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64–555 PDF 2011

ARE THERE GOVERNMENT BARRIERS 

TO THE HOUSING MARKET RECOVERY? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INSURANCE, HOUSING, AND 

COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

FEBRUARY 16, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–7 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON INSURANCE, HOUSING, AND COMMUNITY OPPORTUNITY

JUDY BIGGERT, Illinois, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

PATRICK T. MCHENRY, North Carolina 

LYNN A. WESTMORELAND, Georgia 

SEAN P. DUFFY, Wisconsin 

ROBERT J. DOLD, Illinois 

STEVE STIVERS, Ohio 

LUIS V. GUTIERREZ, Illinois, Ranking 

Member 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

EMANUEL CLEAVER, Missouri 

WM. LACY CLAY, Missouri 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 16, 2011 ............................................................................................ 1 

Appendix: 

February 16, 2011 ............................................................................................ 47 

WITNESSES 

WEDNESDAY, FEBRUARY 16, 2011 

Caldwell, Phyllis, Chief, Homeownership Preservation Office, U.S. Department of the Treasury ........................................................................................... 12 

Farrell, Michael A.J., Chairman, CEO, and President, Annaly Capital Management, Inc ......................................................................................................... 33 

Gordon, Julia, Senior Policy Counsel, Center for Responsible Lending .............. 37 

Holtz-Eakin, Douglas, President, American Action Forum, and former Director of the Congressional Budget Office from 2003 to 2005 ............................... 32 

Schwartz, Faith, Executive Director, HOPE NOW Alliance ................................ 35 

Stevens, Hon. David H., Assistant Secretary for Housing/FHA Commissioner, 

U.S. Department of Housing and Urban Development (HUD) ........................ 8 

Tozer, Theodore ‘‘Ted’’, President, Government National Mortgage Association 

(Ginnie Mae) ......................................................................................................... 10 

APPENDIX 

Prepared statements: 

Caldwell, Phyllis ............................................................................................... 48 

Farrell, Michael A.J. ........................................................................................ 56 

Gordon, Julia .................................................................................................... 60 

Holtz-Eakin, Douglas ....................................................................................... 96 

Schwartz, Faith ................................................................................................ 101 

Stevens, Hon. David H. .................................................................................... 122 

Tozer, Theodore ‘‘Ted’’ ...................................................................................... 133 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Westmoreland, Hon. Lynn A.: 

Written responses to questions submitted to Hon. David Stevens .............. 141 

(1) 

ARE THERE GOVERNMENT BARRIERS 

TO THE HOUSING MARKET RECOVERY? 

Wednesday, February 16, 2011 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON INSURANCE, HOUSING, AND COMMUNITY OPPORTUNITY, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:50 p.m., in room 

2128, Rayburn House Office Building, Hon. Judy Biggert [chairwoman of the subcommittee] presiding. 

Members present: Representatives Biggert, Hurt, Miller of California, Capito, Garrett, McHenry, Duffy, Dold, Stivers; Gutierrez, 

Clay, and Sherman. 

Also present: Representative Green. 

Chairwoman BIGGERT. Good afternoon. This hearing of the Subcommittee on Insurance, Housing, and Community Opportunity 

will come to order. 

We will begin with opening statements. I apologize for keeping 

all of you waiting. I really didn’t think that we were going to have 

18 votes, so it did take quite a bit of time. So I will start and recognize myself for 3 minutes. 

Good afternoon, and thank you for attending this hearing. It is 

the first hearing of the subcommittee. 

Today, we will hear testimony that explores how government 

barriers are driving private capital away from housing while impeding market recovery. We will also examine options for promoting long-term stability in housing and moving toward a housing 

market that is financed by the private sector. 

At no other time in our Nation’s history has housing finance been 

so controlled and so dominated by the Federal Government. While 

private investors or borrowers benefit on the upside, taxpayers assume the risk and foot the bill for failure. It is a distorted equation: 

congressionally-created mortgage giants Fannie Mae and Freddie 

Mac received nearly $150 billion in a taxpayer-backed bailout, and 

programs like the Federal Housing Administration, or FHA, compete with the private sector businesses. In fact, according to HUD’s 

Web site, FHA is the largest insurer of mortgages in the world, insuring over 34 million properties and over 47,000 multifamily 

projects, and this is since the inception in 1934. 

Combined, Fannie, Freddie, and FHA have well over 90 percent 

of the mortgage market. And in recent years, government-created 

and managed mortgage programs united with the private industry 

and investors. They loosened underwriting standards and offered 

2 

borrowers risky but low-cost loans, and all with a government 

guarantee. The result has been that we have seen turmoil not unlike the Great Depression. The government’s role in housing and finance is unsustainable. 

Thus, during today’s hearing we will examine the future of housing finance: Where are we now, what government barriers are fostering uncertainty or preventing a housing market recovery? And 

finally, what mid- and long-term steps should the Administration 

and Congress take to enable the private sector to reenter the business of housing finance? 

Housing is one of the most important cornerstones of our economy and we must get it right. I look forward to working with my 

colleagues on reforms to facilitate the private sector and reentry, 

eliminate the taxpayers’ risk, and generate a vibrant housing finance system that serves creditworthy Americans. 

So, I welcome today’s witnesses and now call on the ranking 

member, Representative Gutierrez, for 4 minutes. 

Mr. GUTIERREZ. Thank you. 

Good afternoon. I want to thank our witnesses for being here 

today. 

Before we move on to discuss the role of government in housing 

and what kind of barriers may be hindering the housing market recovery, I believe we need to have an honest and open discussion 

about the harsh realities facing hundreds of thousands of hardworking families across our Nation who have lost or are at risk of 

losing their homes. People are still being displaced, neighborhoods 

continue to fall apart in some parts of our country, and communities are still suffering due to the foreclosure crisis and the devastating economic condition facing our Nation’s housing system. 

Since we are all familiar with the current housing situation, I 

think we should use this platform as a venue to discuss ways to 

ameliorate the housing crisis and restore faith in America’s housing system. 

I would like to be clear about something; contrary to what some 

of my colleagues may believe, I do not believe that the government 

is hampering the recovery by placing burdensome barriers and 

driving away private investment in the housing market. Let me 

join the voices of those wiser and more expert on this subject—and 

I mean the voices of the Financial Crisis Inquiry Commission. It 

stated: ‘‘The government did not cause the collapse of the housing 

bubble.’’ 

Importantly, there is also consensus among the majority of the 

members of the Commission that Fannie Mae and Freddie Mac 

were not primary causes. And lastly, they concluded that the Community Reinvestment Act was not a significant factor. 

Today, our government is serving the housing market at a time 

when private capital is scarce. Since the Federal Housing Authority, FHA, was created in 1934 to serve the housing market in a 

time of financial crisis, it has worked hard to ensure that housing 

finance credit is available to the American worker. And I would 

like to thank them, as I was able to obtain my first home because 

of FHA. 

We are now, once again, in a time of financial crisis, and the 

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3 

able to help struggling homeowners avoid foreclosure. Our government needs to continue to play the crucial role of providing homeowners with the assistance they need during these tough economic 

times. At this moment, if the government were to leave the housing 

market, there is no assurance that private investment would take 

its formidable place to help families save their homes. 

So as we move forward and look at ways to bring back the housing market to recovery, we need to give thoughtful consideration to 

real solutions that will help protect hardworking families. We have 

seen the devastating effect of lack of credit. Ask business people. 

It is my belief the same would happen in terms of housing. 

I would like to just take a moment and introduce this draft. It 

is the summary of conclusions of the Financial Crisis Inquiry Commission. It has the majority report. I would just like to say importantly the majority, three out of the four dissenters, concluded that 

Fannie Mae and Freddie Mac were not primary causes, and they 

were Republicans. This was a bipartisan group of people, much 

wiser and much smarter than many others on the issues. 

And I would just like to read the second dissent—there was one 

person who did blame Fannie Mae and Freddie Mac, and that was 

Mr. Wallison. This dissident blamed the crisis on the government 

housing policy, a factor that all the other commissioners concluded 

was not a primary cause, and concluded that almost all of the 

causes on which the majority report and the first dissent agreed 

were not primary clauses. 

I would like to ask unanimous consent to introduce this. And 

thank you so much for calling this valuable hearing, Madam Chairwoman. 

Chairwoman BIGGERT. Without objection, it is so ordered. 

The gentlelady from West Virginia is recognized for 2 minutes. 

Mrs. CAPITO. Thank you, Madam Chairwoman. And I would like 

to thank Chairwoman Biggert for holding today’s hearing and to 

congratulate her on this being her first hearing as the chairman of 

the Insurance and Housing Subcommittee. I look forward to working with her and Ranking Member Gutierrez on the many challenges facing our Nation’s housing market. 

Since the start of the housing collapse, the FHA and the Government-Sponsored Enterprises, Fannie and Freddie, have grown in 

market share to the size where they now collectively insure or 

guarantee more than 90 percent of all the mortgages in the United 

States. While the government has played an important role in enhancing the flow of credit to targeted sectors of the economy, excessive risk exposure coupled with lax underwriting standards—and 

we learned more about that this morning—resulted in a government rescue at the taxpayers’ expense. 

I think we could all agree that the taxpayer should no longer be 

on the hook for losses, and that reforms to the housing finance are 

long overdue. In laying out a plan for housing recovery, I was 

happy to hear the Administration acknowledge the need to bring 

private sector capital back into the mortgage market while taking 

steps to minimize government support and housing finance. 

I think generally their report, I welcomed it and thought it was 

a very good step towards hopefully a bipartisan solution for this. 

It is important to keep in mind, however, that reforms to reduce 

4 

the presence of Fannie and Freddie must coincide with FHA reforms to ensure that increased market opportunities flow to the 

private market and not into FHA. I hope that the efforts that were 

made last Congress to restore the capital reserves and to enhance 

financial stability to its deteriorating FHA will continue this Congress so that we may see FHA return to serve its intended role in 

the housing market. 

I believe the Commissioner shares some of those—maybe not entirely, but some of the thoughts there. And I would also like to 

thank him for all of the work that he did with me and our staff 

in crafting the FHA reform bill last year. I am sorry we didn’t get 

it all the way through, but we are still here to fight another day. 

I look forward to hearing from our panel of experts on the challenges to housing recovery and the future role both the private sector and government support will play in housing finance. 

Thank you again to the chairwoman for holding this hearing, and 

thank you to our witnesses for their testimony. 

Chairwoman BIGGERT. The gentleman from California, Mr. Sherman, is recognized for 4 minutes. 

Mr. SHERMAN. The title of this hearing is, ‘‘Are there Government Barriers to the Housing Recovery?’’ I think the real title 

ought to be, ‘‘Are there Government Barriers to the Housing Market Collapse?’’ 

Right now, there are too few buyers, the prices are lower than 

we saw just 2 years ago by a very significant percentage, and we 

are clinging to the leverage under which we fell just 2 years ago. 

And now some want to push us off the ledge on the theory that free 

flight is more ideologically consistent. 

We are in a crisis here still, and I don’t think we should be deciding what to do with housing finance based on ideological purity. If 

we were having a long-term hearing about what to do 4 or 5 years 

from now, I would say that then we would focus on how we want 

to build for the future. But right now, we are just a few headlines 

away from another housing collapse, another 10, 20, 30 percent, 

and with that would be a double-dip recession. 

And so it is fortunate that the Federal Government has stepped 

up to the plate; they should do so in the most responsible manner. 

And after I am no longer obsessed with dealing with the present 

crisis and that crisis has passed, I look forward to hearings of this 

subcommittee to look at a new structure. 

I want to thank our witnesses for playing an important role in 

preventing the collapse that would otherwise occur. I would point 

out that in the absence of Federal involvement, we might see this 

market dominated by two or three financial institutions, just as 

even under the current circumstance, Wells, Bank of America, and 

Chase originate well over half of the mortgages. 

But my greater concern is that—and I see this in my own area 

because just outside my area, I see houses selling for such a price 

that they are above the conforming loan limit, even the higher conforming loan limit. If the homes are out in Malibu, the person buying them is able to get financing from their bank, which they may 

own. But when the home used to be worth $3 million, is now $2 

million, you can’t get financing for it, and that home ends up dropping further. And I can’t say what it would do to the economy of 

5 

Los Angeles and so many other cities if middle-class neighborhoods 

were to face that kind of implosion. That is why we need to maintain the conforming loan limit at $729,000 to $750,000 for high-cost 

areas, and it is why we need to have Fannie and Freddie involved 

in every community for the next phase of our effort at economic recovery. 

This economic recovery hasn’t hit Main Street. We are still in a 

crisis, and ideological purity should not be the enemy of fiscal sanity and economic stability. 

I yield back. 

Chairwoman BIGGERT. I thank the gentleman for yielding back. 

The gentleman from California, Mr. Miller, is recognized for 2 

minutes. 

Mr. MILLER OF CALIFORNIA. Thank you. Welcome, Commissioner 

Stevens. It is good to see you here. 

This is the most difficult housing market I have seen in the 40 

years I have been involved in it. I have never seen anything like 

this occur. We have done what we could in the past; we have increased GSE and FHA participation in high-cost areas, and basically we moved into about 92 percent of the marketplace. That, I 

believe, staved off an incredible crash that could have occurred had 

we not done that. 

We have tried to encourage homeownership. We have tried to 

give tax credits for first-time homebuyers. We have done some 

things out there that I think are pretty good. And we are trying, 

at this point in time, to encourage more private market participation in the marketplace, but liquidity is a problem as we all see it. 

The Administration has proposed three options we have to look 

at, and they are on pages 21 through 29 of the written testimony, 

I believe. The first 20 pages talk about things that are really not 

in the three proposals, like guaranteeing low- and moderate-income 

housing, stability in the marketplace, being able to move into a 

marketplace in case it becomes illiquid, which one, two, and three 

do not do. But my concern is that while we are doing this, at the 

same time the Administration is proposing to increase guarantee 

fees, reducing larger loans in the high-cost areas, requiring larger 

downpayments—which I understand some of these—but at the 

same time, when a market is illiquid, before we have an opportunity to resolve the GSE issue, we are pulling FHA back out of 

the marketplace. 

I understand you are up to 30 percent and you would like to get 

back to 10, 15 percent where you should be, but these are major 

changes in the current market and they are going to have, I believe, a major effect and a negative impact on the market too. In 

this fragile marketplace, dangerous actions like this can take steps 

that I believe are negative, and I think they can have consequences 

that we don’t want to see. These actions are being proposed in the 

short term before we ever decide what we are going to do in the 

long-term. That doesn’t make sense to me. We need to have a longterm resolution in place before we start making short-term moves 

that have a dramatic impact immediately on the marketplace. 

I think we need to take a step back, look at how these proposals 

are already impacting a fragile marketplace, and what we need to 

6 

do to guarantee financing availability in the future. I just think we 

are moving in the wrong direction. 

I yield back. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

The gentleman from North Carolina, Mr. McHenry, is recognized 

for 2 minutes. 

Mr. MCHENRY. I thank the chairwoman. And congratulations on 

your first hearing as well. 

Obviously, the dual mandate of Fannie and Freddie supporting 

both government housing policy and chasing profits for shareholders ended with predictable catastrophic results, proving that 

the Federal Government isn’t really well equipped to deal in competing in the marketplace, especially with an unfair advantage 

with reduced costs of lending for the Federal Government. 

Since Fannie and Freddie’s failure and subsequent placement 

into conservatorship, the Federal Government’s intrusion into the 

housing market has been the most expensive market intervention 

of the financial crisis. Surprising to most, but with taxpayers on 

the hook for close to $150 billion, it is a very real impact. It is time 

we end this disastrous bailout and let private capital get back into 

the marketplace. That is what we need to do in order to move forward. 

I am pleased the Obama Administration supports our call to 

wind down Fannie and Freddie and I look forward to hearing from 

our witnesses about how we move forward. 

Chairwoman BIGGERT. The gentleman from Virginia, our new 

vice chairman, is recognized for 1 minute. 

Mr. HURT. Thank you, Madam Chairwoman, for the opportunity 

to serve in this capacity, and for holding the subcommittee’s first 

hearing on the state of the housing finance market. I also want to 

thank the witnesses for being here. 

In response to the financial crisis, the role of government in the 

housing finance market has grown dramatically. This growth not 

only increases the risk of substantial financial burdens on the taxpayers in Virginia’s Fifth District, my district, but also across the 

country. It also prevents the private sector from competing in the 

market. 

I am particularly concerned about the Administration’s foreclosure and mitigation initiatives, which do not appear to be helping a sufficient number of distressed homeowners to justify the program’s enormous cost. The Administration’s ever-shifting strategies 

and massive expenditures of taxpayer dollars may only be forestalling a necessary bottoming in house prices, thereby hindering 

a more sustainable recovery in housing and the broader economy. 

Again, I appreciate your being here, I look forward to your testimony, and I yield back my time. 

Chairwoman BIGGERT. The gentleman from Ohio, Mr. Stivers, is 

recognized for 1 minute. 

Mr. STIVERS. Thank you, Madam Chairwoman. I want to thank 

the chairwoman for calling this hearing today. I think it is especially timely given last week’s focus on GSE reform in the Capital 

Markets Subcommittee and the delayed release of the Administration’s report to Congress last Friday, talking about the need to 

limit government’s involvement in the housing industry. 

7 

Due to the burst of the housing bubble and changes to FHA eligibility requirements, FHA’s market share has increased in the recent past. For example, in my district in Columbus, Ohio, and central Ohio, in the 15th Congressional District of Ohio, FHA now 

makes up over half the loans in my district. Unfortunately, FHA, 

along with the rest of the market, has been facing higher mortgage 

defaults. So in reviewing reforms, we don’t want to limit access to 

the American dream, but I think it is important for my constituents to understand what is going on here and to focus on what we 

can do to make sure that we avoid damage to the economy and 

make sure that we look out for the American dream. 

I look forward to learning more from the witnesses today on how 

we can ensure the stability of the mutual mortgage insurance industry without removing this important resource from homebuyers. 

Thank you. I yield back the balance of my time, Madam Chairwoman. 

Chairwoman BIGGERT. The gentleman from Illinois, Mr. Dold, is 

recognized for 2 minutes. 

Mr. DOLD. Thank you, Madam Chairwoman. 

I certainly want to take this opportunity to thank the witnesses 

for their time, their effort, and their participation, and I look forward to hearing from each and every one of you. 

All too often, well-meaning government efforts go too far and end 

up having unintended consequences, which are usually very negative and which frequently create more and larger problems than 

those that they were ostensibly intended to solve. These government policies often distort resource allocations, disrupt market 

mechanisms, manufacture artificial investment risk profiles, and 

put taxpayers on the hook for huge amounts of money. And by 

doing so, they frequently drive the private sector out of the market 

to the detriment of our families, employees, businesses, and our 

overall economy. 

And then some say that the government must increase its role 

in the marketplace because it is the only marketplace participant, 

sometimes forgetting about why the government became and remains the only marketplace participant. 

We have seen these results in the housing market, which is one 

of our most heavily regulated economic activities. 

Right now, the Government-Sponsored Enterprises have more 

than 90 percent of the mortgage market, and it is not surprising 

that the private sector capital can’t compete with this kind of political force that drives out private sector capital and misallocates resources, and that also puts taxpayers at potential risk for hundreds 

of billions of dollars and potential liabilities, all with, I would 

argue, little accountability. 

Fortunately, I think we have reached a consensus in this country 

that we must return to a more stable mortgage market with far 

less potential taxpayer exposure and with far greater private sector 

participation. I understand that the Administration and Members 

of Congress on both sides of the aisle agree that we must move 

quickly toward this important objective. 

We as Congress have some important questions to consider, including the two most fundamental questions: first, what are the existing government policies or regulations that are keeping private 

8 

capital out of the mortgage market; and second, what existing government policies or regulations are extending or deepening these 

difficult housing market conditions? I agree with the Administration that the government must not be a barrier to the housing market recovery, and I look forward to hearing from each and every 

one of you. 

Madam Chairwoman, thank you for the time. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

Now, I would like to ask unanimous consent for a member of the 

Financial Services Committee as a whole, Mr. Green from Texas, 

to make an opening statement for 1 minute. 

Mr. GREEN. Thank you, Madam Chairwoman. I thank the witnesses for appearing today. 

I think that there are some things that we agree on. I think that 

we agree that the VA loans are not a real problem, and my hope 

is that we won’t disrupt that agency and the way it benefits our 

veterans. 

Most people don’t perceive FHA to be a significant problem, and 

my trust is that as we move forward, we will realize that there is 

a meaningful place for FHA. Those of us who do concur and agree 

that Fannie and Freddie are going to have to have some adjustments made—and we understand that we don’t know exactly where 

we are going, but we don’t want to go back to that era before 

Fannie and Freddie when you had to have a balloon payment every 

5 to 10 years, when you had to have an enormous downpayment, 

when housing was for the few, not the many, in terms of ownership 

compared to the number of people in the United States of America. 

The American dream should not now be put out of reach because 

of the crisis. 

Thank you, Madam Chairwoman. I yield back. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

And now again, let me welcome the witnesses. Thank you for 

being here, and thank you for spending quite a bit of time before 

we even got back from voting. 

I would like to introduce the witnesses now from Panel I: David 

Stevens, the Assistant Secretary of Housing and the Commissioner 

of the Federal Housing Administration, U.S. Department of Housing and Urban Development, commonly known as HUD; Theodore 

‘‘Ted’’ Tozer, President, Government National Mortgage Association, known as Ginnie Mae; and Phyllis Caldwell, Chief, Homeownership Preservation Office, U.S. Department of the Treasury. 

Without objection, your written statements will be made a part 

of the record. You each will be recognized for a 5-minute summary 

of your testimony. 

I will now recognize Commissioner Stevens of the FHA for 5 minutes. 

STATEMENT OF THE HONORABLE DAVID H. STEVENS, ASSISTANT SECRETARY OF HOUSING/FHA COMMISSIONER, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) 

Mr. STEVENS. Thank you. Chairwoman Biggert, Ranking Member 

Gutierrez, and members of the subcommittee, thank you for the opportunity to testify here before you. It is particularly an honor for 

me to testify today because I have not yet had the privilege of apVerDate Nov 24 2008 13:07 May 20, 2011 Jkt 064555 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\64555.TXT TERRIE
9 

pearing before you or many of the other new members of this committee. 

I am here today on behalf of HUD and the FHA regarding the 

Obama Administration’s efforts to encourage the return of private 

capital to the housing market. 

It is important to understand the context of the crisis that led 

to government intervention in the first place. With home prices 

falling every month for 30 straight months, $6 trillion lost in home 

equity that wiped out the wealth for many families, and the loss 

of 750,000 jobs a month for 22 straight months of job losses, this 

Administration faces an economic crisis second only to the Great 

Depression. 

With private capital in retreat, the Administration had no choice 

but to intervene. The Administration kept mortgage interest rates 

at record lows. We also provided critical support for Fannie and 

Freddie while FHA stepped in to enable a robust market to emerge. 

The FHA’s loss mitigation policies, combined with the Administration’s HAMP program, set the standard for mortgage modification 

that the private market has finally begun to meet. 

We stopped the slide in home prices. Since April 2009, nearly 13 

million homeowners have been able to refinance their mortgages. 

Monthly foreclosures starts are down more than 30,000 per month 

from the same period a year ago. And we have seen 13 straight 

months of private sector job growth. But the time has come for the 

next step as we begin to reduce the government’s role and develop 

policies that will help bring back private capital. 

As you know, in the absence of private capital, FHA’s role expanded significantly, from less than 4 percent of the market in 

2006 to more than one-third of new home purchases today. FHA 

has helped over 2 million families buy a home since President 

Obama took office, 80 percent of whom were first-time home buyers. 

FHA’s role in the multifamily market is equally striking. In 

2008, we supported the development of about 49,000 rental homes. 

In 2010, however, it was 150,000 rental homes. But as proud as we 

are of the historic steps we were forced to take to support American families, we are very aware of the risks of this elevated role. 

FHA has already made important reforms to reduce our footprint 

and strengthen our reserves. With new authority granted by Congress, we have been able to raise our FHA mortgage insurance premiums, including the 25 basis points additional increase we announced this week. 

FHA has also implemented a two-step credit score policy for FHA 

purchase borrowers, requiring that borrowers with lower credit 

scores make significantly larger downpayments. But the result of 

these actions that we have already taken are clear as we reduce 

financial risk to taxpayers and lay the foundation of the return for 

private capital. The quality of loans made over the last 2 years is 

much improved. Fiscal year 2010 represents the highest quality 

book of business in FHA history. 

It is clear that FHA is in a stronger position today, but more 

needs to be done. That is why we delivered this report to Congress 

last week that provides a path towards a return of a responsible 

10 

private mortgage market and suggests how FHA can help make 

that possible. 

First, returning FHA to its traditional role as a targeted lender 

of affordable mortgages by decreasing the maximum FHA loan size 

by allowing the present increase of those loan limits to expire as 

scheduled. 

Second, continue to reform and strengthen FHA itself. The Administration will make sure that creditworthy borrowers who have 

incomes up to the median level for their area have access to FHA 

mortgages, but we will not allow the FHA to expand during normal 

economic times to a share of the market that is unhealthy or 

unsustainable. 

Madam Chairwoman, I believe it is necessary for Congress to 

give FHA more flexibility to respond to market conditions and 

manage its risks more effectively. 

Third, through broader commitment to affordable rental housing. 

To be clear, the Administration is committed to providing families 

with rental housing choices and believes that affordable options for 

the millions of Americans who rent is essential to a more balanced, 

sustainable housing policy. 

Having spent all of my career in the private sector, I know that 

one of the barriers we face to reform isn’t government, but rather 

a trust deficit that the housing finance industry faces in its relationship with everyday Americans who associate housing with exploding ARMs, predatory loans, and foreclosures. Reducing that 

trust deficit is one thing the government can’t do alone. The Administration is not only committed to restoring a healthy balance 

in the housing market, it is committed to working with Congress 

to find the common ground we need to build a 21st Century system 

of housing finance rooted in a strong, healthy market for private 

capital that harnesses the vitality, innovation, and creativity that 

has been at the foundation of our system for centuries. FHA’s role 

in restoring this balance will be critical. We look forward to working closely with Congress to ensure people have the tools they 

need. That is what all our efforts are about. 

Thank you for this opportunity to testify here today. 

[The prepared statement of Commissioner Stevens can be found 

on page 122 of the appendix.] 

Chairwoman BIGGERT. Thank you, Commissioner. 

And now, we have Mr. Tozer. You are recognized for 5 minutes. 

STATEMENT OF THEODORE ‘‘TED’’ TOZER, PRESIDENT, GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE 

MAE) 

Mr. TOZER. Thank you, Chairwoman Biggert, Ranking Member 

Gutierrez, and members of the subcommittee for inviting me today. 

To provide context for our discussion, I would like to describe 

Ginnie Mae’s role in the U.S. housing finance market and efforts 

we have taken to reduce that role. 

Ginnie Mae serves as the financing arm for FHA and other government-insured or guaranteed mortgage products. We are a wholly-owned, self-financed government corporation. 

Since inception in 1968, our corporation created and issued the 

first mortgage-backed security in U.S. history. Since then, we have 

11 

guaranteed $3.7 trillion in mortgage-backed securities and we have 

brought liquidity and stability to the market through all economic 

environments. 

The recent decline in housing clearly led to retreat of private 

label securities investors. As it has before, Ginnie Mae stepped in 

to ensure liquidity. That is our historic role—to provide the 

counter-cyclical support in times of crisis. 

During this crisis, our market share rose from 4 percent to nearly 30 percent. In 2008, our total MBS outstanding stood at $577 

billion, but in June of 2010, we crossed the $1 trillion mark. Currently, outstanding Ginnie Mae securities have financed the homes 

for 7.2 million homeowners and 1.1 million rental units. 

Additionally, our corporate performance has been strong. Last 

year, our net income was $541 million. We have earned this profit 

despite increasing our loss reserve to $1 billion, and we are well 

positioned to deal with future market volatility with $1 billion of 

the loss reserve, plus we have $14.6 billion in capital. 

This performance is largely due to our business model. Let me 

explain. We work with lenders to pull loans guaranteed or insured 

by FHA, VA, Rural Development, and PIH to issue Ginnie Mae 

MBSs, mortgage-backed securities. Although securities are commonly referred to as Ginnie Mae’s, we are not the issuer. These 

lenders who service and manage the mortgage-backed securities 

are the issuers and they pay us a fee to guarantee their bonds 

through investors. Ginnie Mae’s business model mitigates the taxpayers’ risk associated with secondary market transactions. 

Before Ginnie Mae’s guarantee is at risk, three levels of protection have to be exhausted: first, the homeowner’s equity; second, 

the insurance provided by the government agency to back the loan; 

and third, the corporate resource of the entity that issued the mortgage-backed security. We are in the fourth and last position before 

a guarantee comes into place. In effect, our issuers must exhaust 

all their corporate resources before we step in. We are the only entity involved in the housing market today that has this model. 

Madam Chairwoman, our business model has positioned us well 

for this volatile economy, but issuers have issued Ginnie Mae’s securities at levels during the past 2 years that cannot continue. We 

must revise the private label securities market. 

To help us in that direction, we have implemented policies that 

increase accountability among our issuer base. We have increased 

capital and established new liquidity requirements across all product lines. These requirements can be looked at as a different but 

very effective form of ‘‘skin in the game.’’ 

We have expanded our loan data disclosures, announced changes 

to allow small lenders to more easily do business with us, and we 

have worked with the GSEs to implement standardized loan delivery requirements. 

For investors, uncertainty about the future of GSEs impact their 

decision-making. It is difficult to plan production when you are not 

clear which secondary market outlets will remain. The Administration’s proposal to increase the GSE guarantee fees, increase capital, 

and wind down portfolios will help end uncertainty and create 

space for the private label securities investment. 

12 

As the financing arm for the government-insured products such 

as FHA, the level of MBS for guarantee are directly related to the 

level of mortgages these agencies ensure. Commissioner Stevens 

outlined plans to reduce FHA’s role in the market. Our mortgagebacked security bond will decrease respectively. 

In recent years, financial flaws occurred at almost every link in 

the mortgage process. We now are aware of the advantage and disadvantage of securitization. When securitization is managed appropriately, it is a very efficient conduit for capital. However, if insufficient attention is paid to the quality of the collateral, consequences can be disastrous. 

Many investors in the private label securities market believe 

that investing in today’s market requires them to take excessive 

and unpredictable risk. Restoring their faith will require great 

transparency, standardization, and accountability. 

Addressing the GSEs alone will not give rise to a market that 

meets the needs of investors, nor will it guarantee that private 

markets can effectively play a more dominant role. We must work 

together to map our way forward by looking at some of the additional forms I have outlined. 

Thank you again very much for giving me this opportunity to testify, and I am happy to answer any questions you might have. 

[The prepared statement of Mr. Tozer can be found on page 133 

of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Ms. Caldwell, you are recognized for 5 minutes. 

STATEMENT OF PHYLLIS CALDWELL, CHIEF, HOMEOWNERSHIP PRESERVATION OFFICE, U.S. DEPARTMENT OF THE 

TREASURY 

Ms. CALDWELL. Thank you. 

Chairwoman Biggert, Ranking Member Gutierrez, and members 

of the subcommittee, I appreciate the opportunity to testify today. 

I would like to share with you some of the lessons we have learned 

from responding to the most serious housing crisis since the Great 

Depression. 

To begin, I believe it is important to remember where the housing market stood just over 2 years ago. When the Obama Administration took office in January 2009, home prices had fallen for 30 

straight months, home values had fallen by nearly one-third, 

Fannie Mae and Freddie Mac had been in conservatorship for over 

4 months, and American families were struggling to buy and keep 

their homes. 

Treasury, in partnership with other Federal agencies, responded 

by taking a series of aggressive steps with a strategy focused on 

providing stability to housing markets and giving families who can 

afford to stay in their homes a chance to do so. 

In particular, under the Troubled Asset Relief Program, or TARP 

as it is better known, we launched the Making Home Affordable 

Programs to help responsible homeowners avoid foreclosure. 

Through one such program, the Home Affordable Modification Program, or HAMP, Treasury worked to leverage the private sector to 

bring homeowners and their mortgage servicers together to find 

reasonable alternatives to foreclosure. So far, HAMP has helped 

13 

close to 600,000 struggling families stay in their homes, and the 

median monthly payment reduction in these modifications is $520 

per month, or close to 40 percent. The programs only pay for successful modifications, and they pay over time as the loan remains 

current. 

In addition, HAMP has spurred the mortgage industry to adopt 

similar programs that have helped millions more at no cost to the 

taxpayer. Mortgage assistance provided to homeowners through 

HAMP, the Federal Housing Administration, and private sector 

participation in the HOPE NOW Alliance has outpaced foreclosure 

sales by more than two-to-one. At the same time, implementing 

this program has been challenging on many fronts. I would like to 

share a few lessons we have learned over the past 2 years. 

First, when HAMP was launched in early 2009, mortgage 

servicers were totally unequipped to deal with the crisis. Servicers 

were set up to collect payments on performing mortgages. They did 

not have the staff, the systems, or the procedures to help people 

avoid foreclosure. By participating in HAMP, servicers had to build 

a modification infrastructure. They had to comply with HAMP requirements on how to modify mortgages and how to deal with 

homeowners. This has changed the industry. 

Second, engaging homeowners is key. Families facing foreclosure 

are often overwhelmed by their situation and frustrated by poor 

communication from their servicer. As such, we launched a national public service advertising campaign and outreach efforts 

aimed at engaging homeowners. We have also established systems 

designed to address homeowners’ questions and complaints and improve the service they receive from their mortgage provider. 

Third, homeowners need safeguards. Being evaluated for a modification at the same time one’s house is being foreclosed upon can 

be frustrating and confusing. In response, Treasury required 

HAMP servicers to evaluate a homeowner for HAMP before initiating foreclosure. 

And fourth, affordability matters. Mortgage modifications work 

only if they are affordable. Because HAMP sets a clear affordability 

standard, median savings for borrowers is close to 40 percent from 

their mortgage payments, and because of these reductions HAMP 

modifications have lower redefault rates. Nearly 85 percent of 

homeowners remain in their permanent modifications. 

We have faced many challenges in developing and implementing 

our programs, and much work remains to ease the housing and 

foreclosure crisis, but that should not obscure the importance of 

what has been accomplished. Our housing programs have established key benchmarks and borrower protections that are now 

viewed as industry best practices. We will continue to reach out to 

as many eligible homeowners as possible through our program’s expiration in 2012, while safeguarding taxpayer resources every step 

of the way. 

Thank you for the opportunity to testify, and I welcome your 

questions. 

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

48 of the appendix.] 

Chairwoman BIGGERT. Thank you. 

14 

We will now proceed to questions. Members will be recognized for 

5 minutes each to ask questions. I will start and yield myself 5 

minutes. 

Commissioner Stevens, the report that was issued to Congress on 

modernizing the housing finance stated the goal of reducing the 

market share of FHA from historic high levels to a more normal 

level in the future. 

However, at the same time, I have been hearing about discussions of the Qualified Residential Mortgage (QRM) among the regulators, involving creating a very narrow QRM, such as perhaps 

mandating a 20 percent downpayment requirement. Wouldn’t a 

narrow QRM, coupled with winding down of Fannie Mae and 

Freddie Mac, exclude many qualified and worthy borrowers, but 

also drive them to FHA rather than into the private sector? 

Mr. STEVENS. Yes. Thank you for that question, Madam Chairwoman. 

There are two components here. As it relates to QRM, we are one 

of the regulators that are involved in this rulemaking process, and 

so to some degree, I am a bit limited in what we can discuss related specifically to what may come out there. But I would say this: 

Experience that has proven itself over the decades in this housing 

system is that FHA traditionally has always played a much smaller 

role in the housing market, driven mostly by curtailments around 

loan limits as well as a robust competitive market that was functioning well. We don’t have the robust competitive market functioning well, and we have loan limits that clearly cover a much 

larger section of the market than what FHA was ever intended to 

do. 

I remember buying my first home with an FHA mortgage and I 

paid a 3.8 percent mortgage insurance premium on my home— 

which is much higher than we charge today. The loan limits were 

far lower in terms of what we were able to qualify for. And FHA 

played a very important role in the housing market. 

So as we go forward, whatever the QRM—Qualified Residential 

Mortgage—guidelines are and as we work to try to find avenues for 

private capital to reengage, there are measures within the FHA 

that can control that volume in a responsible way and remain targeted towards the purpose it would serve. Loan limits are one; 

mortgage insurance premiums are clearly another; and product 

guidelines are a third. I think those are the three primary methods 

that would ultimately be used, again, over time as we carefully 

transition to a more normalized market where private capital is reengaging. 

Chairwoman BIGGERT. The White Paper also talks about phasing 

down Freddie and Fannie. And there is some angst about how 

could private investors be encouraged to increase investments in 

both the single-family and multifamily housing if there is no guarantee. What mortgage metrics could help investors gain confidence 

in investing in private mortgage-backed securities that don’t have 

a government guarantee? Is that possible? 

Mr. STEVENS. That is really the crux of what the White Paper 

is meant to tease out from a debate standpoint. And that is why, 

when we presented the three options, we clearly eliminated a couple of additional options that we debated and excluded. One was 

15 

a no guarantee system and one was a much larger guarantee system. We recognize that there would be a guarantee literally in all 

three of those options, at a minimum for FHA and underserved 

families. But I have been through market cycles before and I have 

seen private capital exit and return. They have done so under various terms. One of those terms is to come with stabilized home 

prices. As home prices continue to decline, it creates trepidation 

from private investors to come into that market. Another is return 

on investment, that the credit risk has to be priced appropriately 

for private capital to engage. 

I think the White Paper is very careful in spelling out that while 

we need to wind down Fannie Mae and Freddie Mac, this is a 

multiyear process to be done very carefully, this idea of transition. 

And as we transition and we begin to take the first steps, we will 

have test points to see how private capital reengages. But I want 

to be clear: I am confident—having been in these cycles before, 

never to this extreme, but I have been in these cycles when private 

capital exited markets—that capital returns when it believes that 

the investments are safer, sounder, and more secure and at the return rates that are needed to make sound investments. And that 

is what we will have to test as we engage with policy and look to 

see signs that market is returning. 

Chairwoman BIGGERT. Then isn’t one of the lessons that we have 

learned from the crisis that it may not be feasible for everyone to 

own a home at this time, and some may be in a better position to 

rent? In your testimony on page 2, you mention that the Administration will be looking for reforms that balance the impacts on lowand moderate-income families as you consider further FHA reform. 

Can you describe what that balance would look like? 

Mr. STEVENS. Yes. And I think that is absolutely critical. Everybody has to recognize that not everybody should have owned a 

home in this past period. We created a bubble based on stated income, 100 percent financing, exploding loans that ultimately damaged the wealth and credit histories of those families who took out 

those programs in search of perhaps more instant wealth in that 

process. That was irresponsible. 

Secretary Donovan, this Administration, has been very clear that 

we need a much more balanced housing policy. And you can’t have 

a balanced housing policy without a specific focus on rental housing. 

And so in the White Paper, we talk about it. We look forward to 

engaging in a dialogue with Members of Congress on going forward 

and making sure that there is safe, affordable, accessible housing, 

and that there is explicit focus on making sure that there is liquidity behind that market. 

That could come with a couple of suggestions we have in the 

White Paper. One is looking at smaller rental properties. Today, it 

is difficult to find financing for multifamily properties in the 50- 

unit range, particularly in many urban markets where there is 

older multifamily housing stock. Another is making sure that there 

is rental housing in rural markets where traditionally the multifamily investment market and rental investment market hasn’t 

really concentrated. This is an area we think needs to be looked at 

16 

as we look at balancing the ownership/rental markets to make sure 

America is well housed generally, whether they own or rent. 

Chairwoman BIGGERT. Thank you. My time has expired. 

Mr. Sherman is recognized for 5 minutes. 

Mr. SHERMAN. Thank you. 

First, I want to comment that even in good economic times, divorce, unemployment, death, illness—and we hope the health care 

bill will diminish the economic impact of illness, but it can cause 

people not to be able to work—all those things happen. They happen to such a large percentage of mortgages—not a huge percent, 

but a large percentage, so that the private sector is going to be reluctant to get into this market unless they are confident that if 

they need to foreclose, the housing market is going to be a stable 

market. And with the work that government is doing now, we are 

not going to convince the private sector that we have stabilized 

housing prices. 

You can make the ideological argument that today’s problems are 

because we have strayed from the principles of Ayn Rand or not, 

and I am not here to have that ideological argument. But we do 

need to prevent a collapse now in a market that is what it is, 

whether it conforms to anybody’s ideology or not. 

First, Mr. Stevens, a recent report showed, as I mentioned in my 

opening statement, that only three banks originated over half of 

the mortgages. Does this concern your department? And what can 

be done about it? 

Mr. STEVENS. This is an absolutely important part of the discussion that we all need to engage in. Concentration risk, ‘‘too-big-tofail’’, those kinds of statements are being made in headlines as we 

talk about the participants in the mortgage market going forward. 

I think we are very careful in the White Paper to express concern 

for community banks and smaller financial institutions to access 

and participate in the mortgage market. 

You are absolutely correct that we have seen the market consolidate. Reports have come out in the last couple of days giving new 

data in that regard. And much of that has to do with the broad 

weakness in the financial services system and some of the larger 

institutions’ ability to use the capital and balance sheet to continue 

to engage in this market. 

We need to make very certain that as we think about policy 

going forward, particularly the options that we have laid out in the 

White Paper, that they don’t, as a result—you talked about unintended consequences—create the unintended consequence of forcing 

even greater consolidation in the market. We benefit greatly by a 

broadly distributed housing finance system. This country has traditionally operated under that construct. Today we are in very 

unique times, and a policy that we think about has to address that 

on a go-forward basis. 

Mr. SHERMAN. The FHA was designed to fill the gap when the 

private market is unavailable. Is that what the FHA is doing now? 

Mr. STEVENS. Yes, it is. Absolutely. It is absolutely filling that 

gap. I think this question has to come into play: If FHA is financing 3 percent down mortgages at $729,000, is that the principle 

under which it was originally designed? I think the other way to 

ask the question is: Are there borrowers in that population who 

17 

could come up with a larger downpayment and are using the FHA 

program simply because it doesn’t require it? 

And those are the considerations that we think are very important because, without question, one thing I have come to appreciate 

is FHA has some of the best employees and committed people I 

have ever seen in the housing finance system, but they are limited 

by appropriations and budgets, and they just can’t handle an endless amount of volume and risk coming onto that balance sheet. 

Mr. SHERMAN. If I could just interject, we lost a fortune, the Federal Government. We failed to prevent a collapse, we failed to prevent a bubble, and a decision was made that I certainly didn’t 

agree with, that we would honor the implicit guarantee as if it was 

a real legal guarantee, penny for penny. 

Those decisions have been made. The question is not whether 

FHA, Fannie, and Freddie may lose money on loans written up 

until today. The question is, how much is it costing to allow you 

to go forward in the future? What does the CBO think that it costs 

to allow the FHA to do through the end of this fiscal year exactly 

what you are planning to do? I know everybody can argue with the 

CBO, and I still think the Lakers won the game last night, but the 

ref said otherwise. So the CBO is the accepted referee. Go ahead. 

Mr. STEVENS. I appreciate that question, Congressman Sherman. 

Let me just give you the critical data. At the time they scored the 

budget, OMB estimated—I want to show the two numbers—OMB 

estimated that FHA would generate $5.7 billion in negative subsidy, meaning receipts to the taxpayer. CBO scored it at $1.8 billion, a much lower number. 

Mr. SHERMAN. So these folks are just arguing about how much 

money you make. And does that take into account the actuarially 

best determined cost of the guarantee you provide? That is not just 

a cash receipts kind of a thing— 

Mr. STEVENS. No. It absolutely takes into account an actuarially 

sound expectation of losses against the backdrop of— 

Mr. SHERMAN. So you are making money for the Federal Government on the best analysis that we can provide from OMB and 

CBO. 

What about Fannie and Freddie, not looking at the fortune they 

lost on previously existing mortgages. Are they making money or 

losing money for the Federal Government? Best estimate of the 

CBO. 

Mr. STEVENS. I do not have the CBO estimates of Fannie Mae 

and Freddie Mac. 

Mr. SHERMAN. OMB? My time has expired. 

Chairwoman BIGGERT. The gentleman from Virginia, Mr. Hurt, 

is recognized for 5 minutes. 

Mr. HURT. Thank you, Madam Chairwoman. 

In a report released in December of last year, the Congressional 

Oversight Panel wrote, ‘‘In some regards, HAMP’s failure to make 

a dent in the foreclosure crisis may seem surprising. Yet despite 

the apparent strength of HAMP’s economic logic, the program has 

failed to help the vast majority of homeowners facing foreclosure.’’ 

It is my understanding that HAMP has resulted in only 483,000 

permanent mortgage modifications, far short of the 3 to 4 million 

that the Administration predicted when the program was unveiled. 

18 

Ms. Caldwell, I was hoping that you could respond to that criticism. 

Ms. CALDWELL. Thank you for the question. 

First of all, I would say that HAMP has not been a failure. While 

it has not achieved as many modifications as we would have hoped, 

we have to keep in mind that close to 600,000 families have had 

their loans modified in an affordable and sustainable way, and that 

number continues to grow each month. 

Second, I think we have to keep in mind that before HAMP, 

there were no standards for the private market to modify loans this 

way. And by looking at loans and running them through a net 

present value model, modifications are now done when it is in the 

best interest of the investor and the financial system to have that 

homeowner in a sustainable modification. So while it hasn’t 

achieved the volume, I think it is very important to keep in mind 

what it has done, the successes it has had, and the families who 

have been helped. 

Mr. HURT. An additional criticism is that the terms have been 

changed again and again, and servicers have said that every time, 

a change to HAMP requires a costly investment of time, personnel, 

and technology, and that the changes have created confusion in the 

marketplace. 

Do you believe that confusion has made it more difficult to reach 

the 3 to 4 million that were predicted? 

Ms. CALDWELL. As I said at the beginning of my testimony, the 

servicing industry was set up to collect payments and was illequipped to handle the crisis of this response. 

I think when we talk about changes to the program, it is very 

important to keep in mind that the terms and structure of the 

modification for HAMP have stayed the same throughout the program. What has changed throughout this couple of years is how to 

get these servicers to implement the program correctly. And one of 

the things that we learned, we learned early on they had no way 

of figuring out how to reach homeowners, so we had to put systems 

in place to do that. They had no way to respond to checks and balances, so through our compliance mechanisms we asked them to go 

back and reevaluate people and do things. They could not implement a net present value model, so we had to put in procedures. 

So the more procedures that we put in place, it did slow time as 

they made investments in systems, but had they not, millions more 

American families would have gone to foreclosure. 

Mr. HURT. Do you think that homeowners are shopping around 

for the best government deal and then holding out for the best Federal assistance that they might get in trying to seek these modifications? And if so, do you think that hinders private sector capital 

from coming into the market? 

Ms. CALDWELL. One of the things we have learned in the HAMP 

program is that mortgages and mortgage securities may look identical at the securitization level, but you don’t know about the underlying homeowner until they pick up the phone and identify 

themselves. 

What we see is homeowners who are struggling and confused 

and frustrated and sometimes in this position for the first time in 

their life. 

19 

Does that mean that there aren’t some in a broad swath of people who may be shopping, we can’t really say that. What we do say 

is that we have, at least for those modifications that are getting 

taxpayer subsidy, we have fraud controls; we have hardship affidavits; and we try to make sure that we are only using taxpayer resources for those homeowners who need help. 

Mr. HURT. This morning we heard from Mr. Angelides, who is 

chairman of the Financial Crisis Inquiry Commission. And one of 

the things that I thought was surprising in his report was how government housing policy contributed very little if anything to the 

crisis that we are now trying to understand and prevent in the future. 

Do you believe that the government housing policy contributed 

nothing to this, to our current crisis, and if so, why? 

Ms. CALDWELL. Right now—that is a very important question 

and one that has been debated in the past and will continue to be 

debated about the future of housing finance reform. 

I think the one thing that we are focused on in terms of foreclosure prevention is the one thing that we can all agree on, and 

that is a homeowner who is behind on their mortgage payments 

who doesn’t get help will ultimately go to foreclosure, and it is in 

the best interest of the financial system to avoid those foreclosures 

to the extent possible. 

So really I think it is—you can talk about stabilizing the market, 

addressing the problem now and in the future. We are focused on 

addressing that problem. 

Mr. HURT. Ms. Caldwell, thank you for your answers. 

Chairwoman BIGGERT. The gentleman’s time has expired, even 

though the clock was off. 

The gentleman from Missouri, Mr. Clay, for 5 minutes. 

Mr. CLAY. Thank you so much, Madam Chairwoman, and thanks 

for conducting this hearing. 

Commissioner Stevens, according to a recent report by the Special Inspector General for TARP (SIGTARP), only 15 FHA short refinances have been completed so far. Why has there been such a 

lack of participation in this program? 

Mr. STEVENS. Just to be clear, the number is higher but not 

much higher, but that was their most recent report. 

Without question, the FHA short refi program has been a difficult one to get off the ground, for several reasons. One reason is 

that it is optional. The participants in the program have to choose 

to do principal write down. But with roughly 27 percent of all 

American homeowners underwater today, there is certainly an opportunity. 

We have begun to talk to institutions that are beginning to create the capabilities to do short refi, but it requires an operations 

investment. They have to invest in technology and systems. It is 

almost like creating a new product. We think that will have some 

impact on the numbers. 

Without question, however, this is an area in which we continue 

to focus. We believe that principal write down is absolutely needed. 

It is one of the key variables left to address, outside of modifications, to get this housing economy right-sized. But it does require, 

again, the voluntary participation of servicers and investors. 

20 

These are awkward handoffs. And there has been some natural 

resistance to wanting to engage by some, and we continue to work 

with them. 

Mr. CLAY. Any examples of success in prodding any of the institutions to come along? 

Mr. STEVENS. I can’t name institutions without—they would have 

to—I would prefer that they announce that they are going to participate. But I will tell you that I had conversations with the CEOs 

of virtually all the major lenders in this country on this process. 

So has the Secretary and so has Secretary Geithner. 

And I do know a couple of the large ones are actually building 

out the capability to be able to roll out the program. We do need 

more. And there is no question about it that we maintain and continue to maintain that this is an area that needs continued focus 

and pressure to get this market right-sized. 

Mr. CLAY. Thank you for that response. 

Mr. Tozer, can you expand on Ginnie Mae, on how Ginnie Mae 

has handled the housing crisis we are facing differently from 

Fannie Mae and Freddie Mac? 

Mr. TOZER. Thank you, Congressman Clay. 

Basically, Ginnie Mae’s role is completely different than the 

GSEs, Fannie and Freddie. Fannie and Freddie are in a situation 

where they insure the borrower. Like a lender that would originate 

a loan, Fannie and Freddie buy it; they buy without recourse. So 

if a lender follows the rules, the lender has no legal obligation to 

have any financial obligation to any losses that occur. Fannie and 

Freddie take all losses. They also take those loans, create a Fannie 

and Freddie security they are obligated for, and at that point, the 

security then is their obligation, and they have to make good to the 

investor if the borrower goes delinquent. 

Ginnie Mae is different in the fact that we do not buy any loans. 

The lenders take their loans, and they are insured by FHA, VA, 

various government programs. They create a security. That security is the obligation of that lender. And what we do is, for a fee 

we will put a government wrap on that security so that we are 

guaranteeing to the investor that if that servicer cannot perform 

the obligation of making the principal interest payment for delinquent borrowers, we will then step in and make sure there is a 

servicer who will make those payments. 

So we basically are almost like a surety bond making sure that 

the servicer performs their obligation. And what happens if an 

issuer cannot revoke their obligation and fails, we then would actually take the servicing, all their servicing that is Ginnie Mae and 

move it to another servicer. So, from that perspective, we are never 

taking any credit, borrower credit exposure, except for the fact 

however much it stresses the issuer. Because like I said, the issuer 

has to make all the payments to the investor, all the way through 

to the time that they buy it out of a Ginnie Mae security. 

They can buy it out as early as the borrower being down three 

payments or wait all the way through to foreclosure. But as soon 

as they buy it out of the Ginnie Mae pool, our guarantee no longer 

applies to that loan. So once we move the servicing, it is pretty— 

it is easy to move because most of the delinquent ones have been 

21 

bought out so most servicers will take on the business. That is the 

reason why our guarantees come into play so few times. 

But in the uncertainty in the capital markets, having the government guarantee has allowed us to make markets for FHA/VA 

loans, to central bankers, to insurance companies because of the 

uncertainty in the capital markets for what they are going to get. 

That way, they know they get their principal and interest. 

Mr. CLAY. I yield back, Madam Chairwoman. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

The gentleman from North Carolina, Mr. McHenry. 

Mr. MCHENRY. Thank you, Chairwoman Biggert. 

Mr. Stevens, are HUD and the Administration currently contemplating any loan modification or principal reduction programs or 

changes? 

Mr. STEVENS. We are not contemplating at this point any new 

modification programs. FHA has always operated in a very unique 

way. We have a long history of modification programs. 

Mr. MCHENRY. But certainly, you would be a part of that discussion if they changed these? 

Mr. STEVENS. Absolutely. 

Mr. MCHENRY. Okay. Are you aware of any—let me just restate 

this one more time to give you an opportunity. Are you aware of 

HUD or the Administration contemplating any new loan modification or principal reduction programs in connection with a possible 

resolution of the current Federal and State attorney general review 

of the robosigning related problems at the major banks? 

Mr. STEVENS. Thank you for that clarification of your question. 

We are in discussion with 11 regulators, the State attorneys general, the Department of Justice, in talking directly about several 

large servicers that we have publicly mentioned in terms of this effort working together, with one possibility being enjoining in some 

sort of settlement with these institutions. 

This is premature. There would not be necessarily any—there 

would not be any new program created that doesn’t exist already 

in anything we have been discussing. 

Mr. MCHENRY. Will there be new funds? 

Mr. STEVENS. There would not be new funds associated with this 

program, with any settlement that we have been discussing to 

date. 

Let me just step back for a moment, because what is said in this 

regard is very important. We have a significant foreclosure crisis. 

All the regulators, especially since the robosigning news that became so prevalent in the fall, have gone onsite and done various 

levels of investigating or looking into servicer performance standards. Most of the regulators found something that others may not 

have. We were very open at HUD stating that we had found some 

irregularities and variable performance. 

And there are two ways we can proceed to a conclusion here. We 

can work with the other regulators to try to come up with one set 

of solutions, assuming the general findings are the same, or we can 

proceed individually, and that process is being worked through 

right now. 

But none of this involves Federal funds in any settlement or if 

any fines or penalties will be assessed to institutions in due course 

22 

based on the authorities that we currently have at HUD for example. 

Mr. MCHENRY. Can you describe—you described the consideration. Will you commit that any such programs that are proposed 

and funded through the regular budget process with Congress and 

subject to congressional authorization, will you come back to us for 

authorization? 

Mr. STEVENS. So if I can—sorry to answer with specificity, but 

I would like to make sure that I am not saying something that is 

incorrect. If there is anything associated with a potential settlement that involves the creation of a new program or new subsidies, 

I will absolutely come back. 

Mr. MCHENRY. So with the settlement money, how will you allocate that, will you come back to Congress for authorization on how 

that is allocated? 

Mr. STEVENS. The settlement money would be penalties assessed 

to institutions within existing authorities at HUD. We have assessed penalties or taken action against over 1,800 institutions 

since I have become FHA Commissioner. We have a mortgagee review board that assesses penalties on a monthly basis. 

Mr. MCHENRY. I certainly understand that. 

But we are talking about a larger magnitude than those previous 

numbers. Will you come back to Congress with authorization of 

how to allocate those resources? 

Mr. STEVENS. If authorization is required, we will come back to 

Congress. 

Mr. MCHENRY. I am asking you, will you come back regardless 

of what you think your current opportunity is under the law to ask 

for authorization? 

Mr. STEVENS. I cannot commit to that at this time. 

Mr. MCHENRY. Okay. 

Ms. Caldwell, I want to follow up with you about the same. Are 

you a part of these discussions as well? 

Ms. CALDWELL. I am part of some of them but not all of them. 

I am generally aware. 

Mr. MCHENRY. Generally aware. What is your awareness on how 

this will come about, or what will come about, rather? 

Ms. CALDWELL. I think it is important to keep in mind that while 

Treasury is one of the Federal agencies that is involved in the process, Treasury is not a primary regulator of any of the institutions, 

so we do not have the authority, as Mr. Stevens referenced that 

HUD may have. 

Mr. MCHENRY. What part of the discussions are you involved in? 

Ms. CALDWELL. We are involved in both the discussions with the 

servicers as they relate to the HAMP program and the discussions 

among those agencies that have chosen to describe some of the 

things that they have found. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

The gentleman from Illinois, Mr. Dold, is recognized for 5 minutes. 

Mr. DOLD. Thank you, Madam Chairwoman. 

If I could, Mr. Stevens, I just have a quick question for you. I 

think you said during your testimony that about one-third is the 

23 

market share that the FHA has right now in terms of single-family 

lending at this point in time; is that correct? 

Mr. STEVENS. Actually, it has dropped. The current FHA market 

share levels are closer to 20 percent today. 

Mr. DOLD. Closer to 20 percent. 

Mr. STEVENS. Yes. 

Mr. DOLD. What is the optimal market share in a normal market? 

Mr. STEVENS. I would be glad to share with you as a follow up 

and sit down and go over market shares in the history of FHA. It 

has ebbed and flowed over the years. The traditional market share 

has been somewhere in the 10 to 15 percent range. 

I do think it is important, however, to recognize, and let’s just 

use one different market correction, the oil patch crisis, FHA’s 

overall market share remained in the teens, but we were as much 

as 40 percent of the market in States like Colorado, Texas, and 

Oklahoma during that period. But the overall national market 

share was able to remain very low. And again, that is more of a 

normalized market. 

Mr. DOLD. What policy changes would you recommend for this 

body to be considering to promote a more healthy role for the private sector or private capital in mortgage finance? 

Mr. STEVENS. I very much look forward to that dialogue. I would 

like to share with you the policies we have taken over the last couple of years: three mortgage insurance premium increases; changing FICO requirements; changing actual underwriting policies of 

programs. Our market share from first quarter of 2010 to fourth 

quarter of 2010 per Inside Mortgage Finance dropped from 24 to 

14 percent in the fourth quarter, 14.8 percent. That is their data. 

We have already clearly seen from the policy changes we have 

implemented a reduction in FHA shares of market. As I said in the 

opening comments to the chairman, there are several levels we can 

work on, but clearly, pricing the risk appropriate to the mortgages 

we are insuring is a critical component. I think we have done an 

outstanding job on this with the help of Congress in giving us more 

authority. 

Mr. DOLD. What do you deem in the next 18 months will be success if you are able to accomplish or we get what part of the private 

sector in, what will you deem a success in the next 18 months for 

FHA? 

Mr. STEVENS. I would encourage us all, as we are working together on this process, to make sure that we don’t act too quickly 

with the absence of private capital. I am a huge supporter of private capital; it is my entire background, coming into the market. 

Mr. DOLD. That is why I am asking. 

Mr. STEVENS. But I will say this. Ultimately, the policies we put 

in place, and as I said earlier, we are going to have test points 

along the way with loan limits will be—my estimation will be the 

next round, along with these price changes we have currently put 

into place. We will see how private capital is reengaging. Assuming 

a normalized rate of reentry of private capital in the market, I 

think we should strive to get FHA’s market share level back down 

to its more normalized market share. 

24 

As I quoted our fourth quarter data, we actually could be on a 

trend of returning closer to that level rather than the levels we 

have been at for the last couple of years. And all of that I think 

we need to be sensitive about. I would love to have an ongoing dialogue with all of you, and you specifically as you are interested, to 

talk about what is happening in the market more broadly so we 

don’t create this double dip or unnatural outcome that can harm 

families even more. 

Mr. DOLD. Some have suggested, and again, I am sorry to continue to focus on you, Mr. Stevens, and I apologize to the other 

panelists, and please chime in if you feel it necessary. 

Higher downpayments have been talked about in terms of asking 

homeowners. We have seen it going back to previous generations. 

They saved, they saved, and they had to put down 20 percent. And 

that obviously was a big difference, I think, in what is going on 

today as we have seen those capital requirements for 

downpayments drop significantly. What are your thoughts with regard to requiring additional capital for home buyers? 

Mr. STEVENS. If I can answer it this way, I have been doing this 

for 3 decades in the finance system. I bought my first home with 

an FHA loan back in the 1970s with a 3 percent downpayment, believe it or not, because they did it the same way back then. 

The problem ends up being if you have too broad a box in which 

you can originate FHA loans, the market people are going to naturally use that program, even when home buyers could come up 

with a larger downpayment and they don’t necessarily meet the 

original objective of FHA. 

I do think a small downpayment provides a value, particularly 

for underserved families who may not have the additional disposable income to save up, virtually trapping them in a world where 

they can never become homeowners because they will never be able 

to save for a downpayment, even though they have a good job, they 

have a family, and they can afford a home. So I believe targeted 

assistance in those markets should continue. 

But I do believe, if it is the trend of the questions you are asking, 

that we clearly need to contain and reduce the footprint of FHA 

over time safely, but we do need to reduce the footprint so it isn’t 

playing the kind of role it is today and perhaps providing financing 

at low cost to families who could otherwise come up with a downpayment. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

The gentleman from Ohio, Mr. Stivers, is recognized. 

Mr. STIVERS. Thank you, Madam Chairwoman. 

I would like to thank Mr. Stevens for what FHA has done to address their risk pricing and modernize the agency a little bit. 

I do have a couple of specific questions for Mr. Stevens about 

FHA with regard to condominiums. You changed your rules last 

year with regard to spot approvals, with regard to concentration, 

with regard to having at least 50 percent of the units pre-sold, and 

I know that has reduced your concentration in condominiums. I 

know condominiums were part of the problem. 

But I have heard from some constituents in my area that we 

have a lot of bank-owned condos and now it is really hard to get 

financing for those and they are stuck in sort of limbo, because the 

25 

bank took it back. Now you can’t get an FHA loan. You can’t get 

a conventional loan, and therefore those condos are sort of stuck. 

Has FHA and anybody on the panel looked at that issue, and is 

there a way out of that, because obviously we need to get those 

properties in productive use? 

Mr. STEVENS. Congressman, I very much appreciate the question, 

and it is an area that we have spent an extraordinary amount of 

time focusing on. I think, as you may know, we actually put a temporary extension in, we have now done it for 2 years in a row, to 

provide more lenient policies to the condominium market. Keep in 

mind most of this relates to new condominium approval. 

Mr. STIVERS. Right. 

Mr. STEVENS. We are currently one of the few institutions that 

will insure a condominium, particularly at a high loan to value. 

Most of the private insurers will not engage in this market. And 

so we are the sole source provider. And FHA has experienced some 

fairly significant losses on condominium buildings that went completely belly up during this last economic crisis. 

But we also recognize that condominiums are often an entry 

point for first-time home buyers. And in underserved communities, 

it is really important we provide that service. It is a difficult position that we are in to be responsible to the taxpayer and to make 

sure we are providing needed liquidity. I meet frequently with the 

National Association of REALTORS and the home builders, mortgage bankers, all who constantly want to discuss these policies. I 

am very open to discuss them. 

Today we have—I have given temporary extensions to policies at 

much more lenient levels because of the concerns you have, but I 

would be very interested in any insight or input that you or your 

staff would have. 

Mr. STIVERS. I do have some input. Is there some flexibility we 

could give you to charge risk-based pricing on those condominiums 

that are obviously different because your risk is higher than other 

places? And I know currently you don’t offer a lot of differentiation. 

Have you looked at that as a way to offset that— 

Mr. STEVENS. You know, Congressman— 

Mr. STIVERS. —and have people pay for what they need. 

Mr. STEVENS. We have been looking at ways to implement a riskbased pricing pilot, as we are authorized to do by Congress. Actually, it is an interesting idea. It is one I would like to go back and 

look into, and I would be glad to follow up with you on how and 

if we could do something like that. 

Mr. STIVERS. And I would love if you could follow up with me in 

my office because it is impacting a lot of our districts, but especially, again, on whole projects that have fallen into bank foreclosure now, if over 50 percent of them are—it is just hard. They 

can’t get private financing. They are having trouble getting FHA financing. I sympathize with folks trying to get that property in productive use. 

So that was the thing I really wanted to get at in today’s hearing 

because I heard from a constituent on this issue and wanted to follow up on it, and I would love to follow up with you. 

I yield back the balance of my time, Madam Chairwoman. 

Chairwoman BIGGERT. Thank you. 

26 

Mr. Duffy from Wisconsin, you are recognized. 

Mr. DUFFY. Thank you, Madam Chairwoman. 

I yield my time to my colleague from North Carolina. 

Mr. MCHENRY. I thank my colleague from Wisconsin for yielding, 

and just wanted to follow up on my previous line of questioning. 

Mr. Stevens, in terms of the settlement contemplated or being 

discussed that you mention with the 11 regulators and the 

servicers, what is the magnitude and dollar amount that we are 

talking about? 

Mr. STEVENS. I am actually glad you got the time back because 

I wanted to—this is a great opportunity to follow up. First of all— 

Mr. MCHENRY. What is the magnitude and dollar amount? 

Mr. STEVENS. The magnitude is in a broad range. 

Mr. MCHENRY. What is the broad range we are talking about? 

Mr. STEVENS. It would be premature to even give a dollar 

amount because we are not there yet. 

Mr. MCHENRY. Are you talking billions? 

Mr. STEVENS. We are talking a range that could be above or 

below. 

Mr. MCHENRY. Okay, I am hearing ranges in the tens of billions 

range. Is that—would you say that is not correct. 

Mr. STEVENS. Here is what I can tell you. That the range—this 

comes down to, what are the actual violations that have been identified? We haven’t aggregated those. What are the potential costs 

that each individual agency and State attorney general could ultimately assess against these institutions? We need to understand 

what that total potential estimation could be. And off of that, that 

is what we will have to work on to determine if there is a way we 

can come together and make this less disruptive in the market. So 

I cannot give you the— 

Mr. MCHENRY. Okay. I understand that, I understand that. Is 

there a timeframe we are looking at? Is this something that is 

going to happen in the next month? 

Mr. STEVENS. We would like it to be sooner rather than later. As 

you can imagine, I am relatively new to government, but we are 

working with multiple agencies, multiple regulators that have different obligations, but we would like it to be sooner rather than 

later. 

Mr. MCHENRY. Is it this quarter? Is it this month? 

Mr. STEVENS. I would say a month timeframe is probably in the 

reasonable range if we are to reach some sort of conclusion. 

Mr. MCHENRY. Are there discussions about what the money will 

then be used for in this settlement? 

Mr. STEVENS. There are a variety of discussions. There are different views that we are working on. 

Mr. MCHENRY. Are there some options that you are contemplating or you are recommending? 

Mr. STEVENS. There are options that we are contemplating. It 

could include anything from what you suggested in terms of having 

them modify loans so they stay performing in the market, which 

would improve the economy. There are options also just to purely 

collect penalties and have those deposited in the Treasury, and 

there are whole varieties of— 

Mr. MCHENRY. Are principal reductions being one of the options? 

27 

Mr. STEVENS. Yes. 

Mr. MCHENRY. Thank you. 

Ms. Caldwell, in terms of your involvement, have you been involved in these discussions that I have questioned Mr. Stevens 

about? 

Ms. CALDWELL. I have been involved in some of them, yes. 

Mr. MCHENRY. Have you been in the room with various regulators when these discussions are going on. 

Ms. CALDWELL. With some, yes, particularly as— 

Mr. MCHENRY. What regulators? 

Ms. CALDWELL. —it relates to foreclosure prevention. As you said 

earlier— 

Mr. MCHENRY. What regulators, if you might inform us? 

Ms. CALDWELL. Actually, most of the Federal regulators that regulate these institutions. 

Mr. MCHENRY. Okay. Are you there in terms of, using this in 

terms of HAMP or a different type of HAMP program, using the 

settlement money towards that? 

Ms. CALDWELL. At this stage, there are no contemplated changes 

to HAMP in terms of— 

Mr. MCHENRY. No, I mean, in these discussions, why are you 

there? 

Ms. CALDWELL. Primarily because of my expertise and experience 

in foreclosure prevention servicing practices and loss mitigation in 

overall housing finance. 

Mr. MCHENRY. So the regulators don’t have that expertise is 

what you are saying, so you have to be brought in from Treasury 

to provide that? 

Ms. CALDWELL. No. Treasury is there in Treasury’s role. And you 

asked specifically what role I am playing. There are a number of 

people at Treasury who participate, and you asked specifically for 

mine, and it is with respect to that area of expertise. 

Mr. MCHENRY. Okay. In terms of HAMP, have there been discussions about a second HAMP, a HAMP 2? 

Ms. CALDWELL. That is a good question. I think it is important 

to remember— 

Mr. MCHENRY. And that is why I am asking. I hope you give me 

a good answer. 

Ms. CALDWELL. I think the answer is, based on the authority we 

have under EESA, there cannot be any new programs in HAMP 

that were not in place as of June of 2010. We do not have authority 

for new programs. We continue to get ideas. 

Mr. MCHENRY. Could you use settlement money in order to create a new program? 

Ms. CALDWELL. As I said, at this point, there are—we do not 

have authority for new programs. 

Mr. MCHENRY. Even if you have a settlement in the terms of billions of dollars, that could not be used for principal reduction is 

what you are saying? 

Ms. CALDWELL. I would just say one of the focuses of HAMP has 

not been the need for more funds. The focus of HAMP has really 

been getting more attention on homeowners to make sure we use 

the funds that are available. 

28 

Mr. MCHENRY. Madam Chairwoman, I know my time has expired. If I may ask Ms. Caldwell one final question? Do you believe 

that HAMP has been a success? 

Chairwoman BIGGERT. Mr. McHenry— 

Mr. MCHENRY. It is a simple yes-or-no answer, Madam Chairwoman. Do you believe that HAMP has been a success? 

Ms. CALDWELL. I believe that HAMP has been a success at reaching the people it was intended to reach with a modification that is 

sustainable in changing the industry. 

Chairwoman BIGGERT. The gentleman from New Jersey, Mr. 

Garrett, is recognized for 5 minutes. 

Mr. GARRETT. Thank you. I may not use the whole 5 minutes, 

but thank you. 

Mr. Tozer, I just came back from another hearing. Secretary 

Geithner is just down the hall, actually in the other building, and 

made reference to the fact that we just had a hearing in the committee with regard to the GSEs and GSE reform and the like. And 

in that hearing, we discussed ways to treat the book of the GSEs 

and basically put it on the book of the Federal Government, the liabilities and the assets. And one of the comments that was made 

by one of the witnesses was that if you do that, it may actually 

have a negligible impact on the balance sheet, so to speak, because 

the assets basically would offset the liabilities. 

And that if you put it on the books of the U.S. Government as 

the GSE securities began, the short-term securities would begin to 

run off, right, you would reissue U.S. securities to back it, okay. 

And the reason you would do that is because the spread is a little 

bit different between them, about 25 basis points, and theoretically 

you would save money over time which would be good for the taxpayers because we are basically funding them right now. 

So just if you could comment: (a) on a proposal about putting it 

all on the balance sheet; and (b) are there any practical implications with regard to if we did all that over here with the GSEs and 

how that might affect the pricing of Ginnie Mae securities? 

Mr. TOZER. Again, since I really haven’t seen the proposal, but 

as I understand what you are saying is that as GSE’s liabilities roll 

off, you would replace them with government-guaranteed liabilities 

on the liability side of the balance sheet, as I understand what you 

are saying. 

Mr. GARRETT. Yes. 

Mr. TOZER. From my perspective, I would indicate from Ginnie 

Mae, it should probably have a negligible impact. The reason I 

would say that is, and again not understanding all the facts of it, 

but the fact that since we are in a situation where we are dealing 

pretty much with a 30-year fixed-rate market and our issuers are 

creating 30-year securities, you are really dealing with two different investor bases. You have people who invest in short-term assets, which are going to be more banks, money markets and so 

forth. Our investor base is more central bankers, pension funds, insurance companies. So I would think from that perspective from 

what you said, I would say it would have a negligible impact because of the long-term investors for us and short-term ones for the 

short-term liabilities. 

Mr. GARRETT. Okay. 

29 

And the second question is for Commissioner Stevens. You made 

some more comments which I agree with, with regard to as we all 

go through the process here of GSE reform, we sort of have to do 

it at the same pace or track, if you will, with regard to FHA reform 

at the same time, right. 

Mr. STEVENS. Yes. 

Mr. GARRETT. And I think that is crucial because I guess if you 

don’t do that, if all of a sudden we do all the reform tomorrow and 

that is not a timeline, but on the GSEs, then what, everything will 

just—if you begin to do as the Administration says, try to move 

that in a more private fashion that could have the effect of funneling a lot of the business over to FHA, right. 

Some of the Treasury proposal says that over time their proposal 

is to change the downpayments for the GSEs to 10 percent. So if 

you have that effect over here in the GSEs and you guys are over 

here at what, 3.5 percent, the natural implication is that part of 

that book will just extend over to you folks. They also—I think they 

discussed in their proposal as far as raising the GPs over at Fannie 

and Freddie, so the same thing. If it is getting more costly over 

here, what is the natural implication of that? Folks are just going 

to be coming over to FHA, right? 

Mr. STEVENS. If we do nothing, that is correct. We have done 

three premium increases at FHA in the last year alone, and I just 

increased premiums on Monday one more time. And so I think, to 

that extent, there are levers you can address within FHA to make 

sure that there is balance in any steps that take place to change 

the size and scope of the FHA footprint. 

On the downpayment piece, we are looking forward to the dialogue on downpayments. Today, FHA doing minimum 

downpayments up to $729,000 is something that we clearly endorse 

with a White Paper to say that needs to scale back. And that is 

why we do believe, however, there needs to be— 

Mr. GARRETT. Scale back? 

Mr. STEVENS. Scale back at least at a minimum at the end of the 

year to HERA levels. And as the White Paper states, we believe we 

should have a discussion about whether we should increase those 

further. 

Mr. GARRETT. As far as those limits. And as far as the 

downpayments then for them, how would that go? 

Mr. STEVENS. The same issue on the downpayments. I think 

there is a good dialogue in the White Paper that gives this as a 

suggestion: We need to make sure that we provide within the role 

of FHA a much reduced footprint that has explicit support for underserved families that otherwise would not have the disposable income or means to potentially ever buy a home. So you can scale 

that market down by looking at loan limits and other measures. 

And for the remainder of the portfolio, you could theoretically 

change downpayment requirements. 

We talk about an explicit funding mechanism that would be 

budget-neutral in the White Paper that would help support downpayment assistance. And if that was created, you could clearly adjust loan to values within the FHA program. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

The gentleman from Texas is recognized for 5 minutes. 

30 

Mr. GREEN. Thank you, Madam Chairwoman. 

Again, I thank the witnesses for appearing. And I also thank the 

witnesses on the second panel, and apologize that I may not be 

here to hear your testimony, but I assure you I will review it. 

Just for edification purposes I would like to take a moment and 

explain that when we talk about reforming a system, we impact 

more than the buyers and the sellers. I think it is important to 

what we do at the banks, especially small banks, and what we do 

with the consumers, the actual persons who are purchasing homes, 

is important. 

But also we have Realtors who are in this process. And I can tell 

you—I meet with them, talk to them—Realtors are very much concerned about how we will reform this system because they understand how the loans move from the portfolio of the bank to some 

other entity, and then it gets securitized. They have a lot of consternation about this. And we don’t hear a lot from them. I suppose 

they are quietly suffering, to a certain extent. 

But I want to be a voice for them and let people know that Realtors are very much concerned about what will happen when we 

start to reform, if you will, the system. 

And I do advise, as I have been advised, that we proceed with 

a great degree of caution because the system is very fragile right 

now. And while there is a movement toward recovery, we can, if 

we are not careful, do things that may thwart the recovery in an 

effort to be helpful. So we have to be very careful as we move. 

I would like to move next to Mr. Tozer. Am I announcing that 

correctly, sir? 

Mr. TOZER. Yes, you are. 

Mr. GREEN. Okay. 

Mr. Tozer, sir, some things bear repeating. You have given us a 

good deal of intelligence about Ginnie Mae. We understand that it 

originated out of Fannie Mae: Fannie Mae in 1938; Ginnie Mae in 

1968. But you talked about the layers of protection and you talked 

about how you don’t come into play as often as some of the other 

agencies. Can you better define for us how often you come into play 

with these mortgage-backed securities? 

Mr. TOZER. In the past year, we have had four issuers we had 

to deal with their servicing. And in reality, out of the four, two of 

them were ones where they were banks that received the FDIC. So 

the servicing was fine. There was no problem with servicing. We 

were able to move it, because again, it was an FDIC issue that 

made us move them. The other one, we actually were able to move 

the servicing to someone else, too; then put a mortgage banker. So 

really we have had to deal with our guarantee as far as ceding the 

servicing four times. Only one time we even had to even get involved long term. And even with that, it didn’t cost us anything. 

Because what we did was we took the servicing. We have two backup servicers, people who are willing to service for a fee for us, and 

they are servicing on our behalf. 

So as of this point, the four organizations that have failed this 

year to this point have not cost the guarantee any money because 

we were able to replace the servicing. Because that is the key. Our 

guarantee comes into play if the servicing—the whole servicing 

pool, not just the ones that are bad, but the whole servicing pool, 

31 

because these servicers are paid a fee to service a portfolio, and it 

is a very lucrative fee. 

So when we go out to put the servicing out to the private market, 

as long as there is enough current loans, we can place it and not 

cost our fund any money at all. It has really not come into play, 

and it has worked very well. 

Mr. GREEN. You have indicated, and I will restate this, you don’t 

originate loans. You don’t purchase loans. You don’t sell securities. 

As a matter of fact, you really are not involved in derivatives, are 

you? 

Mr. TOZER. No. Again, our whole position is that we have lenders 

that have taken FHA/VA insured or guarantee loans, government 

housing, and they have created pools, basic almost like private 

label pools. What we have done is we have wrapped those securities. So really we don’t get involved in derivatives. 

The only thing we are involved with is we do offer a REMIC program, again to help create liquidity for the Ginnie Mae security. 

But it is not really a derivative; it is more of a situation of just 

kind of helping the market. But overall, we are not involved with 

derivatives. Again, we are truly just an insurance company. 

Mr. GREEN. My time is about to expire. Let me just ask you one 

additional thing. You deal with institutional investors, correct? 

Mr. TOZER. That is correct. 

Mr. GREEN. Could you just quickly define this so that there won’t 

be any question as to what an institutional investor is, please? 

Mr. TOZER. The institutional investors that buy our securities are 

mutual funds like Vanguard. It is central bankers around the 

world. It is pension funds. It is insurance companies. It is the people who have a natural interest in long-term investments and that 

like the government guarantee because that way they know they 

have liquidity to get in and out of the security business. But it is 

mainly like central bankers, insurance companies, mutual fund 

owners. 

Mr. GREEN. Thank you, sir. My time has expired. 

Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. Thank you. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. So, 

without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

And I would like to thank the panel for spending this time with 

us and for being very patient before we started. So, with that, 

thank you, thank you very much. 

We will move to the second panel as quickly as possible. While 

we are moving quickly to the second panel, I do want to acknowledge something, so if I could have your attention please. This committee has also acknowledged this, but I would like to recognize a 

senior professional staff member, Cindy Chetti, for her decades of 

service to this committee and this institution. 

Cindy, thank you, thank you, thank you for your service to this 

committee. And as you all know, Cindy is leaving us or retiring, 

we could say, but to a new career, and we wish her the best, and 

thank you so much. 

32 

I now recognize the second panel. And I thank you for your patience. Certainly, I hope there weren’t any airplanes that were 

leaving now. 

Our second panel consists of: Douglas Holtz-Eakin, president, 

American Action Forum, and former Director of the Congressional 

Budget Office from 2003 to 2005; Michael Farrell, chairman, CEO, 

and president of Annaly Capital Management, Incorporated; Faith 

Schwartz, executive director, HOPE NOW Alliance; and Julia Gordon, senior policy counsel, Center for Responsible Lending. 

And as we said to the first panel, without objection, your written 

statements will be made a part of the record, and you will each be 

recognized for a 5-minute summary of your testimony. 

We will begin with Mr. Holtz-Eakin for 5 minutes. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION FORUM, AND FORMER DIRECTOR OF THE CONGRESSIONAL BUDGET OFFICE FROM 2003 TO 2005 

Mr. HOLTZ-EAKIN. Madam Chairwoman, Mr. Clay, and members 

of the subcommittee, thank you for the chance to be here today. 

You do have my written statement, so I will be brief. Let me 

make two major points about the role of government policy in housing recovery. And the first has to do with the broad macroeconomic 

recovery that the United States is engaged in at the moment where 

I think housing enters in two important ways. 

The first is that an important feature of this economic setting is 

the bad damage to household balance sheets during the financial 

crisis and recession, housing being a key part of that. It is one of 

the reasons that I do not believe that any consumer-led strategy 

will be successful in generating faster economic growth. 

Housing policy enters there in that the sooner the valuations are 

settled in the housing market, the better. And I at least have come 

to the conclusion that I am skeptical that any government intervention can speed the clearance of excess inventories from the market and otherwise stabilize housing values. The quicker this gets 

done, the better, and I think getting government out of the way is 

the fastest way for that to happen. 

The second is that in the end, this recovery will be powered by 

investments, business spending in workers, plant equipment, and 

in residential and nonresidential construction. There, I think the 

most important thing is to settle the rules of the road. Some of this 

debate is familiar. What will be the future of tax policy past 2012 

now? What will be the nature of regulatory burdens, where we 

have seen over the past year a record number of Federal Register 

pages with regulations coming from Dodd-Frank, now the Affordable Care Act, EPA, all of which have impacts on housing construction, but also the future of mortgage finance, where it will be essential for folks to understand how exactly this is going to be operated? 

There I think it is worth stepping back quite a bit and looking 

at what the objectives are. And I would say, broadly speaking, the 

U.S. tradition of subsidizing debt-financed owner-occupied housing 

in ways which are invisible and not transparent for the taxpayer 

has been a great disservice to the taxpayer, certainly to homeowners in the end and to those in the housing community. 

33 

The mortgage interest deduction is a classic example of rewarding debt finance of owner-occupied housing, not merely owner-occupied housing. And the implicit subsidy provided through the GSEs 

with affordable housing goals off the books that left taxpayers massively exposed is a very indirect and inefficient subsidy to policy 

goals. 

And so I think the primary objective for the members would be 

to identify policy roles clearly. Are they to subsidize housing or is 

it owner-occupied housing, or is it debt financing of owner-occupied 

housing where we reward leverage? But identify the goal and provide those subsidies in a budgeted fashion, put them on the budget 

so that they are transparent to taxpayers and to members, and 

they control those subsidies; target them as directly as possible on 

the communities you wish to affect, low-income Americans, veterans, as it may be, and not indirectly through secondary mortgage 

markets, which make it very difficult to have efficient subsidies 

and end up costing very, very much. 

So I think that there is a lot to be done and it must be done relatively quickly. Because until this is settled, where the housing finance industry is going, what then you can plan in the way of sensible transitions in phasing out, clearly, the taxpayer finance hedge 

fund that was Fannie Mae and Freddie Mac portfolios, and indeed, 

in some circumstances, phasing out the guarantee function, which 

you could easily do in a future government-free housing finance 

world; the sooner that is settled, the more clarity you will have and 

the faster we will get genuine recovery in both the housing sector 

and also the larger economy of which it is such an important part. 

I thank you for the chance to be here today and I look forward 

to answering your questions. 

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

page 96 of the appendix.] 

Chairwoman BIGGERT. Thank you so much. 

Mr. Farrell, you are recognized for 5 minutes. 

STATEMENT OF MICHAEL A.J. FARRELL, CHAIRMAN, CEO, AND 

PRESIDENT, ANNALY CAPITAL MANAGEMENT, INC 

Mr. FARRELL. Chairwoman Biggert, Mr. Clay, and members of 

the subcommittee, my name is Mike Farrell. I run Annaly Capital 

Management. I am the chairman and CEO and the founder. 

We are a large residential mortgage real estate investment trust, 

or a REIT, listed on the New York Stock Exchange. Collectively, 

between Annaly and the other companies that we run, we run 

about $100 billion worth of mortgage-backed securities and mortgage loans through our portfolios as investors. 

I represent an important constituency in the housing market, the 

secondary mortgage investors, who provide a majority of the capital 

to finance America’s homeowners. Just for the Annaly family companies, we estimate our shareholders collectively help finance the 

homes of 1 million American households or 3 million American citizens. 

I would like to begin by focusing on the fact that the secondary 

mortgage market investors provide 75 percent of the U.S. housing 

market capital. That is approximately, of the $10 trillion in outstanding home mortgage debt, about $7.5 trillion is funded by 

34 

mortgage-backed securities and investors that fund those securities. Of that $7.5 trillion about $5.5 trillion is in the governmentguaranteed mortgage-backed securities and about $2 trillion in socalled private label mortgage-backed securities. The balance, or 

$2.5 trillion, is held in loan form, primarily on bank balance sheets. Since our country’s banks have about $12 trillion in total assets, 

there is not enough money in the banking system to fund our Nation’s housing stock for cash, at least not at today’s current levels. 

It is axiomatic that without a healthy securitization market, our 

housing finance system would have to undergo a radical transformation. 

Right now, securitization is attracting significant amounts of private capital, at least to that part of the NBS market that is government guaranteed. The problem is that in the nonagency part of the 

sector or the so-called private label market, it is dormant, and only 

one small deal has been done in the last 21⁄2 years. 

I now would like to discuss several reasons why the private label 

market is not restarting. First, the economics don’t work, for a 

number of reasons but mainly because mortgage rates have to rise 

in order to compensate investors for the risk that they are taking 

in those securities. 

Second, there is a higher yielding alternative for investors who 

want to take a residential mortgage credit risk, older private label 

mortgage-backed securities and seasoned loans that have been repriced and are cheaper by the market after the events of the past 

few years. As long as this disparity exists it will impede the restart 

of the new issue of private label market. 

The third reason is the difficulty in sourcing enough newly originated loans. Without the outlet to sell mortgages and 

securitizations, banks have gotten more comfortable holding nonconforming loans on their balance sheet, not only by tightening underwriting standards but including sizable downpayments. In 

short, banks are only willing to make loans to highly capitalized 

borrowers. 

The fourth reason is the uncertainty over the future regulatory 

environment. The many different mortgage modification programs 

and delays in foreclosures have made it difficult for investors to 

analyze cash flows. 

Finally, I want to get to the heart of the current debate. Can the 

private label mortgage-backed securities market come back and fill 

the gap that is currently filled by the GSEs? The short answer is, 

yes, it can, but not at the same price and not in the same size. 

Most investors in agency mortgage-backed securities won’t invest 

in private label mortgage-backed securities at any price or only in 

much reduced amounts because their investment guidelines preclude taking credit risks. These investors include money market 

funds, mutual funds, banks, foreign investors and governmental 

agencies. Some investors could cross over, but we don’t know how 

many or at what price, and we won’t know until we have a lot more 

information to make that analysis clear. 

But back at the end of the day, I have to refer to my two market 

truths: first, securitization is a source of about 75 percent of the 

capital to the housing market; and second, the private label 

securitization market is not working right now. 

35 

I thank you for your time today, and I look forward to your questions. 

[The prepared statement of Mr. Farrell can be found on page 56 

of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Ms. Schwartz, you are recognized for 5 minutes. 

STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, 

HOPE NOW ALLIANCE 

Ms. SCHWARTZ. Thank you, Chairwoman Biggert, and members 

of the subcommittee. 

Thank you for having me come today and testify before you. I am 

Faith Schwartz, the executive director of the HOPE NOW Alliance. 

And I have served in that capacity since 2007, where I work with 

servicers, nonprofit housing counselors, regulators, and the government to help homeowners avoid foreclosure. 

The comments I make today are my own and represent my experience at HOPE NOW and my breadth of experience in the capital 

markets prior to HOPE NOW. I will focus my oral testimony on the 

HOPE NOW data collected over the past 3 years; the state of the 

market, including government programs; and summarize issues to 

consider associated with a return of private capital. 

Foreclosure intervention programs have contributed to a record 

number of borrowers seeking help to avoid foreclosure and have assisted millions of borrowers stay in their homes. These public-private efforts have also contributed to longer foreclosure timelines 

across the country. The information shared today should assist you 

as you think about the important issue of bringing the private capital back. 

In early 2010, we had over 4 million borrowers who were 60 days 

or more past due on their mortgages. The industry completed 1.7 

million loan modifications. Of that, 1.2 million were private industry modifications and another half million modifications were done 

through the HAMP program, the government program. To keep it 

in context, you should compare that with 1 million foreclosure sales 

that happened through the same year of last year. 

What has changed from 2007 through 2011? Early on, the efforts 

on foreclosure prevention were focused on subprime securitizations, 

freezing interest rates, capitalizing arrearages, and extending 

terms of mortgages to keep them intact. There were few government program resources focused on foreclosure prevention, and the 

industry did pull together with government to collaborate and with 

nonprofits to keep people in their homes. The scale of the problem 

remained large, and the government got more involved. 

Some of the government programs rolled out were as follows: 

FHA HOPE for Homeowners. It is a targeted refinance program 

with servicers and investors willing to write down principal and 

consumers have to equity share with the U.S. Government. The 

HARP program was a GSE refinance program targeted at loans at 

80 percent up to 120 percent for negative equity borrowers at risk 

of default. Making Home Affordable, HAFA, a short sales and deed 

in lieu program focused on detailed processes for many players, forgiveness of a deficiency if you sell the home lower than what is 

36 

owed on the loan and extending the timeline of loans up to 120 

days. 

Making Home Affordable. HAMP—government loan modifications that set standards; safe harbors and PB tests focused on affordability; tools including 31 percent DTIs; rate reduction to 2 percent; extension of terms of 40 years. And a detailed review on 

HAMP is in my lengthier written testimony. Treasury also rolled out $7.5 billion to the hardest hit States— 

18 States and the District of Columbia—to address unemployment, 

principal reductions, and other modification supplements to the 

current modification efforts going on. 

Lastly, on the government intervention, we have had the State 

mediation guidelines that have been rolled out from 26 States that 

have a lack of uniformity in them, but their intentions are good: 

to keep people meeting with each other prior to going to foreclosure. What we recommend, however, is a comprehensive review 

for the various programs which are all unique to create universal 

documentation requirement standards and agreements on how to 

measure success. 

Our proprietary solutions and modifications have been up to 3.5 

million since July of 2007. This is without taxpayer dollars, and it 

happens only after a loan has been considered for a government 

modification and is ineligible for a government modification. 

The efforts have improved, and the modifications are more sustainable and affordable. And permanent solutions for borrowers 

who are seeking to stay in their home are now getting permanent 

affordable payments: 84 percent of the proprietary mods have an 

initial duration of set rate of 5 years or greater; 81 percent have 

lower principal and interest payments; and 80 percent of the proprietary mods, on average, are less than 90 days past due that 

have been performed over this past year. 

Summary and recommendation: Foreclosure timelines have increased considerably. While effective interventions have made a difference to millions of homeowners and investors, homeowners and 

communities have also experienced tremendous losses. Vacant 

housing abounds, and the foreclosure process remains drawn out. 

The average delinquency of a foreclosure in 2008 was 300 days, 

and in September 2010, it was 500 days across the country. 

Measuring risk has been difficult in the changing marketplace. 

Investors will want to see standards and uniformity. Whether it is 

State or Federal programs, uniformity and improved execution will 

be important to improve the cost of servicing, managing multiple 

programs, and mandates. 

Clear reps and warranties need to be in place. Identification of 

roles and responsibility of the servicer, of the borrower, and of the 

investor will be spelled out and the terms of the contract must be 

enforceable. 

Duration and prepayment risk, credit risk, and all of the Federal 

programs will also add to the uncertainty for investors. 

Thank you. 

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

101 of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Ms. Gordon, you are recognized for 5 minutes. 

37 

STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, 

CENTER FOR RESPONSIBLE LENDING 

Ms. GORDON. Thank you, Chairwoman Biggert, Mr. Clay, and 

members of the subcommittee. I serve as senior policy counsel of 

the Center for Responsible Lending, a nonprofit research and policy 

organization dedicated to protecting homeownership and family 

wealth. We are an affiliate of Self-Help, a CDFI that finances safe 

and affordable mortgages and small business loans. 

Over the next several years, the toxic combination of 

unsustainable loans, high unemployment, and underwater borrowers could mean a stunning total of more than 13 million foreclosures during this crisis, which is about a quarter of all the mortgages in the country. The spillover effects of these foreclosures will 

cost our Nation billions if not trillions of dollars, and the additional 

excess supply of homes will drive still further declines in home values. 

Things did not need to be this bad. Mortgage servicers are supposed to be capable of handling loans even when problems arise, 

but the profits made during the years when servicing was simple 

were not reinvested to prepare for the rainy days. Instead, nearly 

4 years since the start of the crisis, the industry is still struggling 

to catch up to the new reality. 

If market principles applied here, customers would have voted 

with their feet by now. But mortgages are not like cell phones; 

homeowners do not get to choose their servicer or switch providers 

if service is poor. Even investors have very little control over the 

servicing of the loan pools on which their income depends. For this 

reason, it made a lot of sense for the government to offer tools to 

help servicers do a better job of protecting the assets of both investors and homeowners. 

HAMP, the principal government effort, has proved disappointing, in large part because it is a voluntary rather than a 

mandatory program. And servicers who failed to make the modifications they were supposed to suffered little consequence for these 

failures. But it is not productive to respond to HAMP’s tepid performance by throwing our hands up and declaring that we will just 

let foreclosures continue to wreak havoc on America’s families, 

neighborhoods, and cities.That is reckless endangerment of the 

housing market, not to mention an abandonment of the interests 

of every homeowner in the Nation, all of whose wealth is reduced 

by continued foreclosures. Rather, it is time to do what we should 

have done all along: require all servicers across the entire industry 

to review all loans for alternatives to foreclosure and enforce that 

requirement. 

There is little disagreement that affordable loan modifications 

are a win-win. Not only do they give families a shot at keeping 

their homes, but they provide greater returns to investors even 

when many of those homeowners redefault. There is also consensus 

that for vacant homes and for homes that the borrower cannot possibly afford, it is best to free up that home for a new family. But 

the servicing system simply cannot sort out which is which right 

now. It is crippled by overwhelming volume, and the financial incentives don’t line up with investor and homeowner interests. More 

than 60 percent of borrowers in trouble have had no evaluation of 

38 

their situation at all. In other words, many foreclosures that 

shouldn’t happen, happen; and foreclosures that should happen 

languish in the vast shadow inventory. 

A few commonsense principles are crucial. Servicers should review loans for alternatives even before foreclosure proceedings are 

started, and loss mitigation and foreclosure processes should not go 

forward on a dual track. Servicers should provide borrowers a single point of contact to guide them through the modification maze. 

Banking regulators should enforce existing rules and establish additional duties and standards to prevent detrimental servicing 

practices. 

Last but not least, as we retool the mortgage finance system, 

consider that any market needs a continuous influx of new customers, especially at a time when we suffer from an oversupply of 

homes. The failure to meet the needs of first-time homebuyers and 

customers from low-wealth backgrounds could be catastrophic for 

market recovery and growth. It is important to note that the current crisis was not caused by first-time homebuyers who constituted only 10 percent of those who received risky subprime 

loans. Rather, it was caused by existing homeowners being refinanced by predatory lenders into bad products. 

Excessive fees and large mandatory downpayments that keep 

people out of the market are the wrong way to keep the market 

safe. Instead, a healthy market needs sensible rules resulting in affordable, safe, sustainable loans. And we should make sure that 

lenders don’t discriminate against people who have the ability to 

pay for a mortgage but who live in a low-wealth or minority neighborhood. 

Thank you for your time. And I look forward to your questions 

and to working with you to restore health to the housing market 

and economy. 

[The prepared statement of Ms. Gordon can be found on page 60 

of the appendix.] 

Chairwoman BIGGERT. Thank you. 

I now recognize the committee for 5 minutes for questions, and 

I will yield myself 5 minutes. 

Uncertainty seems to be the word that I am hearing here and we 

heard in the former panel. Uncertainty is a theme. 

Ms. Schwartz, can you just tell a little bit from your own experience about the impact uncertainty is having on participation of private capital in the mortgage finance? 

Ms. SCHWARTZ. I am relating it to servicing and the investment. 

In a mortgage as a whole, you have to have care of how you process 

a loan in the servicing department and also through the foreclosure 

process. And the uncertainties abound in the length of time it takes 

to just foreclose on a loan, and someone might have abandoned the 

house. So we have overlapping government programs in that 

Fannie, Freddie, FHA and HAMP, all really well-intentioned, I 

work well with all of them, but they have different processes and 

procedures to do likely the same type of things. We would really 

benefit from more uniformity and create less uncertainty in 

timelines and getting through the system. 

Chairwoman BIGGERT. Thank you. 

39 

And Mr. Farrell, in your testimony you talk about uncertainty 

over the future regulatory environment, and the many different 

mortgage modification programs and delays in foreclosure have 

made it difficult for investors to analyze cash flows. 

Could you elaborate a little bit about how the Administration is 

exploring the option of implementing national servicing standards 

with no real timeframe for a decision? And the avalanche of rules 

resulting from Dodd-Frank are still in the pipeline. So are you concerned that this will really make much more uncertainty about private capital coming into the market? 

Mr. FARRELL. I think that the uncertainty of regulatory capital, 

charges on banks, the changes that have emerged in coordination 

with other central banks, Basel 3, etc., are unquestionably creating 

an uncertainty of commitment of capital to the market in some respects and in some asset classes. 

If we go back to 2008 during the middle of the crisis, virtually 

every mortgage security—which is unquestionably just a cash flow 

that needs to be analyzed by investors and compared to other allocations of other cash flows—all of the mortgages in the United 

States at that point in time were considered to go bad by investors. 

And the assumptions that were being taken into the market for 

secondary mortgages as well as for primary mortgages was that 

there was going to be a much higher default rate than actually 

what has occurred, the severity rates, the recovery rates, etc. That 

uncertainty only bleeds over into the kind of dialogue that we have 

had about the servicing standards that are going to emerge out of 

this, the continuation of Fannie Mae and Freddie Mac. 

We have to complete globally for this capital when we go out and 

we try to raise it to compete for other asset allocations. When we 

look at the influence of cash flows on our earnings and our returns 

to our investors—who are primarily domestic investors, everyone 

from individual investors to institutional funds—we need to be able 

to clearly explain to them what we think the variance in those 

earnings are going to be. And the uncertainties of policy, modification, tinkering with the cash flows, all lead to us having to essentially take a discount and hair-cut those cash flows, and therefore 

raise interest rates, in effect, in the private market. 

So my short answer is yes, that uncertainty is there. There is 

capital to do that, but it is exacting a higher toll in terms of the 

absolute rates that people need to pay for their mortgages. 

Chairwoman BIGGERT. Thank you. 

And then I would like to move on to Dr. Holtz-Eakin. You also 

talk about the uncertainty and the stress. You talk about the stress 

that housing valuations have caused homeowners and how they restrict their spending. 

Have you identified any policies as having a destabilizing effect 

on the housing valuations? 

Mr. HOLTZ-EAKIN. I think at this point, the sad reality is the best 

thing we can do is to let housing markets clear. And prices will decline where they have to to get excess inventories off the market, 

and at that point they will stabilize and we will also hopefully 

begin to create some jobs. You will get a somewhat closing of the 

gap between the underlying household formation and demographic 

demand for housing, which is probably double the housing starts 

40 

we have right now and the actual demand we see due to diminished wealth and low income. 

So I have thought for 2 years now, if not longer, about housing 

policies that might speed this, and I have come to the reluctant 

conclusion that there are no magic bullets out there. You can’t fool 

Mother Nature. We are going to have to just let this play out. 

Chairwoman BIGGERT. Thank you. I yield back my time. 

The gentleman from Missouri is recognized for 5 minutes. 

Mr. CLAY. Thank you, Madam Chairwoman. 

And let me start with Ms. Schwartz on a district-specific question. Would you be able to supply me with any data on how many 

permanent loan modifications HOPE NOW has performed in the 

First District of Missouri? 

Ms. SCHWARTZ. I can’t on a district basis, but I can on a State 

basis. I can have that data for you. 

Mr. CLAY. That would be fine. Thank you. 

Let me ask you a series of questions to get a feel for your take 

on servicing reform, and these are basically yes-or-no questions. 

Would you support servicing reform that mandates a single point 

of contact for borrowers for the life of their loan modification? 

Ms. SCHWARTZ. I would support reform to make sure borrowers 

had someone to talk to, who knew their situation and could help 

them, but that might look differently to different companies. 

Mr. CLAY. Okay. How about would you support mandates, disclosure of the complete chain of title, and whether or not the servicer 

used a loss note affidavit in the notice of default? Support or oppose? 

Ms. SCHWARTZ. I think that there should be a clear chain of title, 

and you should be able to find it and use loss note affidavits as 

needed. 

Mr. CLAY. Would you require in contracts a formula that would 

govern how second liens had to be written down in the event of a 

first-lien modification? 

Ms. SCHWARTZ. I support the co-modification of a second lien and 

a first lien in the new MP program level. 

Mr. CLAY. Would you require that an independent master 

servicer provide oversight and resolve disputes regarding servicers’ 

actions? 

Ms. SCHWARTZ. I am probably not familiar enough with the master servicer rule to answer that. 

Mr. CLAY. What in Ms. Gordon’s suggestions would you support 

to improve modification? 

Ms. SCHWARTZ. We both were talking and we both were in firm 

agreement that simplicity—and this complex system of modifications can be simplified to help more people and be more effective. 

Mr. CLAY. I see. Thank you for your responses. 

Ms. Gordon, the Federal Housing Finance Agency has announced 

that it would like to make changes to how servicers of loans guaranteed by Fannie and Freddie are compensated. The reason for this 

change is that the FHFA has recognized that servicer compensation leads to misaligned incentives and harm the investor and the 

homeowner. Can you comment on FHFA initiative and the impact 

it would have on changing the misaligned incentives? 

41 

Ms. GORDON. We welcome this initiative, which is not just FHFA, 

it is also FHA and VA as well. That is a conversation we hope to 

be participating in, because we do think the question of servicer incentives has likely impacted the performance of the servicers during this crisis. 

Mr. CLAY. All right. Thank you for that response. 

And Mr. Farrell, the future of the housing market going forward, 

according to your testimony, does not look that promising. Not to 

say that your testimony brought a dark cloud, but I guess it is 

more realistic than anything else as far as what we can expect 

going forward with homeownership and people actually securing 

mortgages. Is that what I heard? Did I hear that correctly? 

Mr. FARRELL. I would say I am a realist, but I would also say 

I am a total optimist. I think that this clearance will happen. I 

think that at the end of the day, as an asset allocator and a cash 

flow allocator, the resounding message that we have received from 

the markets in our business model—which is a very circular business model, the Reid model—and I would congratulate Congress for 

the 1960 rule that put Reid in place, which I think have really 

served the Nation very well over the past few years and helped 

stem some of the crisis in terms of capital raising and allocation. 

But when we talk to investors, they have to make a choice about 

where they are going to put their money and what that return is 

going to look like. And the resounding message that we have heard 

from investors is that they would rather lend to their neighbors at 

6 percent than to another sovereign credit at 6 percent. It is up to 

us as a Nation to figure out what is the process and the price of 

that credit and how that sovereign credit will work versus the private market credit, but I am confident that we will figure it out. 

Mr. CLAY. Thank you, Mr. Farrell. 

I yield back. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

The gentleman from Virginia, Mr. Hurt, is recognized. 

Mr. HURT. Thank you, Madam Chairwoman. 

This is really a question for all four, and maybe we can start 

with Dr. Holtz-Eakin. 

This morning we heard from the Chairman and the Vice Chairman of the Financial Crisis Inquiry Commission, and one of the 

statements that was made in the majority report that I found interesting was that government housing policy did not play any significant factor, was not a significant factor in the crisis that we are 

now going over with a fine-toothed comb and trying to assess and 

trying to find ways to make sure that we prevent this in the future. 

I was wondering, in light of the fact that I think certainly my 

constituents would believe that irresponsible lending led to the 

subprime mortgage crisis, it seems to me that government housing 

policy may actually have a lot to do with where we are and how 

we got here. I was wondering if each of you could maybe speak on 

that briefly and maybe offer the top government policy that you 

think that we need to examine, change, and shoot for in order to 

address this. 

Mr. HOLTZ-EAKIN. I will try to be brief. 

Having issued a dissenting report from the majority, I will not 

relitigate all of the things I think they got wrong. But I would 

42 

point out that Fannie Mae and Freddie Mac may not have caused 

the financial crisis, but they are the poster child for many of the 

phenomena that we highlighted in our dissent. They were key in 

the securitization chain, which during the panic did not serve us 

well. Its opacity contributed to what was a plain financial panic. 

They are the poster children for excess leverage, very little capital 

backing, implicit backing only by the taxpayer. They were the biggest phenomenon of ‘‘too-big-to-fail’’, and the quandary that policymakers were faced with in September 2008 about which institutions to aid and not to aid, and they were the most expensive to 

rescue. 

So the policy that I think is absolutely imperative to reexamine 

is those housing subsidies which are off the Federal budget, which 

are implicit in their nature, which in the end become most dramatic when things fall apart. They are the best example of that 

and certainly worth reconsidering. 

Mr. HURT. Thank you. 

Mr. FARRELL. I would say that my view of the crisis as an investor was and is being addressed by the legislature now, which is the 

amount of leverage that was embedded in the balance sheets of the 

GSEs. As they were reporting to the twin masters of Congress and 

to the capital markets. The allocation and the misallocation of pricing in terms of allowing their balance sheets to grow to $1 trillionplus balance sheets forced other lenders to do things that were creative and modify loans and loan terms and make reps and warranties that were incorrect. 

I think that it is wise to downsize those portfolios. I don’t think 

that the government should be in the portfolio business. People like 

me do that for a living. We live with the consequences of that, day 

to day, in terms of the scrutiny of not only regulators, but the 

shareholders and the investors who have to allocate capital to do 

that. 

So I think that if I had to point towards one critical moment during the past 25 years of looking at the market, I would think it is 

once those balance sheets began to balloon to levels of 

unsustainable growth, that is when lending practices were forced 

into different players that do different things. And I commend the 

Congress and the Administration for looking to downsize those. 

My one recommendation as an investor to remove the uncertainty would be to not let that take a long time, because that inventory overhang is just as serious in the securities market as it 

is in the actual allocation of houses that we have in inventory 

around the Nation. Those securities need to be cleared; we have to 

find clearing prices for them. 

The capital markets are ready to do that. We prove that every 

day, and we raise money against that every day. And the quicker 

that uncertainty is out, at that time we will know the true price 

of what that premium is worth. 

Mr. HURT. Thank you. 

Ms. SCHWARTZ. I think it is fair to say that the early part of this 

crisis was led by risk-layering on loans that fell largely outside of 

the GSEs, Alt A, and subprime; however, they participated in some 

of that as well. 

43 

My recommendation on how to think about government involvement in all of this is, had we been able to detect things earlier, systemwide, on performance of loans in addition to the front end of 

the loans, and linking the two makes some sense for the regulatory 

review of systemic risk. So that would be my other observation. 

Mr. HURT. Thank you. 

Ms. GORDON. Much of what I would say was already said by Mr. 

Farrell and Ms. Schwartz. Irresponsible lending was most certainly 

a key driver of the crisis, but most of that lending was backed by 

private capital. And the GSEs actually maintained standards for 

their loan purchases that would have excluded many of the toxic 

loans that were so problematic. It was an instance here where the 

bad money was crowding out the good money. And without the 

standards that Fannie and Freddie did have, I don’t know how 

much farther these bad products, these toxic products, 

unsustainable loans, could have gone. 

That said, going forward, the Dodd-Frank Act creates a framework for safer lending, and that should provide some protections. 

But the system is always evolving. New ideas come up, and it is 

important to—the government has an interest in making sure that 

lending is safe beyond just protecting the individual homeowner. 

As a Nation, we have an interest in helping people build wealth 

and in helping people be housed. 

And so as we go forward in reforming this system, it is important 

to remember that government has played an important role in that 

for a very long time now. Really, nobody here remembers the time 

before that. 

Mr. HURT. Thank you. 

Chairwoman BIGGERT. Thank you. 

The gentleman from Wisconsin, Mr. Duffy, is recognized for 5 

minutes. 

Mr. DUFFY. Thank you, Madam Chairwoman. 

I appreciate the witnesses coming in this afternoon and testifying. 

Ms. Gordon, just to clarify your testimony, is it your position that 

folks who have come into risk with other mortgages and are potentially near foreclosure, that we should provide them alternatives to 

modify their loans; is that right? 

Ms. GORDON. When it would return a greater amount of cash 

flow to the investor to modify the loan rather than not modify it— 

and if you don’t modify it, generally it goes on to foreclosure—then 

it does make economic sense to modify that loan. That is why all 

of the contracts that you look at will contemplate the possibility of 

modifying loans. 

Mr. DUFFY. But should that be the choice of the investor or 

should that be the choice of government to step in and dictate that 

cash flow? 

Ms. GORDON. Right now it is—the spread sheet that the servicers 

run has to do with the amount that would be returned to the investor. The government actually doesn’t play a role in making that decision.That decision is made by the private servicer. 

Mr. DUFFY. So you are not advocating that government should 

step in and help play a bigger role in writing down principal or 

being part of renegotiating interest rates, are you? 

44 

Ms. GORDON. Unfortunately, the private system has failed us 

here in terms of their capacity and their competence. 

Mr. DUFFY. But government does have a role in doing that? 

Ms. GORDON. I think that government has a role in helping the 

servicers figure out a way to make the choices that help not just 

investors, but help the whole housing market recover. Honestly, I 

don’t think that government has deployed the right tools to do that 

or deployed them forcefully enough. 

Mr. DUFFY. So even when a homeowner and a bank have entered 

into an agreement, two private parties, you believe that it is the 

role of government to step in and potentially negotiate a resolution 

by a potential principal writedown or a decrease in interest rate? 

Ms. GORDON. I should add that in the HAMP program, for example, as one of the principal government programs, the servicers 

have entered into a contract there with Treasury, under which they 

receive financial incentives to do the job that, frankly, they are obligated under all of their contracts with private parties to do anyway. 

Mr. DUFFY. And Ms. Schwartz, one part of your testimony, you 

indicated that the foreclosure times from 2008, 300 days, have gone 

up to now 500 days in 2010. What impact does this have on prolonging this housing crisis? 

Ms. SCHWARTZ. I think it gets at the bigger issue, that we kind 

of have overlapping inefficient processes through the foreclosure 

prevention. And some of it is good because you are protecting consumers who might have fallen through the cracks, but a lot of it 

has drawn out housing that otherwise should go to foreclosure, like 

abandoned houses. And the deterioration of neighborhoods happens 

when you have longtime lines of empty houses of 2 years, because 

that is an average of 500 days. So investors need certainty on what 

they are investing in in the mortgage business, in the mortgage 

markets, to get back to kind of normal timelines. 

Mr. DUFFY. Is it fair to say that we want to work through this 

crisis as quickly as possible, hit our bottom, and hopefully rebound? 

Is that a fair assessment of what you think is an appropriate— 

Ms. SCHWARTZ. I think that is right. I think we have to get 

through the delinquent and past-due loans and get through them 

and hopefully save as many people who are eligible for a loan modification, and then get them foreclosed—or do a short sale and a 

deed in lieu. There are other methods; it is not just a foreclosure. 

Mr. DUFFY. And maybe to the whole panel, are the policies that 

we have in place right now facilitating a movement of these bad 

mortgages through the process so that we can bottom and hopefully 

come back up? Are the policies helping or hurting the movement? 

Ms. GORDON. Something that I think is important to recognize is 

that there is no bottom that you and I can look at and say, oh, look, 

the bottom is right over there, we need to get into it. Foreclosures 

beget more foreclosures. As you have more foreclosures in the 

neighborhood, there are price declines. As people are underwater 

on their mortgages, they are more vulnerable to any kind of income 

interruption, and in that case, they end up going to foreclosures. 

We can talk about letting the markets clear, but the markets can 

clear at various levels. And the importance of keeping people in 

45 

loans when they can afford them and when they return a greater 

value for their investment— 

Mr. DUFFY. My time is almost up. When we have this timeframe 

go from 300 days to 500 days, when it prolongs the foreclosure 

process, doesn’t that put more pressure on the housing market because there are more foreclosures on the market and we haven’t 

worked through them, Mr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. I would say yes. Everyone has the ideal notion 

that if there is an economically rational workout that could be done 

between private parties, it should happen. When you start intervening in dramatic ways, two things happen: one, the rules aren’t 

clear and it leads to uncertainty; and two, there is an actual incentive to wait for a better deal. Maybe taxpayers will stick a little 

more money on the table. What happens next? And this has slowed 

down, not speeded up, the overall housing adjustment. 

Mr. DUFFY. Thank you. 

Chairwoman BIGGERT. The gentleman yields back. 

I would like to thank the panel for their expertise. And the Chair 

notes that some members may have additional questions for this 

panel that they may wish to submit in writing. Without objection, 

the hearing record will remain open for 30 days for members to 

submit written questions to these witnesses and to place their responses in the record. 

Again, thank you very much for being here, and thank you for 

your patience. 

This hearing is adjourned. 

[Whereupon, at 5:15 p.m., the hearing was adjourned.] 

(47) 

A P P E N D I X 

February 16, 2011 

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