U.S. GOVERNMENT PUBLISHING OFFICE

31–575 PDF WASHINGTON : 2018

A FAILURE TO ACT: HOW A DECADE 

WITHOUT GSE REFORM HAS ONCE 

AGAIN PUT TAXPAYERS AT RISK 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 6, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–115 

( 

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(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 

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C O N T E N T S 

Page 

Hearing held on: 

September 6, 2018 ............................................................................................ 1 

Appendix: 

September 6, 2018 ............................................................................................ 43 

WITNESSES 

THURSDAY, SEPTEMBER 6, 2018 

Bailey, Nikitra, Executive Vice President, Center for Responsible Lending ...... 8 

DeMarco, Edward J., President, Housing Policy Council ..................................... 5 

Pinto, Edward J., Co-Director, Center on Housing Markets and Finance; 

Resident Fellow, American Enterprise Institute ............................................... 9 

Swagel, Phillip L., Professor, University of Maryland School of Public Policy .. 6 

APPENDIX 

Prepared statements: 

Bailey, Nikitra .................................................................................................. 44 

DeMarco, Edward J. ......................................................................................... 75 

Pinto, Edward J. ............................................................................................... 94 

Swagel, Phillip L. ............................................................................................. 118 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Duffy, Hon. Sean: 

Government-sponsored Enterprise Reform Coalition letter .......................... 126 

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A FAILURE TO ACT: HOW A DECADE 

WITHOUT GSE REFORM HAS ONCE 

AGAIN PUT TAXPAYERS AT RISK 

Thursday, September 6, 2018 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:07 a.m., in room 

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

Present: Representatives Hensarling, Lucas, Posey, Luetkemeyer, 

Huizenga, Duffy, Stivers, Hultgren, Ross, Pittenger, Barr, Rothfus, 

Tipton, Williams, Poliquin, Hill, Emmer, Zeldin, Trott, Loudermilk, 

MacArthur, Davidson, Budd, Kustoff, Tenney, Waters, Maloney, 

Sherman, Clay, Lynch, Scott, Green, Cleaver, Perlmutter, Himes, 

Foster, Kildee, Delaney, Sinema, Beatty, Vargas, Gottheimer, Crist, 

and Kihuen. 

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

committee at any time, and all Members will have 5 legislative 

days within which to submit extraneous materials to the Chair for 

inclusion in the record. This hearing is entitled, ‘‘A Failure to Act: 

How a Decade without GSE Reform Has Once Again Put Taxpayers at Risk.’’ I now recognize myself for 4 minutes to give an 

opening statement. 

September 6, 2008 is a day that will live on in economic infamy, 

for today marks the not-so-happy anniversary of one of the most 

frustrating and costly moments in recent financial history, namely 

the 10-year anniversary of the Federal takeover of the failed housing government-sponsored enterprises (GSEs): Fannie Mae and 

Freddie Mac. The GSE’s anticompetitive government charters and 

ever-increasing affordable housing mandates created a toxic mess 

of systemic risk. Their collapse directly led to the second worst financial crisis in our history, causing more than $190 billion of taxpayer bailouts and forcing them into a government-run conservatorship. 

Embarrassingly, 10 years later, the GSEs remain in conservatorship very much alive and very much unreformed, as they quietly 

return to their pre-crisis market dominance. That is bad news for 

competition, innovation, and, most of all, taxpayers, since the Congressional Budget Office has said their $5.1 trillion of mortgage obligations are, quote, ‘‘effectively guaranteed by the Federal Government,’’ unquote. 

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Meanwhile, as several of our witnesses will testify, systemic risk 

is building yet again. The cost and risk of continuing to do nothing 

is rising, and rising at an alarming rate. 

Reform, while critical, has proven elusive. For almost 20 years, 

I, along with other handful of reformers like Congressman Ed 

Royce, have labored in vain to replace the GSE’s government-sanctioned monopoly with a new system based on competitive private 

capital, innovation and consumer choice, and market discipline. 

We passed the PATH (Protecting Americans from Tax Hikes) Act 

in the 113th Congress to do just that. I am reintroducing the PATH 

Act this week if, for no other reason, it is the right thing to do, and 

it will let me sleep better at night. Regrettably, its chances for passage remain slim. 

So as an alternative, I have decided to partner with Mr. Delaney 

on the other side of the aisle to propose a bipartisan compromise 

housing reform plan that preserves the government guarantee in 

the secondary mortgage market. In the time I have remaining in 

Congress, this is the plan I will pursue. 

Our discussion draft, which we will unveil later today, will repeal 

the GSE’s charters permanently ending their monopoly, and transition to a system that allows qualified mortgages backed by an approved private credit enhancer, with regulated diversified capital 

resources to access the explicit full government securitization guaranty provided by Ginnie Mae. I believe the plan will preserve much 

of what is demanded in the current system, liquidity, the TBA market, and the 30-year prepayable fixed mortgage. And it will do so 

while dispersing risk and leveling the playing field for all entrants 

into mortgage finance. Additional details of our proposal will be released later today. 

While by no means perfect, we offer this proposal as a grand bargain on how to move past an increasingly dangerous status quo. 

Codify and explicit government MBS guarantee into law, coupled 

with an accountable and effective affordability program, in exchange for placing the taxpayer in a catastrophic loss position only, 

diffusing the credit risk beyond two GSEs, and creating market 

competition. If the political will to enact such reform stalls in this 

Congress or the next, the Administration can and should effectuate 

change. 

The President will appoint a new Federal Housing Finance Agency (FHFA) director in January. The director has broad, unilateral 

powers as conservator of Fannie and Freddie to dramatically reduce their size, scope, and functions. If Congress fails to act by 

early next year, I call upon the new director to institute these reforms administratively. 

The grand bargain I have described does not necessarily represent my preferred policy, or optimal policy, but I believe it represents an achievable policy in a good faith effort at bipartisan 

compromise. A decade without GSE reform has once again put 

homeowners, taxpayers, and the economy at risk. The time to act 

is now. 

With apologies to the Rolling Stones, ‘‘You can’t always get what 

you want, but if you try sometimes, you just might find you get 

what you need’’ to avert the next housing crisis. 

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I now call upon the Ranking Member. I yield her 3 minutes for 

an opening statement. 

Ms. WATERS. Thank you, Mr. Chairman. Mr. Chairman, this 

hearing will focus on the failure to reform the housing finance system. I would point out that Republicans control the House, the 

Senate, and the White House, and there have been no apparent 

steps to advance comprehensive housing finance reform since they 

gained that control. 

It was over 5 years ago that committee Republicans pushed the 

PATH Act through this committee. That bill was not seen as credible. It failed to gain unanimous Republican support in committee, 

and the Republican leadership of the House declined to bring the 

bill to the House floor for a vote. I am in support of responsible efforts to reform our housing finance system. I believe we must 

evaluate what Fannie Mae and Freddie Mac have done well, as 

well as areas where the system still needs improvement and reform. 

Contrary to the claims of the majority, Fannie and Freddie did 

not cause the crisis. The Financial Crisis Inquiry Commission and 

others have made that clear. As we all know, the crisis was driven 

by predatory lending, the private market packaging those toxic, 

risky loans into securities, and then selling those securities to 

unsuspecting investors. Fannie and Freddie did not drive those actions, but the events that transpired during the crisis made clear 

the need for their reform. 

While the Republican-controlled Congress has yet to act, the Federal Housing Finance Agency has taken significant, administrative 

steps to improve the safety and soundness of the enterprises and 

reduce risk to taxpayers. As we consider housing finance reform 

and work to address the structure of our housing finance system, 

it is a priority for me to ensure that underserved borrowers and 

communities are not overlooked. This means that at the heart of 

any reform proposal, we need a comprehensive strategy around access to affordable mortgage credit, as well as access to affordable 

rental housing. And with that, I yield the balance of my time Mr. 

Chairman. 

Chairman HENSARLING. The gentlelady yields back. I now recognize the gentleman from Wisconsin, Mr. Duffy, Chairman of our 

Housing and Insurance Subcommittee, for 1 minute. 

Mr. DUFFY. Thank you, Mr. Chairman. Ten years, 10 years on 

since the financial crisis that was caused by a mortgage crisis that 

put the U.S. economy and the global economy into a tailspin, and 

at the center of that crisis was Fannie Mae and Freddie Mac that 

was allowed, by way of a government guarantee, to create a risky 

book of business they should have never been able to make. 

And so what did the Congress do? We passed Dodd-Frank, and 

I don’t want to get into a spitting match because Dodd-Frank didn’t 

do the reform that was necessary in the housing space, and the 

Ranking Member will say, Well, you guys have controlled Congress 

and now you have the White House. What have you done? And that 

is fair enough. 

The point is that we have to come together as a Congress in a 

bipartisan fashion, to figure out a way to address our housing finance system and make sure it works. But now to look 10 years 

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on that Fannie and Freddie are in conservatorship, and they have 

become bigger beasts than they were even before is troubling. This 

is—one second, Mr. Chairman. Housing is important to America. 

Housing is important to families. You can’t have a partisan bill, 

and that is why I am proud of Mr. Delaney and Mr. Hensarling for 

working together. Whether this is the package we move forward 

with or a different package, we have to come together as a Congress representing American families to make housing work in a 

more sustainable way. I yield back, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. Kildee, Vice Ranking Member of the committee, for 1 minute. 

Mr. KILDEE. Thank you. Thank you, Mr. Chairman and Ranking 

Member. We have talked about GSE reform for a long time in this 

committee. Several bipartisan proposals have been offered, yet we 

have not been able to move any of those bipartisan bills to the 

floor. I hope that changes. I have some reason for optimism, but 

I hope it does happen. It is also important not just that we talk 

about this and raise it in this meeting, but we do so with facts and 

data rather than bias and misdirection. 

We have to be wary of those who try to blame the 2008 crisis on 

expanded homeownership opportunities for low- and moderate-income people. We need an honest assessment of the larger role that 

other factors played, including the market for mortgage-backed securities, deregulation, the availability of risky nontraditional lending products. Home ownership opportunities have to be available 

for low- and moderate-income families, something that bipartisan 

GSE reform can encourage. So it is up to this committee to ensure 

that reform doesn’t pit investors and lenders against one another 

to the detriment of homeowners. 

Finally, GSE reform must include a government backstop for the 

secondary market. Without that, we can’t see the end of the 30- 

year fixed-rate mortgage, which is the product around which our 

markets are calibrated. I look forward to working on this issue, and 

I am encouraged by what I heard in the last few days. I hope we 

can move something this year. We shouldn’t give up on that possibility. This is really important. I thank the Chair and the Ranking 

Member for holding this hearing. I yield back. 

Chairman HENSARLING. The gentleman yields back. Today we 

welcome the testimony of Mr. Ed DeMarco, President of the Housing Policy Council. Mr. DeMarco earned a BA in economics from 

the University of Notre Dame and a PhD in economics from the 

University of Maryland. Prior to joining the Housing Policy Council, Mr. DeMarco was a Senior Fellow at the Milken Institute, and 

was the Acting Director, as I think we all know, of the FHFA for 

4–1/2 years. 

Dr. Phillip Swagel is a Professor at the University of Maryland 

School of Public Policy. Dr. Swagel earned his BS from Princeton 

University and a PhD in economics from Harvard University. Prior 

to joining the University of Maryland, Dr. Swagel was a Visiting 

Professor at Georgetown University and the Assistant Secretary for 

Economic Policy at the Treasury Department. 

Next, Ms. Nikitra Bailey is the Executive Vice President at the 

Center for Responsible Lending. She earned a BA from the Pennnshattuck on FSR297 with DISTILLER

5 

sylvania State University and a JD from the University of Pittsburgh School of Law. Prior to joining the Center for Responsible 

Lending, Ms. Bailey was a Communications Fellow for the Opportunity Agenda. 

Last but not least, Mr. Ed Pinto is the Co-director at the Center 

on Housing Markets and Finance and Resident Fellow at the 

American Enterprise Institute. Mr. Pinto earned a BA from the 

University of Illinois and a JD from the Indiana University School 

of Law. Prior to joining AEI, Mr. Pinto was Vice President and 

Chief Credit Officer for Fannie Mae. 

I think most of you have testified before so each one of you, I believe, knows you will be recognized for 5 minutes to give an oral 

presentation of your testimony. When the yellow light comes on 

you have a minute remaining. Without objection, each of your written statements will be made part of the record. 

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

STATEMENT OF EDWARD J. DEMARCO 

Mr. DEMARCO. Thank you, Mr. Chairman. Mr. Chairman, Ranking Member Waters, Members of the committee, thank you for having me here today. It is an honor to be back before you at this time 

in my capacity as the President of the Housing Policy Council. 

My prepared statement makes the following key points: Fannie 

Mae and Freddie Mac failed 10 years ago and were placed into government conservatorship backed by billions of taxpayer dollars. The 

reason for this conservatorship and for this massive amount of taxpayer support is that if their failure had led to shutting them 

down, the systemic ramifications of that would have been devastating. It was said at the time, and I detail this in my statement, 

that the final resolution of these conservatorships requires congressional action. Why is that? 

Simply put, it was the Congress of the United States that created 

these companies, chartered them, gave them their mission, gave 

them their special privileges, gave them their names, and reserved 

for itself, reserved for Congress alone the authority to change the 

charters, eliminate the charters, create new charters, merge the 

charters, and so on. So that is why with these companies in conservatorship, we are awaiting congressional action. 

Now in the 10 years since, a lot of positive developments have 

taken place, including developments that give the Congress something to build on. This includes the development of a credit risk 

transfer market and a common securitization platform. In those 

ways, things have gotten better, but in some ways, things have not. 

Indeed, the systemic reliance we are placing on Fannie Mae and 

Freddie Mac, if anything, has grown in these 10 years. 

So 10 years ago we saw all around us the manifestations of systemic risk in our financial system and since then, the Congress and 

regulators and, indeed, private financial firms have taken many 

steps to address these systemic issues, but the ones embedded in 

our housing finance system are still unchecked. So on behalf of the 

Housing Policy Council, I am here to say we need Congress to 

make the policy decisions only elected officials can make. The good 

news for all of you is that there is a foundation to build upon. I 

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already mentioned the work being done by the conservator, but 

there is more than that. 

Just in this committee, there have been three comprehensive proposals: One by the Chairman, one by the Ranking Member, one by 

Congressmen Delaney and Himes. And just now, we have learned 

of a bipartisan approach that creates a fourth basis upon which to 

work. And that is not all the good news. There is also this: As I 

review in my written statement, there is broad agreement on many 

of the basic principles and desired outcomes we are trying to 

achieve. 

So the Housing Policy Council welcomes the Chairman’s latest 

proposal with Mr. Delaney and looks forward to reviewing it and 

working with this committee, not just for the remainder of this 

year, but until the job gets done. In the meantime, we hope the 

FHFA and the Treasury continue to support Congress by carefully 

examining the common elements across reform proposals, and taking the administrative steps consistent with these proposals that 

will make legislating easier and the transition easier. 

I would like to make a final comment. It is easy to focus this discussion on what to do with Fannie Mae and Freddie Mac, especially today as we mark this 10-year anniversary, but we should 

not let the discussion get wrapped up in focusing just on Fannie 

and Freddie. Our goal is to strengthen and modernize a credit market, a market essential to one of our fundamental needs—the need 

for housing. Our focus should be on the market. In this case, the 

secondary mortgage market and how it connects the ultimate borrower, a person or a family looking to buy a home, with the ultimate provider of those resources—the investor. 

So let’s start by remembering the key principles of a sound market system: Competition, transparency, consistency, data, equitable 

rules, and so on. And let’s remember that with financial markets, 

systemic risk is a real threat. We ought to disperse risk through 

the system, not concentrate it. And we ought to avoid deep concentration of market power in the hands of one or two firms. And 

finally let’s remember sometimes social goals can only be met with 

the help and support of government. 

In housing finance, one key element of that support comes from 

the FHA (Federal Housing Administration) program and other government insurance programs. They also need to be part of our conversation if we want to envision a complete safe and sound housing 

system that assures the opportunity of sustainable homeownership. 

So, Mr. Chairman, thank you for inviting me to this hearing, and 

I look forward to participating in the discussion. 

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

75 of the Appendix.] 

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

your testimony. 

STATEMENT OF DR. PHILLIP L. SWAGEL 

Dr. SWAGEL. Thank you, Chairman Hensarling, Ranking Member 

Waters, Members of the committee, thank you for the opportunity 

to testify on the subject of GSE reform. I was at the Treasury Department 10 years ago when Fannie Mae and Freddie Mac were 

taken into conservatorship. In fact, I testified in this room before 

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this committee 10 years ago next week on housing policy, the same 

day that AIG was rescued, bailed out. 

I think no one envisioned that 10 years later, the two firms 

would remain in government control and that taxpayers would still 

be on the hook for so much credit risk. Reform is still needed. Too 

many families still find it difficult to get a mortgage while the dominant government role means that taxpayers are taking on too 

much risk. Today’s housing finance system should be unsatisfactory 

to all sides. 

With the two firms at the time, and still today, the linchpins of 

the U.S. mortgage system, allowing them to fail 10 years ago would 

have risked systemic consequences. Ten years later, however, the 

two firms are still undercapitalized and still too important to be allowed to fail. That is the key problem. Housing finance reform 

should clarify the roles of the private sector and the government. 

If the two firms or any other firms competing in housing finance 

are still too important to fail, simply stating that there will not be 

another bailout is not credible. A return to a duopoly of private 

firms such as with the recap and release idea would reconstitute 

the implicit guarantee that was the most problematic aspect of the 

pre-crisis system. 

At the same time, considerable progress has been made in conservatorship, and I think it is important to recognize that FHFA 

under the leadership first of Ed DeMarco, and then most recently 

under Director Mel Watt deserves credit for this progress, as do the 

two firms themselves. Most importantly, there is now private capital taking on housing credit risk ahead of taxpayers. This is important progress. Reform, though, should go further to improve incentives and better protect taxpayers. 

As policymakers, you should look skeptically at the suggestion 

that requiring adequate capital will price people out of mortgages. 

If a certain amount of private capital is enough to protect taxpayers against all but catastrophic risk, then additional capital 

should not be at risk. It cannot be the case that taxpayers are safe, 

and yet, more capital has a large impact on interest rates. If capital is expensive, well, then, taxpayers are not safe. It can’t be one 

or the other. 

Administrative measures, while legislation is still being discussed, should focus the GSE activities, especially on improving 

their effectiveness. My written testimony discusses several suggestions. I want to briefly focus here on ways to improve the effectiveness with which the housing finance system supports affordable 

housing. The current system provides about $3.8 billion every year 

in cross subsidies within the pricing structure of the insurance premiums charged by Fannie and Freddie. Essentially, lower risk borrowers pay more so that higher risk borrowers get a subsidy. But 

the problem is that nearly one in four of the borrowers who receive 

a subsidy in the current system are not low-income and not moderate-income. The subsidies are not allocated based on need. 

The impact is that a lower income family that has prudently accumulated a downpayment and has lived within their means, ends 

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sistance, even the amount that is there today, and provide much 

better and more effective assistance for the families who need help. 

Housing finance reform remains necessary 10 years after Fannie 

and Freddie were taken into conservatorship. Not moving forward 

leaves too many families still facing difficulty obtaining mortgages 

and taxpayers taking on too much risk. Reform can improve the 

safety of the housing finance system and better protect taxpayers 

and also provide for more access for mortgage financing and better 

support for affordable housing. Thank you very much. 

[The prepared statement of Dr. Swagel can be found on page 118 

of the Appendix.] 

Chairman HENSARLING. Ms. Bailey, you are now recognized for 

your testimony. 

STATEMENT OF NIKITRA BAILEY 

Ms. BAILEY. Good morning, Chairman Hensarling, Ranking 

Member Waters, and committee Members. I thank you for the opportunity to testify on this critical issue of GSE reform. Ten years 

after the housing crash of 2008, millions of hardworking families 

most harmed by unnecessary foreclosure continue to be locked outside of the Nation’s steady recovery and housing finance system. 

However, their hopes to participate in the American dream of 

homeownership remains strong. 

I am Execute Vice President of the Center for Responsible Lending, a nonpartisan research and policy organization dedicated to 

protecting family wealth and ending predatory lending. We are affiliated with one of the Nation’s largest community economic development credit unions Self-Help, which is based in Durham, North 

Carolina, and has provided over $7 billion of safe and responsible 

credit in communities all across the country. 

The bipartisan Housing and Economic Recovery Act of 2008, enacted by Congress, represented substantial reforms to the Nation’s 

housing finance system. This act put in place a new and empowered regulator. Moreover, Dodd-Frank’s ability to repay standard 

and qualified mortgage (QM) rules together provided baseline mortgage protections to have enabled the steady though uneven recovery we experience today. 

The sum of these reforms return profitability to the Nation’s financial institutions, and is well-documented in regulatory reports. 

Earlier this month, the Federal Deposit Insurance Corporation reported that the U.S. banking sector reported a record $60 billion 

in profits in the second quarter. 

With these gains, now it is time for the GSEs to be restructured. 

It is a needed action that can be taken administratively. Among 

housing stakeholders, there is broad consensus that the housing finance system needs an explicit and fully paid-for government guarantee with private capital in the first loss position. However, we 

equally acknowledge and need to resolve this fundamental disagreement with any proposal that calls on the elimination of the 

enterprise’s chartered Duty to Serve obligations. The Duty to Serve 

provisions that begin in the charters and remain in HERA (Housing and Economic Recovery Act) require that credit is available in 

all markets at all times. This directive creates liquidity in every 

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community, including rural ones, and for community banks and for 

credit unions. 

These requirements ensure that lower wealth borrowers get an 

opportunity to succeed in homeownership. They also provide mechanisms to keep smaller banks on equal footing with private banks. 

Any reform that the system builds that moves us toward excessive 

risk-based pricing has to be opposed. Average pricing actually 

makes mortgage loans more affordable. 

Our Nation’s fair lending laws, along with HERA and DoddFrank, underscore a longstanding Federal commitment for safe and 

responsible mortgage credit on affordable terms. These principles 

also evidence the belief that the system should not only serve borrowers with the most pristine credit profiles. 

Congress has exercised extreme caution thus far. You must also 

reject untested models that introduce anxiety that come with higher cost projections and provide less access and affordability for 

working families. 

Today, we mark the 50th anniversary of the Federal Fair Housing Act, so as we think about GSE reform and all that it offers, we 

have to deal with the fact that 50 years later, black Americans still 

have the same rates of homeownership that they had in 1968 when 

this Congress passed that significant legislation. 

We also have to look right at the Federal Government’s role in 

fostering historic discrimination that has put us in the racial 

wealth gap that we are dealing with today. Today, African Americans have 13 times less the wealth of whites. Latinos have 10 

times less the wealth of whites. That is the result of Federal housing policy that said we will only insure mortgage loans to white 

families for a significant portion of those programs starting. They 

have given whites a heads up and have denied African Americans 

and Latinos an opportunity for equal parity. 

Discriminatory redlining, along with predatory mortgage lending 

targeted at families of color, place them at higher risk of foreclosure. Many families were steered into loans with dangerous features and higher costs, even when they qualified for loans on separate terms that were cheaper. CRO’s research shows that for people 

who did not even experience foreclosure, they lost $1 trillion of 

wealth in communities of color. So they didn’t have a foreclosure 

themselves, but they lived in a community where there was a propensity toward it. 

So the Federal Government role needs to be addressed, and now 

is the time to do it. Thank you for this opportunity. I appreciate 

it, and I look forward to answering your questions. 

[The prepared statement of Ms. Bailey can be found on page 44 

of the Appendix.] 

Chairman HENSARLING. OK. Mr. Pinto, you are now recognized 

for your testimony. 

STATEMENT OF EDWARD J. PINTO 

Mr. PINTO. Thank you, Chairman Hensarling and Ranking Member Waters, for the opportunity to testify today. In all the work 

that I do, my prime interest is in the big picture—policy implications informed by data about housing finance. I am also interested 

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10 

tional policy discussions for their own benefit, and the detriment of 

first-time buyers and taxpayers. 

In my written testimony, you will see a lot of detail but my remarks are going to focus on big picture policy implications. I will 

be referring to some of the numbered charts in my written testimony. My testimony is based on risk grading of 60 million individual mortgage loans dating back to 1990, and price appreciation 

trends for the most recent 9 million. I will cover four points that 

are informed by our research: House price boom 1.0, from the ’90s 

and the outyears, the current house price boom 2.0, both driven by 

government policy. The same policy decisions are promoting leverage and leave entry-level buyers and taxpayers more exposed. The 

long-running conservatorship and how that has been used to 

strengthen the GSE’s taxpayer-backed duopsony, and prompt administrative action is advisable now. 

Figure 1 shows that the risk buildup that took place starting in 

the early ’90s and ending the first time in 2007, at the GSEs coincided with real house price increases over the same period. This 

buildup is starting up again since 2012, and as are house prices, 

which are in a boom 2.0. The FHA is a big part of this process. 

For many decades, U.S. housing policy has relied almost exclusively on increasing borrower leverage, and a failed attempt to 

make housing more affordable. This is because credit easing in a 

seller’s market makes homes less affordable as the easing gets capitalized into higher prices. 

Figure 2 shows that the history of GSE debt-to-income (DTI) ratios over the past 30 years confirms this. Seller’s markets coincided, in both times, with the rapid rises in DTIs and the real 

house prices that occurred during booms 1.0 and 2.0. 

Turning now to some of the deleterious actions of Fannie Mae, 

Freddie Mac, and the Federal Home Housing Finance Agency since 

the beginning of the conservatorship. The DTI patch was announced by the Bureau of Consumer Financial Protection in 2013, 

and is still in effect and bears special mention. Since 2013, 85 percent of all primary home purchase financing has been guaranteed 

by agencies eligible under the patch. 

Figure 3 shows that rather undertaking an orderly transition period to the qualified mortgages, 43 percent DTI limitation, this was 

what was envisioned by the Bureau, the FHFA, the GSEs, FHA, 

and the VA, all took advantage of the patch to promote higher DTI 

loans. Private portfolio lenders and RHS showed much less use of 

DTIs greater than 43 percent. 

As a result, 36 percent of agency-guaranteed loans that originated in March 2018, had a DTI in excess of 43 percent, the QM 

limit. Double the level the month before the patch was announced. 

It may shock you to learn that 26 percent of FHA’s purchase loans 

have a DTI greater than 50 percent. 

I will now turn to the core of the problem. In my view, not 

enough attention has been paid to the policy arena—in the policy 

arena to changes in leverage, or to the distinction between buyer’s 

and seller’s markets. We are introducing four new price indices to 

help highlight these changes. 

One of the innovations is that we divided the price, the house 

price into four bins because the market behaves differently for each 

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11 

bin. Our broad conclusion is there is a strong correlation between 

increasing census tract home price appreciation, and increasing 

census tract mortgage risk index. 

As you can see from Figure 7, most first-time buyers are in the 

bottom two bins, and their mortgage loans are much riskier. Prices 

in the low bins have increased much faster, 41 percent, than medium high and high bins at 28 percent. This aggressive financing 

has been a key driver of excessive house price appreciation. In the 

low bin, 80 percent of the loans are guaranteed by the GSEs and 

FHA. There is no doubt where this impetus for higher prices is 

coming from. Consider if low prices had increased at the same rate 

as the medium- and high-tier—medium-high and high tier price 

bins. Entry-level buyers today would be able to buy the exact same 

home for an average of $17,000 less and with a lower risk of default. This is a badly designed housing policy that is in place. 

In my written testimony, I list a number of areas where the longrunning conservatorship has been used to strengthen the GSEs. I 

will leave that to your review. 

What about solutions? Let me start off by saying measured step 

now should moderate the current pace of unsustainable home pricing increases. In terms of legislation, I believe the PATH Act is the 

only viable solution. In terms of administrative steps, prompt acts 

should be taken by four agencies: HUD, Bureau of Consumer Financial Protection, FHFA, and Treasury. These are all laid out in 

my written testimony. Thank you. 

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

of the Appendix.] 

Chairman HENSARLING. I thank the witnesses for their testimony. I yield myself 5 minutes for questions. 

Mr. DeMarco, I was struck by your written testimony. On page 

3, you subtitle that portion of your testimony, ‘‘Yet Systemic Risk 

is Growing Not Fading.’’ You mentioned that there are signs that 

underwriting standards are weakening, that pricing by the GSEs 

is less than that backed by private capital. You talk about the government’s involvement growing substantially in the 10 years since 

the conservatorship. And then I am really struck by your quote, 

‘‘The level of systemic risk posed by the GSEs has grown over these 

10 years,’’ unquote. As one of the four—as somebody who spent 4– 

1/2 years of their life as the GSEs’ regulators and probably one of 

the three or four most knowledgeable people in the galaxy about 

the GSEs, this is a profound statement. Can you elaborate? 

Mr. DEMARCO. Thank you, Mr. Chairman, yes. What I am trying 

to indicate here is that during this time of conservatorship, while 

we provide a taxpayer support to the conservatorships to keep 

Fannie Mae and Freddie Mac functioning so that the country could 

have a functioning secondary mortgage market, given the duration 

of these conservatorships and the path that we have since followed, 

what we have effectively done is concentrated more and more of 

the actual decisioning and credit risk management and risk assessment and pricing in these two companies, two companies operating 

in a government conservatorship. 

So end to end, Fannie Mae and Freddie Mac are responsible for 

virtually all the risk—for a great deal, if not virtually all, of the 

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12 

tem, particularly and certainly for the $5 trillion of it that they are 

directly involved. They determine which counterparties can participate in the system and in what manner. They have broad reach to 

all stakeholders whose functions are actually intended to manage 

and mitigate risk, whether that be a mortgage insurer or a title insurer, an appraiser, or a lender. So they set the rules of the business for the entire market, including the underwriting box, and as 

I said, the pricing and so forth. 

So this tremendous concentration of being responsible for the 

decisioning, the decisions and the practices governing credit risk in 

our mortgage market is, to me, building systemic risk. 

Chairman HENSARLING. Thank you. Mr. Pinto, you say something similar in your testimony where you speak of we are in the 

midst—quote, ‘‘We are in the midst of another potentially dangerous buildup of housing risk.’’ You have, I guess, a proprietary 

system mortgage-risk index. You say it is on the rise again. How 

is this comparable to the buildup of risk that you saw before the 

2007–2008 real estate bust? 

Mr. PINTO. Thank you, Mr. Chairman. We are seeing risk increasing. We risk rate every loan that the agencies guarantee each 

and every month. We have been tracking this for 5 years. It is a 

little difficult, and we haven’t completed our research to compare 

it completely back to what it was last time, particularly for FHA, 

which is a big part of the risk. What we focus on is how the risk 

is going up generally, and then how that ties into house price increase. And the research that I presented today shows very clearly 

that the higher the risk in a census tract, and the percentage of 

loans that are high risk in a census tract, the faster the house 

prices go up. And this is because these policies that the Federal 

Government has, have done nothing to add any supply. It only promotes demand, and demand in a pernicious way. 

You can afford to buy a more expensive house, even though it is 

the same house that sold for 10 percent less a year ago, and that 

is what we are seeing; house prices going up year after year, for 

the same houses in entry-level markets, and the government is providing the leverage that allows that to be purchased. 

Chairman HENSARLING. You also said in your testimony almost 

half of the GSE’s 2017 volume wasn’t even related to buying a primary residence, another 41 percent went to help well-to-do buyers. 

And only 3.7 percent of GSE dollars went to repeat buyers of more 

modest homes. So can you elaborate again how the GSEs are making entry-level homes less affordable? 

Mr. PINTO. So again, a very little amount of the GSEs’ business 

goes to entry-level, but because the GSEs are so huge, they are 50 

percent of all the mortgages, so even if, say, 10 percent of their 

business is going to entry-level but at very risky terms, then that 

is cascading through these markets along with FHA loans in these 

low entry-level price points, and that is what is driving up the 

price. What we find is that today, the GSEs, particularly Fannie 

Mae, are increasing their risk most rapidly in the entry-level, and 

that is because they are in competition with FHA. 

Chairman HENSARLING. Thank you, Mr. Pinto. My time has expired. I now recognize the Ranking Member for 5 minutes. 

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13 

Ms. WATERS. Thank you very much. Before I get to a question 

about this discussion about systemic risk, I would like to ask Mr. 

DeMarco what good has happened since conservatorship, and how 

has it been managed and what good can you say about it? 

Mr. DEMARCO. I can say a number of good things, as I went 

through in my prepared statement. First of all, conservatorship actually did ensure stability of our secondary mortgage market during the financial crisis. 

Second, while we had challenges in getting this right, trying different things and seeing what worked and didn’t, the 

conservatorships did a lot to help prevent foreclosures and to help 

people stay in their homes. A lot of effort was poured into efforts 

to bring stability to existing homeowners. 

Third, we have built a number of foundational, or we are in the 

process, the FHFA continues to build foundational cornerstones for 

reform, including credit risk transfer work that has been done, the 

common securitization platform, loan level data disclosures that 

have begun, and so on. 

Ms. WATERS. Very good. Now what evidence do you have of this 

systemic risk that you are trying to describe to us today that you 

blame the conservatorship for? 

Mr. DEMARCO. So in conservatorship, these companies continue 

to operate with the tremendous advantages that they had before 

conservatorship now with the added benefit of the government 

backing. These companies are the ones that are responsible for determining everything about credit— 

Ms. WATERS. I understand that. If I may interrupt you, I understand what you have described. What is the evidence? Where do we 

see the risk? Where does it actually manifest? Where is it demonstrated? 

Mr. DEMARCO. Well, I think a couple of my fellow panelists have 

provided a good bit of data on that point, but I would point to a 

few things: The decisions to relax underwriting standards in certain places is in the province just of Fannie and Freddie; so, for example, they get to determine who gets an appraisal waiver when 

they buy a home. 

In terms of rules that this Congress or the Congress established 

through Dodd-Frank on a qualified mortgage really trying to get 

the Consumer Financial Protection Bureau to set standards of 

what constituted a qualified mortgage, we have written in this 

huge loophole for Fannie and Freddie that says, Well, while this 

rule, this QM rule, is really important, it doesn’t apply for Fannie 

and Freddie. 

Ms. WATERS. OK. I appreciate that, and if the rule does not 

apply on qualified mortgages, then you are saying great risk is 

being created. You think it can be, but you have no demonstration 

that it has created risk. 

I am going to move on to Ms. Bailey. What do we need to expand 

housing opportunities for the average citizen and for low income? 

Ms. BAILEY. Yes, thank you so much. Fannie and Freddie, along 

with FHA actually did what they were designed to do. They actually sustained the market when private credit withdrew. Risky private credit led us to the crisis and that is evidenced in the Finannshattuck on FSR297 with DISTILLER

14 

cial Crisis Inquiry Commission on pages 26 and 27. So they did exactly what they were intended to do. 

FHA actually increased lending at that time when Fannie and 

Freddie were in trouble and actually has now returned to more stable base levels. So Mr. DeMarco, while I appreciate the wonderful 

perspective he is offering today, he instituted policies in his 

tenureship of loan-level price adjustments when he was the director of the Federal House and Finance Agency. That agency’s decision actually made it more expensive for people of color and lower 

wealth families to afford loans guaranteed by the GSEs. 

So I would like to get a better understanding about that decision 

and knowing how that was going to have the outcome that we are 

talking about today where we are saying that the GSEs aren’t serving the broader-based market. That decision happened during then. 

Today we need to make access and affordability central in this 

debate, and we need to get at pricing segmentation. The whole system today is moving toward segmenting borrowers by credit buckets, and by doing that, we are getting rid of something that sustained the system for a long time, which is average pricing, which 

allows us to make sure we have affordable mortgages across the 

Nation. 

Ms. WATERS. What would you advise us to do to ensure that we 

could include more low-income and more minorities in these housing opportunities? 

Ms. BAILEY. Continue the system back toward pooling of loan 

risk, because when you segment by the credit buckets, pricing actually determines who can actually afford a mortgage, and that is 

where most of the proposals are off track. 

Ms. WATERS. Thank you very much, and I yield back. 

Chairman HENSARLING. The gentlelady yields back. The Chair 

now recognizes the gentleman from Wisconsin, Mr. Duffy, Chairman of our Housing and Insurance Subcommittee, 5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. Ms. Bailey, I just want 

to clarify, I think, something that you said in your opening statement. Are you saying that we should get rid of risk-based pricing 

in the mortgage market? 

Ms. BAILEY. No, sir. I am saying we should get rid of excessive 

risk-based pricing. 

Mr. DUFFY. What does that mean? 

Ms. BAILEY. The mortgage market already has risk-based pricing 

built in, but what we have done now is to say we are going to go 

in and put the burden of risk on borrowers that the Financial Crisis Inquiry Commission said did not actually cause the crisis, lower 

wealth families. So what we are saying to those families who also 

have a history of racial discrimination that resulted in them having 

lower credit scores and smaller downpayments, that they actually 

have to pay more now in this current system when they were not 

responsible for the housing crash. 

So what I am saying is, continue to do what the system does 

well. For many, many years, the system has provided broad liquidity in every community across the Nation. Both GSEs, Fannie Mae 

and Freddie Mac, have made sure that we could expand credit 

across the Nation, so continue to do what they actually do really 

well, and don’t get rid of such a foundational aspect of the system 

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15 

so that we can bring in the very borrowers that the future system 

depends. Seven out of 10 future borrowers are going to be people 

of color, so we talk about affordability, but we have to think about 

it in— 

Mr. DUFFY. I want to be clear here. So as long as our system is 

blind to race and religion and sex or sexual preference, blind to 

those things, you are OK with us looking at someone’s risk profile 

in regard to pricing of a mortgage? 

Ms. BAILEY. I appreciate you thinking that the system is blind 

to race and sexual orientation, but it is not, sir. The housing finance system is really rooted in the history and the legacy of intentional— 

Mr. DUFFY. So I guess I am saying—I should say are we going 

to base prices then on race and sex and sexual preference? 

Ms. BAILEY. Say that again, sir. 

Mr. DUFFY. Are we going to base our prices on race or sex or sexual preference or religion, is that what we should do? 

Ms. BAILEY. Part of what we are doing is we are saying that we 

know that the impact of these practices impact people of color, 

women, and lower wealth families differently, and we are still orchestrating policies toward those— 

Mr. DUFFY. I am going to reclaim my time. 

Mr. DeMarco, what happens in a system where we don’t base 

pricing on risk. Obviously we all want to make sure that the system is blind to race and sex and religion, and based on credit, but 

that is the way the market should work, right? 

Mr. DEMARCO. Right. Certainly when one is talking about insurance, if you don’t price based upon risk you get more risk. 

Mr. DUFFY. Mr. Pinto? 

Mr. PINTO. I agree. If you don’t price on risk, you get more risk. 

FHA is a perfect example of that. It does not price on risk, and it 

gets a tremendous amount of risk, and it is at the foundation along 

with the GSEs of this house price boom. 

Mr. DUFFY. And when you have more risk, that can lead to crises 

which help the poorest among us, fair enough? 

Mr. PINTO. Fair enough. 

Mr. DUFFY. OK. Mr. DeMarco, you talked about what might not 

appear to be obvious to the average eye, but the bills that you have 

looked at that have come out from both sides, there are a lot of 

common themes. I don’t have a whole lot of time, but I want to 

touch on a few common themes that you see everyone in the Congress talking about where we can wrap our hands around a pathway forward that everyone could buy into. 

Mr. DEMARCO. Right. I will do, too, to be brief. The first is that 

Fannie Mae and Freddie Mac do not continue forward as government-sponsored enterprises. That doesn’t mean that they get liquidated. It means that their specialness and their privileges and 

protections go away, and whatever they are transformed into, they 

have to compete in the marketplace on the same footing as everyone else. So we can keep the functions that they have been providing the market, but make those functions available to be provided by others. 

The second thing is that they are now, with the Chairman’s announcement today, there certainly seems to be broad consensus 

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about establishing a single, mortgage-backed security that has a 

catastrophic guarantee from the taxpayer, but is backed by a substantial private capital in a first loss position, and that is true from 

the Chairman’s proposal to Ms. Waters’ proposal and all the others. 

Mr. DUFFY. I think one of the great debates we will have to have 

is where does that catastrophic guarantee kick in. We don’t want 

it too low where the market would assess that. Obviously if it is 

too low, and the Congress is going to step in and say the market 

before the legislation would kick in, fair enough? 

Mr. DEMARCO. That is correct. 

Mr. DUFFY. OK. I just want to quickly ask the panel about any 

concerns about FHFA and transparency today. Mr. Pinto, any concern there? 

Mr. PINTO. Which? 

Mr. DUFFY. Transparency, encourage more transparency in the 

markets today. 

Mr. PINTO. I think there should be more information released 

about the mortgages that are being made. There should be complete transparency, and it should come from all the agencies, and 

it should go back in time in terms of those loans, so those can be 

looked at and researched. 

Mr. DUFFY. Mr. DeMarco? 

Mr. DEMARCO. Yes, one of the things that could be done is to further make available to the public the loan level details of the loan 

portfolios of Fannie and Freddie. 

Mr. DUFFY. Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair will recognize the gentleman from Missouri, Mr. Cleaver, Ranking Member of our Housing and Insurance Subcommittee. 

Mr. CLEAVER. Thank you, Mr. Chairman. Thank you Mr. 

DeMarco, for sitting down with me some time back and discussing 

some of these issues. Mr. Duffy and I have had a number of conversations, and he just talked about one of the things that I lift up 

as someone that must be involved in any kind of reform of the 

GSEs from my standpoint, and they are, as I have said before, a 

30-year fixed-mortgage rate as well as the explicit government 

backstop. I would like for the entire panel to tell me something 

that you believe to be inextricable to a reform package of the GSEs, 

other than the two that I have just laid out. Anyone? 

Ms. BAILEY. I would say the system’s current affordability provisions, its Duty to Serve, the ability to provide by broad liquidity in 

every credit market across the Nation, and the housing goals that 

are really important to ensuring that we have an inclusive and 

broadly serving mortgage market, so those would be additional 

ones, along with ensuring that smaller lenders remain on equal 

footing with their larger bank competitors. 

Mr. CLEAVER. But what specifically can we do to increase affordable financing or financing of affordable housing? What can we 

build into the infrastructure of a reform package for the GSEs that 

would assure increased funding for affordable housing, which is one 

of the biggest needs in the country right now? 

Ms. BAILEY. Yes, sir. I totally agree with you, and I would say 

that the move toward excessive risk-based pricing is really making 

it really challenging. So underwriting standards help determine 

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17 

who should qualify for a mortgage. Pricing actually determines who 

can actually afford to pay, and when we move toward these excessive standards, we make it too expensive for working families to afford these mortgages. So what we often see is that FHA is now 

overconcentrated with a segment of borrowers—upper-income people of color, Latinos, and African Americans—that the conventional 

market should be serving, but because of the historic discrimination and lower downpayments and lower credit scoring, that is the 

result of the historic discrimination they are not able to get conventional markets from the conventional space. 

Mr. CLEAVER. Mr. DeMarco? 

Mr. DEMARCO. Mr. Cleaver, to your first question, the thing I 

would add that is fundamental to reform is providing real clarity 

about what is the role of the government in our housing finance 

system and where and how is that role manifested. And then what 

is—on the other side of that coin, what is the role we expect of the 

private market, and is that private market allowed to actually operate as a market and given the tools and the guard rails necessary. So that clarity would help a lot. 

Mr. CLEAVER. Thank you. I thank both of you for that. Where in 

receivership, what is missing, what is going awry? And let’s just assume we do nothing. What would be the consequences of us doing 

nothing right now, leaving GSEs in a conservatorship? 

Mr. DEMARCO. All of the credit risk that is being run through 

those companies is being supported by the American taxpayer. 

Ms. BAILEY. I think it is important to also add, though, that they 

are offloading some of that risk with the credit risk transfers, so 

they are—and I think all of our testimonies acknowledge that— 

that they are actually offloading some of that risk to the private 

market. The question is, are they offloaded in a way that gets rid 

of that segmentation of pricing that we talked about earlier. We see 

that some of that is happening on the front end, and it is safer 

when it happens on the back end. So we just need to move the system more toward that back-ending when we are doing credit risk 

transfers. But they are offloading some of the risk on the private 

market. 

The key is to make sure private capital comes in a safe and responsible way. The only time when private capital dominated the 

market, we ended up in a national housing crisis. So we want to 

just be careful with private capital. I think we all agree that it 

needs to come back in, but we have to do it in a way that is really 

safe for borrowers, as well. 

Dr. SWAGEL. I would just add quickly, we are going to miss out 

on innovation if we stay with the current system, and we won’t 

know what we are missing out. We know that too many people still 

can’t get mortgages, and that is because the dominant government 

role has pushed away private innovation, and that is what we will 

miss with the current system. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, Chairman of our Capital Markets Subcommittee. 

Mr. HUIZENGA. Thank you, Mr. Chairman, and I have about a 

half an hour’s worth of questions. We are going to try and do this 

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18 

real quickly, and one of the things I want to start with, and I 

would like to move right down the panel, and if you could quickly 

answer these two things. What do you think the proper loan-tovalue would be for the GSEs to be involved in and engaged? And 

also, what is the proper debt-to-income ratio for borrowers? What 

should that be? So Mr. DeMarco, and I will just move right down. 

Mr. DEMARCO. Mr. Huizenga, those are challenging questions because households don’t— 

Mr. HUIZENGA. That is why I am asking the experts. 

Mr. DEMARCO. But I think it is risky to give a single answer to 

a question like that, because if I told you that the proper debt-toincome ratio was 38 percent, how does that work for a retiree who 

has retained a lot of assets but doesn’t have income and wants to 

buy a retirement home? So that is an example of why a single answer is challenging here. 

Dr. SWAGEL. Obviously— 

Mr. HUIZENGA. I am sorry, but how about for the GSEs to be involved, though? I understand that debt-to-income ratio maybe for 

individuals, but what should that loan to value be for a GSE’s involvement? 

Mr. DEMARCO. Well, when I was the acting director, we had it 

at 95 percent was the maximum. It is currently 97. 

Mr. HUIZENGA. Mr. Swagel? 

Dr. SWAGEL. I will just add, obviously I agree with Ed. If we are 

going to have the government behind these risky loans, let’s acknowledge it and make that explicit and not bury it within the details of the GSE pricing system. If we take on risk, let’s account 

for it. 

Mr. HUIZENGA. So no percentage. 

Dr. SWAGEL. I apologize. I also, again, like Ed, I don’t have a particular number because the circumstances of borrowers will just 

vary so widely. 

Mr. HUIZENGA. But again, if we are looking at risk in the GSEs, 

what should that level of risk be? 

Dr. SWAGEL. I would agree with Ed. I wouldn’t want the sorts 

of 3–1/2 percent loans that the GSEs have been instructed to push. 

That, to me, seems— 

Mr. HUIZENGA. Would returning to the 95 percent that Mr. 

DeMarco had just referenced, would that be acceptable, better? 

Dr. SWAGEL. Five-percent downpayment, it just seems a very 

modest amount. We know housing prices can go down as well as 

up. I think that puts borrowers at risk. 

Mr. HUIZENGA. OK. Ms. Bailey? 

Ms. BAILEY. I would agree with Mr. DeMarco. I think those are 

decisions that need to be left with the regulator that Congress empowered to actually regulate the GSEs. We now have in place a 

very strong and powerful regulator that we didn’t have before. The 

problem that we had leading up to the crisis before is that they did 

not have a powerful regulator. Congress has acted through hearings to actually create that, so those underwriting decisions should 

remain at the later level. 

And I know there is some concern about moving forward the 3 

percent downpayment, but I have to explain to you, the Center for 

Community Capital at the UNC school did research on borrowers 

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19 

with smaller downpayments. And those borrowers, when they get 

a safe mortgage, they actually perform well. There was a study of 

borrowers all across the Nation, and they actually were able to 

amass $38,000 in home equity even during the housing crisis. We 

now have the safe mortgage practices because of the strong regulation, and we now have the effective regulator. 

Mr. HUIZENGA. So just make sure that you understand, I, as a 

former licensed realtor, I sat at those closing tables and understood, when my parents bought a home and the amount they had 

a downpayment was very different than when I did, and it was 

very different when I sat at my first closing and they slid a check 

across to both the seller and then the buyer. I am assuming you 

would agree that having zero percent down is a bad idea? 

Ms. BAILEY. I am saying those decisions are best left at the regulator. 

Mr. HUIZENGA. So you would say that a zero percent down would 

be acceptable? 

Ms. BAILEY. I am saying that those decisions are underwriting 

and should be with the regulator. 

Mr. HUIZENGA. OK. We will move on. Mr. Pinto? 

Mr. PINTO. So I think we have just seen what happens when you 

leave it to the regulator. First of all, the Bureau said 41 percent 

was the proper DTI. You have pushback from the industry, went 

to 43. Put a rule out at 43. Got pushback from the industry, put 

in the patch, and then FHFA pushed Fannie and Freddie to go to 

50. Regulators are not going to protect us from this. 

What the issue really becomes is we had a system where we had 

a debt-to-income limit, generally across the country back in the 

early 1990’s. It was 38 percent. You had compensating factors 

above that. I presented a chart that shows once Fannie and 

Freddie started moving away from that, those numbers just went 

to the stratosphere. They came back down. And then after the 

patch was put in place they have gone through the stratosphere 

again. You have to have some limitations that act as friction in the 

sellers’ markets. 

Mr. HUIZENGA. OK. And in the 10 remaining seconds, I wanted 

to talk about multifamily loans; and real quickly, can these multifamily markets function without the presence of GSEs? 

Mr. PINTO. Yes. 

Mr. HUIZENGA. Anybody else? 

Mr. PINTO. Yes. 

Mr. HUIZENGA. Ms. Bailey? Quick answer, please. 

Saved by the bell. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Maloney, Ranking Member of our Capital Markets Subcommittee. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

And thank you to all the panelists. I am a strong proponent for 

affordable housing. And in cities, especially large cities like New 

York, that I am privileged to represent, affordable housing is the 

absolute number one public policy goal. So I strongly believe that 

any reform of GSEs should not in any way diminish resources for 

affordable housing and should usually, or hopefully, increase resources. 

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20 

So my question to Ms. Bailey and Mr. DeMarco, as we look at 

GSE reform, what is the most important thing that we can do to 

protect and even expand support for affordable housing? 

Ms. Bailey? 

Ms. BAILEY. Thank you. We should definitely ensure that we 

move the system back toward average pricing. Again, pooling of 

loan risks—and I know I keep harping on this point—but pooling 

of risk and averaging the risk actually makes it more affordable. 

And we have to keep those broad-based Duty to Serves. Those 

goals were put into the charters when the GSEs were created, and 

they were also carried forward in the Housing and Economic Recovery Act of 2008. 

Everyone else in all the proposals that come forward, they want 

to give us aspirations. They don’t have any strong enforcement 

mechanisms behind them. Without the strong enforcement mechanisms behind them for affordable housing, we won’t see that produced. So, right now and in our current system, we have strong 

goals with clear mechanisms for enforcement. Give us a stronger 

enforcement; we will see a move toward that end. And get rid of 

this risk-based pricing. 

Mrs. MALONEY. Thank you. Thank you. 

Mr. DeMarco and Ms. Bailey, we are—some people on the committee are advocating using the Ginnie Mae as a model for GSE 

reform and essentially transferring all of the—Fannie and 

Freddie’s responsibilities to Ginnie Mae. But this is a tiny agency, 

and it has less than 200 employees now, and I would say it has 

a very, very different business model than the—and it doesn’t even 

focus on credit risk at all now because Ginnie Mae only securitizes 

loans that have already been guaranteed by the Federal Housing 

Administration or the Veterans Administration. 

So I am really questioning and rather skeptical that Ginnie Mae 

is equipped to handle this type of responsibility or that the Ginnie 

Mae model would work for a deeper, larger mortgage market. So, 

in your view, Mr. DeMarco and Ms. Bailey, is this a good idea, or 

would using Ginnie Mae model for GSE reform raise borrowing 

costs for middle-class Americans looking to buy a home? 

Mr. DEMARCO. So, Mrs. Maloney, as I will find out this afternoon 

some of the details of the Chairman’s and Mr. Delaney’s Ginnie 

Mae proposal, but I don’t think it is correct to say that Ginnie Mae 

is going to be taking over all of the functions and responsibilities 

that Fannie Mae and Freddie Mac have. As I understand these 

proposals, having coauthored one along these lines, Ginnie Mae actually retains a more limited functionality here, which is to be the 

issuer of government-wrapped, mortgage-backed securities in global 

financial markets so that the investors globally understand the 

backing of the American taxpayer on these mortgage-backed securities, but they are not undertaking all these other activities. And, 

in fact, Fannie Mae and Freddie Mac would be transformed, and 

a lot of this would take place in the private sector. 

As to whether this is untested, Ginnie Mae is a $2 trillion securities operation today, and it is doing quite well. 

Mrs. MALONEY. But it doesn’t have the risk model. And my main 

question is, would it raise borrowing costs for middle-class Americans, Ms. Bailey, in your view? 

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21 

Ms. BAILEY. It would. And it would also put smaller lenders on 

unequal footing with their larger bank competitors. Ginnie is really 

complex and has a lot of complexity around it that would make it 

difficult for smaller lenders to manage. So we would also have to 

take that into consideration. So I agree with your statement. 

Mr. DEMARCO. I am sorry. I take some exception to that. 

Mrs. MALONEY. I have one more question, and it is for you. And 

it is one my favorite topics. 

Mr. DEMARCO. Let’s have it. 

Mrs. MALONEY. Multifamily housing. If the Chairman wants to 

give you more time after that, but I really—multifamily housing is 

very important to my district. Everybody lives vertically, not horizontally. And in the crisis, I think it is fair to say that multifamily 

housing performed relatively well. In fact, it subsidized the singlefamily businesses. 

So my question to Mr. DeMarco is, do you think that Fannie and 

Freddie’s multifamily businesses are currently sharing enough risk 

with the private sector to adequately protect taxpayers? As I understand, the first tranche is guaranteed by— 

Chairman HENSARLING. The time of the gentlelady has expired. 

A brief answer— 

Mrs. MALONEY. It is so tough, but this is such a good question. 

Chairman HENSARLING. A brief answer from the witness, please. 

Mr. DEMARCO. I think that the model that Fannie and Freddie 

each use in their different models to risk-share capital, a risk-share 

credit risk in multifamily is worth considering in what we are looking at with single family; it shows it can be done. 

Mrs. MALONEY. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, Chairman of our Financial Institutions Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

And, Mr. DeMarco, just to follow up on that question by Mrs. 

Maloney, I know Mr. Huizenga asked the same question basically 

with multifamily housing. You made the statement in your testimony that we need to fix what is broken, preserve what works. 

And it seems the multifamily portfolio has done very well. And I 

think, as both of my colleagues indicated, is there a way to look at 

that as perhaps a model, or take from that the way to perhaps 

structure something for the single-family situation, or what is 

your— 

Mr. DEMARCO. The basic lesson that I would suggest from the 

way the multifamily businesses operate at Fannie Mae and Freddie 

Mac is that in fact there is a meaningful amount of risk sharing 

that goes on in those systems. Until the conservatorships, there 

was virtually none in the single-family space. So effectively what 

has been going on with single family, we have been trying to start 

developing that kind of risk sharing, but it does take place in the 

multifamily space. 

What is—what cannot be removed, however, is, as long as Fannie 

and Freddie are operating as government-sponsored enterprises, 

they are competing in this commercial market financing a multifamily dwelling; they are competing with all the advantages that 

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22 

you get when you are a GSE. In this case, with—they are in conservatorship; an advantage is the backing of the American— 

Mr. LUETKEMEYER. When you say ‘‘competing,’’ competing 

against the private market, right? 

Mr. DEMARCO. Yes. 

Mr. LUETKEMEYER. Thank you very much. 

I know that yesterday we had a—under the leadership of Chairman Duffy, we had a hearing that focused on the cost of regulations with regards to the ability of consumers to be able to afford 

housing because we found yesterday that 32 percent of the cost to 

the consumers is actually Federal, State, and local rules and regulations. 

We had a hearing or had a roundtable with myself and my colleagues, Mr. Budd from North Carolina and Mr. Huizenga, here on 

Tuesday afternoon with some regulators, all the regulators involved, as well as some banks and some other interested parties 

with regards to some of the CECL (current expected credit loss) 

rules that are coming out. Does anybody know or you have heard 

of CECL before and know what this is about? It is basically where 

the banks have to—when they make a loan, immediately upfront 

reserve more in their loan loss reserve for a potential loss. 

And so I was wondering: This is going to be a very, very costly 

situation for them. They are going to have to segregate capital. It 

is going to be—and eventually it is going to be a cost that is passed 

on to the consumer. If you have heard of this and are aware of this, 

would you give me an opinion on whether this is going to be helpful, hurtful, to the consumers being able to afford housing, and 

then what effect it is going to have on FHA and Ginnie—or Freddie 

and Fannie, excuse me? 

Mr. DEMARCO. I can’t answer all of those points, but I can address a couple of them. Certainly, long duration assets like a 30- 

mortgage, the CECL accounting creates new challenges for portfolio lenders that they didn’t have before. And so that is going to 

have an effect on those businesses. The question is, if you create 

a reserve upfront, should we be simultaneously reexamining the 

consideration of those reserves under capital rules? 

So, if you are going to fundamentally change the accounting for 

reserves so that we consider reserves to be something other than 

what they traditionally have been, then we have to ask: Well, look, 

our bank capital requirements have been written in a way under 

an old reserving regime, we now have to reconsider those capital 

rules, given that we changed the nature and the requirements 

around reserves. 

To your other point about this, if this does have an impact that 

makes it more costly for a bank to portfolio a mortgage loan, then 

it creates yet another regulatory incentive for those loans to perhaps be sold off into the secondary market to Fannie and Freddie 

rather than being held by the bank because the costs of carrying 

that loan have gone up in a relative basis. 

Mr. LUETKEMEYER. We were discussing a while ago the difference between 5 percent down and 3 percent down. So we are not 

talking about a whole lot of money there. So, again, when you are 

looking at costs—32 percent of the costs of making a loan is regulation—suddenly that is a pretty significant figure. So, if that is signshattuck on FSR297 with DISTILLER

23 

nificant enough, we were discussing a minute ago between people 

getting a loan where they have 5 percent down or 3 percent down, 

to me this would be a barrier, would it not, those increased costs? 

Mr. DEMARCO. Yes. In fact—and you are quite right. I point out 

in my written statement that these kinds of barriers are in fact inhibiting bringing affordable housing supply onto the market, both 

in terms of rental and in terms of single family. And I actually cite 

in an Obama Administration report pointing to some of these, especially at the State and local level, barriers and some ideas about 

how to mitigate some of them. 

Mr. LUETKEMEYER. Thank you. My time is up. I yield back, Mr. 

Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes another gentleman from Missouri, Mr. 

Clay, Ranking Member of Financial Institutions Subcommittee. 

Mr. CLAY. Thank you, Mr. Chairman. 

And thank the witnesses for being here. Before I get into my 

questions, I wanted to note that my friend and colleague Representative Duffy brought up the issue of race in consideration of 

risk. And it is not—it is not the risk that is involved; it is really 

the institutional racism that exists. 

We know during the housing crisis that borrowers of color were 

steered into high-priced loans, and communities of color now are 

targeted by predators. What communities of color are looking for is 

fairness in the housing market, in lending, and not being charged 

what I call a black tax for being black, being charged more for a 

mortgage product. So it is not about risk; it is about the institutional racism that exists. 

Just so the panel understands, and my friend from Wisconsin understands that we are asking for equal protection under the law so 

that we can also realize the American Dream and not the American 

nightmare. And I will—I intend to have that conversation with Mr. 

Duffy and explain it to him on what actually happens. 

But this—my first question is for Mr. Pinto. Mr. Pinto, saving up 

for a downpayment is one of the biggest barriers to homeownership. That is why responsibly underwritten, low-downpayment 

mortgage products backed by Fannie Mae and Freddie Mac, the 

Department of Veterans Affairs, and the Federal Housing Administration serve an important role in expanding access to homeownership. In fact, the Department of Veterans Affairs has been backing 

zero downpayment mortgages for years with a very successful track 

record. You have been very critical of low-downpayment loans. Do 

you contend that low-downpayment loans cannot be responsibly underwritten, or do you contend that veterans should not have access 

to zero downpayment mortgages? 

Mr. PINTO. So what I think—thank you for that question. What 

I contend is that credit easing, minimal downpayments, high-debt 

ratios, et cetera, in a seller’s market with a 30-year loan ends up 

getting capitalized into higher prices, and that doesn’t help anyone, 

and it particularly doesn’t help low-income buyers. I presented data 

from 9 million loans that show that. What I have proposed— 

I think I have mentioned this at this committee before is a zero 

downpayment loan, 100 percent LTV, with a 20-year loan term. 

The problem with all the subsidies that you are talking about is 

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24 

they get ladled on top of the 30-year loan, and they get capitalized 

into higher prices. 

Mr. CLAY. Got it. 

Mr. PINTO. The solution is to go back to a 20-year loan and use 

that subsidy to increase the buying power to allow the 20-year 

loan, which amortizes much faster, to be gotten by this lower-income buyer. I call it LIFT Home: Low-income first-time homebuyer 

tax credit. 

Mr. CLAY. OK. What about those who are recent graduates of college who are heavily indebted with student loans? How do we address them when you and I know that their credit scores are lower 

because of the student loan debt? How do we address that? 

Mr. PINTO. I think Congress has to look at the student loan program, which has exploded in the last 5 or 6 years to—I have lost 

track—$1.4 trillion, and fix that. Having said that, the research I 

have seen shows that the student loan debt—and this is going to 

sound counterintuitive—is not that much of an impediment, mostly 

because most of the buyers are in deferral or on income-based programs. Therefore, it is not creating the debt-to-income ratio problem that is commonly thought. 

Mr. CLAY. How about another solution that will allow the mortgage companies to buy the student loan and roll it into the 30-year 

mortgage? What about that? 

Mr. PINTO. Taking something that was supposed to be something 

paid back hopefully over 5 or 10 years and turning it into a 30-year 

debt doesn’t make any sense to me. 

Mr. CLAY. All right. I give. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, the Chairman of our Monetary Policy and Trade Subcommittee. 

Mr. BARR. Thank you, Mr. Chairman, and thank you for having 

this hearing on this—as you refer to it—the not-so-happy anniversary of American history involving the day that the Federal Government took over Fannie Mae and Freddie Mac. And while the 

GSEs admittedly provide liquidity to the housing finance system, 

let’s face it, Fannie Mae and Freddie Mac were more than mere bystanders in the 2008 financial crisis. They were in fact at the epicenter of that crisis because they were thinly capitalized. They 

bought risky loans with very low downpayments. And with all respect, contrary to Ms. Bailey’s revisionist narrative, the absence of 

risk-based pricing in loans purchased by GSEs was precisely the 

problem. 

And the fact that GSEs fueled origination of mispriced loans that 

put people in homes with mortgages they couldn’t afford was exactly the problem. That was what caused the financial crisis. I just 

think that if we ignore that basic fact, we are willfully disregarding 

history, and we are bound to repeat history, as Mr. Pinto was 

warning us here today. 

I do want to compliment Mr. Delaney and our Chairman for 

working in a bipartisan manner. I have a lot more studying to do 

and looking at the proposal before us that they have worked on. I 

want to learn more about it. But it does seem to me that putting 

layers of diversified private capital in a first loss position will help 

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25 

ensure more accurate pricing of risk and reduce the number of bad 

loans. It seems to me that that is exactly the direction we want to 

go in to have better pricing of risk. 

Let me move to a question, and let me ask Mr. DeMarco. The 

QM rule that we have worked so hard—the CFPB worked on recent statutory changes where we injected a new portfolio safe harbor for the QM rule. Explain to us a little bit more your belief why 

we should apply a comparable QM rule to the GSEs. And I do note 

that the bipartisan proposal would do that. 

Mr. DEMARCO. So the qualified mortgage rule was considered by 

many involved in developing that legislation to be a key aspect of 

Dodd-Frank. It statutorily ruled out certain loans or loan characteristics that were thought to be fundamental in the financial crisis. It allowed the BCFP (Bureau of Consumer Financial Protection) to then write additional rules governing what constituted a 

qualified mortgage, and so that rule was written, and so it applies 

to all mortgage lenders. It says: All right, here is the set of standards for what constitutes a qualified mortgage. 

But then it said: But if the mortgage is acceptable to or financed 

by Fannie Mae and Freddie Mac, then that is OK. So we really created two different standards, a qualified mortgage rule, unless you 

have been financed through a government-sponsored enterprise. 

Well, people are—the industry, borrowers, advocates, everybody 

seems really happy with this QM patch. Well, we can’t have it both 

ways. Either the QM patch is the right way of articulating what 

constitutes a qualified mortgage, in which case we are restricting 

access to credit through the BCFP rule, or the BCFP rule is right, 

and for some reason, we are creating this huge loophole. 

Mr. BARR. Mr. DeMarco, to Ms. Bailey’s concern that there would 

be excessive pricing of risk, wouldn’t the portfolio lending model 

provide an escape valve that would be safer than the originate-todistribute model so that if we build upon our work in the regulatory relief package that is now law and allow for—if there is— 

if there is a mortgage that is out there that is outside of the QM 

rule, but a lender with full view of the borrower’s ability to repay 

were willing to take that risk, retain that risk in portfolio, is that 

a way to address Ms. Bailey’s concern that we want to provide access to affordable housing but do so in a safe and sound way? 

Mr. DEMARCO. Yes, sir. 

Mr. BARR. Mr. Pinto, in my remaining time, let me just ask you 

about credit risk transfers really quickly. Some banks are concerned that, while we like to see the credit risk transfer increasing, 

some banks have stressed that bank capital rules may impede credit risk transfers. Are you concerned about that? 

Mr. PINTO. I am concerned that there should be a level playing 

field. I am also concerned that these credit risk transfers need to 

be upfront, transparent, and put on in place at origination. They 

should not be done in the murky black box that they are being 

done today by the GSEs. 

Mr. BARR. I yield back. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. 

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26 

I also want to thank all the panelists for your participation 

today. It has been very helpful. Ms. Bailey, I grew up in the south 

Boston housing projects, the Old Colony Housing Projects, with a 

lot of other families that were struggling at the time. My dad had 

a—so he used to say at times, we had to save up to be poor. And 

he was only half joking. So we had the blessings of a home in public housing. 

The housing was built probably in the 1940’s right after the Second World War. And now we are trying to rebuild it. We are about 

halfway done rebuilding some of those units. But my problem now 

in my district, which is a big part of Boston and Brockton and 

Quincy and a bunch of towns on the south shore, is that not only 

do I have a problem finding housing for people who are struggling, 

like my family was, but I am struggling to find affordable housing 

for firefighters, teachers, nurses, construction workers, and so there 

is a gap there. Now I need workforce housing. They are getting 

priced out. It is just insane. 

I know that Chairman Hensarling sent a letter to Mel Watt back 

in February criticizing him for making Fannie Mae and Freddie 

Mac continue to contribute to the affordable housing trust fund and 

the Magnet Fund. What is the status right now of our public housing, and is there anything in the formula that might help my 

nurses, my teachers, my teamsters, and construction workers, firefighters, police? 

Ms. BAILEY. Thank you for the question. Yes. Those funds need 

to be fully funded. And I thank you for sharing the background 

that you are sharing. The very pricing segmentation that I talked 

about earlier is hurting working people across the country. So absolutely those things should be fully funded. And I need to just, for 

one moment, just respond a little bit to the response about Fannie 

and Freddie and the revisionist history. 

Most of the mortgages that Fannie got in trouble for were all A 

mortgage loans. They were actually financing and chasing the 

mortgages for upper-income borrowers; these were not working 

families like the ones that you were just talking about. So it is 

really important for us to really highlight that they were no-doc 

loans to A borrowers. And 10 percent of those were GSE loans. So 

it wasn’t the subprime loans that had been raised. 

Mr. LYNCH. Right. 

Ms. BAILEY. And it is also really important for me to make sure 

that we are talking about, for the risk-based pricing, we are talking 

about catastrophic risk, and we need to get specifically at the GSE 

cost, the GSE’s price for 75 percent of that, so when I am making 

that point that is exactly what I am going for. The housing trust 

fund and the Capital Magnet Fund need to be fully funded because 

we know increasingly more and more Americans are paying more 

than 50 percent of their income to cover their housing costs. The 

Harvard Joint Center report that just came out made that fact 

really clear, and clarified that working families just don’t have— 

wages haven’t kept up; they have real wage stagnation. They just 

don’t have the resources to cover the increasing costs around housing. 

So pricing segmentation really hurts them and stifles their ability to get even quality rental opportunity as well. 

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27 

Mr. LYNCH. Thank you. I know that in other areas, in health insurance and in auto insurance, we spread the risk. We don’t put 

all the risk on the sickest people and make them pay the greatest 

amount. We try to figure out—that is the nature of insurance; you 

spread the risk out so that we all absorb it, and if you are lucky 

enough to be healthy, you pay a little bit more, but if you do get 

sick, then you have some relief there. It just—and I realize that 

there is a blending that needs to happen here—I think Mr. 

DeMarco has touched upon it—where if we can shift in a balanced—if we can rebalance the risk, I guess, between the GSEs 

and the private market, find a way to do that because we have to 

shift that over, but do it in a way that maintains our ability to offer 

a 30-year fixed mortgage at a reasonable interest rate, that is 

hugely important to average Americans who are trying to get out 

there and buy their first home. 

So, Mr. Chairman, I want to thank the witnesses again for your 

participation, and I yield back the balance of my time. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman, for calling this important hearing. 

Thank you each of you for coming in and offering your expertise 

today. There are numerous options that we will consider to restructure the GSEs to—with the goal of returning them to financial 

health. With this, they range from simply taking them out of conservatorship to converting them to private corporations or creating 

a new government agency. 

In your opinion, Mr. DeMarco and Mr. Pinto, which of these options would provide the most future stability for both the markets 

and the consumer? 

Mr. DEMARCO. In my view, creating private companies backed by 

private capital in a competitive market has the best long-term outcome, both in terms of the stability of the market as well as innovation and provision of credit to the families. 

Mr. PITTENGER. Yes, sir, Mr. Pinto, and try to— 

Mr. PINTO. I would agree with that. I would just add, without a 

government guarantee on those companies, and I would also add 

that we need to have an administrative solution because, even if 

you put in place the proposal that the Chairman and Mr. Delaney 

have put forth, it would take many, many years for that to actually 

come to fruition. We are in a problem today where we have house 

price boom 2.0. What I am concerned about are the low-income 

buyers and the minority buyers who are in neighborhoods that 

have prices that are at unsustainable levels, and they are going to 

get hurt when that reversion to the traditional trend occurs, and 

it is going to be in all of your districts. And that is what I am concerned about. There is nothing in a legislative solution that is 

going to address that. It can only be addressed with administrative 

solutions—pit. 

Mr. PITTENGER. Well, let me ask you this. If they are released 

from conservatorship, how would they be recapitalized? 

Mr. PINTO. I don’t believe they should be released from conservatorship. I think they should be wound down. 

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28 

Mr. PITTENGER. Yes, sir. Mr. DeMarco. 

Mr. DEMARCO. Yes, Congressman, I believe Congress needs to 

decide what the final disposition of them is, but I would not return 

them as GSEs. 

Mr. PITTENGER. Ms. Bailey and Mr. Swagel, Dr. Swagel, concern 

with the GSE reorganization comes from small community banks. 

Small lenders fear the development of additional guarantors controlled by megabanks, which could result in volume discounts. 

These discounts would leave the smaller banks at a distinct disadvantage. What are your plans to ensure that small community 

lending groups will be able to compete? 

Ms. BAILEY. Right now, as the system works, small lenders have 

access to the cash window on equal footing with their large bank 

competitors. A lot of the proposals that we have discussed could 

really impact the level of equal access for small lenders. So I agree 

with you that small lenders need to be able to operate in their own 

unique way without having to do pricing purchases through their 

large bank competitors. That puts them at an unfair advantage because they just can’t get the volume discounts that the larger lenders are able to get. So I agree with that point. 

Mr. PITTENGER. Dr. Swagel. 

Dr. SWAGEL. I will just add. One of the worst aspects of the old 

system was the disadvantage of small lenders. And Chairman 

Hensarling’s plan, the Corker-Warner, DeMarco-Bright, all of these 

ensure equal access for small lenders. That is important. 

Mr. PITTENGER. Mr. Pinto, you have said in your testimony that 

current policy is creating a home boom and, therefore, making 

entry-level homes less affordable. In your opinion, what policies 

could be put in place to make housing affordable for low- to middleincome home buyers? 

Mr. PINTO. Thank you for that question. As indicated earlier, the 

problem with all of the subsidy, cross-subsidy, Duty to Serve, all 

of these programs is they take the existing 30-year mortgage, 

which itself is a very highly leveraged instrument, add a lot of risk 

to it, and then somehow provide some subsidies on those loans and 

cross subsidies. The problem is that gets capitalized into higher 

house prices during seller’s markets, which we are now in the 71st 

month of the national seller’s market. 

The answer is to say—if you want the 30-year mortgage over 

here, that is fine, but if you want to do something for low-income, 

let’s take the 20-year term and let’s figure out how we provide 

them an ability—and I proposed this first-time home buyer tax 

credit—you take the tax credit and you buy down the interest rate, 

and you do some other things because it is a lower risk loan to 

begin with, et cetera, and you then equalize the cost. So the 20- 

year loan now has the same monthly payment roughly as the 30- 

year loan, except it amortizes much more quickly. You now have 

a wealth-building machine for low-income buyers. They get into the 

house, and you would have zero downpayment, and that is the solution. 

Mr. PITTENGER. Thank you. Ms. Bailey, quickly, are you encouraged that with the economic policies in the last 2 years that have 

been put in place, that the unemployment for African Americans is 

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29 

at an all-time low, does that encourage you to believe that they will 

have greater access to homeownership in the future? 

Ms. BAILEY. No, sir. And I have to say, when people of color have 

been in the marketplace, they have never been well served or fairly 

served, and because of the history of discrimination, they have also 

been targeted with more expensive— 

Mr. PITTENGER. But you do acknowledge that unemployment is 

at an all-time low? Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Well, this has been quite a newsworthy morning. When I opened 

up the opinion section of The Wall Street Journal, ladies and gentlemen, this morning, I was greeted by my friend Chairman 

Hensarling’s op-ed piece touting a bipartisan deal that he has 

struck on GSE reform. And I really appreciated that. 

Chairman, you touted in the paper—The Wall Street Journal 

this morning, you said, and I quote from The Wall Street Journal, 

you said, reduce taxpayers’ risk, codify into law an explicit government guarantee, and increase market competition. 

These are all great things, and I certainly look forward to reading and learning more about it, and I certainly encourage everyone 

to look at this morning’s Wall Street Journal. I think that the 

Chairman has put out some excellent points. 

However, until I see the full text, I remain just a bit skeptical 

because it wasn’t until this morning, in this surprise editorial in 

The Wall Street Journal, that showed the willingness of the Chairman to agree on some issues that—of course, we have had some 

differences—because, prior to this editorial this morning, the Republican side would not agree to the 30-year mortgage. Wouldn’t 

agree that it would remain intact. Wouldn’t agree, even more importantly, to ensure affordable housing and rental housing is supported. 

Before this morning’s op-ed piece, it quite honestly was only the 

Democratic proposals that guaranteed these proposals. Very much 

needed. That 30-year mortgage guarantee is the bedrock of our financial system. And I say this as one of the original cosponsors of 

Mr. Delaney’s bill, Partnership to Strengthen Homeownership Act, 

H.R. 1491. But I certainly welcome this sterling example of leadership on the Chairman’s part here to work in a bipartisan way in 

these final 3 months. 

It reminds me of this past week when we went through a profound exercise in this Nation during our services for the late Senator John McCain, and we found that there was a great cry in this 

Nation for us to show bipartisanship, Republicans and Democrats 

working together. But it is also worth noting that to the American 

people, it was Democrats under the sterling leadership of our 

Ranking Member, Ms. Maxine Waters, who has been fighting and 

been our protector on many of these issues. 

And it is so exciting and glorious, quite honestly, to see our 

Chairman and our Ranking Member—and I will tell you we are 

blessed in this committee to have the kind of knowledgeable leaders in our Ranking Member and our Chairman. And, quite honnshattuck on FSR297 with DISTILLER

30 

estly, it is going to be a disappointment for my friend Chairman 

Hensarling to leave. We came together, so I have great affection for 

him. 

And I do urge everyone to read this op-ed piece today. It is a tremendous article, and it is something that I think will provide a 

way for us to go forward in a bipartisan way. 

Now, in my last—well, I only have 18 seconds, but let me just 

say, the GSEs did not cause this crisis, and the information is 

there to do it. It was caused by private activity in the housing market anchored in Wall Street and steering individuals that they 

know they couldn’t pay into that. 

I yield back. Thank you, sir. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Ross. 

Mr. ROSS. Mr. Chairman, thank you. 

And I thank the panel for being here. I also want to acknowledge, Mr. Chairman, your op-ed piece today, it was very refreshing 

to see, and it is even more refreshing to see that you and my good 

friend from Maryland, Mr. Delaney, are working toward a bipartisan resolution of what is a powder keg waiting to explode again, 

that will work to the detriment of the taxpayers of this country. 

And as I look at our regulatory system and insurance and think 

that we have—and I know that we have better than any across the 

world, our State-based form of regulation, I am concerned that we 

should maybe take a page from our European friends’, who do not 

have GSEs and subsidized mortgages in their housing market and 

seem to do very well. As I begin my questioning, I do want to lay 

the predicate that, of course, this issue of GSE reform has been before a majority of a Democrat Congress and a majority of Republican Congress. Eventually it will collapse if we don’t make a 

change. And no one party has a monopoly on good ideas, and therefore, a bipartisan effort is what is necessary to get this done, and 

so I laud your efforts into that. 

Mr. DeMarco, in your testimony, you write that, quote: The GSEs 

operate with a substantial advantage that guarantees that they 

will be able to offer better terms and lower pricing than any other 

market participants. 

What are the dangers of not opening up the markets to other 

charters? 

Mr. DEMARCO. You concentrate risk. You stifle competition. And 

even more important, perhaps, you stifle innovation. 

Mr. ROSS. And without reform, do you believe that we will continue to see the GSEs entrench themselves further in the market? 

Mr. DEMARCO. Yes, sir. 

Mr. ROSS. There is no other alternative. And there is capacity 

out there, is there not in the markets? 

Mr. DEMARCO. There is. 

Mr. ROSS. And I would—as much of a purest I would like to be 

and say the government shouldn’t be in the business of business, 

the only way we can actually address this is to have a combined 

effort of public-private partnerships where the government is involved in some form as a backstop—would you not agree?—unfortunately, from a political perspective. 

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31 

Mr. DEMARCO. I think it actually can help perfect markets and 

help markets to work better with a well-defined role for the government. 

Mr. ROSS. And, Mr. DeMarco, I agree, a 30-year mortgage has 

been the saving grace for many families. The ability to get into a 

mortgage affordably and be able to pay for it and move on to another mortgage later on. Now, would any way, shape, or form these 

reforms that we are proposing adversely impact the availability of 

a 30-year mortgage? 

Mr. DEMARCO. No, I don’t believe so. 

Mr. ROSS. What about rates? The affordability of rates has been 

at an all-time low, somewhat suppressed, but nevertheless there. 

Would not—would market factors or forces allow—in a competitive 

environment—allow for at least a stabilization of affordable rates 

no different than we have today. 

Mr. DEMARCO. Yes, I think so. 

Mr. ROSS. Dr. Swagel. 

Dr. SWAGEL. I agree. I will just add, on the risk-based pricing, 

the actions taken by the Fed are much more important. So, in some 

sense, instead of criticizing Ed on what he did with the risk-based 

pricing, the criticism would be of Chair Yellen and Chair Bernanke, 

which seems like an unfair criticism. 

Mr. ROSS. I appreciate it. Anybody else? Ms. Bailey? 

Ms. BAILEY. I would say, in the current system, we are likely to 

see rates go up, and not— 

Mr. ROSS. Spike. There will probably be a spike before stabilization. 

Ms. BAILEY. Not in the current system, but if we move toward 

these other untested systems, because what they do is they bring 

in a level of anxiety, and they say bring in these new market actors, market actors that won’t be subject to our Nation’s fair lending laws. So our ability to make sure we have the fairness and equity that the system currently has— 

Mr. ROSS. I agree. 

Ms. BAILEY. —a way, and then the affordability, we have a $4 

billion subsidy in the market right now. Those proposals say that 

they are going to bring in an extra billion dollars. However, what 

they fail to realize is, once you actually calculate the cost, that is 

not going to be the outcome, and the market at other times, when 

more borrowers of color and lower wealth families were actually 

able to get the mortgage credit they deserve, actually had a much 

higher subsidy. So, if we look at a better timeframe of this lending, 

we will see higher rates of subsidy. Right now, the market isn’t 

doing— 

Mr. ROSS. Higher rates of subsidy that are today by the GSEs? 

Ms. BAILEY. Say that again. 

Mr. ROSS. You are saying higher rates of subsidy than exist 

today by the GSEs? 

Ms. BAILEY. We would see more affordability for more borrowers 

because right now Fannie Mae and Freddie Mac are not serving 

the borrower pool that they have served in the past. So we are 

missing out on an opportunity to really go back and do some things 

right. And I have to remind the committee, there was a time where 

we looked at loans for people of color and lower income families difnshattuck on FSR297 with DISTILLER

32 

ferently, and we let them get perpetuated with abusive financial 

practices— 

Mr. ROSS. I appreciate that. 

Ms. BAILEY. And we have to bring them right into the center of 

this debate. And any reform that we do has to have them at the 

center. Seven out of 10 future buyers—so this is a safety and 

soundness concern for our market—are going to be people of color. 

You can’t build the system without figuring out how to bring those 

people in. Wealthier borrowers—homeowners won’t have anybody 

to sell their homes to. 

Mr. ROSS. I appreciate that, Ms. Bailey. My time is expired. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Maryland, Mr. 

Delaney. 

Mr. DELANEY. Thank you, Mr. Chairman. And I want to thank 

you and the Ranking Member for this hearing. 

And, Mr. Chairman, in particular, I want to thank you for the 

opportunity to work with you on the bipartisan housing finance reform proposal that we are releasing today. I think it reflects some 

of—the type of great principled compromise that you typically see 

associated with legislation that really reflects the common good of 

the citizens. And I appreciate your efforts to work with me on this, 

and I appreciate the opportunity to work with you on this. And I 

think we came up with a good product. And also like most good bipartisan compromises, we were finishing it at about 11 o’clock last 

night. So it had all the elements of a good deal. 

But, in particular, I think it does five things that are really important. First and foremost, it stabilizes the housing finance system in this country, which, let’s face it, the U.S. housing market 

is the second largest fixed-income market in the world, and it 

needs to be stabilized, and it needs to be safer. And we need to put 

the taxpayers in a situation where they have less risk in the future, and that they will have a housing system that will have more 

private capital, more discipline, and it can be an enduring part of 

the American financial system. So I believe it does that. 

Second thing it does, and this is very important, it has been a 

core element of the Democratic principles that the Ranking Member has led us on since I have been in the Congress, which is preserving the 30-year fixed-rate mortgage, which is important to 

Americans’ ability to afford housing and have their housing asset 

be part of their long-term portfolio. 

It has a meaningful increase, or at least it creates a pathway for 

a meaningful increase, in terms of the amount of capital allocated 

to affordable housing. I think we have an affordable housing crisis 

in this country right now, and I think it is a very, very significant 

problem. And it is pricing so many Americans out of the opportunity to own a home, for them to raise their family in that home, 

and have the stability that a home provides, and become part of 

a community. 

And it has been my view for a long time that, as a country, we 

have, in general, probably over-allocated some of our resources toward housing generally at the expense of not allocating enough resources toward affordable housing in particular. And I believe this 

proposal we have come up with, by creating a pathway for a fee 

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33 

to go on every mortgage securitized, we will start reallocating some 

of that capital toward the really dire need we have for more affordable housing in this country. 

The fourth thing it does is protects a lot of important consumer 

financial—or consumer protections that were embedded in DoddFrank, which I think are important. And, finally, it preserves the 

part of the GSEs that has worked quite successfully, which is the 

multifamily model. So the bill is explicit about ensuring that those 

businesses within Fannie and Freddie will, in some shape or form 

or fashion, be reconstituted with the benefit of the explicit government guarantee so that they can continue to provide the financing 

that they do in the multifamily market. 

So, again, I don’t have any questions for our witnesses here. I appreciate their testimony. I just really wanted to thank you, Mr. 

Chairman, for the opportunity to work on this bipartisan bill, because, again, I believe it reflects the type of principled compromise 

that we need in this country. And I think it is a good way forward 

for this Congress or for future Congresses. So, with that, I yield 

back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Thank you, panel, for being here today for this important discussion on this anniversary. 

Mr. DeMarco, in your testimony, you talked about how moderateincome households are more susceptible to income volatility, which 

is more prevalent today than in the past. You continued by suggesting that housing policy and our housing finance system need 

to become more attuned to this challenge so better solutions may 

be found. 

Can you give an example of some policy changes that would better accommodate income volatility among moderate-income homeowners? 

Mr. DEMARCO. Certainly. So we talked earlier about QM rules 

and more generally various underwriting rules that are based upon 

fixed ratios. Well, that becomes pretty challenging if someone has 

an income source that is subject to this kind of volatility. So rethinking some of these standards whereby we take account of volatility so we get folks in mortgages that are actually sustainable, is 

I think a very important thing. 

I would add one other thing, Congressman, and that is, it requires in some sense rethinking not just policies but about mortgages or how we go about constructing mortgages. If we know that 

there is income volatility there, what can we be doing on the front 

end to build in some shock absorbers for families so that they can 

weather those temporary disruptions and income flows? 

Mr. ROTHFUS. I am wondering if you can recap, in your view, 

how a more streamlined and transparent housing finance system 

with greater private-sector participation, as you discussed in your 

testimony, would benefit homeowners in what way? 

Mr. DEMARCO. Because you would have a much richer pool of 

lenders competing to provide this financing but to have alternative 

ways of providing that ultimate financial support— 

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34 

Mr. ROTHFUS. And what happens when you have more lenders 

competing? 

Mr. DEMARCO. You get more innovation, and you get better outcomes for consumers. 

Mr. ROTHFUS. Better prices? 

Mr. DEMARCO. Yes, sir. 

Mr. ROTHFUS. Mr. Pinto, as you know, between the GSEs and 

Ginnie Mae, the Federal Government continues to dominate the 

secondary mortgage market. How does the current level of GSE involvement compare with historical levels? 

Mr. PINTO. So, today, the GSEs are responsible for around 50 

percent of all mortgages. Their percentage in history has ranged 

from something around 50 percent to maybe 35, 40 percent. What 

is somewhat different is FHA and the VA and rural housing now 

comprise about 35—excuse me, yes, 35 percent, and so the 85 percent being guaranteed by the Federal Government is extraordinary. 

Mr. ROTHFUS. Compare that then with that historical trend, and 

how it relates to homeownership levels? 

Mr. PINTO. So homeownership levels actually, in the United 

States, if you look broadly, have virtually remained unchanged 

since the early 1960s. I would only point out that is about the time 

the 30-year mortgage became commonplace. It is more commonplace in the United States. It wasn’t even authorized by Congress 

until 1954 for existing homes for FHA. So it was in the early ’60s 

that the 30-year loan became commonplace. We have made no 

progress on homeownership virtually since then. 

Mr. ROTHFUS. In your testimony, you wrote: For many decades, 

U.S. housing policy has relied almost exclusively on increasing borrower leverage in an ineffectual attempt to make housing more affordable. Instead, the result in a seller’s market—again, we have 

been talking about the seller’s market—is to make homes less affordable for the same reason policies such as Duty to Serve, affordable housing fees, and cross subsidization have the same effect: 

higher prices in a seller’s market. 

Can you envision a scenario in which housing becomes affordable 

as a direct consequence of scaled-back Federal support for the 

housing market? 

Mr. PINTO. Absolutely. And I presented in my testimony an example of the Rural Housing Service, which is part of the Department of Agriculture. They followed the Bureau of Consumer Financial Protection’s admonition that the patch was to get you down to 

43 percent. So what did they do in 2014? They announced that they 

were going to lower their debt-to-income ratios, a maximum to 41, 

and require compensating factors above 41. 

Fannie, Freddie, FHA, VA did the exact opposite, and you have 

seen the data that I presented. So we then looked at, well, what 

happened? So the prices of FHA loans during this time period that 

were paid by consumers went up 25 percent in 5 years, nominal 

terms. Incomes did not go up 25 percent. Inflation hasn’t been 25 

percent, yet the prices went up 25 percent. At the lower end, they 

actually went up even further. 

What happened with the rural housing? Prices went up 9 percent, about the same as inflation. What also happened? Debt ratios 

went down, and the prices were much more stable. Therefore, peonshattuck on FSR297 with DISTILLER

35 

ple were able to buy the houses with less leverage. And, in fact, 

we looked at the incomes of the buyers, and the incomes of the buyers in rural housing went up about the same percentage as the income of the buyers in FHA. You get the exact result that you just 

described. You get a better result, not a worse. 

Mr. ROTHFUS. I want to thank the panel for your insights and 

being with us here today, and I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. 

I thank the Ranking Member and the witnesses for appearing 

today. And if I may, with no disrespect to anyone else, I do want 

to thank you, Ms. Bailey, for your courage. I thank you for your 

courage because you have, on more than one occasion, tried to explain that race is a factor. I am a capitalist. I believe in free markets. But if you have invidious discrimination in the market, the 

market is not a free market. 

Would you kindly explain what you have been trying to get 

across as it relates to invidious discrimination and race in the marketplace, especially as it relates to lending? 

Ms. BAILEY. Yes, sir. And thank you for that point and for the 

question. The point is, when we decided to put tremendous resources in housing finance policy following the Great Depression to 

bring America forward and offer this idea of homeownership to 

more Americans, we did it in a way that excluded people of color. 

We did it in a way that would not allow Federal-insured mortgages 

to go to African Americans, Latinos, other people of color. And by 

doing that, we created historical wealth inequities because most 

Americans have built up their wealth through homeownership. The 

equity that they get from their mortgages is what they have passed 

on across generations, to pay for them to go to college, to start businesses. So that means a whole cohort of Americans did not have 

equal access to that outcome. 

So now, today, African Americans, Latinos, and other people of 

color have smaller downpayments because they don’t have that 

wealth equity to pay forward. And then because of broader societal 

discrimination, we know that they also have lower credit profiles. 

So when we take and think about price segmentation in the market 

today and we don’t take those factors into consideration and we put 

in policies that reinforce that, then we just continually reinforce 

that legacy of discrimination, and we hurt the very borrowers that 

our future system depends. 

Mr. GREEN. Thank you very much. 

Mr. DeMarco, if I may, you are intimately familiar with what I 

would like to address. You know what the yield spread premium 

is? 

Mr. DEMARCO. Yes. 

Mr. GREEN. You know what the yield spread premium is? 

Mr. DEMARCO. Yes, sir. 

Mr. GREEN. And you know how the dastardly yield spread premium had an adverse impact on minority communities. Is this 

true? 

Mr. DEMARCO. I would be even more general, Congressman. I 

would say that there were a number of lending practices that were 

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very abusive of minority communities and other borrowers as well. 

Yes, sir. 

Mr. GREEN. Absolutely. I agree with you. And for edification purposes, the yield spread premium allowed a broker, an originator, to 

qualify a person for a loan at 5 percent and then walk out and 

shake that person’s hand and smile in his face and say: Good news, 

we got you a loan for 9 percent. 

It wasn’t right. It wasn’t fair. But it did encroach upon the free 

market. And many people from minority communities who qualified for lower loans, who would have been able to keep their homes, 

were into foreclosure because they were pushed, if you will, into 

these high-cost loans, notwithstanding a good credit history. That 

actually happened to people, and you are aware of this, Mr. 

DeMarco. 

And, by the way, I am not condemning you, but you are the person who knows most about this of the people on the panel, in my 

opinion, because of your years of service with the Federal Government. Do you concur with what I have said, Mr. DeMarco? 

Mr. DEMARCO. I believe instances like this did happen, Congressman, and I would again take you a step further, and say that private markets require and depend upon ethical behavior by those 

involved. 

Mr. GREEN. So the point that Ms. Bailey is making is salient. It 

is something that has to be considered. But here is my closing 

point, since I have but 20 seconds or less: Whenever we have the 

opportunity to do something about invidious discrimination, we 

find clever ways to work around it and just go on with life as it 

is. I refuse to ignore what is obvious. And at some point, we have 

to take what Ms. Bailey has said seriously. 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren. 

Mr. HULTGREN. Thank you, Chairman. Thank you all. I appreciate you being here. The Federal Home Loan Bank of Chicago 

serves my district and works to provide liquidity to member institutions to support the housing finance system. During your tenure 

at the FHFA, Mr. DeMarco, you began the rulemaking process to 

reevaluate FHLB membership requirements. When Director Watt 

finished the rulemaking in 2016, it resulted in a new definition of 

insurance, which excluded captive insurers. FHL Bank of Chicago 

has three captives that will eventually lose their membership in 

the bank because of this change. 

In a cooperative like the Federal Home Loan Bank, the loss of 

these members and their significant borrowing would reduce the 

scale that the Federal Home Loan Bank of Chicago and limit its 

ability to serve its members in their communities. I wonder, there 

has been a lot of discussion today about the need to increase the 

role of private capital in our housing finance system, and so I hope 

you might speak to the role that you see the Federal Home Loan 

Bank already play in funding banks, insurers, and other mortgage 

lenders that choose to hold mortgage loans on their balance sheet 

instead of selling those loans to Fannie or Freddie. And would you 

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37 

ing finance system by shifting more mortgage lending to balance 

sheet lending and away from securitization through the enterprises? And I wondered, do the Federal home loan bank’s advances 

to their members tend to support balance sheet lending? 

Mr. PINTO. Yes. Basically, Congressman, yes to all of that, but 

I suppose you want slight elaboration. First of all, the home loan 

bank system and Home Loan Bank of Chicago, in particular, have 

shown some real leadership in demonstrating the capacity to credit 

share, that is, to syndicate credit risk through what they do, 

through providing an alternative avenue for aggregating the loans 

of lenders, particularly of small lenders. They have been especially 

good at providing financing support for small lenders and for large 

lenders in terms of being able to manage mortgages on their balance sheet by getting the funding flexibility that home loan banks 

provide. 

Mr. HULTGREN. Thanks. I wonder if you—see what other things 

I want to cover here real quick. While I understand the concerns 

associated that many have, I do understand it potentially expanding the footprint of Federal home loan banks by allowing captive 

insurers to maintain membership. I wondered is it fair to say, perhaps, that with some other regulatory changes, captive insurers 

could provide a way to actually attract private capital into the market while shifting mortgages away from Freddie and Fannie? 

Mr. PINTO. I believe that that is possible, and I would, since the 

subject of this hearing is housing finance reform, I would take it 

a step further in a general direction you are headed, which is, I 

think it is important for the Congress to consider liquidity sources 

for our financial system and housing finance reform and what the 

proper role of the Federal home loan banks and being a source of 

liquidity is, and I think that this question about captive insurers 

is really one best addressed by the Congress, because when the 

Congress created the home loan banks, just like with Fannie and 

Freddie, and wrote their mission and gave them these privileges 

but then set some limits, the limit was really about who is eligible 

for a membership and how that membership is structured, because 

Congress knew it was providing a set of benefits to this system. It 

wanted a closed system to benefit mortgage finance. 

Life insurance companies—insurance companies were part of the 

original membership of the home loan bank system because in 

1932, when the system was created, life insurance companies were 

a big source of capital that financed mortgages. Our system is 

much different today. The risk with captive insurance is there is 

a tradeoff. Certainly, captive insurance companies can be structured in way in which they are an important source of capital to 

support housing finance, but if this isn’t done properly, and you 

just simply allow captives then you can have all sorts of companies, 

nonfinancial companies, companies with no interest in housing, 

being able to gain access, and I believe that that is part of what 

motivated the FHFA’s final rulemaking. 

Mr. HULTGREN. Just one last question on that, and I think 

maybe getting into more specifics of how do we find that right balance? How would you view an expansion of membership that came 

with higher collateral requirements, or perhaps even restrictions on 

types of eligible collateral and a way to ensure that those that do 

nshattuck on FSR297 with DISTILLER

38 

gain membership do so in a way that doesn’t significantly increase 

the risk of the entire Federal home loan bank system? 

Mr. PINTO. All right. I think it is quite important if one is to consider changes in the membership construct of the home loan bank 

system that for the existing members, most of which are insured 

depository institutions, and we pay careful attention about how 

that alters the risk profile and whether we are putting insured depositories at risk through how we do that. So some of the ideas you 

suggested are ways of mitigating the risk, but let me simply say 

it is a very important question, one that needs to be carefully 

thought through. 

Mr. HULTGREN. I appreciate that, and I definitely agree with you 

that I think it is something Congress ought to address and ought 

to talk about, and I certainly would look forward to suggestions or 

advice from the entire panel of how to do that well. My time has 

gone by too fast. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Arkansas, Mr. Hill. 

Mr. HILL. I thank the Chairman. I thank the Ranking Member 

for doing this hearing. I agree with the Ranking Member. It is a 

long time in coming in my 3–1/2 years in Congress that we have 

a comprehensive hearing on this topic. So I thank the Chairman. 

I thank he and Mr. Delaney for working on a comprehensive proposal. 

But abdication about responsibility in the secondary mortgage 

market is a bipartisan opportunity. There is no one contrary to the 

Ranking Member’s emphasis on this Administration and this Congress. This is a problem that started 35 years ago. It has been dealing with it, it has been abdicated by numerous administrations, 

both Democratic and Republican, and I don’t remember sitting here 

for 3–1/2 years hearing any comprehensive proposal to change the 

secondary mortgage market by Jack Lew during the Obama years. 

My shelves are littered with studies about what is wrong with 

Fannie Mae and Freddie Mac and the secondary mortgage market. 

We have this historic one, 1980, Ronald Reagan. We have the one 

I had to work on as a staffer of the Treasury 1990, and it had a 

supplement smaller, 1991, and the list goes on and on. And we 

ought to all be embarrassed, I think, by passing Dodd-Frank and 

having the Financial Crisis Commission and not pursuing active 

change in the series. So I thank all four of you for being here today 

and sharing your views. 

A few quick questions for the four of you. Do you support a recap 

and release of the two secondary mortgage market entities? Just 

give me a yes or no. We will talk some more. It is not a trick question. 

Mr. PINTO. No. 

Dr. SWAGEL. No. 

Ms. BAILEY . Fundamental reforms have to happen first. 

Mr. DEMARCO. No. 

Mr. HILL. Thank you. I think that is important, because I think 

that is an important statement on your part. It reflects across policy thinking apparatus, and that is something I think is very important is that we don’t just simply turn the page and go on. And 

I agree, Ms. Bailey, that the new regulator has a lot of power, and 

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39 

so I look forward to a new appointee at that agency and hear their 

considerations. 

One of my concerns is, and I was looking back at Congressman 

Frank’s work on Dodd-Frank. He said the profligate availability of 

credit is a major reason for the current problem, the housing crisis. 

Too many loans were made to people that shouldn’t have gotten 

them, and we need to reduce the pattern of people getting loans 

who shouldn’t have gotten them because they couldn’t repay them. 

That is what we think we have achieved in this bill, and he is referring to Dodd-Frank, and, he is talking about the ability to repay 

and the QM process. 

So, Mr. Pinto, I think you have done a great job with your research about how this patch issue allowing the GSEs to get out and 

around the debt-to-income ratio that you talked to the Ranking 

Member about; she also challenged you that those aren’t necessarily bad loans, and so, when you see FHA and the VA going 

up over 50 percent debt-to-income ratio, that also comes with a 

higher risk index that you outline in your testimony. You didn’t 

really talk much about that, but the GSEs have a 12 percent highrisk mortgage in their portfolios. Back in 2012, it was 10 percent. 

Now your data shows that it is 29 percent. So it is three times 

higher, they have made three times higher risk loans in their portfolio since the patch. So the systemic risk is growing in these 

unreformed GSEs. 

The issue of mission creep. I have read a lot recently that your 

successor, Mr. DeMarco, Mr. Watt is allowing a series of expansions of power of Freddie Mac and Fannie Mae, and this is an oligopoly, this is government power that is incurring now on the private mortgage insurance business, on the commercial lending business for purchase mortgage service rights. Can you talk to us in 

the minutes we have remaining about your views on expanding 

more pricing and market power by these two entities? 

Mr. DEMARCO. I think it contributes to the sort of systemic risk 

that was at the heart of the financial crisis 10 years ago. And the 

one—just to point out one example what you said, providing advances to nonbank lenders for their mortgage servicing is competing directly with a traditional function that happens in our financial system without the benefit of government backing, and by 

using Fannie and Freddie to fund that we are using essentially the 

ability to raise money at taxpayer cost of funds to provide that subsidy. 

Mr. HILL. Well, it takes a lot to figure that rent on a $700 million building, so that is important. Mr. Pinto, quickly. 

Mr. PINTO. We had a conference on this a couple months ago and 

this was the poster for it. Insatiable, out of control, nothing can 

stop it, the blob, Fannie Mae, Freddie Mac, and we showed how the 

exact same thing happened at the end of the ’90s, and it is happening again today. 

Mr. HILL. Well, I was there for the first movie so the sequel is 

no better. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Budd. 

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Mr. BUDD. Thank you, Mr. Chairman, and also, again, thank you 

to our witnesses, each of you, for being here today for what I think 

is a very important hearing. I think the time is right for Congress 

to make a push toward housing finance reform, and if we don’t act 

in a timely manner, the same risks that were at the root of the 

2008 financial crisis are going to continue building up in the system, and we all know how that story ends. Taxpayers and my constituents and people I serve back home in North Carolina, they are 

on the hook. Taxpayers are on the hook. 

So, Mr. DeMarco, my line of questions are for you this morning, 

or afternoon, whatever it is. It is afternoon now. In your testimony 

you write that, quote, ‘‘The uncertainty about the future of GSEs 

and about the government’s next steps stymie innovation and longterm strategic investment by private lenders and services and 

other stakeholders in the system,’’ end quote. 

So this is an important point that will not be solved by continuing the status quo like we have now and thinking that what 

we have today is just good enough. Markets need the long-term certainty that can only come from real legislative reform. So my question: What insights do you have today about the advantages of legislative reform over administrative reform in providing certainty in 

the market? 

Mr. PINTO. Just what you said, Congressman. Even if legislative 

reform has a multiyear transition cycle to it, financial companies, 

mortgage lenders, servicers, everyone else who participates in this 

ecosystem can know, with some certainty, what the role of the government is, what the long-term framework looks like and can make 

strategic business decisions and capital investment in housing finance with some certainty about what their role and opportunity 

is going to look like. As long as we keep this cloud of uncertainty, 

they don’t know whether those long-term investment decisions are 

going to be sound or not, because the government is creating this 

uncertainty. 

Mr. BUDD. So just to further clarify, so you would agree that it 

puts taxpayers at risk by avoiding long-term legislative solutions to 

fixing housing finance reform? 

Mr. PINTO. Yes, sir. 

Mr. BUDD. Do you believe that we will ever reach a level of private capital necessary for a functioning mortgage market without 

legislative action? Without legislative action? 

Mr. PINTO. Not without legislative action. 

Mr. BUDD. OK. And finally, what areas in mortgage finance 

would benefit the most from ending the GSE duopoly and opening 

up to competition and innovation? 

Mr. PINTO. Actually, I believe that we can do a lot more in the 

affordable housing space and in the innovation of helping borrowers where their actual needs are. We don’t have innovation in 

that space. It is only what Fannie and Freddie allow through. 

Mr. BUDD. Thank you. Mr. DeMarco, that is the end of my questions. I yield back to the Chairman the remaining time. I thank 

you. 

Chairman HENSARLING. The gentleman yields back. There are no 

other Members in the cue who have requested time, so I would like 

to thank the witnesses for their testimony today. 

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41 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

[Whereupon, at 12:18 p.m., the committee was adjourned.] 

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(43) 

A P P E N D I X 

September 6, 2018 

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Testimony of Ms. Nikitra Bailey 

Executive Vice President, Center for Responsible Lending 

Before the United States House of Representatives 

Committee on Financial Services 

A Failure to Act: How a Decade without GSE Reform Has Once Again Put Taxpayers at Risk 

September 6, 2018 

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I. Introduction 

Good morning Chairman Hensarling, Ranking Member Waters, and Members of the House Committee 

on Financial Services. Thank you for the opportunity to testify regarding our nation's housing finance 

system during the SO'h year commemoration of the federal Fair Housing Act, which promises all 

Americans an opportunity to live in thriving communities free of housing discrimination including in the 

sale, financing, and securitization of mortgage loans. Housing is an issue that profoundly impacts 

American families as all Americans deserve a safe and decent place to live. Housing accounts for nearly 

20 percent of the national economy as homeownership is the engine that drives the economy by 

creating jobs that stabilize communities across the nation. Homeownership is also one of the most 

important tools for building and passing on wealth for most middle-class families in America. 

I am Executive Vice President of the Center for Responsible lending (CRL), a nonprofit, nonpartisan 

research and policy organization dedicated to protecting homeownership and family wealth by working 

to eliminate abusive financial practices. CRl is an affiliate of Self-Help, a community economic 

development lender headquartered in Durham, NC. Since 1980, Self-Help has provided more than $7 

billion in financing to 131,000 families, individuals, and businesses under-served by traditional financial 

institutions. It helps drive economic development and strengthen communities by financing hundreds of 

homebuyers each year, as well as nonprofits, child care centers, community health facilities, public 

charter schools and residential and commercial real estate projects. Through its credit union network, 

Self-Help's two credit unions serve more than 130,000 people in North Carolina, California, Illinois, 

Florida and Wisconsin and offers a full range of financial products and services. learn more at www.selfhelp.org and www.self-helpfcu.org. 

This important hearing provides an opportunity to look back over the last decade where significant 

reform occurred in the secondary market and offer a pathway for continued improvement by moving to 

a utility model that regulates rates of return, and that can be achieved through administrative action. 

Such action will lead us toward creating a more equitable housing finance system rooted in access to 

safe and responsible mortgage credit for all credit-worthy consumers on affordable terms. The prior 

approach of extreme caution must continue as we build on initial repairs so as not to disrupt the 

delicate recovery that the system is experiencing. The foundations offered by the Housing and Economic 

Recovery Act of 2008 (HERA) and the new rules created by the Dodd-Frank Act and the Consumer 

Financial Protection Bureau (CFPB) deliver important safety and soundness regulation that the prior 

system lacked. Our end goal must be to better protect taxpayers from systemic catastrophic risk and 

incorporate important market segments--people of color, low-to-moderate income families, and rural 

residents- that a well-functioning future system depends. Successful reform produces a system that 

serves the full universe of credit worthy borrowers, and provides equal treatment for small 

lenders, including community banks and credit unions, which often are the only sources of mortgage 

credit in underserved communities across the nation. 

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Today's testimony draws extensively from our October 25, 2017 remarks delivered before the House 

Financial Services Committee Subcommittee on Housing and Insurance.' 

II. The GSEs and Ginnie Mae Provide Important Access to Mortgage Credit in Underserved 

Communities 

Both the GSEs and Ginnie Mae continue to provide critical mortgage capital to underserved 

communities. The GSEs purchased more than two million homes and refinance mortgage loans in 2015, 

including almost half a million loans to low- and moderate-income borrowers, nearly 400,000 loans to 

borrowers of color and over 300,000 loans to borrowers living in rural areas. At the same time, smaller 

financial institutions (those with assets less than $10 billion) originated and sold loans to the GSEs in 

order to meet the credit needs of nearly 400,000 borrowers seeking mortgage credit in rural 

communities, relying on the GSEs for critical capital. Loans backed by Ginnie Mae also continue to play a 

significant role in serving borrowers whose credit may warrant additional enhancement or who have 

limited resources for a down payment. However, government-backed lending cannot and should not be 

the sole source of mortgage lending in these communities. 

To better understand the GSE market share among low- and moderate-income borrowers, borrowers of 

color, rural borrowers and among community banks and credit unions, CRL analyzed over six million 

home purchase and refinance mortgages for first-lien, owner-occupied, 1-4 family homes (including 

manufactured homes) reported under the Home Mortgage Disclosure Act in 2015 (referred to as 

purchase lending and refinance lending going forward). Of these loans, 34.2 percent were sold to Fannie 

Mae, Freddie Mac or Farmer Mac (collectively, the GSEs) and 16.2 percent were loans guaranteed 

through Ginnie Mae (see Figure 1). 

Figure 1. 2015 purchase and refinance loans by purchaser 

All loans loans to loans to 

LMI borrowers borrowers of color 

# % # % # % 

GSEs 2,065,978 34.2% 457,450 31.3% 374,133 30.0% 

Ginnie Mae 976,119 16.2% 235,514 16.1% 262,773 21.1% 

Not sold in 2015 1,245,698 20.6% 275,054 18.8% 225,453 18.1% 

Other 1,752,868 29.0% 493,318 33.8% 382,781 30.7% 

Total 6,040,663 1,461,336 1,245,140 

1 Sustainable Housing Finance: Private Sector Perspectives on Housing Finance Reform, Hearing before the 

Subcommittee on Housing and Insurance of the House Financial Services Subcommittee, llS'h Congress. 1-26 

(2017) (Testimony of Nikitra Bailey), available at https://financialservices.house.gov/uploadedfiles/hhrg-115-ba04-

wstate-n ba iley-20171025. pdf. 

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Source: CRL analysis of 2015 Home Mortgage Disclosure Act data, home purchase and refinance 

mortgages for first-lien, owner-occupied, 1-4 family homes, including manufactured homes. GSEs refers 

to all loans sold to Fannie Mae, Freddie Mac or Farmer Mac in 2015 calendar year. Other category 

includes loans acquired by an affiliate institution, commercial bank, savings bank, savings association, 

life insurance company, credit union, mortgage bank, finance company or private securitization. 

A. The GSEs and Ginnie Mae Provide Important Credit Access for low- and Moderate-Income 

Borrowers and Borrowers of Color 

In 2015, GSEs purchased 457,450 purchase and refinance loans made to low- and moderate-income 

(LMI) borrowers, making up 31.3 percent of purchase and refinance mortgage lending to LMI borrowers, 

or borrowers with incomes less than 80 percent of the area median income. likewise, Ginnie Mae 

guaranteed 235,514 purchase and refinance loans to LMI borrowers, making up 16.1 percent of all 

purchase and refinance lending to low- and moderate-income borrowers (Figure 1). 

During the same year, the GSEs purchased 374,133 loans to borrowers of color, or 30.0 percent of all 

loans to these borrowers and Ginnie Mae guaranteed 262,773 FHA loans to borrowers of color-a 21.1 

percent market share. 

B. GSE Market Share Exceeds Ginnie Mae Market Share in Rural Communities 

While conventional financing and the GSEs remain a critical component of the mortgage market in lowand moderate-income communities of color, the GSEs also provide an important source of mortgage 

capital in rural communities.' According to research by CRL and released by Brookings Institution, the 

GSEs purchased nearly one out of every three new mortgages in rural communities in 2016. In 2016, 

lenders made over 1.2 million purchase and refinance loans in rural areas.3 The GSEs also purchased 

80,680 purchase and refinance loans to LMI borrowers in rural areas and 24,132 loans to rural 

borrowers of color, a 26.7 percent and 21.9 percent market share, respectively (Figure 2). 

In comparison, Ginnie Mae guaranteed 244,573 FHA loans in rural areas, including 59,455 (19.7 percent) 

to rurallMI borrowers and 30,308 loans (27.6 percent) to rural borrowers of color. 

2 Calhoun, Michael, Tom Feltner, and Peter Smith. Supporting Mortgage Lending in Rural Communities. Brookings 

Institution, {January 2018). https:l/www.brookings.edu/wpcontent/uploads/2018/01/es 2018 01 10 rural housing report.pdf. 3 Census tracts, which were classified as either urban or rural areas based on the 2017 definition of rural area at 12 

CFR 1282.1, and available at https://www.fhfa.gov/DataTools/Downloads/Pages/Duty-to-Serve-Data.aspx. 

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Figure 2. 2016 purchase and refinance loans by purchaser in rural areas 

All loans All rural loans loans to rural loans to rural 

lMI borrowers borrowers of 

color 

# % # % # % # % 

GSEs 2,427,$05 35.2 364,719 30.3 80,680 26.7 24,132 21.9 

Ginnie Mae 1,191,979 17.3 244,573 20.3 59,455 19.7 30,308 27.6 

Not sold in 2016 CY 1,346,756 19.5 283,722 23.5 74,531 24.7 24,926 22.7 

Other 1,932,929 28.0 311,900 25.9 87,058 28.8 30,643 27.9 

Total 6,899,169 1,204,914 301,724 110,009 

Source: Center for Responsible Lending analysis of 2016 HMDA data 

The GSEs also provide a critical source of mortgage capital for smaller lenders, those with assets of less 

than $10 billion in 2016. The GSEs purchased 100,151 purchase and refinance loans from smaller lenders 

lending in rural areas, or 26.8 percent of the market. Ginnie Mae guaranteed just 9,119 purchase and 

refinance loans made by small lenders in rural areas that same year-a 2.4 percent market share (Figure 

3). 

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Figure 3. 2016 purchase and refinance loans originated by small lenders by purchaser in rural areas 

Purchase Refinance Total 

# % # % # % 

GSEs 50,334 24.6% 49,817 29.6% 100,151 26.8% 

Ginnie Mae 7,450 3.6% 1,669 1.0% 9,119 2.4% 

Not sold in 2016 CY 78,691 38.4% 79,975 47.4% 158,666 42.5% 

Other 68,252 33.3% 37,123 22.0% 105,375 28.2% 

Total 204,727 

Source: CRL analysis of 2016 Home Mortgage Disclosure Act data 

In addition to support for homeownership, the GSEs also play a vital role in supporting affordable rental 

housing, which is essential for many working families. These programs have performed well, even 

through the recent financial crisis, and should be continued going forward. 

Ill. FHA is a Critical Component of the Housing Finance Svstem and Along with the GSEs Saved 

the Market from Total Collapse. To Remain Effective and Achieve its Goal of Promoting 

Homeownership, it Must be Reformed and Modernized. 

A. When Considering Reform Changes to the Housing Finance System, it is Crucial to Start by 

Recognizing the Central Role that the GSEs and FHA Play in the Nation's Housing Market 

Recovery 

The GSEs and FHA ensured that stable and affordable mortgage credit was available across the country 

throughout the economic downturn and are still essential to the market today. Currently, they hold 

mortgages worth $6.17 trillion with Fannie Mae at 44.2 percent, Freddie Mac at 27.5 percent, and 

Ginnie Mae at 28.3 percent.' The GSEs were created by Congress in the 1930s to provide stability to the 

capital markets and to increase the availability of mortgage credit throughout the United States 

following periods of significant economic instability. The GSEs have a mandate to serve all credit markets 

at all times, which guarantees broad credit availability in all regions of the nation. The charters of the 

GSEs state that they must "promote access to mortgage credit throughout the nation (including central 

cities, rural areas, and underserved areas) by increasing the liquidity of mortgage investments and 

improving the distribution of investment capital available for residential mortgage financing."' By 

4 Laurie Goodman et.al., Housing Finance at a Glance: A Monthly Chartbook, at 6-7 (May 2017), available at 

http:Uedit.urban.org/sites/default/files/publication/90451/may chartbook.pdf. 

5 Fannie Mae's charter is in Title Ill of the National Housing Act, 12 U.S. Code§ 1716 

et. seq. Freddie Mac's charter is in 12 U.S.C. §1451 et. seq. 

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pooling and securitizing mortgages, backed by an implied federal government guarantee, the GSEs have 

ensured the flow of credit to all parts of the nation. We now have a national mortgage market, investor 

confidence, increased loan volume, and widespread use of the 30-year fixed rate mortgage. 

B. Following the Financial Crash, GSE and FHA Lending Saved the Market from Complete 

Shutdown 

Private capital withdrew from the market during the housing crash. The countercyclical nature of the 

GSEs and FHA insured mortgage credit sustained the market during this time. Private label lending 

peaked in 2006 with approximately 40 percent of all mortgage originations.6 It began to decline in 2007 

and virtually stopped by 2008.7 With record levels of defaults and foreclosures occurring alongside sharp 

declining prices nationwide, overall mortgage lending quickly dried up. 

Credit would not have been available for most mortgagees if not for government support during the 

financial crisis. Backed by government guarantees, the GSEs, under Federal Housing Finance 

Administration conservatorship beginning in September 2008, and FHA continued to ensure the 

availability of credit. GSE lending jumped to over 65 percent of all mortgage originations in 2008." FHA 

lending also played a key role as its involvement increasing rapidly? Since then, FHA purchase loans 

have dropped steadily and returned closer to the normal levels of the early 2000s (Figure 9). 10 Moody's 

estimated that FHA's contribution prevented a second collapse in the housing market, which could have 

sent the U.S. economy into a double-dip recession and caused the economy to shed another three 

million jobs and the unemployment rate to rise an additional1.6 percent." 

6 Laurie Goodman et.al., Housing Finance at a Glance: A Monthly Chartbook, at 8 (May 2017), available at 

http:l/edit.urban.org/sites/default/files/publication/90451/may chartbook.pdf. 

7 1d. 

8 1d. 

9 John Griffith, "The Federal Housing Administration Saved the Housing Market" (Washington: Center for American 

Progress, 2012), available at https://www.americanprogress. org/issues/housing/report/2012/10/11/40824/thefederalhousing-administration-saved-the-housing-market/. This report cites data estimates from Moody's 

Analytics in October 2010. 10 US Department of Housing and Urban Development, Annual Report to Congress Regarding the Financial Status 

of the FHA Mutual Mortgage Insurance Fund Fiscal Year 2010, at 2 (November 2010), available at 

https:/lportal.hud.gov/hudportal/documents/huddoc?id=report to congress. pdf: See also US Department of 

Housing and Urban Development, Federal Housing Administration Annual Report to Congress, The Financial Status 

Of the FHA Mutual Mortgage Insurance Fund Fiscal Year 2016, at 8 (November 2016), available at 

https:/ /portal.hud.govjhudportal/documents/huddoc?id=2016fhaannualreport1.pdf. 11 John Griffith, "The Federal Housing Administration Saved the Housing Market" (Washington: Center for 

American Progress, 2012), available at https://www.americanprogress. 

org/issues/housing/report/2012/10/11/40824/the-federalhousing-administration-saved-the-housing-market/. This 

report cites data estimates from Moody's Analytics in October 2010. 

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Figure 9. First lien origination volume 

($trillions) 

$4.0 

$35 

$3.0 

$2.5 

$2.0 

$1.5 

$1.0 

$05 

$0.0 

'tGSEsecuritization aFHANAsecuritization I!PlSsecuritization , Portfolio 

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 

Source: Inside Mortgage Finance and Urban Institute, last updated February 2017 

C. Modernizing the FHA is Critical to Ensure It Carries Out its Mission to Promote 

Homeownership and Ensure Access to Credit 

$0.639 

$0009 

$047 

$095 

The FHA is one of the main pillars of the nation's housing finance system. The program creates an entry 

point for millions of first-time home buyers. As noted above, FHA was central to the nation's economic 

recovery after the financial crash by continuing to insure mortgage loans when private capital dried up. 

However, the program would benefit tremendously from both funding and statutory reform. 

i. The False Claims Act 

Lender liability under the False Claims Act has been the subject of a variety of proposed reforms. There 

is a recognized need to clarify what types of errors can trigger liability under the Act. The statute 

imposes treble damages against anyone who submits a false claim to the government, including FHA 

insurance payments. Because these treble penalties can cost a far greater amount than the loan 

itself, this has the potential to decrease the appetite for making FHA insured loans that have only a 

modest risk of defaulting." This has potential negative effects on access to mortgage credit, especially 

for those borrowers that rely on FHA to secure mortgage loans. The False Claims Act can be a strong tool 

to curb fraud in the mortgage lending space and should be reformed to clarify the liability provisions so 

it can bolster access to credit. 

ii. Program Funding 

FHA loan volume plummeted during the subprime mortgage lending boom. In 2015, FHA lending slightly 

recovered, but while the increase in lending volume has bolstered FHAs capital levels it has 

12 See, The Federal Housing Administration Can Do More With More, April 2017, available at 

https://www.brookings.edu/research/the-federal-housing-administration-can-do-more-with-more/. 

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counterintuitively negatively impacted FHA's operations." Under statute the entirety of FHA's revenue 

is sent to the Mutual Mortgage Insurance Fund (MMIF) and cannot be used for FHA's operations, 

regardless if that funding could significantly improve operational or program efficiency. For example, 

FHA attempted to address the False Claims Act ambiguity by establishing which errors would and would 

not trigger liability, but this effort was abandoned due to lack of funding. 14 Additionally, FHA loan 

servicing for modifications for troubled loans is expensive and risky, so servicers will be constrained in 

their ability to provide payment relief for borrowers without programmatic changes. 

FHA has made attempts to secure additional funding to address these (and more) complications but has 

been met with resistance. One of these proposals was legislation authorizing a 4 basis point ongoing fee 

on FHA loans. Additionally, HERA authorized $25 million a year for five years out of a "negative credit 

subsidy", proceeds from the MMIF, to target system upgrades and quality control.'' These upgrades 

would advance FHA's role in the housing market, protect taxpayers, and support the overall economy. 

Ill. Access to Safe and Responsible Credit on Affordable Terms Must Be Central in the Future 

of the Housing Finance System 

Despite historical inequities in access to mortgage credit, the future of the market depends on oftenexcluded borrowers including people of color and lMI families, the fastest growing segment of potential 

future homebuyers. These borrowers have less wealth, which has translated into lower credit profiles 

and an inability to make large down payments on mortgage loans.16 Therefore, a future well-functioning 

system that serves all credit-worthy borrowers would not only fulfill the GSE's mission, but enable the 

mortgage market to thrive-for example, making it easier for families to sell their homes to new 

buyers. 

A. Serve All Credit-Worthy Borrowers 

Rural borrowers, new emerging households, lMI borrowers and borrowers of color all face obstacles to 

receiving competitive and affordable mortgage loans. Current statutory provisions governing the 

13 See, The Federal Housing Administration Can Do More With More, April 2017, available at 

https:Uwww.brookings.edu/research/the-federal-housing-administration-can-do-more-with-more/. 

14 See The Federal Housing Administration Can Do More With More, April 2017, available at 

https://www.brookings.edu/research/the-federal-housing-administration-can-do-more-with-more/. 

15 12 U.S.C. § 4501 et. seq.; Section 2126 authorized $25m negative subsidy (This funding was dependent on FHA's 

meeting its statutory capital ratio, and FHA has been below this standard for several years before present day, so 

this provision was never implemented.) 16 See The State of the Nation's Housing, Joint Center for Housing Studies, at 3 (2013) (stating 

that "[m]inorities-and particularly younger adults-will also contribute significantly to household growth in 2013-

23, accounting for seven out of ten net new households. An important implication of this trend is that minorities 

will make up an ever-larger share of potential first-time homebuyers. But these households have relatively few 

resources to draw on to make down payments. For example, among renters aged 25-34 in 2010, the median net 

wealth was only $1,400 for blacks and $4,400 for Hispanics, compared with $6,500 for whites. Even higher-income 

minority renters have relatively little net wealth, with both blacks and Hispanics in the top income quartile having 

less than half the average net wealth of whites. Proposed limits on low-down payment mortgages would thus pose 

a substantial obstacle for many of tomorrow's potential homebuyers. ") 

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GSEs include important measures to further service of these markets: the mandate to serve the broad 

market, even at a lower rate of return; affordable housing goals; the duty to serve under-reached 

markets; and the affordable housing funds. These were all included in or reaffirmed by HERA, which 

passed with strong bipartisan support. These bipartisan compromises, worked out over nearly a decade, 

must be preserved and expanded in order to meet needs of the current and future mortgage market, 

which will include large proportions of these borrowers. Equally important, credit risk transfers must 

continue to be done by the GSEs through mechanisms that do not price these borrowers or small 

lenders out of the market. This means credit risk transfers must be executed through reinsurance 

structures that permit pooling of loans and risk, and not through deeper upfront risk transfers. 

B. Pricing Practices Should Expand Mortgage Access 

The GSEs and FHA today have an affirmative duty to serve all markets which incentivizes them to set 

prices in a way that balances risk and accessY These participants in today's housing finance system are 

incentivized to pool risk and price credit risk on a pooled basis. Unfortunately, recent proposals for 

legislative housing finance reform share a common feature that undermines this pricing approach. 

Deep upfront credit risk transferred to private capital would incentivize actors to segment, rather than 

pool, credit risk and prices. Segmented pricing puts mortgage credit out of reach for too many creditworthy borrowers by making mortgage debt more expensive. 

The total amount borrowers pay to cover credit risk is a function of modeled losses, capital standards 

and the required rate of return on capital.18 Modeled losses are largely independent of system 

structures.'9 Capital requirements and required rates of return on capital are dependent on the 

structure of a future system, and function to increase or decrease the overall total amount to be held to 

guard against losses. 

It is the policies of participants in the housing finance system that translate predicted credit losses into 

borrower prices and distribute prices for borrowers with different characteristics. Importantly, the 

degree to which costs are pooled or distributed is determined by the structure of the housing finance 

system. For example, FHA charges the same insurance premium to borrowers regardless of credit 

score/0 whereas private mortgage insurers charge widely different fees to borrowers with different 

credit scores and/or levels of down payment (Figure 4). 

17 CRL continues to work with FHFA to encourage changes which could further open up access to credit. For 

example, eliminating the loan level price adjustments (LLPAs) that were put in place after the crisis. 18 For a more detailed discussion of the levers that affect pricing and the distribution of pricing for credit risk see 

Calhoun, M. and Wolff, 5. Who Will Receive Home Loans, and How Much Will They Pay?, 2016, available 

at http://www.urban.org/policy-centers/housing-finance-policy-center/proiects/housing-finance-reformincubator/mike-calhoun-and-sarah-wolff-who-will-receive-home-loans-and-how-much-will-they-pay. 

19 System structure could introduce new risks. For example, if a future system made it very difficult or costly for 

first-time homebuyers to purchase a home, then existing homeowners would have a difficult time selling their 

homes. This could depress housing prices or limit liquidity in the housing system overall, which could result in a 

downturn and create losses in the system above what would be predicted by current models. 2

° FHA premium rates available at https://portal.hud.gov/hudportal/documents/huddoc?id=17-07ml.pdf. 

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Figure 4. Private mortgage insurance pricing, 2017 

97-95.01% LTV 95-90.01% LTV 90-85.01% LTV 

35% Coverage 30% Coverage 25% Coverage 

>=760 55 41 30 

740-759 75 59 41 

720-739 95 73 so 

700-719 115 87 60 

680-699 140 108 73 

660-679 190 142 100 

640-659 205 150 105 

620-639 225 161 110 

From online published rate sheets for Borrower Paid Mortgage Insurance from private mortgage insurers Genworth 

(https://mortgageinsurance.genworth.com/pdfs/Rates/1137077S.Month!y Nati.FIXE0.0616.pdf) and Radian 

{http://www.radian.biz/sfc/servlet.shepherd/version/download/068C0000002osy91AA) 

85%LTVand 

under 

20 

23 

27 

32 

41 

43 

45 

Underwriting structures determine if borrowers are credit-worthy, but pricing structures have a 

significant impact on whether a credit-worthy borrower can afford a mortgage. Differential pricing 

creates an additional barrier to mortgage credit by increasing the price, sometimes significantly, for 

some borrowers relative to others. There is evidence of price acting as a barrier even in today's 

mortgage market. For example, although Fannie Mae's guidelines allow the GSEs to purchase loans with 

credit scores down to 620 and loan-to-value (lTV) ratios of up to 97 percent, very few loans purchased 

by the GSEs have these characteristics.21 One reason is that risk-based pricing by both the GSEs and 

private mortgage insurers add significantly to the cost of loans for borrowers with lower scores and less 

wealth for a down payment. For example, the combination of loan-level price adjustments (llPAs) and 

mortgage insurance (MI) premiums adds over 300 basis points to the cost of a mortgage for a borrower 

with a credit score of 620 and an lTV of 97 percent." 

The GSEs, though, currently set prices based on a more consolidated set of borrower characteristics 

than private actors like private mortgage insurers. They lay off credit risk largely through back-end credit 

risk transfer mechanisms which allows for pooling of loans and risk. Ultimately, these policies limit the 

degree to which loan pricing is highly segmented." 

21 See p. 6 of 2017 First Quarter Credit Supplement, Fannie Mae, May 5, 201, available 

at http:Uwww. fanniemae.com/resources/file/ir /pdf/quarterly-annual-results/2017 /q12017 credit summary.pdf. 22 350/4+225=312.5 basis points. Fannie's Mae's LLPA for this combination of credit score and LTV is a one-time fee 

of 350 basis points (see page 2: https:Uwww.fanniemae.com/content/pricing/llpa-matrix.odf), we assumed a LLPA 

multiple of 4 to convert this upfront fee to an ongoing cost comparable to the Ml premium. Borrower paid Ml from 

Genworth for this combination of credit score and LTV is a continuing fee of 225 basis points 

(see: https://mortgageinsurance.genworth.com/pdfs/Rates/11370775.Monthly Nati.FIXED.0616.pdf). 

23 Through the LLPAs the GSEs also have differential pricing, which limits their reach to underserved borrowers. 

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Comparing the GSE guarantee fee structure to the Ml pricing structure reveals the private market's 

tendency to create finely defined bands. GSE guarantee fee pricing'14 breaks up credit scores into three 

bands: >=740, 700-739, and 620-699. From December 2013 to April2016, Ml companies broke up this 

same range into four bands: >=760, 720-759,680-719, and 620-679. Recent Ml pricing, released in April 

2016, breaks this same range of credit scores into eight different bands: >=760, 740-759, 720-739, 700-

719, 680-699, 660-679, 640-659, and 620-639 (Figure 5). 

Finely defined pricing frameworks produce more extreme pricing. Figure 5 below shows the change in 

basis points borrowers with a given credit score experienced when PMI pricing 

changes were implemented in April 2016. Some borrowers, those with credit scores above 740, enjoyed 

a reduction in fees whereas others, almost all borrowers with scores below 680, experienced increases. 

The cells highlighted in dark green saw a decrease of more than 30 basis points. The cells highlighted in 

dark green saw a decrease of more than 30 basis points. The cells highlighted in dark orange saw an 

increase of more than 30 basis points (Figure 5). 

Figure 5. Change in Ml pricing by credit score and lTV December 2013 to April 2016 

From online published rate sheets for Borrower Paid Mortgage Insurance from private mortgage insurers Genworth and Radian for December 

2013 and April 2016, 

Proposed housing finance systems that rely on deep, upfront private capital to cover credit risk do not 

provide a countervailing pressure to market incentives to finely and differentially price credit risk. Even 

in the current system, in which the GSEs have incentives for risk and price pooling, troubling pricing 

differences prevent credit worthy borrowers from getting mortgages. Unfortunately, the legislative 

proposals further erode incentives for pooling and are likely to result in even greater differential pricing. 

This will make it even harder and costlier for credit-worthy borrowers of modest means to afford a 

mortgage. 

24 As described in Fannie Mae and Freddie Mac Guarantee Fees: Request for Input, FHFA, 2015, available 

at https://www.fhfa.gov/policyprogramsresearch/policy/documents/gfeerfi060514f.pdf 

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IV. Build on the Extensive Changes Already Made with the HERA, Dodd Frank Act's Ability-toRepay and QM Rules with a Utility Model 

Congress has already substantially reformed the housing finance system. It can now allow for continued 

changes through the administrative process because the FHFA is a more effective, stronger regulator for 

the GSEs that enjoys key enforcement tools to help rein in the abuses of the past. Moving the system to 

a utility model will build on the substantial reforms of the HERA and the reasonable protections 

provided through the Dodd-Frank Act's Ability-to-Repay Standard and QM rules. 

A. A Utility Model Will Rein in Risky Profit Seeking Activity 

The structure of the GSEs created a conflict that has been noted by many. While they had public 

purposes and goals, their structures made them accountable to shareholders who expected maximum 

returns. This created an incentive for the GSEs to take on more risks to increase returns. It also 

encouraged the GSEs to focus on the most lucrative segments of the market, underserving small lenders, 

rural communities, and LMI borrowers. To counteract this conflict, the GSEs should be restructured to 

operate as a utility that have a regulated rate of return and require the approval of new products and 

services. The Duty to Serve and Affordable Housing Goals would be maintained as well. 

A new utility structure preserves the efficiencies and the key countercyclical role that the GSES play 

while protecting private entities from unfair competition. Under this structure, investors are provided a 

lower, but less volatile, rate of return. Additional advantages include closer oversight of the entities, 

including regulation of fees, as has been done in conservatorship of the GSEs. This change in structure 

would prevent the present conflict of interest created by the GSEs' structures. 

1. Additional Reforms Must Include Prohibitions on Political Activities and lobbying, 

Vertical Integration, and Portfolio Arbitrage 

Other reforms that would also better align the GSEs with their important public goals include making 

permanent the ban on their political and lobby activities and continuing the prohibition on any vertical 

integration of their activities into the retail mortgage market. 

It is accurate to say that the GSEs had exploited their implicit government backstop to borrow at 

advantaged interest rates and used this funding to arbitrage the purchase and holding of an outsized 

mortgage portfolio. Doing so produced much higher rates of return than just guaranteeing loans that 

they securitized. However, this action placed additional risk on the books of the GSEs. Such arbitrage 

should be prohibited, and the GSEs have dramatically reduced the size of their portfolios in recent years 

under pressure from the FHFA and Congress. However, some portfolio is necessary for the aggregation 

of TBA loans, the modification of distressed loans and the holding of specialized loans. Borrowing for 

these limited purposes should continue to be permitted and should be protected in times of stress. 

Otherwise, when the need for these services is greatest for the benefit of the overall economy, funding 

will be unavailable or unaffordable. 

2. FHFA Requires the GSEs to be Well Capitalized and Participate in Credit Risk 

Transfer Programs 

The FHFA has decreased taxpayer risk by requiring that the GSEs enter into credit risk transfers on most 

of their loans. This action decreases the amount of risk that the GSEs hold and has already increased 

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private capital in the housing finance system. However, as stated above in the pricing section, front end 

credit risk transfers promote pricing segmentation and make mortgages less affordable. FHFA should 

direct the GSEs more towards back end credit risk transfers that will continue to allow them to pool risk. 

3. The Boards of the GSEs Should Have Designated Public Positions 

To ensure more accountability to the public mission of the GSEs, the boards should have designated 

public positions. This action will protect the public interest and could include seats for taxpayers, 

borrowers, and lenders, including community banks and credit unions. 

V. Current Legislative Proposals to Reform the GSEs will Produce Less Access to Safe and 

Responsible Credit and Drive Up Cost 

Since the Housing Crash of 2008, there have been various proposals to reform the GSEs. There is broad 

consensus that any future reforms must make the government backstop explicit and fully paid for, and 

that access to safe and responsible credit for all credit-worthy borrowers must be a central purpose of a 

future system. However, how to achieve those goals remains a point of major contention. Existing 

proposals fall far short of advancing the types of reforms needed to produce a more inclusive housing 

finance system and as drafted will increase cost for all borrowers by scrapping the system's current 

affordability mechanisms. 

A. Preserve Duty-to-Serve and Affordability for All Market Participants 

The statutorily defined duty-to-serve requirements ensure broad availability of mortgage credit 

throughout the business cycle, which ensures that no region of the nation is left out of the housing 

finance system. Congress created the obligation within the actual charters of the government sponsored 

enterprises (GSEs), and they state that the GSEs must "promote access to mortgage credit throughout 

the nation (including central cities, rural areas, and underserved areas) by increasing the liquidity of 

mortgage investments and improving the distribution of investment capital available for residential 

mortgage financing". 25 These obligations continue through the Fair Housing Act of 1968, which Congress 

passed immediately following the death of Dr. Martin Luther King, Jr. who spent a crucial portion of his 

life working to address housing discrimination.26 They are carried forward in the Equal Credit 

Opportunity Act of 1974 (ECOA), and are implemented through the Federal Housing Enterprises 

Financial Safety and Soundness Act of 1992 (FHEFSSA) and Housing and Economic Recovery Act of 2008 

(HERA).27 They represent Congress' long-term view that all secondary mortgage market participants 

have an affirmative duty to further fair lending. 

Congress also created the Affordable Housing Goals in 1992 with FHEFSSA and carried them forward in 

2008 with HERA to help expand credit access for underserved groups, ensure liquidity in the financial 

markets, and further fair lending goals. 28 Originally, the goals advanced lending opportunities to lowincome families in underserved areas, which resulted in mortgage originators making more affordable 

25 12 U.S.C. § 1716; 12 U.S.C. § 1451 note. 26 42 U.S.C. § 3601 et seq. 27 15 U.S. C.§ 1691 et seq; 12 U.S.C. 4501 et seq; Pub. l. 110-289 (July 30, 2008). 28 12 U.S.C. § 4562 (single-family housing goals) 

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loans. The affordable housing goals made a tremendous impact on helping credit-worthy borrowers 

purchase homes. From 2003 through 2012, the National Community Reinvestment Coalition reported 

that more than 25 million hard-working families nationwide were able to become homeowners due to 

the goals.29 Now, they are a metric for accountability by the GSEs' conservator, the Federal Housing 

Finance Agency, to address underservice to important, and often excluded, market segments such as 

LMI families, rural communities, and people of color. 

Thus, the goals must be strengthened and fully enforced to ensure that their true purpose is 

realized. They can be a tool for helping to strengthen household wealth in a safe and sound manner 

while also shoring up economic growth. Further, Congress should continue to require that all 

participants within the secondary mortgage market be subject to the duty-to-serve mandate and 

affordable housing goals. 

B. Proposals that Abandon the Public Interest Mandate Will Increase Cost Harming 

lower Wealth Families and Smaller lenders 

Most proposals to reform the GSEs seek an explicit and fully paid for government guarantee for systemic 

catastrophic loss. Such a public risk requires the granting of an equal public benefit. Yet, most proposals 

offer untested alternatives to the current system's longstanding affordability provisions that are the 

result of the incentives that the GSEs must pool risk and price credit risk on a pooled basis. 

Unfortunately, recent proposals for legislative housing finance reform share a common feature that 

undermines this pricing approach. Deep upfront credit risk transferred to private capital would 

incentivize actors to segment, rather than pool, credit risk and prices. Segmented pricing puts mortgage 

credit out of reach for too many credit-worthy borrowers. Further, the proposals ignore the reality that 

the broad liquidity provided by the GSEs create the ability for the current system to offer lower costs to 

all borrowers through the existence of the 30-year fixed rate mortgage which allows for predictable 

monthly borrower payments. 

1. Corker-Warner Is A Blow to Affordable Housing and Harmful to the Overall 

Economy 

The most recent draft of the Corker-Warner proposal would jettison the very foundation blocks of the 

obligations of companies using government backing to promote the public interest, including serving a 

national market, including rural and urban areas; serving all lenders equitably; including community 

banks and credit unions.30 It also undermines fair housing and the ability to increase access to 

affordable mortgage credit for underserved borrowers.31 Finally, it repeals and replaces the current 

system's affordable housing goals and enforcement provisions with unenforceable aspirations and an 

29 National Community Reinvestment Coalition, Nationwide Benefits from the Affordable Housing Goals, available 

at http://www.ncrc.org/images/PDFs/ahg/nationwide%20ahg.pdf. 

3

° CRL's President Mike Calhoun provides a more in depth analysis on the weaknesses with the Corker-Warner 

proposal along with the President & CEO of the National Urban League Marc Moria!, and mortgage default risk and 

insurance regulation expert Mike Molesky in Senate GSE Reform Proposal: A Blow to Affordable Housing and 

Harmful to the Overall Market, available at 

https:/lwww.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl-nul-senate-gsereform-proposal march2018.pdf. 31 1d. 

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even explicit prohibition on interfering with the "business judgment" of those receiving and profiting 

from government backing." 

Moreover, the assumptions used in its affordability provisions use narrow scenarios and unreasonable 

assumptions that tilt the numbers erroneously towards the proposal, while a more neutral analysis 

shows that those promises are unattainable.33 When one looks behind the promises, it is clear that this 

proposal would be a historic setback for affordable housing and harm the overall market.34 

Central to the Corker-Warner proposal is the notion that the proposed affordability mechanism will 

result in an additional $1 billion cross subsidy towards affordable housing through the implementation 

of the Market Access Fund. To achieve this goal, the fund would collect fees each month from payments 

of all borrowers, who would, in turn, use them to pay a portion of targeted mortgage payments. 35 This 

action introduces unnecessary complexity and is unlikely to receive broad bi-partisan support. Further, 

once the calculations are closely examined it is clear that this formula when applied to current 2016 loan 

distribution would produce a much smaller outcome.36 It should be noted that the 2016 distribution has 

low levels of targeted loans.37 

The GSEs currently provide $4 billion of cross subsidy. Moreover, in a more typical and inclusive 

mortgage market it would be greater.38 The current system provides nearly twice the amount of subsidy 

for underserved borrowers than the proposed system.39 

2. Proposed Ginnie Models are Untested and Will Lead to Higher Costs 

While proposals for Ginnie Mae models for reform try to strike a public-private hybrid balance, they fail 

to consider the substantial cost increases of this move. Ginnie Mae is the third GSE. It guarantees the 

servicing performance of the issuer and not the underlying collateral. It has a full government wrap on 

the loans that it insures. Extending this wrap is likely to drive up fees as the market will respond to the 

increased number of participants in the Ginnie program with anxiety. 

Further, smaller lenders are disadvantaged with this model as Ginnie has inherent operational 

complexities that could deter smaller lenders from becoming issuers. 

The servicing within the Ginnie program is also far more complex than the existing system and puts 

enormous financial pressure on servicers, especially in times of economic distress. Ginnie servicers are 

required to advance missed payments to investors for an unlimited amount of time until the loan is 

resolved or buy it out of the pool using the servicer's resources. This buyback scenario requires servicer 

financing in times of economic distress when loan defaults are heightened. Ginnie already faces 

difficulty suitably overseeing its large roster of issuers and servicers, which are mostly nonbanks. 

"Jd. 

"Jd. 

"Jd. 

35 ldat4-5. 

36 /dat 5. 37 /d. 

"Jd. 

39 /d at 5-9. 

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A recent HUD Inspector General report details these concerns and found that Ginnie was not prepared 

for the rise in nonbank lending and did not respond to the changes in its lender base. Further, Ginnie 

does not currently evaluate credit risk. Currently, Ginnie relies on FHA, VA, and Rural Housing to 

determine that that program underwriting standards are met. With the new model, it would take on 

the role of determining underwriting and risk on privately guaranteed mortgages along with having to 

determine and manage the counterparts risk of the many issuers (it has a limited amount of risk today 

on VA loans, which do not have 100% insurance, but the counterparty risk is small). 

In the Ginnie proposals the goal is to absorb Fannie and Freddie to utilize their expertise to fulfill this 

requirement. However, the Bright-DeMarco proposal would require that this function continue to be 

performed under the regulatory authority of the FHFA. This action creates uncertainty. 

Finally, a Ginnie model will isolate all affordable mortgage lending to the FHA, VA, and other 

government insured programs. This action places a higher burden of risk in those programs as they 

struggle with needed technology and staffing updates. It will also potentially raise cost for nearly all 

borrowers with the brunt of the weight felt by borrowers with lower credit scores and down payments. 

C. Ensure Equal Access for Smaller lenders Including Community Banks in the Housing 

Finance Reform 

Community banks, credit unions and other small lenders play a critical role in providing mortgages and 

other financial services on a local basis to American families, and they must be supported by the housing 

finance system. The current system has many provisions to do this, and these should be continued and 

expanded. Some proposals for changes in housing finance, though, would strongly tilt the system 

against these institutions. 

Community banks, credit unions, and other small financial institutions deliver mortgages to their 

customers, along with other essential financial services, in the communities where they are located. As 

has been noted by many, these institutions have a different business model than larger institutions, 

often serving local markets and having close relationships with their customers. In rural areas, these 

institutions play a particularly important role. In many rural communities, community banks and credit 

unions are the only financial institutions providing retail branches and services in the community. These 

institutions also focus on traditional banking services and do not engage in many of the complex lines of 

business that larger institutions do, such as securities issuance, credit default swaps, or proprietary 

trading.40 Disruptions to the traditional banking services, such as mortgages, cannot be offset with other 

products and lines of service. As a result, stress on community banks and their mortgage lending would 

be felt elsewhere. For example, community banks provide almost half of small business lending, and 

that is dependent on the overall sustainability of the institutions. 

The GSEs provide a number of features that are essential for community banks. First is the GSEs' cash 

window, which provides lenders the option of selling individual loans. This means that smaller 

institutions do not have to trade their loans for securities or sell their loans to other large banks. 

Although many larger lenders trade their loans for GSE securities, this is difficult for small lenders. The 

40 These distinctions have been recognized by the CFPB, which created a number of special provisions for these 

lenders in the mortgage regulations, exempting smaller lenders from many requirements and providing additional 

flexibility for underwriting and servicing of loans. 

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securities carry the interest rate risk of the underlying loans and, as a result, can change in value if 

market interest rates change. An increase in market interest rates would significantly reduce the value 

of the securities and create a loss for the bank holding the security. larger institutions can purchase 

interest rate swaps to hedge this risk, but this is much harder for small lenders to do. 

Another advantage of the current cash window is that the GSEs purchase these loans without requiring 

the transfer of the servicing of the loans to a third party. This enables the community banks and credit 

unions to continue the relationship with the customer during the life of the loan rather than having the 

loan serviced by a third party or even a competitor. Private loan purchasers and aggregators often 

require the seller to transfer the loan servicing to the purchaser. Keeping loan servicing in the hands of 

the community based financial institutions usually results in better consumer outcomes in terms of 

customer service and loan performance. 

The current cash window also provides comparable pricing to trading for securities. This is critical, as 

options such as the cash window are viable only if the pricing is at a level that permits community banks 

to be competitive in the mortgage market. Overall, the mortgage market favors larger lenders and larger 

transactions, particularly for securities. Sales of large pools of loans are more attractive to buyers of the 

loans and buyers of the securities backed by the loans. Absent safeguards, large lenders can leverage 

the government support to use these structural advantages to squeeze community banks and other 

small lenders out of the market. These important features of the cash window option, which are not 

available for FHA loans, are a reason that the FHA program, while vitally important, is not a substitute 

for community banks having access to conventional lending for their full spectrum of customers. 

Given the importance of these provisions in the current housing finance system, they should be 

continued and expanded. However, some of the proposals for housing reform have provisions that 

would tilt the government supported mortgage market heavily against community banks. While most 

options preserve some form of a cash window, they do not have the supporting protections that make it 

workable. Most important is pricing parity with the securities option. If securities trade at a better price, 

it greatly diminishes the value of the cash window. This is true even if there is a provision that prohibits 

volume pricing or discounts. If all cash transactions are disfavored to securities, the lack of discounts in 

either market are of little consolation to community banks who are disproportionately dependent on 

the cash window transactions. To provide this pricing parity, the guarantor/issuer must have the ability 

to pool costs across the market. This makes it essential that guarantor/issuers serve a national market 

and have a duty to equitably serve all lenders. Otherwise, if some guarantors/issuers can choose to 

cream the market, serving only the large lenders and the most lucrative markets, the remaining 

guarantors will not have sufficient loans from the full market to be able to provide pricing parity to small 

lenders and still compete in the overall market. In order to provide this parity, the guarantor/issuers also 

must be able to pool the credit risk that they hold and reinsure. If all but the catastrophic credit risk is 

transferred before the loans are purchased by the guarantor/issuers, there is insufficient revenue 

remaining for the guarantors/issuers to pool the costs and provide viable pricing to small lenders. If 

substantially all of the credit risk is sold and priced before the loans are acquired by the 

guarantor/issuer, then these other parties control the access and pricing and they will favor the larger 

lender transactions, which will be more profitable. 

Provisions for a small lender security or issuer are offered in some plans to address this problem, but 

they are inadequate. Securities resulting from small groups of loans from many lenders will be 

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measurably more expensive to assemble. They would also still lack the size to create enough loans to 

provide the large volume of securities for the economies of scale and liquidity that investors in securities 

desire, and would also reduce the price community banks received for the mortgages. 

Other aspects of the mortgage market already have headwinds for community lenders. Many 

components of the production of mortgages favor large lenders due to their market size. These larger 

lenders can demand lower prices for many of the third-party services provided to lenders, and overall, 

they have the advantage of economies of scale over smaller lenders. These conditions make it all the 

more important that the government elements of the mortgage provide a level playing field and not 

contribute to the squeezing out of community bank mortgage lending. 

VI. Today's Housing Finance System is Rooted in a Legacy of Discrimination and Exclusion 

In an address to Howard University titled "To Fulfill These Rights," President lyndon B. Johnson offered 

the following remarks on June 4, 1965: 

You do not wipe away the scars of centuries by saying: Now you are free to go where you want, 

and do as you desire, and choose the leaders as you please. 

You do not take a person who, for years, has been hobbled by chains and liberate him, bring him 

up to the starting line of a race and then say, "you are free to compete with others," and still 

justly believe that you have been completely fair. 

Thus is it not enough just to open the gates of opportunity. All our citizens must have the ability 

to walk through those gates.41 

Regrettably, President Johnson's recommendation did not occur within the nation's housing finance 

system. Race matters in mortgage lending. Federal housing policies created in the twentieth century in 

response to the Great Depression explicitly discriminated against families of color and denied them 

access to federally insured mortgage programs. These federal programs helped white families, mostly 

former immigrant families with European backgrounds, enter homeownership and build a solid 

foundation to help establish the American middle class. These federal policies granted whites the ability 

to build wealth through homeownership while denying equal opportunities for families of color to build 

similar home equity over the same period. As a result, whites built an economic advantage over families 

of color that has been passed on to future generations through intergenerational wealth 

transfers. According to a report by Demos, if homeownership rates were the same for whites and 

people of color we would see a decrease in the racial wealth gap by 31 percent for African-Americans 

and 28 percent for latinos.42 The current mortgage market was built on discriminatory federal housing 

policies and has yet to offer an equitable solution forward. 

A. Homeowners hip is Critical to Reducing the Persistent and Growing Racial Wealth Gap 

41 Lyndon B. Johnson: Commencement Address at Howard University: 'To Fulfill These Rights.' Accessed October 

23, 2017. http://www.presidency.ucsb.edu/ws/?pid;27021. 42 Tanvi Misra, Why America's Racial Wealth Gap is Really a Homeownership Gap, Demos, March 12, 

2015, available at http://www.demos.org/news/why-americas-racial-wealth-gap-really-homeownership-gap. 

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Homeownership is the foundation of the American Dream and is still the primary way that most middleclass families build wealth and achieve economic stability. Wide access to credit is critical for building 

family wealth, closing the racial wealth gap, and for sustaining the housing market overall-which in 

turn, contributes significantly to our overall economy. Today, the opportunity to purchase, maintain and 

refinance a home has not reached significant portions of low-to-moderate income families and people 

of color. As a result, these families lag far behind wealthier and white communities that received a head 

start due to historic lending discrimination supported by our federal government's mortgage policies. 

These well-documented policies began in 1933 with the underwriting guidelines of the Home Owners 

loan Corporation (HOLC) and allowed red lining of African-American and other communities of color, 

denying them access to mainstream banking services.43 Examples of the impact of this inequity include 

the reality that only 2% of FHA insured mortgage loans went to homebuyers of color during the first 35 

years of the program due to redlining.44 Further, the administration of the Gl Bill loan programs enacted 

by Congress in 1944 continued this discrimination.45 In the state of Mississippi alone, just 2 out of 3,229 

VA insured mortgages went to African-Americans servicemembers seeking to finance a home or 

business in the first three years of the program.46 

Likewise, the lasting impacts of the Great Recession have eroded the modest increase in 

homeownership rates that African-American and Latino families enjoyed since the passage of the Fair 

Housing Act in 1968. Evidence from data provided by the Home Mortgage Disclosure Act suggest that 

communities of color continue to be underserved by the conventional mortgage market and are more 

likely than white borrowers to receive FHA loans.47 At the same time, while FHA remains an important 

part of the mortgage market, lending backed by Fannie Mae and Freddie Mac is also a critical part of the 

housing finance system in low-wealth communities, rural communities and communities of color. 

The Great Recession exacerbated inequality in wealth distributions. According to the Pew Research 

Center, in 2012 whites had 13 times the wealth of African-Americans and 10 times the wealth of 

43 For a more robust discussion of how federal housing policies benefitted whites while disadvantaging AfricanAmericans and other people of color, see Ta-Nehisi Coates, The Case for Reparations, The Atlantic, June 

2014, available at http://www.theatlantic.com/features/archive/2014/05/the-case-for-reparations/361631/; Bob 

Herbert, Against All Odds: The Fight for the Black Middle Class, Bob Herbert and Public Square Media, Inc 

(2016), available at http://www.pbs.org/wnet/chasing-the·dream/films/against-all-odds/; 

James Carr and Nandinee Kutty, Segregation: The Rise Costs for America, Routledge (2008); Ira Katznelson, When 

Affirmative Action Was White: An Untold History of Racial Inequality in Twentieth-Century America, W. W. Norton 

& Company (2005); Thomas M. Shapiro, The Hidden Cost of Being African American: How Wealth Perpetuates 

Inequality, Oxford University Press (2004); Melvin L. Oliver and Thomas M. Shapiro, Black Wealth/White Wealth: A 

New Perspective on Racial Inequality, Routledge (1997). 44 Dedrick Asante-Muhammad, et. al, The Road to Zero Wealth: How the Racial Wealth Divide is Hallowing Out 

America's Middle Class; p. 15, September 2017, available 

at https://prosperitynow.org/files/PDFs/road to zero wealth.pdf. 

•s ld at. 16. 

46/d. 

47 Center for Responsible Lending, New HMDA Data Show Despite Growing Market, African-Americans and Latinos 

Remain Underserved (September 2017) available at http://www.responsiblelending.org/researchpublication/new-hmda-data-show-despite-growing-market-african-americans-and-latinos-remain. 

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Hispanics.48 Specifically, whites had a median wealth of $141,900 compared to $13,700 and $11,000 for 

non-Hispanic whites and African-Americans respectively.49 Also, the St. Louis Federal Reserve reports 

that one in nine whites have less than $1,000 in wealth compared to one in four for Latinos and one in 

three for African-Americans. 5° Home equity plays a great role in determining a families' wealth and is 

the furthermost contributor to the racial wealth gap between whites and people of color. 51 

Unfortunately, the decline in homeownership that followed the Great Recession wiped out thirty years 

of homeownership gains among African-Americans and substantially reduced the homeownership rate 

among Hispanics (Figure 6). Between 1970 and 2000, African-American homeownership rate increased 

5.5% and the Hispanic homeownership rate increased 2.9%. Since 2000, the homeownership rate 

decreased 6.1% among African-Americans and 1.8% among Hispanics. 52 

Figure 6. All gains in African-American homeownership since the Fair Housing Act have been erased 

since 2000 

African-American Hof!ite Hispanic Other race 

111970·2000 

Source: Urban Institute. Other race includes Asian Americans, Pacific Islanders, American Indians and Alaska Natives, people 

who identify as "other," and {starting 2000) people who chose more than one racial identity. Hispanics can be of any race; all 

other categories are non-Hispanic. 

48 Rakesh Kochhar and Richard Fry, Wealth inequality has widened along racial, ethnic lines since end of Great 

Recession, Pew Research Center, December 12, 2014, available at http://www.pewresearch.org/facttank/2014/12/12/racial-wealth-gaps-great-recession/. 

491d. 

50 Ray Beshara and William Emmons, Stark Disparities in Wealth Are Key in Discussions on Race in the United 

States, Washington Post, December 30, 2014, available at https://www.washingtonpost.com/opinions/policiesthat-can-bootstrap-the-poor-out-of-the-wealth-gap/2014/12/30/3bf972a6-8f87-lle4-a412-

4b735edc7175 story.html?utm term;.bfc010a14313. 51 See Shapiro et al., The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide, 

Institute on Assets and Social Policy, (February 2013). 52 Goodman, Laurie, Jun Zhu, and Rolf Pendall, Are Gains in Black Homeownership History? Urban Institute, 

February 14, 2017. https:/ /www.urban.org/urban-wi re/are-gains-black -homeownershi p-history. 

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B. Evidence From 2016 HMDA Data Suggests that the Current Housing Finance System is 

Underserving Important Market Segments 

As the housing bubble burst between 2008 and 2012, access to conventional loans decreased 

dramatically for low- and moderate-income borrowers and borrowers of color. At the same time, FHA 

stepped in to maintain access to mortgage credit for many underserved homebuyers, as well as ensure 

toxic subprime loans could be refinanced into more sustainable FHA loans (Figure 7).53 FHA's loan 

volume grew quickly following the financial crisis, and this growth helped prevent more foreclosures and 

even steeper declines in home prices. 54 According to estimates from Moody's Analytics, home prices 

would have fallen another 25% nationally if FHA had not stepped in. 55 While FHA played a crucial 

countercyclical role following the crisis and preserved access to credit for underserved borrowers, the 

conventional market has tightened credit standards and shut out over 6 million creditworthy borrowers 

between 2009 and 2015.56 

Figure 7: Conventional and FHA purchase loans by year, 2004-2016 

Source: CRL calculations of 2004-2016 HMDA purchase loan data 

During the recession, as credit standards tightened in the conventional market, the FHA took on a much 

broader role than it had previously. This was a necessary countercyclical influence in the fallout from the 

era of subprime mortgages, but it marked changes within both markets. While FHA has historically 

provided access to credit to lower-income borrowers and first-time homebuyers, it has emerged and 

remained the mortgage credit source for over 40% of the low-income home purchase market (Figure 8). 

53 Jared Bernstein, The FHA's Countercyclical Contribution, N.Y. Times, Dec. 16, 2013, 

https://economix.blogs.nytimes. com/2013/12/16/the-f-h-a-s-countercyclical-contribution/. 54 John Griffith, The Federal Housing Administration Saved the Housing Market, Center for American Progress (Oct. 

11, 2012), available at https://www.americanprogress.org/issues/economy/reports/2012/10/11/40824/thefederal-housingadministration-saved-the-housing-market/. 

55 Mark Zandi and Cris deRitis, What lfThere Were No FHA, Moody's Analytics (Oct. 2010), available at https:// 

www.economy.com/mark-zandi/documents/2010-10-01-What-lf-There-Were-No-FHA.pdf. 

56 Laurie Goodman, Jun Zhu, and Bing Bai, Overly Tight Credit Killed 1.1 Million Mortgages in 2015, Urban Institute 

(Nov. 21, 2016), available at https://www.urban.org/urban-wire/overly-tight-credit-killed-11-million-mortgages2015 (stating that lenders would have issued 6.3 million additional mortgages between 2009 and 2015 if lending 

standards had been more reasonable). 

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Figure 8: FHA share of all purchase loans made by income category, by year, 2004-2016 

Source: CRL calculations of 2004-2016 HMDA purchase loan data 

Since the Great Recession, the share of conventional loans made to borrowers of color has declined 

precipitously and failed to recover at the same rate it has for white borrowers. In 2006, Black, Asian, 

Latino, and white borrowers each received more than 85% of their purchase loans from the 

conventional market. By 2009, conventional lending market share among Black borrowers had declined 

dramatically, with Black borrowers receiving just 18.2% of their loans from the conventional marketless than half the rate of conventional lending to white borrowers. While the 2006 conventional market 

included some of the most problematic subprime loans, 57 this cannot explain the post-recession 

difference in conventional lending between white borrowers and borrowers of color (Figure 9). 

57 Marshall Lux and Robert Greene, What's Behind the Non-Bank Mortgage Boom?, Harvard Kennedy School 

Mossavar Rahmani Center for Business and Government (June 2015), at 2, available at 

https:/ /www.hks.harvard.edu/sites/default/ 

files/centers/mrcbg/working.papers/42_Nonbank_Boom_Lux_Greene.pdf. 

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Figure 9: Conventional share of all purchase loans by race/ethnicity category, by year, 2004-2016 

Source: CRL calculations of 2004-2016 HMDA purchase loan data 

As conventional lending to borrowers of color steeply declined between 2006 and 2009, the FHA share 

of lending to borrowers of color increased and remains high. While the share of FHA purchase lending 

made to Black and Latino borrowers has exceeded the share of FHA purchase lending to white 

borrowers since 2004, the FHA share to borrowers of color also grew at a faster rate during the 

recession and has remained persistently high.58 In 2016, Black and Latino borrowers received nearly half 

their purchase mortgage loans from FHA, while white borrowers received less than a quarter of theirs 

and Asian borrowers received under 14% (Figure 10). 

58 The only exception was the 2005...()6 FHA, which made a higher percentage of white borrowers' loans than those 

of Latino borrowers. 

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Figure 10: FHA share of all purchase loans by race/ethnicity category, by year, 2004-2016 

Source: CRL calculations of 2004-2016 HMDA purchase loan data 

As historically FHA-reliant low- and moderate-income borrowers continue to rely on FHA lending for 

access to purchase mortgage credit, there are similar FHA lending patterns among borrowers of color. In 

2006, Black, Asian, Latino, and white borrowers each received more than 85% of their purchase loans 

from the conventional market. By 2009, conventional lending market share among Black borrowers had 

declined dramatically, with Black borrowers receiving just 18.2% of their loans from the conventional 

market-less than half the rate of conventional lending to white borrowers. 

While the overall market share for these programs continues to decline as the market improves, the rate 

at which people of color rely on these programs has not diminished. Government-insured loans, such as 

FHA, have clearly been an important source of credit post-crisis. FHA mortgages are a primary source of 

credit for African-Americans and Latino home purchasers. However, compared to conventional loans 

these loans can be costlier over the life of the Joan. Further, increasingly, lenders have also been less 

willing to make these loans. 

As banks have exited the FHA market or reduced their FHA lending, the market share of the 10 largest 

lenders has declined, and nonbank lenders have become the dominant market segment. 59 In 2004, the 

top 10 FHA lenders held a 34% share of the total FHA home purchase market, and by 2016 the market 

share of the largest lenders declined to just over 18%. Of the 10 largest FHA home purchase lenders in 

59 Michele Lerner, The Mortgage Market is Now Dominated by Non-Bank lenders, Washington Post, Feb. 23, 2017, 

https://www.washingtonpost.comjrealestate/the-mortgage-market-is-now-dominated-bynonbanklenders/2017 /02/22/9c6bf5fc-dl f5-lle6-a 783-cd3fa950f2fd_story.html?utm_ term=.577814ac35f5. 

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2004, no lender remained in the top 10 by 2016 (Figure 11). At the same time, the share of nondepositories increased dramatically.60 

Figure 11. FHA purchase lending of the top 10 largest FHA purchase lenders in 2004 and 2016, before 

and after the financial crisis 

Source: CRL calculations of 2004-2016 HMDA purchase loan data 

While FHA cannot be the major source of mortgage credit for borrowers of color, these programs are 

critical and deserve ongoing federal support. The FHA program must be adequately funded and 

modernized to ensure its viability. However, these data also underscore the urgent need for federal 

regulators to better enforce fair lending requirements to ensure a more robust conventional mortgage 

market that serves borrowers of color. 

Market indicators highlight how tight lending standards have become, especially for conventional 

mortgages. These trends help explain the remarkably low levels of conventional loans that made to 

African-American and Latino borrowers in 2016. As noted, last year only 3.1% of conventional loans 

were made to African-American borrowers, and only 5.8% were made to Hispanic white borrowers. By 

contrast, non-Hispanic white borrowers received 70.2% of the conventional loans. 

6

° For a further discussion of the market participants in the FHA market, see Stegman, Melissa, and Peter Smith. 

Repairing a Two-Tiered System: The Crucial but Complex Role of FHA. Center for Responsible Lending (May 2018). 

https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl-repairing-two-tieredsystem-fha-may2018.pdf. 

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In 2016 the average credit score for all new loan originations fell from its high of 750 in 2013 to stand at 

732 in December of 2016. However, the average score remained about 33 pts above the average score a 

decade before.61 At the same time, market-level credit availability indices continue to show that lenders 

have a very low tolerance for taking reasonable risk for new loans.62 Recent vintages of new mortgages 

(loans originated from 2011-2015) have had near zero rates of default.63 

These tight credit standards are preventing homeownership opportunity for credit-worthy borrowers of 

color and low- to moderate-income borrowers. Recent data released by Fannie Mae show that loans to 

low-income borrowers originated from 2010-2015 had a default rate of just 0.3 percent, approximately 

equal to that of loans to high-income borrowers originated from 2002-2004.64 There is ample 

opportunity in the mortgage market to expand lending to borrowers while still offering responsible 

loans that borrowers can successfully repay. 

VII. Housing Finance Reform Must Address Prior Discrimination in the System 

Discrimination within the nation's housing finance system is well documented and a significant 

contributor to the current racial wealth gap that plagues our nation today. This discrimination harms 

the market by curtailing credit-worthy borrowers from accessing loans in a marketplace that is safer; has 

historically low interest rates; and relatively lower housing costs than the times leading up to the Great 

Recession. Action is needed now to reduce unnecessary restrictions on mortgage credit access such as 

excessive risk-based pricing. Thus, the FHFA's loan level price adjustments (LLPAs) must be eliminated. 

A. The Future of the Market Depends on Mortgage Providers Meeting Their Duty-toServe Obligations 

Existing homeowners, especially older Americans, will need buyers when they want to sell, and new 

families need access to affordable mortgage credit to buy their homes. In the future, homebuyers will be 

more racially and ethnically diverse than they have been in the past. Harvard's Joint Center for Housing 

Studies found that non-whites accounted for 60 percent of household growth from 1995-2015 and 

predicted that half of millennia! households by 2035 will be non-white.65 The mortgage market will need 

61 Laurie Goodman et.al., Housing Finance at a Glance: A Monthly Chartbook (March 2017), available at 

https:Uwww.urban.org/research/publication/housing-finance-glance-monthly-chartbook-march2017/view/full report. 62 1d.; Mortgage Bankers Association, Mortgage Credit Availability Index (2017), available at 

https:/ /www. mba .org/newsresearch-and-resources/research-and-economics/single-family-research/mortgagecredit-availability-index. 

63 Laurie Goodman, Squeaky Clean Loans Lead to Near-Zero Borrower Defaults- And That is Not a Good Thing, 

Urban Institute (Aug. 31, 2016), available at http://www.urban.org/urban-wire/squeaky-clean-loans-lead-nearzero-borrower-defaults-and-not-good-thing. 

64 Fannie Mae 2016 Annual Housing Activities Report and Annual Mortgage Report, chart at page 19, available at 

https://www. fhfa .gov /Poli cyProgramsResea rch/Programs/AffordableHousing/Docu ments/Fa n M Goals/2017/Fa n 

nie-Mae-2016-AHAR-AMR-FINAL.pdf. 

65 Joint Center for Housing Studies of Harvard University, State of the Nation's Housing 2017, June 2017, available 

at http:Uwww.jchs.harvard.edu/research/state nations housing. 

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to find ways to serve borrowers of color and lower-wealth borrowers to sustain a robust market in the 

coming years. 

Responsible and affordable refinance loans are also crucial to allowing borrowers to preserve 

homeownership. Recent history shows this to be the case, as toxic refinance loans helped spur the housing 

crisis. In fact, 90 percent of borrowers who took out subprime loans from 1998 to 2006 were already 

homeowners.66 Yet, discrepancies persist in access to refinance mortgages as well as purchase mortgages. 

In fact, while very modest gains were made in 2016 in the access of borrowers of color to purchase 

mortgages, these gains did not carry over for African-American and Hispanic white borrowers, relative to 

the growing refinance market. In addition to making loans broadly available for home purchase, 

responsible and affordable refinance mortgages need to be broadly available to support sustained 

homeownership. 

B. The Federal Housing Finance Agency Must Eliminate Loan Level Price Adjustments 

Following the mortgage crisis of 2008, which was found to be caused by Wall Street's appetite for 

excessive profits, market overcorrections emerged that led to excessive pricing of risk in the system. 

FHFA instituted LLPAs to offset risk from borrowers with lower credit profiles and smaller down 

payments, despite compelling evidence that when provided with safe and affordable mortgage loans, 

these borrowers perform well. Further, these increased fees disproportionately impact potential 

homebuyers of color and low-to-moderate income families whose ability to save for down payments 

and credit profiles have been negatively impacted by discrimination and lack of opportunity in the 

mortgage market that has been previously been discussed.67 

Moreover, families of color and LMI communities have been deeply harmed by irresponsible lending in 

the last decade. Predatory mortgage lending dominated formerly redlined communities and, the brunt 

of the impact was experienced in communities of color across the nation. The Center for Responsible 

lending's research on the effects of subprime lending found that a disproportionate number of 

foreclosures occurred in communities of color- even when these borrowers qualified for less 

expensive and sustainable mortgage loans.68 Core logic reports that 7.8 million foreclosures have been 

completed.69 The post foreclosure spillover costs within communities of color totaled $1 trillion 

66 Maura Reynolds, Refinancing spurred subprime crisis, Los-Angeles Times (July 5, 2008), available at 

http:Uarticles.latimes.com/2008/jul/05/business/fi-refi5; Amir Khandani, Andrew Lo, and Robert Merton, Systemic 

Risk and the Refinancing Ratchet Effect, National Bureau of Economic Research Working Paper No. 15362 (Sept. 

2009), available at http:Uwww.nber.org/papers/w15362 67For a more detail discussion of how discrimination contributes to lower credit scores for borrowers of color see, 

Racial Justice Project of the National Consumer Law Center, Past Imperfect: How Credit Scores and Other Analytics 

"Bake In" and Perpetuate Past Discrimination, May 2016 available at 

https:/ /www.nclc.org/images/pdf/credit_discrimination/Past_lmperfect050616.pdf. 68 Debbie Gruenstein Bocian, Wei Li, and Keith S. Ernst, Foreclosures by Race and Ethnicity: The Demographics of a 

Crisis, June 18, 2010, available at http://www.responsiblelending.org/mortgage-lending/reseorchonalysis/forec/osures-by-race-ond-ethnicity.pdf 

69 http:ljwww.corelogic.com/about-us/news/corelogic-issues-us-residential-foreclosure-crisis-decade-inreview.aspx. 

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dollars.70 These losses were not to homeowners who actually suffered a foreclosure but to their 

neighbors who lived in close proximity to homes that had been foreclosed upon. 

Today, rather than remediate the damage done by abusive subprime lending and its disproportionate 

impact on communities of color, lenders and FHFA responded by closing off lending options for these 

communities. The Urban Institute reports that from 2009-2014 there were 5.2 million mortgage loans 

missing from the secondary market system due to unnecessarily overly tight credit restrictions put in 

place by the GSEs. 71 

C. Maintain Flexibility in Determining Down Payments and Creating Initiatives to Fuel 

lending 

Removing regulator flexibility in establishing down payments in housing finance reform and mandating 

down payments would unnecessarily restrict access to credit for lower-wealth families. As an initial 

matter, these mandates overlook the fact that borrowers must also save for closing costs- roughly 3 

percent of the loan amount- on top of any down payment required. And, the mandates would increase 

the number of years that borrowers would need to save for a down payment. An analysis by the Center 

for Responsible lending demonstrates that it would take the typical family 17 years to save for a 10 

percent down payment and 11 years to save for a 5 percent down payment.72 This time frame is greatly 

expanded for African-American and Latino borrowers. Considering that many of these households have 

limited wealth, down payment mandates could significantly reduce the number of future first-time 

homebuyers.73 This reduced pool of buyers could lead to lower home prices, more difficulty selling an 

existing home, and even some existing borrowers defaulting on their mortgage. 

70Debbie Gruenstein Bocian, Peter Smith and Wei li, Collateral Damage: The Spillover Costs of Foreclosures, 

October 24, 2012, available at http://www.responsiblelending.org/sites/default/files/nodes/files/researchpublication/collateral-damage.pdf. 

71 Bing Bai, Laurie Goodman, Jun Zhu, Tight credit standards prevented 5.2 million mortgages between 2009 and 

2014, Urban Institute, January 28, 2016, available at https://www.urban.org/urban-wire/tight-credit-standardsprevented-52-million-mortgages-between-2009-and-2014. 

72 CRL years-to-save calculations are based on purchase of a 2011 median priced house ($173,600) by borrower 

with median income in 2011 ($50,502). Assumes an annual savings rate dedicated for down payment of 2.6%. 

Median income for 2011 is from American Community Survey. Savings rate assumption is derived from the Bureau 

of Economic Analysis's (the 1-year average of the BEA's personal savings rate from July 2012-July 2013 is 4.9 

percent; the 20-year average was 5.0 percent). However, the BEA's the BEA's rate is based on take home, not 

gross, income, and therefore, a 5.0 personal savings rate translates to a 3.6 percent rate for gross income, 

assuming a combined federal, state and local tax rate of 28 percent (see effective tax burden for the middle 

http://www.nytimes.com/2012/11/30/us/most-americans-facelower-tax-burden-than-in-the80s.html?pagewanted=aii&J=2&). Assumes that, of this 3.6 percent, 1 percentage point must be used by families 

for retirement, college, and emergencies, leaving 2.6% available for homeownership savings. 73 See The State of the Nation's Housing, Joint Center for Housing Studies, at 3 (2013) (stating that "[m]inoritiesand particularly younger adults-will also contribute significantly to household growth in 2013-23, accounting for 

seven out of ten net new households. An important implication of this trend is that minorities will make up an 

ever-larger share of potential first-time homebuyers. But these households have relatively few resources to draw 

on to make downpayments. For example, among renters aged 25-34 in 2010, the median net wealth was only 

$1,400 for blacks and $4,400 for Hispanics, compared with $6,500 for whites. Even higher-income minority renters 

have relatively little net wealth, with both blacks and Hispanics in the top income quartile having less than half the 

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Not only is there a huge cost to legislatively mandating down payments, but there is also a limited 

benefit in terms of reducing default rates. When looking at loans that already meet the product 

requirements for a Qualified Mortgage, a UNC Center for Community Capital and CRL study shows that 

these requirements cut the overall default rate by almost half compared with loans that did not.74 

Layering on a down payment requirement on top of these protections produces a marginal benefit." 

This makes sense, because risky product features and poor lending practices caused the crisis by pushing 

borrowers into default, and the Dodd-Frank Act reforms address these abuses. The Qualified Mortgage 

and Ability to Repay reforms restrict risky features such as high fees, interest-only payments, 

prepayment penalties, yield-spread premiums paid to mortgage brokers, lack of escrows for taxes and 

insurance for higher priced mortgage loans, teaser rates that spiked to unaffordable levels even with 

constant interest rates and outlawing no-doc loans. These reforms address the unaffordable and abusive 

loan products that caused the crisis.76 

D. The U.S. Commission on Civil Rights Should Convene Hearings to Investigate the 

Impact of Mortgage Discrimination Within the Nation's Housing Finance System on 

Families of Color 

Throughout these remarks, the federal government's role in furthering housing discrimination within 

the mortgage market has been described. Now, is the appropriate time to fully investigate the impact of 

those discriminatory practices on the ability of families of color to build wealth through homeownership 

in an equitable manner with whites. According to recent research by Prosperity Now, it will take 228 

years for the average African-American family to reach the level of wealth white families own today." 

For the average Latino family, matching the wealth of white families will take 84 years. 78 The U.S. 

Commission on Civil Rights should convene hearings to probe and complete an official record of this 

discrimination similar to work done by the Financial Crisis Inquiry Commission following the Housing 

Crash of 2008. Once an official record is completed, Congress should request that the Congressional 

average net wealth of whites. Proposed limits on low-down payment mortgages would thus pose a substantial 

obstacle for many of tomorrow's potential homebuyers. "). 74 Roberto G. Quercia, Lei Ding, Carolina Reid, Balancing Risk and Access: Underwriting Standards for Qualified 

Residential Mortgages, Center for Responsible Lending and UNC Center for Community Capital (Revised March 5, 

2012) (stating that "[l]oans consistent with the QM product features-which include both prime and subprime 

loans-have fared extremely well, with just 5.8 percent of loans either 90+ days delinquent, in the foreclosure 

process, or foreclosed upon as of February 2011. In comparison, the default rate for prime conventional loans in 

our sample was 7.7 percent, nearly two percentage points higher ... [T]he rates for the subprime and Alt-A market 

segments [were]32.3 and 22.3 percent, respectively.") (available at 

http://www .responsiblelendi ng.org/mortgage-lending/researchanalysis/U nderwriting-Standards-for-QualifiedResidentiai-Mortgages.pdf). 

75 1d. at 18. 76 See Debbie Gruenstein Bocian, Wei U, Carolina Reid, and Roberto G. Quercia, Lost Ground, 2011: Disparities in 

Mortgage Lending and Foreclosures, Center for Responsible Lending and UNC Center for Community Capital 

(November 2011), available at http://www.responsiblelending.org/mortgagelending/research-analysis/LostGround-2011.pdf). 

77 Dedrick Asante-Muhammad, et.al., The Road to Zero Wealth: How the Racial Wealth Divide is Hollowing Out 

America's Middle Class, Prosperity Now, p. 5, September 2017, available at 

https://prosperitynow.org/files/PDFs/road to zero wealth.pdf. 78 1d. 

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Budget Office issue a report on the economic impact of the discrimination and offer legislative action 

that directly addresses this discrimination. 

VIII. Conclusion 

This year, our nation celebrates SO years of the passage of the federal Fair Housing Act of 1968. Many of 

the promises of that important legislation have yet to be realized, especially within the nation's housing 

finance system. Congress has a unique opportunity to reform the secondary mortgage market in a more 

equitable manner. Such action will allow far more American citizens the opportunity to 

thrive and keep smaller lenders on equal footing with large national banks. Congress must also act with 

extreme care and build upon existing reforms that have stabilized the marketplace and made it safe for 

consumers and lenders alike. 

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~ 

HPC 

HOUSING POLICY 

COUNCIL 

Testimony of 

Edward J. DeMarco 

President of the Housing Policy Council 

House Financial Services Committee 

Hearing on: 

"A Failure to Act: How a Decade without GSE Reform Has Once Again Put Taxpayers at Risk" 

Thursday, September 6, 2018 
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Chairman Hensarling, Ranking Member Waters, and Members of the Committee: 

It is an honor to be here. My name is Ed DeMarco. I am the President of the Housing Policy 

Council, a trade association comprised of30 of the nation's leading firms in housing finance. 

Ten years ago, I was the Senior Deputy Director and Chief Operating Officer at the Federal 

Housing Finance Agency, an agency I would later lead as Acting Director for 4.5 years. 

Today's ten-year anniversary of the failures and conservatorships of Fannie Mae and Freddie 

Mac is not a cause for celebration. What happened ten years ago to Fannie Mae and Freddie 

Mac had been forecast by some but denied as a possibility by many. Yet, Fannie Mae and 

Freddie Mac did fail, and taxpayers were forced to take on extraordinary financial risks bailing 

them out Moreover, the fundamental challenge posed by their failure remains today - how best 

should the United States Congress replace this inherently flawed structure with a far more 

resilient structure that puts mortgage credit risk on the private sector, not taxpayers. 

My remarks cover four broad topics: 

1. What happened ten years ago 

2. What has improved and what has gotten worse 

3. Why Congress still must act and what can Congress build upon 

4. What could be accomplished administratively to assist Congress and markets 

September 2008 - A Look Back 

On July 30, 2008, Congress passed the Housing and Economic Recovery Act (HERA) that 

established the Federal Housing Finance Agency (FHF A) to replace the Office of Federal 

Housing Enterprise Oversight (OFHEO). Less than six weeks later, on September 6, 2008, 

FHF A used its new authorities in conjunction with the U.S. Department of the Treasury to place 

the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation 

into conservatorships. While these companies are more commonly known by their nicknames, 

Fannie Mae and Freddie Mac, I want to emphasize their formal names for the first word in those 

names- FederaL Where did that come from? It came from Congress. Congress created these 

companies, named them, wrote their charter, gave them their purpose, and endowed them with 

numerous benefits and privileges unavailable to other private firms. 

This unique legal structure gave rise to the companies being referred to as GovernmentSponsored Enterprises, or GSEs. Despite their private corporate status, with their shares trading 

on the New York Stock Exchange, Fannie Mae and Freddie Mac often were perceived as 

extensions of the U.S. government and they exercised substantial influence over policymakers. 

This gave rise to the frequently referenced, but officially denied, implicit guarantee of Fannie 

Mae and Freddie Mac securities. When the crisis hit, Congress authorized Treasury to extend 

substantial financial assistance to the companies. While at one level this was a bailout of the 

companies' debt and mortgage-backed securities holders (but not shareholders), at another level 

it was the long-predicted realization of the implicit government backing. 

By September 2008, both the systemic risk and the conflicts of interest embedded in the GSE 

model - a public mission yet private shareholder interests to satisfy - could no longer be ignored. 

The markets spoke. Despite the quasi-governmental structure, market participants questioned 

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the firms' solvency; the GSEs were unable to raise new equity and the debt markets were closing 

off to them, giving rise to significant liquidity concems. 1 

In creating FHF A, Congress provided new regulatory authority to put these two companies into 

conservatorship or into receivership and broad authority with respect to managing the 

conservatorships. But it did NOT give FHF A the authority to amend or extinguish these two 

charters, nor did it allow additional charters to be created. Even in the event of a receivership, 

Congress required that FHFA set up a bridge institution and re-establish the failed company 

under the same name with the same charter, rights, privileges and so on. In short, Congress 

created these two companies and Congress reserved for itself the authority to change them. 

That bit of history helps explain the closing statement made by Treasury Secretary Paulson on 

September 7, 2008, in announcing the conservatorships along with my then boss, FHF A Director 

Lockhart. These words demand our attention ten years later: 

Through the four actions we have taken today, FHFA and Treasury have acted on the 

responsibilities we have to protect the stability of the financial markets, including the mortgage 

market, and to protect the taxpayer to the maximum extent possible. 

And let me make clear what today's actions mean for Americans and their families. Fannie Mae 

and Freddie Mac are so large and so interwoven in our financial system that a failure of 

either of them would cause great turmoil in our financial markets here at home and around 

the globe. This turmoil would directly and negatively impact household wealth: from family 

budgets, to home values, to savings for college and retirement. A failure would affect the ability 

of Americans to get home loans, auto loans and other consumer credit and business finance. And 

a failure would be harmful to economic growth and job creation. That is why we have taken these 

actions today. 

While we expect these four steps to provide greater stability and certainty to market participants 

and provide long-term clarity to investors in GSE debt and MBS securities, our collective work is 

not complete. At the end of next year, the Treasury temporary authorities will expire, the GSE 

portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to 

compensate taxpayers for the on-going support provided by the Preferred Stock Purchase 

Agreements. Together, these factors should give momentum and urgency to the reform 

cause. Policymakers must view this next period as a "time out" where we have stabilized the 

GSEs while we decide their future role and structure. 

Because the GSEs are Congressionally-chartered, only Congress can address the inherent 

conflict of attempting to serve both shareholders and a public mission. The new Congress 

and the next Administration must decide what role government in general, and these 

entities in particular, should play in the housing market. There is a consensus today that 

these enterprises pose a systemic risk and they cannot continue in their current form. 

Government support needs to be either explicit or non-existent, and structured to resolve the 

conflict between public and private purposes. And policymakers must address the issue of 

systemic risk. I recognize that there are strong differences of opinion over the role of government 

in supporting housing, but under any course policymakers choose, there are ways to 

structure these entities in order to address market stability in the transition and limit 

1 See Statement of FHF A Director James Lockhart before the House Financial Services Committee, September 25, 

2008. 

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systemic risk and conflict of purposes for the long-term. We will make a grave error if we 

don't use this time out to permanently address the structural issues presented by the GSEs.2 

We are here today, ten years later, to consider how Congress can respond to this call for action. 

While I will turn now to the advances that have been made in these ten years, and the 

opportunities to make further advances administratively, make no mistake: the job is not done 

until Congress acts. And the status quo is not a long-term answer. 

We've Taken Steps Forward ... Yet Systemic Risk is Growing, Not Fading 

Positive Developments Building for the Future 

During my tenure as FHF A's Acting Director and as Conservator of Fannie Mae and Freddie 

Mac, I submitted numerous letters and reports to this Committee. I also testified before the 

Committee on several occasions. I sometimes describe the course of the conservatorships as 

chapters in a book, with themes, priorities, and goals evolving over time and adapting to 

evolving circumstances.3 

The early chapters of the conservatorship saga focused on establishing and maintaining market 

stability and liquidity. At the time, this was no small feat and there were many anxious moments 

awaiting the response of market participants here and abroad to the conservatorships. We also 

were deeply concerned with the response of home buyers, lenders, and Fannie Mae and Freddie 

Mac employees themselves, who were needed to maintain the ongoing operations of the two 

firms. Notwithstanding this unprecedented government action, there was no guarantee of 

success. Fortunately, our efforts were effective- liquidity was maintained in the secondary 

mortgage market for Fannie Mae and Freddie Mac mortgage-backed securities, new loans 

continued to be securitized, and confidence gradually returned. 

The next chapters were the most challenging. As the recession worsened, house prices continued 

to fall, and mortgage delinquencies soared, our priority was assisting troubled homeowners avoid 

foreclosure while minimizing taxpayer losses. The FHF A team, working with the GSEs, 

continually tested, measured, and evaluated our efforts, working collaboratively with a wide 

range of government and private entities in search of tools that worked. The quality and results 

of our collective efforts improved with time and experience. FHF A recently reported that more 

than 4 million total foreclosure prevention actions and 3.5 million HARP refinances have been 

completed on GSE loans over these ten years.4 

2 "Statement by Treasury Secretary Henry Paulson on Treasury and Federal Housing Finance Agency action to 

protect financial markets and taxpayers," September 7, 2008. https://www.treasury.gov/press-center/pressreleases/Pages/hp 1129 .aspx (emphasis added). 3 "FHF A Sends Congress Strategic Plan for Fannie Mae and Freddie Mac Conservatorships," News Release dated 

February 21, 2012 with an accompanying letter to Congress and report titled "A Strategic Plan for Enterprise 

Conservatorships: The Next Chapter in a Story that Needs an Ending." 

lillJl_s:l/www.fhfa.gov/Media/PublicAffairsiPages/FHFA-Sends-Congress-Strategic-Pian-for-Fannie-Mae-andfD'ddie:Mac-~onset:YlJ!Qrships&m:lli 

4 For industry data on loan modifications encompassing more than the GSEs, see, for example, by 

HOPENOW.llitr~~~~~illlliillillwn~~~~~ll&~Uft~~~illll~ 

Page 3 of 18 
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A new chapter in the saga of the conservatorships began in 2012 with the release of the first 

Strategic Plan for the conservatorships. 5 FHF A directed a series of actions designed to further 

limit risk to the taxpayers, prepare the companies for final resolution, and build an infrastructure 

for the housing finance system that would facilitate the return of private capital and support 

Congressional action. Some of these initiatives are well-known to this committee, others less so. 

Key initiatives included: 

• Credit Risk Transfers (CRT). The first CRT transaction was completed in 2013. Today, 

FHFA reports that more than 90 percent of standard, 30-year fixed rate mortgages 

securitized by Fannie Mae and Freddie Mac involve some form of credit risk transfer. 

This is a critically important development for the market and for taxpayers. For the 

market, CRT represents the formation of a credit market backed by private capital to hold 

mortgage credit risk. For taxpayers, CRT shifts some degree of Fannie Mae and Freddie 

Mac's mortgage credit risk to private investors, drawing private capital in to supplement 

taxpayer capital. 

• The Uniform Mortgage Data Program (UMDP). Initiated in 2010, this is the umbrella 

title for a series of data initiatives aimed at simplifying and standardizing certain data 

collection and reporting processes. Always understood to be a long-term set of initiatives 

aimed at improving data quality while lowering collection costs, improving data 

accuracy, and reducing barriers to entry, many of the individual initiatives are completed 

and operating in the marketplace today. Since data is foundational to underwriting and 

financial risk management, this program has been a significant, positive development for 

the housing finance system. 

• Underwriting Standards. In the years leading up to the conservatorships, Fannie Mae and 

Freddie Mac lowered their underwriting standards, thereby increasing their risk profile. 

Post-conservatorship, FHFA ensured this weakening was reversed although there are 

signs that standards have been weakening again. 

• Pricing (Guarantee Fees, or G-Fees). Fundamentally, Fannie Mae and Freddie Mac 

operate as financial guarantors of mortgages. By guaranteeing that investors in their 

mortgage-backed securities will not lose principal and interest, even if the underlying 

mortgage defaults, Fannie Mae and Freddie Mac assume that credit risk. Pre-crisis, the 

companies vastly underpriced this risk. Since conservatorship, and at FHFA's direction, 

they have gradually increased their g-fee pricing although the current pricing, at least in 

some segments, may be lower than what private markets backed by private capital would 

require.6 Any underpricing should be understood as a subsidy provided by taxpayers as 

well as a subsidy provided by lower risk borrowers to higher risk borrowers. 

• Common Securitization Platform (CSP). Prior to the crisis and up to today, Fannie Mae 

and Freddie Mac have operated separate, proprietary platforms for "manufacturing" 

mortgage-backed securities. Those securities have distinct rules governing when 

investors get paid, what information is disclosed to them, and how their interests are 

5 Ibid. 

6 As required by statute, FHF A produces an annual report on guarantee fees. Each year the report shows that the 

pricing of new loan acquisitions falls short of that needed to meet target returns for lower credit quality loans and for 

30-year fixed rate mortgages relative to other mortgages. See FHFA's latest annual report: "Fannie Mae and 

Freddie Mac Single-Family Guarantee Fees in 20 16," October 2017. 

https:/lwww.fl1fa.gov/ AboutUsiReportsiReportDocuments/GFeeReport 10172017 .pdf 

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protected. In 2012, FHF A determined that neither of these proprietary platforms was 

capable of supporting a future securitization market. We concluded that the most 

efficient way to invest taxpayer dollars in upgrading the outdated technology was to build 

a new, open-architecture, standardized system that could be a cornerstone for a postconservatorship secondary market. Today, the CSP remains under development, with 

only Freddie Mac using some of its features to-date. FHFA projects both GSEs utilizing 

the CSP next year, with the introduction of the uniform MBS. While the CSP has not 

developed at the pace or in the way that I and others had envisioned, it remains an 

important development upon which to build for the future. 

• Disclosures. Prior to the conservatorships, one indicator of investor reliance on implicit 

taxpayer support of Fannie Mae and Freddie Mac debt was the very weak disclosure 

regime. Fannie Mae published no loan level data on the mortgages in its MBS and 

Freddie Mac published very little. An important development since, in part aligned with 

the introduction of CRT, has been the movement to provide more loan level disclosure to 

the market. Also, as part of initiating CRTs, FHFA directed the two companies to release 

millions of historical loan level data files to assist the market in calibrating models to 

support CRT investment. This is also an important development although there is much 

unfinished business here that I will return to later in my testimony. 

The Current State of the Mortgage Market 

In conservatorship, investor confidence in Fannie Mae and Freddie Mac mortgage-backed 

securities and debt stems from the Treasury commitment, which assures them that the American 

taxpayer will make good on the companies' obligations. In other words, it is the pledge of 

capital from the U.S. taxpayer that bolsters the profitability of these companies, funding their 

extensive technology investments, expanded lines of business, personnel and facilities 

enhancements, and other growth strategies. 

A gradually recovering economy combined with taxpayer support of Fannie Mae and Freddie 

Mac, foreclosure prevention efforts, and substantial federal intervention, such as Federal Reserve 

purchases of MBS, have all contributed to the strengthening of our housing markets and liquidity 

in the housing fmance system. The Federal Housing Administration (FHA) and Veterans Affairs 

(VA) mortgage guarantee programs also have grown substantially during this time, lending 

additional support to the recovery. 

According to the FHFA purchase-only index, U.S. housing prices peaked in April2007 before 

dropping more than 20 percent over the next four years. Since then, national house prices have 

generally recovered and now surpass the 2007 peak level. 7 However, there really is not a 

national market for houses, so some communities have experienced greater or lesser fluctuations 

during this time. Moreover, the foundation upon which this house price recovery has been built 

is not as strong as it should be. 

Growing Risks to Taxpayers, Markets, and Homebuyers 

The federal government has long been a significant player in U.S. housing finance, both directly 

and indirectly. The federal government provides direct support through mortgage guarantor 

programs such as FHA and VA, numerous tax subsidies, and various laws and regulations 

7 https:l/www. fhfa.gov/AboutUs/ReportsiReportDocumentsiHP! May20 18.pdf 

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ranging from bank capital requirements to fair lending, fair housing, and consumer protection 

laws. It provides indirect support through institutions such as Fannie Mae, Freddie Mac, and the 

Federal Home Loan Banks. 

As significant as the government's involvement was ten years ago, it has grown substantially 

since. Members of the Housing Policy Council believe this evolving state of our housing finance 

system is adding risk that requires congressional attention and action. I will review four 

categories of risk. 

1. Government Program5 and Regulations 

The FHA and VA loan guarantee programs grew rapidly as the financial crisis took hold. These 

programs provided a critical source of counter-cyclical support to the market but with markets 

since stabilized, these programs remain larger than their traditional market share would predict. 

This likely reflects several factors, including but not limited to, the collapse of the subprime 

market, higher Fannie Mae and Freddie Mac guarantee-fees, growth in higher risk FHA loans, 

and the increase in eligible FHA loan size instituted during the crisis but not reset to normal 

levels. The bigger concern we have is more structural, particularly with the FHA program. 

Several factors have contributed to the reduction in participation in the FHA program by wellcapitalized lenders, including inefficient servicing rules, challenging claims processes, and 

aggressive lawsuits filed against FHA lenders under the federal False Claims Act. As a result, 

non-depository lenders and servicers have become more significant participants in the FHA 

program and larger banks less so. While banks and non-bank lenders alike should be able to 

offer FHA loans, the trend has at least three important consequences for the marketplace. First, 

it limits the financing options for potential homebuyers; in some cases, they cannot obtain a 

mortgage from the bank where they maintain checking, savings, or other credit accounts. HUD 

Secretary Carson and Treasury Secretary Mnuchin have acknowledged this problem.8 Second, 

addressing the challenges of doing business with FHA would lead to a more competitive market 

that would drive down costs for borrowers. Third, non-depositories do not have access to all the 

liquidity resources available to banks. In a credit-constrained environment, this poses liquidity 

and solvency risk to the system and especially to Ginnie Mae, something Ginnie Mae has 

wamed.9

,

10 

In addition, FHA suffers from prolonged resource constraints that have prevented investment in 

systems and technology advances with the rest of the market. This is a source of great concern 

to lenders, servicers, and FHA itself. We are encouraged by the new FHA Commissioner's focus 

8 Remarks of Dr. Ben Carson before the National Association of Home Builders Executive Board Meeting, May 23, 

2018. https://www.hud.gov/press/speeches remarks statements/Speech 052318 and "AFinancia1 System That 

Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation," U.S. Department of the Treasury 

Report to President Donald J. Trump, July 2018, page 97. https:/ihome.treasurv.gov/sitesidefault/files/2018-08! AFinanciai-System-that-Creates-Economic-Oppot1unities---Nonbank-Financials-Fintech-and-Innovation.pdf 

9"An Era of Transformation," Ginnie Mae, September, 2014. 

hltgs://w~_nni~l!il.e.~ill'.WST0.9Jn!Pocuments/ginniemae an era of transfonnation.lli!f 10 Preliminary research reported in a Federal Reserve staff working paper supports this conclusion and highlights the 

liquidity risks in the current environment. Kim, You Suk, Steven M. Laufer, Karen Pence, Richard Stanton, and 

Nancy Wallace (2018). \Liquidity Crises in the Mortgage Market," Finance and Economics Discussion Series 2018-

016. Washington: Board of Governors of the Federal Reserve System, 

https://doi.org/1 0.170 16/FEDS.20 18.016. 

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on this issue and urge the House to join the Senate in providing appropriations to fund needed 

technology upgrades. 

While a tightening of federal mortgage regulations was both an inevitable and needed response 

to the financial crisis, it is also not surprising that some of these regulations missed the mark and, 

in certain cases, new regulations have created inefficiencies that increase loan origination and 

servicing costs, which boost costs for borrowers and may have restrained the emergence of 

private-label securitization. This does not mean these reforms should be repealed or regulations 

rescinded but it does mean that they should be evaluated for their efficacy and impact, and 

moderated or refined as appropriate. We appreciate that the Treasury Department and federal 

financial regulators are undertaking such a review and recalibration. 

2. Macroeconomic Risks 

Thankfully, the deep recession has given way to a prolonged period of slow but positive 

economic growth and stability. Yet macroeconomic risks remain. Interest rates have been 

historically low throughout most of this period. With the Federal Reserve on a path to unwind its 

mortgage portfolio while pursuing gradual rate normalization, markets will need to adjust to 

these changes. 

3. Housing Supply Constraints 

Perhaps the most significant legal and regulatory risks to housing affordability are not driven by 

federal regulation but result from state and local housing policy. Housing supply constraints are 

a meaningful contributor to housing affordability concerns in both the rental and ownership 

markets. 11 Enhancing credit subsidies at the federal level, including the GSEs' increasing 

acceptance ofloans with high debt-to-income ratios, in the face of supply constraints at the local 

level drives up house (and apartment) prices, thereby exacerbating, not aiding, affordability 

concerns. 

4. Control of the Nation's Mortgage Market 

Despite the many positive developments over the past ten years, less apparent to casual observers 

but more threatening to long-term stability has been the growing level of control of the mortgage 

market exercised by Fannie Mae, Freddie Mac, and their conservator. I opened my remarks by 

highlighting the systemic risks that led directly to the need for Congress to authorize, and 

Treasury to carry out, a massive financial intervention to protect GSE MBS and debt holders. If 

anything, the level of systemic risk posed by the GSEs has grown over these ten years. 

For starters, Fannie Mae and Freddie Mac MBS outstanding today (approximately $5.1 trillion) 

is about $750 billion greater than ten years ago. But there is much more to it than that. 

While the emergence of CRT has spread some credit risk previously retained by the GSEs, most 

of that risk-sharing is mezzanine risk, not first dollar or equity risk, and it has been accompanied 

by even greater reliance on the GSE risk management infrastructure and practices. In other 

words, the risk of loss has shifted to another party, but not the means to control or contain that 

risk. The same holds for credit pricing. This is not a fully competitive private market; it is a 

GSE-dominated credit market with the attendant systemic risk we have already witnessed. So, 

11 "Housing Development Toolkit," The White House, September, 2016. 

https://www.whitehouse.gov/sites/whitehouse.gov/files/images!Housing Development Toolkit%20f.2.pdf 

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while CRT continues to be an important development and has shifted some amount of future loss 

away from the GSEs, there is much more to do here. 

End-to-end, the mortgage market depends upon the risk analysis, pricing, and risk-bearing of 

Fannie Mae and Freddie Mac. These two companies determine which countetparties can 

participate in the system- with broad reach to all stakeholders whose functions are intended to 

manage and mitigate risk, from lenders and servicers to mortgage insurers, appraisers, and title 

companies. Meanwhile, they set the rules of business for the entire market, including the 

undeiWriting box, which determines what loans may be sold into the secondary market. With 

their conservator, they price the guarantee fees but also determine the external credit 

enhancement via CRT, setting the terms and pricing of these enhancements, and the rules 

governing these structures. They determine where and when to relax their traditional lending 

standards, whether through appraisal waivers, alterations to undeiWriting, or direct reductions in 

credit costs for some borrowers at the expense of other borrowers. 

The companies continue to have a significant information advantage over other market 

participants, in terms of loan level data, appraisal data, and market prices. They set the capital 

and operational rules for mortgage insurers, have direct access to mortgage insurers' financial 

and pricing data, and they now offer a product that competes with existing mortgage insurance 

products. 12 

The companies' cash window purchases have grown significantly, making them the largest 

whole loan aggregators in the system, a function once performed by a number of the larger banks 

and independent mortgage companies. 13 This used to be a competitive activity in the primary 

market, one that lent additional oversight to the quality of loan manufacturing and compliance 

monitoring and embraced "skin in the game" through traditional commercial counterparty 

contracts that held multiple institutions accountable to one another for loan quality and 

performance. While some lenders may argue that this development benefits them because they 

sell directly to the GSEs, the system is concentrating risk in Fannie Mae and Freddie Mac and 

making lenders more beholden to, and reliant upon them. That reduces competition and 

increases systemic risk. 

During the first six years of conservatorship, FHF A stopped Fannie Mae and Freddie Mac from 

entering new lines of business and focused them on their core mission. More recently, however, 

the companies' activities have expanded, bringing with it new risks to manage while operating in 

conservatorship and backed just by taxpayer capital. Examples include financing support for 

12 The mortgage insurance pilots (Freddie Mac's Imagin program and Fannie Mae's Enterprise Paid Mortgage 

Insurance) are good examples of the one-step forward, one-step back characteristic of some developments in 

conservatorship. As an alternative execution structure for pooling and laying off mortgage risk, the pilots may be 

seen as just another development in the set of credit risk transfer structures designed to attract private capital and 

shift risk away from the GSEs. And so they are. Yet they also reflect the level of control the GSEs exercise over all 

aspects of credit assessment, risk management, pricing, participation eligibility, and master servicing. These 

products compete with existing mortgage insurance products, yet the GSEs have a full view into their competitors' 

pricing and rules and do not offer the same transparency back. If these structures are good enough for the GSEs, 

FHF A should make the rules of participation clear and allow other firms to offer the same structure in the 

marketplace, rather than force the execution through the GSEs. 13 "Recent Trends in the Enterprises' Purchases of Mortgages from Smaller Lenders and Nonbank Mortgage 

Companies," Federal Housing Finance Agency Office oflnspector General, July 17, 2014. 

https:/ lwww.flJfaoig.gov/Conlent/FilesfEVL-20 14-01 0 O.pdf 

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institutional single-family rental (something previously authorized and now just halted by 

FHF A), debt financing of non-bank mortgage servicers, and expansion into multifamily finance 

out of proportion to pre-crisis market share. 

Collectively, these new activities add risk and complexity while putting the GSEs into direct 

competition with private market participants. This would be fmc if the playing field were level, 

but it is not. The GSEs operate with a substantial advantage that guarantees that they will be 

able to offer better terms and lower pricing than other market participants. They can access 

taxpayer, not private, capital, they continue to benefit from a host of special privileges accruing 

to them as GSEs, and they issue debt at approximately government pricing levels. 

Why Congress Must Act and What Congress Can Build Upon 

To pursue a resilient liquid market in the future, we should be working to restore private capital 

and a competitive market in housing finance. In its simplest terms, ending the conservatorships 

and achieving housing finance reform is about creating a safe, liquid, and competitive market for 

mortgage credit risk, where private companies can thrive and innovate to serve the diverse array 

of U.S. households, and perform critical risk management functions that complement those of 

any governmental entities serving in a backstop capacity for the system. There is nothing unique 

or special about mortgage credit risk that requires wholesale reliance on the risk management 

practices of the government. 

Put another way, ten years ago, virtually all the mortgage credit risk on $5 trillion of mortgages 

was held by Fannie Mae and Freddie Mac. The market relied heavily on their credit judgment 

and credit risk management practices. Yet, the two companies had weakened their underwriting, 

underpriced their risk, and operated with far less capital than any potential competitor. Ten years 

ago today, we realized the result. Ten years later, Fannie Mae and Freddie Mac perform most of 

the risk management functions for the system, albeit pushing some modest amount of loss to the 

private market through CRT. 

What we need now, more than ever, is to rebuild a future housing finance system that is more 

transparent, where the playing field is level, and where substantial amounts of private capital 

from numerous sources are brought together in a competitive marketplace that allows big lenders 

and small lenders, banks and non-banks, an equal chance to compete for the business of families 

seeking to own a home. 

Restoring private capital, and relieving taxpayers of bearing so much mortgage risk, is not just a 

question of credit risk transfers. To better focus the government's role, we should strive toward 

a future state with greater private securitization, which would also lower catastrophic risk placed 

on taxpayers. Among the avenues for lawmakers to examine as ways to restore private capital 

are: establishing uniform national servicing standards, opening a common securitization 

platform to the option of private label securitization, addressing the regulatory inefficiencies 

holding back the market, encouraging innovation, and reconsidering loan limits. 

Without progress in these areas, the uncertainty about the future of the GSEs and about the 

government's next steps stymies innovation and long-term strategic investment by private 

lenders and servicers and other stakeholders in the system. Since a stable housing market is 

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essential to consumer well-being and the opportunity for long-term household wealth-building, 

these ongoing risks and uncertainties need to be resolved. Simply put, Congress must act. 

While significant differences of opinion remain on some key aspects of housing fmance reform, 

these are in relatively few areas and, in some instances, multiple solutions may be workable and 

acceptable. The critical point is that reform cannot be completed without Congress. 

Members of this Committee have put forth three comprehensive reform proposals, all warranting 

consideration in reaching a bipartisan consensus. The Chairman has been a thought leader in 

developing and advancing the PATH Act. Ranking Member Waters' HOME Forward Act and 

Representatives Delaney and Himes' Partnership to Strengthen Homeownership Act have also 

contributed very positively to the framework for a path forward. Notwithstanding clear 

differences across these bills, the bills have more in common than is recognized and the 

differences are reconcilable. HPC's members stand ready to help the Committee forge the 

bipartisan consensus needed to get comprehensive housing finance reform legislation to the 

finish line. 

Enacting such reform will put the country on a better course to ensure that future homebuyers 

have broad access to credit and that our fmancial system can deliver this credit with much less 

systemic risk. Comprehensive housing fmance reform also can protect taxpayers from another 

bailout, even if we face a deep recession and a nationwide collapse in house prices as we did last 

decade. While ending the GSE conservatorships dominates housing finance reform discussions, 

any comprehensive restructuring of the system should include the FHA. The Housing Policy 

Council has developed a set of ideas to strengthen the organizational and operational structure of 

FHA that we would be glad to share with the Committee. 

An appropriate starting point for discussing major legislation that will affect so many citizens 

and a large segment of the economy is to agree upon a set of principles that can guide reform. 

The Housing Policy Council centers its reform views on the following principles: 14 

I. Fix what is broken and preserve what works in support of consumers and the market 

2. The transition from the old system to the new one should avoid disrupting consumers and 

markets. 

3. Private capital should bear all but catastrophic mortgage credit risk so that market 

discipline contains risk. The government should provide an explicit, full faith and credit 

guarantee on MBS but with a pre-set mechanism to ensure any catastrophic losses that 

call upon taxpayer support will be repaid fully. 

4. Government should provide a regulatory framework that is clear and equitable across all 

participating companies and ensures that participants in the housing finance system 

operate in a safe and sound manner. 

14 For a complete explanation of the Housing Policy Council's principles and a more detailed discussion ofHPC's 

perspective in housing reform issues, see Testimony of Edward J. DeMarco before the U.S. Senate Committee on 

Banking, Housing, and Urban Affairs, June 29, 2017. 

https://www.banking.senate.gov/imo/media/doc/DeMarco%20Testimony%206-29-17.pdf. The Housing Policy 

Council has a long track record, dating back to its founding in 2003, of testifying before Congress on the need to 

strengthen the regulatory regime governing Fannie Mae and Freddie Mac and, over the past ten years, in advocating 

for comprehensive housing finance reform that replaces the GSE structure with an approach more reliant on 

meaningful private capital and related reforms. 

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5. The government-protected GSE duopoly should be replaced with a structure that serves 

consumers by promoting competition, affordability, transparency, innovation, market 

efficiency, and broad consumer access to a range of mortgage products. 

The good news is that these principles align well with those that motivate the aforementioned 

three bills as well as those that motivate similar legislation introduced in the Senate and those 

reflected in leading reform proposals from others. 

The appendix to my statement maps HPC's reform principles to key provisions in the leading 

House and Senate bills, demonstrating the broad agreement with replacing the GSE duopoly with 

a system that relies more on a competitive market for distributing and containing mortgage credit 

risk. In short, there is a broad, bipartisan consensus on most, if not all, of the principles guiding 

reform. Leading legislative proposals to-date, including those from the Chairman and from the 

Ranking Member, have the following features in common: 

• Fannie Mae and Freddie Mac would be wound down and then ended as GSEs. Whether 

and how they are merged or broken up or otherwise repositioned in the marketplace 

under a new charter and ownership regime is unresolved. 

• The GSEs' current affordable housing goals regime would be eliminated (or at least 

altered), typically replaced by a funding stream generated from a small fee placed on all 

of the new government-backed MBS created by reform. The use and control of these 

funds to support affordable housing varies by proposal. Most proposals also include some 

expression of a duty of secondary market entities to serve the broad market, including 

low- and moderate-income borrowers and communities. 

• A common securitization platform operating either as an industry utility or a government 

corporation. 

• A single, government-backed MBS to give rate investors (the private capital 

backstopping interest rate risk and the source of the long-term funding for long-term 

mortgages) freedom from credit risk concerns and deepening the universe ofMBS 

investors. Some proposals call for creating a new government entity to provide this 

·insurance (for example, the Johnson-Crapo bill created the Federal Mortgage Insurance 

Corporation (FMIC)) while others recommend using an existing government MBS 

guarantor (Ginnie Mae), and yet others are silent on this point. 

• Substantial private capital would back each mortgage pool, supplemented by the capital 

of the pool aggregator (the entity bundling mortgages for securitization) and by an 

industry-funded, government-backed reserve fund (as described just above). 

• The credit risk transfer market that FHF A directed Fannie Mae and Freddie Mac to 

initiate is the basis for continuing to attract private capital using multiple structures 

and appealing to multiple types of investors in credit risk assets. 

• A government regulator would oversee this credit risk syndication and the sufficiency 

of the capital backing that risk. 

What Could be Accomplished Administratively to Assist Congress and Markets 

Mr. Chairman, in your letter of invitation, you asked that I address potential actions the 

Administration and FHF A could take to further the cause of reform. Given the broad areas of 

consensus I have outlined, I believe the Administration and FHF A should be working together to 

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use this period of conservatorship to prepare for legislative reform. FHFA and the 

Administration should look to reverse the growing systemic risk that I described earlier. They 

should take administrative actions to build upon the steps already taken in conservatorship to 

develop the market infrastructure, standards, and activities that are the foundation for a postconservatorship housing finance system. Keeping in mind that keys to a competitive credit 

market include access to data, industry standards, and a level regulatory playing field, examples 

of such steps include: 

• Direct the GSEs to release to the public the rest of their historical loan level and other 

data sets they've accumulated over time as part of their risk analytics capabilities, such as 

their extensive appraisal and property records data. 

• Give the industry a greater role in the development of the common securitization 

platform and consider expanding this technology beyond the GSEs. 

• Establish a standards-setting board that would operate on behalf of the broader 

marketplace and regulatory community, to bring a level of aligrunent and harmony in 

mortgage rules and requirements across all types of products and programs. 

• FHF A and other regulators develop a consistent approach to evaluating counterparties 

that is transparent and applied consistently across regulatory regimes. 

• Determine a path to break the proprietary, duopoly control on mortgage underwriting 

exercised through the GSEs automated underwriting systems and loan manufacturing 

technology, either by transitioning those tools to a market-wide utility or the 

securitization platform, or by defining a path for competing systems to emerge that could 

approve loans eligible for government-backed securitization on the same terms as the 

GSEs have. An even better approach may be to take each of these steps while also 

encompassing government programs such as FHA so that they may benefit from the 

taxpayer investment in GSE technology during conservatorship and from future private 

innovations. 

• Increase transparency related to guarantee fee pricing, including the capital assumptions 

and the guarantee-fee pricing offsets given third-party credit enhancement. 

• Freeze (and perhaps consider lowering) the conforming Joan limits. For a purely private 

securitization market to re-emerge, there should be some room at the higher-end of the 

mortgage market for private lending activity, which is needed to ensure sufficient 

liquidity in this jumbo segment of the market. A commensurate adjustment to FHA 

loan levels would also be appropriate to prevent further market share distortions. 

• Future GSE "pilot programs" should have (I) a clear articulation of their purpose relative 

to being in conservatorship, (2) specific, measurable, and time bound outcome metrics, 

(3) an avenue for public comment and transparency around pilot results, and ( 4) an intent 

to make the results, including any permanent establishment of a new activity, 

generalizable to the market not specific to Fannie Mae and Freddie Mac. 

Additionally, Congress should encourage FHF A to use its current capital rulemaking process and 

its oversight of the developing credit risk transfer market to ensure a more open, transparent, 

standardized, and competitive market for mortgage credit risk. There has been substantial 

interest in the CRT asset class across mortgage insurers, reinsurers, mortgage REITs, banks, and 

a broad array of other capital market participants. They all seek the opportunity to compete in 

this segment and FHFA's openness to ensuring that opportunity will go a long way to shaping 

that future market. Congress also should encourage FHF A and other federal financial regulators 

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to examine other regulatory and conservator policies that extend the reach of the GSEs and alter 

competitive balance in the marketplace. 

Capital Rules 

HPC welcomes FHF A's recent proposed capital rule for the Enterprises. This proposal should 

be a catalyst for a thoughtful discussion across regulators and market participants. 15 

Notwithstanding that FHFA intends to suspend the rule while the conservatorships remain in 

place, the proposal marks the beginning of a complex and critical discussion of restoring private 

capital, creating competitive balance, and protecting taxpayers while mitigating the systemic risk 

inherent to the GSEs. 

A grave failing of the pre-crisis regulatory regime for Fannie Mae and Freddie Mac was a 

regulatory capital standard for the GSES that was divorced from other regulatory capital 

standards and from the risks associated not only with mortgage assets and GSE counterparties, 

but also with the extensive set of roles, responsibilities, and risk management operations of the 

GSEs. The GSEs compete with other sources of regulated capital in the mortgage credit market 

but seldom on equal footing. With FHFA, today, effectively regulating the capital of mortgage 

insurance companies and approving standards and eligibility for credit risk transfer (CRT) 

structures, the need to align GSE capital requirements with other regulatory capital standards and 

related credit protection standards is more obvious and consequential than ever before. 

Our initial review suggests that FHFA's proposed rule perpetuates the misalignment of 

regulatory capital requirements across the system. Therefore, we hope the Committee would 

join us in urging FHF A to begin discussions with the bank and insurance regulators to identify 

where regulatory capital rules are misaligned with actual risk and to align those rules to avoid 

competitive imbalances based upon regulatory arbitrage. FHF A's analysis may reveal that the 

bank regulators have excessive requirements relative to actual mortgage credit risk, so perhaps 

some portion of the regulatory alignment needs to happen there. Yet, the FHF A proposal also 

gives much less weight to systemic risk and counter-cyclical capital concerns relative to bank 

capital rules. Surely the experience from 2008 demonstrates the need for a sizeable buffer 

beyond any "measured" risk levels. 16 

Through this rule-making, FHF A also has an opportunity to provide clarity to the market on the 

interplay between CRT and capital. By defining the capital offset, the GSEs may gain from 

having CRT protection, FHFA effectively sets the standard for other credit enhancers that may 

15 Since establishment of the conservatorships, regulatory capital rules have been suspended. FHF A Director Watt 

testified earlier this year that "FHFA has worked with the Enterprises to develop a Conservatorship Capital 

Framework that establishes aligned capital guidelines for both Enterprises across different mortgage loan and asset 

categories. Both Enterprises now use this aligned framework to make their regular business decisions. FHF A also 

uses this framework in its role as conservator to assess Enterprise guarantee fees, activities, and operations and to 

guard against the Enterprises making competitive decisions that could adversely impact safety and soundness." 

Statement of Melvin L. Watt, Director, FHF A, Before the U.S. Senate Committee on Banking, Housing, and Urban 

Affairs, May 23, 2018. Greater transparency regarding that framework would also be welcome. 16 The absence of regulatory coordination and consistency in capital requirements created regulatory arbitrage that 

contributed to enormous taxpayer losses during the financial crisis. This is not the only area in mottgage regulation 

where such coordination is lacking. Another example is FHFA's go-it-alone approach in pursuing rule changes 

regarding Limited English Proficiency in mortgage origination. Other banking, consumer, and housing regulators 

who have more direct responsibility for primary market lending regulation should be engaged in this effort, which 

could have far-reaching and unintended consequences for consumers and the market. 

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compete with the GSEs. To be clear, FHF A should explicitly pursue standards that will define a 

level playing field for private capital including banks, mortgage insurance companies, 

reinsurance companies, and other CRT structures and investors. To do otherwise would 

encourage risk to migrate where the capital requirements are lowest. 

GSEs Should Not Get Preferential Treatment 

There are numerous ways in which the GSEs get preferential treatment. Some I have already 

discussed, such as the privileges embedded in their congressional charters. Others arise from 

favorable treatment bestowed on them by regulators, partially because of those charters. For 

example, GSE securities receive favorable treatment under bank liquidity and capital rules. 

Mortgages approved by the GSEs get favorable treatment under the Bureau of Consumer 

Financial Protection's qualified mortgage rule. Appraisals may be waived for GSE mortgages 

under special ex6Iusions in federal law. The list goes on. If we are to wean the system from its 

dependency on the GSEs, a systematic review of these preferences is needed and regulators, 

starting with FHF A, should be seeking pathways to end preferential treatment. Such a 

systematic review also should identify those preferences that are worth preserving because they 

enhance market efficiency. The best course may be to make the preference broadly available to 

the mortgage market, not just to two companies. 

In the end, the goal should be achieving a more open and competitive market, not an 

unstructured market. HPC's first principle for housing finance reform is relevant here: fix what 

is broken and preserve what works in support of consumers and the market. Over time, the 

standardization and structure the GSE model has brought to the market have made important and 

valuable contributions to the way the market works today. An example is the emergence of the 

to-be-armounced (TBA) market that allows lenders to offer their customers interest rate locks. 

But we need to move to a system in which we have a more open and competitive system, not one 

where just two companies gamer the benefits. 

Continuing the Development of the Credit Risk Transfer Market 

Today, the development of a market for mortgage credit risk assets can move the secondary 

mortgage market to a place where we can greatly diminish systemic risk by pricing, managing, 

and distributing credit risk across multiple channels to attract private capital. However, that will 

not happen so long as Fannie Mae and Freddie Mac are (1) at the center of every decision 

regarding credit risk management, and (2) retain advantages such as lower capital requirements 

or an ability to control the rules affecting their competitors. 

All capital providers should be encouraged to compete in the assessment, management, and 

holding of mortgage credit risk, with clear standards to ensure safety and soundness and a level 

playing field. As FHFA continues the development of the CRT market, it should look to expand 

eligible CRT structures to those developed and implemented by entities beyond Fannie Mae and 

Freddie Mac. If a structure is eligible for CRT when executed by a GSE, the terms of that 

eligibility should be transparent, allowing other parties - banks, mortgage insurers, mortgage 

REITs, and other capital market participants- to also establish and execute such structures. 

Making that adjustment alone would constitute an enormous advance towards mitigating the 

systemic risk in the current system. 

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Preparing Borrowers to Become Sustainable Homeowners 

Before closing, it is important that I also address the other critical element of housing finance 

reform - how reform might advance the public policy interest in supporting home ownership 

opportunities for all Americans, especially for segments of our society that face heightened 

challenges in achieving home ownership. These are challenges HPC members address every day 

and they remain committed to seeking innovative and sustainable approaches to expanding home 

ownership opportunities. 

A common element across many housing fmance proposals is a goal to ensure homeownership is 

sustainable; that is, reducing the likelihood of default by borrowers, especially borrowers with 

less-than-perfect credit profiles. This requires more work and thought than simply subsidizing 

the cost of credit to low down payment, low credit score, or lower-income borrowers. It requires 

greater attention to saving both for down payments and for cash reserves once in the home, 

greater financial literacy, homebuyer education and home ownership counseling, and more effort 

to repair credit histories. Many HPC members sponsor and support programs that do these 

things. 

A challenge facing many lower income renter and owner households, indeed even moderate and 

some higher income households, is increased income volatility. Many people lack the resources 

to buffer themselves from life's disruptions, and income disruptions are more common today 

than in the past. Housing policy and our housing finance system need to become more attuned to 

this challenge so better solutions may be found. 

Loan qualification standards also need to evolve and improve. Too often, Fannie Mae and 

Freddie Mac are looked to as the only means by which marginalized communities can be served, 

as the entities that bestow mortgage credit when private lenders will not. Instead, we should ask 

our secondary market to be open and available for securitizing eligible, privately credit enhanced 

mortgages while encouraging lenders in the primary market to innovate and to develop 

responsive and responsible products to serve the special needs of people and communities that 

face greater obstacles to home ownership. 

Conclusion 

Thank you for the opportunity to testify today. For the next milestone anniversary of GSE 

conservatorship, let us ensure that the Committee's hearing focuses on how we are progressing 

with the final implementation of housing finance reform, not whether we should pursue this 

critical objective. 

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Appendix: 

Aligning Key Provisions of Congressional Housing Finance Reform Proposals to the 

Housing Policy Council's Principles for Reform* 

H.R. 2767 GarreWHensarling (PATH Act) 

Waters Draft Housing Opportunities Move the Economy (HOME) Forward Act 

H.R. 1491 Delaney/Carney/Himes 

S. 1217 Johnson/Crapo Substitute to Corker/Warner Bill 

HPC Principles for GSE 

Reform* 

Principle 1 a: Fix what is 

broken 

Principle lb: Preserve what 

works 

GSE Reform Proposals 

Wind-down of GSEs -Each of the proposals recognizes that 

the structure of the GSEs is inherently flawed, and each 

calls for replacing the GSEs with a new structure to 

facilitate a secondary market for conventional single-family 

and multifamily mortgages 

Transparency- Each of the proposals calls for standardized 

securitization agreements to improve transparency of 

securitization process for all stakeholders 

Data- Each of the proposals (other than 

Delaney/Carney/Rimes) calls for loan level data 

dissemination I publication to give investors and other 

stakeholders greater insight into risks associated with 

securitization 

Housing Goals Each of the proposals (other than the 

PATH Act) replaces the existing housing goals with an 

affordable housing fee 

FHA Reform- The PATH Act includes reforms to FHA 

30-Year Fixed-Rate Mortgage- Each of the proposals 

preserves the To-Be-Announced (TBA) market so the 30-

year fixed rate mortgage can remain an option for 

consumers 

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Principle 2: Ensure a smooth 

transition 

Principle 3: Place an explicit 

federal guarantee on MBS, but 

providefor private capital to 

stand in front of that guarantee 

Principle 4: Establish a clear 

and equitable regulatory 

structure that ensures a safe 

and sound housingfinance 

system 

National Market- Each of the proposals seeks to preserve a 

secondary market that serves all credit-worthy borrowers 

Small Lender Access Each of the proposals includes 

provisions to ensure small lenders access to the secondary 

market 

Phased Wind-down Each of the proposals provides for a 

multi-year transition on the wind-down of the GSEs 

Protection for Existing Securities- Each of the proposals 

provides for explicit federal support for outstanding GSE 

debt and MBS issuances to avoid market disruption 

Securitization Platform- Each of the proposals provides for 

a centralized platform to facilitate the securitization ofMBS 

Explicit Federal Guarantee- Each of the proposals (other 

than the PATH Act) calls for an explicit federal guarantee 

on conventional and multifamily MBS. Chairman 

Hensarling has since acknowledged that such a guarantee 

will likely be a feature of any reform legislation 

Private Capital- Each of the proposals that include an 

explicit federal guarantee on MBS requires meaningful 

private capital to stand in front of that guarantee, and 

provides for the creation of an insurance fund to absorb any 

losses before taxpayers 

Regulator- Each of the proposals calls for a strong, 

independent federal regulator to oversee the housing finance 

system: 

• the PATH Act provides for FHF A to serve this 

function; 

• the Waters proposal creates a new federal National 

Mortgage Finance Administration (NMF A) to 

replace FHFA; 

• the Johnson/Crapo bill calls for the creation of a 

Federal Mortgage Insurance Corporation (FMIC) to 

replace FHF A; and 

• the Delaney/Camey/Himes bill transfers the 

functions of FHFA to Ginnie Mae, and makes 

Ginnie Mae an independent federal agency 

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Safety and Soundness Standards - Each of the proposals 

calls for the establishment of appropriate standards for the 

operations of the secondary market and the participants in 

that market 

Principle 5: Replace GSE New Structure- Each of the proposals replaces the GSEs 

duopoly with a structure that with a new structure that is intended to promote greater 

promotes competition, competition and innovation than the existing duopoly: 

affordability, transparency, • the PATH Act provides for the establishment of a 

innovation, market efficiency, stakeholder administered Utility that sets standards 

and consumer access to a range for the qualified issuers ofMBS; 

of mortgage products • the Waters proposal creates an industry-owned 

Cooperative to issue federally guaranteed MBS; 

• the Johnson/Crapo bill provides for a central 

securitization platform to issue federally guaranteed 

MBS and for FMIC to license qualified private 

guarantors to assume risks ahead of the federal 

guarantee; and 

• the Delaney/Camey/Himes bill directs Ginnie Mae 

to establish an Issuing Platform for federally 

guaranteed MBS on behalf of mortgage originators 

and aggregators 

*Testimony of Edward J. DeMarco, President of the Housing Policy Council, on "Principles of 

Housing Finance Reform," before the U.S. Senate Committee on Banking, Housing, and Urban 

Affairs, June 29, 2017. 

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A ,..,l AMERICAN 

~ 

,.., ENTERPRISE 

INSTITUTE 

Statement before the House Committee on Financial Services 

On "A Failure to Act: How a Decade Without GSE Reform Has Once Again Put Taxpayers 

at Risk" 

How a Decade Without GSE Reform 

Has Once Again Put Taxpayers at 

Risk 

Prompt Administrative Action Is Advisable Now 

Edward J. Pinto 

Resident Fellow and Codirector of Center on Housing Markets and Finance 

September 6, 2018 

The American Enterprise Institute (Aft) !sa nonpartisan, nortprofit, 501(c)(3) educational organization and 

does :1ot ta:.;.e inslit~.;iional positions on 3ny issues. The views expressed in this testimony a1 e those of tf:e 

author. 
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Chairman Hensarling and Ranking Member Waters, thank you for the opportunity to 

testify today. 

"A Failure to Act: How a Decade Without GSE Reform Has Once Again Put 

Taxpayers at Risk" is an appropriate title for this hearing. 

The last house price boom and subsequent bust was the result of ill-advised and risky 

govermnent housing policy. Today we are in the midst of another boom, and, once 

again, it is the result of ill-advised and risky govermnent housing policy. 

In 2014 I cofounded the AEI Center on Housing Markets and Finance. My prior 

research had established that the financial crisis largely stemmed from a failure to 

understand buildup of housing risk. I am pleased to report the center now produces 

the most comprehensive set of risk measures-providing accurate, real-time tracking 

ofleverage that, when left unchecked, results in destructive housing booms and busts. 

Unfortunately, we are now able to document that we are in the midst of another 

potentially dangerous buildup of policy-induced housing risk. This policy is 

making entry-level homes less, not more, affordable. 

My testimony today uses the results from risk rating of 60 million individual 

mortgage loans dating back to 1990. 

I will start our analysis with the buildup of risk in the 1990s and 2000s that was the 

result of ill-advised and risky government housing policy. The left panel below shows 

that the govermnent-sponsored enterprises' (GSEs') Mortgage Risk Index (MRI) 

began rising in the early 1990s, not the early-2000s as many have incorrectly claimed. 

This increase in risk was the direct result of the passage of The Federal Housing 

Enterprises Financial Safety and Soundness Act of 1992. By 2007 the GSEs' MRI 

had tripled to 21 percent. The right panel in Figure 1 demonstrates that home prices 

started climbing at an unsustainable annual rate in the late-1990s and continued until 

2006. During this entire period there was a seller's market, indicative of tight supply 

versus demand. 1 Then for five years the market was a buyer's market (2007-11 ), and 

home prices plummeted, severely damaging our economy and inflicting untold harm 

on millions of Americans. 

1 The National Association of Realtors defines a seller's market as six months or less remaining 

inventory at the current monthly sales rate. A buyer's market is greater than six months inventory. 
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Figure 1. GSE Historical Mortgage Risk Index and National House Price 

Increases 

0% 0% -12% :_ ____________ ...!._ ____ _j 

,# ~""' 4t ,# ~~"'"' # #"' ~., <f>"' ~.,. <f>~ i'' Note: om palta!n ro 1·4 umt mt..uen ~ purt:!la$E ban&. 

SOI.!ftE,; Dr. ~~,csbtlil200i U&lngt1alafromFHFA 

1'tlfE Cttart~'i ~Change:frtmtourthquarteral'prtoryear 

tcflltR'tt1quarterrl')!ear600wrl roru.s-. as a W1lcta Source: fHFA 

expa~hoose IX\CE!ndeX. 

Note: Data pertain to one to four unit, first-lien home purchase loans. The figure displays 

percentage change from fourth quarter of the prior year to fourth quarter of year shown for 

US as a whole. 

Source: Stephen Oliner's calculations using data from the Federal Housing Finance Agency; 

and Federal Housing Finance Agency expanded-data house price index. 

As the left panel above demonstrates, the GSEs' MRI is once again on the rise. As I 

will demonstrate later in my testimony, it is of even more concern that the Federal 

Housing Administration's (FHA's) MRI now stands at 28 percent, well above the 

level reached by the GSEs in 2007 and up from the FHA' s 19 percent in 2012. 

The right panel indicates that we have been in a continuous seller's market since mid2012, one even stronger than in the last boom. The current boom is once again 

fueled by ill-advised and risky government housing policy. We clearly did not 

learn the lessons of the last boom and bust. And once again, this unsustainable 

home price boom is making entry-level homes less, not more, affordable and is a 

threat to low-income homebuyers and taxpayers. 

We have long known what causes unsustainable home price increases in a seller's 

market. In 1951, Ernest Fisher, the FHA's first chief economist in the 1930s, made 

the following observation, based on empirical studies of FHA and VA lending. 

In a seller's market, when choice is restricted and the seller virtually dictates sales 

terms, more liberal credit is likely to be [capitalized] in price with probably a 

reduction in housing standards.2 

2 Ernest Fisher, Financing Home Ownership, National Bureau of Economic Research, 1951 
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For many decades US housing policy has relied almost exclusively on increasing 

borrower leverage in an ineffectual attempt to make housing more affordable. 

Instead, as Fisher points out, the result in a seller's market is to make homes less 

affordable. For the same reason, policies such as duty to serve, affordable 

housing fees, and cross-subsidization have the same effect-higher prices in a 

seller's market. 

The history ofGSE debt-to-income ratios (DTis) over the past 30 years helps confirm 

this. Figure 2 traces the history of DTis greater than or equal to 42 percent from 1990 

through 2018.3 This percentage has ranged from less than 5 percent in 1988-91 up to 

15 percent in 1998, hitting a peak of 43 percent in 2007, back down to 17 percent in 

2012, and now back up to 38 percent in 2018 (the same as the average level attained 

in 2005-06). Seller's market coincides with both rapid rises in real home prices. 

3 Greater than or equal to 42 percent is a common data point available for the entire time period. 

Except for 1988-91 common data point, which is based on loan counts, all other calculations are 

based on loan dollars. 

Loan type used for BCFP analysis: first-lien mortgages on first or second homes that have fully 

documented income and are fully amortizing with a maturity that does not exceed 30 years. The BCFP 

further noted that the tabulations do not include the following types of loans: loans for investorowned properties; low- or no-document mortgages; interest-only (10) mortgages; negatively 

amortizing mortgages such as payment option-ARMs; or mortgages with a balloon payment feature. 

Except for 1988-91, all calculations use the same defined subset of GSE loans. 

Data sources: 

1988-91: Fannie Mae random sample for loan acquisitions, percentage greater than or equal to 42 

percent based on extrapolation of data results, document in files of Edward Pinto 

1997-2009: Derived from Bureau of Consumer Financial Protection, 2012, 

http://files.consumerfinance.gov/f/201205 cfpb Ability to Repay.pdf 

201D-16: Fannie Mae and Freddie Mac, loan performance files 

2017-March 2018: Fannie Mae and Freddie Mac loan level securitization data 
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Figure 2. GSE Loan Share with DTI 2:: 42 Percent and Real House Prices 

50% 

45% 

40% 

35% 

30% 

25% 

20% 

15% 

10% 

GSE Loan Share with DTI 2: 42% and Real House Prices 

Real house prices indexed to 100 in 2000 

(red, right axis) 

160 

150 

140 

130 

120 

110 

100 

90 

80 

5% 

0% 

<-- Seller's market --> <-- Seller's market --> 70 

60 

Sources: AEI Center on Housing Markets and Finance, Fannie Mae, BCFP, SEA and FHFA 

Source: AEI Ceoter on Housing Markets and Finance; Fannie Mae; Bureau of Consumer 

Financial Protection; US Bureau of Economic Analysis; and Federal Housing Finance 

Ageocy. 

The inflation-adjusted house price trend looks quite similar to the DTI trend above. 

The DTI trend is remarkable for two reasons: ( 1) the tremendous volatility in the 

incidence of high DTis and (2) the interest rate trend's decline to flat for 1991-2017. 

The house price trend is also unprecedented for two reasons: (I) the amplitude of the 

booms and (2) their occurring so close together. 

I now turn to the deleterious actions of Fannie Mae, Freddie Mac, and the Federal 

Housing Finance Agency (FHFA) since the beginning of the conservatorship that 

relate to the proliferation of high DTI lending, quite similar to what happened during 

the boom of the late-1990s and early- to mid-2000s. 

In January 2013 the Bureau for Consumer Financial Protection (BCFP) promulgated, 

under authority granted in the Dodd Frank Act, its Qualified Mortgage (QM) rule, 

which set a maximum DTI of 43 percent and simultaneously exempted GSE, FHA, 

the Veterans Affairs (VA), and Rural Housing Service (RHS) ("Agency") guaranteed 

loans from QM's 43 percent DTI limitation. Both provisions took effect in January 

2014. Since 2013, about 85 percent of all primary home purchase financing has been 

guaranteed by these agencies. 

The bureau believed that the patch would "provide an adequate period for economic, 

market, and regulatory conditions to stabilize" and that it would "provide an orderly 

transition period, while preserving access to credit and effectuating the broader 
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purposes of the ability-to-repay statute during the interim period."4 (Emphasis added.) 

The patch has expired for the FHA, the VA, the US Department of Agriculture 

(USDA), and the RHS because each agency has issued its own QM rules. 5 For Fannie 

and Freddie, the patch will sunset in seven years from the effective date ofthe rule 

(January 10, 2014) or when their federal conservatorship ends. Given the current state 

of the conservatorship, the patch-which now applies only to Fannie and Freddie 

loans-will expire in January 2021. 

Rather than undertake "an orderly transition period" to the QM's 43 percent DTI 

limitation during the patch period, the FHF A, the GSEs, the FHA, and the VA all 

took advantage of the patch to promote the proliferation of high DTI loans, in many 

cases doubling or more the percentage of their DTis greater than 43 percent. Because 

the patch allows government agencies and the GSEs to increase DTis, the patch 

is helping fuel the current house price boom. When mortgage risk expands 

alongside of home prices, there is little "friction" in mortgage markets to slow 

the growth of a housing boom. This serves to make entry-level housing less, not 

more, affordable. 

We conducted an examination of the five-year trend ofDTis greater than 43 percent 

across purchase; rate and term refinance; cash-out refinances for all market 

participants for the GSEs, the FHA, the VA, and the RHS; and private portfolio 

lenders. It discloses a common pattern by the FHA, the VA, and the GSEs to take 

advantage of the patch to promote the proliferation of high DTI loans, including in 

the case of the GSEs, apparently at the urging of the FHFA. However, private 

portfolio lenders and the RHS have been the exceptions, showing less usage ofDTis 

greater than 43 percent over time. Furthermore, the results are similar for portfolio 

loans below the GSE national conforming loan limit. 

As a result of the broadly applicable patch, 36 percent of agency purchase guaranteed 

loans that were originated in March 2018 had a DTI in excess of 43 percent, double 

the level the month before the patch was announced. This rate continues to rise. 

Figures 3-5 show the five-year trend ofDTis greater than 43 percent across purchase; 

rate and term refinance; cash-out refinances for the GSEs, the FHA, the VA, and the 

RHS; and private portfolio lenders. 

4 Bureau of Consumer Financial Protection, 6534. 5 Section 1412 of Dodd Frank requires each of these agencies to issue its own QM rules. See 15 USC§ 

1639c(b){3){B){ii). 
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Figure 3. Share of Purchase Loans with DTI > 43 Percent 

55% 

45% 

35% 

25% 

5% m 

.-< 

~ "' .-< 

.:. 

c. 

<( 

"' m 7 

~ ~ 0 

Share of Purchase loans with DTI > 43% 

::: =-·-· -

:rP'" 

.,. .,. .,. .,. "" "" "" .., "' "' "' "' ..... .-< .-< 7 ~ .-< .-< 7 ~ .-< .-< 7 i:: .:. i:: .:. i:: .:. .!!l c. ~ .!!l c. ~ .!!l <( 0 <( 0 <( 

a. ~ 

.-< .-< 

-6 

0 ~ 

..... 

.-< 

.:. 

a. 

<( 

Port. -GSE -VA - RHS -FHA 

Source: AEI Center on Housing Markets and Finance. 

..... ..... 7 .... 

~ g 

Figure 4. Share of Rate-and-Term Refinance Loans with DTI > 43 Percent 

Share of Rate-and-Term Refis with DTI > 43% 

45% 

25% 

5% 

:cl m m m .,. .,. .,. " .., "" ::s .., <D 

7 7 ~ "' "' ~ .-< .-< 7 .-< .-< .-< 7 7 7 .-< 

~ a. ~ ~ .:. ~ g i:: .:. ~ g c: .:. a. ~ t .!!l a. .!!l c. <( 0 <( <( <( 0 

Port. -GSE -VA ----FHA 

Source: AEI Center on Housing Markets and Finance. 

Figure 5. Share of Cash-Out Refinance Loans with DTI > 43 Percent 

Share of Cash-Out Refis with DTI > 43% 

55% 

45% 

35% 

25% 

15% 

+,;~ 

5% m m m .,., ;"; .,. .,. ;"; ~ ~ .., ~ <D ~ ~ "' ..... ..... ..... ..... .-< .-< 7 .-< .-< 7 7 .-< .-< .-< .-< 7 7 i:: .:. -6 i:: .:. g ~ .:. ~ i:: .:. -6 i:: .:. .!!l <( 

a. ~ a. ~ c. ~ c. ~ c. ~ g 0 .!!l <( <( .!!l <( 0 .!!l <( 

Port. -GSE -VA ---FHA 

Source: AEI Center on Housing Markets and Finance. 

55% 

45% 

35% 

25% 

15% 

5% 

45% 

25% 

5% 

55% 

45% 

35% 

25% 

15% 

5% 
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Figure 6 presents one final point regarding DTI trends: Purchase loans with DTis 

over 50 percent are almost entirely FHA or VA insured. The GSEs and RHS back 

only a negligible number of loans, if any, over 50 percent. 

Figure 6. Share of Purchase Loans with DTI > 50 Percent 

Share of Purchase loans with DTI > 50% 

25% 

20% 

15% 

10% 

5% 

Source: AEI Center on Housing Markets and Finance. 

25% 

20% 

15% 

10% 

5% 

To better understand this boom and the impact of US housing policy and attendant 

credit easing, one needs to measure home sales, price trends, mortgage risk trends, 

and other characteristics over time. To this end, AEI's Housing Center has developed 

an 8.3 million sale transaction study covering five years of home price appreciation 

(HP A) for over 40,000 census tracts in 73 large metros areas. This data set was used 

to create a new tiered House Price Index (HPI) that allows for the most thorough 

analysis of home price trends ever available. In particular it allows for a detailed 

analysis of the role equity and income leverage, and high risk lending in particular, 

play on home prices. 

Price tiers at the county level are defmed as follows: 

Low: :5 40th percentile of FHA sales price; 

Low medium: > 40th and :5 80th percentile of FHA sales price; 

Medium high: > 80th percentile of FHA sales price and :5 125% of GSE 

limit; and 

High:> 125% ofGSE limit. 

We found a generally strong correlation between increasing tract HP A and increasing 

tract mortgage risk index or MRI (a measure of equity and income leverage). 
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Figure 7 below sets forth key characteristics of the four price tiers. First-time buyers 

(FTBs) were 68 percent of buyers in low and medium-low priced tiers. At 14 percent, 

these tiers have a much higher MRl and prices have increased much faster (+38 

percent) than for medium-high and high tiers (+28 percent), which have much lower 

FTB share (35 percent) and an MRl of7 percent). 

Figure 7. Key Characteristics of the Four Price Tiers 

Combined 

tow & Low-Med 38% 56% 30% 14% 68% 

Combined 

Med-High & High 28% 44% 10% 7% NA 

Source: AEI Center on Housing Markets and Finance. 

Figure 8 demonstrates how constant quality home prices by tier have increased since 

2012:Q4, which was just about the begirming of the current boom. The low and lowmedium tiers, largely consisting of first-time buyers and with about 30 percent of 

these two tier's home sales financed with FHA-insured loans, had substantially higher 

price increases. In the case of the low tier, prices went up 41 percent, compared to 27 

percent for each of the medium-high and high tiers. If low tier prices had increased 

at the same rate as the medium-high and high tiers, entry-level buyers would 

today be able to buy these homes at much more affordable prices and with less 

risk of default-an average of $17,000 per home less than today. 

$197,000 

$405,000 
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Figure 8. AEI Cumulative Constant-Quality HPI, by Price Tier (2012:Q4 0 

Percent) 

45% 

AEI Cumulative Constant-Quality HPI, by Price Tier 

(2012:Q4 = 0%} 

?~~~~~~~~~~~~~~0~~~0~ 

######~#¥#######¥#### 

Source: AEI Center on Housing Markets and Finance. 

Figure 9 shows low tier price trends by financing source. It is noteworthy that the 

FHA, GSE, and private HPis for the low-priced tier all went up about the same 

amount over five years: 45 percent. This is because the FHA and other buyers with 

access to high levels of equity and income leverage set the price for that market 

segment (the "FHA effect"). The VA and RHS had lower price gains, likely due to 

differing appraisal practices and DTI limitations. 
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Figure 9. AEI Cumulative Constant-Quality HPI for Low Price Tier, by 

Guarantor Type (2012:Q4 = 0 Percent) 

AEI Cumulative Constant-Quality HPI for Low Price Tier, 

by Guarantor Type (2012:Q4 = 0%) 

Source: AEI Center on Housing Markets and Finance. 

Most importantly, our research demonstrates that high-risk home purchase lending is 

fueling home price appreciation. Currently 41 percent of agency purchase lending is 

high risk. As shown in Table 1, FHA accounts for 57 percent of such high-risk 

lending, down from 74 percent in 2012. Significantly, the GSEs account for nearly all 

of this high-risk share shift, increasing from 10 percent in 2012 to 30 percent in 2018. 

Table I. High-Risk Loans by Loan Type (High Risk= >12 Percent Mortgage 

Risk Index) 

High Risk loans by loan type (High risk= >12% Mortgage Risk Index) 

FHA GSE Portfolio RHS* VA ighted count 

2012 74.4% 10.4% 1.9% 4.9% 8.4% 

2013 66.5% 16.8% 2.0% 5.3% 9.5% 

2014 60.8% 20.6% 2.4% 5.1% 11.2% 

2015 65.9% 18.9% 1.9% 3.3% 10.1% 

2016 63.6% 21.5% 2.1% 2.7% 10.1% 

2017 58.6% 26.6% 2.2% 2.6% 10.0% 

01:2018 56.6% 29.9% 3.5% NA 10.0% 

* Unable to Identify RHS loans as HMDA data for 2018 not yet available 

Source: AEI Center on Housing Markets and Finance. 

1 124,052 

100.0% 515,921 

100.0% 555,358 

100.0% 667,255 

100.0"h 760,591 

100.0% 762,629 

100.0% 132,673 
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There is a strong positive correlation between higher mortgage risk (higher expected 

default rates under stress) and higher home price appreciation, lower home prices, and 

lower income. Figures 10-12 show correlations at the census tract level relating to: 

(I) mortgage risk, which measures expected default rates under stress (x-axis) and 

ratio of tract home price appreciation (HP A) to county HPA, (2) mortgage risk (xaxis) and median home price appreciation, and (3) mortgage risk (x-axis) and income 

as a percentage of metro area income. The scatter dots for each figure are color coded 

based on the percentage of high risk purchase loans as a share of all purchase loans in 

the tract. Those from the green color palette have a high risk share of less than 30 

percent. Those from the blue color palette have a high risk share of greater than or 

equal to 30 percent. 

Correlation 1: Census Tract Mortgage Risk and House Price Appreciation, by 

Tract Share of High-Risk Lending 

There is a strong positive correlation between higher mortgage risk (higher expected 

default rates under stress) and home price appreciation. 

The binned scatterplot below shows that the greater a census tract's MRI, the faster 

house prices have appreciated for 2013-17. The scatterplot has a clear upward trend: 

As the tract MRI increases (x-axis), the ratio of tract home price appreciation relative 

to county home price appreciation also increases (y-axis). For example, the dark 

green dots on the right, which had <15 percent high risk loans, had low average tract 

MRis (about 3-6 percent) and the dark purple dots on the right, which had >=60 

percent high risk loans, had high tract MRis (about 17-23 percent). For the dark 

green dots, the median ratio of tract to county house price appreciation is 0.86, while 

for the dark purple dots, the median ratio of tract to county appreciation is 1.19-a 38 

percent higher level of price appreciation for the dark purple over dark green tracts. 

Further, the blue color palette tracts all had a high risk loan share of 30 percent or 

more. Together these tracts represent about 50 percent of all sale transactions and had 

higher price appreciation relative to the county than did the green color palette tracts. 

In these tracts, a critical mass of buyers (at least 30 percent) has access to high-risk 

loans providing higher equity and income leverage, thereby allowing this group to 

essentially set the price for all buyers (and for borrowers in the tract who are 

refinancing). Therefore, all these borrowers (and lenders and mortgage guarantors) in 

a tract with a greater share of high-risk lending are exposed to dangerous home price 

volatility that is not related to fundamentals but to increases in leverage. 

The BCFP's DTI patch, announced in 2013 and still in effect, bears special mention 

in this regard. Because the patch allows government agencies and the GSEs to 

increase DTis, the patch is helping fuel the current house price boom. When 

mortgage risk expands alongside of home prices, there is little "friction" in mortgage 

markets to slow the growth of a housing boom. 
106 

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Figure 10. Correlation 1: Census Tract Mortgage Risk and House Price 

Appreciation, by Tract Share of High-Risk Lending 

Census Tract Mortgage Risk & House Price Appreciation: 

by Tract Share of High Risk Lending 

0% 

• 

• 

• ft·29.9'1; 

e 31'S:- U§ 

•m·!l9.9'11c 

·--1!Jl'lo 

5% 10% 15% 20% 

Tract Mortgage Risk Index (avg. for 2013-2017) 

25% 

Note: Binned Scatter~d 'With 100 equally sizecl bins Shacling indicates the majoriy cttracts by 

high riSks hare wtthln the bin. Results based on over 17,000 census tracts IIIith at least 20 

mached loans in eac hyear for 73 caSAs Weighting based on HMDA. 

Source: AEI, Center on Housilg 114 arkets and Fin ante. \II'W\f'/.AEI.orglhousing. 

Note: Binned scatterplot with I 00 equally sized bins. Shading indicated the majority of tracts 

by high-risk share within the bin. Results based on over 17,000 census tracts with at least 20 

match loans in each year for 73 CBS As. Weighting is based on the Horne Mortgage 

Disclosure Act. 

Source: AEI Center on Housing Markets and Finance. 

Correlation 2: Census Tract Mortgage Risk Index and Home Price by High-Risk 

Loan Share of Tract Lending 

There is a strong positive correlation between higher mortgage risk and lower home 

prices. 

The binned scatterplot below shows that the greater a census tract's MRI, the lower 

the median home price. Low mortgage risk census tracts are present among the entire 

range of tracts by average home price (green color palette dots). High-risk census 

tracts are concentrated among tracts with median home prices of$300,000 or less. 

High-risk lending is associated with at least 30 percent of purchases for all these 

tracts (blue color palette dots). 
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Further, the scatterplot has a clear downward trend: As the tract MRI increases (xaxis), the median tract home prices decreases (y-axis). For example, the dark green 

dots on the right, which had <15 percent high risk loans, had low average tract MRis 

(about 3-6 percent) and the dark purple dots on the right, which had >=60 percent 

high risk loans, had high tract MRis (about 17-23 percent). For the dark green dots, 

the median tract home price is $482,000, while for the dark purple dots, the median 

tract home price is $176,000. 

Eighty-three percent of the binned census tracks with median home prices below 

$300,000 had average tract MRis of9 percent or greater. As was demonstrated by 

Correlation l above, there is a strong positive correlation between higher mortgage 

risk and home price appreciation. When the inevitable reversion of real house prices 

to their trend growth path occurs, these lower-priced census tracts and their residents, 

who are more likely to be low-income and minority, will again be subjected to more 

price volatility, greater loss of equity, and higher rates of loan default. 

Figure 11. Correlation 2: Census Tract Mortgage Risk Index and Home Price by 

High-Risk Loan Share of Tract Lending 

0 

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Census Tract Mortgage Risk & Tract House Prices: 

by Tract Share of High Risk Lending 

• • 

• • ,. 

High Risk %of Loans (avg. for 2013-2017) 

• 0%-H.~ 

.. 1~- 29.9" 

• 3:1%~ U.9'1. 

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0% 5% 10% 15% 20% 25% 

Tract Mortgage Risk Index (avg. for 2013-2017) 

1\bte: Binned Scatterplo!wi!h 1 CD equally sized bins. Shading indicates the majority of tracts bv 

high risk share wtthin the bin. Resutts based on CNer 17,000 census tracts with at least 20 

matched loans in each year for 73 CBSAs. V\feighti ng based on HM DA. 

Source:AEI, Center on Housing Markets and Finance, www.AEI.orgfhousing. 

Note: Binned scatterplot with I 00 equally sized bins. Shading indicated the majority of tracts 

by high-risk share within the bin. Results based on over 17,000 census tracts with at least 20 

match loans in each year for 73 CBSAs. Weighting is based on the Home Mortgage 

Disclosure Act. 

Source: AEI Center on Housing Markets and Finance. 
108 

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Correlation 3: Census Tract Mortgage Risk Index and Income, by High-Risk 

Loan Share of Tract Lending 

There is a strong positive correlation between higher mortgage risk and lower tract 

income as a percentage of metro area income. 

The binned scatterplot below shows that the greater a census tract's MRI, the lower 

tract income as a percentage of metro area income. The scatterplot has a clear 

downward trend: As the tract MRI increases (x-axis), the median tract home prices 

decreases (y-axis). For example, the dark green dots on the right, which had <15 

percent high risk loans, had low average tract MRis (about 3-6 percent) and the dark 

purple dots on the right, which had >=60 percent high-risk loans, had high tract MRis 

(about 17-23 percent). For the dark green dots, the median tract income was 158.2 

percent of metro area income, while for the dark purple dots, the median tract income 

was 88.8 percent of metro area income. 

Seventy-five percent of the binned census tracks with median income below 120 

percent income of metro area income had average tract MRis of9 percent or greater. 

As was demonstrated by Correlation 1 above, there is a strong positive correlation 

between higher mortgage risk and home price appreciation. Once again, the residents 

of these lower-income census tracts will be subjected to more price volatility, greater 

loss of equity, and higher rates of loan default. 

Figure 12. Correlation 3: Census Tract Mortgage Risk Index and Income, by 

High-Risk Loan Share of Tract Lending 
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0 

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00 0 

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Census Tract Mortgage Risk & Tract Income: 

by Tract Share of High Risk Lending 

• 

High Risk %of Loans (avg. for2013-2017) 

• ~-HY" 

• 151;-19.9"-

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5% 10% 15% 20% 

Tract Mortgage Risk Index (avg. for 20 13-2017) 

25% 

Note: Binned Scatterplot 'Nith 1m equally sized bins. Shading indicates the majority of tracts by high risk share w~hin the bin. Results based on over 17,000 census tracts with at least 20 

matched loans in each year for73 CBSAs. Weighting based on HMDA 

Source: .AEI, Center on Housing Markets and Finance, WWN.AEI.orgthousing. 

Note: Binned scattetplot with I 00 equally sized bins. Shading indicated the majority of tracts 

by high-risk share within the bin. Results based on over 17,000 census tracts with at least 20 

match loans in each year for 73 CBSAs. Weighting is based on the Home Mortgage 

Disclosure Act. 

Source: AEI Center on Housing Markets and Finance. 

Correlation 4: 73 CBSAs Predicted Census Tract-Level Home Price 

Appreciation by Census Tract Average Mortgage Risk, with Housing Demand as 

a Factor 

This fourth correlation shows there is a strong positive correlation between leverage 

and house price appreciation. 

In a 5.7 million sales transaction study of five-year home price appreciation (HPA) 

rates for over 17,000 census tracts with at least 20 loans per year, we examined the 

relationship between tract house price appreciation from 2013 to 2017 and tract-level 

average mortgage risk between 2013 and 2017 within 73 large core-based statistical 

areas. (See Appendix 1 for a list ofCBSAs.) We found that within these CBSAs, 

leverage is positively correlated with house price appreciation. 

The scattetplot below (Figure 13) shows the predicted tract-level home price 

appreciation by tract-level average mortgage risk. Each line represents the 
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relationship between the two variables for a given CBSA. The color coding of the line 

represents a snapshot of market tightness. 

• This correlation was positive in 68 of the 73 CBSAs. 

o The positive correlation between tract house price appreciation and tract mortgage 

risk was statistically significant at the 5 percent level in 62 of 68 CBSAs. 

o This positive correlation was observed across a range of demand conditions as 

measured by days on market relative to the national average. 

Twenty-four of the 68 were in metros with below average days on market 

(high relative demand), 

• Thirty-eight of the 68 were in metros with average days on market 

(average relative demand), and 

• Six of the 68 were in metros with above-average days on market (below 

average relative demand). 

o The correlation was even stronger when markets are tighter (as measured by the 

average days on market of listings between 2013 and 2017.) 

• The correlation was negative in five of the 73 CBSAs. 

o The negative correlation was, however, only statistically significant in three 

CBSAs (San Jose-Sunnyvale-Santa Clara, California; Seattle-Tacoma-Bellevue, 

Washington; and New Orleans-Metairie, Louisiana). 

o For San Jose and Seattle, both with below-average days on market, strong demand 

in the high-price tier may have outweighed the mortgage risk effect. In San Jose 

for example, the share of sales in the high price tier increased from 35 percent in 

2013 to 65 percent in 2017. In Seattle, sales growth in the high-price tier also far 

outpaced sales growth in the low tier. Additionally, when King County (Seattle) 

and Pierce County (Tacoma) were examined individually, while the correlation in 

King was still negative, the correlation in Pierce was positive. 

o New Orleans was an outlier. 

Figure 13. Seventy-Three CBSAs Predicted Trace-Level Home Price 

Appreciation by Tract-Level Average Mortgage Risk, Sorted by Housing 

Demand 

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.... 

.... 

0 

N 

0.6 

0.5 ~ 0.4 ~ .~ .~ ~ 0.3 

c. ~ l:j ~ ~ 0.2 ~ 1j 

.= "' 

0.1 

0 

0% 

73 CBSAs: Predicted Tract-Level Home Price Appreciation by Tract-Level Average Mortga

Risk, Sorted by Housing Demand .---u-p_w_a-rd,..s71o-p""in-g"": b'"e"'lo_w_a_v_e-ra_g_e-:d-ay_s_o~n:.:m:;:a:.:r;:.ke.:t;..::.:, 

-upward sloping: average days on market 

upward sloping: above average days on market 

-----downward sloping: below average days on market 

--- downward sloping: average days on market 

----·downward sloping: above average days on market -~- 5% 10% 15% 

Tract Mortgage Risk Index (avg. for 2013-2017) 

20% 

Note: Each line represents the linear regression plot line for Tract Home Price Appreciation and Tract Mortgage Risk Index in a CBSA. Results are based on o

tracts with at least 20 matched loans in each year for 73 CBSAs. Weighting based on HMDA. Inventory is defined relative to the national average for days on 

2018. Below average means a ratio of< 80%, average means a ratio of~ 80% and < 120%, and above average means a ratio of~ 120%. 

Source: AEI, Center on Housing Markets and Finance, www.AEI.org/housing, and Zillow. 
112 

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I will now turn to the deleterious actions of Fannie Mae and FHF A during the past few years of the 

conservatorship that relate to the growing competitive battle between Fannie and FHA for high-risk firsttime buyers (Figure 14). Worryingly, the pace of credit easing by FHA and Fannie is increasing. Over 

the past nine months, Freddie has largely resisted this trend but will likely eventually have to compete as 

well. 

Figure 14. First-Time Buyer Agency Loan NMRI 

"'" ..... 

15" 

'·"" 

05" 

-0.5% 

'lightening -o.s% 

-1.0% '---------------------------------' -l.o% , .... ,. fl!lb-17 Joo-11 Oct--17 l'eb--1S 

Note: This includes all types ofNMRI purchase loans (primary owner-occupied, second home, and investor 

loans). 

Source: AEI Center on Housing Markets and Finance. 

Given that the GSEs' purchase share is nearly three times that of FHA, impact of relatively modest 

increases in high-risk lending by the GSEs will be amplified by their greater share. The share ofGSE 

loans that are high risk (an MRI >12 percent) has risen from 7 percent in late-2012 to 21 percent today. 

This will have a commensurate impact on driving home prices unsustainably higher. 

Before turning to potential actions that the administration and the FHF A could take with respect 

to the GSEs and the FHA, I want to briefly point out some of the many areas where the longrunning conservatorship has been used to strengthen the GSEs' taxpayer-guaranteed duopsony 

and compete unfairly with the private sector. 

GSE's Common Securitization Platform (CSP), pricing, and credit risk transfers 

• Expansions into private-sector business activities including: 

o Mortgage insurance, 

o Lines of credit to nonbank mortgage companies to assist with their mortgage servicing 

operations, and 
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o Services and technology that help mortgage bankers raise cash from mortgage servicing 

rights. 

• Multifamily GSEs' loan acquisitions grew by 256 percent from 2013, reflecting an increase from 

$54.5 billion in 2013 to $139.3 billion in 2017. 

Expansion into risky cash out refinance loans 

Compared to an identical purchase loan, refis have higher stressed default rates across all 

CLTV buckets. Cash-out refis are even riskier than no-cash-out refis. For example, a 

purchase loan with a 720-769 credit score, a DTI of39-43 percent, and a CLTV of71-80 

percent has a stressed default rate of 4.5%, however, a cash-out with the same 

characteristics has a MRI that is three times as high at 14 percent, the same as a purchase 

loan with a CLTV of >90 percent. 

25% 

Stressed Default Rate (y-axis) 

20% 

15% 

10% 

5% 

0% 

1-60% 61-70% 71-80% 81-90% >90% 

Note: For illustrative purposes, all stress default rates computed for credit score of 720-769 aud 

DTI of39-43%. 

Source: AEI, Center on Housing Markets and Finance. 

I will now tum to potential actions that the administration and the FHF A could take regarding the 

GSEs and the FHA. 

Let me start off by stating that measured steps now would moderate the current pace of 

unsustainable home price increases and not lead to home price declines. 

Unlike FHA, RHS has not moved out risk curve during the current boom, keeping housing more 

affordable for RHS buyers. This is demonstrated in the next chart. The upper portion shows that 

FHA borrowers are able to buy a 26 percent more expensive home than five years ago (more 

than triple the rate of inflation), yet with a smaller down payment. At the same time, homes 

purchased by RHS buyers have only gone up 9 percent, about the same as the rate of inflation. 

RHS' s stressed default rate is unchanged over the past five plus years, while FHA' s first-time 

25% 

20% 

15% 

10% 

5% 

0% 
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buyer risk index has increased from 21.5 percent to 27.5 percent. At the same time, our research 

shows that the median income of home buyers served by the FHA and RHS over the last five 

years have both gone up by about the same percentage, further evidence that RHS' policy has 

helped RHS borrowers buy home at more sustainable prices and with less leverage. 

Figure 15. Not Moving Out the Risk Curve During the Current Boom Has Helped Keep 

Housing More Affordable for RHS Buyers 

Median downpayment Median saleprice 

feb.2Dl3 I Feb.20l8 Chance &om Feb. 2013 to feb. 2018 

.... $-1,900 I $.1,000 

FHA $4,100 I $3,900 +2 -... 

.., .. - ...... ___ ..,.~.,""-'"'""""""'""-",..,,....,.,._,.. .............. ..,-.. .., • .,..,.. ... ""-'"'-,.,._"".,. ... ..,'""_ .. ..., __ .. ..,_,..~-- ................... .,. ... ...-,. XI% 

RHSFTB ... ~• L-----~------~----~------~----~------~----~------~--~re• 

Source: AEI Center on Housing Markets and Finance. 

Turning now to my recommendations for administrative actions addressing housing fmance 

reform, I will cover the need for prompt action, which may be taken by three parties: the 

Department of Housing and Urban Development (HUD)/FHA, BCFP, and FHF A/Treasury. 

Step 1: Actions by HUD/FHA That Should Be Taken in 2019. As suggested in recent 

testimony by Benjamin Carson, HUD/FHA should "closely examine policies that go beyond 

FHA's core mission" and be "mindful of concerning trends." 

The evidence is clear that during a seller's market, with FHA's share at 20 percent and its 

MRI at nearly 30 percent, FHA and other FHA-like lending will result in an unsustainable 

increase in home prices. 

In light of this, HUD/FHA should takes steps to: 

• Reduce FHA's footprint by better targeting to FHA's core mission of serving low-income 

home buyers 

o Cap FHA' s QM at loan limits equal to a multiple of area median income: 

Three times income for all but high-cost areas and new construction 

Four times income for high-eost areas and new construction 

o FHA's volume would drop by 42 percent with share at about 12 percent, down from 

20 percent today 
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• Trim several risky parts of FHA' s credit box by: 

o Limiting DTis to 50 percent along with other corresponding DTI changes 

o Reducing seller's concessions from a maximum of 6 percent to 3 percent 

o Restricting equity leverage risk layering resulting from simultaneous use of down 

payment assistance and seller concessions 

o Eliminating all or a substantial portion ofFHA's cash-out refinance loan activity 

• Promote wealth building by crowding in loan terms of20 years or less and crowding out 30-

year loans 

• Use QM authority to implement countercyclical changes: 

o Evidence that a creditor's ability-to-repay determination was reasonable and in good 

faith: 

Underwriting standards that have historically resulted in comparatively low 

rates of delinquency and default during adverse economic conditions 

Underwriting standards based on empirically derived, demonstrably, and 

statistically sound models 

o Evidence that a creditor's ability-to-repay determination was not reasonable or not in 

good faith: 

The creditor disregarded evidence that the consumer may have insufficient 

residual income to cover other recurring obligations and expenses, taking into 

account the consumer's assets other than the property securing the loan, after 

paying his or her monthly payments for the covered transaction, any 

simultaneous loans, mortgage-related obligations, and any current debt 

obligations 

• Institute a consumer disclosure regarding a loan's likelihood to default under stress 

conditions 

• Net present value (NPV) claims-paying capacity, MIP revenue and capital resources 

o At end ofFY 2018, assuming a portfolio of$1.19 trillion and a need to withstand a 

Great Recession-sized event, FHA should have: 

NPV claims-paying capacity equal to 9.0 percent or $107 billion 

Capital resources portion equal to 5.0 percent or $60 billion 

However, home prices, particularly entry-level prices, have been inflated by 

excess leverage, most of which has been provided by FHA 

Therefore, a buffer of an additional 2 percent in capital resources should be 

provided for each 10 percent that low and low-medium FHA home prices 

have increased faster than medium-high and high home prices (currently+ 18 

percent) 

This would require $24 billion in additional capital resources for a total of 

$84 billion to support $1.19 trillion in outstandings 

The above steps would go a long way toward reducing the FHA' s pro-cyclical impact of 

driving up entry level home prices in a seller's market. 

Step 2: Actions by BCFP in 2019. The bureau should, coincident with its five-year review 

of the QM regulation and attendant "patch" due by January 2019, announce that the GSE 
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patch will not be renewed when it expires in January 2021. It should also provide guidance to 

the GSEs that they should immediately begin reducing industry reliance on the patch in a 

measured manner, thereby reducing any market impacts between now and the 2021 

expiration of the patch. Providing guidance to the GSEs would go a long way toward 

eliminating the capture by the GSEs of the high DTI FHA business that the FHA would be 

cutting back under Step I above. Finally, it should coordinate these actions with 

HUD/FHA's own actions to reduce FHA's DTis. 

Step 3: Actions by FHFA in Concert with Treasury. The only plausible reason for 

government to back the housing market is to help low- or moderate income families buy 

homes. An evaluation of the GSEs 2017 business shows, that the GSEs fail to meet this 

simple test. Almost half of the GSEs' 2017 volume wasn't even related to buying a 

primary residence. Another 41% went to help well-to-do buyers, of which 25 

percentage points went to well-to-do repeat buyers of primary residences and 16 

percentage points went to well-to-do first-time buyers. Only 6.5% (1 in 16) GSE 

Dollars went to first-time buyers of more modest homes and only 3. 7% (1 in 30) GSE 

Dollars went to repeat buyers of more modest homes. 

Therefore, even before a new permanent or acting FHF A director named by the president 

takes office, the Treasury should announce a strategic plan to implement at least a 50 percent 

reduction in the GSEs' single-family and multifamily acquisition footprint. Once a director 

named by the president has taken office, Treasury and FHFA should work together to 

implement this strategic plan. 

Single-family-plan reductions might be accomplished by the following steps over three to 

four years with minimal impact on the primary owner-occupied home finance market and the 

availability of the 30-year fixed rate mortgage: 

• End acquisition of cash out refinance loans (25 percent footprint reduction based on 2017 

acquisition volumes) 

• End acquisition of high-cost limit loans (3 percent additional footprint reduction based on 2017 

acquisition volumes) and freeze conforming loan limit at $453,100 

• End acquisition of second home and investor loans (9 percent additional footprint reduction 

based on 2017 acquisition volumes) 

• End acquisition of noncash-out refinance loans ( 15 percent additional footprint reduction based 

on 2017 acquisition volumes) 

Multifamily: 

• A 50 percent reduction in combined GSE annual acquisition volume to $65 billion/year would 

return their share to 2012 levels, taking into account the growth of outstanding multifamily debt 

since 2013. 

o The GSEs' loan acquisitions grew by 256 percent from 2013, reflecting an increase from 

$54.5 billion in 2013 to $139.3 billion in 2017. 

o This reduction will be achieved through some combination of increased pricing, more 

limited product offerings, and tighter overall underwriting standards. 
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GSE's Common Securitization Platform (CSP), pricing, and credit risk transfers. Treasury 

and FHF A should: 

Conduct a detailed study of the issues and options on the GSE's CSP and credit risk transfers. 

Treasury should work with FHFA to: 

Either implement the suspended standby fee as compensation for the taxpayer backstop as 

originally provided for under the PSPA or raise guarantee fees a commensurate amount 

Examine the GSEs' guaranty fee pricing, capital requirements, and full implementation of 

Section 401 of the Temporary Payroll Tax Cut Continuation Act of2011. This statutory 

provision directs FHF A to require GSE guarantee fees to be set so as to appropriately reflect the 

cost of capital allocated to similar assets held by fully private regulated financial institutions 

Examine current cross-subsidies in the guarantee fee pricing, effect of competing with FHA, and 

impact on home prices 

• Expand the credit risk transfer program to maximize the amount of credit risk transferred to or 

retained by the private market, with emphasis on front-end, first-loss transfers. Also to review 

CRT pricing, structure, and entities (including where domiciled) 

• Review the current wind down of the GSE' s retained portfolios to ensure the size is 

commensurate with the operational needs of the GSE's and Treasury's exposure as effective 

guarantor 

Examine Affordable Housing Program 

o Reduce combined loan to value ratio on >20 year loan term to 95 percent 

o Implement wealth building home loan ( <=20 year loan term) at I 00 percent combined 

loan to value ratio 

o Examine Affordable Housing Trust Fund and Capital Magnet Fund funding while in 

conservatorship 

• Reduce maximum DTI to: 

o 43 percent on >20 year loan term by January 2021 

o 46 percent on <=20 year loan term by January 2021 

Promptly examine all program and product expansion approvals that have been given while in 

conservatorship, with the immediate termination of those that compete with the private sector 

In conclusion, prompt administrative action is advisable now. We are in the midst of a strong home price 

boom that is unsustainable and fueled by leverage. While we do not know when real house prices will 

revert to their trend growth path, what is certain is that when such a reversion occurs, low-income and 

minority home buyers will again be unduly subjected to volatile home prices, loss of equity, and 

attendant loan defaults. As a nation we can and must do better. 
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Testimony of 

Phillip L. Swage! 

Before the Committee on Financial Services 

U.S. House of Representatives 

"A Failure to Act: How a Decade Without GSE Reform Has Once Again Put Taxpayers at Risk" 

Thursday, September 6, 2018 

Chairman Hensarling, Ranking Member Waters, and Members of the Committee, thank you for the 

opportunity to testify on the subject of GSE Reform. I am a professor at the University of Maryland's 

School of Public Policy and a faculty affiliate of the Center for Financial Policy at the Robert H. Smith 

School of Business at the University of Maryland. I am also a senior fellow with the Milken Institute's 

Center for Financial Markets. I was Assistant Secretary for Economic Policy at the Treasury Department 

from December 2006 to January 2009. 

Housing finance reform remains the notable unfinished legislative task of the financial crisis. Indeed, 

when Fannie Mae and Freddie Mac were taken into conservatorship ten years ago-while I was at the 

Treasury Department-it was scarcely imagined that the two Government Sponsored Enterprises would 

remain in government control a decade later and that the vast majority of mortgages in the United 

States would be guaranteed by taxpayers. 

Housing finance reform is still needed. While the housing finance system seems to work well for many 

Americans, access to mortgage financing remains crimped for many families even as the dominant 

government role means that taxpayers are taking on too much risk and consumers are missing out on 

potentially beneficial innovation. In other words, the current housing finance system should satisfy 

neither those who care most about considerations of taxpayer safety and healthy markets, nor those for 

whom concerns over affordability and access are paramount. 

Housing finance reform can mean a better system in several dimensions: 

1. Better taxpayer protection and diminished systemic risk of another financial crisis; 

2. Improved access to mortgage financing for families who still face difficulty getting loans; 

3. Better targeted and more effective subsidies for affordable housing; 

4. Increased transparency in the expenditure of public resources for those subsidies; 

5. A more innovative housing finance system with a well-defined role for the government. 

Importantly, reform can do better on both taxpayer protection/efficiency and affordability/access. 

The Flawed System Before the Financial Crisis 

Understanding the flaws of the pre-crisis housing finance system is helpful to ensure that we avoid them 

in moving forward with reform, whether future changes come about through legislation or through 

administrative actions. 

1 
119 

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The central flaw of the old system was the implicit guarantee under which Fannie and Freddie, though 

private companies, were viewed by market participants as having the financial backing of the U.S. 

government. As David Scharfstein and I explain in a recent overview paper, 1 this implicit guarantee 

allowed Fannie and Freddie to fund themselves at lower rates than otherwise would have been the case 

given their modest capital ratios, earning a spread between the yield on the MBS they held in portfolio 

and their artificially low debt financing costs. The implicit guarantee meant that Agency MBS (mortgage 

backed securities guaranteed by Fannie and Freddie) traded as if they were free of credit risk even 

though the two firms were woefully undercapitalized; the two firms were required to fund themselves 

with only 40 bps of capital (four-tenths of one percent) for each $100 of single family mortgages they 

insured. 

In retrospect, given the incredibly favorable situations enjoyed by Fannie and Freddie, it is astonishing 

that the two firms put themselves in position to fail. 2 And yet they did, presenting great peril to the U.S. 

financial system and economy. Indeed, the risks taken by the two firms leading into the crisis embodied 

the moral hazard in the pre-crisis system in which the implicit-and uncompensated-guarantee meant 

that GSE shareholders and management got the upside in good times, while U.S. taxpayers were left 

covering the risk in a catastrophe- as happened in 2008. Flaws in securitization and origination of nonAgency lending were the initial driving factors behind the housing bubble and thus the financial crisis, 

but the actions of the GSEs made the crisis worse. 

With the two firms then (and still) the linchpins of the U.S. mortgage system, allowing them to fail would 

have seriously disrupted the flow of mortgage credit at a time when the U.S. financial system and 

broader economy were facing considerable challenges. Moreover, with GSE debt held widely in the 

United States and around the world, allowing the two firms to default on their obligations could have 

had systemic consequences. Many U.S. financial institutions might have been required to recapitalize or 

shrink their balance sheets, while foreign investors might have hesitated to provide the capital flows 

that support U.S. investment and consumption and help finance the U.S. government. The terms of the 

taxpayer support in September 2008 were stiff but appropriate. Fannie and Freddie shareholders had 

their stakes diluted through the government's 79.9 percent ownership in each firm, with new senior 

preferred shares issued ahead of the pre-crisis common and preferred equity and paying a 10 percent 

coupon (or higher if the dividend was paid in kind). Investors in GSE debt and MBS were bailed out, 

however-much as had been predicted by those who warned about the dangers of the implicit 

guarantee. 3 While taxpayers remain on the hook to support the firms indefinitely in conservatorship, 

the commitment of taxpayer resources achieved its purpose, as mortgage financing remained available 

throughout the crisis even while many other parts of U.S financial markets exhibited severe strains. 

1 David Scharfstein and Phillip Swage!, 2016. "Legislative Approaches to Housing Finance Reform," in Principles of 

Housing Finance Reform, Edited by Susan M. Wachter and Joseph Tracy, University of Pennsylvania Press. 2 An account of the misjudgments at Freddie Mac can be found in Susan Gates, Days of Slaughter: Inside the Fall of 

Freddie Mac and Why It Could Happen Again, Johns Hopkins University Press (2017), while Timothy Howard, The 

Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse af the American Dream, McGraw-Hill 

(2013) discusses missteps at Fannie Mae. 3 See, for example, N. Gregory Mankiw, "Remarks at the Conference of State Bank Supervisors, State Banking 

Summit and leadership Conference," November 6, 2003. http://scholar.harvard.edu/files/mankiw/files/stbank.pdf 

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Ten years later, the problems of the pre-crisis GSE system remain in place: we still have two 

undercapitalized firms that are too important to be allowed to fail. In short, we have failed to address a 

problem that long has been in front of us. 

In addressing these dangers, housing finance reform should clarify the roles of the private sector and the 

government, making clear what would happen in the event that Fannie, Freddie or any future 

competitors in securitization and guaranty face collapse. Ensuring that these firms, once they exit 

conservatorship, fund themselves with more capital will reduce the likelihood of another failure. But if 

firms remain too important to be allowed to fail, then simply stating that there will not be another 

bailout is not credible-indeed, a return to a duopoly of private firms such as with "recap and release" 

would reconstitute the implicit guarantee that was the most problematic aspect of the pre-crisis system. 

This would be the case even in a recap and release approach that increased the amount of capital over 

the meager amount required in the pre-crisis system. More capital is important, but not enough: simply 

adding capital to the model that failed in the crisis does not enough address its structural problems. 

Reform should make the GSEs and any successor or competitor firms safer and also foster more 

competition outside of the now-dominant government-guaranteed sector of the mortgage market. 

The Housing Finance System since the Crisis 

While the current situation with the GSEs is not satisfactory, considerable progress has been made in 

addressing some problems of the old system. 

Most importantly, there is now private capital taking on housing credit risk in the GSEs' single-family 

guaranty business through a variety of risk transfer transactions (the GSEs' multi-family businesses 

already shared risk with private capital). The Federal Housing Finance Agency under the leadership of 

Director DeMarco and Director Watt deserves praise for moving forward with this initiative, as do the 

people involved at both Freddie and Fannie. While having private capital at risk provides welcome 

protection ahead of the government, with a duopoly, taxpayers are still on the hook to ensure the 

continued operations of the two firms. Addressing this latter concern is a key objective of reform- to 

arrive at a system in which there are sufficient competitors in securitization and guaranty that one or 

more of them can be allowed to fail without posing a risk to the financial system or the economy. 

Reform further would usefully increase the share of non-guaranteed origination. 

The retained portfolios of MBS have shrunk at the two firms, reducing a way in which the GSEs posed a 

systemic risk by their massive issuance of debt to fund the portfolios. There is no need for Fannie and 

Freddie to act as "buyers of last resort" to support demand for mortgages-a rationale sometimes put 

forward for having massive retained portfolios-since the Federal Reserve can purchase MBS again in 

the future if needed to support the broad economy as it did during the financial crisis. Indeed, reform 

should leave the Federal Reserve and the Treasury Department and not the housing finance regulator as 

the policymakers responsible for responding to macroeconomic threats. 

Other steps taken with the GSEs in conservatorship likewise have improved the housing finance system. 

The Private Mortgage Insurer Eligibility Requirements (PMIERS) that establish capital standards for 

private mortgage insurers reduce the chance of problems among these firms as happened during the 

crisis. The development of a common security for GSE MBS will improve liquidity by unifying the pools in 

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which Fannie and Freddie MBS trade, ultimately reducing mortgage interest rates. More could be done 

to turn this initiative into a vehicle for longer term reform by opening the architecture of the common 

securitization platform to allow additional firms to compete with Fannie and Freddie in the 

securitization of MBS with a government guarantee. 

Future Reforms 

Even with this progress, the housing finance market will remain in limbo absent legislation to move to a 

better system. Importantly, the current situation imposes a cost in lost activity-we do not see what we 

are missing in terms of foregone investment and innovation by people who are standing on the sidelines 

because they are unsure about the structure of the future housing finance system. Legislation would be 

preferable, but in the meantime, it would be useful for the next FHFA Director to consider 

administrative measures to push forward with aspects of a reform agenda within the bounds of the 

Agency's legal authority. I first discuss aspects of legislative reform and then consider administrative 

steps. 

In contemplating the future housing finance system, it is important to keep in mind that taxpayers are 

now on the hook for housing credit risk, both explicitly through the terms of the Treasury support for 

Fannie and Freddie and implicitly because the two firms remain too important to the housing finance 

system and to the broader economy to be allowed to fail. A reduction in taxpayer exposure would be 

brought about through a reform that involves an explicit guarantee on specified MBS protected by an 

ample cushion of private capital. The guarantee and taxpayer exposure already exist. Reform that 

recognizes this risk would improve taxpayer protection and make the government role transparent 

rather than implied. Reform can also usefully separate the critical infrastructure of the housing finance 

system such as the common securitization platform from the firms that serve as guarantors or credit 

enhancers, among whom there can be competition for the benefit of borrowers and the overall 

economy. 

legislation 

There are important dimensions of agreement among the various legislative proposals for housing 

finance reform, including 1) the key role for private capital in taking credit risk ahead of a government 

guarantee; 2) the secondary government guarantee covering MBS and not the firms such as Fannie and 

Freddie involved in securitization and guaranty; 3) support for affordable housing to be made explicit, 

transparent, and more effective; and 4) provisions to ensure that smaller originators have equal access 

to the processes by which mortgages receive government backing. I would add a fifth principle: the 

importance of fostering competition within the mortgage finance system. 4 

This approach would open the business of guaranty and securitization to multiple private firms that 

would compete with the existing GSEs. This could be done in various ways, including along the lines of 

4 See Susan Gates, Ann Schnare, and Phillip Swage!, "Privatize Fannie and Freddie, yes. But be pragmatic," March 

2017. https://www.rhsmith.umd.edu/files/Documents/Centers/CFP /research/swage! march 2017 .pdf 

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the PATH Act; as proposed by Ed DeMarco and Michael Bright5 or by Jim Parrott et al; 6 or following the 

approach in the Senate Banking Committee with the Crapo-Johnson and Corker-Warner proposals. In 

the latter approach, firms that purchase the secondary government guarantee on their MBS would be 

required to fund themselves with considerable private capital that would be extinguished ahead of the 

taxpayer obligation. MBS would be guaranteed but the firms undertaking securitization and guaranty 

would not; with sufficient entry, one or more of the private guarantors could fail without posing a 

systemic risk. In the event of a broad crisis that threatens the collapse of all guarantors, there is little 

doubt that the federal government would step in, but this is the case with any system. Indeed, 

legislation should contemplate this possibility and include a resolution regime that ensures that the 

private shareholders are wiped out ahead of such federal support. Even so, the essential- and I think 

achievable- goal of reform is to ensure more capital and instill more competition and market discipline 

to avoid another catastrophic failure in the first place. 

The amount of capital and the pricing of the secondary government guarantee are crucial decisions. 7 

The key insight remains that ample private capital is essential both to shield taxpayers and to provide 

the private sector firms with an incentive for prudence. Policymakers should look skeptically at the 

suggestion that ensuring appropriate capital levels will have an especially large impact in pricing people 

out of mortgages. After all, if a specified amount of capital is enough to protect taxpayers against all but 

the most catastrophic housing credit risk, then incremental capital past this point would hardly be at risk 

and therefore cannot be expensive. It cannot be the case that taxpayers are safe and yet incremental 

capital has a large impact on mortgage interest rates-if adding capital is expensive, then taxpayers are 

not safe and the capital requirement is insufficient. 8 A recent CBO report, for example, indicates that a 

structure for the secondary mortgage market along the lines of the 2014 cost estimate for the CrapoJohnson proposal (5.1217) would result in a small impact of 10 to 20 basis points on mortgage interest 

rates- and this modest impact easily could be offset with better targeted subsidies to improve 

affordability for low- and moderate-income borrowers. 9 

The proposal by Representatives Carney, Delaney, and Himes provides an example of an innovative 

approach by which to price the government guarantee. In their setup, five percent private capital would 

be required in the first-loss position, and then 10 percent of the mortgage credit risk of the remaining 95 

percent of the securitization would sold to private investors pari passu to the government exposure. The 

pricing of this 9.5 percentage points of capital would be used to set the price of the secondary 

government insurance. The precise details of a pricing mechanism would have to be worked out, but the 

5 Ed DeMarco and Michael Bright, "Toward a New Secondary Mortgage Market," September 29, 2016. 

https:/!www.milkeninstitute.org/publications/view/823 

6 Jim Parrott, Lewis Ranieri, Gene Sperling, Mark Zandi, and Barry Zigas, "A More Promising Road to GSE Reform," 

March 2016. https:/!www.economy.com/mark-zandi/documents/2016-03-22-A-More-Promising-Road-To-GSEReform.pdf 

7 See Eric Kaplan, Michael Stegman, Phillip Swage I, and Ted Tozer, "Bringing Housing Finance Reform over the 

Finish Line," January 2018, Milken Institute. https:l/www.milkeninstitute.org/publications/view/898 8 See Scharfstein and Swage! (2016) for an analytic discussion, or the numerical analysis in Jim Parrott, Michael 

Stegman, Phillip L. Swage!, and Mark M. Zandi, "Access and Affordability in the New Housing Finance System," 

Urban Institute, February 13, 2018. https:l/www.urban.org/research/publication/access-and-affordability-newhousing-finance-system 

9 Congressional Budget Office, "Transitioning to Alternative Structures for Housing Finance: An Update," August 23, 

2018. https://www.cbo.gov/publication/54218 

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key insight of the Carney-Delaney-Himes proposal is to harness private incentives to price the 

government guarantee. 

Entry of new firms to compete in securitization and guaranty is useful for two related purposes: to 

ensure that one or more firm can fail without an undesirably large disruption to the availability of 

mortgage financing, and to ensure that competition among firms pushes down the costs involved with 

home loans for the benefit of consumers. 10 A challenge for housing finance reform is thus to ensure that 

an adequate number of new firms enter to compete. With the annual earnings of Fannie and Freddie 

together more than $10 billion in recent years, there would seem to be adequate incentive for others to 

enter into this market. Opening the common securitization platform to entrant firms would ensure that 

new competitors are not at an initial liquidity disadvantage. And as noted previously, housing finance 

reform must ensure that smaller lenders are not disadvantaged as was the case in the pre-reform 

system. 

Administrative Measures 

While housing finance legislation remains difficult, it would be useful to take administrative measures 

that move in the direction of an improved housing finance system. Such steps would not foreclose any 

particular legislative outcome. The broad direction of administrative measures in housing finance reform 

would be to focus the GSEs' activities while improving their effectiveness. 

Ahead of legislation, it is useful that the FHFA in July of this year put forward for comment a proposal for 

Enterprise Capital Requirements that would apply in the event the GSEs emerge from conservatorship. It 

is common for the level of capital requirements for the GSEs to be compared to the firms' losses in the 

financial crisis-for example, to note that the amount of capital implied by the recent capital proposal or 

by the FHFA's annual stress test would have been enough for Fannie and Freddie to make it through the 

crisis. This comparison is inapt. The losses of the two firms during the crisis came in the face of massive 

interventions by the federal government to support the housing market and the economy. Capital 

requirements should be set so that problems in the housing finance system do not require another 

TARP, an $800 billion fiscal spending binge, or extraordinary policy actions by the Fed and FDIC. And 

even then, capital requirements are set to ensure that firms have not just the capital to squeak past a 

severely stressful environment but to continue operating through the stress. If the future housing 

finance system involves a duopoly, those two firms must have fortress balance sheets- they will be 

essentially akin to utilities. 

While the duopoly continues in the present, additional competition and innovation in the housing 

finance system can be fostered by actions that increase the share of non-Agency securitization and 

thereby reduce the exposure of taxpayers to mortgage risk. An approach in line with the second oft he 

three options in the Obama Administration's white paper on housing finance reform would be to limit 

the scope of the government guarantee on MBS in normal times when there is little need for it, and 

expand the availability of the government backstop in periods of financial stress. This is similar to the 

provisions of the PATH Act, in which a government guarantee is available through the FHA for low10 Evidence on the importance of competition in housing finance is provided by David Scharfstein and Adi 

Sunderam, "Market Power in Mortgage Lending and the Transmission of Monetary Policy," April 2015. 

https:/fwww.hbs.edu/faculty/Pages/item.aspx?num=44239 

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income and first-time homebuyers in normal times, and made widely available in times of stress. 

Administrative changes to the GSE capital regime and the pricing of GSE insurance premiums could 

move in this direction. 

The expiration of the QM Patch in January 2021 provides a natural opportunity to consider the scope of 

GSE activities and the broader set of regulations around origination, with the FHFA usefully coordinating 

with other federal regulators. As noted by Kaul and Goodman (2018), "The non-QM market is small 

because most lenders are wary of taking on the risk that a borrower in default will sue, citing lender 

failure to verify ability to repay." 11 The problem is that overly rigid regulation discourages private sector 

capital from taking on mortgage risk outside the confines of the GSEs. It would be useful to coalesce on 

one set of standards that avoid favoring the GSE channel-ultimately doing away with the QM patch 

rather than broadening it to encompass additional lending. FHFA should further examine whether 

elements of the GSEs' automated underwriting systems represent critical infrastructure in the sense that 

the favored status of loans approved by those systems poses a barrier to entry. This would lead to 

consideration of putting those systems into the common securitization platform. 

In making changes to capital standards, insurance pricing, and acceptable origination parameters at the 

GSEs, it would be useful as well to coordinate with the FHA and with the regulators of other lending 

securitized by Ginnie Mae. The goal is to avoid having borrowers migrate to FHA, presenting a yet 

greater risk to taxpayers since FHA loans have no private capital at the MBS level and typically modest 

down payments such as 3.5 percent. 

Administrative reforms can also improve the effectiveness with which the housing finance system 

supports affordable housing. As documented in my February 2018 paper with Parrott, Stegman, and 

Zandi, the current GSE system provides an estimated $4.1 billion in annual resources to subsidize 

affordable housing, of which $3.8 billion comes through cross-subsidization that takes place within the 

pricing structure of the insurance premiums charged by Fannie and Freddie, and another $300 million 

each year results from the affordable housing fee imposed on the two firms. 12 The $3.8 billion in crosssubsidization comes about because lower risk borrowers pay relatively higher insurance premiums than 

would be implied by considerations of risk and return, in order to reduce insurance premiums and thus 

borrowing costs for higher-risk borrowers. 

This approach to subsidizing affordable housing is poorly targeted to help low- and moderate-income 

borrowers who most need assistance to become homeowners, because the measure of risk by which 

the subsidies are allocated does not correspond to measures of income or need. In the current GSE 

system, a lower-income family that has prudently accumulated money for a 20 percent down payment 

on their home and has Jived within their means to end up with a high FICO score in effect will subsidize a 

higher-income or wealthier borrower with a smaller down payment and a lower FICO score. In my 

February 2018 paper with Parrott, Stegman, and Zandi, we estimate that approximately 23 percent of 

borrowers receiving a subsidy under the current system are not low- and moderate-income households. 

We describe an alternative in which the cross-subsidy would go only to low- and moderate-income 

11 Karan Kaul and Laurie Goodman, "What, If Anything, Should Replace the GSE QM Patch?" Urban Institute, 

August 2018. https://www.urban.org/sites/default/files/publication/98949/cualified mortgage rule. pdf 12 For a discussion of the affordable housing fee and initial review of the uses of the funds, see Michael Stegman 

and Phillip Swage!, "An Affordable Housing Fee in the Context of GSE Reform," Milken Institute, June 2018. 

https://www.milkeninstitute.org/publications/view/916 

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borrowers, providing $4,500 in assistance per borrower, equal to 29 basis points-an amount that 

would more than offset the impact of higher capital requirements as calculated by the CBO. Restricting 

affordable housing assistance to new low- and moderate-income homebuyers (rather than those 

refinancing a loan) would increase the amount of assistance to $6,000 per family and yet more carefully 

target assistance to those looking to become homeowners. 

Administrative measures could take immediate steps to more carefully target affordable housing 

assistance even ahead of a full-scale revision ofthe GSE insurance premiums by removing the crosssubsidy from cash-out refinances. It might make sense for a family to borrow against the value of their 

home, which for many is their largest asset. But there is no need for the federal government to subsidize 

the use of a home as an ATM when the private sector can do this effectively. 

Administrative measures could further improve the targeting of other GSE activities aimed at affordable 

housing. In this respect, the decisions made during conservatorship merit careful examination. As an 

example, the FHFA's implementation of the Duty to Serve provisions mandated by the Housing and 

Economic Recovery Act of 2008 (HERA) provides Fannie and Freddie with credit for financing energy or 

water-efficiency improvements through provisions that are not mentioned in the statute. As shown in 

research by a former top economist in the Obama White House, however, for residential energy 

efficiency investments, "the cost to deploy the efficiency upgrades was about double the energy 

savings." 13 There is nothing wrong with people deciding to put up solar panels, but federal subsidies for 

cost-ineffective activities means less support for low- and moderate-income families looking to become 

homeowners. A similar approach should guide consideration of other GSE activities to ensure that 

subsidies embodied in the single-family and multi-family activities are effective and well targeted to 

those who most need assistance to become homeowners or to afford decent housing. 

Conclusion 

Housing finance reform remains necessary ten years after Fannie Mae and Freddie Mac were taken into 

conservatorship. Not moving forward with housing finance reform leaves too many families still facing 

difficulty obtaining mortgages and taxpayers taking on too much risk. Reform can improve the safety of 

the housing finance system and better protect taxpayers, and also provide for more access to mortgage 

financing and better support for affordable housing. 

13 "Energy Efficiency Upgrades Cost Double the Projected Benefits." UChicago News. June 23, 2015. 

https://news.uchicago.edu/story/energy-efficiency-upgrades-costdouble-projected-benefits-0. 

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AN OPEN LETTER TO THE ADMINISTRATION AND CONGRESS 

A Defining Moment for Housing Finance: 

The Need to Preserve Access and Affordability 

While the nation is in the midst of one of the longest economic expansions on record, 

the wounds of the 2008 financial crisis have not completely healed. Fannie Mae and 

Freddie Mac, the two government-sponsored enterprises (GSEs), remain mired in 

government conservatorship a decade later. And yet despite this limbo status, the 

housing market has recovered in many respects. Home prices have broadly recovered, 

the numbers of foreclosures and underwater borrowers have steadily fallen, and the 

multifamily market has responded to meet increased demand for rental housing. 

Reforms put in place during conservatorship have better positioned the GSEs to continue 

to play a vital role in facilitating mortgage liquidity. Such reforms include pricing parity 

across lenders, the transfer of risk off of taxpayer shoulders, a new infrastructure for 

the single-family secondary market, and support for strong and sustained liquidity 

in the multifamily rental market. But none of these reforms are etched in stone, and 

thus the stability of the housing market is more illusory than appearances may initially 

indicate. The GSEs' long-term ability to support the housing market, without exposing 

taxpayers to excessive risk, depends on the outcome of efforts to permanently reform 

the structural problems that contributed to the crisis. Only with the certainty that 

comes from these reforms and the end of conservatorship will the private market 

be able to establish a more permanent and reliable presence in housing finance. 

Indeed, as policymakers consider options to remove the GSEs from conservatorship, 

retain adequate capital to support GSE operations and foster a system that relies more 

heavily on private capital, there is a pressing need to ensure that the existing progress 

is cemented rather than cast aside. Any efforts to change the role played by the GSEs 

must contain safeguards against higher costs or other market disruptions that reduce 

access to mortgage credit in both the single-family and multifamily markets. They 

must also include enforceable mechanisms to serve the entire market of renters and 

qualified homebuyers, including underserved markets and manufactured housing. 

The undersigned organizations believe that a well-functioning housing finance system should 

provide consistent, affordable credit to borrowers across the nation and through all parts 

of the economic cycle. This credit should be broadly available through responsible lenders 

operating in the single-family and multifamily markets. Lenders and other market participants 

should feel confident that they can access the secondary market on a level playing field with 

their competitors, through clear and transparent standards that do not discriminate based 

on charter type, asset size or loan volume. Investors should feel confident that channeling 

long-term capital into the housing market is sustainable. Consumers should feel confident 

that they can obtain affordable mortgage credit and that they can secure decent housing 

that meets their needs, whether they rent or own, in both high- and low-cost markets. 
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To achieve these goals, policymakers must take great care that further actions to reform 

the GSEs are prudently developed and implemented over a sensible time horizon. Moreover, 

reforms should reflect a pragmatic understanding of the market and the mechanisms 

by which credit is delivered. Housing is simply too important to our national economy 

and our local communities to risk disruption of the system by which it is financed. 

Together, we urge policymakers to lock in recent reforms to the GSEs and complete the 

necessary additional reforms to protect taxpayers, provide liquidity and promote stability 

while taking care not to roll back aspects of the GSEs' operations that are supporting the 

foundation of the housing market. Only through such efforts can we ensure an affordable, 

accessible housing finance system that works for American homeowners and renters alike. 

Sincerely, 

Asian Real Estate Association of America 

Center for Responsible Lending 

Community Home Lenders Association 

The Community Mortgage Lenders of America 

Credit Union National Association 

Enterprise Community Partners, Inc. 

Habitat for Humanity International 

Housing Partnership Network 

Independent Community Bankers of America 

Leading Builders of America 

Local Initiatives Support Corporation 

Make Room 

Manufactured Housing Institute 

Mercy Housing Lakefront 

Mortgage Bankers Association 

National Apartment Association 

National Association of Affordable 

Housing Lenders 

National Association of Home Builders 

National Association of REALTORS• 

National Council of State Housing Agencies 

National Housing Conference 

National Housing Trust 

National Multifamily Housing Council 

Real Estate Services Providers Council 

The Realty Alliance 

Stewards of Affordable Housing for the Future 

U.S. Mortgage Insurers 

United States Conference of Mayors 

Up for Growth Action