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HELPING RESPONSIBLE HOMEOWNERS SAVE 

MONEY THROUGH REFINANCING 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING, TRANSPORTATION, AND COMMUNITY 

DEVELOPMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING WAYS TO HELP HOMEOWNERS SAVE MONEY THROUGH 

REFINANCING 

APRIL 25, 2012 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

ANU KASARABADA, Deputy Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT

ROBERT MENENDEZ, New Jersey, Chairman 

JIM DEMINT, South Carolina, Ranking Republican Member 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

MICHAEL PASSANTE, Subcommittee Staff Director 

JEFF R. MURRAY, Republican Subcommittee Staff Director 

(II)

C O N T E N T S 

WEDNESDAY, APRIL 25, 2012 

Page 

Opening statement of Chairman Menendez .......................................................... 1 

WITNESSES 

Christopher J. Mayer, Professor of Real Estate, Finance and Economics, 

Columbia Business School ................................................................................... 3 

Prepared statement .......................................................................................... 27 

Debra Still, Chairman-Elect, Mortgage Bankers Association .............................. 5 

Prepared statement .......................................................................................... 32 

Laurie S. Goodman, Senior Managing Director, Amherst Securities .................. 6 

Prepared statement .......................................................................................... 40 

Anthony B. Sanders, Professor of Finance, George Mason University School 

of Management ..................................................................................................... 8 

Prepared statement .......................................................................................... 48 

Michael Calhoun, President, Center for Responsible Lending ............................ 10 

Prepared statement .......................................................................................... 53 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Written statement submitted by Bill Emerson, Chief Executive Officer, 

Quicken Loans ...................................................................................................... 57 

Written statement submitted by National Association of REALTORS® ............ 60 

Letter submitted by Maurice Veissi, President, National Association of 

REALTORS® ........................................................................................................ 62 

Letter submitted by James W. Tobin III, Senior Vice President and Chief 

Lobbyist, National Association of Home Builders ............................................. 63 

(III)

(1) 

HELPING RESPONSIBLE HOMEOWNERS SAVE 

MONEY THROUGH REFINANCING 

WEDNESDAY, APRIL 25, 2012 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, SUBCOMMITTEE ON HOUSING, TRANSPORTATION, AND

COMMUNITY DEVELOPMENT

Washington, DC. 

The Subcommittee met at 10:06 a.m., in room SD–538, Dirksen 

Senate Office Building, Senator Robert Menendez, Chairman of the 

Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ 

Chairman MENENDEZ. Good morning. This hearing will come to 

order. Thank you for being here today. 

This hearing of the Banking Subcommittee on Housing, Transportation, and Community Development will focus on helping responsible homeowners save money through refinancing. 

As I have said many times, we need to fix the housing market 

now to get the broader economy moving again and create jobs. And 

an important part of fixing the housing market is to remove barriers, some of them Government created, to homeowners refinancing. Allowing a homeowner to refinance from a loan at 6 percent interest to a loan that is 4 percent interest, for example, would 

save them hundreds of dollars a month, putting more money in 

their pockets and reducing defaults and foreclosures. 

We are going to hear testimony today that there are 17.5 million 

loans guaranteed by Fannie Mae and Freddie Mac, paying interest 

above 5 percent, that could benefit from a refinance, and millions 

of these homeowners are trapped in higher interest rate loans because of barriers to refinancing. Some, but not all, of these barriers 

were addressed in FHFA’s Home Affordable Refinance Program, or 

HARP, and its expansion called HARP 2. 

For example, HARP 2 removed loan-to-value caps for underwater 

homeowners but does not apply to borrowers under 80 percent 

loan-to-value ratio who, theoretically, should be able to refinance 

but, in practice, sometimes cannot. 

FHFA scaled back lender liability for representations and warranties, which lenders cite as an obstacle to encouraging them to 

extend refinance loans for same servicer refinances in HARP 2, but 

FHFA did not scale back representations and warranties liability 

for cases when server was refinancing a loan, which has led to a 

lack of competition among lenders that has resulted in much higher interest rates for borrowers. We need to inject competition and 

2 

market forces into this market where servicers have an unfair monopoly on refinancing certain borrowers who effectively have no 

choice but to use their original lender. 

Another obstacle is that the second mortgage holders and mortgage insurers do not always allow their interest to be transferred 

to a new refinanced loan even though they are generally better off 

when the first mortgage refinances to a lower payment since that 

makes the loan less likely to default and the homeowner more likely to be able to pay the second mortgage as well. 

Another obstacle is up-front fees and appraisal costs that homeowners without savings cannot afford, keeping them trapped in 

high interest loans. 

Another barrier is verification of income tax returns and other 

paperwork, which is needed for new loans but not necessary for refinanced loans where the borrower is already making payments on 

time. 

The important thing to keep in mind here is that for these 

Fannie and Freddie loans, taxpayers already own the risk of these 

homeowners’ default, regardless of whether we allow the homeowner to refinance or not. So stopping homeowners from refinancing into lower cost loans, where they are less likely to default, 

harms both homeowners, taxpayers, and is crazy in my view as a 

policy. FHFA needs to change this. 

Other challenges also remain such as how to increase homeowner 

awareness of refinance actions. 

I have been working with Senator Barbara Boxer on a discussion 

draft bill that I have asked witnesses at these hearings today to 

comment on. I would like to thank her for her great work on behalf 

of the people of California as well as everyone in this country. The 

Senator has shown some great interest in this. 

I appreciate summaries of the Menendez-Boxer discussion draft 

are available for the press in the back of the room. 

I would also like to thank Senator Al Franken for working with 

me on the put-back risk provision of the discussion draft, which is 

similar to a provision he introduced in another bill. 

I am going to look forward to hearing from the witnesses. 

And there are several colleagues on the Committee who have 

been very much engaged in refinancing, and I would be happy to 

recognize any of them at this time if they wish to be recognized. 

If not, let me introduce the witnesses. 

Dr. Chris Mayer is the Paul Milstein Professor of Real Estate, Finance and Economics and Co-Director of the Richard Paul Richman 

Center for Business Law and Public Policy at Columbia Business 

School. His research explores a variety of topics in real estate and 

financial markets, especially refinancing. And he has appeared before Congress, and certainly this Committee, several times. We 

welcome him back. 

Ms. Debra Still is the President and Chief Executive Officer of 

Pulte Mortgage which is located in Englewood, Colorado, and she 

is the Chairwoman-Elect of the Mortgage Bankers Association. 

Congratulations. She has been an active MBA member for over 10 

years, has more than 3 decades of experience in the mortgage industry. 

3 

And so, we thank you for traveling all the way from Washington 

State today. 

Dr. Laurie Goodman is a Senior Managing Director of Amherst 

Securities, responsible for research and business development. Before joining the firm, she was the head of Global Fixed Income Research and Manager of U.S. Securitized Products Research at UBS 

and their predecessor firm. She has appeared before our Subcommittee numerous times before, and her tremendous knowledge 

of the market and investors is always welcome. 

So, welcome back. 

Dr. Anthony Sanders is a Professor of Finance in the School of 

Management at George Mason University. He has a long history of 

academic research into financial institutions, capital markets, real 

estate finance and investments. He has testified before the Subcommittee numerous times. 

You must all be good because we keep bringing you back. And 

as a Garden State native, he is always welcome here. 

Mr. Michael Calhoun is President of the Center for Responsible 

Lending, which is a nonprofit, nonpartisan research and policy organization dedicated to protecting home ownership and family 

wealth by promoting access to fair terms of credit for low income 

families. He has testified also numerous times before the Congress 

and currently serves as the Chair of the Federal Reserve Board’s 

Consumer Advisory Council. 

Thank you all for agreeing to come and share your expertise on 

this subject. I would ask you to summarize your statements in 

about 5 minutes. All of your full statements will be included in the 

record. 

And with that, we will start with you, Dr. Mayer. 

STATEMENT OF CHRISTOPHER J. MAYER, PROFESSOR OF 

REAL ESTATE, FINANCE AND ECONOMICS, COLUMBIA BUSINESS SCHOOL 

Mr. MAYER. Thank you, Senator Menendez and fellow Senators. 

Good afternoon. Thank you for the opportunity to be here today. 

My name is Chris Mayer. I am the Milstein Professor of Real Estate at Columbia Business School. 

This is the sixth time I have been called to testify, equally called 

by both Democrats and Republicans. Each time, I have advocated 

for what is seemingly straightforward and simple policy: Allow millions of Americans to refinance their GSE mortgages at low current 

rates. 

The failure to do so over the last 3 years has resulted in at least 

300,000 unnecessary defaults, $10 billion in higher taxpayer costs 

from excess foreclosures and a less stable housing market. Bond 

holders have received $60 billion over the last 3 years in excess 

mortgage payments from homeowners trapped in high interest rate 

loans. 

Last year, the FHFA announced changes to HARP with the stated goal of increasing eligibility for streamlined refinancing. Yet, 

these changes are inadequate. 

The most serious problem under HARP 2 is the lack of competition, as I know some of our other witnesses will testify to. Lenders 

are strongly discouraged from refinancing a mortgage they did not 

4 

originate because they must take on legal liability for the original 

mortgage. 

Existing servicers are taking full advantage of the situation, earning profits of $7,000 to $13,000 when an underwater borrower 

with a $200,000 mortgage wants to refinance. This is an unprecedented and inexplicable profit. 

Some servicers, such as MetLife, do not even originate new mortgages, leaving their borrowers locked out altogether. 

Freddie Mac, the target of an NPR–ProPublica investigation for 

supposedly betting against household refinancing, continues to implement further additional hurdles to refinancing relative to 

Fannie Mae. 

Under the law, the FHFA must preserve and conserve the GSE 

assets, ensure liquid, efficient and competitive mortgage markets, 

minimize foreclosures and operate the GSEs in a manner consistent with the public interest. Yet, the activities I described appear to directly violate these congressional mandates. 

Giving existing servicers preferential legal treatment reduces 

competition. Imposing unnecessary and opaque credit restrictions 

makes the market less transparent and efficient. Limiting access to 

a program that lowers borrowing costs results in more foreclosures 

and is seemingly against the public interest. 

Some argue that restricting refinancing is justified to protect the 

value of the GSEs’ investment portfolio. Of course, Acting Director 

DeMarco has stated that there is no conflict because the GSEs 

were not supposed to consider their portfolio in implementing 

HARP 2. But if not protecting their portfolios, why else impose onerous refinancing restrictions? 

I was asked to assess the economic impact of the MenendezBoxer discussion draft legislation, which would remove key barriers 

to refinancing. My research with co-authors, including Glenn Hubbard, James Witkin, and Alan Boyce, suggests the bill might result 

in as many as 11.6 million new refinancings and prevent 400,000 

unnecessary defaults based on current interest rates. 

A recent CBO working paper suggests that a refinancing program would earn the GSEs about $700 million, even taking into account portfolio losses, because more refinancings lead to fewer defaults and lower insurance costs. 

Even if the CBO is wrong and refinancing does impose net portfolio costs, or the GSEs must somehow give up valuable legal 

rights, the GSEs could charge a slightly higher annual refinancing 

fee. Our analysis suggests that adding a seven basis point annual 

fee to the insurance premium plus covering the existing costs, a 

total premium of about 29 basis points would lead to a profit for 

the GSEs of more than $23.6 billion. 

Even considering portfolio losses to the Federal Reserve, this program is profitable for taxpayers on a standalone basis. The FHFA 

should be held accountable for failure to implement a program that 

would save taxpayers billions of dollars in lower bailout costs. 

I believe the Congress should act as called for by the President, 

as proposed under this existing legislation. Although obviously this 

bill is very different than that proposed by the President, I think 

the draft bill is very, very close to what we have been proposing 

for over 3 years. So I think it is a wonderful piece of legislation. 

5 

Two enhancements that I would suggest: One, all current GSE 

mortgages should be eligible for any refinancing program regardless of origination date, and two, the legislation should mandate 

that an independent trustee be appointed to wind down the GSEs’ 

maintained, retained portfolio of MBS. Conservatorship, as it 

stands now, is laden with conflicts of interest and holds back the 

reintroduction of private capital. 

Removing barriers to refinancing will help the effectiveness of 

monetary policy, allowing the Federal Reserve to more quickly reduce its efforts in quantitative easing. These steps can occur now 

even without a consensus on what the future of the U.S. housing 

finance system would look like. 

Thank you very much for inviting me. 

Chairman MENENDEZ. Thank you. 

Ms. Still. 

STATEMENT OF DEBRA STILL, CHAIRMAN-ELECT, MORTGAGE 

BANKERS ASSOCIATION 

Ms. STILL. Thank you, Chairman Menendez and other Members 

of the Subcommittee, for the opportunity to testify today. As the 

President and CEO of Pulte Mortgage and the Chairman-Elect of 

the Mortgage Bankers Association, I am pleased to offer MBA’s 

perspective on the Responsible Homeowner Refinancing Act of 2012 

as currently being drafted by you, Mr. Chairman, and Senator 

Boxer. 

As we work toward a recovery for housing, MBA appreciates all 

efforts directed at helping homeowners and making sure that qualified, deserving borrowers have access to mortgage credit. We believe this bill aims to address these goals, and we agree with the 

intent and objectives of this draft legislation. 

The MBA believes that a number of provisions contained within 

the bill will help overcome certain remaining barriers that have 

prevented responsible homeowners, who have remained current on 

their mortgages, from reaping the benefits of historically low interest rates and existing mortgage assistance programs. 

MBA particularly appreciates the provisions that would standardize and therefore simplify Fannie Mae and Freddie Mac’s borrower eligibility requirements. 

We also support the bill’s provision to lower borrowing costs by 

prohibiting the GSEs from establishing pricing differences based on 

loan-to-value ratios, borrower income or employment status. 

We appreciate that all lenders, not just the existing servicer, can 

participate in the program’s streamlined underwriting program. 

These provisions are all improvements to the current version of 

HARP. It is in the best interest of borrowers, the GSEs and taxpayers to incorporate these concepts for loans held by the GSEs 

since both agencies already hold that risk. 

For lenders interested in helping borrowers refinance, MBA is 

pleased that the bill addresses the exposure of a new lender’s representation in warranty obligations to Fannie and Freddie. Lenders 

have faced an unprecedented volume of repurchase demands and 

are understandably hesitant to take further incremental risk on 

streamlined refinances. Therefore, by clarifying their rep and warVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
6 

rant obligations, many more lenders can help existing homeowners 

while interest rates are low. 

While MBA supports the concept I have just discussed, we would 

like to offer commentary on a few of the provisions that we believe 

need enhancement. 

The bill addresses two important and complex pieces of the refinancing process, but MBA would offer a different approach to both 

subordination of second liens and mortgage insurance. MBA believes the penalties proposed for subordinate lien holders and mortgage insurers are severe and unnecessary. While some second lien 

holders may have originally been slow to respond to subordination 

requests, the industry has seen significant traction in this area. In 

regards to mortgage insurance, as evidenced by the existing HARP 

program, most mortgage insurance companies have already agreed 

to participate. 

It is imperative we support market liquidity for consumers. Limiting competition amongst lenders and insurers is contrary to the 

goals and objectives of this legislation. We find these provisions 

prohibitive and would be glad to work with you on alternative solutions. 

Finally, we recommend that the bill be modified to expand the 

types of loans eligible for refinancing under the HARP 2 program. 

In particular, loans owned by the GSEs that exceed the current 

loan limit should be eligible for refinancing under the program. 

It is critical that future housing policy be developed with 

thoughtful, well balanced, incremental steps that progressively 

eliminate the current uncertainties faced by our industry and by 

homeowners. We appreciate that the bill is meant to build upon the 

momentum we have seen in the HARP 2 program, and we are convinced it addresses the appropriate enhancements to the existing 

program. It is simple, easy to understand and mirrors the parallel 

FHA streamlined refinance program that has been in existence for 

30 years. 

We have reason to be optimistic about the Nation’s housing markets, beginning with record home affordability, some signs of job 

growth and a recovering stock market. In my business, I have personally witnessed green shoots appearing in many markets around 

the country, where we are seeing the first notable spring buying 

season in several years and our borrowers appear to be more confident in their buying decisions. 

More needs to be done, however, to continue the housing recovery, including for borrowers who are locked into higher rate mortgages, and your legislation builds upon that effort. MBA stands 

ready to work with you to refine this legislation and achieve our 

common goal. 

Thank you very much. I would be happy to take questions at the 

appropriate time. 

Chairman MENENDEZ. Thank you. 

Dr. Goodman. 

STATEMENT OF LAURIE S. GOODMAN, SENIOR MANAGING 

DIRECTOR, AMHERST SECURITIES 

Ms. GOODMAN. Chairman Menendez and Members of the Subcommittee, I thank you for the opportunity to testify today. 

7 

My name is Laurie Goodman, and I am a Senior Managing Director of Amherst Securities Group, a leading broker-dealer specializing in the trading of residential and commercial mortgage-backed 

securities. We are a market maker in these securities, dealing with 

an institutional account base—financial institutions, money managers, insurance companies and hedge funds. 

In my testimony today, I will discuss actions that can be taken 

to help responsible homeowners save money through refinancing 

without disrupting the very well functioning agency mortgage market. I will limit my comments to the refinancing of GSE mortgages. 

My number one suggestion would be to allow for competition by 

permitting a different servicer to refinance a borrower on the same 

terms as the current servicer. This will result in a much better rate 

to borrowers and much more refinancing of the targeted HARP 

population. 

The HARP program, applicable to borrowers with a current LTV 

ratio of greater than 80 and an origination date of the old loan 

prior to June 1, 2009, was rolled out in April of 2009. The program 

was expected to help four to five million borrowers. Since the program has been in existence, it has helped 1.12 million borrowers. 

Other streamlined programs using the HARP infrastructure have 

helped another two million borrowers. It is important to realize 

that over this period there have been 10.7 million refinancings. 

Thus, 71 percent of the refinancings over this period was neither 

HARPed nor streamlined. 

In assessing what should be done to HARP going forward, there 

are two separable issues: What can be done to increase the penetration of the HARP borrower base, and what can be done to increase the scope of the HARP program? 

We believe that a series of definitive steps can be taken to increase the penetration of the existing HARP universe. There are 

3.3 million borrowers who have loans taken out before the cutoff 

date, have an ability to take advantage of HARP as measured by 

pay history, have an incentive to refinance and have LTVs of 80 

to 125. There are another 700,000 borrowers who are over 125 

LTV. These four million borrowers are the ones that create the 

most risk for the GSEs, and a refinancing would benefit both the 

affected individuals and the taxpayers the most. 

In addition, there are 10.9 million borrowers who are eligible for 

HARP-like refinance programs. We have more mixed feelings on increasing the scope of the HARP program in a capacity-constrained 

environment. 

Currently, on a same-servicer refi, the servicer need only prove 

that the borrower has no delinquencies in the past 6 months and 

no more than one in the past year, has a source of income and is 

aided by the refinance. If the refinance meets these conditions, the 

servicer is released from the rep and warrant risk on the old loan 

and the new loan. If the borrower goes to a different servicer, that 

servicer must collect more information about the borrower and has 

the rep and warrant risk on the new loan; different servicers are 

not eager to take rep and warrant risk on higher LTV loans. 

Thus, the current servicer, which is one of the three largest 

banks well over 50 percent of the time, has a huge advantage and 

tends to charge the borrower more for these loans. In many cases, 

8 

the lender-servicer is making 7 to 8 points on the refinancing, or 

about $15,000 on a $200,000 mortgage versus an average of 1 to 

2 percent or $3,000 on refinancings over the past decade. 

This problem can be elegantly eliminated by allowing different 

servicers to do the refinance on the same terms as the current 

servicer, most importantly, including the elimination of the rep and 

warrant risk on the new loan. The Menendez-Boxer discussion 

draft does exactly this, and we endorse it. 

Loan level pricing adjustments and appraisal costs should be 

eliminated, but they are small, less than 1.5 percent of the loan 

amount on a $200,000 loan, and are dwarfed by the monopoly profits being earned by the largest banks. 

Similarly, requiring resubordination of second liens and portability of all insurance policies are nice features but will only help 

at the margin. It is in the economic interest of second lien holders 

to resubordinate, and as Debbie pointed out, most mortgage insurers have agreed to full portability. 

We are very much in favor of a consistent set of guidelines for 

Fannie and Freddie in order to ease lender compliance. In particular, we would like to see pre-cutoff Freddie loans with LTVs 

less than 80 receive rep and warrant risk consistent with pre-cutoff 

higher LTV Freddie loans and all pre-cutoff Fannie loans. 

We would also like to see consistency on the financing of closing 

costs. 

We believe the first goal of the refinancing initiatives should be 

better penetration of the existing HARP-eligible borrower base. 

This is best done by promoting competition and making borrowers 

more aware of their refinancing options. In a capacity-constrained 

environment, these actions should be taken before expanding eligibility by moving the cutoff date forward 1 year. 

If the cutoff date were to be changed, it can be most easily done 

for borrowers with LTVs less 80 as there is never a covenant with 

investors on these loans. If it is to be done on HARP loans, we 

would suggest doing it only on purchase loans. Allowing re-HARPing would be very detrimental to the well functioning agency mortgage market. 

Thank you very much for the opportunity to testify on this important set of issues. 

Chairman MENENDEZ. Thank you. 

Dr. Sanders. 

STATEMENT OF ANTHONY B. SANDERS, PROFESSOR OF FINANCE, GEORGE MASON UNIVERSITY SCHOOL OF MANAGEMENT 

Mr. SANDERS. Chairman Menendez and distinguished Members 

of the Committee, my name is Dr. Anthony B. Sanders, and I am 

Distinguished Professor of Finance at George Mason University 

and a Senior Scholar at the Mercatus Center. It is an honor to testify before the Committee today. 

The proposal to be discussed at this hearing is the expansion of 

the affordable refinancing of mortgages held by Fannie Mae and 

Freddie Mac. 

It can be argued that Fannie Mae and Freddie Mac are resisting 

loan modifications to protect their retained portfolios. Hence, fewer 

9 

borrowers are able to refinance their mortgages. This proposal 

would remove the safeguards from HARP and encourage more refinancing by borrowers. 

Even so, I would encourage a detailed examination of the projected benefits to the consumers and costs to the American taxpayers of these proposed changes by FHFA, the Congressional 

Budget Office and the Federal Reserve Board before you proceed. 

Administrations and Congress have undertaken large policy 

changes in housing and housing finance, particularly since 1995, 

and these changes have had unintended consequences. Removing 

the safeguards may be appropriate, but we need detailed studies of 

the 14 Federal Government loan modification programs and how 

they interact with each other and the Federal Reserve’s monetary 

easing strategy. 

Now the U.S. Department of Treasury provides us with a limited 

summary of the magnitude and effectiveness of HAMP and other 

programs, but the number that stands out is approximately 25 percent of modified mortgages to into redefault after 1 year. True, that 

data are from 2010, but the trend for the most recent modifications 

shows the same daunting trend. 

According to the Mortgage Bankers Association Refinancing 

Index, we have seen refinancing applications expanding since the 

beginning of 2011. Bank of America, for example, has received 

30,000 HARP 2 applications since mid-January, and they have 

added nearly 1,000 new fulfillment associates in order to add capacity to handle the strong volume. 

But with historically low interest rates, unprecedented intervention by the Federal Reserve and the continued European debt crisis 

that is driving investors into the U.S. Treasury market, we must 

be careful. We are in uncharted territory in intervention and mortgage rates, and we have to be careful not to create more unintended consequences that could devastate American taxpayers. 

Now Section 4 requires that Freddie Mac and Fannie Mae contact borrowers directly about the possibility of benefits of a mortgage modification. In addition, Fannie Mae and Freddie Mac must 

post relevant refinancing information on the Web. Of course, this 

is an unprecedented change from current procedures. 

Given the plethora of media and links on bank Web sites—which 

I document in my appendix—and Government Web sites concerning loan modifications, I cannot say how any borrower interested in loan modifications could possibly be unaware of the possibilities. 

And again, bear in mind large changes in Government policy can 

produce unintended effects, particularly when we consider the alternative of programs on principal reductions that are being considered by the Administration and Congress and, again, how HARP 

2 changes may impact everything. 

So I am on record about saying a careful analysis of the joint impact of all 14 programs should be undertaken before any other 

changes should be made. 

So my answer is at least no, at this point, until appropriate studies are performed. In fact, I would recommend Debbie Lucas work 

with the CBO and score this as soon as possible. 

10 

At some point, the collective impact of these programs could 

drive our banks into bankruptcy. The possibility of this also must 

be included in analysis of any further steps taken. 

Another reason I am opposed to removing the loan modification 

safeguards is the banks and investors are private market concerns, 

not private market concerns in conservatorship. So, in other words, 

these are private firms, and I am not really very approving of 

interfering in the private sector. Once again, this could be a Jurassic Park moment where we signal to the world that the U.S. will 

pass laws to alter contracts and dramatically change investor expectations. 

In summary, I encourage the Senate to request detailed studies 

of the impact of the legislation. I strongly suggest: 

One, the cost of each proposed change to taxpayers and the expected decline in default and redefault rates; 

Two, how these changes will interact with the 14 existing programs from the Federal Government and the proposed principal 

write-downs for Freddie Mac and Fannie Mae; 

And three, ignore private market estimates of the costs and benefits of the analysis if it comes from any firms or organization that 

benefits from proposed changes or has ties to the Federal Government. 

Let us be wary of another major policy change that might have 

untended consequences. Again, we are in unchartered water for 

housing finance and Federal Reserve policies, and any further 

changes should be enacted with extreme caution. 

Thank you for the opportunity to testify. 

Chairman MENENDEZ. Thank you. 

Mr. Calhoun. 

STATEMENT OF MICHAEL CALHOUN, PRESIDENT, CENTER 

FOR RESPONSIBLE LENDING 

Mr. CALHOUN. Thank you, Chairman Menendez, Senator Corker 

and Senator Merkley. 

I am Mike Calhoun, the President of the Center for Responsible 

Lending, which is the policy affiliate of Self-Help, which is the Nation’s largest community development lender. In the nonprofit 

sphere, we have provided over 6 billion of financing for American 

home families. 

The topic of today’s hearing addresses one of the most critical 

challenges our country faces, and that is how to strengthen the 

housing market that remains perhaps the largest drag on our recovering economy. 

The HARP program, including the reforms that were implemented last fall and the additional administrative and legislative 

reforms that are the topic of this hearing, can significantly aid 

homeowners and the overall housing market. We urge the regulatory agencies and the Congress to immediately enact these further improvements of the HARP program. 

The current housing crisis is actually the third major national 

housing price correction of the last 30 years. Several factors, 

though, set it apart from the previous downturns. 

First, reckless lending sustained and enabled this housing bubble 

to expand far beyond the price appreciation of the previous bubbles 

11 

to over 80 percent in real price appreciation that we saw in the last 

decade, and that compares to previous appreciation bubbles in the 

80s and 90s of the mid-teens. 

Second, the leverage of securitization and derivatives greatly 

magnified the resulting losses when the bubble crashed and triggered a deep, general economic decline. 

And third, and most important for today’s hearing, this bubble 

left many homeowners underwater while in the previous bubbles 

the real value of houses declined but this was hidden by inflation 

so that nominal values, while failing to keep up with inflation, did 

not actually decline and did not lead borrowers underwater so that 

they were unable to refinance. 

These circumstances today make a housing recovery more important, and it makes it critical to assist underwater borrowers to aid 

this recovery. One of the most important tools in this are the historically low mortgage credit rates so that refinancing can save borrowers hundreds of dollars a month on their mortgages. 

While HARP does not assist underwater borrowers who, due to 

the economic crisis, are not current on the mortgage. There is testimony today that millions of other underwater borrowers can be 

helped. 

In addition, as set out in our testimony, it is important to remember that there was widespread steering during this housing 

bubble of overpriced credit to African American and Hispanic 

households. And furthermore, the data show that these households 

are having the most trouble refinancing and are the most likely to 

be trapped in higher interest mortgages. 

The HARP reforms implemented last fall removed significant 

frictions in the program, and early reports indicate increasing numbers of underwater borrowers are now benefiting from the program. 

We support the additional reforms that are set out in both the 

Menendez-Boxer draft and further reforms set out by the Administration. Included in these are the limits on LTVs should be removed so that borrowers who are below 80 percent can benefit from 

the relief from the reps and warranties issues that have been discussed today. In addition, the additional incentives for second lien 

subordination in the Menendez-Boxer draft would speed 

refinancings, especially those with smaller lenders who have not 

joined the consortium who are facilitating subordination of second 

liens; those are largely the major lenders. 

Additional outreach is needed. FHFA has conducted some outreach, but more outreach conducted and coordinated with other 

agencies would help because many borrowers have tried to refinance and been rebuffed and should now be made aware of these 

improvements in the programs. 

Finally, Congress should enact the proposals for refinancing of 

non-GSE mortgages through FHA, as proposed by the Administration, to assist those homeowners and provide equal treatment to all 

homeowners so one program is not available for GSE borrowers 

while others are shut out simply based on who happened to purchase their loans. 

And we also support the assistance for refinancing in the shorterterm mortgages through support for reducing closing costs as those 

put borrowers into equity and reduce credit risk at the same time. 

12 

There are no silver bullets is one of the lessons of this crisis, and 

indeed, more efforts beyond those discussed today are needed. 

Nonetheless, the reforms proposed today benefit not only homeowners who find themselves underwater or trapped in high interest 

rates; they help all homeowners by stabilizing home values, by reducing the dilution of home prices that has been caused by the 

flood of preventable foreclosures. 

In conclusion, most important, these reforms put more dollars 

each month into the hands of working families, and they aid the 

overall housing market, both of which create jobs and boost the 

whole economy and benefit all Americans. 

I would be happy to answer any questions that you have today. 

Chairman MENENDEZ. Thank you very much. Thank you all for 

your testimony. 

Let me start off with a question period with Dr. Mayer. Your testimony goes through what I think are several compelling reasons 

why the discussion draft from myself and Senator Boxer is in the 

best interest of the GSEs, but I want to focus on their financial interest and not just their best interest, which has been the subject 

of much debate here in the Congress. 

As I get it—and you correct me if I am wrong—by your calculations, you believe that 11.6 million new refinances would take place 

and it would result in GSE profits of as much as $23.7 billion primarily through preventing defaults, and your testimony cites a 

CBO study that every thousand refinances result in 38 fewer defaults. 

And the statistic we have previously used is that foreclosure 

brings anywhere between a $50,000 and $65,000 loss to a lender. 

So can you walk us through the calculations because every time 

we broach this subject in hearings, and particularly when we have 

Mr. DeMarco and others, if at the end of the day the trustees’ job 

is to obviously preserve largely the corpus, then it seems that your 

calculations do a good job of that and mirror what a lot of the private sector is doing, where over 25 percent of their portfolios are 

being refinanced? 

So there is a reason the private sector does that. It does it to not 

lose money, right, Dr. Sanders? 

So why don’t you try to walk us through that calculation? 

Mr. MAYER. Sure. The intuition for this is pretty straightforward, 

which is suppose you have somebody sitting with a 6 percent mortgage and current rates are 4 percent. 

The GSEs own some bonds. Let’s say they own 10 percent of the 

bonds. So you are going to save a homeowner 2 percent a year in 

the cost of borrowing on their mortgage. 

If the GSEs lose 10 percent of that—let’s say that it costs their 

portfolio two-tenths of a percent a year—they can basically just 

charge a little bit more for the refinancing. So instead of that refinancing costing 4 percent, maybe it costs 4.2 percent. The homeowner still saves a large amount of money, and the GSEs have covered whatever their costs are associated with the program. 

So intuitively, given the very large savings associated with 

refinancings, there is enough money in there for the GSEs to actually earn a profit. 

13 

And that calculation, by the way, assumes no offset whatsoever 

in foreclosures. 

Then if you sort of think, well, gee, every time we do 100 of those 

almost 4 of them prevent a foreclosure, and the foreclosures cost 

$60,000 apiece, all of a sudden, you do not have to charge 2/10ths 

of a percent more; you only have to charge a little bit more, in 

order to do the refinancing and break even. 

So it is sort of the argument that some people have had that this 

does not earn a profit really cannot make sense because you understand every time you lower people’s payments there is some spread 

there. 

Obviously, the losers here are investors, but the investors have 

had an enormous windfall associated with this program. They have 

had an enormous windfall associated with the Fed buying $2 trillion of long-dated MBS. It seems the investors—when we put an 

explicit guarantee on the GSEs, all of these things have benefited 

the investors. I think it is starting to be time to benefit not only 

the homeowners but taxpayers who have had to pay for all of this. 

Chairman MENENDEZ. Are you familiar with the CBO study that 

said that a widespread refinancing program such as we are proposing here would result in higher profits for the GSEs? 

Mr. MAYER. Yes, I am. 

Chairman MENENDEZ. And as you note, in our discussion draft, 

the GSEs would be charging additional fees to cover the cost of the 

program. 

So I am trying to figure out, having had that as the basis, Dr. 

Sanders, you made a comment that sort of like struck me, that my 

proposal would drive banks into bankruptcy. How do you figure 

that out? 

Mr. SANDERS. I have to reread my testimony because that is not 

what I said. 

What I was saying was the combined nature of the 14 programs 

plus the Attorney General settlement plus the big push from the 

Administration to have big principal write-downs—all those together could put the banks, not your legislation in particular. 

Chairman MENENDEZ. Oh, oh, oh, OK. I did not quite hear it 

that way. 

Mr. SANDERS. My theme was the joint effect. 

Chairman MENENDEZ. I wanted to make sure because the last 

thing I want to do after having to save their backsides in 2008 is 

to drive them into bankruptcy again. So I do not want to do that. 

Let me ask Ms. Goodman; based on your testimony, you believe 

that the current HARP 2 policies, some implemented by the GSEs 

and some by the servicers themselves, are severely reducing competition among banks and ultimately decreasing the effectiveness 

of HARP 2 and robbing homeowners’ savings through lower interest rates. Do you think that we address that problem in our discussion draft? 

Ms. GOODMAN. Yes, I think you do a very good job of that in your 

discussion draft. 

Chairman MENENDEZ. OK. Let me recognize Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman, and thanks for calling the hearing and to all of you for your testimony. 

14 

I want to start with, you know, to be in the Senate is to be inconsistent. That is kind of a definitional thing. And I know that so 

many of my friends, who I think do care deeply about people being 

able to refinance on one hand, on the other hand, end up using 

guaranty fees not to increase sort of the insurance pool, if you will, 

for the GSEs; use G-fees to pay for other programs in the Federal 

Government. 

I am just wondering if there are any of you that think that is 

a good policy as it relates to housing finance. If so, please tell me. 

Ms. STILL. Well, MBA would certainly not support raising G-fees 

for the use of other programs. 

I think one of the advantages or components of this proposal, 

though, is to pay for the streamlined refinance with a very targeted 

G-fee on the consumers that would choose to use the program. So 

I think that is well done in this bill, certainly not though in support of outside of that, say. 

Senator CORKER. And I understand if anybody objected to that. 

If we were working on some legislation, I guess, to reframe the 

GSEs, I assume that all of you would support us having conditions 

in there that say they cannot use G-fees to pay for things other 

than actual insurance for the GSEs. I assume that would be unanimous. 

One of the other things that are occurring right now in the financing market is that the Consumer Protection Bureau is looking 

at using rebuttable presumption on financings. I assume that 

maybe Mr. Calhoun would disagree. I am not sure. 

But are there any of you that think that helps future financing 

of residential mortgages, and would we not be better off to have a 

safe harbor of some kind so that people know if they did appropriate due diligences and checked all the boxes that they would be 

free from future lawsuits by people who are very aggressive in that 

regard? Is there anybody that disagrees with that? 

And I assume Mr. Calhoun might disagree. 

Mr. CALHOUN. Yes, Senator Corker, and I would note for the 

record that we submitted a joint comment to the CFPB that was 

joined in by the clearinghouse which includes the largest lenders 

which originate well in excess of 80 percent of all the mortgages 

in the U.S. 

And that joint letter called for clear standards for the QM, but 

it also called for a rebuttable presumption because there is a tradeoff between those. If you want to create that safe harbor, you have 

to really tighten down the QM standards to make sure that an abusive loan does not get through, but doing so really throttles access 

to credit. 

The experience with other litigation in North Carolina—we have 

had our predatory lending law on the books for well over a decade. 

Without even rebuttable presumption, there has been near zero 

litigation because individual cases are very hard to bring. 

The clear standards address the greater risk which we are talking about today, which is the reps and warranty risk, which is 

what is really driving what credit lenders are offering today. 

And so, I would just add that to the record, that there is a lot 

of consensus out there that the better approach is relatively generous standards for the QM, what is a QM loan, so that you proVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
15 

vide broad access to credit and support the overall economy and 

use a rebuttable presumption as a backstop for what should be 

very rare cases where abusive loans are made. 

Senator CORKER. Is there any disagreement with that? 

Ms. STILL. Yes, MBA would strongly support a safe harbor. We 

believe the industry desperately needs certainty. Lenders need certainty and clear guidelines with a brightline safe harbor, very 

much in the best interest of consumers and housing. 

As it relates to some of the definition that the clearinghouse document would otherwise suggest, MBA also believes that inside of 

the current QM ruling, where the law prohibits certain loan types 

and then requires full documentation loan, that will limit the market appropriately in a responsible way. 

So inside of that, a broad definition of QM is very important to 

consumers. We are very concerned that lenders will not lend outside the QM box. 

Senator CORKER. I would like to follow on both of you all. 

I mean, I think we would like to get this right. We think where 

the CFPB is heading right now is not a good place for the industry, 

and I think all of you agree with that, but I think we would like 

to figure out the best way going forward. 

And Ms. Goodman, I think you disagreed also with other testimony regarding, I think, Mr. Calhoun talked about the need to 

take high leverage loans and put them on the Government’s balance sheet. Many of the refinancings that we have had in the past 

programs have been good for homeowners but also good for the 

Federal Government because we are not shifting risk this way. 

One of the most recent proposals, I think, coming from the Administration talks about taking high leverage loans and shifting 

them onto FHA. And I think you would think that would be not 

a good thing for us to do; is that correct? 

Ms. GOODMAN. I think it is not a good thing. On the GSE mortgages, clearly, the GSEs already own the risk. So, refinancing 

makes a lot of sense. 

A broader refinancing plan which allows the transfer of risk on 

higher LTV mortgages, where the mortgages are owned by bank 

portfolios or investors in the private label securities to the Government, would basically be a taxpayer bailout for both bank portfolios 

and for private label investors and, hence, a very poor use of taxpayer money. 

Senator CORKER. Yes, I could not agree more. 

Mr. Chairman, I know my time is up. I will say that—and I say 

I really enjoy working with the Chairman on so many. We are actually on numbers of committees together. 

I know that Ed DeMarco and the FHFA has been a great punching bag for all, and people seem to have enjoyed it a great deal. 

I will say that this Subcommittee’s jurisdiction would allow us to 

actually deal with GSE reform, and instead of maybe punching 

DeMarco all the time, what we could actually do is craft legislation 

to redesign the GSEs so we do not have these problems. And I 

would just say that possibly that is a more fruitful use of time. 

But anyway, I thank you very much. 

Chairman MENENDEZ. I thank the Senator. 

16 

I take no joy out of what you describe as punching, using Mr. 

DeMarco as a punching bag. However, I think that when there is 

a different view as to what is the right public policy that can preserve the corpus and do a better job of it, those of us who believe 

that are obviously not only entitled but believe the responsibility 

to pursue it. 

And that is the way I look at the challenge of trying to effect policy with Mr. DeMarco in a way that I would just want him to 

broaden his view as how does he pursue his fiduciary duty at the 

end of the day. 

Senator Reed. 

Senator REED. Thank you, Mr. Chairman, and I thank the witnesses for their excellent testimony. 

Dr. Mayer, I am going to commend you for your work with your 

colleague, Dr. Hubbard, and others up at Columbia. 

One of the things you said in response to the Chairman’s question is that the economics itself sort of argues for the changes that 

you have been talking about and the Chairman is proposing. This 

is not some kind of esoteric request. This is that you have looked 

at the numbers and you think those numbers make sense to do the 

type of refinancing of the proposal; that is correct? 

Mr. MAYER. Yes, I do. 

Senator REED. And one of the other factors, it would seem to me 

too because from the perspective of a very small institution it 

would make sense. But the sheer size, the volume of the loans that 

are controlled indirectly and directly by FHA, Fannie and Freddie 

basically, is 80 percent of the market. So there will be a market 

effect if they do these things. 

I mean, there will be an effect beyond just simple individual 

portfolios. Is that something you have looked at? 

Mr. MAYER. It is. This would involve buying—basically, paying 

off—one set of bonds and reissuing another. 

The first thing to realize about all refinancing programs is they 

do not affect the overall supply of credit into the market. So the 

kind of concerns you might have about doing something that has 

a really challenging effect would be an issue. 

I think the other real concern might be one—and I think this is 

a place where taking a page from the Federal Reserve if very important. The fact the Federal Reserve owns $1.25 trillion of these 

bonds and is constantly kind of making a market in this, so to 

speak, combined with the real liquidity in this market in general, 

significantly diminishes the concerns that some might have that a 

program like this would really roil the markets. 

The other thing I would point to is in 2002 and 2003 we refinanced 25 million mortgages in the United States with no Government intervention whatsoever, and the credit markets responded 

perfectly fine to that. So I think any concerns that this would 

somehow cause investors to not buy bonds, that people would be 

concerned, I think those are much overstated. 

Senator REED. I am told, just for the record, it is closer to 60 percent of the market that they directly or indirectly control. 

But also to your point, in 2003 and 2004, because the housing 

market was in a much healthier position, refinancing was availVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
17 

able, and I think billions of dollars essentially flowed to the benefit 

of households—— 

Mr. MAYER. Right. 

Senator REED. ——through refinancing without roiling the credit 

markets, et cetera. 

Our problem is given the value of homes relative to the loans 

they cannot access this refinancing market. If they could, it could 

be a powerful stimulus for recovery, literally putting billions of dollars into the households for education, health care, discretionary 

spending, et cetera. 

There is another issue that comes up perennially, and that is— 

and you looked at it closely. Is it your view that the FHFA has the 

authority to do all these things right now? 

Mr. MAYER. Yes. 

Senator REED. Thank you. 

And in fact—I will go to Dr. Goodman—one of the points in your 

testimony is that you have seen these frictions and you have recognized that large banks have been given the opportunity to extract 

monopoly profits. And one of the responsibilities of FHFA statutorily is to provide for efficient competition. So it would seem that 

not only do they have the authority if you follow Dr. Mayer’s logic, 

but they seem not to be performing one of their obligations, which 

is to provide for efficient markets; is that fair? 

Ms. GOODMAN. I think that is very fair. Rates would certainly be 

a lot lower to these refinancing borrowers if there was competition. 

Senator REED. And the other point that I would note to Dr. 

Sanders is that looking at some of the most successful private financial institutions, they seem to be doing very well, and one of the 

things is refinancing their own paper. In fact, as I talked to individual bank companies, the paper that they control, many times 

they have already gone through and written down a sizable portion, not all of it because some of it clearly cannot be sustained 

even with lower payments. 

And yet, this model seems to be one that the FHFA will not embrace with Fannie and Freddie. There is a disconnect between 

what the private bankers, the folks who are paid by their shareholders to make money, and what FHFA is telling Fannie and 

Freddie to do. 

Mr. SANDERS. Well, first of all, Senator Reed, let me comment on 

two things. 

First of all, both Laurie and I have done mortgage prepayment 

models and default models for a living, and we are—maybe Laurie 

is not, but I was always constantly surprised by what we thought 

would make as a perfectly sensible model. And it turns out the 

market tricks us. The market has a mind of its own. 

So again, when I see these forecasts of how much this will save 

taxpayers and consumers, I kind of take it with a grain of salt because, again, there are too many conflicting variables in there. And 

I do not know if that is what is motivating Mr. DeMarco from being 

resistant. 

But I think the bigger issue, Senator Reed, is that, as I said, 14 

programs plus the Administration is pushing for principal writedowns. We have all these things. It is like we have opened not war, 

18 

but we are firing everything we have got at this problem, and we 

are only looking incrementally at one bullet. 

What happens if they all hit at once and then Europe blows up 

further and rates end up dropping another 1 percent? 

Supposing we overcook it. 

I am not referring to this legislation per se because the legislation, again, I agree with many parts of it. I am just saying, can we 

get a joint assessment? That is it. And even the banks have not 

done that one. 

Senator REED. Well, I mean, you could also presume there would 

be a cataclysmic hurricane destroying thousands of homes. 

I mean, frankly, you can justify doing nothing. 

I think you have got to try it. You have got to try these things. 

And the idea that if something, the cumulative effect, was not producing results, that you could not stop doing things, what we have 

seen in my impression at least is an unwillingness to try. 

And frankly, in the crisis—and I go back to 2008—the Federal 

Reserve particularly tried several different options. Some worked. 

Some did not. But if they sat back and said, oh, jeepers creepers, 

things could be so terrible if we do this and this and this—paralysis, I think, is the worst situation at the moment. 

Mr. SANDERS. May I follow up on that? 

Senator REED. Let me get to Ms. Still. 

Ms. STILL. I was going to follow up on the comment as well. I 

think if you look at the rationale behind HARP 1, the rationale behind HARP 2, in my mind, one of the strengths of the draft bill 

is the fact that it is not a major sea change. It is not a new program. It is a very sensible next step to plug some holes, if you will, 

or create some opportunity to help just an incremental set of more 

buyers. And so, that is one of the beauties of it is it is very logical 

and incremental. 

Senator REED. My time has expired. I do not want to impose, and 

I know the Chairman will have a second round. So I think he will 

be able to make—— 

Chairman MENENDEZ. Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chair and thank you for holding this hearing. And I appreciate the series of adjustments that 

are proposed in the Menendez-Boxer legislation to try to make 

HARP 2 work better. 

I, quite frankly, was shocked by the numbers that you presented, 

that the monopoly strategy in HARP 2 results in the difference between—I think it was between $15,000 and $4,000 in refinancing. 

Did I catch those numbers correctly? 

Was that—Laurie, was that yours? 

Ms. GOODMAN. The $4,000 was more of a decade average. Even 

on non-HARPed loans, it is a little bit more profitable than that 

now, but there is a huge difference—it is at least an $8,000 difference. 

Senator MERKLEY. Yes. So here, we have homeowners who saw 

the Government respond vigorously and generously on helping 

major financial institutions, and little tweaks in the law could save 

a family $8,000. And let’s get moving. I really applaud holding this 

hearing and thank you all for your testimony. 

19 

Mr. Calhoun, I wanted to turn to a comment in your testimony 

where you support the Administration’s proposal to pay the closing 

costs of borrowers who refinance into shorter-term mortgages 

under the theory that shorter-term mortgages encourage a principal reduction through quicker amortization. Can you just expand 

on that a little bit? 

Mr. CALHOUN. Yes, specifically, two things—that there is benefit 

to investors by reduced risk in that you get people into positive equity more quickly and that that lowers, as we have heard the testimony today, significantly lowers default risk. So it is a worthwhile 

intervention there. 

And I would state quickly, more broadly, that I think it is important for us to remember the context here. We issued a report at the 

end of last year. We are less than halfway through the foreclosure 

crisis. We are not coming down to the fourth quarter or the running out of the clock. We have got more of this to chew on than 

we have had to digest so far. And so, the idea that we have been 

too aggressive at addressing this problem now 4 years into the crisis seems hard to support with the data. 

Senator MERKLEY. So, thank you. 

By basically paying the closing costs you create—you eliminate 

a hurdle to get more people into that financing stream, and by reducing the foreclosures you then have broader positive effects for 

the entire housing market, entire community. 

Mr. CALHOUN. Yes, Senator. 

Senator MERKLEY. So one of the things that I have puzzled over 

is a situation where you are thinking about whether you want to 

encourage someone to keep their payments higher but a shorter 

term so that they pay down their principal faster and get out from 

underwater faster or whether you really want to encourage them 

to keep a longer term and benefit from the lower interest rates, reducing their monthly payment and, thereby, making it less likely 

that they will financially default and less likely that they will strategically default because the comparison to rental rates is ameliorated. 

So has there been any modeling of those two different approaches 

in terms of their impact on risk of foreclosure? 

Mr. CALHOUN. Well, usually, the borrower has the option there 

of how they want to do that tradeoff and normally will not take the 

lower payments unless they can afford that. 

The risk—they sort of self-select for that. If the risk of default 

is highest because they cannot meet their monthly expenses, they 

are going to tend to take the lowest monthly payment. If, for them, 

the need is to get out of their underwater situation, they are more 

likely, I believe, the shorter term. 

Senator MERKLEY. I see your point. In this case, we are thinking 

about whether to subsidize one of those two options, and so it creates some interesting issues. 

I am going to continue with a different question because I will 

be running out of time, and that is all of our conversation here has 

been about refinancing for folks who have GSE-backed mortgages, 

so half the world out there. Folks come into my casework team, 

and they say what is possible? And we say, well, we have got to 

look and see if your mortgage is a GSE-backed mortgage or not. 

20 

And often, it is just luck of the draw whether it was purchased in 

part of that GSE pool. 

So, any insights or suggestions on how we help the other half of 

the home mortgage world that are in non-GSE loans? 

Debra, I see you are shaking your head. Do you want to jump 

in there? 

Ms. STILL. Yes. I am not sure that I have recommendations to 

offer. MBA’s position, though, would be to probably look holistically 

at GSE reform as it tried to answer that question or make recommendations. 

I think depending on how large a role you want the Federal Government in housing in the future would certainly determine whether or not some of the programs to help the private label market 

right now would need to be wrapped up in that discussion. There 

is no private label market, and so in all likelihood help for homeowners in private label mortgages would need to come from the 

Government. 

Mr. CALHOUN. And if I could note—— 

Senator MERKLEY. Yes. 

Mr. CALHOUN. ——Senator, for the record, that the Administration’s proposal is that the costs of that program be paid for by the 

banks and other financial entities that received assistance from the 

taxpayers in 2008 to keep them alive. It is not passed on to the 

general taxpaying population. 

Senator MERKLEY. Yes. 

Mr. MAYER. I would point out a couple of things. 

One of them is that there are also mortgages in the FHA and 

VA. In the FHA, there are barriers there with the FHA program, 

including insurance premiums and other things that could be improved and to further streamline within the FHA. So I think that 

is one place to help. 

The other is just recognizing how tight credit is even in the Government sector, for which, again, I can read no mandate in the law 

that suggests this. The average rejected application has been recently reported to have a 719 FICO and about an 18 percent downpayment. So if we opened up credit a little bit into the markets, 

to normal standards, the GSEs could do a fair bit in terms of helping some of these folks without subsidies or other kinds of things. 

There is a group of people who are underwater that would require additional assistance, but again, I think the GSEs’ just general view that we are going to tighten everything has really had 

a negative effect in all parts of the market. 

Senator MERKLEY. Thank you all. 

Thank you, Mr. Chairman. 

Chairman MENENDEZ. Before I call Senator Warner, I just want 

to follow up on that comment on FHA. Those would have been normal standards for underwriting at a different time, would they not? 

Mr. MAYER. Yes, they would have been. 

Chairman MENENDEZ. Senator Warner. 

Senator WARNER. I think it was a good point, Mr. Chairman. 

I also want to thank you for doing this. I have been intrigued 

with your legislation and the idea that Dr. Mayer and Mr. Hubbard 

have had floated for some time out there. 

21 

A couple of general comments, then I am going to try for a question. 

I tend to agree with Mr. Calhoun that we are not through this 

crisis yet although I do think—thinking back to when we first kind 

of jumped in—for whatever reason it seemed, Mr. Chairman, that 

we kind of punted on the housing piece. We dealt with the financial 

institutions, we punted, and we kind of went into a period of at 

least do no harm. 

And we ended up, as I think Mr. Sanders pointed out, creating 

a lot of efforts, most of them that missed the mark. 

I do wonder whether, Mr. Sanders, you would be more inclined 

to be supportive of what the Chair has put forward if perhaps we 

limited those 14 programs and got rid of the ones which just are 

not working, which are most of them, and got that down to a more 

manageable series of options so there would be more clarity to the 

market, more clarity to the regulators and to investors. Would that 

make some sense? 

Mr. SANDERS. Well, thank you, Senator Warner, for making my 

case for me. I agree with you 100 percent. That is, in fact, what 

I was saying. 

In fact, again, I have no problems with the proposal that Senator 

Menendez has at all, and I agree that unification of the pricing and 

some of the other components is exactly right. 

My issue, one more time, is that we have so many programs. And 

I agree if we could sit here today and say we are going to exclude 

10 of these and we are going to prohibit principal write-downs, so 

we would make it more predictable and very clear, I would back 

the Menendez proposal sitting right here. I would raise my hand. 

But again, it is just too many moving parts. That is my only concern. 

Senator WARNER. I guess I might take one exception with that. 

Since we do see our non-GSE institutions using principal writedown as one of their tools, I am not sure I would—I share, along 

with the Chair, the notion that we at least ought to have Mr. 

DeMarco and FHFA look at that and do a more thorough analysis 

so we can make a policy evaluation. I tend to think there may be 

some bucket around principal write-down. 

I still have been hearing for a year-plus lots of conversations 

about rental programs, rent-to-own, other variations, lots of capital 

sitting on the sidelines. That does not seem to ever kind of get off 

the sidelines into other than incremental, small experiments in 

that way. 

And then, I would take this third bucket—I want to give you another bite, but I want to come to Dr. Mayer first—which is this 

kind of more massive general refi. 

It seems like those are the three major buckets. 

And this would build upon—your proposal, I believe, would build 

upon the perhaps less than successful HARP variations, but at 

least we have got a couple years of investment in starting those. 

Maybe we could wind down a couple of those and do this more of 

a major refi approach. 

I guess what I would ask Dr. Mayer is that at what point, understanding, as Mr. Calhoun has said, that we are not through this. 

22 

But at some point along the way I think we had the sense of, at 

least at first, this notion of do no harm. 

We got a lot of indirect counsel: This will pass. This will pass 

through the snake. Just do not screw it up anymore, politicians. 

It has not passed through, but at some point this will move along 

far enough that perhaps further intervention will do harm. 

Do you have any kind of sense on that, Dr. Mayer? How much 

more of a window do we have? 

And our concern, which is it sure would make a lot more sense 

if we could do this administratively rather than working through 

the cumbersome legislative process, but what are our time lines? 

Mr. MAYER. I mean, I think the first thing is as you pointed out; 

we have been advocating for this program since 2008, and I think 

we have lost a lot of ground for not doing it. 

My sort of sense is that the role of Government in a crisis, first 

and foremost, is supposed to try and restore normal operating market conditions, particularly during a financial crisis. And I think 

that has been a place where we could have done a lot more than 

we have done, and we are still not doing it. 

So my comments earlier about restoring normal credit standards 

to the markets, I think the first step is to try and bring back the 

credit side, and that is why financial crises tend to be so painful 

relative to a normal recession—because people cannot borrow. 

Senator WARNER. I have got 12 seconds, and I want to make sure 

everybody gets a quick bite. Will you just give me—you know, do 

we have—perhaps because, as Mr. Calhoun said, we still are only 

halfway through. 

Mr. MAYER. Right. 

Senator WARNER. But if we do not take, whether administratively or legislatively, some either consolidation or some action, 

what is our window because I do not think we can get to GSE reform in a major way—— 

Mr. MAYER. Right. 

Senator WARNER. ——until at least we kind of—as long as we 

have got this overhang. 

Mr. MAYER. Our window is when rates go up. And we do not 

know when that is going to happen, but the window for this refinancing is when rates start rising. 

Senator WARNER. Can I hear from everybody? 

Again, I do not want—my time is expired, but if everybody could 

at least give their two cents. 

Mr. MAYER. Sorry. 

Senator WARNER. Should we be concerned about at some point, 

whatever well intentioned proposal, we may have missed the window? 

Ms. STILL. Yes, I certainly agree that the window is between now 

and when rates would preclude any value to the consumer. 

My comment, though, is the notion that all of this takes time and 

we do have programs in place. HARP 2 would be a good example. 

We are just now getting statistics to show that the HARP 2 program is getting some traction. It takes time for lenders to build 

their infrastructure. It takes time for them to train their employees. It takes time for them to solicit their customers. 

23 

And so, I would be very hesitant. It is one of the reasons why 

we believe that small, incremental improvements are better than 

a major change that could cause more unintended consequences, 

particularly since we are seeing some encouraging signs of stabilization. 

Wiping out existing programs or consolidating? I think the answer would be to more simplify, standardize and make sure that 

both lenders and consumers understand how to help the housing 

environment. 

Senator WARNER. Not had a great track record on that so far. 

Ms. GOODMAN. Let me just make a couple quick comments. 

First, one reason we have a lot of programs is that there is absolutely no silver bullet to help the housing market. It takes a little 

bit of this and a little bit of that. And I think there has to be a 

realization of that. 

Second, I agree with Chris’s comment that in trying to sort of 

combat some of the loose credit standards that created the last crisis we are sowing the seeds of another crisis by so limiting credit 

availability at this juncture. And QM and QRM, once they are 

eventually realized, will probably aggravate the problem, not help 

solve it. 

Mr. SANDERS. And, Senator Warner—— 

Senator WARNER. My time is expired, so if you can—— 

Mr. SANDERS. I am not against principal reductions per se. What 

I am just saying is it is sort of the menu at a Chinese restaurant. 

We have to calculate the cost of each one and sum them up. That 

might be what is driving Mr. DeMarco’s fears. 

But again—and I do not even disagree with Laurie—I think all 

these programs have a place. But we need to have, again, simplification, which I think, by the way, Senator Menendez’s bill does. 

It standardizes things across servicers and across the banks. So I 

think that is a great idea. 

But again, can we get a bigger picture of whether—because we 

do not know the Attorney General’s settlement costs yet. We do not 

know about whether they will actually do—go to Reuters. They 

have a mortgage write-down calculator on there. 

Take a look at that. It shows you the variation of what this could 

be. It could be 2.8 billion, which I think Mr. DeMarco quoted, but 

it can go as high as about 333 billion, depending on how much they 

open the door. 

That is all I am saying. 

Mr. CALHOUN. Just very quickly, the housing market needed to 

correct. It was overpriced. But now what we see is the flood of foreclosures is causing overcorrection and tremendous uncertainty. 

As I indicated, CRL is an affiliated lender. That is what 90 percent of our folks do. It is just lending. It is very hard to lend when 

the housing market is this uncertain, and it will remain that way 

with this flood of foreclosures. 

So there is going to be a bunch of them that nothing can be done 

about, but it makes it essential to prevent the preventable ones 

and to process through the other ones so that we get to that resolution because the uncertainty kills markets more than almost anything else. 

Senator WARNER. Thank you, Mr. Chairman. 

24 

Chairman MENENDEZ. Let me go through—since I observed the 

5-minute time limit on myself and have been liberal with everybody else, let me go through one last round of questions. 

Senator WARNER. That is why he is such a great Chairman. 

Chairman MENENDEZ. You are such a charmer. 

Anyhow, I just want to go. Since this is going to be a very important foundation for how we move forward here, I want to get some 

key questions that I would like to see you answer for the record. 

Given that taxpayers own the risk as it is right now—if we do 

nothing, taxpayers own the risk on these loans—do you think documentation of employment, credit checks, tax returns and other underwriting requirements that are typically required on new loans 

are needed in the refi context, particularly when what we are looking at is individuals who are timely and performing? 

I need verbal responses. 

Mr. MAYER. No, we do not need to verify any of that information. 

Chairman MENENDEZ. Anyone? 

Ms. STILL. No, we do not. The GSEs already own the risk. 

Ms. GOODMAN. I agree. 

Mr. SANDERS. I completely disagree with the whole tenet of the 

GSEs own the risk, but again, I do not see any real problem with 

it. 

Mr. CALHOUN. I agree. It is a particular friction when people 

have nontraditional income. It is not as much a burden when you 

just have to call the employer, but when someone, for example, is 

a business owner or something like that, it is a significant hurdle 

and obstacle to the refinancings. And so, yes, we should eliminate 

that requirement. 

Chairman MENENDEZ. Ms. Still, lenders cite representation and 

warranty liability as obstacles to encouraging them to extend refinanced loans. FHFA scaled back the liability for same-servicer refinancing in HARP 2 but not for cases where a different servicer was 

refinancing the loan. To me, that is somewhat of a strange policy 

that has led to a lack of competition among lenders that may result 

in higher interest rates for borrowers by treating these two types 

of lenders differently. 

Do you agree that that should be fixed? 

Ms. STILL. MBA would agree that all lenders should have the 

same level playing field and the same servicer-to-servicer treatment. 

And we talked about competition, which is very valid. I would 

also add it may be a capacity issue as well. I think you have many 

lenders in the industry that would like to help borrowers refinance, 

and we can get to our borrowers sooner if more players can help. 

So it also solves capacity and time. 

Mr. MAYER. I agree with the proposition. 

I would also say that increasing every time you verify anything 

and every time you require any more paperwork you slow the capacity problem. So it is not that we cannot do employers and everything else. Not only is it unnecessary, it actually harms the process 

and slows it down appreciably. 

Ms. STILL. And the same would apply for borrowers at 80 percent 

loan-to-value or less. 

25 

Chairman MENENDEZ. I have a real concern. Years ago, in this 

Committee, before we had the housing foreclosure crisis, we had 

members of the previous Administration, and I said, we are on the 

verge of a tsunami of foreclosures. And I was told by the witness 

at the time for the Administration that with all due respect Senator, that is an exaggeration. 

I wish they had been right and I had been wrong. 

The problem is I still do not think we have seen the full crest 

of that tsunami. And there is an opportunity to stem some of, not 

all of it, but a lot of it, and to do it in a way that not only helps 

individuals and American families be responsible borrowers but, at 

the same time, deal with a major challenge to our economy. 

We have never had an economic recovery in which housing was 

not a driver of that recovery. And this is the one part; while we 

have focused on the financial institutions, we have really not succeeded at finding the right set of circumstances for that housing 

market. 

So that is why I am concerned. And I do think that in some respects in this regard, as it relates to refinancing, time is of the essence at the end of the day. 

I want to ask two last questions, and then we will wrap up. 

Ms. Still, your testimony brings up the good point that borrower 

eligibility may be further broadened by allowing borrowers whose 

mortgages are greater than the conforming loan limits to refinance 

if their loans are already owned by the GSEs. Do you have any 

sense of how many additional borrowers would be captured by 

that? 

Ms. STILL. Yes, we do. If we allowed the GSE jumbo loans to be 

included, we would add about $70 billion worth of loans to the opportunity. If you also included Alt-A loans that the GSEs already 

own, it would be another $276 billion worth of loans. And so, you 

have got about $350 billion worth of loans that would be incrementally included if you lifted the restrictions on products and loan-tovalue, or loan amount. 

Chairman MENENDEZ. Finally, Senator Reed offered me a question that he would like to have asked had he been able to stay, and 

it is to you, Dr. Mayer. If FHFA makes no further changes and 

does not act on your refinancing recommendations, who are the 

real winners, who are the real losers? 

Mr. MAYER. It is very clear that the existing system benefits the 

largest servicers, it benefits investors, and it harms homeowners 

and taxpayers if we were to leave the existing structure of HARP 

2 in place. 

Chairman MENENDEZ. Well, I want to thank all of you for laying 

some very good foundation of testimony and thoughts as we move 

forward and for sharing your experience. I think that the testimony 

here has been very helpful in exploring the problems that we have 

and homeowners face in refinancing their loans and then ways that 

would save them money, reduce foreclosures, increase job growth, 

as well as I believe end furtherance of responsibility to the taxpayers who are ultimately on the hook here. 

I believe that we can come together to solve some of these different issues, and I look forward to working with everyone inVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
26 

tended to solve these important problems and help homeowners, 

the housing market and our economy. 

I would like to submit for the record a statement from the National Association of Realtors and a statement from the National 

Association of Home Builders that has endorsed the draft, and 

without objection, it shall be so included. 

I will also be submitting other statements in the record for the 

coming week. 

The record will remain open until 1 week from today if any Senators wish to submit questions for the record. 

And with the thanks of the Subcommittee to all of you, this hearing is adjourned. 

[Whereupon, at 11:24 a.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow:] 

27 

1 Numerous other analysts, investors, or policy makers have called for a widespread refinancing program including, for example, Alan Boyce, David Greenlaw, Bill Gross, Glenn Hubbard, and Mark Zandi. The recent Federal Reserve White Paper pointed out the merits of widespread refinancing, as have Federal Reserve officials and columnists Ezra Klein, David Wessel, 

and Allan Sloan, and the New York Times editorial page. 2See, http://www4.gsb.columbia.edu/realestate/research/housingcrisis/. One small difference between the draft legislation and our policy simulations is that we do not exempt any 

mortgages from a widespread refinancing program, while the draft legislation limits the program to mortgages originated prior to June, 2010. This might result in a reduction of as many 

as 1–2 million mortgages from our policy estimates, but the overall conclusion remains unchanged. 

PREPARED STATEMENT OF CHRISTOPHER J. MAYER 

PROFESSOR OF REAL ESTATE, FINANCE AND ECONOMICS, COLUMBIA BUSINESS

SCHOOL

APRIL 25, 2012 

Good afternoon Chairman Menendez, Ranking Member DeMint, and Members of 

the Subcommittee. Thank you for inviting me to speak today. It is my honor to be 

here. My name is Christopher J. Mayer. I am the Paul Milstein Professor of Real 

Estate at Columbia Business School. I have spent the last 19 years studying housing markets and credit while working at the Federal Reserve Bank of Boston and 

serving on the faculties of Columbia Business School, the University of Michigan 

Business School, and the Wharton School of the University of Pennsylvania. I also 

serve as Visiting Scholar at the Federal Reserve Bank of New York. 

This is the sixth time I have been called to testify at a Congressional Committee 

or Subcommittee hearing, dating back to November 2008, with three of those at the 

request of Republicans and three from Democratic requests. At all six of those hearings I have advocated for what is a seemingly straightforward and simple policy; 

allow millions of Americans who are trapped in high interest rate mortgages to refinance their mortgages at low current rates. Tens of millions of American homeowners with mortgages guaranteed by Fannie Mae or Freddie Mac would have been 

eligible for such a program. 1 Had the Federal Housing Finance Agency (the GSE’s 

regulator) adopted such a policy at that time, conservative estimates suggest that 

it likely would have prevented over 300,000 defaults, saved taxpayers and GSEs $10 

billion in insurance costs from excess foreclosures, helped stabilize the housing market, and saved homeowners about $20 billion annually in mortgage payments. (See, 

Appendix 1 for supporting calculations.) 

Today the housing market is being hobbled by excessively tight credit, continuing 

foreclosures, and lack of consumer confidence, as described by the recent Federal 

Reserve White Paper. This is not only result of the economic downturn; housing is 

in much worse shape than the rest of the economy. Auto lending has grown for each 

of the last 2 years, while new bank card credit is up 30 percent from its trough. 

With credit available at more favorable terms than 2 years ago, consumer spending 

and auto sales have grown. By comparison, the National Association of Realtors reports that about 30 percent of existing homebuyers do not obtain a mortgage. The 

Mortgage Bankers Association Index of Applications for Home Purchase is at its 

1996 levels. Consumers are forced to pay almost 0.75 percent more in higher 

spreads on mortgages relative to before the GSEs were taken over by the FHFA. 

In other words, many existing borrowers and potential homebuyers have been 

locked out from the benefits of low interest rates. Excessively tight credit is not just 

a market outcome; it is a result of policy choices made by Government regulators 

at the FHFA. Without Congressional action, such conditions are likely to continue. 

As noted below, tight mortgage credit is hampering the recovery and costing taxpayers billions of dollars. 

It Is Not Too Late To Act! 

Policy makers can still take important steps to help struggling homeowners, while 

benefiting taxpayers and helping the housing market. I have been asked to assess 

the ‘‘Menendez-Boxer Discussion Draft’’, which summarizes legislation that would 

remove key barriers to refinancing that continue to exist due to policies perpetuated 

by the Government Sponsored Entities (GSEs—Fannie Mae and Freddie Mac) and 

their regulator, the Federal Housing Finance Agency (FHFA). This draft legislation 

sets conditions similar to those proposed by Boyce, Hubbard, Mayer, and Witkin. 2

Under such a program, we estimate that as many as 11.6 million new refinancings 

would take place. The GSEs would earn additional profits of as much as $23.7 bilVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00031 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
28 

3For comparison, the GSEs currently have about 1.1 million mortgages that are 90 days or 

more delinquent. We estimate that about 1.2 million borrowers with a GSEs mortgage have lost 

their home due to a foreclosure, a short sale, or giving a deed-in-lieu of foreclosure after 2008. 

Preventing 400,000 defaults would represent almost 20 percent of all current defaults or homes 

lost in the crisis with a GSE mortgage. 4See, D. Lucas, D. Moore, and M. Remy, 2011, ‘‘An Evaluation of Large-Scale Mortgage Refinancing Programs’’, CBO Working Paper 2011-4, Washington, DC. See also our response: 

http://www4.gsb.columbia.edu/null/download?&exclusive=filemgr.download&filelid=7219077. 5Laurie Goodman, ‘‘Amherst Mortgage Insight: HARP 2.0—And The Winner Is . . . The 

Largest Banks’’, Amherst Securities Group LP. 21 March 2012. 6Paul Muolo, ‘‘Wells Caps HARP LTVs From Third-Party Lenders’’, Origination News. 16 

April 2012. http://www.originationnews.com/nmnlfeatures/wells-caps-harp-ltvs-1029946- 

1.html 

lion, predominantly through preventing 400,000 defaults. 3 The GSEs can charge a 

higher guarantee fee to pay for any losses to their portfolio. Even considering portfolio losses to the Federal Reserve, we estimate the program is profitable for taxpayers. Our conclusion that widespread refinancing earns profits for the GSEs is 

quite similar to those in the CBO working paper, although we believe that there 

will be a much higher take-up rate than that used in the CBO paper. 4

Of course, there are some tradeoffs. The gains in this proposal come at the partial 

expense of bondholders, who lose higher interest payments they would otherwise receive if homeowners remain locked in to mortgages at above market rates. Of 

course, the owners of these bonds knew that mortgage bonds could be prepaid at 

any time and earned a healthy financial premium over other Government guaranteed bonds to accept this prepayment risk. In a normally functioning mortgage market, most homeowners would have refinanced a long time ago, and bondholders 

would not have received an additional financial windfall over the last several years. 

Our policy proposal, cited above, discusses the winners and losers of a widespread 

refinancing program in much more detail, with financial estimates of the gains and 

losses to all major stakeholders. 

HARP 2.0: Some Positives, But Many More Problems 

In late October 2011, the FHFA announced changes to the HARP program with 

the stated goal of increasing eligibility to allow more borrowers to benefit from 

record low mortgage rates. These adjustments were supposed to be focused on aiding underwater borrowers and increasing competition between servicers, but the results so far have failed to live up to this promise. Although the GSEs already own 

the default risk on existing mortgages, they continue to put in place hurdles that 

limit access to refinancing. Thus only a relatively small group of borrowers—estimates range between 2–3 million—will be able to refinance under HARP 2 and even 

these borrowers are likely to pay rates well above what a new borrower would pay. 

The most serious problem is that existing rules continue to reduce competition, 

resulting in higher profit margins for large banks and scarce options for struggling 

borrowers. Representations and warranties risk, the legal obligation for originators 

to repurchase certain mortgages that become delinquent, remains a huge constraint. 

For same-servicer refinancings, the lender must only verify that the loan will benefit 

the borrower, that the borrower has a source of income, and that there have been 

no late payments in the past 6 months and no more than one in the past year. Conversely, cross-servicer refinancings with either GSE require no payments more than 

60 days late in the past year, as well as more detailed employment and income 

verification (Fannie Mae imposes a maximum DTI ratio and Freddie Mac requires 

a full underwrite). 5 The new servicer will then be responsible for the borrower representation and warranties risk on the mortgage. This increases the lender’s legal 

risk, discourages competition, and results in refinancings for only the safest borrowers, yet this does nothing to help the position of the GSEs, who already guarantee the original mortgage. 

The risk on the property value is waived only if Fannie Mae or Freddie Mac 

grants an appraisal waiver on the property. In the presence of either borrower or 

property value representations and warranties risk, up front profits come with uncertain and potentially large future liabilities. As such, large servicers like Wells 

Fargo, Citi, and Chase have implemented much stricter underwriting guidelines for 

mortgages they do not already service, capping LTVs at 105 percent (in certain 

cases, the maximum LTV is as low as 80 percent). 6 In other words, the high LTV 

borrowers that are supposedly the target of HARP 2 are often locked out from refinancing from all but their existing servicer. Other non-LTV restrictions also remain, 

such as Chase’s ‘‘more stringent FICO, LTV, documentation, debt-to-income (DTI), 

29 

7Wei-Ang Lee and Nicholas Strand, ‘‘Prepayment Commentary: Speeds Underwhelm’’, 

Barclays. 13 April 2012. 8See, Goodman, above. 9 Rob Chrisman, ‘‘GMAC ‘Significantly Scales Back’; Citi’s HARP 2.0; Lots of Investor, Agency, 

MI, and Conference Updates’’, Mortgage News Daily. 14 April 2012. http:// 

www.mortgagenewsdaily.com/channels/pipelinepress/04142012-citimortgage-harp-2-0.aspx 10See, Lee and Strand, above. 11Mary Ellen Podmolik, ‘‘Freddie Mac To Ease Refinancing Program’s Guidelines for Borrowers’’, Chicago Tribune. 15 April 2012. http://articles.chicagotribune.com/2012-04-15/business/ct-biz-0416-freddie-harp-20120414l1lfreddie-mac-refinancing-program-largest-servicers 12See, Podmolik, above. 

and payment history requirements.’’ 7 Effectively, borrowers run into obstacles and 

greater costs in obtaining a mortgage from any lender besides their current servicer. 

It is also difficult for other servicers to identify and solicit eligible borrowers without knowing who has a GSE loan or the loan’s payment history. The GSEs could 

address this problem by providing a list of all borrowers who are eligible for HARP 

to approved servicers or notifying borrowers that they are eligible, but have chosen 

not to. 

Of course, existing servicers are taking full advantage of limited competition. 

Same-servicer refinancings have been enormously profitable, with a recent Amherst 

Securities report finding profit margins on these refinancings of 3.5 to 6.6 percent, 

an unheard of profit margin in this business. 8 Without competition, borrowers cannot choose a new servicer if they do not like the quality of service or the loan offer 

their existing servicer presents. 

Some high LTV borrowers cannot access same-servicer originations at any price. 

Citi has a maximum LTV/CLTV/HCLTV of 125 percent for FRMs and 105 percent 

for ARMs. 9 Given the cross-servicer restrictions mentioned above, a high LTV borrower serviced by Citi is effectively unable to refinance to take advantage of today’s 

low rates. Even worse, some large servicers such as MetLife no longer originate new 

mortgages, so existing MetLife borrowers have nowhere to go for a same-servicer refinancing. 

Some Evidence That Freddie Mac Tightens Credit More Than Fannie Mae 

Freddie Mac appears to impose greater restrictions on HARP 2 refinancings than 

Fannie Mae. National Public Radio and ProPublica reported that Freddie Mac created risky securities called Inverse IO Floaters that had the appearance of betting 

against household refinancing. These securities involve creating a concentrated risk 

position that pays off only as long as the underlying mortgages continue making 

payments. Freddie Mac has limited HARP 2 refinancings to borrowers with an LTV 

above 80 percent and locked out borrowers with a CLTV over 105 percent, rules not 

imposed by Fannie Mae. 

Even if a borrower appears to meet the rules for a HARP 2 refinancing, the loan 

approval process may be derailed by additional underwriting restrictions that are 

not disclosed. According to reports from loan officers, ‘‘ . . . aside from the current 

mortgage not having any late [payment]s within the last 6 months and only one 30 

day late within the last 12 months, according to Freddie Mac any revolving or installment late within the last 12 months could kill the deal. Lastly, it is rumored 

that revolving debt that is over 50 percent of the credit limit, in spite of good credit 

scores, will cause Freddie Mac to deny/decline the application. And considering most 

equity lines are coded as revolving accounts and are typically over 50 percent of 

their credit limit, most Freddie Mac loans will not be refinanced.’’ 10 HARP’s unclear 

guidelines and implementations inevitably lead to additional costs for borrowers: 

Bridgeview Bank Mortgage Co. reports that just 1 of about 100 borrowers applying 

for a HARP refinancing have been approved; elsewhere a borrower was rejected because he had originally begun applying for a refinancing at a different bank. 11

Freddie Mac has announced that it would be ‘‘fine-tuning’’ its standards. However, 

‘‘specifics of how the automated underwriting models will be altered aren’t being disclosed, even to lenders, but some homeowners who have been turned down for the 

program may now qualify.’’ 12 For a refinancing program to have success, the rules 

and eligibility requirements should be fully disclosed to both lenders and borrowers. 

This opaqueness serves no clear purpose other than to give the appearance that 

Freddie Mac is a reluctant participant in HARP 2 refinancings. 

Finally it is unclear why any existing loans should be ineligible for HARP 2, 

which locks out mortgages originated after May of 2009. Over $880 billion of outstanding GSE MBS has been issued in 2009 or later with a coupon of 4.5 percent 

30 

13Data courtesy of Knowledge Decision Services LLC. Based on pool-level data on Fannie Mae 

and Freddie Mac MBS. Current as of March 2012. 14See, H.R. 3221-11. I have abbreviated the rules to focus on the relevant parts of the legislation for this testimony. This is not a complete list of all legislative requirements. 15See, FHFA letter to Congressman Cummings: http://www.fhfa.gov/webfiles/23056/ 

PrincipalForgivenessltr12312.pdf. 16Federal Housing Finance Agency, ‘‘FHFA Statement on Freddie Mac Refinance Story’’, 30 

January 2012. www.fhfa.gov/webfiles/23178/ProPublicaNPRFHFAStmt13012.pdf 

or higher (mortgage rates are typically roughly 50 basis points above the coupon). 13

A borrower receiving a 5.25 percent mortgage in 2010 due to the tightening of credit 

and lack of competition in the mortgage market is no better off than a borrower who 

obtained an identical loan in 2007. 

HARP 2 Restrictions Appear To Violate FHFA’s Mandate 

As I noted in my testimony before the full Committee on February 9, 2012, the 

FHFA appears to be in violation of its Congressional mandates. In 2008, Congress 

passed the Housing and Economic Recovery Act (HERA). Under HERA, the Director 

of the FHFA must ensure that the GSEs meet a number of conditions, including: 14

‘‘each regulated entity operates in a safe and sound manner . . . ’’; ‘‘the operations 

and activities of each regulated entity foster liquid, efficient, competitive, and resilient national housing finance markets . . . ’’; ‘‘the activities of each regulated entity 

and the manner in which such regulated entity is operated are consistent with the 

public interest.’’ As well, under conservatorship, the FHFA must ‘‘preserve and conserve the assets and property of the regulated entities . . . ’’ Finally, the Emergency 

Economic Stabilization Act of 2008 (EESA) specifies that the FHFA ‘‘ . . . has a 

statutory responsibility to maximize assistance for homeowners to minimize foreclosures.’’ 15

Many commentators focus on the requirement to preserve and conserve assets in 

explaining the GSE’s behavior towards refinancing. According to this line of reasoning, the fact that the FHFA and the GSEs have taken active steps to restrict 

refinancing might be justified in order to protect the value of its retained portfolio 

of mortgage-backed securities. Many of these mortgage-backed securities were acquired at a time when mortgage rates were much higher than today and thus prepayments due to refinancing could cause appreciable portfolio losses. 

These policies under HARP 2 described above may at first pass seem consistent 

with the strategic goal of preserving and conserving assets, even if the policies violate the mandate to ‘‘foster liquid, efficient, competitive, and resilient national housing finance markets’’ and to operate in a manner ‘‘consistent with the public interest.’’ As noted above, policies that restrict refinancing include limiting competition 

by giving existing servicers preferential legal treatment for ‘‘Reps and Warranties’’ 

relative to new servicers, imposing opaque credit restrictions that make the market 

less transparent (and thus less efficient), and limiting access to a program that lowers borrowing costs and reduces foreclosures (seemingly against the public interest). 

Each of these restrictions under HARP 2 violates a specific provision of HERA and/ 

or EESA. Nonetheless, following this line of reasoning, and in the face of conflicting 

mandates, the FHFA must choose one mandate over another. 

Of course, Acting Director DeMarco has said that there is no conflict because the 

GSEs were not supposed to consider their portfolio in implementing HARP 2. When 

responding the NPR/ProPublica report listed above, the FHFA stated, ‘‘In evaluating 

changes to HARP, FHFA specifically directed both Enterprises not to consider 

changes in their own investment income as part of the HARP evaluation process.’’ 16

Absent such conflicts, independent analysis by the Congressional Budget Office 

undermines the argument that refinancing restrictions serve even the single goal of 

conserving assets. According to the CBO Working Paper, cited above, a widespread 

refinancing program would result in higher profits for the GSEs, even taking into 

account portfolio losses, because more refinancings lead to fewer defaults and lower 

insurance costs. The CBO estimates a $2.5 billion ‘‘reduction in subsidy cost on GSE 

guarantees’’ and $1.8 billion ‘‘lost portfolio value to GSEs’’ for a net impact of $0.7 

billion in profit for the GSEs. 

My own analysis with co-authors, also cited above, takes the CBO case one step 

further. Suppose that refinancing did impose net portfolio costs, or suppose that the 

GSEs must give up valuable legal rights to sue for reps and warranties violations 

(a case that most independent analysts doubt); in either circumstance, the GSEs 

could just charge a slightly higher annual fee to pay for any incremental costs. Our 

analysis suggests that a streamlined proposal could achieve healthy profitability for 

the GSEs simply by increasing the annual guarantee fee by 15 basis points and adding a 7 basis point annual fee to cover losses from waived representations and warranty liabilities. In their analysis, the CBO found that ‘‘potential recoveries from 

31 

17 Bill Berliner, ‘‘Trading in MBS Pools Backed by HARP Loans’’, Mortgage News Daily. 18 

April 2012. http://www.mortgagenewsdaily.com/channels/secondarylmarkets/04182012-trading-pools-harp-loans.aspx 

put-backs on mortgages refinanced under the program that would not have been refinanced without the program appear to be relatively small,’’ suggesting that our 7 

basis point annuity will be more than sufficient to compensate the GSEs for relieving lenders of this risk. In net, we find that our proposed program would lead to 

a profit for the GSEs of more than $23.6 billion. Thus there really is no trade-off 

between conserving assets and supporting a competitive and efficient mortgage market. 

Finally, it is possible that a widespread refinancing program might lower the 

price of mortgage bonds in the future because investors would require a large premium to cover refinancing risk. The fact that managers at Pimco, Morgan Stanley, 

and Moody’s Analytics have argued in favor of widespread refinancing makes it less 

likely that a revolt by bond buyers is a serious concern. Counter to such a suggestion, securities backed by these refinancings have turned out to be quite appealing 

to investors given their low prepayment risk. An article examining MBS backed by 

HARP 2.0 refinancings found that ‘‘recent trades show that demand for the >125 

percent LTV pools is strong . . . Investors are apparently willing to accept the reduced liquidity of the securities and still pay through the TBA market for glacial 

prepayment speeds and the resulting boost in carry.’’ 17 As well, about 25 million 

borrowers refinanced their mortgages in 2002 and 2003, much larger than is envisioned by even the most optimistic projections. So a high rate of refinancing is far 

from unprecedented. 

Conclusion 

It is not too late to achieve a win–win scenario. The FHFA has the authority to 

pursue a widespread refinancing plan, and such a program seems to be called for 

by existing mandates. However, the FHFA has chosen not to do so and appears unlikely to change course without outside intervention. As a result, Congress should 

act to reinforce the mandate of conservatorship with regard to refinancing and credit availability. The ‘‘Menendez-Boxer Discussion Draft’’ addresses the key problems 

listed above. 

Nonetheless, I have two additional suggestions. First, all mortgages originated 

prior to the date of passage should be eligible for the refinancing program as long 

as they are current at the time of application. Existing FHFA rules have limited 

competition, so most borrowers are paying higher mortgage rates than would prevail 

in a more competitive mortgage market as envisioned under this draft legislation. 

All of these borrowers deserve relief. Second, I believe that legislation should mandate that an independent trustee be appointed to wind down the GSE’s retained 

portfolio of MBS. The GSEs could continue to retain nonperforming loans that they 

have bought back from securitizations as is necessary to perform their mortgage 

guarantee business. Independent management of the retained portfolio will make 

the eventual privatization or replacement of the GSEs considerably easier. 

Finally, I would make one other argument in favor of a legislative solution. The 

Federal Reserve has often pointed to the housing market as a key justification for 

its controversial policy of quantitative easing. Yet low interest rates benefit relatively few borrowers under existing FHFA policies. Repairing large flaws in the 

mortgage market will help ease pressure on the housing market. Under these circumstances, the Federal Reserve may feel comfortable reducing the amount of quantitative easing, leaving it room to exit more quickly from existing bond holdings. 

Until we fix the housing market, it will be hard for the economy to fully recover. 

I believe that immediate action is necessary to address fundamental flaws in the 

structure of the GSEs. Conservatorship as it now stands is laden with conflicts of 

interest between lending and portfolio management and holds back the reintroduction of private capital. These steps can occur now, even without a consensus on 

what the future of the U.S. housing finance system will look like. 

I appreciate the opportunity to address you today and look forward to answering 

any questions that you might have. 

Appendix 1: Estimating Losses From Failing To Adopt a Widespread Refinancing Plan 

Below I present simple calculations to get an order of magnitude of losses from 

the failure to adopt a widespread refinancing program. These estimates are intended to be a conservative, but reflect rough calculations and not a detailed study. 

32 

18http://www4.gsb.columbia.edu/null/ 

download?&exclusive=filemgr.download&filelid=7219077 19D. Lucas, D. Moore, and M. Remy, 2011, ‘‘An Evaluation of Large-Scale Mortgage Refinancing Programs’’, CBO Working Paper 2011-4, Washington, DC. 20See, http://www4.gsb.columbia.edu/realestate/research/housingcrisis/. 1The Mortgage Bankers Association (MBA) is the national association representing the real 

estate finance industry, an industry that employs more than 280,000 people in virtually every 

community in the country. Headquartered in Washington, DC, the association works to ensure 

the continued strength of the Nation’s residential and commercial real estate markets; to expand 

home ownership and extend access to affordable housing to all Americans. MBA promotes fair 

and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 2,200 companies includes all elements of real estate finance: mortgage companies, 

mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and 

others in the mortgage lending field. For additional information, visit MBA’s Web site: 

www.mortgagebankers.org. 

In an earlier analysis, Boyce, Hubbard, and Mayer summarize various studies of 

the take-up of an appropriately structured widespread refinancing program. 18

Moody’s Analytics and Morgan Stanley estimates from 2010 suggest that such a program would have resulted in about 18 million mortgages that would be refinanced, 

saving homeowners $46–56 billion annually in lower mortgage payments. These estimates include FHA and VA loans, which at the time represented a distinct minority of all outstanding mortgages. For these calculations, I assume that about 14 million of the 18 million refinancings would be for GSE mortgages. 

Instead, the GSEs accomplished about 10 million refinancings, of which a significant share are either multiple refinancings for the same borrowers or refinancings 

of mortgages originated after April 1, 2009. Assuming about 40 percent of the 

refinancings are for mortgages that were originated after 4/1/2009 or to borrowers 

that refinanced more than once, this suggests that about 6 million legacy mortgages 

were refinanced instead of 14 million as might have happened with a widespread 

refinancing program. So, policy resulted in about 8 million ‘‘lost’’ refinancings. 

Next, I compute the economic outcomes associated with the lack of appropriate 

refinancing activity. According to a Congressional Budget Office study, 19 every 

1,000 refinancings result in 38 fewer defaults (3.8 percent). So 8 million ‘‘lost’’ 

refinancings resulted in about 304,000 unnecessary defaults. Using CBO estimates 

of the cost per default, these additional defaults have cost taxpayers about $10.75 

billion in higher insurance costs for the GSEs. As well, Moody’s Analytics, Morgan 

Stanley, and the CBO estimate that each refinancing saves homeowners between 

$2,500 and $3,000 per year. Using $2,600 from the CBO, these lost refinancings 

‘‘cost’’ homeowners an additional $20.8 billion annually in higher mortgage costs. 

I believe these estimates are quite conservative. By comparison, Boyce, Hubbard, 

Mayer, and Witkin currently believe that about 11.6 million new borrowers would 

take-up an appropriately structured refinancing program today. 20 Assuming the 

GSEs charge a higher annual guarantee fee, they can earn a profit for taxpayers 

of about $23 billion, taking into account an estimate of losses to their portfolio of 

mortgage-backed securities as well as savings from fewer defaults. These 

refinancings would save homeowners about $123 billion over 10 years and prevent 

about 440,800 defaults. 

PREPARED STATEMENT OF DEBRA STILL 

CHAIRMAN-ELECT, MORTGAGE BANKERS ASSOCIATION

APRIL 25, 2012 

Introduction 

Chairman Menendez, Ranking Member DeMint and Members of the Senate Subcommittee on Housing, Transportation and Community Development, I appreciate 

the opportunity to offer remarks on behalf of the Mortgage Bankers Association 1

(MBA) at this hearing on ‘‘Helping Homeowners Save Money Through Refinancing.’’ 

My name is Debra Still and I am Chair-Elect of MBA. My remarks will focus on 

the ‘‘Responsible Homeowner Refinancing Act of 2012’’ currently being drafted by 

Chairman Menendez and Senator Boxer. 

At the outset, let me state that MBA strongly supports the intent and major objectives of this legislation: to address obstacles that have prevented borrowers who 

have conscientiously made their mortgage payments from reaping the benefits of 

historically low interest rates and other assistance programs. We are particularly 

intrigued by the sections of the bill that would remove existing restrictions of the 

Home Affordable Refinance Program (HARP) based on arbitrary requirements such 

33 

as who services the loan, whether the borrower’s loan-to-value ratio is above or 

below 80 percent, and which Government-sponsored enterprise owns the current 

loan. Such features only serve to increase borrower and lender confusion, and reduce the number of qualified borrowers who could benefit from the program. MBA 

looks forward to working with the authors of this draft legislation, Members of this 

Subcommittee, the Administration, and other key stakeholders as a resource to help 

resolve whatever issues or differences may arise as a result of this dialogue. 

Before addressing specific aspects of the bill, I believe it would help to provide 

some analytics regarding the housing market’s recovery thus far, and the policy considerations MBA used to assess the merits of the bill. 

Economic Context 

Notwithstanding this widespread uncertainty, we are starting to see signs of recovery and growth. Optimism is beginning to emerge with record home affordability, 

some signs of job formation, and a slowly recovering stock market. Recent economic 

indicators also point to sustained, albeit slow, growth for 2012. 

I have personally witnessed other ‘‘green shoots’’ appearing in local markets 

around the country. For example, I can say with some optimism that I anticipate 

the first true spring buying season we have had in a few years. Even more telling 

is the fact that some former homeowners who exited the market through short sales 

or ‘‘deed-in-lieu’’ transactions are now asking how they can return. 

Chart 1 provides an overall perspective of homes for sale on the market today 

with overlays of delinquent loans and loans in foreclosure. Although the volume is 

still at historically high levels, we are seeing consistently lower numbers in all key 

statistics. In fact, MBA expects existing home sales to increase slightly in 2012 followed by more significant growth in 2013. 

Chart 2 shows the ratio of refinancings to purchase mortgages also is reverting 

to normal trends. MBA expects purchase originations to be a little over the $400 

billion level in 2012, similar to 2011, before increasing to $680 billion in 2013, as 

home prices turn upward more definitively, and home sales increase. Refinance 

originations were strong in 2011 as rates were at historical lows, and have remained 

relatively strong thus far in 2012. The expanded HARP effort is currently contributing roughly 30 percent of refinance application volume. 

34 

Chart 3 shows the trend in delinquency and foreclosure rates remains disturbingly high. But on a positive note, we are clearly over the hump in both measures. 

Closer analysis shows that we are back to where we were before the crash in 2008. 


Chart 2 

Estimated Mortgage Originations: 1990-2013 

$4,SOO 

$4,000 

• Refi _ Purchase 

$3,SOO 

~ 

~ 

~ $3,000 ... 

·c 

0 

c $2,500 I 

] 

'0 $2,000 .., 

'0 

c $l,SOO 

~ iii 

Sl,OOO I 

$500 

$0 tn tli - - -

Chart 3 

Total Delinquency Rate (SA) and Percent of Loans in Foreclosure (NSA) 

12.00 --------------------------------

10.00 ---------------------------r-.. ----

8.00 ------------------------jr-------~ 

6.00 --------------------/------------

4.00 ----Z ---+--- ~ -

2.00 --... :::::::::~~~~~~~~~~~~~~~~~~~;7 ----,,,.c..------------

0.00 -------------------------------- r<l ~ .... N ('I) ~ .... N ('II 

000000000 

H~~~~~H - Total Delinquency Rate (SA) - FOfeciosurelnventory (NSA) 
35 

Reaction to Bill 

Turning now to the draft legislation, MBA fully supports its goal of reducing operational inconsistencies and economic obstacles impeding the ability of on-time borrowers to refinance their mortgages. We also support the bill’s provisions clarifying 

the post-sale obligations of lenders for loans they sell to the Government-sponsored 

enterprises (GSEs), Fannie Mae and Freddie Mac. It is likely that if many of the 

provisions in this bill were included in the first version of HARP, we probably would 

be much further along in the recovery. In reality, however, this bill effectively would 

represent the third iteration of HARP and is being introduced at a time when HARP 

2 is just beginning to show signs of progress. Therefore we believe it would be useful 

to monitor HARP 2’s effectiveness as you continue the deliberations regarding this 

draft legislation to assess the tradeoffs between the benefits the bill provides to borrowers and the operational costs to the GSEs, lenders, and taxpayers. Following additional comments about specific provisions of the bill, MBA suggests additional initiatives for consideration. 

Borrower Eligibility 

MBA is particularly appreciative of the draft legislation’s provisions that reduce 

the complexity of HARP’s eligibility and compliance. For example, the ability of borrowers to lower their mortgage payments by refinancing their loan through HARP 

should not hinge on who services their loan. Additionally, the existing distinction 

regarding whether a borrower’s LTV is above or below 80 percent is subject to manipulation by mischaracterizing the value of a borrower’s collateral. 

The bill also would prohibit the GSEs from establishing pricing differences based 

on loan to value (LTV) ratios, income or employment status. The rationale for this 

provision is that reducing the re-underwriting requirements for loans already held 

by the GSEs is appropriate because the GSEs already hold the risk. Moreover, reducing a borrower’s payments reduces the risk that a borrower will not repay the 

loan. As a general rule, MBA believes strong underwriting requirements including 

full documentation and verification are critical to safe and sound lending practices. 

However, MBA supports the concept of streamlining underwriting requirements 

where the borrower is current and the loan being refinanced is currently owned by 

Fannie Mae or Freddie Mac. 

MBA also requests consideration of whether the provisions to streamline HARP’s 

eligibility requirements for conscientious borrowers make it easier for unscrupulous 

borrowers to abuse the program. For example, one of the primary tools lenders use 

to detect and prevent fraud is to verify the employment, assets, and liabilities of 

borrowers. 

Additionally, MBA believes a refinancing is not always in the best interest of a 

borrower, and that a modification is sometimes a better alternative. For example, 

a loan modification is likely the better option for the borrower in situations where 

the borrower is no longer employed. Allowing origination of loans without any 

verification of a borrower’s income source effectively allows unemployed borrowers 

to refinance their loans when other alternatives may be a better option. 

Another concern is that the bill’s reduced underwriting requirements could be interpreted to interfere with a lender’s ability to comply with the requirements in the 

Dodd-Frank Act to verify whether the borrower has a ‘‘reasonable ability to repay 

the loan.’’ Although regulations are currently in the proposed stage, final regulations are likely to be issued before the end of the year. Streamlined refinances by 

the GSEs are not exempt from the statutory requirement and reliance solely on pay 

history (as is currently permitted for manual refinances) fails to meet the statutory 

standard for determining a reasonable ability to repay under the Dodd-Frank Act. 

Furthermore, eliminating any employment verification raises the concern that an 

assessment has not been conducted of the borrower’s ability to repay the loan. 

MBA suggests the limitations on the types of loans eligible for refinancing under 

HARP also restricts otherwise qualified borrowers from lowering their monthly payments by refinancing into a lower interest rate loan. For example, high balance 

loans owned by the GSEs are ineligible to be refinanced under HARP if they are 

above the existing conforming loan limit. MBA believes that if a borrower meets 

HARP’s eligibility requirements, and the GSE owns the existing mortgage, the mortgage should be able to be refinanced. 

For these reasons, MBA believes this section of the bill would benefit from further 

refinement to ease implementation. 

Repurchases 

MBA is pleased that the bill attempts to reduce the existing disparity between 

a lender’s representation and warranty (rep and warrant) obligations to Fannie Mae 

and Freddie Mac. MBA believes this would encourage competition by allowing difVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00039 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
36 

ferent servicers to refinance a borrower on the same terms on which the current 

servicer is able. This would create many more refinances of the targeted HARP-eligible population, and those refinances would be at a considerably better rate to the 

borrower. In our remarks below, we offer additional considerations regarding rep 

and warrant obligations because MBA believes this issue transcends the HARP context. 

Collateral Valuation 

The bill also would require collateral valuations to be estimated through the 

GSEs’ automated valuation models (AVMs). In locations where AVM modeling data 

is nonexistent, such as rural areas, an actual appraisal can be used, at no cost to 

the borrower. 

MBA believes this is a prudent attempt to use technological efficiencies to reduce 

the up front refinancing costs for eligible borrowers. It should be noted, however, 

that appraisals are an invaluable tool for protecting against fraud. Therefore, to the 

extent that the bill conflicts with lenders’ fraud prevention measures, we request 

a commensurate adjustment in a lender’s repurchase obligation. We believe this will 

enable lenders to be able to maximize the cost savings to borrowers. 

Re-Subordinating Second Liens 

The bill provides that if a servicer or creditor refuses to re-subordinate certain 

second liens when the first lien is refinanced under HARP, such servicer or creditor 

will be ineligible to deliver or sell any future loans to Fannie Mae or Freddie Mac. 

It is unclear whether such a bar would expire with HARP or continue in perpetuity. 

Most junior lien holders today will subordinate their liens provided the borrower 

finances only closing costs, such closing costs are not excessive, the borrower derives 

a benefit from the refinance, and the borrower does not receive cash out (other than 

to settle small calculation discrepancies). This policy is also followed in most cases 

even if the borrower’s combined LTV is above 100 percent. 

For these reasons, MBA believes this provision imposes harsh penalties for a situation that seems to be resolving itself. When a borrower’s LTV exceeds 100 percent, 

second lien holders are rightly concerned with an increase in the first lien debt because it imposes additional risk of loss, by the amount financed, if the loan fails. 

We are concerned that the harsh penalty will actually impair the recovery of the 

real estate market by making junior liens extremely costly and unattractive to originate and service. 

We also question whether the penalties imposed by the bill are worse than the 

problem it seeks to address. In theory, a single mistake could render a significant 

market player or number of players unable to do business with Fannie Mae and 

Freddie Mac. This does not appear to be a positive result for borrowers or the GSEs 

as it could affect competition, price, and the GSEs’ future revenue opportunities. 

In addition, it appears that the servicer would be held responsible if the owner 

of the junior loan does not permit a subordination. In many instances servicers are 

mere loan administrators and thus cannot impose a requirement of this nature on 

the lien holder. Servicers, therefore, should not be penalized for decisions outside 

of their control. 

While most second liens are held in portfolio as whole loans, there are instances 

in which such loans are securitized. If trust documents prohibit the servicer from 

impacting the security interest of the notes, it would not be appropriate to penalize 

the servicer for complying. The law would, in this instance, put servicers in an unfortunate position; either they face litigation or get barred from delivering loans to 

the GSEs. 

There are also valid situations where the servicer should not be required to subordinate. One example is where the borrower sold the property without the lien holder’s consent thus violating the due on sale clause in the mortgage contract. Another 

example is where a first lien holder provided a cash-out refinance without getting 

a subordination agreement from the second lien holder. Had the request been made, 

the second lien holder would not have approved the subordination due to the cashout feature. The second lien holder should not be required to re-subordinate simply 

because the borrower now seeks to refinance again under HARP when the subordination wouldn’t have been granted in the first instance. The examples given are not 

an exhaustive list. Moreover, servicers cannot predict situations that might arise in 

the future that support denying a subordination request. 

For the reasons described above, we believe the re-subordination requirement provisions are a well-intentioned attempt to streamline the refinancing process for borrowers, but the operational and practical consequences could negate the benefits 

they were intended to provide. MBA would have strong concerns regarding these 

provisions if this bill were to move forward. 

37 

Mortgage Insurance 

A similar provision imposes a bar on mortgage insurers who refuse to transfer 

coverage to the new HARP refinanced mortgage. Such insurers would be ineligible 

to insure new mortgages purchased or guaranteed by the enterprises. We are concerned that this penalty may create an unintended outcome. Lenders must obtain 

mortgage insurance (MI) on higher-LTV loans in order to deliver such loans to the 

GSEs. If one or more insurers were barred from doing business with the GSEs, it 

could severely strain the availability and cost of MI. Likewise, it would increase the 

GSEs’ counterparty risk. 

It also is not clear whether the GSEs have the technological capacity to monitor 

and track whether an MI refused to transfer coverage and then to automatically terminate new deliveries of loans insured by such an MI. If the operational framework 

is not in place already, developing it could be costly and time-consuming. 

It also is unclear whether the bill would apply to situations where lenders or investors place MI on the loan after it was originated to make it eligible for an enterprise to purchase (back-end MI) and in cases for certain lenders where the lender 

has purchased mortgage insurance (traditionally called LPMI). In these circumstances, special processes need to be put in place by the GSEs, the MI companies and lenders to ensure that coverage remains in place. These operational challenges could be time-consuming and costly, which could ultimately offset any potential consumer benefit. 

MBA therefore requests this provision be reevaluated in light of these considerations. 

Credit Risk Guarantee Fees 

The bill would be funded by a ten basis point increase in the credit risk guarantee 

fees (g-fees) charged by Fannie Mae and Freddie Mac, but only for those loans refinanced under the provisions of the bill. MBA strongly believes that g-fees should 

be calculated as a function of the costs of guaranteeing the securities they issue, 

i.e., the risk of underlying loans. 

In this situation, MBA would prefer that the GSEs themselves be authorized to 

adjust their g-fees in accordance with their increased risk profile and with the strict 

oversight of their regulator. Given Federal budgetary scoring constraints, however, 

we recognize that g-fees must be deposited into an account at the Department of 

the Treasury. 

Because g-fees directly impact consumer borrowing costs, we ask that Congress 

establish sufficient statutory firewalls so that these funds can only be used to offset 

credit risk exposure by the GSEs. 

Additional Recommendations 

The timing of this hearing is fortuitous because MBA members were in Washington, DC, just last week as part of our association’s annual advocacy conference. 

MBA met with leadership in the House, Senate, several regulatory agencies, and 

President Obama’s housing policy team. The threshold question that we were asked 

in virtually every meeting was what could be done to restore access to credit for 

all eligible borrowers in a safe and sound manner. 

MBA’s response to this question is that a long-term recovery hinges on restoring 

certainty and providing clear standards regarding the rights and responsibilities of 

all market participants. Heightened levels of uncertainty are pervasive throughout 

the housing market. Borrowers are unsure of their job stability, are afraid of buying 

when home prices may still be falling or are concerned about how they will be treated by their lender or loan servicer. 

Lenders face uncertainty not just because of the cascading effect of new rules and 

regulations but also because existing, longstanding agreements between counterparties are being reinterpreted and applied retroactively. And private investors that 

could provide much needed capital also are skittish; they don’t know which way the 

market is headed or what new policy may come next that will impact their position. 

This overall uncertainty results in reduced access to affordable housing finance options for qualified borrowers. MBA supports provisions in the draft legislation that 

would address this widespread uncertainty. 

MBA also recognizes there are other challenges that need to be resolved before 

a sense of vibrancy returns to the housing market. Therefore, we offer the following 

additional recommendations to help restore access to credit for qualified borrowers. 

Foreclosure Inventory 

While the draft legislation would do much to stem the tide of new delinquencies 

and foreclosures, it is not directly focused on the overhang of distressed properties. 

Addressing that overhang would spur further economic recovery and stabilize neighVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00041 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
38 

borhoods and long-term home prices. A reduction in the current ‘‘real estate owned’’ 

(REO) inventory will provide for the swiftest and most efficient return to market 

stability. As the country moves to correct the supply and demand imbalance, it is 

critical that policy makers balance taxpayer interests, investor interests, and consumer protections to ensure responsible asset disposition. 

Local investors understand their particular markets and have a long-term stake 

in the stabilization of their neighborhoods. Providing affordable, responsible financing options to investors not only eliminates REO properties, but also empowers 

neighborhoods by giving local residents an increased stake in its success. These tools 

would be especially beneficial in urban neighborhoods that face the challenges of 

older housing stock and neighborhood blight. 

MBA believes the Federal Housing Administration (FHA) should introduce an investor program—specifically one that includes a renovation option. One solution 

would be to temporarily lift the moratorium on investors participating in FHA’s Section 203(k) Rehabilitation Loan Program. The Section 203(k) program helps buyers 

of properties in need of repairs reduce financing costs, thereby encouraging rehabilitation of existing housing. With a Section 203(k) loan, the buyer obtains one FHAinsured, market-rate mortgage to finance both the purchase and rehabilitation of a 

home. Loan amounts are based on the lesser of the sum of the purchase price and 

the estimated cost of the improvements or 110 percent of the projected appraised 

value of the property, up to the standard FHA loan limit. 

HUD began promoting Section 203(k) to homeowners, private investors, and nonprofit organizations in 1993. Private investors were often able to find undervalued 

properties, renovate them and sell them for more than the purchase price plus the 

cost of improvements, or provide much needed rental housing. Motivated by this 

profit potential, many investors successfully renovated and sold properties ranging 

from individual homes to entire blocks, thereby expanding home ownership opportunities, revitalizing neighborhoods, creating jobs, and spurring additional investment 

in once blighted areas. 

In 1996, however, following a report by HUD’s Inspector General describing improprieties concentrated in New York and insufficient departmental oversight, HUD 

placed a moratorium on all Section 203(k) loans to private investors. The Inspector 

General noted rampant fraudulent activity that resulted in financial gain for the 

participants and unrehabilitated houses in the neighborhoods. 

MBA agrees that safeguards in any program are necessary to prevent abuse and 

to ensure that the program meets its intended purpose. MBA recommends that FHA 

lift the moratorium on investors participating in the 203(k) and reinstate it as a 

pilot to facilitate the purchasing and rehabilitating of REO properties by local investors. In recognition of the historical abuses of the program, MBA also recommends 

that the program be modified to ensure responsible lending and minimize fraudulent activity. MBA’s members welcome the opportunity to work with FHA to develop 

a program that meets these criteria. 

Ability To Repay Regulations 

MBA also believes proper implementation of the Dodd-Frank Act’s ability to repay 

(ATR) and Qualified Mortgage (QM) requirements, now pending before the Bureau 

of Consumer Financial Protection (CFPB), is crucial to homeowners and those seeking home ownership. Under the proposal, there are three major issues: (1) whether 

the QM is structured broadly; (2) whether the QM is structured with clear bright 

line standards as a safe harbor; and (3) whether the three percent limit on points 

and fees is overly inclusive and has the effect of limiting the availability of credit, 

particularly for loans under $150,000. 

Failure to comply with the ATR requirements risks very significant liability including actual damages, up to 3 years of finance charges, attorney fees, as well as 

a claim for offset at foreclosure for the life of the mortgage. In light of these liability 

considerations, it is anticipated that virtually all mortgages made will be QMs; 

those that are not, if available at all, will be costlier and are not required to offer 

borrowers QM protections. For these reasons, it is crucial that the QM standards 

be established broadly so they offer affordable credit and protect as many borrowers 

as possible. 

The proposed rule offers alternative approaches to the construction of a QM, only 

one of which will be adopted in a final rule—a safe harbor or a rebuttable presumption of compliance. Specific standards are contained in both, and under both borrowers may seek court review of whether the lender complied. 

The principal difference between the two approaches is that under a safe harbor 

litigation is more predictable and addresses only whether the standards set forth 

in the safe harbor have been met. Structuring the QM as a safe harbor is the best 

means of ensuring that the largest number of borrowers possible will enjoy the 

39 

safest and most affordable options for sustainable mortgage credit. A presumption 

of compliance does not generally provide the same degree of predictability. Consequently, if provided for in a final rule, a rebuttable presumption structure will result in more conservative lending standards, and less available and affordable credit. 

The proposal also would apply the statutory requirement of a three percent limit 

on points and fees for the QM so that it would appear to include: (1) third party 

fees such as title services when the service provider is an affiliate of the lender; (2) 

loan originator compensation; and (3) escrows for taxes and insurance. The limit is 

only adjusted up to 5 percent for loans under $75,000. 

All third-party fees should be excluded from the three percent limit. Any other 

outcome undermines competition and borrower choice. The inclusion of payments 

from lenders (i.e., loan officer compensation) has no place in a formula governing 

payments to lenders. Likewise, escrows not retained by the lender have no place in 

a calculation of points and fees. Additionally, consumers should continue to have the 

option of using a lender with affiliated settlement services providers. Finally, since 

the average loan size is closer to $150,000, upward adjustment of the three percent 

limit for smaller loans should commence for loans below that amount. Considering 

the effects of the proposal on smaller loans, both revision of the small loan requirements and revision of the formula’s ingredients are essential to ensure the availability of credit to low-and moderate-income families with smaller loans. 

How the QM is defined and structured is crucial to determining who will benefit 

from affordable, sustainable mortgage financing. Loans that fail the QM test will 

be costlier, if they are available at all. MBA urges the Members of this Subcommittee to encourage the CFPB to adopt a broad QM and a safe harbor for QM 

loans. MBA also encourages Members of this Subcommittee to consider the introduction of Senate legislation similar to that proposed in the House by Reps. Bill 

Huizenga (R-MI) and David Scott (D-GA) that would make important technical 

changes to the QM points and fees definition. The Consumer Mortgage Choice Act 

(H.R. 4323) would exclude affiliate fees, loan originator compensation and escrows. 

GSE Repurchase Requirements 

As mentioned above, MBA believes much more needs to be done to clarify the 

rights and responsibilities of lenders with respect to repurchase requirements. Leadership at the Department of Housing and Urban Development (HUD), Federal 

Housing Finance Agency (FHFA), and the Board of Governors of the Federal Reserve System all recognize that a key driver of this tight credit environment is the 

unprecedented number of loan repurchase demands by the GSEs to lenders, based 

on representations and warranties made by lenders when they sell loans to the 

GSEs. 

We recognize the importance of these reps and warrants in holding mortgage 

originators accountable for the loans they sell into the secondary market. These contractual provisions are critical to the securitization process, and a successful and liquid secondary market. Reps and warrants appropriately allocate risk and align the 

incentives of all parties in the direction of sustainable, responsible mortgage lending. Unfortunately, lenders are now facing an unprecedented volume of repurchase 

demands from investors looking to recoup losses. A portion of these are legitimate 

requests and are being honored, as they should be. However, lenders are finding 

more and more loans being sent back for repurchase for minor, technical mistakes 

that had no impact on loan performance. 

Take, for example, a loan where the borrower had been paying his or her mortgage on time for several years, lost a job, couldn’t pay the mortgage and went into 

default. Investors will sometimes scrutinize loan documents to find a minor, immaterial infraction, like a forgotten signature, and force the loan back to the originator 

for repurchase. This is not why the process was put into place. 

Lenders do have means to contest and defend repurchase requests, but they are 

time-consuming and expensive. Instead of underwriting and funding new loans for 

qualified borrowers, lenders have to go back through old loan files and prepare a 

defense against the repurchase claims. Even when the lenders prevail, they are 

forced to dedicate scarce capital and staff time to adjudicate these cases. This is 

disproportionally hurting smaller, independent community lenders who simply don’t 

have the resources to research, respond to and contest the flood of repurchase demands they are facing. 

Consumers are paying the ultimate price because buyback requests for such 

minor mistakes only serve to make lenders even more cautious when making new 

loans. The knowledge that every loan that defaults, no matter how well it is documented and underwritten, could result in a costly repurchase request, is forcing 

lenders to qualify only borrowers with the most pristine credit histories, highest inVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00043 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
40 

comes and significant cash reserves. Again, the impact is magnified for smaller 

lenders with more limited resources to handle repurchase requests. 

Lenders, regulators, the GSEs and other investors need to coalesce in order to develop guidelines for the type of loan defects that are and are not eligible to be put 

back on lenders. Loans that have been performing for several years, and default 

with no signs of lender fraud or underwriting deficiencies, should not be pushed 

back on the lender. If a loan defaults and a flaw in the loan documents is found, 

the investor should be required to demonstrate that the defect was material to the 

default. Such flaws also should be based on objective criteria, not a subjective opinion rendered after the fact. 

MBA notes that correspondent lenders add their own credit overlays to loans they 

purchase from other lenders in order to limit their repurchase risk exposure. These 

‘‘downstream lenders’’ tend to be local, community or independent mortgage banks 

that do not have the volume or corporate structure to deal directly with the GSEs. 

MBA believes consumer access to credit would be greatly enhanced if GSE repurchase requests also were addressed in the correspondent lending channel. 

MBA also notes an unfortunate conflict arising between HARP provisions and 

State law. Some State laws impose specific underwriting requirements on high-LTV 

loans, such as requiring a physical appraisal and determining a borrower’s ability 

to repay based on consideration of specific statutory information. One of the GSEs’ 

HARP rep and warrant provisions is that lenders must stipulate the HARP loan 

complies with all laws. Therefore, a lender would be required to repurchase a loan 

that violated a State law high-LTV loan requirement even if they were otherwise 

compliant with this bill, or existing HARP 2 provisions. We strongly urge you to resolve this matter. 

Future of the GSEs 

MBA is firmly aligned with the Subcommittee’s desire to attract private capital 

to fund loans for a broad spectrum of qualified borrowers, not just to help in the 

economic recovery, but for the long-term. The current mortgage market relies far 

too heavily on Government support, edging out private investment. This is neither 

desirable nor sustainable. MBA believes the long-term stability of the real estate 

market requires a vibrant secondary mortgage market that relies, first and foremost, on private capital. However, the status quo of overwhelming involvement by 

FHA, Fannie Mae and Freddie Mac has helped to create insufficient private liquidity. It is time for the future of the GSEs and the role of the Federal Government 

in housing finance to be addressed in a comprehensive manner. MBA believes there 

is a need for a clear definition of the Government’s role in the mortgage market— 

an explicit, limited guarantee of the securities, but not the entities—paid for by actuarially sound, risk based fees, with the entities tightly regulated as to their activities, risk-based capital and the types of mortgages they can guarantee. 

Conclusion 

In conclusion, let me reiterate that MBA strongly supports the intent and objectives of this proposed legislation. We believe the Responsible Homeowner Refinancing Act of 2012 is a commendable effort to reduce the costs and other barriers 

on-time borrowers face in benefiting from today’s historically low interest rates. We 

further believe the bill’s rep and warrant provisions are a welcome attempt to solidify the allocation of responsibilities between the GSEs and their lender business 

partners. Given the balance of multiple considerations this bill poses, we urge this 

Subcommittee and the Congress to continue to work with all engaged stakeholders 

as this dialogue moves forward. In particular, we urge the Subcommittee to revisit 

the provisions regarding subordinate liens and mortgage insurance. 

All stakeholders in our housing finance system have an interest in seeing the 

market rebound, and only together can we establish a housing finance system that 

provides affordable housing finance options to as many qualified borrowers as possible in a safe and sound manner. MBA stands ready to serve as a resource to help 

you evaluate the economic and policy tradeoffs to these various approaches. 

PREPARED STATEMENT OF LAURIE S. GOODMAN 

SENIOR MANAGING DIRECTOR, AMHERST SECURITIES

APRIL 25, 2012 

Chairman Menendez, Ranking Member DeMint, and Members of the Subcommittee, I thank you for your invitation to testify today. My name is Laurie Goodman and I am a Senior Managing Director at Amherst Securities Group, L.P., a 

leading broker/dealer specializing in the trading of residential and commercial mortVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00044 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
41 

gage-backed securities. We are a market maker in these securities, dealing with an 

institutional account base: financial institutions, money managers, insurance companies, and hedge funds. I am in charge of the Strategy area; we perform extensive, 

data-intensive studies as part of our efforts to keep ourselves and our customers informed of critical trends in the residential mortgage-backed securities market. 

In my testimony today, I will discuss actions that can be taken to help responsible 

homeowners save money through refinancing, without disrupting the very well functioning Agency mortgage market. I will limit my comments to the refinancings of 

GSE mortgages, which are the mortgages in which the GSEs already bear the risk. 

My number one suggestion will be to allow for competition by permitting a different 

servicer to refinance a borrower on the same terms that apply to the current 

servicer. This will result in much better rates to the borrower, and much more refinancing of the targeted Home Affordable Refinance Program (HARP) population. 

It is very clear that responsible borrowers with high loan-to-value ratios (many 

of whom are underwater) or low FICO scores, who do not hold a GSE or FHA/VA 

loan—have no or very limited refinancing opportunities. Their counterparts, with 

higher FICO scores and lower LTVs, can refinance through the GSEs; if such loans 

exceed the maximum loan size limits, then bank portfolios are willing to take the 

risk. We believe that a broader refinancing plan which allows the transfer of risk 

on higher loan-to-value ratio (i.e., underwater) mortgages owned by bank portfolios 

or investors in private label securities, to the Government, would basically be a taxpayer bailout for both bank portfolios and private label investors. We believe this 

would be a very inefficient application of taxpayer money. 

Sizing the Refinancing Opportunity 

The Home Affordable Refinancing Program was initially rolled out on April 1, 

2009. This program was designed to help GSE borrowers who have LTVs (loan to 

value ratios) greater than 80 refinance into another GSE mortgage. At the outset, 

the program was referred to by the industry as HARP 1.0, and included borrowers 

with LTV ratios of 80–125 who took out loans prior to June 1, 2009. It was initially 

hoped that this program would help 4–5 million borrowers. However, from April 1, 

2009–February 28, 2012, only 1.12 million borrowers, a disappointingly low number, 

were aided by the program. As Government officials and market participants scrutinized the data, it became very clear that higher LTV, lower FICO borrowers were 

still refinancing much more slowly than their more creditworthy (lower LTV, higher 

FICO) counterparts. This is best illustrated by looking at the prepayment speeds on 

2008-issued FNMA and FHLMC 4.5, 5.0, 5.5, and 6.0 passthrus during the period 

of low rates in late 2010, as shown on the left side of Exhibit 1 (next page). The 

lower coupon borrowers—the 4.0s and 5.0s—prepaid more rapidly than the higher 

coupons—5.5s and 6.0s. This counter-intuitive behavior, where mortgages with less 

incentive to refinance (less potential savings) were prepaying more rapidly, clearly 

reflected the difference in credit-worthiness between the coupons. I.e., if two borrowers took out a mortgage at the same time, the less credit-worthy borrower would 

have had to pay more (a higher interest rate, translating into a higher coupon) for 

the mortgage. These differentials in borrower quality can be seen on the right side 

of Exhibit 1. For example, for the 2008 4.5s, 44 percent of borrowers are in the highest quality bucket—they have mark-to-market LTVs of =80 and a FICO of =750. 

However, only 14 percent of borrowers among the 2008 6.0s are in the highest quality bucket. By contrast, only 14 percent of the 2008 4.5s have an LTV >80 and a 

FICO <750, while the representation is 38 percent for the 6 percent coupon. In 

short—the higher coupon, more credit-impaired borrowers, who are more apt to default, were prepaying far less quickly than their non- credit impaired counterparts. 

The salient fact to bear in mind is that the borrowers that create the most risk for 

the GSEs, would benefit the most from a refinancing, and would benefit the taxpayers the most from a refinancing, were actually the least likely to get a refinance 

opportunity! 


'1-

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6.50 

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Source: CoreLogic Prime Servicing Database, Fannie Mae, Freddie Mac, 1010Data, Amherst Securities 

2008 Vintage Composition 

% Balance, by MTM L

Cohort Ol'ig. FICO ::;80 80 to 105 > 105 

;0.750 FICO 44 23 3 

4.5 2008 <750 FICO 16 12 2 

Total 60 35 6 

;0.750 FICO 32 25 5 

5.02008 <750 FICO 17 17 4 

Total 49 42 10 

;0.750 FICO 22 25 7 

5.5 2008 <750 FICO 17 22 7 

Total 39 46 14 

;0.750 FICO 14 23 8 

6.02008 <750 FICO 16 27 11 

Total 30 50 19 
43 

Armed with this information, the FHFA, Fannie Mae, and Freddie Mac were determined to ‘‘correct’’ the situation. On October 24, 2011, the FHFA, Fannie Mae, 

and Freddie Mac announced a series of HARP changes to allow the program to 

reach more borrowers. Effective December 1, 2011, the 125 LTV cap was lifted for 

new fixed rate loans, some ‘‘rep and warrant’’ features were relaxed (which also 

served to bring Fannie and Freddie more into line), and the program was extended 

for one more year to year-end 2013 to encourage banks to invest more in personnel 

and systems to ensure program success. For program eligibility HARP 1.0 required 

mortgages to be issued prior to the June 1, 2009; this cutoff date remained firmly 

intact. This revised program is often referred to as HARP 2.0. 

It is useful at this point to take a step back and look at aggregate refinancing 

activity since HARP was introduced in April 2009. The FHFA, in their February 

2012 Foreclosure Prevention and Refinance Report, noted that as of February 2012 

the HARP program had cumulatively aided 1.12 million borrowers. (This refers only 

to refinances on mortgages with a mark-to-market (MTM) LTV >80, where the initial mortgage was issued before the 6/1/2009 cut-off date). In addition, another 1.98 

million borrowers have taken advantage of streamlined refinance programs. These 

streamlined refinance programs essentially follow the HARP framework, and are 

targeted for borrowers with mark-to market LTVs =80, where the initial mortgage 

was issued before the 6/1/2009 cut-off date. (Both Fannie and Freddie had streamlined programs in place prior to the introduction of HARP. Fannie replaced theirs 

with a HARP look-alike when the HARP program was implemented in 2009. 

Freddie kept their streamlined program in place until early 2011.) In addition to 

the 1.12 million HARP refinances, and the 1.98 million streamline refis, there have 

been another 7.63 million refis, raising total activity from 4/1/2009 to 12/31/2011 to 

a total of 10.73 million borrowers. 

Now let’s look forward. Exhibit 2 (below) sorts the universe of borrowers into 

groups. We classify borrowers first by whether they meet the HARP eligibility date 

(before June 1, 2009), then we sort according to mark-to-market LTV (the loan-tovalue ratio based on valuing a home at today’s actual, realistic current market 

price). We then sort each group by whether the pay history would conform to that 

required by the GSEs to be eligible for a HARP refi (i.e., no delinquencies in the 

past 6 months; no more than 1 delinquency in the past year). Finally, we sorted by 

whether the borrower is refinanceable or not. For simplicity, we assume a cut-off 

mortgage rate of 4.75 percent or higher for a 30-year fixed rate loan; 4.25 percent 

on a 20-year; 4 percent for a 15-year; and 3.5 percent for an ARM. Essentially, we 

assume the borrower needs to have an incentive of 50–75 bps to be considered inthe-money (for a refinancing); we use this to determine willingness to refinance. 

(Our results should be regarded as an upper bound; we do not account for borrowers 

or loans that may be ineligible as the property was always used as an investor property). 

The numbers are quite interesting. There are currently 10.9 million borrowers 

who took out loans before the June 1, 2009, cut-off date, are eligible for a streamline 

refinancing based on pay history (no delinquencies in the past 6 months, no more 

than 1 in the past year) and have an incentive to refinance. There are another 3.3 

million borrowers who are eligible for HARP 1.0 and HARP 2.0, and have an incentive to refinance. In addition, due to the expansion of the 125 LTV ceiling, HARP 

2.0 allowed for another almost 700,000 eligible and incented borrowers. 


Poor History 

OOTM 5,823 1,086 

ITM 282,173 46,613 Pre-Cutoff 80 to 125 OOTM 92748 19853 

Good History ITM 3,302,502 545,412 

P oor History OOTM 2,354 415 ITM 73,391 12,370 > 125 OOTM Good History 9197 1653 ITM 690,957 1l4,135 Poor History 

OOTM 

ITM 78,118 14,821 < 80 - OOTM 2664985 607812 

Good History ITM 4,788,185 877,881 

OOTM 6,567 1,538 Poor History ITM 51,519 10,971 Post-Cutoff 80 to 125 OOTM 67 .407 157 !49 

Good History ITM 2,052,185 429,480 

OOTM 39 7 Poor History ITM 1,418 282 > 125 OOTM 1190 180 

Good History ITM 28,539 5,455 

Source: CoreLogic Prime Servicing Database, Fannie Mae, Freddie Mac, lOlOData, Amherst Securities 

ei ee e e iii e e e e ieieeee 

% Count % Balance 

0 0 

2 1 

1 2 

41 27 

0 0 

1 1 

0 0 

12 13 

0 0 0 0 0 0 

3 3 

U U 

0 0 

10 15 18 21 

0 0 0 0 

3 

8 10 

0 0 0 0 0 0 0 0 

I+-I+-I+-

Stream

Refis 

HARP 

HARP

with >1

LTV 

Eligiblit

Possibl

Expans

of 

Stream

Refi 

Possibl

Expans

HARP2
45 

If we look after the cut-off date, there are another 4.8 million borrowers who have 

LTVs less than 80, a good credit history and are incented to refinance. These borrowers are not eligible for any streamlined program. However, given that 71.1 percent of the refinancings during the 4/1/2009–12/31/2011 period came from this borrower group (7.63 million nonstreamlined refis/10.73 million total refis), it is clear 

that many of these borrowers will be able to refinance anyway. There are 2.1 million 

post cut-off borrowers with strong pay histories who are between 80–125 LTV and 

another 29K borrower who are over 125 LTV. 

There are two separable issues. The first is what can be done to increase the penetration of the borrowers that HARP is meant to reach. The second is whether the 

scope of the HARP program should be increased. We feel that there are a number 

of definitive steps that should be taken to increase the penetration of the HARP program, and our feelings are much more mixed on increasing the scope of the program. 

Allowing Different Servicers To Refinance on the Same Conditions as Same 

Servicers 

We have long argued that the single most effective change that can be made to 

the HARP program is to encourage competition by allowing different servicers to refinance a borrower on the same terms as the current servicer is able to do. We believe this would create many more refinances for the targeted HARP-eligible population, and those refinances would be done at a considerably better rate to the borrower. Under HARP 2.0, for both Fannie and Freddie, the current servicer is released 

from all borrower representations and warrantees on both the old loan and the new 

loan if three conditions are met: 

• The borrower has been current for the past 6 months and has no more than 

one delinquency in the past year. 

• Employment (or a source of nonemployment income) must be verified. Note that 

this is not a verification of income, just a verification that there is a source of 

income. 

• The borrower must meet the net benefit provisions of a refinance (it must reduce his payment, term, or move him into a more stable product). 

By contrast, different servicers are required to gather more information on the 

borrower and are required to take the rep and warrant risk on the new loan. For 

Fannie, there is a maximum debt-to-income ratio in Desktop Underwriter (Fannie’s 

automated underwriting program) and there are requirements for the servicer to 

gather income information. For self-employed borrowers, a Federal tax return is required. For Freddie Mac, a different servicer refi requires that the borrower have 

no delinquencies in the past year (a same servicer refi allows one). In addition, the 

servicer must do a full underwrite, including a current pay stub, W-2 forms for the 

last 2 years, verbal verification of employment, as well as verification of assets to 

show the funds are available to close. Since the servicer is taking the rep and warrant risk on the new loan, most of the servicers we have talked to require the full 

underwrite on Fannie loans as well as Freddie loans. 

To summarize the comparison between same and different servicer refis under 

HARP 2.0—different servicer refis require servicers to gather more information 

about the HARP 2.0 borrower than would be the case under a same servicer refinance. Moreover, under different servicer refis, the servicer is not released from borrower reps and warrants on the new loans. We also believe same servicers have 

greater access to Freddie Mac’s Home Value Explorer and Fannie Mae’s Automated 

Valuation Model, which entitles the servicer to greater relief from the property reps 

and warrants. Thus, same servicers have a huge advantage in doing refinancings. 

Essentially, HARP has a design flaw that eliminates put-back risks, to the detriment of the GSEs, while simultaneously prevents the borrower from obtaining a 

competitive rate. 

The Menendez-Boxer Discussion Draft contains a much smarter method to handle 

the rep and warrant risk—allow different lenders/servicers to enjoy the same rep 

and warrant relief as is currently enjoyed by the current lender/servicer. Under that 

discussion draft, it does not matter who does the refinance—neither the current nor 

a different lender/servicer would have any put-back risk on the new loan, and the 

put-back risk on the old loan is waived. Thus, the GSEs are in the same position 

they are in now, but the borrower is able to obtain a competitive rate as there is 

competition to extend the new loan. 

We have noted that as the program is currently structured, a same servicer refinancing is hugely advantaged, allowing the servicers to charge the borrowers a 

higher rate. The benefits of this accrue disproportionately to the top 3 servicers, who 

46 

service well over 50 percent of the eligible loans. In actuality, a same servicer refinancing of a HARP loan should actually be less costly to the borrower than a nonadvantaged refinancing because: (1) the servicer has less put-back risk, (2) less information collection is necessary, and (3) investors are willing to pay more to obtain 

these so called ‘‘Making Home Affordable’’ (MHA) loans, as these loans have limited 

ability to refinance again. Thus, the servicer is able to capture a specified pool payup on these loans. (The borrower has limited ability to refinance again; if his LTV 

is >95 he would be unable to refinance even with mortgage insurance. If his LTV 

is 80–95, he would need to take out mortgage insurance at current market levels, 

and the costs of this insurance would be high.) The lack of competition has also exacerbated the capacity constraints in the system, as the most capacity constrained 

lenders are the only ones that can effectively refinance borrowers with LTV >80. 

To give a hypothetical illustration of how profitable this operation is to a same 

servicer, let us assume the same servicer originates a 4.5 percent loan to a borrower 

with a 95–100 LTV. (This rate is about 35 basis points above the Freddie Survey 

Rate, and is typical of the rate charged to a borrower in this LTV bucket). The loan 

would typically have a 25 bps guarantee fee (ignoring loan level pricing adjustments), and the servicer would generally retain 25 bps of servicing. This retained 

servicing is worth $1.25 per $100 par to the servicer. Thus, this loan could be sold 

into a Fannie Mae pool, bearing a 4.0 percent coupon. This would command a price 

of $105.58 per $100 par in the secondary market. In addition, the investor would 

pay another $1.15 for a pool consisting of refinance loans in the 95–100 LTV bucket, 

as the investor is betting that it is more difficult for these loans to refinance. Thus, 

the proceeds to the servicer are $107.98 ($105.58 +$1.25 +$1.15) for $100 in debt; 

assuming a $0.50 origination charge, the servicer is making $7.48 on this loan. 

Thus, on a $200,000 loan, the total profitability to the servicer is $14,960. To put 

this into perspective, the profitability of mortgage originations over the past decade 

(taking into account variable but not fixed costs) has averaged in the neighborhood 

of 1–2 points or $2,000–$4,000 on a $200,000 loan. 

Loan Level Pricing Adjustments, Appraisal Fees, Bank Costs 

Thus far in our example, we have ignored the loan level pricing adjustments 

charged by Fannie Mae and Freddie Mac. These are capped at 0.75 points (0.75 percent of the loan amount), or $1,500 on a $200,000 loan under HARP 2.0. (The loan 

level pricing adjustments are capped at 2.0 points for 30-year non-HARP, streamlined refis and uncapped for refis of loans originated post 6/1/2009). And if the loan 

had needed an appraisal this would cost another $500–$750. Compare this to the 

$14,960 the originator/servicer is making because the borrower is paying above market rates. Yes, we are in favor of eliminating loan level pricing adjustments and all 

appraisals in situations where Fannie and Freddie already have the risk on the 

mortgage, but we believe the elimination of these items would result in a very marginally lower rate to the borrower. To significantly reduce the frictions in the system, it is necessary to recognize the fact that the largest banks have been given the 

opportunity to extract monopoly profits on HARP refis, and they have taken advantage of this. If you want to lower the cost of a refinancing to the borrower, allow 

different servicers to refinance on the same terms as the same servicer. 

Program Inconsistencies Between Fannie and Freddie 

The Menendez-Boxer Discussion Draft would require FHFA to issue guidelines requiring that Fannie and Freddie make their refinancing programs consistent to ease 

lender compliance (especially with respect to loans below 80 LTV and to closing cost 

policies). We think this is a good idea. 

The HARP program only covers loans with LTV >80, issued before the cut-off 

date. Fannie and Freddie were entitled to promulgate their own rules for loans with 

LTVs =80. Fannie and Freddie both decided to allow the same streamlined refinancing procedure for loans =80 LTV issued before the cut-off date as applies to 

HARP loans. However, Fannie opted to waive the lenders’ rep and warrant risk on 

same servicer refinances, whereas Freddie opted not to do so. Thus, for Freddie 

loans =80 LTV, there is no same servicer rep and warrant relief on the new loan. 

We have hypothesized that Freddie servicers would be incented to refinance the 

HARP 2.0 borrowers first, before their lower LTV counterparts, as they are able to 

shed the rep and warrant risk on the old and new loan. In any case, this is illogical 

and confusing to lenders. 

There is also a small difference in the treatment of closing costs that should be 

made uniform. Fannie refinancings allow for the pay-off of the first lien mortgage, 

the financing of closing costs and no more than $250 cash to the borrower. Freddie 

refinancings on >80 LTV loans are slightly less generous, capping closing costs at 

4 percent of the current unpaid principal balance of the loan or $5,000, whichever 

47 

is less, and limiting the cash to the borrower to $250. Freddie refinancing on =80 

LTV loans are slightly more generous than Fannie, allowing for all closing costs to 

be financed (as with Fannie); while permitting up to 2 percent of the loan amount 

or $2,000, whichever is less, to be taken as cash to the borrower. 

Automatic Transfer of Mortgage Insurance and Second Liens 

The Menendez-Boxer Discussion Draft provides for the automatic transfer of mortgage insurance and second liens. More precisely, it requires that second liens and 

mortgage insurance be automatically portable under the same terms to a newly refinanced loan if the second lien holder or mortgage insurer wants to sell loans to the 

GSEs. While we are in favor of these items, we do not believe the second lien issue 

has been a major obstacle to refinancing. We also believe that most of the mortgage 

insurers have voluntarily agreed to make the policies fully portable; it is our understanding that United Guaranty is the only hold-out. 

It is important to realize that a refinancing on a first mortgage makes the second 

lien more valuable, as it makes the costs of home ownership more affordable, and 

hence makes the borrower less likely to default. Thus, the second lien holder is generally happy to resubordinate his interest. And the first lien holder rarely has a 

problem locating the second lien holder. In fact, our work has shown that, controlling for other factors, there was only a marginal difference in the prepayment 

speeds between borrowers who had a second lien and those that did not. Nonetheless, requiring subordination to assure continued GSE access seems reasonable, and 

would help at the margin. 

Mortgage insurers will generally treat a refinance as a modification of the existing 

policy in order to port the policy to the new loan. In a same servicer refinancing, 

the reps and warrants made by the originator of the original loan to the MI provider 

remain in effect. However, this is only possible when the existing servicer refinances 

the loans; in a different servicer refi the risk to the MI provider is increased, as 

the MI provider loses the reps and warrants on the original loan. Under HARP 1.0, 

if there was a servicer change, some MIs required a new MI certificate at market 

rates, others charged a surcharged or imposed other costs, and others required increased documentation. During the negotiations for HARP 2.0, most of the major 

mortgage insurers voluntarily agreed to allow the insurance policies to be fully portable, in spite of the fact that it is not in their economic interest to do so. We are 

told there was only one hold out, United Guaranty, an AIG subsidiary, which imposes a surcharge on a different servicer refis. We believe that all mortgage insurers 

should allow for full portability, even in the event of a servicer change. 

Moving the Cut-Off Date Until 6/1/2010 

The Menendez-Boxer Discussion Draft requires the cut-off date be moved from 6/ 

1/2009 to 6/1/2010. This move was suggested because the latter date was approximately when 30-year fixed rates loans dropped below 5 percent, and would allow 

borrowers whose loans were originated at higher rates to take advantage of refinancing. 

If we use the same framework as in Exhibit 2, it would raise the number of precut off borrowers (=80, 80–125, >125) who have good pay history and are in-themoney (have an economic incentive to refinance) from (10.9 million, 3.3 million and 

700 thousand) to (13.0 million, 4.2 million and 700 thousand). Therefore the number 

of post-cut off borrowers (=80, 80–125, >125) who have a good pay history and are 

in-the-money drops from (4.8 million, 2.1 million, 30 thousand) to (2.6 million, 1.1 

million, 18 thousand). 

We believe that the streamlined refinance program should be expanded for borrowers with LTVs =80, with or without rep and warrant relief. (Providing rep and 

warrant relief is expensive for the GSEs.) This action alone would increase the number of eligible borrowers by 2.1 million. However, these are borrowers who most 

likely would have been able to refinance anyway, this just makes the refinancing 

process easier. Would these borrowers be ‘‘crowding out’’ the pre-cutoff borrowers 

who need the help more? The answer to this is unclear. It might divert some resources, at the margin, but would allow for many more refinances. 

For HARP loans, it is a much harder call; we have very mixed feelings about the 

proposal and are on balance negative. We recognize that it will give an extra 900 

thousand borrowers the opportunity to refinance, and these are borrowers who 

would otherwise not be able to. This benefit has to be weighed against the ‘‘covenant 

with investors.’’ The FHFA has repeatedly reiterated the importance of the cut-off 

date. The date was also used as the FHA cut-off; the FHA decided to roll-back the 

Mortgage Insurance Premium for refinancing loans originated before the cut-off 

date. Investors have relied upon that date and developed a series of pay-ups on 

mortgages with this refinance friction. Changing the date would be very disruptive 

48 

to this covenant. The Agency mortgage market is wide and deep, regarded as the 

second most liquid market in the world behind the U.S. Treasury market. We believe that ‘‘breaking the covenant’’ with investors would be very damaging to the 

health of this market; if the date is moved once, market participants (investors, borrowers, and originators/servicers) will assume it will be moved again. 

This could, in turn, create a set of adverse incentives. If originators/servicers believe that an expansion of HARP 2.0 could allow reps and warrants to be stripped 

off future loans, it could entice originators to make more questionable loans, and 

then, a few months later, target those loans to get rep and warrant relief. 

We believe there is a continuum. Changing the cut-off date for streamlined 

refinancings of loans with LTV =80 would be minimally disruptive. If there is a 

groundswell of support to move the HARP date forward by 1 year, we would suggest 

that it be done for purchase loans only. Since allowing re-HARPing, and changing 

the dynamics of specified pool trading would be extremely disruptive. 

Increasing Homeowner Awareness 

The Menendez-Boxer Discussion Draft would require the GSEs to send eligible 

borrowers an official notice that they are eligible for refinancing at a lower rate, 

with an indication as to how much they would save each month. The notice would 

include referrals to Internet portals where the borrower could determine the type 

of loan they have, and get quotes from competing lenders. This is simply a notice 

to increase homeowner awareness. It is hard not be in favor of this type of action. 

Conclusion 

HARP 1.0 clearly fell short of expectations. The verdict on HARP 2.0 is still out. 

However, we believe that HARP 2.0 (for borrowers >80 LTV, loans made before the 

cut-off date) and current streamlined refinancing programs (for borrowers less than 

80 LTV, loans made before the cut-off date) could be much more effective if different 

servicer refinances were to be permitted on the same terms as the current servicer. 

We believe that promoting competition is the single most important action that can 

be taken to increase the impact of the program. It is also the single most powerful 

action that can be taken to decrease the mortgage rates and fees paid by the borrower. We are very much in favor of a consistent set of guidelines for Fannie and Freddie 

in order to ease lender compliance. We would like to see pre-cut off Freddie loans 

with LTVs =80 LTV receive rep and warrant relief, consistent with pre-cut off 

Freddie loans with LTVs >80 and all pre-cut off Fannie loans. We would also like 

to see consistency on the financing of closing costs. 

Other actions, such as eliminating loan level pricing adjustments and appraisals, 

are relatively minor. Borrowers are paying high fees because the banks are making 

oligopoly profits. These costs can be lowered by promoting competition. Similarly, 

requiring resubordination of second liens and portability of all mortgage insurance 

policies are nice features, but will only help at the margin. It is in the economic 

interest of second lien holders to resubordinate. Most mortgage insurers have already agreed to full portability. 

We would like to see more penetration of the existing HARP program by promoting competition and making borrowers aware of their refinancing options before 

expanding the eligibility by moving the cut-off date forward by 1 year. If the cutoff date were to be changed, it can most easily be done for borrowers with LTVs 

=80, as there was never a ‘‘covenant with investors’’ on these loans. If it is to be 

done on HARP loans, we would suggest doing it on purchase only loans. Allowing 

re-HARPing would be very detrimental to a well functioning market. 

Thank you very much for the opportunity to testify on this important set of issues. 

PREPARED STATEMENT OF ANTHONY B. SANDERS 

PROFESSOR OF FINANCE, GEORGE MASON UNIVERSITY SCHOOL OF MANAGEMENT

APRIL 25, 2012 

Senator Menendez and distinguished Members of the Subcommittee, my name is 

Dr. Anthony B. Sanders and I am the Distinguished Professor of Finance at George 

Mason and a Senior Scholar at the Mercatus Center. It is an honor to testify before 

this Subcommittee today. 

The proposal to be discussed at this hearing is the expansion of affordable refinancing of mortgages held by the Federal National Mortgage Association and the 

Federal Home Loan Mortgage Corporation. The expansion represents changes in 

HARP that eliminates Loan Level Price Adjustments (LLPAs), eliminates representations and warrants for cross servicer refinancing and appraisal streamlining and 

49 

1http://confoundedinterest.wordpress.com/2012/04/20/parsons-blames-glass-steagall-repealfor-crisis-but-glass-steagall-was-only-13rd-of-clintons-housing-trifecta/ 2See, http://partners.nytimes.com/library/financial/102399banks-congress.html. 

orders Fannie Mae and Freddie Mac to contact borrowers directly about HARP opportunities. 

It can be argued that Fannie Mae and Freddie Mac are resisting loan modification 

to protect their retained portfolios. Hence, fewer borrowers are able to refinance 

their mortgages. This proposal would remove the safeguards from HARP and encourage more refinancing by borrowers. 

Even so, I would encourage a detailed examination of the projected benefits to 

consumers and costs to American taxpayers of these proposed changes by FHFA, the 

Congressional Budget Office and The Federal Reserve Board before you proceed. Administrations and Congress have undertaken large policy changes in housing and 

housing finance (particularly since 1995) and these changes had unintended consequences. Removing the safeguards may be appropriate, but we need detailed studies of the 14 Federal Government loan modification programs and how they interact 

with each other and The Federal Reserves’ monetary easing strategy. 

Lessons From Jurassic Park 

The Clinton Administration embarked on a well-intended strategy of increasing 

the home ownership through the expansion of credit to lower-income households. 

The first leg in the ‘‘housing finance trifecta’’ was the National Home Ownership 

Strategy: Partners in the American Dream (1995). 1

The partnership should support efforts to increase local lender awareness 

and use of the flexible underwriting criteria established by the secondary 

market, FHA, and VA. 

The result was 

• A focused effort to target the ‘‘low income’’ borrower through extensive outreach 

• The drastic reduction of minimum downpayment levels from 20 percent to 0 

percent 

And the ‘‘partners’’ for this ‘‘Great Leap Forward’’ in home ownership included 

Fannie Mae and Freddie Mac who are now in Government conservatorship under 

the Federal Housing Finance Administration. 

The second leg in the ‘‘housing finance trifecta’’ was President Clinton’s desire to 

set capital gains tax on housing to zero (1997). 

Tonight, I propose a new tax cut for home ownership that says to every 

middle-income working family in this country, if you sell your home, you 

will not have to pay a capital gains tax on it ever—not ever. —President 

Bill Clinton, at the 1996 Democratic National Convention 

With the first two legs of the housing finance trifecta, the Clinton Administration 

was encouraging riskier low downpayment mortgages coupled with no capital gains 

tax on housing, a recipe for a massive increase in housing prices. This coincided 

with an explosion of GSE debt (mostly Fannie Mae and Freddie Mac) to fund the 

required mortgage debt expansion (see, Figure 1). 

The third leg of housing finance trifecta was the repeal of the Glass-Steagall Act 

of 1933. Deregulation per se is not damaging to the economy (and is often beneficial), but the shock of such a major regulatory change in conjunction with two 

large shocks in housing policy make it extremely difficult to predict the outcomes 

and unintended consequences. This is especially true when the Clinton Administration insisted that no merger may proceed if any of the financial holding institutions, 

or affiliates thereof, received a ‘‘less than satisfactory [sic] rating at its most recent 

Community Reinvestment Act exam,’’ essentially meaning that any merger may 

only go ahead with the strict approval of the regulatory bodies responsible for the 

CRA. The Clinton Administration stressed that it ‘‘would veto any legislation that 

would scale back minority-lending requirements.’’ 2

Taken together, the trifecta clearly was a major policy change to an extremely 

complex economy. I am unaware of any research at HUD from their Policy, Development and Research group examining how the three legs would work together and 

what the joint intended and unintended consequences would be. This type of major 

policy shift can have Jurassic Park type of unintended consequences for the housing 

market, the mortgage market and borrowers. The Clinton trifecta ultimately resulted in the taxpayers being eaten by the monster that was created (as in $7.4 trillion in household equity being lost and millions of borrowers in default or foreclosure). 

50 

3See, http://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/ 

index-mortgage-metrics.html. 4See, Table 25 of the most recent OCC Mortgage Metrics Report. http://www.occ.treas.gov/ 

publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgagemetrics-q4-2011.pdf 5 In the short run, HARP 2.0 is improving bank gain-on-sale margins http:// 

www.housingwire.com/news/harp-20-improving-bank-gain-sales. 6See, http://confoundedinterest.wordpress.com/2012/04/18/mba-refinance-applications-up13-5-purchase-applications-down-11-2-harp-at-32-of-refi-volume/. 7See, http://confoundedinterest.wordpress.com/2012/04/18/reuters-uber-cool-mortgage-writedown-calculator-loss-to-taxpayers-of-128-billion/. 

In summary, I strongly believe that any change in policy for the housing and 

mortgage market must be accompanied by sound theory and econometric models of 

the policy impact. If we don’t have the appropriate theory or data, we shouldn’t do 

it. It will simply unleash more taxpayer-eating dinosaurs on the economy. 

The 14 Federal Government Loan Modification Programs 

There are currently 14 Federal Government loan modification programs: 

• Home Affordable Modification Program (HAMP) 

• Principal Reduction Alternative (PRA) 

• Second Lien Modification Program (2MP) 

• FHA Home Affordable Modification Program (FHA–HAMP) 

• USDA’s Special Loan Servicing 

• Veteran’s Affairs Home Affordable Modification (VA–HAMP) 

• Home Affordable Unemployment Program (UP) 

• Second Lien Modification Program (2MP) 

• Home Affordable Refinance Program (HARP) 

• FHA Refinance for Borrowers in Negative Equity (FHA Short Refinance) 

• Treasury/FHA Second Lien Program (FHA2LP) 

• Home Affordable Foreclosure Alternatives (HAFA) 

• Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets 

(HHF) 

• Attorneys General Settlement for Mortgage Servicers (AGS) 

We anxiously await the results on HARP 2.0 and the Attorneys General Settlement has yet to kick in. In addition, there is pressure from the Administration and 

Congress on having FHFA approve principal reductions for the GSEs. 

The Evidence so Far 

The U.S. Department of Treasury provides us with a limited summary of the magnitude and effectiveness of HAMP and other programs. 3 But the number that 

stands out is that approximately 25 percent of modified mortgages go into redefault 

after 1 year. 4 True, the data is from 2010, but the trend for most recent modifications shows the same daunting trend. 

According to the Mortgage Bankers Association (MBA) Mortgage Refinancing 

Index, mortgage refinancing applications have been increasing since the beginning 

of 2011 (see, Figure 2). 5 With historically low mortgage rates, unprecedented intervention by the Federal Reserve, and the continued European debt crisis that is driving investors into the U.S. Treasury market. 6 We are in unchartered territory on 

Fed intervention and mortgage rates and we have to be careful not to create more 

unintended consequences that could devastate American taxpayers. 

While this proposed expansion of HARP does not include principal write downs, 

bear in mind that it is virtually impossible to accurately predict the outcomes of 

HAMP and HARP if FHFA agrees to principal reductions AND the Attorneys General Settlement (which includes principal reductions). Before proceeding, I suggest 

a study from the Congressional Budget Office, FHFA and The Federal Reserve on 

the joint effects of all programs kicking in together. 

I appreciate the difficulties faced by FHFA and others about predicting the success rates for HAMP and HARP. We simply do not have adequate data to make a 

sensible recommendation, particularly with regard to principal write downs. Reuters 

made an attempt to model principal reductions from Fannie Mae and Freddie Mac 

and estimated they could cost taxpayers $128 billion. 7 This is a much bigger number than FHFA has indicated ($2.1 billion) and far more than the available TARP 

funds ($41.7 billion). Likewise, we can only guess at the final success of HARP and 

the Attorneys General Settlement. And there is the moral hazard of principal reducVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00054 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
51 

tions that must be considered in any analysis (that is, will borrowers fall behind 

in their payments simply to qualify for a mortgage write down?). 

Please exercise extreme caution and wait until we have more data as to the effectiveness of the collected efforts of the 14 loan modification programs AND the principal reduction proposals for FHFA. And bear in mind that we only have data on 

loan modifications since 2008 and virtually no data over a long period (4 years) on 

principal reductions. 

Section 4: Having Fannie Mae and Freddie Mac Contact Borrowers Directly 

Section 4 requires that Fannie Mae and Freddie Mac contact borrowers directly 

about the possibility and benefits of a mortgage modification. In addition, Fannie 

Mae and Freddie Mac must post relevant refinancing information on their Web sites 

(see, Table 1 for examples of existing Web sites). 

Of course, this is an unprecedented change from current procedures. Given the 

plethora of media and links on bank Web sites and Government Web sites concerning loan modifications, I can’t see how any borrower interested in a loan modification could possibly not be aware of the possibilities. And again, the lessons from 

Jurassic Park teach us that large changes in Government policy can produce unintended consequences (14 Government mortgage modification programs PLUS individual bank/servicer/investor private mortgage modification programs). We must be 

careful to avoid a firestorm of unintended consequences. 

Should We Have Non-GSE Banks/Servicers Remove the Safeguards as Well? 

I am on record above stating that careful analysis of the joint impact of the 14 

Federal Government loan modification programs should be undertaken before any 

more changes are made (or new programs are created). So, my answer is no, at least 

until the appropriate studies are performed. 

At some point, the collective impact of these programs could drive our banks into 

bankruptcy. This possibility must be included in the analysis before any further 

steps are taken. 

Another reason that I am opposed to removing the loan modification safeguards 

is that the banks and investors are private market concerns, not private market 

concerns in conservatorship. Once again, this could be a Jurassic Park moment 

where we signal to the world that the U.S. will pass laws at will to alter contracts 

and dramatically change investor expectations. 

In summary, I encourage the Senate to request detailed studies on the impact of 

this legislation before proceeding further. I strongly suggest: 

1. The cost of each proposed change to taxpayers and the expected decline in default and redefault rates. 

2. How these changes will interact the 14 existing loan modification programs 

from the Federal Government and the proposed principal write down proposals 

for Fannie Mae and Freddie Mac. 

3. Ignore private market estimates of the costs and benefits if the analysis comes 

from a firm that benefits from any of these proposed changes or has ties to 

the Federal Government. 

Let us be wary of creating another Jurassic Park policy change. We are in unchartered waters for housing finance and Federal Reserve policies and any further 

changes should be enacted with extreme caution. 

Thank you for the opportunity to testify. 

52 

53 

PREPARED STATEMENT OF MICHAEL CALHOUN 

PRESIDENT, CENTER FOR RESPONSIBLE LENDING

APRIL 25, 2012 

Good morning Chairman Menendez, Ranking Member DeMint, and Members of 

the Subcommittee. Thank you for inviting me to testify at today’s hearing on efforts 

to help homeowners refinance their mortgages through responsible streamlined refinance policies. 

I am President of the Center for Responsible Lending (CRL), a nonprofit, nonpartisan research and policy organization dedicated to protecting home ownership 

and family wealth by working to eliminate abusive financial practices. CRL is an 

affiliate of Self-Help, a nonprofit community development financial institution. For 

30 years, Self-Help has focused on creating asset-building opportunities for low-income, rural, women-headed, and minority families, primarily through financing safe, 

affordable home loans. In total, Self-Help has provided over $6 billion of financing 

to almost 70,000 low-wealth families, small businesses and nonprofit organizations 

in North Carolina and across America. 

In my comments today, I will highlight the following points: 

• First, time is still of the essence to improve the housing market and prevent 

foreclosures, because the foreclosure crisis is far from being over. Research completed by CRL shows that the foreclosure crisis is around the halfway point for 

borrowers with loans originated during 2004–2008. 

• Second, foreclosure prevention efforts, including initiatives to help homeowners 

refinance their mortgage, are necessary and still needed. Access to the Home 

Affordable Refinance Program (HARP) is particularly important for underwater 

homeowners and those homeowners still in a mortgage with harmful features— 

including hybrid adjustable rate mortgages (ARMs) and mortgages with high interest rates. Opening up the refinance market to millions of American families 

paying above market interest rates and currently prevented from refinancing is 

a commonsense step that will prevent foreclosures, improve homeowners’ financial situation and help the economy. 

54 

• Third, while the improvements made in HARP 2 are significant, more should 

still be done to increase refinancing access to underwater borrowers and homeowners with mortgages that have harmful features. This includes taking steps 

to increase lender competition, further streamline the refinance process and coordinate HARP outreach with other foreclosure prevention programs. Additionally, CRL supports Congressional action to expand refinancing opportunities 

through FHA for borrowers with mortgages that are not owned or guaranteed 

by the GSEs or FHA. 

The U.S. Is Not Yet Halfway Through the Foreclosure Crisis 

I’d like to begin my comments today by putting the current status of the housing 

market in context. Last year, the Center for Responsible Lending published research 

showing that the Nation is not yet halfway through the foreclosure crisis. CRL’s research, which is detailed in our Lost Ground report, shows that for mortgages made 

during the height of the lending boom that occurred between 2004 and 2008, 8.3 

percent of these loans were at least 60 days delinquent or in the foreclosure process 

as of February 2011. This represents another 3.6 million households that could possibly lose their homes. This is on top of the 6.4 percent of mortgages—totaling 2.7 

million households—identified in CRL’s study that have already gone through foreclosure. Because our research focused only on 2004-2008 originations, these estimates are likely to be on the conservative side. For example, Moody’s has reported 

the completion of 5 million foreclosures or short sales. 

In addition to highlighting the scope of the ongoing foreclosure crisis, CRL’s research also makes important findings about who is likely to be affected by foreclosure. Our Lost Ground research confirms that higher foreclosure rates and serious delinquency rates are linked to mortgages with one of the following characteristics: having been originated by a mortgage broker, containing hybrid or option 

ARMs, having prepayment penalties, and featuring high interest rates (subprime 

loans). Homeowners with mortgages that have one of these features are much more 

likely to be seriously delinquent and at risk of foreclosure than homeowners in a 

30-year fixed-rate mortgage without a prepayment penalty. 

CRL’s analysis in Lost Ground also confirms that foreclosures and mortgage delinquencies continue to have a disproportionate impact on African American and 

Latino borrowers. This disparity persists when comparing borrowers with higher incomes. CRL’s research also demonstrates that African American and Latino borrowers were much more likely to receive mortgages with harmful features as described above. For example, African American and Latino borrowers with FICO 

scores above 660 were three times as likely to have a high interest rate mortgage 

than white borrowers in the same credit range. 

The research published in Lost Ground is CRL’s latest effort to document the 

harmful impact of predatory and subprime lending. In fact, this research builds on 

and updates CRL’s 2006 study entitled Losing Ground, which estimated that predatory lending would lead to approximately 2.2 million foreclosures of subprime mortgages. While CRL correctly predicted a likely foreclosure crisis, the number of foreclosures has unfortunately been much larger than forecast, in part because the crisis spread beyond the subprime market and into the broader housing market. 

As homeowners and communities struggle with ongoing foreclosures, we encourage Members of this Subcommittee to continue all efforts to find solutions that help 

families stay in their homes and prevent as many foreclosures as possible. 

Supporting Mortgage Refinancing Is a Needed Policy Tool To Avoid Foreclosures and Help Homeowners Obtain Less Expensive and More Stable 

Mortgages 

Interest rates are currently at historic lows, but many homeowners who stand to 

benefit from these low rates have not refinanced their existing, higher-rate mortgage. Making refinancing more accessible for underwater homeowners and those 

homeowners in mortgages with harmful features should be an essential component 

of preventing foreclosures. 

Millions of families across the country have seen the value of their homes plummet over the last 5 years. According to the Fiserv Case-Shiller house price index, 

housing prices have fallen by one-third since the first quarter of 2006, and the statistics released yesterday show that the housing market is still struggling. In the 

years leading up to the housing market collapse, homeowners took out mortgages 

while home prices were increasing. Unsustainable lending driven by Wall Street investment bank demand for risky mortgages regardless of whether borrowers could 

afford the loans fueled the housing bubble. The subsequent drop in housing prices 

is a market price correction of the housing bubble that has harmed current homeowners through no fault of their own. 

55 

Decreased home prices have created complications for many homeowners trying 

to refinance their mortgage. Homeowners have lost over $7 trillion in home equity 

since the housing market collapse, and approximately 11 million homeowners are 

now estimated to be underwater on their mortgage, meaning that their mortgage 

balance is greater than the value of their home. As a result, many of these homeowners have been unable to refinance their mortgage because they now have a high 

loan-to-volume (LTV) ratio well above standard underwriting requirements. 

Racial and ethnic differences in refinancing rates are a less-discussed aspect of 

this issue, but an important one to examine. Home Mortgage Disclosure Act 

(HMDA) data show that while the number of refinance applications for Asian and 

non-Hispanic white borrowers increased between 2008 and 2010, the number of refinance applications for African American and Latino borrowers actually decreased. 

In addition, CRL analysis shows that among borrowers current on mortgage payments through February 2011, African American and Latino borrowers remained 

more likely to be paying toward a high-interest (subprime) loan than Asian and nonHispanic white borrowers. While not conclusive, these data suggest that many African American and Latino borrowers would benefit from refinancing at today’s historically low interest rates, but that there remains significant frictions in the refinance market that have prevented them from doing so. 

The Federal Housing Finance Agency’s announcement last year to expand HARP 

to all underwater borrowers was a strong step in the right direction. The initial 

HARP program was limited to borrowers with a maximum LTV of 125 percent, and 

the revisions made in ‘‘HARP 2’’ have removed this high-LTV restriction. HARP 2 

program changes went into effect on December 1, 2011. 

The changes in HARP 2 have the potential to help underwater borrowers and borrowers in mortgages with harmful features gain better access to refinancing opportunities. To date, the majority of borrowers entering into a HARP refinance fall between 80–105 percent LTV. Since its inception in 2009 through February 2012, 

more borrowers with an LTV between 80–105 percent benefited from HARP refinances (1.01 million) than underwater borrowers with an LTV above 105 percent 

(110,000). However, progress is being made with the improvements in HARP 2: 

more borrowers with an LTV above 105 percent refinanced under HARP in January 

and February 2012 than in any prior month. 

Further Improvements to HARP 2 Should Be Designed To Maximize Participation by Underwater Homeowners and Those Homeowners Still in 

a Mortgage With Harmful Features 

While the changes implemented in HARP 2 are very positive, we believe that 

FHFA should take additional steps to expand access to streamlined refinances of 

mortgages owned or guaranteed by Fannie Mae or Freddie Mac. There is an urgent 

need to prevent as many foreclosures as possible, and CRL supports changes that 

will maximize the participation of underwater borrowers and those with mortgages 

that have harmful features. Expanded access to streamlined refinances—along with 

principal reduction in certain circumstances, principal forbearance, and mortgage 

modifications—is an important part of the solution. 

Although FHFA has the authority to implement most of the suggestions detailed 

below, in the meantime we also believe that the Menendez-Boxer Discussion Draft 

would go a long way to further improving borrower access to streamlined refinances. 

First, CRL supports efforts to increase competition in offering HARP refinances, 

which would result in better pricing and greater access to refinancing opportunities. 

One way to accomplish this goal is by putting servicers on par with one another 

regarding the waiver of representations and warranties liability. Frequently called 

‘‘reps and warranties,’’ these statements require servicers to buy back a mortgage 

if it later falls short of the characteristics promised when it was originated. As Laurie Goodman has highlighted in her research, servicers participating in HARP currently have reduced reps and warrants liability if they are refinancing a mortgage 

already in their servicing portfolio. However, servicers taking on a new mortgage 

to refinance maintain full reps and warranties liability. Ms. Goodman and her colleagues have persuasively argued that this differential treatment reduces competition and, therefore, increases the cost of HARP refinances. 

Second, expanding HARP to all borrowers—regardless of LTV ratio—would likely 

have several benefits. One benefit would be further streamlining the refinance process by eliminating differences between Fannie Mae and Freddie Mac’s versions of 

HARP. It also would allow borrowers who don’t reach 80 percent LTV on their first 

mortgage but have a combined LTV above 80 percent when factoring in a second 

mortgage to qualify for HAMP refinances. This would put these borrowers on par 

with borrowers over 80 percent LTV on a first mortgage alone. Lastly, it would 

56 

allow lower LTV borrowers who are unable to access this market to actually obtain 

a refinance and at a lower cost. 

Third, the Menendez-Boxer Discussion Draft language concerning resubordination 

of second liens would also contribute to streamlining the refinance process for these 

borrowers. 

In addition to the Menendez-Boxer Discussion Draft language concerning outreach 

to eligible borrowers, CRL encourages Fannie Mae, Freddie Mac and FHFA to make 

every effort to coordinate their HARP outreach efforts with other Federal agencies 

administering housing initiatives. HARP is one part of a broader list of foreclosure 

prevention initiatives, including the Independent Foreclosure Review tied to the 

April 2011 Consent Orders between the banking regulators and mortgage servicers; 

the Attorneys Generals and Administration settlement involving refinancing and 

principal reduction; FHA refinancing initiatives; and mortgage modifications 

through HAMP. Coordinated outreach will help reach borrowers possibly eligible for 

HARP or another program. 

Finally, we support the Administration’s proposal to pay the closing costs of borrowers who refinance into shorter-term mortgages in order to encourage principal 

reduction through quicker amortization. The debt overhang facing borrowers needs 

to be addressed through various means, and this is an important approach. 

Given capacity constraints that would be further heightened by some of these proposals, we do have concerns about opening up HARP to investment properties. 

While investors would benefit from lower rates and tenants are harmed when their 

landlords are foreclosed upon, we believe the needs facing owner-occupants are so 

significant that servicer capacity should continue to be focused on this group. 

On top of the HARP improvements outlined above, CRL believes several additional points merit further thought and consideration. One is paying attention to 

whether lenders are adding overlays that limit HARP’s reach to underwater borrowers. It is especially important for the refinancing market to serve underwater 

borrowers while also serving those borrowers with a lower LTV ratio. Additionally, 

in developing HARP outreach materials for eligible borrowers, we believe that refinancing costs and fees should be included in these materials in addition to the estimated monthly savings. 

I want to end on a final point that also merits additional Congressional action, 

which is expanding streamlined refinances to borrowers in mortgages that are not 

owned or guaranteed by the GSEs or FHA. The Administration’s proposal to provide 

these borrowers with streamlined refinancing opportunities through FHA would 

help both underwater borrowers and those borrowers currently in mortgages with 

harmful features, such as subprime mortgages. Every effort should be made to reach 

these borrowers with responsible refinancing opportunities. 

Thank you for the opportunity to present this testimony before the Subcommittee 

today, and I look forward to your questions. 

57 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

WRITTEN STATEMENT SUBMITTED BY BILL EMERSON, CHIEF 

EXECUTIVE OFFICER, QUICKEN LOANS 

Chairman Menendez, Ranking Member DeMint, and Members of the Senate Subcommittee on Housing, Transportation, and Community Development, I thank you 

for your invitation to submit written testimony for today’s hearing, ‘‘Helping Responsible Homeowners Save Money Through Refinancing.’’ My name is Bill Emerson 

and I am the CEO of Quicken Loans, an independent Detroit, Michigan-based conventional, FHA, and VA retail residential mortgage lender. 

As a bit of background, Quicken Loans has been in business since 1985, and has 

approximately 5,000 employees, most of them working in the city of Detroit. We do 

business in all 50 States and are the Nation’s largest online lender, one of the four 

largest retail mortgage lenders, one of the three largest FHA lenders, and a top five 

VA mortgage lender. We closed over $30 billion in mortgage loans in 2011, helping 

almost 150,000 homeowners. 

JD Power and Associates has ranked Quicken Loans highest in Customer Satisfaction for Primary Mortgage Origination in the U.S. for years 2010 and 2011. 

My testimony will mainly address the issues with HARP, HARP 2.0, and ‘‘The Responsible Homeowner Refinancing Act of 2012,’’ currently being drafted by Chairman Menendez and Senator Boxer. 

HARP 1.0 

Has HARP 1.0 been a success? According to the FHFA’s Web site, HARP 1.0, 

which was introduced in 2009, has assisted about 900,000 homeowners through October 2011. On the surface, that seems like a big number. But upon closer examination, it appears there was a missed opportunity to help those who faithfully make 

their mortgage payment each month, but find themselves unable to take advantage 

of today’s historically low rates simply because they owe more than their home is 

worth. 

Of the 900,000 HARP refinances, only about 200,000 have been to homeowners 

who owe more than their homes are worth. The rest were ‘‘coded’’ by the GSE’s as 

HARP loans, but were to consumers who still had equity in their homes. Further, 

estimates show that there are about four million underwater homeowners who are 

in a mortgage backed by the GSE’s, current on such mortgage and employed. These 

homeowners could be eligible for a HARP refinance but for their mortgage being underwater. In other words, only about 200,000 eligible homeowners have been helped 

out of a population of roughly four million. By this key measure, HARP has been 

less than successful. More should be done to help these homeowners. 

HARP 2.0 

HARP 2.0 is definitely positioned to help more homeowners than HARP 1.0, and 

we applaud the Administration, the FHFA, the GSE’s, and the mortgage industry 

for working together to improve the HARP product by rolling out HARP 2.0. However, HARP 2.0 still is not designed to help enough underwater homeowners and 

as a result we do not think enough of the four million homeowners who are eligible 

for HARP 2.0 will actually be helped. 

Why will HARP 2.0 fail to help many of the four million homeowners? 

The answer lies in the difference between the risk the homeowner’s existing 

servicer (same servicer) must bear under the HARP 2.0 program versus the risk any 

other mortgage originator (new originator) must bear under the program. 

The risks born by same servicers and new originators under HARP 2.0 are different because the underwriting guidelines that a same servicer must follow, as 

compared to the underwriting guidelines that a new originator must follow are very 

different. 

To refinance a borrower into a HARP 2.0 loan, a same servicer is not required 

to verify (i) debt-to-income ratio calculations (ii) the borrower’s income or (iii) the 

borrower’s assets. The same servicer only needs to verify that the borrower has a 

viable source of income. The new originator on the other hand, must calculate a 

debt-to-income ratio, and verify income and assets. Both the same servicer and new 

originator have the same clean title requirements and same appraisal guidelines (if 

an appraisal is required). 

Both new originators and same servicers are required to represent and warrant 

to the GSE’s that they are originating and underwriting loans according to GSE 

guidelines. If the originator is found to be in violation of a representation and warranty, the originator is required to repurchase the loan. The GSE’s routinely challenge the appraisals on loans. In many such cases, the demands are predicated on 

simple differences of opinion on the values that third party, licensed appraisers proVerDate Nov 24 2008 10:43 Jan 22, 2013 Jkt 048080 PO 00000 Frm 00061 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\04-25 HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THRO
58 

vided. It is almost impossible for a lender to defend themselves in such situations, 

and they wind up having to repurchase many loans. In addition, the GSE’s often 

require repurchases based on other flaws (however minor) in the origination and underwriting process. Sometimes such flaws are extraordinarily difficult to prevent 

(example: a borrower who takes out a credit card or auto loan one day before the 

loan closes), and originators are required to repurchase loans, even though they 

acted diligently. Data models show that as a loan’s loan-to-value ratio (LTV) rises 

beyond 100 percent, default rates begin to rise precipitously. When the LTV exceeds 

125 percent and beyond, default rates skyrocket. Because many HARP 2.0 loans are 

deeply underwater, there is great risk of default and losses on any loan that goes 

into default can be substantial. It’s not uncommon for a minor flaw on an underwater loan to cost $100,000 or more. 

Because the new originators have more difficult underwriting requirements than 

same servicers, the new originators’ representations and warranties are more stringent and the likelihood that they will have to repurchase more loans and incur more 

losses is much higher. Accordingly, most prudent new originators stay clear of any 

HARP 2.0 loan where the borrower is underwater, and for the most part HARP 2.0 

loans are originated by same servicers, who bear less risk. 

The reluctance of new originators to fully participate in HARP 2.0 has limited 

HARP 2.0’s success. Roughly 70 percent of all GSE mortgages are being serviced 

by the largest servicing firms. Because these same servicers can originate HARP 2.0 

refinances with reduced risk, these servicers must carry the load of trying to administer the HARP 2.0 program. Notwithstanding the good intentions of the large 

servicers, they will simply not be able to help all HARP 2.0 eligible borrowers. Given 

all the other duties these larger servicers must perform aside from originating 

HARP 2.0 loans, they simply can’t ramp up their platforms and hire and train people fast enough to help these millions of homeowners. Additionally, some of the 

large servicers have greatly reduced or eliminated their origination platforms, thereby significantly reducing access to credit for the HARP 2.0 borrowers being serviced 

by these large firms. 

Because we are from the Motor City, we will provide a car-related analogy. 

The current HARP 2.0 program which funnels all underwater borrowers to their 

current loan servicer for their new HARP loan is analogous to a car recall program 

which requires all car owners whose car has been recalled to return their cars to 

the factory for the needed repairs, as opposed to visiting one of the many dealers 

in the nationwide network that are capable of fixing the problem. Such a recall system would never work, and yet that is exactly how HARP 2.0 is set up today. 

The GSE’s already bear the risk on these loans regardless of who is originating 

the loans. So there is no viable reason to create artificial barriers that effectively 

block new originators from using the HARP 2.0 program to assist homeowners and 

to enable the GSE’s to improve their risk position. Because HARP 2.0 is being utilized mostly by a small number of firms, the demand for HARP 2.0 originations is 

dramatically exceeding the supply of firms who fully offer the program. The imbalance between supply and demand has caused the price of the new HARP 2.0 mortgage to be higher than it normally would be if competition existed. Same servicer 

HARP 2.0 has created an oligopoly and, by any measure, oligopoly pricing is in play. 

Solutions 

‘‘The Responsible Homeowner Refinancing Act of 2012’’ (the ‘‘Act’’), currently 

being drafted by Chairman Menendez and Senator Boxer goes a long way toward 

addressing many of the underlying problems. We have the following suggestions for 

improvement to the Act: 

Eligibility 

Allowing a new originator to operate under same servicer guidelines resolves almost all of the issues we’ve addressed above. The current draft of the Act requires 

that the GSE’s allow all originators to originate loans under same servicer guidelines. This alone would be a major breakthrough. It would enable every loan originator in the country the opportunity to help the four million HARP eligible borrowers. We strongly support the intentions of the ACT to instruct the GSE’s to allow all 

mortgage originators to use the same servicer guidelines. 

Appraisals 

On roughly 80 percent of HARP 2.0 loans, the GSE’s will provide originators an 

automated valuation that can be used in lieu of an appraisal. Because this valuation 

comes from the GSE’s, the originator does not represent or warrant the value, marketability, condition, or property type of the home that collateralizes the HARP 2.0 

mortgage. 

59 

On the remaining 20 percent of HARP 2.0 loans that require an appraisal to be 

completed by a licensed appraiser, there is great, and unquantifiable, risk to originators. It is very common for the GSE’s to require that an originator repurchase 

a loan if, many years after the loan was closed, the GSE’s decide to challenge the 

value the independent 3rd party appraiser provided at time of origination. Insuring 

a 3rd party appraiser’s opinion is always risky, but it is downright irresponsible on 

a loan that is deeply underwater. This reality has led most originators to put restrictions or overlays on the HARP 2.0 appraisal and LTV guidelines. 

We support the language in the Act that states—On HARP 2.0 loans, the originator should only be required to comply with the GSE’s methods and standards for 

properly, ordering the appraisal and choosing the appraiser. The lender should not 

be required to warrant the value, marketability, condition or the property type that 

is evidenced by the appraisal or any allowable alternative valuation methods. 

Resubordination of Second Liens 

We support the spirit of the ACT requiring that lenders subordinate to HARP 

loans. However, we recommend that you carefully consider the Mortgage Banker Association’s testimony on the possibility of unintended consequences that this requirement may cause. 

Mortgage Insurance 

We support the spirit of the ACT of requiring that all mortgage insurers transfer 

mortgage insurance on all HARP 2.0 eligible loans. However, we recommend, that 

you carefully consider the Mortgage Banker Association’s testimony on the possibility of unintended consequences that this requirement may cause. 

Consistency 

We also agree with the language in the Act suggesting that the FHFA issue guidance to require the GSEs to make their refinancing guidelines under the HARP program consistent with each other to ease originator compliance requirements. 

Remove Barriers That Make Borrowers Ineligible for a HARP Loan 

There are barriers which may cause a borrower to be ineligible for a HARP 2.0 

loan, such as: 

• Credit enhancements 

• Repurchase request outstanding 

• Loan was previously an alt A or subprime loan 

We suggest the Act remove these barriers. 

Automated Underwriting 

We think the Act should address the use of automated underwriting systems— 

Desktop Underwriter (Fannie) and Loan Prospector (Freddie). These systems should 

provide insight into key data required to determine eligibility for a HARP program 

as well as data necessary for the refinance. 

The systems should confirm: 

• The loan is eligible for a HARP refinance via confirmation of all guideline requirements, identity of borrower(s), and property address 

• The estimate value of the property when/if an appraisal is not required 

• Provide all mortgage insurance data applicable to perform a HARP MI Modification 

Conclusion 

If the Helping Responsible Homeowners Act were to be refined as discussed above 

then the new version of HARP 2.0 could help millions of underwater borrowers in 

short order. Therefore, we support the Act, with the changes and enhancements that 

we have proposed. 

Thank you for allowing me to testify on this very important topic. 

60 

WRITTEN STATEMENT SUBMITTED BY NATIONAL ASSOCIATION Of 

REALTORS®

Introduction 

On behalf of more than 1.1 million REALTORS® who are involved in residential 

and commercial real estate as brokers, sales people, property managers, appraisers, 

counselors, and others engaged in all aspects of the real estate industry, thank you 

for giving us an opportunity to share our thoughts on how to help responsible homeowners save money through refinancing. 

It’s no secret our Nation’s housing markets remain in a tenuous state. While no 

one thought the crisis would carry on so long, markets are slowly recovering, but 

remain in need of immediate policy solutions to address the myriad challenges in 

order to stabilize housing and support an economic recovery. REALTORS® have 

long maintained that the key to the Nation’s economic strength is a robust housing 

industry. And, we remain steadfast in our belief that swift action is needed to directly stimulate a housing recovery. In particular, bringing relief to the millions of 

homeowners who have remained current on their mortgages in the face of declining 

home values and rising inflationary pressures will go a long way to kick starting 

not just the housing sector, but the overall economy. 

The Responsible Homeowner Refinancing Act 

The National Association of REALTORS® supports the ‘‘Responsible Homeowner 

Refinancing Act’’ because it offers relief to homeowners who continue to meet their 

mortgage obligation during this ongoing period of economic unrest. Many homeowners have maintained their mortgage payments even as the economy stalled and 

prices of other consumer goods rose, squeezing their discretionary income. Unfortunately, these same consumers have not been able to take advantage of the low mortgage interest rates fostered by policy aimed at stimulating the economy because of 

constraints embedded in the Government-sponsored enterprises (GSEs) mortgage refinance guidelines. 

The ‘‘Responsible Homeowner Refinancing Act’’ removes those impediments and 

allows ‘‘current borrowers’’ to take advantage of record low interest rates. Effectively, this places more money into their pockets and gives them the confidence they 

need to participate in our Nation’s economy. Moreover, helping these responsible 

homeowners lower their payments reduces their risk of default and aids the recovery of the GSEs, Fannie Mae, and Freddie Mac. Finally, the economic activity 

spurred on by these consumers’ ability to meet an affordable loan payment will act 

as a mechanism to begin moving our Nation out of recovery. 

The GSEs, under the guidance of the Federal Housing Finance Agency (FHFA), 

have recently made improvements to their refinance guidelines. This legislation 

codifies many of those improvements, and offers enhancements to others in an effort 

to ensure that hard-working, diligent mortgage payers, who are ‘‘current,’’ have options available to them to relieve some of their economic burden during this tumultuous period. 

The proposed legislation does a number of things that REALTORS® believe are 

necessary to entice both consumers and lenders to pursue refinancing in this environment. First, it eliminates unnecessary consumer costs associated with a refinance that tend to keep homeowners who need a refi on the sidelines. These would 

be the up-front risk-based fees charged by the GSEs that could cost consumers up 

to $4,000 on a $200,000 loan, as well as costs associated with the appraisal. Also, 

underwriting guidelines that restrict eligibility due to loan-to-value (LTV) ratios 

would be waived for existing, performing GSE loans in order to ensure all ‘‘current’’ 

borrowers have access to affordable refinancing rates. In our present economic environment, many consumers may not have the discretionary capital required to close 

a refinance. However, many of these same consumers are current on their mortgage 

indicating their ability, and desire, to observe their obligation. The removal of these 

barriers will help reward those diligent mortgage payers by allowing them to 

achieve a reduced mortgage payment. 

Second, the legislation improves competition for lenders looking to compete with 

the existing mortgage servicer. The proposed legislation directs the GSEs to require 

the same streamlined underwriting and associated representations and warranties 

for the new servicer that are in place for the existing servicer. This will level the 

playing field in a manner that yields increased competition for the consumer’s business. Ultimately, this competition will lower the cost of refinancing for the consumer, again benefiting the stability of the GSEs and the overall economy. 

An additional lender concern is addressed in the provision that directs FHFA to 

align the refinance guidance of Fannie Mae and Freddie Mac. Confusion over the 

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61 

line out of concern for misunderstanding the guidance offered by the appropriate organization and being subject to ‘‘repurchase’’ risk. 

Finally, the legislation establishes penalties for servicers of second liens and mortgage insurers who thwart the refinance process. Establishing the ability for consumers to overcome the obstacles of second liens and mortgage insurance will increase the number of households that can take advantage of the Administration’s, 

Regulators’, and Congress’ efforts to help alleviate existing housing costs pressures, 

and stimulate the economy. 

Utilization of GSE Guarantee Fee as ‘‘Pay-for’’ for Nonhousing Programs 

A final issue that has the ability to prevent consumers from refinancing, or to 

keep potential homebuyers on the sideline, is the use of GSE guarantee fees (g-fees) 

as a means to ‘‘pay-for’’ nonhousing programs. Just as the proposed legislation will 

make refinances more attractive by removing some cost barriers associated with the 

refinance process, the potential for Congress to increase the GSEs’ g-fees for nonhousing purposes effectively re-erects a cost barrier. 

Our members were deeply troubled by the use of a 10 basis-point increase over 

the 2011 average g-fee to pay for a 2-month extension of the payroll tax relief. That 

increase will impact homebuyers and consumers looking to refinance their mortgages for the next 10 years. Therefore, when Congress began negotiating the 10- 

month extension of the payroll tax relief and the potential use of the g-fees to cover 

that expense, you can understand why our members emphatically let Congress 

know that housing cannot, and will not, be used as the Nation’s piggy bank. Though 

they are only rumors about the potential use of g-fees to cover another non-housing 

expenditure, we would like to use this opportunity to indicate the counter-productivity of such an increase in the face of the proposed legislation, ‘‘the Responsible 

Homeowner Refinancing Act’’. 

The Nation’s housing sector remains in a precarious state. Though we are seeing 

signs of improvement, we are cautious of taking any steps that may retard that recovery and ultimately send our overall economy into another tailspin. Increasing the 

g-fee, even just extending the current fee increase, effectively taxes potential homebuyers and consumers looking to refinance their mortgages, at a time when the 

housing sector can least afford it. The unintended impact of any proposed fee increase would be to keep housing consumers on the sideline, preventing the absorption of our Nation’s large real-estate owned (REO) inventory, as well as curtailing 

refinance activity that is needed to keep responsible consumers in their homes. 

Lastly, please note that g-fees currently are calculated by the Enterprises as a 

function of the costs of guaranteeing the securities they issue, i.e., the risk of underlying loans. We strongly believe that fees charged by the Enterprises to manage risk 

and enhance capital should not be diverted for purposes unrelated to the safety and 

soundness of the housing finance system. 

Conclusion 

Home ownership matters. Either fostering new home purchases or helping consumers remain in their homes must be a priority if we are going to move our Nation 

from tenuous recovery to prosperity. Home ownership represents the single largest 

expenditure for most American families and the single largest source of wealth for 

most homeowners. The development of home ownership has a major impact on the 

national economy and the economic growth and health of regions and communities. 

Home ownership is inextricably linked to job access and healthy communities and 

the social behavior of the families who occupy it. 

The National Association of REALTORS® sees a bright future for the housing 

market and the overall economy. However, our members are well aware that the 

future we see rests on the industry’s and the economy’s ability to successfully navigate some continuing and persistent obstacles. Congress and the housing industry 

must maintain a positive, aggressive, forward looking partnership if we are to ensure that housing and national economic recoveries are sustained. The National Association of REALTORS® believes that the proposed legislation will foster and encourage steps in that direction. 

62 

LETTER SUBMITTED BY MAURICE VEISSI, PRESIDENT, NATIONAL 

ASSOCIATION Of REALTORS®


April 23, 2012 

The Honorable Robert Menendez 

United States Senate 

528 Hart Senate Office Building 

Washington, DC 20510 

The Honorable Barbara Boxer 

United States Senate 

11 2 Hart Senate Office Building 

Washington, DC 20510 

Dear Chairman Menendez and Senator Boxer: 

On behalf of the 1.1 milJjon members of the ational Association of REALTORS® 

(NAR) and our affiliates, thank you for your efforts to streamline and align the refinance 

processes of Fannie Mae and Freddie Mac, as well as make these improvements available 

to homeowners who have remained current on their mortgages as they watched their 

home's value and their equity dissipate. 

The ational Association ofREALTORS® supports the "Responsible Homeowner 

Refmancing Act" because it offers relief to homeowners who continue to meet their 

mortgage obligation during this on-going period of economic unrest. Many homeowners 

have maintained their mortgage payments even as the economy stalled and prices of 

other consumer goods rose, squeezing their discretionary income. Unfortunately, these 

same consumers have not been able to take advantage of the low mortgage interest rates 

fostered by policy aimed at stimulating the economy because of constraints embedded in 

the government-sponsored enterprises (GSEs) mortgage refinance guidelines. 

The "Responsible Homeowner Refinancing Act" removes those impediments and allows 

"current borrowers" to take advantage of record low interest rates. Effectively, this 

places more money into their pockets and gives them the confidence they need to 

participate in our nation's economy. Moreover, helping these responsible homeowners 

lower their payments reduces their risk of default and aids the recovery of the GSEs, 

Fannie Mae and Freddie Mac. Finally, the economic activity spurred on by these 

consumers' ability to meet an affordable loan payment will act as a mechanism to begin 

moving our nation out of recovery. 

Again, REALTORS® thank you for your efforts to help offer much needed relief to 

homeowners who continue to struggle, but meet their mortgage obligation. As always, 

NAR stands ready to collaborate with you and Congress to enact comprehensive and 

effective housing focused legislation. 

~ 

Maurice "Moe" Veissi 

2012 President, National Association of REALTORS® 
63 

LETTER SUBMITTED BY JAMES W. TOBIN III, SENIOR VICE PRESIDENT 

AND CHIEF LOBBYIST, NATIONAL ASSOCIATION OF HOME BUILDERS 


NatIonal AssocIatIon of Home Bulldens 

120115th Street NW 

Washington, DC 20005 

T 800 368 5242 

F 202 266 8400 

www.nahb.org 

April 24, 2012 

The Honorable Robert Menendez 

Chairman 

Subcommittee on Housing 

Senate Banking Committee 

Washington DC 20510 

Dear Chairman Menendez: 

Government Affairs 

James W. Tobin III 

Senior Vice President & Chief Lobbyist 

On behalf of the 140,000 members of the National Association of Home Builders (NAHB), I 

am writing to support your efforts to improve the Home Affordable Refinance Program 

(HARP). NAHB believes that your draft bill, the Responsible Homeowner Refinancing Act of 

2012, will go a long way to address the obstacles preventing many individuals from taking 

advantage of government efforts to mitigate foreclosures through refinance, and allow 

borrowers to take advantage of the historically low interest rates that have been beneficial to 

many American homeowners and home buyers. 

Home mortgage foreclosures continue to have a significant negative impact on the housing 

market and contribute to the lag in the nation's economic recovery. While government efforts 

to reduce foreclosures have had limited success to date, NAHB believes that your legislation 

will help reduce foreclosures and stabilize home values u~ mate y aiding the financial 

recovery of our nation. 

In particular, NAHB supports the provisions of the draft legislation that will allow the program 

to reach more eligible borrowers, including extending the cutoff date to May 31 , 2010, 

requiring consistent Fannie Mae and Freddie Mac refinancing guidelines and establishing 

consistent treatment of representations and warranties for all servicers. 

NAHB strongly believes that the recovery of the housing market, and the overall economy, is 

dependent on a stable housing sector. We look forward to working with you as the 

Responsible Homeowner Refinancing Act of 2012 moves forward to ensure that responsible 

homeowners who are in financial need avoid foreclosure. 

Sincerely, 

Cltl! 

James W. Tobin III