that time, the Federal 

Home Loan Banks actually received more scrutiny than Freddie 

41 

and Fannie and came through this better. So in some sense, I feel 

like the cooperative structure is probably more stable than Freddie 

and Fannie, but were you to do a variety of things to the Federal 

Home Loan Banks, certainly, my ultimate goal would be to get rid 

of them. In the interim, I think looking at their debt registration, 

I would certainly put them under the 1933 Securities Act in terms 

of their debt registration. I think certainly some concerns about the 

concentration and advances to a small number of lenders is a concern. We all remember the very large advances that were given to 

Countrywide before it went down. So, there is a very high concentration in advance to a small number of institutions. I think 

that is something— 

Mr. ROYCE. Thank you. 

Dr. Zandi? 

Mr. ZANDI. I can concur with the spirit of what you said. I really 

do think this is a very therapeutic process. We need to go down all 

the paths, and this is a very important path that we need to explore in great detail and just work it out. My sense of it, just based 

on the work I have done and my experience, is that this isn’t going 

to be viable. But I am not saying we shouldn’t go down the path. 

We should. And you are doing a good job of it. 

Mr. ROYCE. Thank you. 

Mr. Wallison or Mr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. I can’t resist the temptation to say that I concur with your reading of the record on Fannie and Freddie. And I 

told you so, literally. When I was the CBO Director, we testified 

in 2003 that it was going to cost the taxpayers about $20 billion 

a year for 10 years. We were pretty close to right when it went 

down. So we cannot replicate that structure again. This FHA is not 

that. It is better capitalized. I think we will survive better than 

they did. But certainly the thing I would emphasize most is the 

steady withdrawal to allow private capital to come in. That has to 

happen. 

Mr. ROYCE. Right. Mr. Wallison? 

Mr. WALLISON. I think that it is pretty clear that the way Fannie 

and Freddie worked was troubling. And everything that has been 

said here is correct. We have to stop that kind of— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Ms. 

Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Levitin, your testimony indicated that the PATH Act could 

potentially undermine the TBA market and make it extremely difficult for borrowers to lock in mortgage rates 60, 90 days before 

closing. Do you believe that the mortgage market will see fewer 

closings and subsequent sales under these circumstances? 

Mr. LEVITIN. I do. The ability to lock in a rate before closing 

means that a borrower knows what the expense of the loan will be. 

And when you are buying a house, you have to figure out how 

much house you can buy and how much loan you can buy, as it 

were. If you can figure out how much loan you can buy in advance, 

you then know how much house you can buy. That means when 

you go out looking for a house, you know what the price range is 

that you can bid on. If you don’t have your rate locked in, in adVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
42 

vance, there is some uncertainty about what that rate will be. And 

that means you are going to have to lower your bid on the housing 

price. And the effect of that is going to be to lower housing prices, 

which have real effects on the economy. 

Ms. VELAZQUEZ. Thank you. As the Representative of a number 

of credit unions, community banks, and CDFIs in New York’s 7th 

Congressional District, I am troubled by the PATH Act’s lack of 

protections for small financial institution access to the secondary 

mortgage market. 

Dr. Zandi and Mr. Levitin, do you believe the proposed national 

mortgage market utility provides small financial institutions with 

adequate opportunities to securitize their mortgage portfolios? 

Mr. ZANDI. I think that is an open question. My sense is there 

wouldn’t be, as currently written in the legislation, that there 

would be much take-up on the platform. The key incentive for institutions to go to a common securitization platform is the ability to 

gain the government reinsurance, the government guarantee. Of 

course, in PATH, there is no government guarantee, so there is not 

that incentive. There are additional restrictions, though, and you 

might call costs to going to the platform. There are data requirements—you have to disclose data. You have to pool—a pooling servicing, all kinds of different things you have to worry about. So the 

question is, what is the benefit? Here are the costs. So I am very 

skeptical that the platform as structured would get any take-up, or 

significant take-up. And if you don’t get take-up, you don’t get liquidity, the TBA market. So that makes me nervous about the 

whole structure of the platform. 

Ms. VELAZQUEZ. Professor Levitin? 

Mr. LEVITIN. I agree. As the PATH Act is written, there certainly 

is open access to the utility for smaller financial institutions. And 

I think that is very important. But for all the reasons that Dr. 

Zandi just outlined, that may not matter. If there isn’t enough 

scale created with the national mortgage utility, it is just not going 

to be successful, and that will mean that smaller institutions are 

basically kept out of the market. And critically, I want to underscore for the other financing channel that the PATH Act envisions, 

covered bonds, smaller institutions are not going to be able to 

issue—do covered bond programs, that investors simply do not 

want to take on that type of credit risk on those smaller institutions. They would rather take on the credit risks of the too-big-tofail banks. 

Ms. VELAZQUEZ. Thank you. Dr. Zandi, one of the most important 

issues for me, coming from New York, is multi-family mortgages, 

and ending the government guarantee represents a very important 

issue for us. 

Do you think that the private sector effectively taking over the 

GSE’s role as a facilitator of credit for multi-family mortgages with 

our government guarantee will help meet this growing demand? 

Mr. ZANDI. No. I do think there is a role for an explicit catastrophic government guarantee to backstop the multi-family mortgage market. I think the experience of the Great Recession makes 

that—strikes that point very clearly. The market shut down, and 

there was no credit. And this is obviously very important to multifamily construction, to vacancies, to rent. And not only in urban 

43 

areas but particularly in—especially in rural areas and ex-urban 

areas. So I do think a role—has to be explicit, it has to be catastrophic, has to be paid for, has to be very clear. But I think there 

is a role for it. 

Ms. VELAZQUEZ. Thank you. Thank you, Mr. Chairman. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from New Mexico, Mr. 

Pearce. 

Mr. PEARCE. Thank you, Mr. Chairman. And thanks to each one 

of you who are here today. 

Dr. Zandi, you have quantified your estimate of the cost of doing 

what we are considering here today. Is there a quantifiable cost to 

not doing anything, a quantifiable cost to the government backstop, 

the explicit guarantee? 

Mr. ZANDI. If we do nothing, if we keep the current system? 

Mr. PEARCE. If we keep the current system, yes. 

Mr. ZANDI. I think that would be a serious and grave error. I 

think there is no reason why the government needs to be making 

85, 90 percent of the mortgage loans in the United States. It is a 

cost that taxpayers don’t need to— 

Mr. PEARCE. Does it have to be higher, less—I am back with Mr. 

Capuano from Massachusetts. Just get it down to the big stuff for 

us, our constituents. So are the costs going to be greater in the current system or less under the current system? 

Mr. ZANDI. I haven’t done—I haven’t thought through that calculation. 

Mr. PEARCE. You are in a better position than me. I could flip 

a coin, and it might end up heads or tails. But you would come up 

with a closer guess than I would. 

Mr. ZANDI. Can I answer—I am not going to be satisfactory in 

my answer, but let me answer it this way. I don’t like either approach. I wouldn’t go down either path at the end of the day. There 

is a better approach. 

Mr. PEARCE. Mr. Wallison, do you have an opinion? 

Mr. WALLISON. You have to take everything into account, including the costs that occur when— 

Mr. PEARCE. I think that’s the point. 

Mr. WALLISON. —we make the kinds of investments that Fannie 

and Freddie made, that is the current system. And when those investments are in poor quality mortgages, we have a loss, a severe 

loss in the case of Fannie and Freddie, up to almost $200 billion, 

and the taxpayers had to pay for that. So if you are looking at the 

costs, if you look at the entire cost, including what it may cost the 

taxpayers, I think the system that is recommended in this bill in 

the PATH Act would be cheaper for the taxpayers and still produce 

a very effective system of financing mortgages. 

Mr. PEARCE. When I first came to Congress, I read and heard 

speculation that the Japanese had damaged their economy to a 

point that it might never recover in the 1990s. And when I read 

what they did, they started letting housing prices escalate. And in 

order to make it affordable, they began to lower interest rates. And 

then, they began to mix public and private money. And they hurt 

their economy maybe forever. And we are still short of that year. 

We have not yet reached forever. 

44 

So I would come back to Dr. Zandi, when you are estimating a 

cost of implementing this, can you now compare it to what the Japanese did, which sounds exactly like what we have done, starting 

with Mr. Greenspan and now with Mr. Bernanke? Could you quantify the cost of ruining an economy forever versus 90 basis points, 

or whatever, can you give me sort of an indicator on that? 

Mr. ZANDI. Congressman, we are not Japan. We have made a lot 

of progress— 

Mr. PEARCE. I understand. So you are saying we can do things 

that Japan can’t do. 

Mr. ZANDI. No. I’m not saying that. I am saying— 

Mr. PEARCE. Excuse me, sir. 

I view the laws of economics as being one of the really neat 

things. They don’t know boundaries, they don’t know anywhere. If 

you do the wrong thing, the capital is going to get up and leave 

today. That is really refreshing to me. It is pure. It is beyond 

human touch. And to say that the Japanese economy is not our 

economy, I’m sorry, sir, but that says we have different rules. We 

can print 40 percent of our national budget, and we are okay. I 

don’t think we are okay. But I am sitting here with just some country background from New Mexico. And I am just trying to get a 

sense— 

Dr. Levitin, I see you kind of peering. Do you have an opinion? 

We only have 47 seconds for your opinion. 

Mr. LEVITIN. I am not quite sure where to begin. I think that 

there is a real problem that we may be locking ourselves into a period of very low interest rates. Lots of homeowners have refinanced 

into incredibly low rate loans. And when they want to move, when 

they have to move, if rates are up, we are going to have a problem. 

Mr. PEARCE. Dr. Calabria, why don’t you finish this up? 20 seconds. 

Mr. CALABRIA. I will just say that the biggest problem, in my 

opinion, having been to Japan, and talked to people there, is every 

other company is like Fannie Mae, it is such a crony-capitalism society that we want to avoid that, in my opinion, or you will regret 

it. 

Mr. PEARCE. All right, fair enough. Thanks. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank the witnesses for appearing. 

Let me start with you, Mr. Zandi—Dr. Zandi, excuse me. We 

have all seemed to make this faux pas today. 

Mr. ZANDI. You can call me anything you would like. It doesn’t 

matter really. 

Mr. GREEN. I will call you a friend. 

Mr. ZANDI. Thank you. I appreciate that. 

Mr. GREEN. Dr. Zandi, you have wanted to juxtapose the conforming market to the jumbo market. And each time I think you 

were not given the opportunity to express yourself. I did step out 

for a moment, and I don’t know whether it occurred while I was 

away or not. So would you kindly now give us your explanation as 

to why we cannot anticipate the jumbo market to be indicative of 

what will happen in the conforming market? 

45 

Mr. ZANDI. Thank you. Yes. I don’t think the jumbo market is, 

as I would say, scalable. It will serve a small part of the market, 

it does serve a small part of the market. Just for context, in a normal housing market it is 10, 15 percent of the market, something 

like that. These are usually higher-quality borrowers. In many 

cases, they are not 30-year fixed-rate loans, they are adjustable 

rate mortgage loans. There’s a—Mr. Wallison had in his testimony, 

go Google, ‘‘30-year fixed-rate loan.’’ If you do that, you get to the 

Wells Fargo site, and you compare a Wells Fargo conforming loan 

with a jumbo loan, and the interest rates are very comparable. The 

thing is, you have to assume a 20 percent downpayment. If you put 

into the calculator a 10 percent downpayment, which is more typical for many Americans, it doesn’t calculate, because they don’t 

offer that. So that goes to the point that this is a market that is 

very specialized. 

Now, in a world like PATH, this market will expand. The U.S. 

economy and financial system are very adept, and they will adjust, 

and we will see the ability to provide jumbo-like loans to a bigger 

part of the market grow. But it will never, in my view, be able to 

offer up 30-year fixed-rate loans to the vast majority of American 

households. And I think that should be a key working assumption 

that we want to preserve that as part of our system. 

Mr. GREEN. Thank you. I think that was very important for us 

to have in the record. 

Let’s move to the covered bonds for just a moment. 

What percentage of the covered bond market is contained within 

the United States, if you can, Dr. Zandi? 

Mr. ZANDI. I think it is marginal. There are no covered bonds, 

or very few covered bonds of which I am aware. 

Mr. GREEN. And in Europe, where we do have covered bonds, we 

don’t have, generally speaking, 30-year fixed-rate mortgages. Is 

that correct? 

Mr. ZANDI. That is correct. 

Mr. GREEN. Which means— 

Mr. ZANDI. Just to be precise, France has a 30-year fixed-rate 

market. But there are very extensive prepayment penalties. And 

the Danish have 30-year fixed, but that goes to the very idiosyncratic nature of their system. 

Mr. GREEN. But my point that I would like to get to is that if 

you don’t have a 30-year, you have, say, 3, 5, up to 15, maybe, that 

means that you don’t get the asset liability mismatch that you can 

get when you have a mortgage that will expire in 30 years, matures in 30 years, but your covered bonds, if the pool will mature 

in 5 to maybe 10 years. And this creates some sort of market value 

risk that many investors will have a second look at. 

Can you just briefly comment on this, please, in terms of how 

this impacts the market? 

And I would also add this: That when this occurs, it seems to 

have some pressure on the market to avoid the 30-year fixed-rate 

product because of this mismatch that can occur. 

Mr. ZANDI. Yes. That is correct. And that is one of the reasons 

why you don’t see 30-year fixed-rate loans in other parts of the 

world, including Europe. And the key to the European system, and 

this is a point we were discussing earlier, is that the European 

46 

banks are very large. So if you go to any European country, three 

or four banks dominate the banking system. And the banking system is where all the credit is provided. That is because they are 

too-big-to-fail, and Europeans really don’t have a problem with 

that. That is part of their system. 

Mr. GREEN. Quick response to this question, please: If we have 

the FDIC backing in the shadows the covered bonds, would this 

cause the premiums that banks will pay to go up? 

Mr. ZANDI. Okay. That is an interesting, good point. So there is— 

if we are going to incent more of the mortgage lending to come out 

of the banking system through, say, a covered bond market, then 

you are using a government guarantee. It is not the Fannie, 

Freddie, or the catastrophic guarantee; it is the FDIC. It is just another form of government guarantee. 

Mr. GREEN. Yes. So what we have done is sort of move the chairs 

around. 

Mr. ZANDI. Just moving the chairs around, to some degree, yes. 

Mr. NEUGEBAUER [presiding]. I thank the gentleman. 

Now the gentleman from Michigan, Mr. Huizenga, is recognized 

for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. I appreciate that. And 

you interrupted one of my Google searches here. Because I do want 

to explore this as we were going into this what other countries are 

doing. But I would be remiss if I didn’t bring up a portion of the 

bill that I have some distinct interest in. My bill, H.R. 1077, having 

to do with the points and fees that are going to be part of the final 

QM rules, which are going to be taking effect in January. This is 

part of it. And I am very concerned about the consequences if Congress doesn’t resolve the issue. And I appreciate the chairman and 

others including that. I don’t know if anybody wants to comment 

on that, but it seems to me that is another barrier for entry as we 

are looking at that for consumers. 

I have a background in construction, real estate. My family has 

been involved in that for about 60 years. We have an employee, Irv. 

Irv has worked for my grandfather, my dad, and myself. This is a 

man who has worked for my family for nearly 50 years. I have an 

obligation to him as well to make sure what we are doing is getting 

it right, because he works in and depends on that. And whether it’s 

Irv, Dirk, Mark, or Larry, the guys who work for us are intensely 

interested in this, as are all of our constituents. 

But I think, Mr. Calabria, you hit the nail on the head. Yesterday, when Mr. Bernanke was here, I asked him, only half tonguein-cheek, whether or not we should refinance. That was a question 

my friend had. He did quip that he wasn’t qualified to give that 

advice, at which point I was concerned for all of us. And maybe 

Keynes is right, and in the end we are all dead anyway. But that 

was very problematic. 

My background in real estate started in the late 1980s and into 

the 1990s, and interest rates were significantly higher than they 

are now. Downpayments were typically much higher than what 

they are now. I will never forget when my real estate mentor 

pulled me aside one day when we had seen interest rates going 

from 12 percent to 11 to 10 to 9 to 8 and at 7.95 percent, he pulled 

me aside and said, ‘‘Buy a house now, interest rates will never be 

47 

this low again.’’ He had been in the industry for about 30 years. 

And Mr. Miller had talked about the 211⁄2 percent mortgage rates. 

Downpayments went from 20 percent to 15 to 10 to 7 to 5 to 3 to 

2 to 1 to nothing to 20—120 percent loan to value. I will never forget that my first closing was one of those where they are sliding 

a check across to the purchaser, not just the seller. This is a 

generational issue. We have seen house sizes increase dramatically. 

Hey, I am 44 now, and when I was buying my first house about 

20 years ago, a little short of that. It wasn’t going to have to be 

long, because I am pretty darn sure I deserve the three-stall garage 

and the walk-in closet and let’s get a pool, and all of those other 

things. So we have some generational expectations that I have been 

talking about with my friends. 

Part of the problem also has been as we saw equity. Equity 

didn’t rise because people were putting more in, whether it was a 

30-year or 15-year or 5-year mortgage. They saw equity increase 

because of home values. That was why. And you only realized it 

when you got out. A bubble occurs when people outpace reality. 

Would you agree with that? That is certainly part of what they are 

doing. 

And that has happened way too many times. I commend the 

chairman and everybody else who has put time into this because 

the cycle needs to end. It used to be when I was in real estate getting an FHA loan, there was some sort of stigma to it. It was a 

bit of a taboo. One, you didn’t want to have an FHA deal. And you 

didn’t want to be the buyer or the seller who was having to deal 

with that. And the taxpayer was a backstop of last resort. And now 

it seems that taxpayers are the first stop, not the backstop. And 

we have to get serious about this. 

So, 30-year fixes. What is the proper downpayment, Dr. Zandi? 

You were saying 20 percent certainly isn’t it. What is? 

Mr. ZANDI. There is no one answer because you have to take the 

borrower’s entire financial situation into account. 

Mr. HUIZENGA. 20 percent— 

Mr. ZANDI. Are they an owner? Are they an investor? Do they 

have an 830 FICO score? 

Mr. HUIZENGA. All right. Does anybody have anything else other 

than a government program that is going to help people get into 

homes? It happened during the 1980s a lot. In my 2 seconds, I will 

close it with land contracts. The marketplace is going to fill in if 

and when that there isn’t a specific government program-backed 

mortgage. It might not be ideal. But there are a lot of other things 

that are going to happen that we can’t even predict right now necessarily of what is going to be happening. 

Sorry, Mr. Chairman, I filibustered myself. I apologize for that. 

Mr. NEUGEBAUER. Now, the gentleman from Missouri, Mr. 

Cleaver, is recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. This is primarily a 

question for Dr. Zandi, but I would like for Mr. Levitin to also become involved. 

In your statement, Dr. Zandi, on the fourth page, you state that 

complete privatization is much more plausible in theory than it 

would be in practice. Private capital is not limitless and there are 

48 

plausible catastrophic scenarios similar to the Great Recession that 

would completely wipe it out. 

On page 8 of your testimony, you state that, ‘‘a fully privatized 

mortgage finance system will have difficulty providing stable mortgage funding during difficult financial times.’’ 

I tried to get Mr. Bernanke to respond to this yesterday. I failed. 

But my question is, the private markets are generally going to bail 

out in tough times. And if that is the case, and I don’t think there 

is a question we just witnessed that after 2008. This proposal, this 

PATH Act, can you envision in any way how this would—how we 

would be able to effectuate this PATH Act in a time of financial 

crisis? If this bill as proposed is approved, do you think it would 

hold up in post-2008 to 2012? 

Mr. ZANDI. No. I think one of the significant drawbacks to a 

purely privatized system without any catastrophic government 

backstop is it would be subject to runs. Investors would lose faith 

and they would run at just the worst time for the housing market 

and for the economy. And of course we saw that in regard to deposits. And that is why we have an FDIC that provides a catastrophic 

backstop to our depositors. The principle is just the same. We apply 

the same principle to the mortgage market, a catastrophic backstop 

which would prevent runs. It should be paid for by homeowners. 

It is a service we are providing. But it is a very valuable service 

and would ensure that we would not have this problem at the 

worst possible time. 

Mr. CLEAVER. Yes, Mr. Levitin? 

Mr. LEVITIN. On its face, the PATH Act would create a private 

housing finance market. But in reality it would create an implicitly 

guaranteed housing finance market. There is no such thing as a 

non-guaranteed housing finance market. It is only whether there is 

an explicit guarantee or an implicit one. And we know this from 

our own history. In 2008, we had a statute that said Fannie and 

Freddie debt is not guaranteed by the government. It was there in 

bright letters for everyone to see, and we bailed them out. And if 

you look outside of the United States, Germany bailed out its 

banks, Denmark bailed out its mortgage banks. We know that 

there will be bailouts if the housing finance system gets in trouble 

because housing is simply too important to too many people. Therefore, the question is whether we just kick the can down the road 

and let some other Administration pay for the costs or whether we 

prudently try and charge risk premiums now that will—and build 

up an insurance fund, essentially, against future problems. 

Mr. HOLTZ-EAKIN. If I may? 

Mr. CLEAVER. Yes, please. 

Mr. HOLTZ-EAKIN. I think this is an important question, but 

there are arguments on the other side. First, it is important to remember as well that one of the things that happens when private 

capital comes in is there is better scrutiny of risk. So the trouble 

you are going to get in is going to be smaller. And, second, if you 

have better scrutiny of risk broadly in the system—the greatest 

failure we had was poor pricing of risks. If you price risks, you 

don’t get runs because people aren’t afraid of the securities. And 

so the very act of putting the private capital in mitigates the fears 

they are worried about. 

49 

Mr. CLEAVER. I agree with you. But is there any scenario whereby you can envision the government not being a backstop? 

Mr. HOLTZ-EAKIN. You can always envision a disaster so bad it 

is impossible for the private sector to survive. So, let’s just stipulate that. 

Mr. CLEAVER. We just had one. 

Mr. HOLTZ-EAKIN. The question is, how do you want to handle 

the issue of providing the bulk of housing finance? And we are 

right now providing the bulk of housing finance on the taxpayers’ 

dime, not on the private sector. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Fitzpatrick. 

Mr. FITZPATRICK. I thank the chairman for all of your hard work 

in reforming a finance system that is in desperate need of reform, 

and I appreciate the time and patience of the panel as well. It was 

about 3, 31⁄2 hours ago when you gave your opening statements, 

and I listened to each one of them. And I have been out of the room 

since. 

But Professor Levitin, you made a statement that I think is important. You said—and I want to make sure I am correct in this, 

so please correct me if I am wrong—that one of the bedrock principles of housing finance post World War II has been the availability of the 30-year fixed-rate mortgage. Which we are all interested in. Is that correct? 

Mr. LEVITIN. That is correct. 

Mr. FITZPATRICK. And I have a lot of very specific questions. And 

I think probably a lot of them have been asked. I am going to write 

each of you and just ask you to consider some of what I am saying. 

And if you get a chance, get back to me. And I will share that with 

my constituents. 

But I would like to kind of ask a general question by telling a 

story. And it is a story of my hometown, Levittown, Pennsylvania. 

But I believe the story of Levittown is somewhat the story of America. In 1950, in Bucks County, the president of the United States 

Steel Corporation, Ben Levitt, announced he was going to build a 

steel mill in Bucks County. And he did. And that mill provided 

about 10,000 really good jobs to folks who were going to come from 

the coal mining country of northeastern Pennsylvania, out from 

Pittsburgh. And jobs for a lot of returning veterans, World War II 

and Korea veterans. 

All those jobs created quite a demand for housing in lower Bucks 

County. And we being Americans, we met that demand. We figured 

out how to do it. It is the town where I grew up; I would never 

have grown up anywhere else. Bill Levitt, from Long Island, New 

York, who had figured out how to mass produce housing, he came 

down. He was part of the solution in meeting that demand. He 

came to Bucks County, and he built 17,311 houses between 1952 

and 1957. And if you were a returning veteran from World War II 

or Korea—my father was a veteran who purchased his first home 

in Levittown around that time—you could purchase the basic Levittown model for $9,990. If you were a veteran, it was $100 down. 

And it was a perfectly planned community—some say too planned. 

Bill Levitt even brought a bank with him from New York, the BowVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
50 

ery Savings Bank, and they provided mortgages for those individuals who—most of whom thought they would never own a home in 

their life. And so this was described to be their first home. And for 

many of them, 60 years later, it is still their home, if they are still 

there. And so this for many is everything that they own in the 

world. It is their complete retirement, what they will pass on to 

their children. 

But the point of the question is that—and my father and others 

who settled Levittown, they would build a statue of Bill Levitt in 

the middle of town, if they could. They were provided that opportunity because of the availability of a great builder, a community 

willing to accept it, and a fixed-rate mortgage that they could afford, they could figure out what it was. 

So my question is today, 21st Century in the year 2013, how 

would the PATH Act have affected the ability of Bill Levitt to build 

that community and those veterans to move out of the cities, the 

first suburban planned community to be able to own that home 

today, in your view? 

Mr. LEVITIN. With the PATH Act, Levittown, Pennsylvania, 

would not exist. Your father would not have been able to buy a 

home. That is the sad truth. 

Mr. CALABRIA. If I could make a comment on that. Let’s be clear. 

Freddie Mac didn’t exist at that time. Fannie Mae’s operations in 

the mid-1940s were approximately zero; about 1, 2 percent of the 

market. As mentioned, it was a bank that made those loans, and 

held them on portfolio. There is nothing in the PATH Act that says 

you can’t do this. There is nothing in the PATH Act—nobody here 

is talking about banning the 30-year mortgage. Again, before the 

1980s, we did not have a secondary mortgage market. So I think, 

going back and looking at some history—I also want to emphasize 

there is nothing to pass on to your children if you are drowning in 

debt. Getting people in with 100 percent financing, with nothing in 

there, there is nothing to pass on. You are leaving them debt to 

pass on. And that to me, I think, is not what we should be looking 

for, for our children or our future generations. 

Mr. WALLISON. If I could just add something to that. And that 

is in the 1980s, the technology of securitization was developed. 

What Fannie and Freddie were initially intended to do was to create a secondary mortgage market and the liquidity that allowed 

banks to sell the mortgages into the secondary market and make 

more mortgages. Once we had the technology in the private sector, 

we didn’t need Fannie Mae and Freddie Mac. So if this had existed, 

if the PATH Act had existed back then, and if the technology of 

securitization had existed, a private secondary market could have 

existed. Either of those mortgages could have been portfolioed by 

the bank that made them or they could have sold them to private 

securitizers without Fannie and Freddie. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

I guess I want to start out by asking Mr. Wallison a question. 

I notice that you served on the Financial Crisis Inquiry Committee, 

appointed by our Speaker, Mr. Boehner. And there was a minority 

51 

report. And then you had a separate report of your own, which it 

mirrors—I looked it up, I Googled too because I thought it was kind 

of familiar, kind of a familiar argument with your testimony that 

you have given here today. 

And I guess your testimony here today seems to sort of lay the 

blame for the entire financial crisis at the feet of these constituents 

of ours who just wanted a house so badly that we sort of induced, 

the government induced the bad underwriting and tolerated bad 

underwriting. These are words that I have sort of taken out of your 

testimony. 

And your minority report, along with the other three commissioners who gave a minority report, didn’t mention a word about 

credit default swaps or derivatives or credit rating agencies. Or we 

have heard testimony on this committee from people like Andrew 

Cuomo who said that at the bottom of every single one of these 

things was a bad appraisal. Predatory lenders. I think Mr. 

Fitzpatrick made a wonderful point. There are people who are living in the first and only house that they have ever bought. So, how 

were they supposed to know that they needed to bring certain documentation? Freddie and Fannie weren’t doing the underwriting. 

And so I guess I am curious, particularly in view of your—Freddie 

and Fannie do need some reforms. They were overleveraged, there 

were many things done. And you also said maybe CRA was also 

sort of at fault as well. And what we have found is that only 6 percent of all of these toxic loans were—had a delinquency rate of 

2012 of—from the GSEs versus 28 percent for non-GSEs. And of 

course the CRA was definitely not a factor in subprime lending or 

the crisis. 

And so I am very curious to see—to ask you why you think the 

GSEs, in view of all these other things that we know happened in 

the marketplace, why you say that at the centerpiece of it all was 

the fault of our constituents who the government induced us to give 

them all these loans. 

Mr. WALLISON. In my dissent, I focused on the affordable housing 

requirements which were put into effect in 1992, when many people came to Congress and said that Fannie Mae and Freddie Mac 

actually are much too conservative in their underwriting, so many 

of our constituents cannot buy homes. Congress acted in 1992 and 

said, okay, Fannie and Freddie, from now on you are going to have 

to buy a certain number of these loans that are made to people who 

are below the median income. Fannie and Freddie did in fact control the market. And as Fannie and Freddie reduced their underwriting standards in order to meet the affordable housing requirements, the result was that by the year 2008, we had 28 million 

subprime loans in this economy— 

Ms. MOORE. Thank you. 

Mr. WALLISON. —about half of all mortgages. 

Ms. MOORE. My time is lapsing. And so, Freddie and Fannie 

were not—they did not do the—the underwriting was wrong. 

Let me ask you a question, Mr. Zandi, in my last 49 seconds. 

You keep saying that we are going to have this guarantee, but 

if we don’t, what do you think downpayment and interest rates will 

be so that the private sector can finance its risk in the marketplace 

to have this private securitization market? 

52 

Mr. ZANDI. The calculation I did in the testimony was for the 

typical borrower in the current mortgage environment, 20 percent 

down, 750 credit score, 31 percent debt-to-income ratio. That is the 

middle of the distribution right now. The PATH Act as currently 

envisaged would raise the mortgage rate for that borrower by 90 

basis points. That is .9 percentage points. That is $130 a month in 

monthly mortgage payments. 

Ms. MOORE. And interest rates, what would it do to interest 

rates, specifically? 

Mr. ZANDI. That 90 basis points, that .9 percentage points, that 

is the effect on mortgage rates. 

Ms. MOORE. Okay. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from South Carolina, 

Mr. Mulvaney. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

I was going to start off by saying I was surprised, but I guess 

I’m not surprised. I guess I am just disappointed that somehow this 

debate today has turned into rich versus poor. It strikes me that 

if you think that Fannie and Freddie and more directly the abuses 

that we saw in Fannie and Freddie were about somehow helping 

poor people or helping deal with the plight of the American worker, 

you are sadly mistaken. 

Ms. MOORE. Will the gentleman yield? 

Mr. MULVANEY. No, I will not. 

The abuses at Fannie and Freddie were designed mostly— 

Ms. MOORE. Will the gentleman yield? 

Mr. MULVANEY. I absolutely will not. And I would appreciate not 

being interrupted. 

Ms. MOORE. Well, you are talking about me. 

Chairman HENSARLING. It is the time of the gentleman from 

South Carolina. 

Mr. MULVANEY. The abuses at Fannie and Freddie were designed 

to enrich the shareholders and to a great extent the executives, 

most of whom were heavily connected to both parties. It was never 

involved, never designed to help the plight of the American workers. We are dealing with—a question that we just asked Mr. Zandi. 

I heard $150 a month, not $130, so I ran the numbers on $150 of 

additional payment, the 90 basis points leading to $150 of additional monthly payment. I ran the numbers on that. It is a multivariable equation, so you sort of have to freeze an interest rate. 

But it looks like that house costs about $325,000. Is that poor? Because that could buy 90 percent of the houses in my district. It is 

not about rich and poor. What really is telling is that we had testimony today, or at least the chairman mentioned it, that there is 

currently a regulation that is being considered by this Administration that would raise interest rates 400 basis points. Where is the 

outrage over that? Where is the concern that this Administration 

is beating up on poor people and making housing unaffordable for 

the American worker with a 400 basis point increase in the regulation that we will never see? Where are the demands for a hearing 

on this regulation from my friend across the aisle? 

We are sitting here. We talked about a hundred mortgage points, 

a hundred—a hundred basis point increase last week in the 30- 

53 

year. A hundred interest basis points last week in large part because of the fiscal policies that this government is undertaking. We 

are hurting poor people. We are hurting the people who are trying 

to buy houses because we are borrowing money. We are going to 

the markets and saying, would you please lend us money. They are 

going to the same markets and saying, please lend them money. 

And we are driving up the price of them buying their houses. We 

are doing that. Where is the outrage over that? 

Since the outrage today, though, seems to be focused on the 90 

basis points and how that is supposedly going to be the end of the 

world, I will accept for sake of the argument that there is going to 

be a 90 basis point increase in this, Mr. Zandi. 

And I will simply point out the fact that my family has been in 

this business off and on for the last 50 years, okay. 1970. Does anybody remember—and I had to Bing it, not Google it, since I have 

friends who work at Microsoft—I Binged it. Do you know what the 

average interest mortgage rate was in 1970? It was 8 percent, 350 

basis points higher than it is today. Did we have a functioning 

mortgage market in 1970, gentlemen? Does anybody know what 

the homeownership rate was in 1970—it was 62 percent. In 1980, 

interest rates, 18 percent, 15 percent, pick a number. 1,400 basis 

points higher than we are today, than we have today. We still had 

a functioning mortgage market, and we still had 64 percent of the 

people living in houses. In 1990, it was 9 percent, 64 percent. 

In 2000, it was 7 percent. And we are sitting here today saying 

that supposedly a 90 basis point increase, just so we can protect 

the American taxpayer, is somehow going to end the housing market in this country. It is absurd. It is absolutely absurd. 

We are trying to have a conversation not about rich versus poor. 

We are trying to have a conversation that somehow finds a way to 

protect the American taxpayer, rich and poor. And ends the abuses 

that fabulously enriched people probably illegally at the expense of 

the American taxpayer. 

I would hope, Mr. Chairman, that is what this debate would be 

about, and not about class warfare, not about pitting against each 

other. There are reasons that there are bipartisan bills on the Floor 

to try and fix this problem, because it needs to be fixed. You may 

disagree with the fact that this might be the best way to do it, but 

don’t accuse us of going after poor people because that is not what 

we are doing. We are trying to help the taxpayers. And I would 

think that would be something on which we could all agree. 

With that, I yield back the balance of my time. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Colorado, Mr. 

Perlmutter. 

Mr. PERLMUTTER. I knew somebody would raise my blood pressure on this one. So, the first thing I would like to do is introduce 

for the record something I always do when we talk about housing 

and Fannie Mae and Freddie Mac, and that is the Financial Times 

article of September 9, 2008, where Mr. Mike Oxley hits back at 

ideologues that—Mr. Wallison, you and I have had this conversation on at least three occasions, if I am counting right, where this 

was a few days after Fannie Mae and Freddie Mac were placed in 

conservatorship. Do you recall that? 

54 

Mr. WALLISON. Yes. 

Mr. PERLMUTTER. Okay. And what Mr. Oxley said in this article 

was—Congress was taking a lot of criticism about why there wasn’t 

more oversight. And he said, ‘‘Instead the Ohio Republican, who 

headed the House Financial Services Committee until his retirement after midterm elections, blames the mess on ideologues within the White House, as well as Mr. Greenspan, former Chairman 

of the Federal Reserve. The critics have forgotten that the House 

passed the GSE reform bill in 2005 that could well have prevented 

the current crisis.’’ He fumes about the criticism of his House colleagues, ‘‘All the handwringing and bedwetting is going on without 

remembering how the House stepped up on this. What did we get 

from the White House? We got a one-finger salute.’’ 

Okay. So, Mr. Wallison, you and I have had a chance to talk 

about this on several occasions. And, quite frankly, you and I agree 

on a lot of the basic points. But we draw very different conclusions. 

And we have talked about the length of time that Fannie Mae has 

been in existence, since 1933 or 1934 to today. We talked about the 

fact that in the period of time from 2004 to 2007, especially the 

time when no documents were required, no downpayment was required, that time the public sector, Fannie Mae, Freddie Mac, had 

much less than the private sector in terms of outstanding loans. 

Then when the market fell apart in the fall of 2008, that is when 

Fannie Mae and the public sector was the only game in town. The 

only lender in town. And I would just—instead of me filibustering, 

which I have already done, let me just ask a couple of simple questions. 

How many of you own a home? 

Okay. So I assume there is one renter. Do you own a home or 

are you renting? 

Mr. HOLTZ-EAKIN. I am renting. 

Mr. PERLMUTTER. For those of you who own a home, do you have 

mortgages? 

The answer is yes. Mr. Levitin, good job. 

Okay. Within those mortgages, does anybody have a jumbo loan? 

Mr. WALLISON. Yes. 

Mr. PERLMUTTER. I just bought a house. We just sold a house, 

and bought a house. And I know that between the jumbo loan to 

the loan under $417,000, which is what it is in the Denver area, 

in Colorado, there is a difference of about a point. So did any of 

you go looking to try to get under what would be the FHA number 

of $417,000 or whatever it might be in your locale? 

Doctor? 

Mr. CALABRIA. If I can make a point where I think you are going 

with this. Let me— 

Mr. PERLMUTTER. I am not sure where I am going, so hopefully 

you can make a point. 

Mr. CALABRIA. Let’s have me filibuster for a little while then if 

that is going to be the case. 

Mr. PERLMUTTER. I will interrupt you if you get off track. 

Mr. CALABRIA. Please do. So, full admission, I have a mortgage. 

I got it with Wells. I think they might have sold it to Freddie. I 

even take the mortgage interest deduction. I, as a citizen, am willing to give up all of those things because I believe our system will 

55 

be safer because of that. Will I pay higher mortgage costs? Probably. I will say that I paid more in taxes last year than I made in 

mortgage payments. Now, that is not necessarily a bad thing because again, it is better to be non-poor. 

Mr. PERLMUTTER. One of the points was that you are not building up much equity with a 30-year loan, but I would like to ask 

Dr. Holtz-Eakin, do you build up any equity by renting? 

Mr. HOLTZ-EAKIN. Not in my apartment, but elsewhere. 

Mr. PERLMUTTER. Maybe elsewhere, but certainly not in your 

apartment. These are so simple. And I have to ask a question. Dr. 

Calabria, we were talking a little bit about auto loans. We are looking at auto loans. So I am looking at your graph which shows that 

in 2009, basically there were no auto loans. Do you see that? 

Mr. CALABRIA. I am going to apologize because the scale of that 

chart is not zero at the bottom. So, again, that probably is not the 

best. It is cut off at actually a positive number at the axis. So, my 

apologies. 

Mr. PERLMUTTER. Okay, let’s go to the bottom there. At the bottom, there is a spike. I think the spike was the Cash for Clunkers? 

Mr. CALABRIA. It was. 

Mr. PERLMUTTER. Okay. So that was Federal injection of money, 

right? 

Mr. CALABRIA. Another great policy. 

Mr. PERLMUTTER. Okay. But there was a spike. Oh, heck. Thank 

you, Mr. Chairman. 

Chairman HENSARLING. That word would almost be stricken 

from the record. 

The Chair now recognizes the gentleman from Alabama, the 

chairman emeritus, Mr. Bachus. 

Mr. BACHUS. Thank you. In the last few years, I guess since the 

financial meltdown, the one question I have been asked more than 

any other question back home is, ‘‘How can you justify asking me 

to pay somebody else’s mortgage? I struggle to pay my mortgage. 

Why does the government take my tax dollars and help someone 

else pay their mortgage?’’ 

And I think it is almost impossible when you have a governmentsponsored entity for it not to subsidize someone else’s mortgage 

with your tax dollar. Maybe that is not the intent, but it always 

has mission creep and more. And what we have discussed today is 

that FHA intended to help low-income Americans, and it has 

morphed into something quite different, where even in attempts to 

lower the high number of those eligible, we have not been able to 

accomplish that. Once you start, once you put it out there, it is almost impossible to end it. 

Dr. Zandi, you said you liked parts of this bill. I find the parts 

where it does seem to, the provisions to attract private capital or 

to lessen some of the barriers to private capital. Do you see those 

as helpful? And you said you don’t believe enough private capital 

will come into the market, is that right? 

Mr. ZANDI. I do like the provisions in the bill that try to attract 

capital, yes. I like the idea of trying to support and promote a covered bond market. I think that is a laudable effort. I think it is 

going to be difficult in the context of our current financial system 

56 

and some of the issues with regard to the FDIC. But I applaud the 

effort to go down that path, yes. 

I think some of the provisions related to the residential mortgage 

securities market, we talked a lot about QRM, but there are others, 

I think that is laudable because we need to get the RMBS market 

up and going again. It is still dead in the water. So getting private 

capital is exactly the right thing to do. And there is a lot of good 

in the bill that I think we really should think through, yes. 

Mr. BACHUS. We have the largest and deepest financial system 

in the world. There are always tremendous amounts of capital looking for more return. And now that the return on Treasuries and 

other things is not that good, I would imagine there is an immense 

amount of capital that would love to come in and invest in safe 

mortgages. 

Mr. ZANDI. Can I respond? I agree. You want to design a mortgage finance system, a housing finance system for all times, good 

times and bad times and everything in between. So in the good 

times, yes, you will find private capital and people taking chances. 

But that is not—we can’t build a housing finance system for our 

kids and our grandkids based on that. 

Mr. BACHUS. But in the bad times, it creates bad times. I asked 

the chairman yesterday whether unemployment was structural. He 

had said it was cyclical. Some of it is structural. But in the bad 

times, the cyclical, people are losing their jobs. So when you lose 

your job, it is hard to keep your home. 

Mr. ZANDI. Yes, it is. Yes. 

Mr. BACHUS. I would just ask Mr. Wallison or Mr. Holtz-Eakin, 

do you have any comments on anything you heard in the last few 

minutes or during this hearing on which you would like to further 

elaborate? Or do you believe—our private markets in the United 

States are immense. 

Mr. HOLTZ-EAKIN. I want to second what Mr. Zandi said about— 

or I guess I should say Dr. Zandi. I think the provisions to attract 

private capital are very important. I think it does a very good job 

of bringing in better scrutiny. I would like to see it be more aggressive about bringing in taxpayer protection, broader, deeper capital. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Delaware, Mr. Carney. 

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

for having this hearing, and thank you to all the panelists for staying so long. I apologize for coming in and out. 

Dr. Zandi, you said when I was here about an hour or so ago, 

that this is a really critical issue and an important decision. We 

have to get it right. You said we have to get it right not only because we could screw up the housing finance system, but we could 

screw up the financial—I don’t think you used the words ‘‘screw 

up,’’ we could mess up the financial system as well. 

What are the risks here? What do I tell my middle-income constituents back in the State of Delaware, are the risks associated 

with adopting this approach to housing finance? You mentioned 

some of them in answer to the questions. But in terms that the ordinary guy or gal that I talk to on the street can understand, what 

are the risks involved in this approach? 

57 

Mr. ZANDI. There is no bigger risk I think at this point that— 

the housing finance system, the mortgage market is the largest 

market, say, for the U.S. Treasury market on the planet, and if we 

mess that up, it is going to raise interest rates not only for mortgages, but for every other thing that we borrow, credit cards, auto 

loans. 

The other thing to consider is that the home is the most important asset for most Americans. 

Mr. CARNEY. So what is it going to do, in your view, to real estate values and values potentially? 

Mr. ZANDI. If the bill is passed as it is and mortgage rates rise 

as is? It would hurt home sales, it would hurt housing construction, 

it would lower house prices. 

Mr. CARNEY. It would lower house prices and therefore reduce 

personal wealth. 

Mr. ZANDI. Can I make a broader point? 

Mr. CARNEY. Sure you can. 

Mr. ZANDI. Look, I think we have to put our housing finance system on a more solid ground and it is not going to be free, it is going 

to cost us. 

Mr. CARNEY. I want to get to that. But I want to talk about the 

risks first. At the end, you said that there is a better approach and 

I want you to answer that question. But let’s focus on the risk first, 

just so we understand, so I can tell my constituents when they ask 

me, do you support this piece of legislation or not. 

What do I tell them specifically that might be at risk for them? 

I take a little bit of offense to the insinuations that were made 

about some of my colleagues on this side of the aisle defending or 

being concerned about lower-income access to homeownership. Is 

that at risk here at some level? 

Mr. ZANDI. Yes. I think that it means higher mortgage rates for 

all homeowners with mortgages. It will make it harder for firsttime home buyers to become homeowners. It will make it harder 

to refinance. Particularly in the worst of economic times, when 

things are going badly, wrong, and when people are losing their 

jobs and they can ill afford any other financial stress, it means that 

the asset that they own that is most important to their financial 

well-being, their home, will be worth less. 

So, the housing finance reform is going to cost us, but there are 

more efficient ways to do it, better ways. We can accomplish all the 

goals that we have in a different way. 

Mr. CARNEY. What about the effect on jobs and real estate and 

housing, home construction, that kind of thing. Positive or negative 

effect, big risk? 

Mr. ZANDI. It would be negative. Higher mortgage rates, less 

housing activity, fewer jobs in the housing sector. 

Mr. CARNEY. So what is the better approach? You mentioned earlier that there is a better approach. In your view, what is the better approach? 

Mr. ZANDI. There is. In my view, I would call it a hybrid system, 

somewhere between the privatized system that the committee is 

working on, and the current system that is a nationalized system, 

the government is making all the loans. It involves an explicit catastrophic government guarantee, private capital in front of the guarVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
58 

antee, a lot of private capital. It can be a boatload of private capital. I am all on board with that. It is explicit and it is paid for 

by mortgage borrowers. And it is fashioned off the FDIC so that it 

protects us in bad times. 

Mr. CARNEY. So a better system, a more prudent system and a 

big change, but not the kind of risk that we would be taking in 

going down the approach of the past. It is a pretty serious change 

as well. 

Mr. ZANDI. In my view—I don’t know if you were here for my cliff 

metaphor. With the privatization path, you are diving off a cliff, 

but you don’t know what you are diving into. With a hybrid system, 

you are diving off the cliff, but you are diving into water. We have 

a much better sense of what that means and what the implications 

are. 

Mr. CARNEY. So we are looking at a pretty big dive or a big 

change in any case? 

Mr. ZANDI. It is a big change. And by the way, of all the financial 

and all the economic efforts to address the great recession and the 

financial crisis, we are addressing each of them, we have addressed 

each of them except for what we are going to do with Fannie Mae 

and Freddie Mac. 

Mr. CARNEY. And as you say, it is absolutely critically important 

that we get it right, that we are careful. Otherwise, as you said, 

we could ruin the financial system. Did I hear you say that right? 

Mr. ZANDI. You heard right. 

Mr. CARNEY. Thank you, I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, Mr. 

Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman, and thank you, gentlemen, for being with us today. As I assess where we are in terms 

of our debt obligations, we have about $1 trillion in student loan 

debt, about $1 trillion in credit card debt, and we have about $5.1 

trillion in mortgage guarantees. The American taxpayers have paid 

now for $200 billion or so of obligations back to Fannie and Freddie 

for which they were responsible. So in a sense, as Mr. Bachus said, 

Billy Bob from North Carolina has assumed the obligation of Winston from Connecticut, or vice versa, and he has taken on their 

debt and their obligation. 

Mrs. Maloney and our distinguished body authored a bill, the 

CARD Act, that put restrictions on interest rates for credit cards, 

all for the stated purpose of protecting the American consumer. We 

have, as a body, as a government, according to the testimony of Mr. 

Wallison a few minutes ago, facilitated the access of credit for 

homeowners by offering easy credit, by encouraging if not instructing lenders to make credit available to some of those who perhaps 

were not worthy of credit, but they had that requirement nonetheless. 

So the government has, in many ways, been complicit in a way 

to cause those consumers that we are so concerned about to have 

an inordinate amount of debt and obligation that has been catastrophic for their lives and their families and enormous displacement for where they are today. And I think the point that I would 

like your response to is it seems to me that the manager, the govVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
59 

ernment, as the manager of housing financing, we have been an 

abysmal failure. What we have done, with all good intentions, in 

all good faith, seeking the best from our position, trying to control 

it through central planning, has had an adverse effect, has been 

counterproductive to what we had intended. 

Having said that, it would beg the question of have we done anything thus far to correct the problem, to make that change, to protect the taxpayer, to protect that consumer, as well as look at beyond—if we haven’t done a good job, what is the alternative? And 

I would say to you, and I would like your reaction, that markets 

work, free markets work. And perhaps it is true that a marketdriven housing industry would better determine who is worthy of 

that credit so that we don’t create a problem for them in the long 

run, that they are assuming an obligation that they cannot afford. 

Maybe that is the reason why some people won’t be able to get 

those loans. Maybe they shouldn’t be taking on those loans and 

maybe we are complicit in causing their own demise. 

So I would state to you, and welcome your response in the 

minute left, that markets can work and they should work. Thank 

you. I welcome your response. 

Mr. WALLISON. Let me try to take that on, and thank you for 

leaving me a minute. Actually, I haven’t had much of that this 

afternoon. But what we are looking for here is balance, and one of 

the really wonderful things about this Act as I see it is an attempt 

to achieve a balance between a social program, which is fundamentally what FHA does, that is, to enable people to get into homes 

who wouldn’t otherwise have the downpayments, for example, to do 

that, and to eliminate the things that have always caused difficulties in the housing market, which is excessive use of credit for people who ultimately— 

Mr. PITTENGER. All right. I have 10 seconds left. Does anybody 

else have anything they want to say? 

Mr. LEVITIN. That we have seen markets not work though in 

housing finance. In the housing bubble, that was private— 

Mr. PITTENGER. We have done it worse though, haven’t we? 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair recognizes the gentleman from Washington, Mr. Heck. 

Mr. HECK. Thank you, Mr. Chairman, and to each and every one 

of the panelists, thank you so much for the generous presence of 

your time and your expertise. It is exceptional, even by congressional standards. 

Dr. Zandi, I am not quite done with the 90 basis point issue, but 

I kind of want to turn it on its ear. I am a little taken aback at 

the prospect that somebody would need to have a credit score of 

750 and put 20 percent down to pay 90 basis points more, but I 

want to turn it on its head. 

Under the proposed legislation, what credit score and how much 

down would you guesstimate would be required for a home purchaser to pay interest rates that are currently available? 

Mr. ZANDI. That is a great question. 

Mr. HECK. Would you repeat the part about it being a great 

question? 

Mr. ZANDI. That is a great question. That is a nice way of thinking about it. Let me just do the calculation. Obviously, it would be 

60 

a very pristine borrower, yes. But I don’t want to give a number 

without—I can run it through my model with you and I will show 

you what the results are. But it would be a pristine borrower, yes. 

A very, very interesting way of looking at it. 

Mr. HECK. So given that all of these things would occur, higher 

interest rates and the removal of the mandate to serve all borrowers, I am interested, and I realize that the proposal has only 

been out a few days, if you have thought about or even begun to 

do any modeling about what would happen to the rate of homeownership in the country? The rate has been, as best as I can determine, relatively stable over a long period of time, and we are at 

what now, about 63 percent? 

Mr. ZANDI. 65 percent, a little over 65 percent. 

Mr. HECK. What would happen to that over what period of time? 

Mr. ZANDI. You are asking such precise questions and they are 

great questions. I just don’t have the answers at my fingertips. But 

they would be lower, obviously. I don’t know how much lower. 

Mr. HECK. Materially lower? 

Mr. ZANDI. Yes, I think it would be meaningful. I guess the bigger point is it is unnecessary. 

Mr. HECK. Mark, I actually think the bigger point is whether or 

not we think homeownership is an inherently good thing on balance. Do you? 

Mr. ZANDI. Yes, I think that is a good question. Ultimately, that 

is a question we have to ask and answer ourselves collectively. Is 

homeownership something that we want to promote or not? But 

that is a basic question, yes. 

Mr. CALABRIA. If I could make a point? 

Mr. HECK. Make it quick. 

Mr. CALABRIA. Okay. I love homeownership. I think it is a great 

thing. I am happy to be a homeowner. I am not sure having somebody drowning in debt—people aspire to be homeowners. People 

don’t aspire to be highly leveraged and drowning in debt. 

Mr. HECK. So back to you, Dr. Zandi. Have any of the green eyeshade, sharp-penciled economists ever tried to quantify what the 

community and societal benefits are of increased homeownership? 

Mr. ZANDI. Yes. 

Mr. HECK. Does this go beyond just a value that has long held 

the American dream? Are we let better off when more people own 

homes when they can? 

Mr. ZANDI. You are asking really good questions. Too bad we are 

31⁄2 hours in and I am running out of juice. But this is actually a 

very legitimate discussion and debate we should have. 

I think we have come to the conclusion that homeownership— 

there are costs and there are benefits, and on net, it is a benefit. 

It is part of the American dream. But it is not—that is not an immutable fact and we should really think about and there are actually a lot of—I am just bringing this up—there is a lot of really 

good recent research that calls into question just what is the benefit and the cost. And it is worthy of looking at more carefully. 

This goes back it a bigger point, broader than housing finance reform that has been brought up, and that is the subsidies we provide to the housing market. They go well beyond the guarantee, 

right? We are talking about the mortgage interest deduction, we 

61 

are talking about FHA. This goes on and on and on. It is very, very 

significant and we need to ask ourselves is this appropriate, are we 

getting our money’s worth? These are very legitimate and important questions. 

It is not a slam-dunk to say, I think, homeownership, this is the 

number and in every case it is a good thing. It really is much more 

complicated than that. But, again, I am sorry I am not as articulate as I would aspire to be, but I am literally running out of— 

Mr. HECK. My sixth grade teacher, Harry Noonan, God rest his 

soul, used to say, ‘‘That is a really good question. The definition of 

a good question is one I can’t answer.’’ 

Mr. ZANDI. Yes, that is exactly right. 

Mr. HECK. So I am out of time except to reiterate— 

Mr. ZANDI. But I will definitely get back to you. I absolutely will. 

Mr. HECK. I hope you will, sir. If I might just reiterate my gratitude. Thank you all. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr. 

Mr. BARR. Thank you, Mr. Chairman. 

Professor Levitin, you testified that we have a government guarantee of housing finance regardless, that it will either be explicit 

or implicit. Isn’t your assumption proof that moral hazard exists by 

virtue of the fact that interventionist politicians have, in fact, kind 

of carried out your point, and then if we had restrained ourselves 

as an institution, that moral hazard would not exist and market 

discipline would exist in this world? 

Mr. LEVITIN. I don’t think that this Congress or any Congress 

can restrain itself or would in the face of a collapse of the housing 

market. While I understand that certainly there are Members of 

Congress who would just let the chips fall as they may, I think we 

saw proof that two different Administrations, a Republican Administration and then a Democratic Administration, were willing to 

proceed with a wide-ranging bailout, not just of housing, but of all 

sorts of sectors of the economy. Yes, ideally, if we could credibly 

commit never to have bailouts, we would see a better functioning 

market. But I don’t think we can credibly do that. 

Mr. BARR. Let me ask any of the panelists who want to comment 

about the flow of private capital back into the housing finance system. Presumably, the PATH Act would require a great deal more 

credit risk investors as opposed to rate risk investors. Can you all 

comment, and Dr. Zandi, in particular, can you all comment on 

why there are barriers in a more market-driven mortgage finance 

system? Why credit risk investors are not there? 

Mr. ZANDI. In part, it is legacy. We have set up a system, it is 

the system that has been in place since the Depression, and as a 

result of that to some degree. Part of it is that credit risk is very 

difficult to evaluate and assess. It is very idiosyncratic. It depends 

on the specific credit, and when we are dealing with lots, millions, 

tens of millions of homeowners, it becomes very difficult to evaluate. And in the case of mortgage securities which are based on the 

mortgage payments, those securities themselves are quite complex, 

right? There are all kinds of financial structures, and the rating 

62 

agencies obviously didn’t get that right when they were trying to 

evaluate the quality of those structures. 

So it is a level of complexity that when you combine it with the 

interest rate risk makes it incredibly difficult. 

The third point is that it is hard to hedge. Interest rate risks, 

there are mechanisms to hedge it and you can assess and quantify 

your risk. Credit risk is a lot harder. We have tried to develop 

mechanisms for doing that. For example, the credit default swap 

market, the CDS market was an effort to try to hedge credit risk. 

But as we know, we didn’t really get that quite right. It will be better in the future, but that is also a problem, and all those things 

combined make this very difficult to do. 

Mr. BARR. Does anybody else have a comment on that in terms 

of the availability of credit risk investors? 

Mr. WALLISON. Yes, let me try to address that, because a mortgage is a particularly good investment for life insurance companies 

and private pension funds, because they want long-term assets to 

deal with their long-term liabilities. The reason they don’t invest 

now in Fannie and Freddies, most of them do not, and they don’t 

put a lot of money into Treasuries either, is because the yields are 

too low for them. They need a higher yield and they get that higher 

yield by making prudent investments, taking prudent risks. That 

is the market that this bill would open up because those investors 

will be looking for private credit risk that will compensate them for 

taking those risks and be long-term assets. 

Mr. CALABRIA. I want to make an important point because sometimes we talk as if the government is there, then magic, the risk 

goes away. The credit risk is always going to be there. The interest 

rate risk is always going to be there. 

I would choose to have that risk borne by people who choose to 

bear it, and I don’t believe as a taxpayer—our taxpayers in general 

are very good at managing credit risk. So I am not going to pretend 

the private sector is going to do a great job, but I am absolutely 

certain that the government will do a horrible job at managing that 

credit risk. 

Mr. BARR. Just in the 20 seconds left, does anyone on the panel 

wish to respond to, I believe it was Dr. Zandi’s concern about the 

utility in the PATH Act? Does anybody wish to respond to the concern that with the utility, there is no requirement compelling use 

of the utility? Why would people not use the utility for purposes of 

securitization? 

Mr. LEVITIN. They don’t want to have to comply—one reason not 

to use it would be that the utility would have certain underwriting 

standards with which a bank that is conducting its own private 

label securitization might not want to have to comply. 

Mr. ZANDI. Large lenders would almost assuredly not use it, 

right, because they have their own platform? 

Mr. BARR. I yield back. 

Mr. GARRETT [presiding]. The gentleman from California is now 

recognized. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

I am glad we are holding these hearings, but I think that we 

have selected a room that is way too small, because if we were 

going to put all of the business groups that have come to me and 

63 

others and said they oppose the path that we are on in this bill but 

they don’t want to say so on C-SPAN, they don’t want to offend the 

chairman, we would need to be in the large auditorium in the Capitol Visitor’s Center. 

This is a long hearing, but this is a bill with hundreds of pages, 

that has taken many years to write behind closed doors, and now 

in a couple of weeks, we are supposed to go from seeing the bill 

to moving it out of the committee. I would hope that we wouldn’t 

be marking up this bill until we have a chance to spend August reviewing it. 

The old system had a lethal combination of private sector objectives for Fannie and Freddie where there were stock options, large 

compensation plans, pressures from the stock market, and a desire 

for market share combined with government credit guarantees and 

then finally, combined with inadequate oversight. And as the gentleman from Colorado, Mr. Perlmutter, pointed out, when we tried 

to have oversight and passed it in this committee, Chairman Oxley 

saw the bill die in the Senate and attributed that to the one-finger 

salute that he received from the Bush Administration. To this day, 

Mr. Oxley has not indicated which finger was involved. 

What we need is a new system that continues the government 

guarantee but eliminates the private ownership with stock market 

pressures, stock options, and enormous compensation plans, and 

that has adequate oversight and an adequate fee to make sure that 

the taxpayers are reimbursed for the risks that they are taking. 

Now, I realize you can read everything Ayn Rand ever wrote, and 

you won’t see any mention of Fannie, Freddie or the FHA, but just 

because it is not in ‘‘The Fountainhead’’ doesn’t mean it should not 

exist. 

The Chair was here saying that for $729,000, $750,000, you 

could buy a mansion in his district. I don’t know what the houses 

sell for in Coffman, Texas, but in my area, that is a middle-class 

home. And I would like to, for the record, point out that there are 

10 million Californians who live in counties where the median 

home price is over $525,500. And I assure the chairman, whom I 

know will take an interest in reading this transcript, that for 

$729,000, $750,000, you do not get a mansion in America’s best 

named city, which, of course, is Sherman Oaks, California. 

As to auto loans, they were referenced by one of the other Members. You can’t get a 30-year fixed-rate auto loan. The private sector will not take both the credit risk and the interest rate risk. 

Mr. Zandi, we have been told how well the jumbo loans are working, but let’s say you are getting a conforming loan. You are putting about 5 or 10 percent down. Imagine what the interest rate 

would be. Now, to get that same interest rate on a jumbo, how big 

a downpayment would you need? 

Mr. ZANDI. It depends on all of the other circumstances. I can’t 

answer that question. It would be large. Larger. 

Mr. SHERMAN. Does someone else—professor, do you have a comment? 

Mr. LEVITIN. No. 

Mr. SHERMAN. Doesn’t it typically take a 20 percent downpayment on a jumbo, or aren’t the vast majority of jumbos at 20 percent downpayment? 

64 

Mr. WALLISON. I don’t know the answer to that, but whenever 

you have a mortgage, you have a balancing of the creditworthiness 

of the borrower, the collateral, the importance of the collateral, as 

well as the downpayment. So there can be a lot of bargaining over 

that. 

Mr. SHERMAN. Without the government guarantee, and expecting 

a fixed-rate loan for 30 years, you are going to be putting at least 

20 percent down. 

Finally, I would like to be concerned about the effect this is going to have on home prices. Keep in mind we have guaranteed $5 trillion worth of mortgages, and if they go underwater, we, the Federal 

Government, are going to lose a lot of money. What happens, and 

I will ask Dr. Zandi, if you take 20 or 30 percent of the potential 

buyers out of the market? What happens to home prices? 

Mr. ZANDI. All else being equal, they will decline. 

Mr. SHERMAN. Yes. And wouldn’t we have at least 20 or 30 percent of the home buyers today unable to put up a 20 percent downpayment or having a 750 FICO score? 

Mr. ZANDI. Almost certainly, yes. 

Mr. GARRETT. Mr. Duffy is recognized for 5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. I appreciate the panel 

staying here and working so hard, staying so late. 

I just want to take a look back to 2008 to Mr. Calabria. Do you 

know what the cause was of the 2008 financial crisis? Do you have 

an opinion as to what caused it? 

Mr. CALABRIA. I think you have, at minimum, a dozen different 

factors. It would be nice if there was one thing you could point to 

and say, fix that, and that was it. So I would certainly put a number of things. According to my opinion, what I think was absolutely 

reckless monetary policy. I don’t think you could have a real Federal funds rate negative for 3 years. You had a situation where because of the Fed, we were paying people to take money. That is all 

you need to have for a bad situation. 

Mr. DUFFY. Did the housing bubble have an impact on the financial crisis of 2008? 

Mr. CALABRIA. Absolutely. And I think to really distinguish part 

of the discussion here and maybe differences between Adam and 

Mark and myself is the real question of how much of the current 

system is procyclical versus countercyclical. If you assume that this 

sort of crisis just happens, and then, of course, you want to say we 

want a backstop because a crisis happens. So our argument is, how 

much of the backstop caused the crisis? 

Mr. DUFFY. I hear you. And one of the main drivers of the housing bubble, we are talking about monetary policy, but also Fannie 

and Freddie had a role in that too, didn’t they? 

Mr. CALABRIA. Absolutely. They helped inflate the housing bubble, and just as importantly they helped transfer losses to the taxpayer, which is the difference between, say, the office market bubble, the hotel market bubble. All of these things bubbled, but you 

and I did not pick up the check for them in the same way. 

Mr. DUFFY. I want to move along a little bit more quickly here, 

but you would agree in the financial crisis of 2008, we had a housing bubble, and Fannie and Freddie played a role in it. Right? You 

would agree? 

65 

Mr. CALABRIA. Absolutely. 

Mr. DUFFY. And have you had a chance to review the DoddFrank legislation that passed a number of years ago? 

Mr. CALABRIA. I am afraid to say I have actually read it several 

times. 

Mr. DUFFY. Section by section, title, the whole thing? 

Mr. CALABRIA. Yes. 

Mr. DUFFY. Could you give me the section where Dodd-Frank addresses Fannie and Freddie? 

Mr. CALABRIA. I think it is pretty clear that was left out. 

Mr. DUFFY. That was left out, that is right. So that is why we 

find ourselves here today, right, having a conversation about how 

do we fix one of the main drivers of the 2008 crisis? 

Mr. CALABRIA. Right. 

Mr. DUFFY. Does anyone on the panel disagree with this? Mr. 

Levitin? 

Mr. LEVITIN. I would say Fannie and Freddie played a role in the 

crisis, but they were not the leading edge of the housing bubble. 

The leading edge of the housing bubble was private label 

securitization—in 2006, over half of mortgages originated ended up 

getting securitized in private label securitization. I don’t think that 

can be ignored. Fannie and Freddie played a role in creating demand for private label securitization. They are not guiltless. But it 

I don’t think it is quite right to say that they were the main driver 

of the crisis. 

Mr. DUFFY. But my point is they were left out, and that is why 

we find ourselves here today. And I think that is important to note. 

We are having a big conversation about this because this wasn’t 

addressed and it should have been addressed, and that is why we 

are here today having a conversation about what are the right 

steps forward to make this system work. 

I want to talk about the 30-year fixed. We have had a lot of conversation about that. So obviously we have, in our traditional system that exists today, we have the investors in mortgage-backed 

securities. They take the rate risk, and we have the government 

take the credit risk, right? And, Mr. Zandi, is it your position that 

if the investors have to take the rate risk and the credit risk, that 

they are not going to invest in these products? Is that your position? 

Mr. ZANDI. No, they will, it will just be much diminished. So the 

share of the market that is 30-year fixed would decline significantly. 

Mr. DUFFY. How much? 

Mr. ZANDI. I think the rest of the world would be a good benchmark. In the rest of the world, 30-year fixed, say Europe probably 

is the best market, it is about 20 to 25 percent of the market. I 

would say that is about right. 

Mr. DUFFY. Mr. Holtz-Eakin, do you agree with that? 

Okay. So we are still saying there is going to be a 30-year fixedrate. That product will be available, yes? 

Mr. HOLTZ-EAKIN. And can I make the point, I think it is an important one, that if we do nothing, we are going to see rates go up, 

and about 20 percent of mortgages taken off the market by Basel 

III and QM-QRM, and if we do the hybrid system that Mark deVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
66 

signed, there is going to be an explicit charge built into interest 

rates for the backstop. It is going to raise rates. It is going to lower 

home prices. It is going to lower the homeownership rate. The notion that there is a freebie out there where we have a better system and these things don’t happen is wrong. 

Mr. DUFFY. There is no free lunch, right. I think it is a good 

question for you all. You look at the moderate- and low-income constituents that I have in central and northern Wisconsin, or in any 

of our districts, were they helped when they lost their home because they were encouraged to buy homes they couldn’t afford? 

Were they helped in that process? 

Mr. WALLISON. That was the point that I made in my opening 

statement, that the people who really got hurt by the policies that 

we followed during the 1990s and into the 2000s were the people 

who were induced to buy homes even though they had very low 

credit scores, and very low financial capabilities, who then found 

when the market turned that they lost their homes. That was a 

tragedy. 

Mr. DUFFY. Right. And so the status quo of not fixing the system 

isn’t helping poor and moderate-income families— 

Chairman HENSARLING. The time of the gentleman has expired. 

Mr. DUFFY. So close. I yield back. 

Chairman HENSARLING. The Chair wishes to make a process announcement. Again, my apologies. Due to starting 3 hours late in 

votes, the hour is much later than anticipated. I understand, Mr. 

Wallison, you need to be excused at this time. My apologies to the 

second panel as well. We currently have two more Members to ask 

questions of this panel, in which case we hope to excuse this panel, 

take a short break, and impanel the second panel, although votes 

are anticipated sometime within the next 30 to 40 minutes. 

So the Chair now recognizes Mr. Stutzman of Indiana. 

Mr. STUTZMAN. Thank you, Mr. Chairman, and thanks to each of 

you for being here and thank you for your testimony and for your 

answers and for your expertise on this very complex issue. 

I would like to touch just quickly, I guess my question kind of 

maybe comes more from a position of where and why should government be helping. I want to touch on a comment that Mr. 

DeMarco made: ‘‘One thing I would say about 30-year mortgages, 

it is not necessarily the best mortgage product for a home buyer, 

especially a first-time home buyer. If you look at statistics and see 

that the first-time home buyers in this country tend to own their 

first home for 4 years or 5 years, it may not be the best for their 

circumstance if they buy that house with that kind of timeline.’’ He 

goes on to say, ‘‘There may be a different mortgage product in 

which they can build equity at a faster rate than a 30-year fixedrate mortgage.’’ 

I want to ask any of you on the panel, where is the best place 

for government to guarantee mortgages? Is it a first-time home 

buyer? Is it a lower- to medium-income household? Where do we 

start picking, or why do we start picking and choosing who does 

and who shouldn’t? And if you look at the statistics, obviously we 

are backing a lot of them. 

Dr. Calabria? 

67 

Mr. CALABRIA. Let me preface with, I wouldn’t back any of them. 

But I do think you have to ask yourself the question of if you are 

going to have a government intervention, and you have decided to 

have a government intervention, it should be helping people who 

would not be helped otherwise. A very large segment of the subsidies that Fannie and Freddie deliver are people who would have 

become homeowners otherwise, would have gotten a mortgage otherwise. So if you are going to have that subsidy, I would focus it 

on families who, but for the subsidy, would not be homeowners. 

Mr. STUTZMAN. Dr. Holtz-Eakin, go ahead. 

Mr. HOLTZ-EAKIN. I think it is important to recognize, and Mark 

made this point earlier, that we care about people having access to 

shelter, but a lot of this belongs in the appropriations process 

where you explicitly have a social program to help low-income 

Americans. 

The second thing I would say is remember there is also a private 

mortgage insurance market too, so it is not like the government is 

the only one who can provide guarantees. 

Mr. STUTZMAN. Because in the bill, from my understanding, 

where we are addressing FHA and what FHA’s mission really is, 

it is designed or targets FHA’s mission specifically to first-time 

home buyers, and they are eligible—the eligibility is regardless of 

their income nationwide. We are helping people out there get into 

a home. 

Mr. CALABRIA. I think that is the right approach, to have an income-based approach where you are making sure that you are targeting somebody who is middle-class or not necessarily having all 

these subsidies go to the rich. 

Let me say as an aside, my approach to public policy questions 

is often the first thing to ask, is this problem a problem for rich 

people? If it isn’t, then it is an income problem. Rich people have 

no problem getting housing. I don’t care about subsidizing rich people. And if what we care about is that the poor people are poor, 

the best thing to do is try to give them direct subsidies so they are 

not poor rather than feed it through all sorts of industries. 

Mr. STUTZMAN. Dr. Zandi or Professor Levitin, any comments on 

that? Isn’t that a good approach and shouldn’t that be our primary 

focus? 

Mr. LEVITIN. If you started with a blank slate, I think that is a 

very reasonable approach. The problem is we are not starting with 

a blank slate. And if you start tinkering with the guarantee too 

much, it risks pushing down housing prices, and for lots and lots 

of families, their house is their most significant asset. If housing 

prices fall, the family’s net worth falls, it has a real impact on their 

financial stability. 

Mr. STUTZMAN. But it is a good goal, isn’t it? 

Mr. LEVITIN. To push down housing prices? 

Mr. STUTZMAN. No. No, no, no, I’m sorry. To focus on first-time 

borrowers— 

Mr. LEVITIN. That is definitely an appropriate role. 

Mr. STUTZMAN. How much to you—from FHA-guaranteed GSEs, 

more than 85 percent of all new mortgages originated and were responsible for 99 percent of all mortgage securitizations in 2012. 

68 

How much is too much? Where is that line? Is it 100 percent? 

Would you say that should be 100 percent? 

Mr. LEVITIN. Not at all. I think I take a position pretty similar 

to what Dr. Zandi has articulated, which is that there is a role for 

a government guarantee, but a limited one, and it should be focused on catastrophic risk. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair recognizes the gentleman from Virginia, Mr. Hurt. 

Mr. HURT. Thank you, Mr. Chairman. I certainly appreciate the 

chairman’s leadership on this issue and I certainly thank the members of the panel for spending the time with us this afternoon. 

I wanted to follow up on something that Ms. Velazquez was talking about in terms of the national mortgage market utility during 

her line of questioning. Dr. Zandi concluded and stated that he did 

not think that there would be much uptake on the securitization 

platform. 

I was wondering if we could hear from Dr. Holtz-Eakin and Dr. 

Calabria on their take on the platform itself. Do you believe that 

it will attract the private sector and why? And then the second 

thing that I was hoping you could address is, do you believe that 

platform will also have a place there and encourage smaller institutions to be a part of it? 

Mr. HOLTZ-EAKIN. I think the utility is an important question 

and I don’t have a bright line answer. I have a couple of thoughts 

on it. First, I don’t see any particular problem with access from the 

smaller institutions that needs to be fixed. That has come up a couple of times today. 

Second, it clearly reflects a problem, which is that currently, 

Fannie and Freddie have platforms and the FHA is developing another platform, and if you were to simply privatize that, you would 

give someone a deeply unfair competitive advantage. You can’t do 

that. So this seems so be a halfway house where you turn into a 

government utility. I am not particularly happy with that approach. 

And third, and what I think is the most important aspect, is the 

degree to which the utility is the mechanism by which you impose 

standardization, data collection, and some transparency on this 

market. Those are all absolutely admirable goals, and if you can do 

that without creating the utility, do it. 

Mr. HURT. I want to hear from Dr. Calabria, but on that point, 

that was my follow-up question, had to do with, as you said earlier, 

talking about the importance of scrutinizing risk and how vital 

that is to strengthening, strengthening homeownership in this 

country and preventing future crises, are you satisfied with the 

way the bill is laid out in terms of providing the transparency and 

disclosure that will allow investors what they need to be able to get 

on to the platform or use the platform? 

Mr. HOLTZ-EAKIN. I won’t pretend to have read every line of it, 

but it seems to be in the right ballpark. No question about that. 

Mr. HURT. Thank you. 

Mr. CALABRIA. Let me start from the observation, and it is important to keep in mind, that Fannie and Freddie and the Federal 

Home Loan Banks all, in my opinion, clearly increase consolidation 

among originators. They charge different G fees by size. At one 

69 

point Countrywide was almost one-third of Fannie Mae’s business. 

So it is hard for me to look at the previous and somewhat existing 

model and think that was good for small institutions. It wasn’t. It 

drove consolidation in the industry. 

I also will say as you are well aware there are estimates across 

the board, but there are certainly concerns that 1,000 or more 

small banks will be driven out of business because of Dodd-Frank. 

So there are a number of things that worry me in terms of consolidation in the industry. 

That said, I think the utility is a reasonable start. I have some 

concerns. Doug mentioned, I think, hours ago that the problem 

about having a monopoly, I worry about that. I am less enamored 

of standardization than I think anybody else at the table is. I tend 

to like a lot of diversity in our mortgage market and lots of different products and lots of different players. So I do worry about 

that. 

I guess to me, the biggest flaw in the previous system was the 

government put its thumb very heavily in favor of one system. I 

think that is a mistake. We need to let 1,000 flowers bloom, so to 

say, and let the market figure that out. 

Mr. HURT. On the second part of Mr. Holtz-Eakin’s answer, you 

talked about scrutinizing risk. Do you have a sense of whether or 

not this bill offers a transparency in the disclosure necessary for 

investors to see what they are buying and make prudent decisions 

in allocating risk? 

Mr. CALABRIA. I think there is some increased transparency 

there that is a positive. I think it is also important to keep in mind 

that this is a minimum level of disclosure. Investors are always 

free to go back to somebody who is issuing private label securities 

and say we want more information, and certainly I think there was 

a lack of transparency in those securitizations pre-crisis. But you 

are already seeing investors, you look at things like what Redwood 

has done, there is far more transparency in the private label market, albeit it is a small market, but there is far more transparency 

today there. So I think it is an adequate floor in which the market 

will demand more information to distinguish between players. 

Mr. HURT. Thank you. I yield back the balance of my time. 

Chairman HENSARLING. The gentleman yields back the balance 

of his time. There are no other Members who wish to be recognized. I want to sincerely thank the panel for their patience and 

for what they have added. Even the witnesses who have difficulty 

agreeing with the chairman have had much to add today. This 

panel is excused, again, with our gratitude. 

We will take a brief moment as we seat the exceedingly patient 

second panel. 

[recess] 

Chairman HENSARLING. If Members could please take their 

seats. Although we are missing two witnesses, in the interest of 

time we will go ahead and start the introductions. Votes are, regrettably, expected soon, but perhaps we can start on some of the 

opening statements. Again, if staff could close the door, please. 

I do wish to say for the record that with one exception, this industry panel was invited by the Majority, and even though a number of the witnesses oppose some or all of the provisions of the 

70 

PATH Act, even though we have a disagreement, we respect the organizations, we respect their members, and their voices need to be 

heard, and I am glad they took the opportunity to accept the invitation to testify. 

Testifying on behalf of the National Association of Federal Credit 

Unions is Ms. Janice Sheppard, who serves as the senior vice president for mortgage compliance at Southwest Airlines. It is nice to 

have somebody from back home. 

Testifying on behalf of the Mortgage Bankers Association is its 

president and CEO, David Stevens, who, as most of us know, previously served as the Assistant Secretary for Housing and as the 

Federal Housing Commissioner at HUD. 

William Loving, Jr., is the president and CEO of Pendleton Community Bank in West Virginia. He will offer testimony on behalf 

of the Independent Community Bankers of America. 

Testifying on behalf of the National Association of Home Builders, we welcome its CEO, Jerry Howard. 

We also welcome the testimony of Tom Deutsch, the executive director of the American Securitization Forum. 

Our final witness will be Mike Calhoun, the president of the 

Center for Responsible Lending. 

I think most of you have testified in the past. You will have 5 

minutes to give your oral testimony. 

Mr. Loving, you are now recognized for your testimony. 

STATEMENT OF WILLIAM A. LOVING, JR., PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, PENDLETON COMMUNITY 

BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY 

BANKERS OF AMERICA (ICBA) 

Mr. LOVING. Chairman Hensarling, Ranking Member Waters, 

and members of the committee, my name is William A. Loving, Jr., 

and I am president and CEO of Pendleton Community Bank, a 

$260 million bank in Franklin, West Virginia. I am also chairman 

of the Independent Community Bankers of America, and I testify 

on its behalf. 

Thank you for convening this hearing on the PATH Act. It is 

critically important to our Nation’s borrowers and the broader 

economy that the details of any housing finance reform are done 

right. We appreciate your efforts to advance needed reforms. 

Community banks represent approximately 20 percent of the 

mortgage market, but, more importantly, our lending is concentrated in small towns in rural America which is not effectively 

served by large banks. Any mortgage reforms that constrain lending by community banks will seriously harm communities like 

mine. 

Access to a robust secondary market is vitally important to community banks as we do not have the scale and resources needed to 

effectively hedge the interest rate risk inherent with long-term 

fixed-rate lending. Secondary market sales make it possible for 

community banks to offer these loans without risk exposure. 

ICBA has developed a comprehensive set of principles for secondary market reform which I will summarize as follows: First, 

community banks must have equal and direct access. We must 

71 

have the ability to sell loans individually for cash under the same 

terms and pricing available for larger lenders. 

Second, there can be no appropriation of customer data for crossselling of financial products. We must be able to preserve the customer relationship after transferring loans. 

Third, originators must have the option to retain servicing rights 

at a reasonable cost. Servicing is a critical aspect of the relationship lending model vital to community banks. 

Finally, private capital must protect taxpayers. Securities issued 

by secondary market entities must be backed by private capital and 

third-party guarantors. Government catastrophic loss protection, 

which is critical during periods of market stress, must be fully and 

explicitly priced in the guarantee fee and loan level price. 

Any reforms that are not consistent with these principles could 

drive further consolidation of the mortgage market, which would 

harm borrowers and communities and put our financial system at 

risk of another collapse. 

ICBA appreciates Chairman Hensarling drafting legislation to 

protect taxpayers, enhance the role of private capital and housing 

finance, and provide needed regulatory relief for community banks. 

These critical areas of reform are reflected in the PATH Act. We 

are encouraged by the bill and believe it is something with which 

we can work. 

With that said, we have questions about how the national mortgage market utility, which would serve as a platform for the 

securitization of mortgages, would perform in a live marketplace 

inherently dominated by large lenders. These questions include, 

first, would community banks be forced to sell loans to the large 

aggregator that would appropriate servicing rights and valuable 

customer data? Second, would the owners of the utility have the 

ability to appropriate customer data? Third, while we are encouraged that any Federal Home Loan Bank would be authorized to aggregate mortgages for securitization, nothing in the Act compels 

them to perform this service, if they choose not to, what direct access will community banks have to the secondary market? 

Finally, the majority of community banks that now sell directly 

to Fannie Mae and Freddie Mac do so through the GSEs’ cash window. Can the utility accommodate this option? We hope that the 

utility can be implemented in a way that does not, despite the intent of the statute, marginalize community bank mortgage lenders 

or lead to further consolidation of the mortgage market. ICBA looks 

forward to working with you and the committee to address these 

and other questions as the PATH Act is debated. 

ICBA sincerely appreciates the chairman’s effort to protect community banks from Basel III. In addition, the Act’s mortgage lending regulatory relief, especially the qualified mortgage status for 

portfolio loans and repeal of the new credit risk retention requirement, are urgently needed and will facilitate community bank 

mortgage lending. The Capito-Maloney examination reforms will go 

a long way towards improving the oppressive examination environment which is impeding the flow of credit in our communities. 

Thank you for the opportunity to share our views. We look forward to working with the committee and providing ongoing input 

into the process. 

72 

[The prepared statement of Mr. Loving can be found on page 191 

of the appendix.] 

Chairman HENSARLING. Votes have been called on the Floor. We 

should have the opportunity to hear two more opening statements. 

Ms. Sheppard, you are now recognized. 

STATEMENT OF JANICE SHEPPARD, SENIOR VICE PRESIDENT, 

MORTGAGE COMPLIANCE, SOUTHWEST AIRLINES FEDERAL 

CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU) 

Ms. SHEPPARD. Good afternoon, Chairman Hensarling, Ranking 

Member Waters, and members of the committee. My name is Janice Sheppard, and I am testifying today on behalf of NAFCU. I appreciate the opportunity to share our views with the committee on 

housing finance reform and the PATH Act. 

Credit unions have a solid track record of making safe and sound 

mortgage loans that members can afford. As the committee works 

on housing finance reform, a primary concern of credit unions is 

continued unfettered access to the secondary mortgage market, including adequate transition time to a new system. A second concern equally as important is recognizing the quality of credit union 

loans through a fair pricing structure. Because credit unions originate a relatively few number of loans compared to others in the 

marketplace, they cannot support a pricing structure based on loan 

volume, institution asset size, or any other issue that could disadvantage our members. 

Credit union mortgage originations have more than doubled between 2007 and 2013 as we helped meet the demand created when 

other lenders cut back. The portion of first mortgage originations 

sold into the secondary market also more than doubled over that 

same period, from 25 percent to 53 percent. While credit unions 

hedge against interest rate risk in a number of ways, selling products for securitization on the secondary market is vital to our safety and soundness. Small lenders must have continued access to secondary market sources, including Fannie Mae, Freddie Mac, Ginnie 

Mae, and the Federal Home Loan Banks or any new entity Congress may create. They are valuable partners for credit unions who 

seek to hedge interest rate risk by selling their fixed-rate mortgages, as credit unions do not have the economies of scale that 

larger market participants enjoy. 

In 2010, the NAFCU board of directors established a set of principles that the Association would like to see reflected in any reform 

efforts. These principles are outlined in my written testimony. We 

believe that the unveiling of the PATH Act is an important step in 

the debate on housing finance reform. 

While NAFCU appreciates the serious and comprehensive effort 

put forth by the PATH Act, we have outstanding concerns with 

how the elimination of the GSEs and the government guarantee 

could impact reliable market access for credit unions. We believe 

that any reforms should focus on the consumer and not disrupt the 

recovery under way in the housing market. The guaranteed access 

to the secondary market was a critical component for credit unions 

being able to continue to meet the mortgage needs of Americans 

during this recent economic downturn. 

73 

We are pleased, however, to see Section 261, to discourage the 

trend of strategic defaults that some credit unions have seen. 

NAFCU also believes that the regulatory relief found in Title IV is 

a very important aspect of the bill. In particular, NAFCU strongly 

supports Section 403, to address the CFPB’s definition of points 

and fees under the ability-to-repay rule. 

Given the tidal wave of new mortgage regulations, we also 

strongly support the 1-year delay of the mortgage rules found in 

Section 406. NAFCU also strongly supports Section 409, which exempts from the Qualified Mortgage definition residential mortgage 

loans held in portfolio. We also support Section 411 that allows 40- 

year mortgages to be considered for QM and would allow consumers to waive the 3-day waiting period before closing. 

In addition to the mortgage-related provisions contained in the 

draft bill, NAFCU would like to recognize the important changes 

that would be made with respect to the examination process at 

credit unions. Finally, we would like to know that if the bill contains provisions relating to Basel III for community banks, we believe provisions implementing risk-based capital for credit unions 

should also be included. 

In conclusion, we appreciate the opportunity to provide our input 

on this important issue. We look forward to working with Chairman Hensarling, Ranking Member Waters, committee members, 

and your staff to address our comments as housing finance reform 

moves forward. I thank you for your time today and I would welcome any questions that you may have. Thank you. 

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

196 of the appendix.] 

Chairman HENSARLING. We will go to Mr. Howard’s testimony, 

and then we will recess. Mr. Howard, you are recognized. 

STATEMENT OF JERRY HOWARD, CHIEF EXECUTIVE OFFICER, 

THE NATIONAL ASSOCIATION OF HOME BUILDERS (NAHB) 

Mr. HOWARD. Chairman Hensarling, Ranking Members Waters, 

and members of the committee, my name is Jerry Howard, and I 

am the CEO of the National Association of Home Builders and I 

appreciate the opportunity to testify here today. NAHB is proud to 

appear here today, Mr. Chairman, and we applaud you for finally 

beginning the debate on housing finance reform. 

The housing finance system has been in limbo for the past several years and we strongly believe that the status of the system 

has held back the overall economic recovery. We applaud you also 

for looking at this issue holistically. I have been around here long 

enough to remember several housing bills, including the CranstonGonzalez Act. And I believe that looking at these holistically is a 

much more effective way of legislating than piecemeal. NAHB is 

eager to be a constructive partner in this debate as we move forward. There are elements of the PATH Act that we support and 

there are elements of the Act with which we have serious concerns. 

Let me start by touching on provisions that we support. First, 

many of the provisions for building a new market structure are 

consistent with NAHB’s policy recommendation for reforming the 

mortgage securitization practices and procedures. 

74 

Second, we are very pleased that you included the Capito-Maloney bank examination bill which addresses bank examiners and 

their actions with respect to commercial real estate lending. We believe that this legislation, if enacted, will add consistency to the 

regulatory processes that banks undertake on a daily basis when 

interacting with our members. 

Third, we are happy to see you address the QM and QRM rules, 

and we support the proposed amendment to the Truth in Lending 

Act for exceptions to the calculation of points and fees. 

Finally, addressing the Basel III accords and ensuring that Basel 

III does not apply onerously to community banks, as has been 

feared, will go far toward helping banks free up capital that is 

much needed in the housing finance system. 

These four elements alone are very, very important and we are 

grateful that they are included in the draft legislation. 

With respect to the title that addresses FHA, we have to be 

mindful of the fundamental countercyclical mission of the FHA. 

While NAHB could support moving the FHA out of HUD, we are 

concerned that an independent FHA, with the restrictions imposed 

by the PATH Act, would be ineffective in its countercyclical mission, a mission that to date has served us so very well during the 

current downturn, despite the financial status of the MMI fund. 

With respect to GSEs, I have to tell you that I have been in the 

game long enough that I remember when President Clinton called 

the housing industry into a room and said, ‘‘Make more Americans 

homeowners.’’ I also remember 8 years after that when President 

Bush issued the same edict. I believe that the goals of President 

Clinton and President Bush, to increase America’s homeowners, 

are valid public purpose goals. And I believe that expending Federal resources to that end is an equally valid public purpose. 

Prior to this downturn, which was the fault of the American 

housing industry itself, the housing finance system as a whole was 

working fine. To totally dismantle the housing finance system 

based on this recent short-term though devastating crisis we believe would be a shortsighted and a dramatic departure from the 

longstanding American housing policy dating back at least to the 

Housing Act of 1949. 

Most significantly, NAHB believes that the future housing finance system must have an explicit Federal Government guarantee. NAHB urges the committee to make changes to the PATH 

Act to ensure the Federal Government continues to provide a backstop for a reliable and adequate flow of affordable housing credit 

for both single and multi-family housing and in all economic and 

financial conditions. 

NAHB believes that this Federal support is particularly important in continuing the availability of a 30-year fixed-rate mortgage. 

We believe that the PATH Act as currently drafted does not provide the Federal support necessary to ensure a liquid and strong 

housing finance system. 

Mr. Chairman, the National Association of Home Builders is 

eager to begin this debate. We believe that a fundamental goal of 

the American people is still to own their own homes. And we believe that an abundance of affordable rental housing must be available to provide Americans with housing choice. Unfortunately, we 

75 

believe that the PATH Act as drafted would make homeownership 

unnecessarily expensive for first-time homebuyers, reduce homeownership opportunities for middle-class Americans, and retard the 

construction of rental housing. NAHB will be a constructive partner in this process. I sincerely thank you for the opportunity to testify, and I look forward to working with the entire Congress that 

will enact legislation to create a sustainable housing finance system. Thank you, sir. 

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

148 of the appendix.] 

Chairman HENSARLING. Thank you. 

There are votes on the Floor at the moment. We expect to return 

in approximately 40 minutes. The committee stands in recess until 

such a time. 

[recess] 

Chairman HENSARLING. The committee will come to order. 

Mr. Stevens, you are now recognized for your testimony. 

STATEMENT OF THE HONORABLE DAVID H. STEVENS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE MORTGAGE 

BANKERS ASSOCIATION (MBA) 

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

this hearing and, more importantly, for jump-starting a debate that 

is long overdue. 

Fannie Mae and Freddie Mac have been in conservatorship for 

almost 5 years now and it is important that policymakers begin defining a long-term plan for the future role of the Federal Government in the mortgage market. Your legislation, coupled with the 

recent introduction of the Corker-Warner bill in the Senate, and 

the FHA bill unveiled earlier this week by Chairman Johnson and 

Ranking Member Crapo, helped set the process in motion and 

frame the boundaries of this debate. 

Over the course of the last year, MBA reconvened our members 

in two task forces, one for a single family, another for multi-family, 

to discuss the future of the secondary market and examine the 

broad range of issues that will be crucial to this debate. Our members identified several key principles necessary for a sound secondary market. We believe any new structure should rely primarily 

on private capital but must also provide liquidity through economic 

cycles with an explicit government backstop. Additionally, the new 

structure should support the availability of a traditional long-term 

fixed-rate mortgage product with the ability to lock interest rates 

efficiently and at low cost. 

Finally, there must be robust competition supporting multiple 

business models in both the primary and secondary mortgage markets. We believe these principles will ultimately benefit borrowers 

and taxpayers through increased competition and lower costs. As 

we begin to work toward a new secondary mortgage market end 

state, we must be mindful that this could be a long road. 

To that end, the MBA has also developed a series of transitional 

steps that can be taken now without congressional action that can 

help bring private capital back and help pave the road for comprehensive housing reform. Each one of these steps, which I outlined in my written testimony, advances healthy reforms to the secVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00079 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
76 

ondary mortgage market in a manner consistent with the common 

objectives shared by the majority of GSE proposals. And each one 

of these steps can be taken by FHFA and the GSEs through a 

transparent process without the need for authorizing legislation, 

thus allowing Congress to focus its efforts on developing the end 

state. 

I want to turn my attention to the FHA. We wholeheartedly 

share your goal of strengthening FHA’s fiscal solvency and protecting taxpayers from future losses, a process I began when I took 

over as FHA Commissioner at the height of the housing crisis. 

However, MBA has strong concerns with the overall scope of the 

FHA changes contemplated in the discussion draft. Each of the policy choices in this bill carries with it the potential for reducing affordable credit options for many otherwise qualified borrowers in 

the single family and multi-family markets. While we share your 

goal of reducing FHA’s footprint to a more traditional role, we urge 

the committee to re-examine changes to the single family mortgage 

insurance coverage, repurchase requirements, and loan limit floor 

as well as multi-family income limits. The final bill needs to strike 

a balance between strengthening FHA’s fiscal solvency and maintaining flexibility to support homeownership opportunities for both 

first-time and working-class borrowers as well as a vibrant rental 

housing market. 

Finally, MBA welcomes many of the improvements to DoddFrank contained in the discussion drafts. The proposal contains the 

provisions of H.R. 1077, the Consumer Mortgage Choice Act, which 

would amend the way points and fees are calculated for purposes 

of determining the eligibility for the Qualified Mortgage. This will 

make these safer loan products more affordable and more widely 

available to qualified borrowers. 

The bill also contains a prohibition on Fannie Mae, Freddie Mac, 

and FHA from purchasing or insuring mortgages in jurisdictions 

that permit using the power of eminent domain to seize underwater mortgages out of private label mortgage pools. MBA has 

strongly discouraged local jurisdictions from moving forward with 

this unprecedented and likely unconstitutional scheme and supports legislation to ensure U.S. taxpayers do not ultimately foot the 

bill for these unwise programs. 

Mr. Chairman, I want to again thank you for beginning this 

process of reforming our Nation’s housing finance system. As I 

have outlined, we believe there are some key changes that are necessary prior to this legislation being considered by the full House. 

But we stand ready to work with you, the ranking member, and 

all other members of this committee to improve the bill as it moves 

through the legislative process. Thank you. 

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

212 of the appendix.] 

Chairman HENSARLING. Mr. Deutsch, you are now recognized for 

your testimony. 

STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, THE 

AMERICAN SECURITIZATION FORUM (ASF) 

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

the opportunity to testify here today on behalf of the hundreds of 

77 

ASF member institutions. We issue, structure, trade, service, and 

invest in trillions of dollars of outstanding and newly originated 

mortgage, residential mortgage-backed securities, and asset-backed 

securities in the United States, including those entirely backed by 

private capital as well as those guaranteed or insured by public entities such as Fannie Mae, Freddie Mac, and Ginnie Mae. 

ASF strongly supports the introduction of the PATH Act as its 

proposal should continue to fuel what we hope to be a tangible, 

constructive dialogue to resolve the future of U.S. housing finance 

reform. For the 5 years since the onset of the GSE’s conservatorship, the mortgage reform dialogue has been, in our opinion, far too 

theoretical. While ASF and others will propose changes to this discussion draft, we believe this bill, along with the recent introduction of the GSE and FHA reform bills in the U.S. Senate, serve as 

concrete steps towards comprehensively restructuring the currently 

misguided U.S. housing finance system that relies on the U.S. Government to backstop 90 percent of residential mortgages made in 

America. We agree this must be done responsibly so that greater 

dislocation does not occur within our Nation’s housing market, the 

materially reduced access to credit, and/or impairment of the value 

of outstanding agency and private label RMBS. We believe there 

are many aspects of the PATH Act that would help achieve this 

goal. 

In our submitted written testimony, we provide substantial detail 

on seven key views we have on different parts of this proposed bill. 

One, we are strongly supportive of ratcheting down in the near 

term the Federal Government’s involvement in the U.S. housing finance system, the gradual reductions in GSE loan limits, appropriate increases in guarantee fees, and the GSEs issuing material 

amounts of their securities that expose investors to credit risk of 

the underlying mortgages. I point you to a recent White Paper we 

also issued in April of this year for substantially more detail and 

steps the Congress, FHA, and all regulators can and should take 

to increase private capital in the near term regardless of how long 

or in what form housing finance reform takes. 

Two, as many of these near-term steps take effect, the credit risk 

investor base is rebuilt, heavier competition returns to the RMBS 

issuance market in the private sector, and crisis era regulations 

are finalized. Congress and FHFA should push additional volume 

loans outside of the government guarantees through its various levers in the form of either GSE risk sharing deals and/or privately 

issued transactions. 

Let me take a point here to note that we believe that the 30-year 

fixed-rate note will by no means disappear at any future state with 

or without a government guarantee. In our opinion, there is no real 

debate about the 30-year fixed-rate mortgage disappearing or not 

existing. Currently, in the existing market, RMBS deals entirely 

backed by private capital, ones being just issued last month included 30-year fixed-rate collateral. That is not something that is 

necessary to have a government guarantee to backstop. As I think 

Mr. Garrett had indicated earlier, the real debate is about filling 

the entire pie of the outstanding agency asset-backed mortgagebacked securities market out there, is effectively bringing credit inVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
78 

terest rate risk investors in to fill this credit risk volume. And that 

is where a number of the aspects of the PATH bill will look to fill. 

Let me go to my third point, which is that ASF is strongly supportive of the FHFA securitization platform and/or any subsequent 

utility that all market stakeholders have an appropriate say in creating those standards of development that will increase the standardization. The point of that standardization is to create more fungible and liquid securities that will in part attempt to achieve and 

replicate some of the agency market that exists right now. By creating that fungibility and that standardization, those securities— 

the hope is that they will trade in a liquid and deep market. But 

you can’t have a liquid and deep market of private label capital 

when the government guarantees approximately 90 percent of existing mortgages. 

Fourth, ASF has supported, and continues to support, a strong 

legislative covered bond market in the United States that will help 

create even more demand and more product for these rates investors that are not necessarily looking to create credit risk. 

Five, ASF is strongly supportive of targeted corrections to the 

Dodd-Frank Act, Basel III, and other regulations to remove impediments and better facilitate the origination and capital market sales 

of mortgages and other securities backed by them. As an example, 

eliminating the premium cash capture reserve account that many 

people have noted, if people are concerned that 90 basis points is 

too much by eliminating the government guarantee, losing 100 to 

400 basis points by just one of the aspects of Dodd-Frank seems to 

be a pretty obvious answer to us. 

Sixth, ASF is extremely supportive of the PATH Act’s prohibition 

of the GSEs and FHA from guaranteeing any mortgage out of a jurisdiction that seized mortgages through eminent domain. 

And finally, ASF offers some key amendments that would fix 

some of the Dodd-Frank Act related to swap and margin requirements that got some of the same impacts as the premium cash capture reserve account. 

Thank you very much, Mr. Chairman. I look forward to answering questions. 

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

126 of the appendix.] 

Chairman HENSARLING. And finally, Mr. Calhoun, you are now 

recognized for your testimony. 

STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, THE 

CENTER FOR RESPONSIBLE LENDING 

Mr. CALHOUN. I may be popular today as the last witness of the 

day. 

Thank you, Chairman Hensarling, and members of the committee who have stayed for this important hearing. And thank you 

for your work to address the future of the critically important housing finance system. 

The PATH bill raises numerous ideas that add to this important 

discussion. We are concerned though that as currently drafted, it 

would lead to unnecessarily more expensive and riskier home 

loans, reduction of borrowing options for the popular and safe 30- 

year fixed-rate mortgage, more concentration in what is an already 

79 

too concentrated banking and mortgage industry with harm to community banks, and disruption of the housing industry and harm to 

the overall economy. 

Let me first address comments to the quality of U.S. mortgages 

leading up to the housing crisis because I think it is instructive to 

look back at those, and it addresses several questions today. Let 

me start with recognizing the work of the chairman emeritus to try 

to address that quality issue back in 2006. 

Loans in this country were unaffordable without constant refinancing that depended upon unsustainable home price growth and 

the musical chairs game came to an end when house prices slowed 

down and then declined. It is important that the quality of our 

mortgages was very low compared to other countries where there 

was a housing bubble and prices reduced but people were not in 

mortgages that they couldn’t afford just the basic payments. It is 

also notable that quality was lowest and defaults and losses were 

by far the highest on private label security mortgages. They were 

more than double the defaults, for example, in the severity that 

you saw for the GSE portfolio. 

Ultimately, our housing finance system depends on the quality, 

transparency, and predictability of our mortgages. And those mortgages were driven by the fee incentives up and down the chain. 

Those mortgages, for example—people ended up in no-doc loans. 

Well, those loans carried higher interest rates than a full-documentation loan. So if a borrower walked in, the broker or the lender could earn twice as much money putting the person in a no-doc 

loan as giving the same borrower a fully documented loan. As we 

have quoted in previous testimony, one CEO of a mortgage company said, ‘‘Wall Street pays me almost double for a no-doc loan 

versus a full-doc loan. Which ones do you think I am going to 

write?’’ That is market incentive. 

Importantly, the Dodd-Frank Act has provided incentives and 

standards, commonsense standards that will dramatically improve 

mortgage quality and, indeed, overall in response to the crisis, 

mortgage quality right now is at its highest and, indeed, I think 

there is consensus if you ask that credit is too tight at this time. 

Going forward, the Qualified Mortgage ability-to-repay will prevent the return of the exotic unsustainable mortgages that went 

from being small niche products to dominating the whole market 

leading up to the crisis. 

I will address quickly a couple of questions that came up. First 

of all, there have been cites to the CoreLogic data about what is 

the size of this QM market. Let me clarify again for the record. It 

has been cited that 50 percent of current loans would fit the QM 

market, that is, if you do not take into account the compensating 

factors that the rule explicitly allows. When you do that, depending 

upon whether you look at 2010 or 2011, 90 to 95 percent of mortgages fit the QM box with no adjustment. There has been talk 

about the fee level. The fee level for QM loans is 3 points. The average fee on a GSE loan today is less than one point. That was an 

intentional part because the idea is to align that lenders make 

money not from the fees, prepayment penalties, and things like 

that made at closing, but rather from the performance of the loan. 

It realigns a sustainable loan with a lender’s model. 

80 

Let me address also very quickly just with community banks. We 

must preserve the TBA market and the cash window. As the bill 

is written out, it is very difficult for community banks to compete 

against the larger banks and we are going to see further concentration in the market. 

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

questions. 

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

119 of the appendix.] 

Chairman HENSARLING. Thank you. And I thank all of the panelists for their testimony. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. I was kind of interested that the last panel—I had a lot of comments with regards 

to some of the things that they were saying. But it would seem to 

me that back in the 1980s and 1990s, we were able to have a marketplace without a tremendous amount of government-backed securities, yet we had everybody getting into houses that they could afford. And in the interim here, we have had a large run-up of loans 

which are guaranteed by the government, and yet we haven’t increased homeownership. I think 1 percent was one of the statistics 

that I saw. Which is kind of interesting to see that all we have 

done is transfer risk basically from the financial institution individuals to the Federal Government and the taxpayers. So, it is just 

a comment. 

Mr. Deutsch, you deal with a lot of the securitization stuff. You 

mentioned Basel III. How is Basel III going to affect the 

securitization market here? 

Mr. DEUTSCH. There are multiple parts I think of Basel III that 

are ultimately going to reduce demand for mortgage-backed securities. I would first start with what is called the liquidity coverage 

ratio. It is a new aspect of Basel III to make sure the banks have 

sufficient liquid assets to withstand a credit crisis, in effect. The liquidity coverage ratio is an example that allows RMBS—private 

label RMBS to be eligible as liquid assets. But it says that for nonrecourse States—for nonrecourse loans, they can’t be included in 

any RMBS securities. So for a committee like this where the chairman is from Texas, and the ranking member is from California, I 

would think this would be anathema to this committee because 

California and Texas both are nonrecourse States, which means no 

loans from California or Texas may be included in any RMBS security if that security is ultimately then considered to be a ‘‘liquid 

asset.’’ 

Mr. LUETKEMEYER. And therefore, they can’t be included in the 

capital ratio. 

Mr. DEUTSCH. Exactly. The United States is one of the few, if 

any, of the countries around the world that has nonrecourse statutes. Australia, Canada, England, they are all fully recourse. So all 

of their RMBS will be considered high quality liquid asset as private securities. 

Mr. LUETKEMEYER. Okay. So this is going to hurt the ability of 

people to get loans, is basically what it boils down to, right? 

Mr. DEUTSCH. Yes. It only applies to private capital securities. 

81 

Mr. LUETKEMEYER. Okay. Is this going to increase the cost then 

as well? 

Mr. DEUTSCH. It ultimately will reduce demand by banks to purchase these private securities which of course means that they are 

then going to have to charge higher rates to get those securities. 

Mr. LUETKEMEYER. One of the problems that we are having here 

and we are discussing is kind of getting around the edges of it as 

with the qualified mortgages, qualified real estate mortgages here. 

We have talked about it a couple of times. But it really is concerning to me because it looks to me like we are having two different markets that are going to be defined here by this rule. We 

are going to have one market with loans that conform to the rule 

and one market with loans that don’t conform to the rule. How are 

you going to mesh those two into a securitized situation? 

Mr. DEUTSCH. I think the simple answer is that securitizations 

will include only QM loans generally. You will have securitizations 

with QM. You may eventually see some securitizations with nonQM loans but I think those are farther down the road compared 

to— 

Mr. LUETKEMEYER. Okay. So, Mr. Stevens, whenever somebody 

comes to one of your folks and wants a loan, the choices are going 

to be limited, are they not? 

Mr. STEVENS. Absolutely. Yes. The QM rule does a lot of good 

things. But without question, it is going to limit the capital available for anything outside the QM provision. And there will be some 

good borrowers on the margin who are caught outside. To Tom’s 

point that common securitizations will be QM only, they will be 

specifieds or story bonds that get done as non-QM pools. And we 

are already hearing about companies being started up to enter that 

space. 

Mr. LUETKEMEYER. So there will be somebody that fills the void 

then? 

Mr. STEVENS. They will fill the void but in the early phase it will 

be for high-wealth clients. And it will provide programs like interest-onlys which are not allowed in the QM provisions. But they are 

just such wealthy borrowers that the risk is very low. And those 

will sell as sort of separate story execution— 

Mr. LUETKEMEYER. Would you anticipate the rate being higher or 

lower on those? 

Mr. STEVENS. I think the rate differential for the high net worth 

borrower could be equal or perhaps in some cases even more advantageous. For anybody who is at all on the margin from a risk 

standpoint, it will be much more expensive. So you are going to 

have two different markets. The low-downpayment market is going 

to be much more expensive loans. The high net worth borrower will 

get you products. 

Mr. LUETKEMEYER. Very good. I appreciate your answer. I don’t 

want to cut you off but I only have about 20 seconds left here. And 

I have one more question I want to ask because I don’t think anybody has asked it all day, which is kind of amazing. Does this bill 

prohibit innovation? Mr. Calhoun, you talked a while ago about all 

these things are going to go out the window. Products are going to 

be restricted. And yet I don’t see anything in here that prohibits 

82 

the private sector from coming up with new financial instruments. 

Do you see anything in there that prohibits them from doing that? 

Mr. CALHOUN. I think the question is, does it allow for innovation that will be widely available? And that is our concern. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the ranking member from California for 

5 minutes. 

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

I would like to direct a question to Mr. Bill Loving of the ICBA. 

Earlier this year, the ICBA released its policy resolutions for 2013. 

In this document, the ICBA stated that to ensure the continued 

flow of credit for housing, some type of government tie to the secondary market is necessary. Your testimony today notes that government catastrophic loss protection would provide credit assurances to investors and sustain robust liquidity even during periods 

of market stress. Your testimony does not provide a view of what 

happens to community banks in the absence of such protection, as 

the Republican discussion draft contemplates. Why do you think a 

government tie to the secondary market is necessary? Does the Republican proposal have such a tie? And what are the consequences 

of not having this government role? 

Mr. LOVING. We believe that there needs to be a catastrophic 

backstop behind the private capital that will provide for support in 

the market during times of stress. We haven’t changed our position 

from the earlier policy statement. Looking at the bill as it is in 

draft form today, it does provide for liquidity through the Federal 

Home Loan Bank System. And so without the government or the 

Fannie or Freddie model, then we are looking to the Federal Home 

Loan Bank System to support that borrowing role. 

Ms. WATERS. Does the Republican proposal have such a tie? 

Mr. LOVING. Which tie? To the government? 

Ms. WATERS. In your testimony, you did not really give us a view 

of what happens to community banks in the absence of such protection, as the Republican discussion draft contemplates. Why do you 

think a government tie to the secondary market is necessary? And 

in looking at this proposal, the question is, does the Republican 

proposal have such a high a tie? 

Mr. LOVING. The proposal we do not see has a tie but we believe 

that there does need to be backstop for the catastrophic backstop 

in the plan. 

Ms. WATERS. What are the consequences of not having this government role? 

Mr. LOVING. At this point, there is uncertainty in the marketplace about how it will function without that catastrophic backstop. 

Recent history has shown that there has been a catastrophic backstop. We are uncertain how it will perform without that element. 

Ms. WATERS. The ICBA took a strong position criticizing the bipartisan policy commission’s proposal to reform the market. The 

main argument against the structure was that it would favor only 

a few large institutions because it would require community banks 

to sell their loans to an aggregator in order to access the secondary 

market. Another argument against it was that the system would 

add significant costs, as there were several private credit 

enhancers ahead of the government guarantee. 

83 

Given that the Republican discussion draft also appears to favor 

the largest institutions in spite of a few lines in the bill about fair 

access and envisions a completely private system, does the ICBA 

have an equally strong position against the Republican plan? 

Mr. LOVING. We have concerns with any model that would provide for one or a few number of mortgage originators and would not 

allow private access by the community banking industry. 

Ms. WATERS. Let me turn to Mr. Stevens. 

Mr. Stevens, in your testimony, you explain why the MBA opposes Section 237 of the discussion draft which sets income and occupancy limitations on FHA multi-family properties and requires 

annual recertifications. It seems to me that the Republican discussion draft is trying to make the FHA multi-family program more 

like Section 8 and bog it down in the types of onerous rules that 

I have been trying to provide relief from as I work on Section 8 

voucher programs. 

In your opinion, will this new requirement restrict multi-family 

lending? What impact will this discussion draft have on the overall 

production and availability of multi-family housing, especially during an economic downturn? 

Mr. STEVENS. I appreciate the question. The challenges with the 

multi-family role of FHA—and I respect the concern about trying 

to ensure that as much multi-family lending is done by private capital. When I came in as FHA Commissioner, the multi-family market had all but evaporated. There were 5-year notes that were coming due and there was no way for these multi-family properties to 

refinance themselves. FHA became sole source provider during that 

period of time and the demand became very extensive. And many 

of you remember that. You probably got calls from multi-family 

owners and originators who couldn’t get their loans through the 

FHA because the backlog became so strong. 

So having that liquidity there, particularly during times when 

private capital isn’t there is extremely important for the rental 

community. As to income limits, I think that is just an awkward 

way to deal with people who are paying their rent and market rate 

finance properties that are profitable to the government but all of 

a sudden have a threshold that says, if your income goes above it, 

you are going to have to relocate and move out of this building to 

another location, creating a vacancy for the owner which creates 

higher risk on the transaction in the first place, causing stress 

again to the taxpayer simply as that result. I think there is another way to discuss these multi-family limitations that are a concern of FHA’s extensive role. But it is a profitable program. And 

I think that income barrier, where they would have to ultimately 

move out of the building just doesn’t really make sense for a market rate property— 

Mr. NEUGEBAUER [presiding]. The gentlewoman’s time has expired. Thank you. 

The gentleman from Pennsylvania, Mr. Rothfus, is recognized for 

5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. I would like to venture 

into the regulatory burdens imposed by Dodd-Frank and how the 

PATH Act might alleviate some of the barriers to capital. We know 

from previous testimony of Dr. Holtz-Eakin, who was actually on 

84 

the prior panel, but he testified earlier this year before the Judiciary Committee about how Dodd-Frank had already caused significant compliance costs and paperwork burdens. I would like to ask 

Mr. Loving, Ms. Sheppard, and Mr. Stevens whether you would 

agree that Dodd-Frank has put in place significant burdens that if 

alleviated could improve our housing finance system and attract 

more private capital; specifically, in particular, are the credit 

unions, community banks, and mortgage bankers ready to comply 

with all of these impending Dodd-Frank rules? 

Ms. SHEPPARD. I will take that one first. 

Mr. ROTHFUS. Sure. 

Ms. SHEPPARD. No. The answer is no. I just recently came back 

from a nationwide participatory program with a national trade association called ACUMA. We spent three different sessions in three 

major cities. And the concern in the credit union world out there 

is, no, they are not compliant with all that is expected under the 

CFPB in January. Everyone is working really hard and diligently 

to work towards that. But there are major concerns across the credit union industry nationwide about being in compliance in January. 

I do see that some of the protections that are in the PATH Act 

would be beneficial to credit unions regarding the QM exemptions. 

That is a very attractive consideration. 

Mr. ROTHFUS. Mr. Stevens? 

Mr. STEVENS. I would just like to say at the outset that I think 

the CFPB got a lot right in the Qualified Mortgage rule and implementing some of the rules. There are still provisions that have yet 

to be implemented. QRM is a perfect example of that, that if it is 

implemented as the proposed rule is structured, it would be extremely prohibitive I think not just to lending overall but particularly to private capital re-engaging in the marketplace and would 

be counterproductive to that end. So we are very concerned about 

ensuring that at a minimum, QRM equals QM in the final rule and 

that would be very helpful as a provision in the PATH Act. 

Likewise, the points and fees limitations that came out in the 

final rule get resolved by incorporating the language from H.R. 

1077, which we think would actually be beneficial ultimately to 

providing access to the market for more institutions to compete for 

American home purchasers’ business and ultimately make rates 

even more competitive for homebuyers. 

So those two provisions are examples of how you can continue to 

ensure that what is left in Dodd-Frank creates easier access to 

housing finance. 

Mr. ROTHFUS. Mr. Loving? 

Mr. LOVING. Yes. We share the concern as well with the regulatory burden. In particular, we appreciate the parts of Title IV 

that will eliminate QM and provide the opportunity to provide capital to many borrowers across America. The rule designation is a 

help but we are still concerned that many will not qualify and will 

be able to meet the requirements of QM. 

Mr. ROTHFUS. Have any of your respective organizations calculated compliance costs under Dodd-Frank for your organizations? 

Mr. STEVENS. The MBA does a peer group study in which we are 

looking at the cost of compliance in all areas. And it has definitely 

added a significant expense to the process which of course we all 

85 

know gets passed on to the consumer. I would stress that there is 

balance in all things. If the industry was processing loans without 

enough scrutiny, and we were having products that were not sustainable in a previous period, that needed to be corrected. The 

question is, has the pendulum gone so far as now these costs are 

overly burdensome, creating less competition and transferring too 

much cost to the consumer? And I think ultimately that is what 

the policy debate needs to work on is making sure loans are sustainable, that the process is sound, that it is well-managed, but it 

doesn’t add so much cost and burden to the marketplace that it creates a new level of lack of access for homeownership. 

Mr. ROTHFUS. Ms. Sheppard, have you calculated the compliance 

costs for your organization? 

Ms. SHEPPARD. We do not have a specific percentage. But I can 

tell you, we have had to bring on full-time additional staff and 

management to handle our compliance costs. So I am sorry I don’t 

have a specific number for you. If you would like, I can take that 

down and answer your question in writing. 

Mr. ROTHFUS. Yes. Thank you. I would appreciate that. I yield 

back. 

[The following response was received for the record: 

‘‘We estimate that Southwest Airlines Federal Credit Union directly spends over $259,000 a year on Federal regulatory compliance.’’] 

Mr. NEUGEBAUER. I thank the gentleman. Now, the gentlewoman 

from New York, Mrs. Maloney, is recognized for 5 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman. I would like to ask 

Mr. Howard, in your testimony you state that the Home Builders 

oppose the FHA title of the PATH Act. And you urge the committee 

to ‘‘make the changes necessary to preserve FHA’s vital liquidity 

mission.’’ 

Could you elaborate? What changes would you make to Title II 

to preserve FHA’s historical role in the mortgage market? 

Mr. HOWARD. Well, ma’am, I guess the simplest way to answer 

is to say that we believe that the measures that were contained in 

the FHA Solvency Act that the House passed last year were much 

more effective in getting FHA solvent and maintaining its ability 

to respond to the needs in the marketplace. Specifically, I think 

there were provisions in that Act that would have called for increased premiums and also would have called for a stronger lender 

indemnification. Those two things. And FHA is implementing some 

of those changes on their own. In fact, it is already adding money 

into the fund already without the legislation. But clearly, a regulatory reform bill more like the Solvency Act we think would be 

more effective than the provisions in the PATH Act. 

Mrs. MALONEY. So basically, you would scrap Title II entirely 

and replace it with the bipartisan bills that we passed really on 

suspension twice in two prior Congresses. Would that be what you 

would say, to scrap it? 

Mr. HOWARD. Yes, ma’am. 

Mrs. MALONEY. What is your position on it, Mr. Calhoun? Would 

you scrap it and go back to what we already passed twice in two 

Congresses? 

86 

Mr. CALHOUN. I think everybody agrees that the FHA needs 

some improvements. But I would second the comments there. I 

think it is noteworthy that the largest portion of their losses was 

for loans that they had actually asked Congress to allow them to 

stop taking and Congress had, up until 2009, required them to 

keep doing, a so-called seller-assisted downpayment program. Of 

the $16 billion deficit, about $13 billion of that is from that one 

program which now they did discontinue and that is why their 

book is among the more profitable they have ever had at this point 

going forward. 

So yes, I would support that same substitution. 

Mrs. MALONEY. What about you, Mr. Deutsch? 

Mr. DEUTSCH. I think the existing Act, as you push it out, many 

of the features that are in this Act can be very helpful to the market and would push forward with what is being proposed. 

Mrs. MALONEY. And what about you, Mr. Stevens? 

Mr. STEVENS. I think I am consistent with the others. I do believe if you were to reintroduce the FHA Reform Act that there are 

some minor nuance provision changes that could make it more 

implementable for the market. But yes, we are in agreement. 

Mrs. MALONEY. Ms. Sheppard? 

Ms. SHEPPARD. I can’t speak to the FHA reform. Our credit union 

does not do FHA or VA or government loans. 

Mrs. MALONEY. Okay. And Mr. Loving? 

Mr. LOVING. Yes. We believe that the FHA model does need reform. As it is proposed, there are some good elements, but we do 

believe there needs to be some further negotiation on the percentage of guarantee, the 50 percent guarantee seems to be a low level 

and needs to be at a much higher level. 

Mrs. MALONEY. Okay. So you are all in agreement. Is it a fair 

statement to say to go back to the bill that we passed twice in the 

House? Is that a fair statement? 

Mr. STEVENS. If I could add, I think that having worked on 

that—having been FHA Commissioner when the first bill was introduced, and this was the body that actually approved that bill to 

begin with and gave us some initial ability to even raise premiums, 

which made it through the Senate without the rest of the bill, there 

are some variables that we would love to follow up with you on as 

to how that bill could be made even stronger. 

Mrs. MALONEY. Okay. Mr. Stevens, also in your testimony, you 

noted that the government role to provide quality regulation of 

grantors and systems and to provide a clearly defined but limited 

catastrophic credit backstop is an important component of this 

ideal system. And you went on to say that it would have a big impact on qualified lower-income households and their access to affordable mortgage credit. 

Would you elaborate on how this smaller mortgage market with 

tighter credit would affect the economy and jobs in our country? 

Mr. STEVENS. Look, it is a well-known fact that housing has been 

actually one of the positive stories of however we view the current 

economic recovery. Mark Zandi, who was on the previous panel, 

has stated publicly the role that FHA had played in the housing 

recovery. The concern I have as we think about the complete lack 

of a backstop is that private capital is clearly opportunistic. It 

87 

comes into markets when markets are strong, and when you are 

in a recovery market, there is a lot of private capital, spreads between private mortgage-backed securities and guaranteed mortgage-backed securities, narrows. And you can talk about how 

jumbo fixed-rates are priced very closely to conventional rates. 

Mr. NEUGEBAUER. I am not picking on you, but we were trying 

to keep our time here. 

Mr. STEVENS. Okay. 

Mr. NEUGEBAUER. I will now recognize myself for 5 minutes. 

Again, I thank the panel for your endurance here. 

Mr. Calhoun, you are the president of the Center for Responsible 

Lending. So you believe in using market discipline as one of the 

factors of making sure that everybody kind of has a stake in the 

lending. That is when lending works best, right? 

Mr. CALHOUN. Yes. We support— 

Mr. NEUGEBAUER. So the borrowers have responsibilities and the 

lenders have responsibilities, is that correct? 

Mr. CALHOUN. Certainly. 

Mr. NEUGEBAUER. Yes. So what about then if a lender can transfer all of the risk, what part of market discipline interacts with the 

lender if he is going to transfer 100 percent of that risk? What 

would encourage that lender to have market discipline? 

Mr. CALHOUN. One of the concerns that we have— 

Mr. NEUGEBAUER. No. I am not asking your opinion about the 

bill. I am just saying, is there any market discipline when 100 percent of the risk is transferred? 

Mr. CALHOUN. If the lender has some legal liability as they do 

under Dodd-Frank for writing— 

Mr. NEUGEBAUER. I am not asking about Dodd-Frank. This is 

just a simple question: Is there market discipline when somebody 

can transfer 100 percent of the risk? 

Mr. CALHOUN. There may be legal risk. Separate from that— 

Mr. NEUGEBAUER. Obviously, you are not answering the question. So the other question here is that I know there is some heartburn about 50 percent. Does anybody know what the guarantee 

level is on a VA loan? I think Mr. Stevens knows the answer to 

that question. What is it? 

Mr. STEVENS. Yes. It is 90 percent. 

Mr. NEUGEBAUER. I don’t believe that is correct. It is 25 percent. 

Mr. HOWARD. I thought it was 50. 

Mr. NEUGEBAUER. Yes. So it is not unprecedented. And we had 

a gentleman from the mortgage insurance industry here a while 

back on the last panel. Now there has been a lot of discussion 

about what to do with FHA. And Mr. Howard, I know that you 

mentioned in your testimony that you supported the past proposal 

restructuring FHA. But yet I just heard you say that you want to 

go back to the previous— 

But in your testimony you said you supported restructuring FHA 

and I believe—and allowing it to be a wholly owned government 

corporation. Is that true? 

Mr. HOWARD. We support FHA—we can support, depending on 

the concept, Mr. Neugebauer, of taking FHA outside of HUD, yes. 

But we would still like to see the provisions of the Solvency Act, 

the FHA Solvency Act be the guiding provisions for its regulations. 

88 

Mr. NEUGEBAUER. What is the advantage of having an independent FHA, in your estimation? 

Mr. HOWARD. I believe it could be nimbler. 

Mr. NEUGEBAUER. One of the things that was brought up about 

this bill that was passed on suspension—I would remind everybody 

who was before we knew that they were $16.3 billion underwater. 

And so it became obvious, the disclosure came after we passed that 

legislation, that FHA was in a much deeper hole than I think previously folks had represented to us. 

The question is then in this countercyclical role that everybody 

seems to be extremely concerned about, and so the concern then is 

about the borrowers being able to continue to access credit, but the 

question is, if we are going to have a balanced housing finance system, we have to make sure that everybody’s interest is represented 

in this process. 

So tell me, in this countercyclical role, should we just regard the 

taxpayers and just say, you know what, we are going to keep plowing. We may have to have some taxpayer assistance here but we 

are going to keep pushing the ball down the road. Is that the countercyclical role that you anticipate? Jerry? 

Mr. HOWARD. No, sir, I think what we are forgetting in the detailed level we are getting in this conversation is it is all about the 

underwriting, Mr. Neugebauer. And in the past when FHA got into 

trouble, when the GSEs got into trouble, it was during a time when 

traditional underwriting standards were just being ignored. I believe that the FHA would not be in the financial condition it is in 

now, and I am speaking only of the single family fund, had traditional underwriting standards been in place throughout the earlier 

part of this century. 

Mr. NEUGEBAUER. I appreciate that. And I think you are exactly 

right. I think one of the things I want to make sure as we address 

this issue, and I appreciate everybody’s feedback, is that there is 

a time to quit lending. If markets are—and that is the reason we 

need that market discipline in there. If there are too many apartments units or there are too many houses, it doesn’t do any good 

to make a little family a 97 percent loan in a neighborhood where 

the prices of those houses could be dropping because there is an 

overbuilt situation. So the countercyclical role isn’t—necessarily 

shouldn’t be to counteract market swings. 

Now, what I think you are trying to say is that market should 

come in, in the event that there is a plumbing stoppage in the finance market. Is that true? 

Mr. HOWARD. Yes, sir, that is certainly part of it. 

Mr. NEUGEBAUER. I see my time has expired. In order to be fair 

here, we will now go to Mr. Capuano from Massachusetts, the 

ranking member of the Housing and Insurance Subcommittee. 

Mr. CAPUANO. Thank you, Mr. Chairman. I just want you to 

know I don’t understand you any more than I understood the full 

committee chairman. 

Mr. NEUGEBAUER. You and I have to have an interpreter when 

we talk to each other. 

Mr. CAPUANO. I want to thank the panel for being so patient and 

for sticking around on this important issue. I kind of wish you had 

been the first panel because the first panel I am sure if you had 

89 

watched was very thoughtful, very theoretical. You guys are the 

hands-on people, and honestly it is about hands on. The theory is 

wonderful and all that, but I really need to know what it does, how 

it really impacts the building and buying and selling of homes. 

I guess, first of all, some of this stuff that has been talked about, 

Dodd-Frank, have any of your organizations ever testified in front 

of Congress to say there was too little regulation? I don’t think so. 

If you have, you can raise your hand. 

There you go, there is one. And I don’t expect that you did. I understand, I think it is a fair question where the pendulum should 

be. I think that is a very fair question. We are always asking this. 

But to ask you if there is too much regulation is almost setting you 

up a little too easily. And I love you, but not that much. 

So I want to move on to the basis of why we are really here, 

which is to try to figure out what to do with the mortgage financing 

industry. 

Do any of you believe or any of your institutions believe that the 

United States really can get to a fully privatized home mortgage 

system as proposed in the PATH bill? Mr. Loving, do you believe 

we can get to a fully privatized system and still provide the kind 

of opportunities that we have provided to so many Americans? 

Mr. LOVING. We support provisions of the PATH Act but believe 

there has to be a catastrophic backdrop in the model for this period. 

Mr. CAPUANO. Fair enough. Ms. Sheppard, do you believe that 

we can get to a fully privatized system? 

Ms. SHEPPARD. No, sir, I don’t believe we can get to a fully 

privatized system. 

Mr. CAPUANO. Thank you. We are having a good time, but thank 

you. Simple question, simple answer. Mr. Howard, do you believe 

we can get to a fully privatized system? 

Mr. HOWARD. No, sir. 

Mr. CAPUANO. Mr. Stevens, do you? 

Mr. STEVENS. We need more private capital, but not fully 

privatized. 

Mr. CAPUANO. I agree with that, but we can’t get to a fully 

privatized. Mr. Deutsch, do you believe we can get to a fully subsidized system? 

Mr. DEUTSCH. No. We are always going to need FHA to serve a 

role. 

Mr. CAPUANO. Mr. Calhoun, do you? 

Mr. CALHOUN. No, we need a catastrophic backstop. And the 

numbers now show— 

Mr. CAPUANO. Fair enough. Because I agree. I am no different 

than anybody else. I want more private capital in as well, and to 

me the question is, what is the balance, and again simply some 

regulation. What is the balance? What is too much? What is too little? 

As you know, Mr. Deutsch, actually you said there was far too 

much theoretical conversation so far. I couldn’t agree with you 

more, even today. But here is my dilemma. We get this bill last 

week, a nice, long, thoughtful, comprehensive bill that includes everything but the kitchen sink, more than I thought that it would 

include. That is great. A lot of hard work. I think the staff has been 

90 

properly thanked for that. But we don’t have time to really comprehensively fully integrate this without talking to people like you. 

I don’t get a chance to talk about what should and shouldn’t be. 

We are kind of beyond that. 

You know how this place works. What is likely to happen is that 

I will soon, within the next week or two, be asked to vote on this 

bill yes or no pretty much in the form that it is in now. We might 

be able to amend a few things around the edges. But you all know 

that to be a fact. 

So the question I have for you, if I gave you my voting, come on 

up, sit up here, next week we go to a markup on this bill, it is an 

up or down vote, not let’s talk about I like this, I like that. There 

has never been a bill I have ever voted for or against that I didn’t 

like or hate something in it. I was a big supporter of the health 

care bill, but there are things in there that I don’t like. I was a 

big supporter of Dodd-Frank, but there are things in there I don’t 

like. Though with due respect, I am not interested in the things 

you like or things you don’t like, I get to vote yes or no. 

Mr. Loving, would your group suggest that I vote yes or no on 

the bill as is? 

Mr. LOVING. We believe it is something we can work with, but 

we believe it is an imperfect bill and there still needs to be discussion. 

Mr. CAPUANO. I understand that. I appreciate that. I don’t mind, 

but I am going to try again. I think the same thing you just said. 

It is a great thing to have something to begin with. I get to vote 

yes or no. Would you vote yes or no? 

Mr. LOVING. Again, as I said earlier, we believe it is something 

that we can support and get behind with additional work. 

Mr. CAPUANO. So, that is a no. 

Mr. LOVING. We can support it with additional work. 

Mr. CAPUANO. I am going to jump to Mr. Calhoun. Would you 

vote yes or no? 

Mr. CALHOUN. No. 

Mr. CAPUANO. Mr. Deutsch, would you vote yes or no? 

Mr. DEUTSCH. I would vote yes, with changes. 

Mr. CAPUANO. No, that is not what I said. I would vote yes with 

changes too. My definition of how many changes is a different 

thing. 

Mr. DEUTSCH. I think the number one rule of sitting here is answering a question you would like to have asked. 

Mr. CAPUANO. I know. And my number one rule is to get you to 

take a position. 

Mr. Stevens, would you vote yes or no? 

Mr. STEVENS. I am going to align with Mr. Loving, that I that 

I think this is— 

Mr. CAPUANO. You can’t blame me for trying. My time is up. I 

appreciate these witnesses. 

Mr. STEVENS. We have been very clear in our position about— 

Mr. DEUTSCH. Thank you for using the gavel, Mr. Chairman. 

Chairman HENSARLING. Saved by the gavel. The time of the gentleman has expired. The Chair will recognize himself for 5 minutes. 

I did have to step out for a few minutes, so forgive me if I am covVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
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ering some old ground here that might have been covered when I 

was out of the room. 

Sometimes, I think at certain points, we need to step back from 

the trees and look at the forest here. And we have been here for 

many, many hours, you quite patiently, and I want to cover a couple of the concerns that I still hear, particularly from Members on 

this side of the aisle. 

One of the concerns is, again, without some form of government 

guarantee, private capital will not come in and fill the void and we 

will not have a 30-year fixed mortgage at something approaching 

affordability, however that is defined. 

So, Mr. Deutsch, will private capital come in, and there is very 

little private capital today, so will it not come in or can it not compete under the provisions currently of Fannie and Freddie and 

Dodd-Frank? What is the answer here? 

Mr. DEUTSCH. I think there is a simple answer that there is a 

fallacy in the market that private capital doesn’t want to come into 

the mortgage market. Private mortgage-backed securitizations are 

not going to compete for $200,000 loans because each and every 

one of those loans being made are going to be sold to FHA or 

Fannie or Freddie because it is effectively better execution. It is a 

better deal for an originator to sell that to Fannie or Freddie than 

it is to sell it on the open market, in large part many would argue 

because the guarantee fees are too low, which is in effect a subsidy 

for those mortgages. 

So I think the answer to your question is private capital does 

and will come back into the market if there is space for it to come 

back into. But since the crisis, because loan limits went up so 

much, from $417,000 to now $625,000, there are effectively very 

few loans you can originate nationwide that are above that 

$625,000 that private originators then can compete and sell to private label mortgage-backed issuers. 

Chairman HENSARLING. Mr. Calhoun, you have been a frequent 

witness before our committee. I haven’t found anything we have 

agreed on yet, but I haven’t lost hope. It may happen one day. But 

here is something I don’t quite get. 

I have a 30-year fixed-rate mortgage. I am glad I had the opportunity to get it. The truth is as I look at it a little bit more closely, 

I am not completely certain, had I spent more time, that it was the 

right product for myself and my family. I know that you have articulated in the past and your organization, your great concern 

about low-income people finding themselves awash in debt, and yet 

I look at the figures, and math occasionally can be a little pesky 

here, but just the difference on a 15-year fixed-rate mortgage 

versus a 30-year fixed-rate mortgage, this is a hypothetical, 

$400,000, a little bit on the high side for my district, but 7 years 

into a 15-year fixed-rate mortgage you have $143,000 of principal, 

and 7 years into a 30-year mortgage you have $38,000 of principal. 

So if the average American is selling their home after 7 years, I 

want everybody to have the opportunity to have a 30-year fixed, 

but I am not sure I want my government steering people into a 

product that may not be right for them. And is it really the purpose 

of the Federal Government to tell people take on the maximum 

amount of debt possible? 

92 

Then when you talk about concern about homeownership opportunities, I know what you are saying, that somehow these rules 

and the CFPB is going to get it right, but it seems to me we have 

gone from extremes here. We have a Federal Government on the 

one hand through their affordable housing goals helping put people 

into homes they couldn’t afford ultimately to keep. They didn’t do 

them any favors there. And now, it seems like the pendulum has 

swung the complete opposite direction, and we are about to tell half 

of America, you can no longer qualify for a home. 

And so I don’t understand how you can kind of have it both 

ways. So regrettably, I am leaving you all of 16 seconds to comment, but have at it. 

Mr. CALHOUN. The record will reflect that when you were out we 

discussed—the CoreLogic data shows that when you apply the full 

QM rule as it exists today, 90 to 95 percent of mortgages fit in that 

box without any restructuring, and then with restructuring a huge 

array of mortgages can fit there. And that is what we support. 

Chairman HENSARLING. That may be a closely held opinion. My 

time has run out, which means that your time has run out. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

We all want to see private capital in these markets. In fact, what 

we do see now is private capital. That is to say eventually, these 

mortgage-backed securities are sold for private capital. The question is whether private capital is going to provide the average 

American family with a 30-year fixed-rate mortgage at a rate they 

can afford with a downpayment that they can come up with. 

The chairman correctly points out that some people might prefer 

a 15-year fixed. I have a 15-year fixed. I saved 50 basis points. Payments are a bit higher. That is fine. We in Congress make 3 times 

what the average American family makes, but it turns out it may 

be a good deal for people in our bracket. 

The question I have is without a government guarantee, how 

much more difficult and how much more expensive are these mortgages going to be and what effect is that going to have on the number of buyers in the market? Have any of your groups—we heard 

Mark Zandi tell us the 90 basis points, and that is only if you have 

a very high FICO score. Have any of your groups analyzed what 

this bill will do to the average home price in the United States? 

Mr. DEUTSCH. I will take the first shot. I think a quick answer 

is I don’t think you can possibly model it to come up with a very 

credible estimate of the basis points. 

Mr. SHERMAN. Mr. Chairman, I think that illustrates why we 

should not mark up this bill until at least after the August break. 

Mr. DEUTSCH. But I think the second part of that question— 

Mr. SHERMAN. Yes. We are talking about home values in this 

country totaling between, what, 5 and 10 or 12 trillion dollars. We 

are going to have a dramatic effect on that, and I would like another month to figure out whether this bill is going to have an acceptable effect. But go on with your answer, Mr. Deutsch. 

Mr. DEUTSCH. I think in the last 5 years since the advent of 

Fannie and Freddie’s conservatorship, there has been plenty of 

time to try to model that and figure that out. I don’t think in anVerDate Nov 24 2008 14:44 Jul 15, 2014 Jkt 082862 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 K:\DOCS\82862.TXT TERRI
93 

other 5 years you could get a bunch of rocket scientists in a room 

who could come up with a credible number as to what that rate differential is. Because you have a lot of other factors moving, Basel 

III, $85 billion a month currently being purchased right now of 

mortgage-backed securities by the Federal Reserve. Just the mere 

whisper by the Federal Reserve Chairman of moving away from 

that created an 80 basis point jump in one month. 

Mr. SHERMAN. Okay. Just by show of hands here, who represents 

an organization that feels that we can live, and this picks up on 

Mr. Capuano’s question, without a government guarantee playing 

a role in the mortgage market? 

I see no hands going up, and yet that is exactly or pretty much 

exactly what this bill does. 

There has been a lot of discussion of the jumbo market, but the 

person with the jumbo loan is in the top 5 or 10 percent in terms 

of their income. Mr. Stevens, wouldn’t almost all those jumbo loans 

involve a 20 percent downpayment, at least? 

Mr. STEVENS. Today, they do. We have seen the market shift, 

Congressman, over the years, and as markets are healthier, and I 

think we will begin to see that—Wells Fargo just announced a 

jumbo with a 15 percent downpayment and they are trumpeting 

that in the marketplace. 

Mr. SHERMAN. Yes, and if you have a FICO score of 950, you can 

probably get that loan. 

Mr. STEVENS. I think it goes back and makes the point that as 

markets improve, I think we will see more private capital competing to finance mortgages. There will be 30-year fixed-rate mortgages, but the risk we run, we have to protect against— 

Mr. SHERMAN. Yes. If I could just squeeze in one more question. 

To oversimplify Dr. Zandi’s testimony, it was that this bill would 

take say 30 percent or more of the buyers out of the market. What 

effect would that have on not only the value of homes, but the 

value of mortgage-backed securities in the market today? Mr. Stevens, any comment? 

Mr. STEVENS. We have not had the time to calculate that. 

Mr. SHERMAN. Would it take you 5 years or 5 weeks? 

Mr. STEVENS. I think there are benefits to this bill and there are 

benefits to driving towards a private capital solution. But as we 

have said very clearly, we believe there is some work that could be 

done to make this kind of legislation something that would ensure 

that there is liquidity as well as private capital. 

Mr. SHERMAN. And anybody who thinks we can do that in 5 days 

does not understand Congress. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

To announce to all Members, I think I understand this right, Ms. 

Sheppard, you have asked to be excused at 7:30. Is that correct? 

Ms. SHEPPARD. Yes, sir. 

Chairman HENSARLING. Okay. So for Members who may have 

questions for her, you don’t have too long. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett. 

Mr. GARRETT. Thank you, Mr. Chairman. Thank you to the 

panel. I will just digress and follow up with Mr. Capuano’s question. 

94 

He had asked, Mr. Chairman, who would vote for this legislation 

as it stands right now. I will just ask rhetorically—not rhetorically, 

how many people would vote for Dodd-Frank if that bill just came 

up once again? 

Okay, no one, that is as I thought. Good. Should the record reflect that no one on the other side of the aisle raised their hand? 

Oh, one did. Okay. I see. 

So where are we here? Let me just go down this other road for 

one second. The question was also asked as far as a government 

involvement or government backstop and I saw your hands or lack 

of hands on that. Does this panel recognize that with this bill as 

it reads right now, there will be a variable, significant government 

involvement in the housing market with FHA, VA, Federal Home 

Loan Banks, and the Federal Reserve, along with some 87 other 

housing programs as well, that these make up some additional 

backstops in the housing market? Does anyone recognize that on 

the panel? 

I see hands nobody wants to raise. Good. 

I probably shouldn’t go with this question. For those who think 

we need an explicit government backstop, is there anyone who disagrees with the statement that we also would need, if you had 

something akin to what we have right now, in other words, keep 

going with some sort of a mechanism like we have right now, that 

you need for the government to also therefore appropriately deal 

with the risk, credit risk, deal with the risk and price that risk appropriately? Does everyone agree if we were to have some other explicit backstop other than what we have in the bill, that we have 

to price that risk? 

Everyone is nodding heads. 

Can someone give me just one Federal program where we are 

currently appropriately pricing risk? I am thinking flood insurance. 

No, I guess that is not it. Is there any program that you can look 

to historically where the Federal Government has done an exemplary job of pricing that risk? 

And I see no one raising your hand. So you are suggesting that 

we are going to go forward and create that program going forward. 

Do you have a program where we appropriately priced the risk? 

Mr. CALHOUN. If you look at what has happened with the GSEs 

since the passage of HERA, there was no question you had a hamstrung regulator misaligned at center. 

Mr. GARRETT. But going back, we haven’t seen until the next crisis—okay. 

Mr. CALHOUN. But going forward, they are generating enough 

revenues to repay the bailout within the next year. 

Mr. GARRETT. That is clever. So I will ask Mr. Deutsch, here is 

a question. Is there a benefit, if we were to put something akin to 

this legislation through and we have the utility, which I should add 

that we got some of this idea by looking to the Administration 

where they had three different proposals out there and one of their 

ideas talked about somewhat of a utility and we sort of copied some 

of that idea here, if we had this platform set up, is there a benefit 

to using that utility, the securitization on that platform? 

Mr. DEUTSCH. Fundamentally, a key benefit of the utility is the 

standardization. Investors can go buy a security that has a stamp 

95 

that says this is pretty fungible with a separate security that may 

be issued the next day or the following day. That is, I think, the 

key benefit of any utility that could create that fungibility. 

Mr. GARRETT. We have put other benefits we thought in there. 

Do you see other benefits with regard to exemption from 

securitization, registration as well, and the QM exemptions as well. 

Do you see them as benefits? They are in the legislation for people 

to say, I am going to go through the utility as opposed to the other 

market? 

Mr. DEUTSCH. Yes. I think investors in the securities, you 

wouldn’t be able to create any kind of TBA without that exemption 

from the securities laws, so that would be critical to try to recreate 

any part of the TBA market. 

Mr. GARRETT. If we are able to get that homogeneity in the underwriting and the standardization and the securitization, what 

does that do—maybe you have answered this—what does that do 

as far as the depth and liquidity of the marketplace under this? 

Mr. DEUTSCH. Ultimately what you trying to do is create a bigger 

swimming pool, and the more water you have in the pool the more 

liquidity you have, which means that you can interchange the securities. People can trade them in the secondary market almost as if 

they were cash. 

Mr. GARRETT. Got it. Okay. 

Mr. DEUTSCH. And the positive impact of that is it ultimately 

ends up lowering rates for the borrowers because those securities 

are that much more valuable. 

Mr. GARRETT. And in real simple terms that I can understand, 

what that also means to me as a homeowner is what, maybe someone on the earlier panel, I forget, said that that means I am able 

to, what, lock in my rates to the TBA, is that right? 

Mr. DEUTSCH. Correct. If you as a borrower want to be able to 

lock your rate in, the TBA market is critical, so that if you go today 

and say I would like a mortgage, when you actually get the mortgage 90 days from now your rate will be as it was at the day you 

asked for it. 

Mr. GARRETT. In 9 seconds, does that not also mean that through 

to that depth that you also facilitate the extension of the 30-year 

mortgage as well? 

Mr. DEUTSCH. Correct. 

Mr. GARRETT. Great. Thanks for your answers. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. Also, Mr. Chairman, if I 

may, I would like to thank you for the recognition that we showed 

earlier today to the former President of South Africa, Mr. Nelson 

Mandela. I regret that some of you have been detained possibly 

longer than we wanted you to be detained. It was one of those 

times when there was a really important event to many of us that 

was taking place. So thank you for your patience. 

To reward you for being so patient, I am just going to ask one 

question and I will give each person an opportunity to respond, a 

very simple question. Why, in your opinion, is the 30-year fixedrate mortgage important? Why is it important to your constituents, 

the people that you serve or represent here today? 

96 

Mr. Calhoun, I will start with you, and I do so with the understanding that you do have a constituency and I am sure you have 

an opinion. 

Mr. CALHOUN. Yes. Quickly, households do not handle interest 

rate risk well. As you see in today’s market, if you had a variable 

rate loan, they were down as low as 3 percent or less, and within 

a couple year period we could be easily looking at rates of 5 percent. That is more than a 50 percent increase in the borrower’s 

mortgage payment. Most households don’t fully understand that 

and very few of them have the financial reserve and liquidity to be 

able to absorb that. 

Mr. GREEN. My friend? 

Mr. DEUTSCH. I would say what the 30-year fixed effectively provides to a borrower is they are buying insurance on their interest 

rate risk. Instead of paying, let’s say 41⁄2 percent, you are paying 

43⁄4, and that differential between 41⁄2 and 43⁄4 is effectively an insurance payment, so that 10 years down the road your interest rate 

doesn’t go up. But there is a cost to that and ultimately the capital 

markets will always provide that service, but, of course, for that insurance price cross. 

Mr. GREEN. My friend, Mr. Stevens. 

Mr. STEVENS. Congressman, first, not everybody necessarily 

needs a 30-year fixed-rate loan, but for many families the confidence of knowing that their rate will not go up over time for their 

shelter is important. But more so as we look forward, it is going 

to be much more important than in decades past. We have gone 

from 18 percent back in 1980 to 3 percent several weeks ago. On 

a forward-looking basis we are going to have rates rising, so having 

that protection is going to be a stability factor, not just for the family but for the economy overall. 

Mr. GREEN. Thank you. My friend from the builders, Mr. Howard. 

Mr. HOWARD. In the interest of time, I will associate myself with 

the remarks of the three previous speakers. They hit the nail right 

on the head. 

Mr. GREEN. All right. And we will move next to my friend, Ms. 

Sheppard. 

Ms. SHEPPARD. The quick answer is that we have a system of 

long-term fixed-rate mortgages financed through the stable 

securitization, which helps provide stability in the U.S. economy on 

the 30-year mortgage. But in addition to that, I would like to mention really quick that this is something our membership asks for. 

They demand or want this product, the very members that we 

serve. So because we serve them, we go to meet their demand and 

we do the 15-year. And it is almost a 50–50 split now. 

Mr. GREEN. Thank you. My friend, Mr. Loving? 

Mr. LOVING. As well, our customers ask for this product. Not all 

customers want this product. I think the real issue is the fixedrate. Depending upon whether it would be 10 years, 15 years or 30 

years, it is the knowledge of what the payment will be from the day 

of origination to the day that they pay the loan off in full. 

So I think the key is the fixed-rate component. Again, the 30- 

year product is something that is asked for by our customers and 

97 

is something that allows us as community banks to serve our customers’ needs. 

Mr. GREEN. Thank you very much. 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. The gentleman yields back. At this hour, 

Ms. Sheppard, I understand that you wish to be excused from the 

panel. 

Ms. SHEPPARD. Yes, sir. Thank you very much. 

Chairman HENSARLING. Thank you. We will excuse you from the 

panel. 

The Chair now recognizes the gentleman from California, Mr. 

Miller, for 5 minutes. 

Mr. MILLER. Thank you, Mr. Chairman. 

I keep hearing from investors that they believe we need a vibrant 

TBA market for the housing finance system. Mr. Deutsch, what 

changes would need to be made in this bill to ensure a vibrant TBA 

market would occur? 

Mr. DEUTSCH. Currently, the TBA market functions because 

there is a government guarantee. If you go and you try to take out 

a mortgage and you want to rate-lock it on a go-forward basis, the 

originator of that mortgage knows that they can sell it. They have 

a government guarantee behind it. So fundamentally, what this bill 

tries to do is evolve that system from being a government guarantee that is a backstop to ultimately the capital markets evolving 

in some fashion through the utility, through other methods, to 

where the capital markets will effectively provide that insurance, 

if you will, in that you want as, a borrower, to be insured that from 

the time that you ask for the mortgage until the time you take out 

the mortgage, that that rate doesn’t change over time. 

So I think like virtually any other financial product, there is always a price that the capital markets will be willing to charge and 

ultimately offer that product to you to be able to rate lock over 

time. 

Mr. MILLER. If we end the guarantee, will investors continue to 

buy mortgage-backed securities in the market? 

Mr. DEUTSCH. If you end the guarantee— 

Mr. MILLER. Will they continue to invest? 

Mr. DEUTSCH. Absolutely, but it will and it does require a shift. 

And I think the first panel hit on it a few different points is that 

currently, you have a significant amount of rates investors out 

there, but you need to shift some of those. And not all of them will 

shift. There will be many investors who are rate investors who 

won’t magically turn overnight into credit investors. But there will 

be some who will shift some of their product from buying rates 

products to credit risk products. But ultimately, and I indicated 

this in my oral and written testimony, we have to start rebuilding 

that credit risk base to be able to get more investors to buy those 

credit risk products. 

Mr. MILLER. Okay. A question for the panel. Would it be more 

appropriate to avoid shocks in the market to tie the wind-down of 

the GSEs to the ramp up of the utility with evidence-based market 

and structural triggers and milestones? Mr. Stevens? 

Mr. STEVENS. Congressman, I think this is the question that has 

been debated a lot today, is can there be a TBA market without 

98 

a guarantee. And I think what Tom alluded to is if the 

counterparty ultimately isn’t backstopped by the U.S. Government, 

which backs the mortgage-backed security even if the originator 

fails and can’t back up their representations and warranties themselves, it brings a lot of investment capital from around the globe, 

because then all the investor has to worry about is the interest rate 

risk. They know what they are buying from a homogenized product 

standpoint because it is defined, but what they don’t know is 

whether the counterparty will be there to back up that loan, and 

having that wrap on it has created that capital flow. 

So I think there is an opportunity as a pilot to determine whether you really can create a TBA market without the backstop, rather 

than completely pulling out the supports without knowing yet 

whether that system will work. And given the size and scope of it, 

which has been discussed today, I think doing this in a measured 

way is far more critical to making sure the system could support 

any shift to that kind of structure. 

Mr. MILLER. That seems to be what I am hearing from a lot of 

sources. 

Mr. Howard, would you agree with that? 

Mr. HOWARD. I would agree with that, Mr. Miller, and I would 

suggest that there might be a TBA market without a government 

guarantee, but I think it would be very, very expensive and it 

would force a lot of people out of the housing markets. 

Mr. MILLER. So you think a wind-down tied to a ramp-up for 

verification would be most appropriate? 

Mr. HOWARD. Yes, sir. 

Mr. MILLER. Mr. Calhoun? 

Mr. CALHOUN. A real additional concern is the TBA market, even 

if it does exist, is it available to all lenders based on size at comparable prices? It is a lot easier for an investor to evaluate what 

the counterparty risk is for Wells Fargo than it is for the local community bank. So the real questions are if you have a TBA market, 

which is uncertain, it might be available just for the largest lenders, which we think has adverse consequences, and if it is available 

even at all for the smaller lenders, there is almost certainly a tremendous price penalty that they have to pay. 

Mr. MILLER. I don’t believe any of us want to see another Countrywide machine who sold these mortgage-backed securities that 

couldn’t be unwound. They couldn’t replace the bad mortgages. Investors were just stuck with them. That is why it left a lot of bad 

taste in a lot of investors’ mouths today, and I think you, Mr. 

Deutsch, what a lot of people who realize that. They thought they 

were buying mortgage-backed securities from a GSE and they 

weren’t, and they lost tremendous amounts of money. 

I yield back the balance of my time. 

Chairman HENSARLING. The gentleman yields back. The Chair 

now recognizes the gentleman from New Mexico, Mr. Pearce. 

Mr. PEARCE. I almost drifted off there, Mr. Chairman. You 

caught me just before I was going away. 

Mr. Calhoun, you had spent adequate time talking about the nodoc loans, and I think you articulated the problems with them. Do 

you think that the government had any role in those no-doc loans 

or was that just sheer, greedy capitalism? 

99 

Mr. CALHOUN. I think the main role the government had was lifting up the rating agencies, because the rating agencies gave those 

no-doc loans a rating that created the arbitrage. 

Mr. PEARCE. Okay. Just by point of differentiation from that 

point, I have an article here that talks about Countrywide and 

doing exactly what you are describing. It also talks about the GSEs 

buying them straight from them. And I think that if the GSEs had 

not bought those things, I think when Countrywide began to choke 

on them in their portfolio, I suspect they would have quit doing it. 

But I saw Mr. Franklin Raines make $29 million in one year cooking the books, doing things like this, and James Johnson before 

him, $100 million in 10 years, and they were doing Enron-type 

stuff, which was cycle the stuff in faster, go get everything you can 

get. So I suspect that the government had something to do with 

Countrywide’s decision to do that. 

Mr. Deutsch, is there a cost to consumers for a 30-year mortgage? 

Mr. DEUTSCH. Absolutely. 

Mr. PEARCE. What would that cost be? 

Mr. DEUTSCH. It is simply an insurance payment cost. It is that 

if you as a consumer want to lock your rate in for 30 years, the 

financial institution of some kind has to be on the other side of 

that. They have to say if rates rise, effectively we are going to take 

a loss, so we want an insurance payment for that. 

Mr. PEARCE. Let me tell you the cost to me. When I bought my first house it was a trailer house for $4,500. My next house was 

a townhouse, brand new for $55,000 when I was about 30. They 

asked me 15 years or 30 and they didn’t explain there is a difference. I had never considered that question at all. I could have 

afforded it. It was $400 a month for my $55,000 over 30 years. I 

could have afforded the $485, but I didn’t because I just said, well, 

I don’t know. I hadn’t thought about it. I sold my townhouse 15 years later for $55,000. I owed $55,000 

still. I would have had it paid clear. So the cost of the 30-year 

mortgage to me was $55,000, cash in hand. And so when we are 

talking about this sacred product, there are instances where it is 

very costly to the consumer. 

Mr. Loving, are there products available in the financial market 

today that weren’t available, say, back in 1970 or something, financial products available to the consumer? 

Mr. LOVING. To the consumer? I would say the products that 

were available then are available today. There has just been a 

greater utilization of the 30-year fixed-rate mortgage. 

Mr. PEARCE. Are there investment mechanisms out there that 

couldn’t have been dreamed about 4 or 5 years ago, 10 years ago, 

20 years ago? 

Mr. LOVING. I would say there could be, yes. 

Mr. PEARCE. Yes. When I look at the problem we got into, I can’t 

dream of my banker back when I was borrowing $2,000 a year for 

my 4-H pigs when I was 14, I can’t dream of my banker having 

derivatives and stuff like that. Am I correct or maybe— 

Mr. LOVING. I think from the community bank perspective, you 

are exactly correct. Derivatives, swaps, certainly were not in the 

vocabulary. 

100 

Mr. PEARCE. Yes, there is all sorts of stuff moving just like this, 

because computers make some things available and then we as 

people can design things as long as there is a demand. So I just 

see this tremendous demand out there in the private market, and 

we are being told that the 30-year fixed mortgage would go away. 

If the demand is that strong, I just can’t visualize that with all the 

magnificent things we do for one-quarter of a basis points for 36 

hours that there wouldn’t be some product developed out there. 

Maybe I am wrong, but I just have trouble seeing it. 

I am going to wrap up with the idea that is there private capital 

that will do what we consider to be government functions? And so, 

I will just take one of the most explicit government functions, 

which is going into space—one giant step for mankind or whatever 

that deal was. 

Do you think that the private market could or would ever do 

that? Just a show of hands altogether. Yes? No? No. No, no, no, no, 

no. So let the record reflect that everybody says no. 

Let me tell you that the X Prize was set up just to do that. 

Mr. CALHOUN. I would say yes. 

Mr. PEARCE. They are all yeses. Okay, I’m sorry. 

The X Prize was set up because most people would think there 

is no way private capital would chase this because there is no investment return. Yet the X Prize put in 2 years something that 

NASA has never done. 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair recognizes the gentleman from Wisconsin, Mr. Duffy. 

Mr. DUFFY. Thank you, Mr. Chairman, and again, I appreciate 

the panel staying so late, giving us a long day of your time. 

I want to talk about the 30-year fixed-rate mortgage. There has 

been a lot of focus on that during this hearing. Maybe I will have 

you all walk me through your thoughts on this. And, again, just to 

review right now, we have our investors in mortgage-backed securities, they assume the rate risk. The American taxpayer assumes 

the credit risk. 

Is it everyone’s position on the panel that if we actually have our 

investors assume the credit risk as well, they are not smart enough 

to price that, and then invest accordingly in our mortgage-backed 

securities? Is that the position of the panel? 

Mr. DEUTSCH. I wouldn’t take the position that investors are not 

smart enough to price the credit risk, no, absolutely not representing institutional investors who do it every day. 

Mr. DUFFY. All right. Anyone else? 

Mr. STEVENS. We do have a history where subprime and no-doc 

lending was promoting to an excess and private investors went too 

far. So there are imbalances you can have in a fully privatized 

market or a fully guarantored market, and it is getting those balances right that I think ultimately creates sustainability. 

Mr. DUFFY. But if we get the balance right, the investors can assess that new credit risk, right? If they get a return on their investment to assume that risk, they will make that investment along 

with the rate risk they are already assuming, correct? 

Mr. DEUTSCH. Many can. 

Mr. DUFFY. Mr. Loving, do you agree with that? 

101 

Mr. LOVING. I think they can, but I think the question is how 

broadly available will the 30-year fixed-rate mortgage be to the 

marketplace, and if it is not available, if it is demanded, what impact it would have upon the overall housing market. So it is not 

a question of if, it is of how much, and how broadly available it 

would be. 

Mr. HOWARD. And how much it would cost if it was available to 

the consumer. 

Mr. DUFFY. But the point you all made earlier to Mr. Garrett, 

you said should the Federal Government accurately assess the 

credit risk that the government assumes, and you all I think you 

shook your head saying, yes, we should all try to accurately assess 

that risk, and then Mr. Garrett pointed out that the government 

really hasn’t done a very good job of it. But you all agree that we 

should try to assess that credit risk and pass it on in the form of 

an interest rate hike, of a G fee. 

Why can’t the market do the same thing? And why would there 

be a significant price differential, Mr. Howard? 

Mr. HOWARD. In our conversations with investors and potential 

investors and those that do the securitization, what we are told is 

that absent the guarantee, the product is viewed as a riskier product, purely and simply, and therefore it will cost more to the consumer to put the product on the market. 

Mr. DUFFY. And they are going to price that risk, but those are 

going to start off at a lower rate because they are not paying G fees 

right now, right? They are going to start at a lower rate. 

Mr. HOWARD. Right. 

Mr. DUFFY. They will assess the risk. 

Mr. HOWARD. Not necessarily. 

Mr. STEVENS. The guarantee fee is the guarantee on that mortgage-backed security that comes where a AAA rating. So the guarantee fee reduction is offset by the fact that the value of the security is greater. In fact, Tom Deutsch was talking about how that 

is actually crowding out private capital from competing. So that 

execution difference is legitimate. 

Mr. CALHOUN. And can I add just very quickly, I have bought 

mortgage pools. It is very complex. Mortgages are not cookie-cutter 

all-alike borrower significant. It is hard to assess the risk on pools 

that are relatively small. There are huge economies of sale— 

Mr. DUFFY. But if you get the standardization right, you should 

be able to, right? 

Mr. CALHOUN. In lending by having large issuances that make 

the system work. On small deals, there are tremendous price premiums that are added because of the work and the economies of 

scale. 

Mr. DUFFY. Very well. And I guess we have a lot of things, Mr. 

Calhoun, we disagree on. I don’t know that the panel would agree 

that 95 percent of current mortgages would fit the QM rule, but we 

will leave that alone right now. 

I guess I would just point out, you look at why we are here. 

Again, I am going to make the same point. Dodd-Frank, massive 

financial reform, and it left Fannie and Freddie alone, didn’t address a significant portion of the cause of the 2008 crisis. I would 

argue that it hasn’t lowered the cost of mortgages, hasn’t increased 

102 

access to credit, and it is causing a lot of problems in the market 

that we are trying to also resolve in this bill. So though we are 

here today, frankly we should be reviewing policies that our friends 

across the aisle had included in Dodd-Frank and trying to tweak 

them instead of starting from scratch. 

But, again, I want to be clear to all of you here. I want to make 

sure coming from small town America, rural Wisconsin, that our 

small community banks and our credit unions have the ability to 

aggregate and securitize their loans effectively, and I want to make 

sure we continually work together to make sure that we have a 

process in place that that will absolutely work for us. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The ranking member? 

Ms. WATERS. I have a unanimous consent request. I would like 

to enter into the record a letter from a number of organizations 

who have indicated some concerns. 

Chairman HENSARLING. It will all come in under general leave, 

and without objection. 

I would like to thank all of our witnesses again today for their 

testimony, and for their patience. 

The Chair notes that some Members may have additional questions for these panels, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing is adjourned. 

[Whereupon, at 7:50 p.m., the hearing was adjourned.] 

(103) 

A P P E N D I X 

July 18, 2013 

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