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BUILDING A SUSTAINABLE HOUSING 

FINANCE SYSTEM: EXAMINING REGULATORY 

IMPEDIMENTS TO PRIVATE INVESTMENT CAPITAL 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

APRIL 24, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–16 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

April 24, 2013 ................................................................................................... 1 

Appendix: 

April 24, 2013 ................................................................................................... 49 

WITNESSES 

WEDNESDAY, APRIL 24, 2013 

Hughes, Martin S., Chief Executive Officer, Redwood Trust, Inc. ...................... 10 

Katopis, Chris J., Executive Director, Association of Mortgage Investors 

(AMI) ..................................................................................................................... 8 

Kling, Arnold, member, Mercatus Center Financial Markets Working Group .. 13 

Millstein, James E., Chief Executive Officer, Millstein & Co. ............................. 11 

APPENDIX 

Prepared statements: 

Hughes, Martin S. ............................................................................................ 50 

Katopis, Chris J. ............................................................................................... 61 

Kling, Arnold ..................................................................................................... 80 

Millstein, James E. ........................................................................................... 85 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Foster, Hon. Bill: 

Written responses to questions submitted to Martin S. Hughes .................. 113 

Written responses to questions submitted to Chris J. Katopis .................... 114 

Written responses to questions submitted to Arnold Kling .......................... 116 

Written responses to questions submitted to James E. Millstein ................ 118 

Hurt, Hon. Robert: 

Written statement of the Securities Industry and Financial Markets Association (SIFMA) ......................................................................................... 120 

Stivers, Hon. Steve: 

Study by Douglas Holtz-Eakin, Cameron Smith, and Andrew Winkler 

of the American Action Forum entitled, ‘‘Regulatory Reform and Housing Finance: Putting the ‘Cost’ Back in Benefit-Cost,’’ dated October 

2012 ................................................................................................................ 130 

(1) 

BUILDING A SUSTAINABLE HOUSING 

FINANCE SYSTEM: EXAMINING 

REGULATORY IMPEDIMENTS TO 

PRIVATE INVESTMENT CAPITAL 

Wednesday, April 24, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:04 a.m., in room 

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

Members present: Representatives Hensarling, Royce, Capito, 

Garrett, Neugebauer, McHenry, Campbell, Pearce, Posey, 

Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, Stivers, 

Fincher, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, 

Barr, Cotton, Rothfus; Waters, Maloney, Velazquez, Watt, Sherman, Meeks, Capuano, Clay, Scott, Green, Cleaver, Himes, Peters, 

Carney, Sewell, Foster, Kildee, Murphy, Delaney, Sinema, Beatty, 

and Heck. 

Chairman HENSARLING. The committee will come to order. 

Without objection, the Chair is authorized to declare a recess of 

the committee at any time. 

Before we begin our hearing, I would like to take a moment to 

introduce the newest member of our committee. Keith Rothfus is 

a freshman Member representing the 12th District of Pennsylvania. He is an attorney with a law degree from the Notre Dame 

Law School, and a background in business law. He worked for the 

Department of Homeland Security from 2006 to 2007, and earned 

his BA from SUNY Buffalo. We are very happy to have him officially join our committee today. 

And I am sorry you won’t get recognized today to speak at your 

first hearing. 

We will now turn to opening remarks. The Chair will recognize 

himself for 41⁄2 minutes. This is the 7th full or subcommittee hearing that we have had on the topic of forging a new sustainable 

housing policy for America, one that is sustainable for homeowners, 

taxpayers, and our economy. 

Clearly, all Americans want a healthier economy. They want a 

fair opportunity for all Americans to be able to buy a home that 

they can actually afford to keep. It is clearly time to displace the 

false hopes and broken dreams which have arisen from a system 

of misdirected government policies that regrettably incented, browVerDate Nov 24 2008 18:15 Jul 19, 2013 Jkt 080882 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\80882.TXT TERRI
2 

beat or mandated financial institutions to loan money to people to 

buy homes that all too often they could not afford to keep. 

Regrettably, on this topic there have recently been a couple of 

disturbing press reports concerning actions of the Administration. 

On April 2nd, The Washington Post had the headline, ‘‘Obama 

Administration Pushes Banks to Make Home Loans to People With 

Weaker Credit.’’ Had the story been posted on April 1st, I might 

have thought it was an April Fool’s joke. I ask the question, have 

we as a Nation learned nothing? 

The article went on to say that the Obama Housing officials were 

urging Obama Justice officials to offer banks the equivalent of getout-of-jail-free cards if they would lend money to folks with weaker 

credit. 

Ed Pinto, the former top Fannie Mae executive and a recent witness before our committee, said in response, ‘‘That would open the 

floodgates to highly excessive risk and would send us right back on 

the same path we are just trying to recover from.’’ 

The other disturbing headlines came from the L.A. Times and 

many other major publications on April 10th. The L.A. Times headline was, ‘‘Obama budget projects $943-million bailout for key housing agency.’’ Regrettably, the President’s budget does indeed call 

for a bailout of FHA. That institution has abandoned its historical 

mission, endangered the future of the agency, and regrettably put 

taxpayers at risk. 

Many of us believe that there are three steps to a sustainable 

housing policy for our Nation: one, to gradually reduce and eventually eliminate the government guarantee of Fannie Mae and 

Freddie Mac; two, to reform the FHA so that its mission is explicit, 

targeted, and paid for; and three, to remove the artificial barriers 

to private capital coming into the market, which is the subject of 

today’s hearing. 

Now, it may be a challenge for members of this committee to 

come to agreement on all the provisions of the first two steps, but 

surely, surely, we can find some way to come together on the third, 

and that is removing barriers to entry of private capital coming 

into this market. After all, the Administration has clearly been on 

the record urging us to do just that. This is a quote from the Administration’s housing White Paper: ‘‘We need to scale back the 

role of government in the mortgage market and promote the return 

of private capital to a healthier, more robust mortgage market.’’ 

Again, that was in the Administration’s White Paper, which regrettably has been left to gather dust for about 2 years. 

Then-Secretary of the Treasury, Secretary Geithner, on behalf of 

the Administration, said, ‘‘The administration is committed to a 

system in which the private market, subject to strong oversight 

and strong consumer investor protections, is the primary source of 

mortgage credit. We are committed to a system in which the private market, not American taxpayers, bears the burden for losses.’’ 

HUD Secretary Donovan, ‘‘As we have made clear, this administration believes that private capital needs to come back and that 

the government’s footprint in the housing market needs to be much 

smaller. In order to do this, some provisions of the Dodd-Frank Act, 

particularly QM and QRM, will have to be carefully examined 

given their potential impact on the mortgage market.’’ 

3 

I know that many of my friends on the other side of the aisle 

have much invested in the Dodd-Frank Act and its brand, and I respect this, but if you agree that private capital and not taxpayer 

capital should be the foundation of our housing finance system, 

then I hope you will have open minds that perhaps some limited 

number of provisions of the Dodd-Frank law perhaps could be refined and improved upon at this time. 

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

Ms. WATERS. Thank you, Mr. Chairman, for holding this hearing. 

Today, we are examining regulatory impediments to private capital coming back to the housing markets, even as we have very 

fresh memories of a largely unregulated shadow mortgage industry 

selling billions of dollars of toxic securities to investors and devastating millions of American families. Interestingly, we are not examining the private sector impediments to private capital returning. For example, how many investors have confidence that the institution selling new mortgage-backed securities won’t try to swindle them again? Have banks fixed their servicing practices that 

harmed both borrowers and investors, and do we really think investors have forgotten that? 

According to the GAO, the financial crisis reduced the wealth of Americans by $9 trillion. This is not to say that I think that our 

current predicament in which the taxpayer is backstopping 90 percent of all mortgages is sustainable. Nearly everyone on both sides 

of the aisle agrees that we must reduce the taxpayers’ current exposure. However, it was FHA, Fannie Mae, and Freddie Mac that 

stepped up to ensure housing finance continued when the private 

market disappeared. 

Congress passed the Dodd-Frank Act to help restore investor confidence in the housing finance markets by providing clear rules of 

the road. To name a few, the Act provides legal certainty to banks 

only when underwriting safe and sound mortgages. Congress also 

requires issuers to have skin in the game by retaining some of the 

risks, thus aligning their incentives with investors. To provide investors with better information, Dodd-Frank improves securities 

disclosures, including requiring better data on the underlying assets as well as reforming and imposing liability on the credit rating 

agencies when analyzing those securities. 

Even if these changes are implemented, we are still a long way 

from restoring the level of investor confidence necessary to restart 

the private label security markets. I continue to support proposals, 

including aspects of Mr. Garrett’s securitization bill from last year 

that recognized the government’s role in encouraging further standardization in these markets. I also think the government can work 

with the private sector in other areas, like helping to establish a 

model purchase and sale agreement, eliminating the conflicts of interest some banks have that service first liens while also owning 

the second lien on the same property or transferring servicing generally to institutions that have much higher levels of personal contact with borrowers. 

But if we are really looking for impediments to bringing back private capital, we need look no further than this committee. While 

the GSEs are incrementally taking steps to reduce their market 

presence, it is Congress that must pass comprehensive housing fiVerDate Nov 24 2008 18:15 Jul 19, 2013 Jkt 080882 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\80882.TXT TERRI
4 

nance legislation to bring about real reform. This legislation will 

only be successful if it ensures a continuance of stable products 

such as the 30-year fixed-rate mortgage, provides all eligible borrowers with access to credit, and supports affordable rental housing 

options. 

Two weeks ago, I hosted a roundtable of experts, the first in a 

series to discuss housing finance reform and a path forward. I 

think participants found the forum conducive to digging deeper into 

the issues to understand policy choices. One conclusion from this 

roundtable, for example, was that the objectives I just outlined 

must be met or can be met only if the government backstops some 

level of credit risk. I am told that there are now over a dozen different comprehensive proposals to reform our housing finance system, many with bipartisan support. I find it disappointing that 

while we have convened more than 20 hearings on FHA and the 

GSEs over the last 3 years, we have not considered any of these 

ideas. I hope that our witnesses will explain to my colleagues the 

need as well as the opportunity we have to build a stable mortgage 

market for generations to come. 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Texas, Mr. Neugebauer, for 2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, and I appreciate 

you holding this hearing as we examine the regulatory impediments to private capital returning to the housing market. 

One of the things we know is that sometimes what government 

does when they are trying to fix one problem is they create another 

one, and a lot of the legislation that was passed in the last few 

years was to try to address what happened in 2008, but basically, 

what we have done in trying to ‘‘fix’’ the mortgage market in this 

country is we have nationalized the mortgage market in this country. 

As the chairman mentioned, 9 out of every 10 mortgages in this 

country have some Federal backing, FHA and the GSEs continue 

to dominate the markets, and while there is some private activity, 

it is a very nominal amount of private activity, and the other thing 

that we have done is, I think most people who are investors in 

those securities, debt securities are interested in credit risk, identifying what is the credit risk, what is the interest rate risk, but 

what we have done with some of the new regulations is we created 

a new category of risk called regulatory risk. And as we talk to a 

lot of the market participants, they are having a difficult time trying to price what this regulatory risk is because there is so much 

uncertainty and so many unanswered questions because, as we 

speak, rules continue to change, rules continue to come out, and so 

I am looking forward to hearing today about some ways that we 

can remove some of the impediments, bring private capital back in 

because the big beneficiary will, if we have a robust housing finance market, everybody wins, but more importantly, the American taxpayers have already put $200 billion into the mortgage finance entities. And our ultimate goal is to have a robust market 

but also to make sure that we get the taxpayers out of the business 

of guaranteeing their neighbors’ home loan in the future. 

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

5 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

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

Mrs. MALONEY. Thank you, Mr. Chairman, and Madam Ranking 

Member. 

I welcome all the panelists, particularly those from the district 

which I am honored to represent: Mr. Chris Katopis, who is also 

a leader in the Greek-American community; and Mr. James 

Millstein, who successfully restructured AIG into a form which was 

making a profit. 

The current homeownership rate in the United States is 65 percent, and for every percentage point that drops, another 3 million 

Americans exit the homeownership market, and I believe, going 

forward, we have to look at answers that help the middle class 

have access to financing and homeownership. 

The Wall Street Journal 2 days ago wrote that existing home 

sales are down as inventories tighten. So getting the housing finance structure right is tremendously important to our economy 

going forward. Some economists estimate that it is as much as 25 

percent. So it is very, very important. And with Fannie and 

Freddie still in conservatorship and the Federal Government guaranteeing 90 percent of the mortgage originations, I think we all 

agree that changes are needed. But with $6.5 trillion of the $10 

trillion guaranteed by the government, in my opinion, we need a 

transition period, and we need to be very careful how we move forward. We need the private sector to play more of a role, but at the 

same time, we need the middle class to have access to credit, the 

30-year mortgage, and others that have built the stability in our 

economy. 

My main question today is, how do we protect the taxpayers from 

bearing the risk of housing finance in the future? None of us want 

to see another government bailout, and I am also interested how 

any changes would impact homeownership and interest rates as we 

move forward in the future. I look forward to the testimony today. 

Thank you for being here. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from West Virginia, Mrs. Capito, for 2 minutes. 

Mrs. CAPITO. Thank you. 

I would like to thank the chairman and the ranking member for 

holding this morning’s hearing as we continue to look to the future 

of housing finance. As you can tell from our opening statements, 

I think we have a lot of consensus here. As our Nation’s housing 

finance system slowly recovers, the current imbalance between private sector and government in our markets remains clear. While 

we might have consensus and it sounds fixable, it is not as easy 

as it sounds. We know this from the many hearings that we have 

had. 

Although what a suitable mortgage market will look like remains 

unknown, there is an agreement that the current environment of 

government dominance is not reasonable nor is it a long-term solution, so I would encourage that we work toward a sustainable housing finance system which promotes a broader private marketplace 

where creditworthy customers can find affordable credit in a safe 

and sound system which protects taxpayers from future losses. 

6 

This starts with applying smarter regulations and not adding 

new regulations on top of the old. Unfortunately, with the implementation of Dodd-Frank, the current regulatory structure does not 

foster this type of environment, and expansive regulations being 

implemented only add to uncertainty and impose more time and resources on private institutions trying to deploy their capital. 

These regulations especially impact those who cannot bear the 

weight of the new and restricting rules, further restricting credit 

availability. Rather, the impediments to private capital should be 

addressed through consistent regulations that coincide with efforts 

to restore an appropriate balance between the private market and 

government. 

While I hope to return government’s occupancy and housing finance to the private market as quickly as possible, I would reiterate that these efforts need to be made towards the attention to 

the customer or the consumer. Withdrawing government’s presence 

should at the same time correspond with facilitating opportunities 

in the private market so we can defend market stability and create 

growth. 

Again, I thank the chairman for holding the hearing, and I look 

forward to the testimony of our witnesses and thank them for coming. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Georgia, Mr. Scott, for 3 minutes. 

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

This is a very interesting topic on which I have quite a bit of interest, and I think that the title of this hearing is examining regulatory impediments to private investment capital. I think it is important, but the fundamental issue here that we must first address 

is whether or not the current health of the private mortgage market is strong enough to bear the risk of bringing back private investment capital. 

This is particularly true, for we know that the displacement of 

private sector competition is now so large that roughly 90 percent 

of all residential mortgage originations are securitized into government-backed, mortgage-backed securities. 

So is there sufficient capital in the private market to make up 

for what the GSEs are doing and to make sure that we still have 

the guarantee of the 30-year mortgage situation? If our secondary 

mortgage market were entirely privatized, does sufficient capacity 

exist among both bank and non-bank lenders to absorb loans on 

balance sheets until they can be securitized or sold? 

Then, there is a cascading number of questions. To what extent, 

for example, do guaranteed fees charged by Fannie Mae and 

Freddie Mac still need to rise in order for private label 

securitizations to compete in the market? And do we know the capacity of the private market to step in and provide credit if Fannie 

and Freddie were to raise their prices? Will the supply of mortgage 

credit expand as a reaction to additional price increases? Will it 

have the effect of simply limiting access to qualified borrowers or 

both? And then is there a concern that raising the guarantee fees 

further without also reforming the Enterprises will not break the 

GSEs duopoly over securitization but instead bring in enormous 

profits. So, we have some very perplexing issues here. 

7 

Fundamentally the issue should be, is the private market really 

capable? Can they handle the risk, and can they do what the GSEs 

do? They were put here for a reason, and the reason was because 

the private sector wasn’t doing this, so we have to make sure, before we throw the baby out with the bath water here, that we protect the baby. 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from California, Mr. Campbell, for 11⁄2 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman, and good morning to 

the panel. 

Today in this hearing, we are going to look at, as the title says, 

impediments that exist in the structure or regulatory structure, impediments to bringing private investment capital back into the 

housing market, but the one thing I think we should all agree on 

is that we don’t want to create some new impediments to private 

capital, and right now, there is an idea out there about using eminent domain to seize mortgages, which is gaining a little traction 

with some cities in my home State, and actually across the country, 

and we will discuss this more during the hearing, and about the 

issues, but for the purposes of this hearing, it has a lot of problems. 

It is hard to convince private capital to come in when their security 

could be at risk with the idea that a municipality could just arbitrarily decide, okay, we are going to seize your mortgage, and write 

down your security. And by the way, we are going to put a bunch 

of that money in our pocket and a bunch of it in the pocket of the 

private company which is pushing this idea. 

So it seems to me, and this is a bipartisan issue—Chicago Mayor 

Rahm Emanuel, when this was brought up in front of Chicago, 

said, ‘‘The idea of using eminent domain is not one that I support 

because I don’t think it is the right way to address the problem.’’ 

So I look forward to hearing from the panel, and I yield back. 

Thank you. 

Chairman HENSARLING. That concludes the opening statements. 

I will now welcome our distinguished panel of witnesses and introduce them. First, Mr. Chris Katopis is the executive director of 

the Association of Mortgage Investors (AMI). According to its Web 

site, AMI was formed ‘‘to serve as the industry voice for institutional investors and investment professionals with interest in mortgage securities.’’ 

Previously, Mr. Katopis has served on the Hill as a legislative 

staffer. 

Mr. Martin Hughes is the CEO of Redwood Trust, which I believe may be one of the few, if not the only securitizer of private 

label mortgage-backed securities at the moment. He has over 15 

years of senior management experience in the financial services industry. He is a CPA, and holds a bachelor’s degree in accounting 

from Villanova. 

Mr. James Millstein is the CEO of Millstein & Co. He previously 

served as the Chief Restructuring Officer at the Treasury Department where he oversaw AIG’s restructuring efforts. He has a JD 

from Columbia, a master’s from UC Berkeley, and a BA from 

Princeton. 

8 

Finally, Dr. Arnold Kling is a senior scholar and a member of the 

Financial Markets Working Group at the Mercatus Center at 

George Mason University. He has previously served as a Senior 

Economist at Freddie Mac and a Senior Economist at the Federal 

Reserve. He has a Ph.D. in economics from MIT. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. 

Without objection, each of your written statements will be made 

a part of the record. Some of you have testified before, so you are 

familiar with our light system. The green light will be on for 4 minutes. When it turns yellow, you have 1 minute to sum up. When 

it turns red, I think you know what that means. 

After all of you have finished presenting your testimony, each 

member of the committee will have 5 minutes in which to ask any 

or all of you questions. 

Mr. Katopis, you are now recognized for 5 minutes. 

STATEMENT OF CHRIS J. KATOPIS, EXECUTIVE DIRECTOR, 

ASSOCIATION OF MORTGAGE INVESTORS (AMI) 

Mr. KATOPIS. Good morning, Mr. Chairman, Ranking Member 

Waters, and distinguished members of the committee. We appreciate the opportunity to testify this morning. The Association of 

Mortgage Investors was formed as a primary unconflicted trade association for investors and residential mortgage-backed securities. 

We, along with investors from life insurance companies, State pensions, State retirement systems, and university endowments invest 

in the U.S. mortgage market. A key goal of the system today is to 

move credit and mortgage capital from investors to borrowers and 

then back again. The more private capital that is in the system, 

the more opportunities there are for borrowers and the more housing opportunities exist. At essence, securitization today is broken, 

limiting the availability of housing credit and the reach of the 

American dream of homeownership. 

Mortgage investors share your frustration with the slow restoration of the housing market and the need to assist homeowners who 

are truly hurting. In fact, the market for residential mortgagebacked securities today has virtually ground to a halt since the financial crisis for the reasons we describe in detail in our written 

statement. 

Today, Members of Congress have said mortgage investors are on 

strike. We assure you, Mr. Chairman, that we are on strike, but 

we would like to get back to work, and with your help, perhaps 

that will be possible in the near future. 

So what do we do? For example, we are hopeful that meaningful 

solutions can be implemented more quickly, and we believe that 

our interests are aligned with responsible homeowners. As difficult 

as it may be to believe, many of the most sophisticated investors 

in the market were as victimized and abused by big bank servicers 

as many consumers. Investor-managed funds are essential to rebuilding the private mortgage market. 

However, Mr. Chairman, investors will only return to a mortgage 

market which is transparent, has data on the underlying mortgages backed by enforceable reps and warranties, addresses 

9 

servicer conflicts of interest, and provides protection through law 

and regulation. 

The current mortgage market suffers from a thorough lack of 

transparency as well as a number of other items outlined in my 

testimony: poor underwriting standards; a lack of standardization 

concerning mortgage documents; numerous conflicts of interest; defective and improper mortgage service practices; an absence of effective legal remedies for contractual violations; and unwarranted 

State and Federal interventions in the mortgage market, for example the proposed use of eminent domain as a foreclosure mitigation 

tool. 

In terms of competition, private investors in the mortgage-backed 

securities space right now are crowded out by the government to 

a large degree. Mr. Chairman, the playing field is not level for investors, and even if FHFA, as conservator of the GSEs, were to 

raise g-fees to market levels by regulatory order, this would not 

solve the problem in itself. Fannie Mae and Freddie Mac are in the 

same business as private mortgage investors and mortgage insurers, bearing credit risk in exchange for financial compensation. And 

going forward, the Enterprises should not have their costs subsidized by the advantages of government sponsorship. Congress 

should prepare a transition plan to end the government sponsorship and have the credit risk-bearing functions of these entities 

fully privatized to ensure a competitive level playing field. 

Mr. Chairman, the return to private capital requires several 

steps. There is no one silver bullet. There is no ‘‘easy button’’ like 

we see on TV. What can we do? Congress has already acted in a 

way that could be exemplary. They solved a problem very similar 

to this in the 1920s with the stock market crash of the corporate 

bond market. The Trust Indenture Act was enacted by Congress in 

the 1930s to restore the corporate bond market, and it works so 

well today that most corporate bond market traders have it work 

without even knowing it is in existence. 

It creates a number of responsibilities and obligations for trustees, resolves intercreditor rights, and creates certain standards, 

structures, and systems that help the market go forward. We hope 

these can be emulated for RMBS to bring private capital back into 

the space. 

Beyond that, we hope that Congress can consider the following: 

facilitating a single national Internet database of mortgages; mortgage servicing standards that address the needs of investors as 

well as borrowers; and a single national uniform foreclosure law. 

So we thank you very much for this opportunity to testify. AMI 

is pleased to be a resource for the committee as you continue your 

efforts to bring private capital back to the U.S. mortgage market 

for generations to come. Thank you. 

[The prepared statement of Mr. Katopis can be found on page 61 

of the appendix.] 

Chairman HENSARLING. Mr. Hughes, you are now recognized for 

5 minutes. 

10 

STATEMENT OF MARTIN S. HUGHES, CHIEF EXECUTIVE 

OFFICER, REDWOOD TRUST, INC. 

Mr. HUGHES. Good morning, Chairman Hensarling, Ranking 

Member Waters, and members of the committee. I appreciate the 

opportunity to testify here today on what could be done to accelerate the return of the private secondary market. 

My testimony is singularly focused on the perspective of the institutional investors that are the buyers of senior classes of securities backed by mortgage backs. Those investors are the single most 

critical variable to consider as you take steps to produce a robust 

mortgage-backed, private mortgage-backed market. Simply put, 

these investors have the money, and without their participation, 

there is no market. 

In the wake of the financial crisis, investors in private mortgage 

securities lost confidence that their rights and interests in the securities they own would be respected and, consequently, that their investments were safe and secure. In response, some large senior 

MBS investors who previously had significant capital obligations to 

the private MBS space now have little or no participation. 

It doesn’t add up. In today’s financial world awash with liquidity, 

with senior investors searching for safe, attractive yield, the private MBS market should play a much larger role as an attractive 

investment asset, as it was in the past. 

So in terms of recommendations on how we can get there, it will 

take a combination of efforts by market participants, Congress, and 

regulators. My recommendations are threefold: first, meet investors’ demands for stronger structural protections, increase transparency, and align interest through the entire mortgage chain; second, give the private MBS market room to develop and grow by 

having the government reduce its market share on a safe and 

measured basis—this can be accomplished through further increases in guarantee fees and reductions in loan limits; and third, 

remove the overhang of unfinished regulation by requiring that unfinished rules that are past deadline to be issued within 4 months 

are subject to a 4-year moratorium. My written testimony contains 

detailed recommendations for each of these three categories. 

In the interest of time, I would like to single out one issue for 

special mention because it has not received the attention equal to 

the harm it has caused, and that is the need to control the systemic 

threat that second liens, otherwise known as home equity loans, 

pose to first lienholders. We can do this by giving first lienholders 

the ability to require their consent to a second lien if the combined 

loan to value with all other liens will exceed 80 percent. During the 

housing bubble, homeowners used home equity lines to extract 

record levels of equity from their homes and also as a substitute 

for a cash downpayment. The rise in home equity lending increased 

monthly payment obligations for borrowers and reduced the 

amount of equity remaining in their homes, leaving borrowers vulnerable to price decline. As a result, 38 percent of borrowers who 

used these loans found themselves underwater compared to only 18 

percent who did not, and from a delinquency standpoint, even for 

prime borrowers, the delinquency rate was 114 percent for borrowers who had taken out seconds. This proposal would allow borVerDate Nov 24 2008 18:15 Jul 19, 2013 Jkt 080882 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\80882.TXT TERRI
11 

rowers to tap into their equity while preserving a level of protection for first lien investors. 

If we move back to Redwood, the success of Redwood’s private 

securitizations proves that this market can be fixed and that it is 

ready to assume a larger role in our housing finance system. Since 

we restarted securitization in 2010, Redwood has securitized $5.6 

billion of jumbo loans in 14 transactions. We plan to securitize $7 

billion in transactions this year, and we have already completed 5 

transactions to date. Our success didn’t happen by accident. We listened to investors, and worked hard to meet the new requirements 

by putting together transactions that included more comprehensive 

disclosures, better and simpler structures, and new enforcement 

mechanisms for representations and warranty. Currently, our primary focus has been on the prime jumbo market. We are limited 

to the prime jumbo market at this point because we cannot compete with the price and market advantages the government has 

conferred to the GSEs. Once the playing field is level, we stand by 

ready to securitize prime loans of any size, and we are not that far 

off. For example, today the rate on a Redwood jumbo mortgage is 

3.875 percent, on a Wells Fargo mortgage on an agency conforming 

it is 3.65 percent, and on an agency conforming completely it is 3.5 

percent. 

In conclusion, Mr. Chairman, I commend you for focusing this 

hearing on investors. I firmly believe that the private secondary 

mortgage market can grow quickly to provide liquidity to a very 

large share of the mortgage market without the need of a government guarantee if the needs of investors are met and the government gives the private markets an opportunity to grow. Thank you 

for the opportunity. 

[The prepared statement of Mr. Hughes can be found on page 50 

of the appendix.] 

Chairman HENSARLING. Thank you. 

The Chair now recognizes Mr. Millstein for 5 minutes. 

STATEMENT OF JAMES E. MILLSTEIN, CHIEF EXECUTIVE 

OFFICER, MILLSTEIN & CO. 

Mr. MILLSTEIN. Thank you. Chairman Hensarling, Ranking 

Member Waters, and members of the committee, thank you for the 

opportunity to testify today. 

Chairman HENSARLING. I’m sorry, could you pull the microphone 

a little closer, please? Thank you. 

Mr. MILLSTEIN. I am losing precious time. 

Chairman HENSARLING. We will give you 5 seconds. 

Mr. MILLSTEIN. The question we now face, 5 years into the conservatorship over Fannie and Freddie, and a market in which 90 

percent of all new mortgage originations are ending up on the balance sheet of the Federal Government, is how to back the government out of a market it now dominates without triggering another 

credit contraction and downturn in house prices? How do we design 

a transition plan to a market where private capital plays the leading role in credit formation but which also protects the economy 

and ensures access to credit? 

During my recent tenure as the Chief Restructuring Officer at 

the Treasury Department, I had primary responsibility for the reVerDate Nov 24 2008 18:15 Jul 19, 2013 Jkt 080882 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\80882.TXT TERRI
12 

structuring and recovery of the government’s funding commitments 

to AIG, commitments which rivaled in size the amount of capital 

today invested in Fannie and Freddie. In downsizing AIG and recovering the taxpayers’ investments in it without destabilizing the 

broader financial markets in which it operated, we faced a problem 

similar to the problem facing Congress today: how to reduce the 

systemic importance of Fannie and Freddie without undermining 

stable credit formation in the mortgage markets. 

Although housing reform is more complex in several respects 

than the AIG restructuring, I believe that a similar corporate finance and restructuring solution to that which we employed with 

AIG, combined with a broader housing finance reform of the sort 

you have just heard, could accomplish three important goals for 

which I believe there is broad bipartisan support: one, ending the 

conservatorships and the creeping nationalization of the mortgage 

markets; two, fully recovering the taxpayers’ substantial investments in Fannie and Freddie; and three, creating conditions under 

which private investment capital will return to a market now almost completely dominated by the Federal Government. Any credible transition plan to reduce the government’s footprint needs to 

ensure that private capital will, in fact, substitute for what the government is providing through Fannie and Freddie today. 

To ensure that outcome, there are four key features of the proposal. First, we need to wind down the government-sponsored 

hedge funds that Fannie and Freddie ran. We need to terminate 

the government charters that created an implied guarantee of their 

debt and recapitalize and sell their mortgage guarantee businesses 

to private investors. 

Second, to be able to continue to tap the broad and deep pool of 

capital that the government guarantee permits, however, until private markets fully heal, we need to provide government reinsurance for qualified MBS in exchange for a fee properly calibrated to 

protect taxpayers against the risk of loss. This would be similar to 

the FDIC’s Deposit Insurance Program and would represent a dramatic shift in structure and substance from the pre-crisis model of 

a free implicit guarantee of undercapitalized government-sponsored 

entities. 

Third, remove structural impediments to PLS issuance. Along 

those lines, I am in agreement with much of what you have just 

heard from both of these gentlemen. 

Fourth, fund affordability initiatives in a transparent fashion by 

assessing a fee on all MBS issued with this government reinsurance. 

For better or for worse, the truth is that Fannie and Freddie play 

a central role in credit formation of the mortgage markets today, 

a role too big for banks, too big for private mortgage insurers or 

private institutional investors to displace overnight or even over 

the next decade, particularly in the aftermath of the greatest credit 

crisis in 4 generations from which these investors are still reeling. 

So, in light of the continued weakness in the appetites of banks, 

private insurers, and private investors for taking mortgage credit 

risks, our plan calls for the recapitalization and privatization of 

Fannie and Freddie’s mortgage guarantee business and the creation of a separate independent agency to provide reinsurance on 

13 

qualified mortgage-backed securities, which reinsurance would be 

behind in the first instance the substantial capital then owned by 

the newly privatized guarantee businesses. We think this is a practical and executable transaction and transition out of the 

conservatorships to a new market structure in which well-regulated 

private insurers put substantial private capital ahead of the government on its guarantee. 

In the interest of full disclosure, my firm owns certain of the junior preferred securities issued by Fannie and Freddie. These securities are only entitled to a recovery if the government is repaid in 

full on its investments. The merits of my proposal for ending the 

conservatorships, however, do not rise and fall on whether those securities are entitled to a recovery. The primary objective of the proposal is to ensure that mortgage credit remains broadly available 

in the transition from a system dominated by the government 

today to a system in which private capital takes the lead in mortgage formation in the future. 

Thank you. 

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

85 of the appendix.] 

Chairman HENSARLING. The Chair now recognizes Dr. Kling for 

5 minutes. 

STATEMENT OF ARNOLD KLING, MEMBER, MERCATUS 

CENTER FINANCIAL MARKETS WORKING GROUP 

Mr. KLING. Thank you, Chairman Hensarling, and Ranking 

Member Waters. 

My fellow panel members are much more familiar than I am 

with current practices. I have spent the last 12 years teaching at 

a high school. 

And I am going to be a bit pedantic today and say that technically all of the capital for mortgages today comes from private 

capital. It is private capital. It is now, always has been, and always 

will be the savings of the private sector that gets channeled into 

mortgages. 

The difference is what kind of intermediary and what kind of 

intermediation takes place to translate that private capital into 

mortgages, and so the purpose of this hearing is quite correct, and 

several people have stated it: The issue is, how can that intermediation take place without taxpayers taking so much of the risk? 

That is kind of the fundamental question here. 

I want to start out by pointing out, and maybe we can discuss 

this more later, that a major form of risk that we should be concerned with that the taxpayer is taking is interest rate risk. There 

is a real potential, while everyone focuses on credit risk, for taxpayers to end up taking interest rate risk in ways people haven’t 

anticipated. 

The other point to make about this intermediation is that it does 

not necessarily require securitization. I am old enough to remember when savings and loans were the intermediaries that supplied 

most of the capital to the mortgage market, and there are some 

pros and cons to going back to that model, and we shouldn’t close 

ourselves off to that model. 

14 

With that said, I have seven recommendations to run through for 

improving the intermediation of private capital. And the first is to 

stop demonizing mortgage originators. Mortgage originators were 

told after Dodd-Frank that they should not originate any loans that 

violated the rules. And then they were told if they asked what the 

rules are, ‘‘We are not going to tell you yet.’’ That is not a sustainable way of dealing with mortgage originators. 

Second, stop demonizing mortgage servicers. Mortgage servicing 

is an industry that, until recently, was kind of shaving nickels off 

of its cost of doing business and has been basically beaten up to 

the tune of having to spend thousands and thousands of dollars per 

loan because other people are telling them that they should be able 

to cure loans. And it has just completely thrown that business 

apart. So the net result is that there are fewer originators today 

and fewer people want to do servicing on anything other than a 

squeaky clean loan today. And, the joke I have heard recently is 

that if you want a loan, you can either go to Wells Fargo or Wells 

Fargo, and mortgage rates are high because the origination market 

and the servicing market have been beaten up. 

As far as phasing out Freddie Mac, Fannie Mae, and FHA, I 

think that is a simple matter of phasing down their maximum loan 

sizes. I think you should consider, if you at all want any kind of 

national market in mortgages, to have a national title system. The 

fragmented title system doesn’t work, and you can also get rid of 

the cost of title insurance by switching to something called a 

Torrens title. I think that a national model for loan servicing agreements, and people have already spoken about this, would be useful 

as well. 

I would say continue to develop a national standard for conforming loan for mortgage securities. Again, that is a constructive 

step. 

And finally, continue to support consumer protection, financial 

literacy, and programs to help families save for downpayments. It 

frightens me, frankly, when people complain that 65 percent homeownership is too low. Buying a home is a complex transaction. In 

the United States, when you are putting 10 percent down, that is 

way more than we allow people to borrow to buy stock. We require 

50 percent margin to buy stock. So we are putting people into very 

complex transactions, and I think we need to make sure that they 

have the savings to deal with it and the financial literacy to understand what they are doing. Thank you very much. 

[The prepared statement of Dr. Kling can be found on page 80 

of the appendix.] 

Chairman HENSARLING. Thank you, Dr. Kling. 

And thank you to all the panelists. 

The Chair now recognizes himself for 5 minutes. I think I hear 

a concurrence among the panel and hopefully among many Members who gave opening statements that we all want a system with 

more private capital, but some have begged the question, is there 

enough private capital, and will it come back in? 

I think it was you, Mr. Hughes, who said presently the system 

is ‘‘awash in liquidity.’’ Was that your phrase? 

Mr. HUGHES. That was my phrase. 

15 

Chairman HENSARLING. And just how much liquidity do you see 

awashing around? 

Mr. HUGHES. In fixed income funds, there is $3.5 trillion, and 

that is not counting banks’ balance sheets or what is available on 

insurance companies’ balance sheets. So personally, I don’t think it 

is a money problem. 

Chairman HENSARLING. I believe if I have the right statistic in 

front of me, the current size of the U.S. residential mortgage market is roughly $10 trillion. I have heard some concern from many 

that private capital could not backfill a market of this size, so I 

guess a question, what is the optimum size of the U.S. mortgage 

market? Is it $8 trillion? Is it $10 trillion? Is it $12 trillion? Who 

is qualified to tell me what the optimum size of the U.S. mortgage 

market should be? No takers? 

We have one taker. 

Mr. Millstein? 

Mr. MILLSTEIN. I will say this: In 2000, at the turn of the century, the size of that market was $4.5 trillion of outstanding mortgage indebtedness. In the 7 years between 2000 and 2007, we more 

than doubled the aggregate debt on the housing stock of the United 

States to $11 trillion. It is off a trillion now with foreclosures and 

debt repayment, but we are clearly at a very inflated size of the 

mortgage market. 

Chairman HENSARLING. That does beg the question of what the 

optimum size of this market ought to be. I myself don’t know the 

answer to that question. But I do believe also, maybe it was in your 

testimony, Mr. Hughes, you noted that the auto loans, credit card 

loans, and commercial real estate loans are up and functioning 

while the private residential mortgage-backed securities market is 

barely developed. So is there something about the residential mortgage market that makes it immune to the laws of supply and demand, and won’t they ultimately determine the size of capital for 

the market? 

Mr. HUGHES. There is no shortage of money. The problem is the 

risk that investors see in that market, from being burned and waiting to see that steps have been taken to improve investor protection mechanism, servicing, and a number of factors that we both 

have talked about. 

Chairman HENSARLING. Dr. Kling, you didn’t discuss it in your 

oral testimony, but I found in your written testimony an interesting discussion of, I guess the Canadian model, their version of 

a 30-year amortized model. We have heard some Members say they 

are concerned that we might end up with a model where the 30- 

year fixed no longer exists. I am under the impression that it exists 

in jumbo now where the GSEs do not operate. Does anybody wish 

to offer a contrary opinion? 

If not, let me ask about this model, because I know we had testimony when FHA Director Ed DeMarco came and testified before us 

regarding the 30-year fixed, ‘‘It is not necessarily the best mortgage 

product for a home buyer, especially a first-time home buyer.’’ I can 

see a system where anybody who wanted it, I would hope it would 

appear in the market, I observe it appears in the market, but I am 

also curious in the Canadian model, as I understand it, you have 

a 5-year reset on the interest rate, yet it amortizes over 30 years, 

16 

which means a number of our constituents have found that they 

were underwater with their mortgages, had challenges engaging in 

refinancing, then also the refinancing costs, the closing costs kept 

many from doing it. Had they had access to this model, many of 

them would have seen their monthly payments go down and might 

have been able to keep their home. Is that correct? 

Mr. KLING. I don’t—I guess I wouldn’t champion the 5-year rollover as something that would have done a whole lot in this crisis. 

I think a lot of these people were underwater almost from day one. 

Maybe a few of them who took out really crazy adjustable rate 

mortgages would not have taken them out and would have taken 

out a 5-year loan. 

The main thing is that we don’t know where the risk on the 30- 

year product resides. We don’t know where it resided when Freddie 

Mac and Fannie Mae were at their peak. We just didn’t observe the 

kind of spike in interest rates that would have shown us what happened. My guess is that either Freddie Mac or Fannie Mae would 

have gone bankrupt because of the interest rate they took or the 

derivatives that— 

Chairman HENSARLING. Regrettably, I need to cut you off and attempt to set a better example for the committee. I am over my 

time. 

I now yield 5 minutes to the ranking member. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I would like to thank all of our panelists who are here today. It 

seems as if there is a consensus on some things. It appears that 

everybody agrees that there is a lack of confidence and that there 

needs to be transparency and some other kinds of things. 

I would like to particularly thank Mr. Millstein for his participation in the discussion, not just here today, but the fact that you 

have come up with some real live proposals, and have been helpful 

to me and to others. 

[Dogs barking]. 

Ms. WATERS. That is the servicers. 

Chairman HENSARLING. Are they German Shepherds? 

Ms. WATERS. I have a question for Mr. Katopis. Do you agree 

that mortgage servicers have been demonized and that the ‘‘gotcha’’ 

regulators Mr. Kling references have been unfair to servicers? 

Mr. KATOPIS. With all due respect, Congresswoman, we disagree. 

We think that the servicing model that has existed for decades is 

not sufficient for the economic environment we are in now. We 

have a lot of distressed borrowers who should be helped, who may 

need some special touch, and we have seen a lot of reforms in this 

space, but still we think more needs to be done. And in particular, 

for the topic of this hearing, bringing private capital back into the 

markets, we need servicer reform that not only addresses the needs 

of distressed borrowers but of investors. And remember when I 

speak of investors, I am talking about all the limited partners we 

have, whether it is CalPERS, retirement systems, or university endowments, because returns for those investors are harmed by the 

servicing practices we are seeing today. 

Ms. WATERS. Absolutely. And despite the fact that some of us are 

real advocates for our consumers and we want to make sure that 

they have available to them the kind of mortgages that are fair, we 

17 

also are concerned about investors. And I have been concerned 

about the fact that various servicing settlements from regulators 

and State attorneys general allow servicers to meet the terms of 

the settlements by writing down the loans that are owned by investors. Do you think that is fair? 

Mr. KATOPIS. That is an absolutely keen observation. We are 

very concerned, and my testimony touches on what I call unwarranted Federal and State interventions in the market. A lot of 

these settlements are extremely troubling for mortgage investors 

because they are having some of these institutions, these too-bigto-fail institutions settle with other people’s money, the first lien 

investors, so we really appreciate your attention to these matters. 

And we have asked for more transparency. We have contacted a 

number of Administration officials, including the National Mortgage Settlement Administrator, for more transparency, and we 

hope that there is action taken on that front. And as an aside, I 

talk about who are mortgage investors. I was a Hill staffer. I had 

a TSP. I was in the G or C fund, I would like to think anyone who 

has a TSP is a mortgage investor, too, on one level, so I claim as 

many as I can. 

Ms. WATERS. I want to get to Mr. Millstein. In your testimony, 

you describe some of the private label mortgage securitization deals 

that have occurred since the 2008 financial crisis, and you note 

that they are structured to provide immense protection for investors. This includes both high downpayments for the loans, underlying the securitizations, the high FICO scores for borrowers. This 

also includes the fact that the issuers of these new private label 

mortgage securitizations retain the subordinated tranches in these 

deals, meaning that the issuers take losses before other investors 

take losses. Given the extremely conservative nature of these 

issuances, is it reasonable to expect that private investors are willing to absorb all of the credit risk currently borne by Fannie Mae 

and Freddie Mac? 

Mr. MILLSTEIN. In my testimony, I described the deal done by 

Mr. Hughes. And I think this is important for the committee to understand, that while Redwood is really pioneering now this private 

label securitization market, they are doing it with enormous equity 

cushions and subordinated tranche cushions to protect the senior 

investor. You could have a downturn as severe as we had in 2007 

and 2008 and the investors in the Redwood Trust recent issuances 

would not lose a dime because of the enormous cushion. So there 

is not a lot of credit risk being taken by the private market today. 

And that is for good and valid reasons. The Government of the 

United States has two of the largest funding sources for mortgages 

in conservatorship. Until you guys clarify what is the fate of those, 

the fate of the housing market will remain uncertain for private investors. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentlemen from Texas, Mr. 

Neugebauer, for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

I would like to continue along this line because one of the keys 

to getting private securitization going again is making sure the 

government is pricing its risk appropriately. And what we have 

18 

seen by the fact that we had to put $200 billion in Fannie and 

Freddie is that they weren’t pricing that risk appropriately. 

So, Mr. Hughes, would you comment on the fact that—I think 

Redwood bonds are trading at about a 2.6 percent yield and MBS 

agency are trading around 2.2; I understand that there could be 

some differences. But that is a 40-basis point spread. And in this 

market, 40 basis points is real money. I would like to be getting 

40 basis points on my savings. But would you kind of expand on 

that a little bit for us? 

Mr. HUGHES. Sure. Actually, the historical average was approximately 25 basis points between those numbers. And if you rolled 

back the increases and guarantee fees, the actual spread today is 

closer to 60 basis points. What that spread was intended for was 

to cover three potential risks to the extent you are holding a private security: one was faster prepayments; the second was not as 

much liquidity; and the real biggie was the credit risk. So with the 

agency security didn’t have that. And where the premium is today 

is investors needing more for that credit side, which isn’t necessarily borrower credit, but it is everything that goes with the 

process to make sure that their investments are safe and secure. 

Mr. NEUGEBAUER. Another issue that has been talked about a little bit is the fact that the agencies aren’t subject to all of the same 

rules that the private securitizers are. And you heard me say in my 

opening statement about this new risk that we have in the marketplace today, this regulatory risk. How is the pricing—in other 

words, if the agencies today had to play by the same rules, what 

would be the pricing premium that would be in the marketplace for 

regulatory? 

Mr. HUGHES. Are you referring to QM? 

Mr. NEUGEBAUER. Yes. 

Mr. HUGHES. Today, the pricing difference between the two markets, again, we are about three-eights of a point. To the extent that 

the same regulations—I think it would close the gap some, maybe 

an 8th of a point. But I think the bigger difference is going to have 

to come over time through increased guarantee fees and spreads 

coming in as we invite more and more investors in to the investor 

side. 

Mr. NEUGEBAUER. Mr. Katopis? 

Mr. KATOPIS. I just wanted to add an observation, Congressman, 

that for some of our investors, when they look at the issue you 

have raised very wisely, what they deem is what is the political 

risk premium surrounding some of the transactions in this space. 

Depending on the nature of the political activity, the severity that 

it entails, they will not—there is no premium they will pay if a 30- 

year contract becomes a 30-minute contract. So it depends on the 

nature of the activity, and it can really steer private capital out of 

the market. 

Mr. NEUGEBAUER. I am glad you made that point. Because I 

think one of the things that we are hearing is, okay, even if you 

increase the g-fees, reduce the loan limits, create this space up 

there, until you bring some certainty into investor rights and 

servicers’ responsibilities, a lot of market participants still would 

not be comfortable until we resolve some of the Dodd-Frank reVerDate Nov 24 2008 18:15 Jul 19, 2013 Jkt 080882 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\80882.TXT TERRI
19 

quirements—capital requirements, risk retention requirements. 

Does anybody disagree with that statement? 

Mr. HUGHES. I totally agree with that statement. 

Mr. NEUGEBAUER. What do you think would be two or three of 

the top impediments to us doing something quickly in that area? 

What would those be? 

Mr. MILLSTEIN. Congressman, Representative Garrett has done a 

lot of work around this. And I think there are many aspects of that 

bill that all of us on this panel would agree with. 

Mr. NEUGEBAUER. Mr. Katopis? 

Mr. KATOPIS. I invite everyone to look at our testimony describing the Trust Indenture Act as an exemplary model that saved the 

corporate bond market in the 1930s and has worked flawlessly for 

the last 70 years. 

Mr. NEUGEBAUER. Mr. Chairman, I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from North Carolina, Mr. Watt, for 5 minutes. 

Mr. WATT. Thank you, Mr. Chairman. Thank you for convening 

this hearing. 

Mr. Katopis, I am fascinated by some points that you made on 

page 11 of your written testimony in which you suggest that if we 

did four things—limit the charter to high-quality guarantees; ensure sound regulation with appropriate equity capital; sever government sponsorship and entity level backstops; and impose appropriate political limitations—the core mortgage guarantee business 

can be sold into the private markets with no government backstop 

and the funds realized can repay the government for sustenance, 

as was done with AIG. That is what you said. 

I envision, then, kind of a government IPO spinning off these 

things, Fannie and Freddie, or at least parts of Fannie and Freddie 

into the private sector. And correct me if I am wrong in that vision. 

I would then want to know what would happen—first of all, whether that wouldn’t create entities in the private sector that were toobig-to-fail and how we could guard against that? 

Second, since you would be limiting this to high-quality guarantees, which is what Mr. Hughes’ business sounds like it is, what, 

then, would you do about average-quality guarantees? And whether 

this could still be done with 30-year mortgages as opposed to what 

Dr. Kling is saying, how would you hedge against the risks that are 

associated with 30-year mortgages? If you could just answer that 

series of questions, I probably won’t have enough time to ask another one. 

Mr. KATOPIS. Thank you, Congressman, for the opportunity to 

address that issue. 

I will try to answer in the time. And if we need to follow up in 

writing, we are happy to do so. AMI stands for a number of goals 

broadly, including housing finance reform, increasing housing opportunities, and bringing private capital back to the market. We 

believe that the GSEs can be restructured in a way where you take 

the ‘‘GS’’ off, and they are no longer government-sponsored entities 

and create housing opportunities. We do not promise we can do 

what Redwood has done with these super prime, immaculate kind 

of high net value homes. 

20 

Mr. WATT. You are getting me off the subject there. What I am 

really interested in is, it seems to me that the primary thing that 

the government has to sell, if we did an IPO, would be the government guarantee. And if you take that away, then you are back into 

a private sector with a much, much higher interest rate, I would 

think. Am I missing something there? 

Mr. KATOPIS. Broadly speaking, and we can follow up on this, we 

know that the backstop creates certain characteristics for a mortgage. Those characteristics would change under this. I think it is 

a question of what pricing, what type of product you want to have 

in the market. And we certainly believe that the 30-year mortgage 

is valuable and is important— 

Mr. WATT. For the high-end market? 

Mr. KATOPIS. No. 

Mr. WATT. What about for any market? 

Mr. KATOPIS. For any market. It is just a matter of the characteristics would change. 

Mr. WATT. One of those characteristics would be that interest 

rates would go up? 

Mr. KATOPIS. Possibly. But, again, I think it is a question of calibrating the risk, the perceived risk by investors with the price. 

Mr. WATT. And what would the government’s role be at the end 

of the day in that process? 

Mr. KATOPIS. I think the government’s role, looking at the testimony of the others and our internal thinking, although we do not 

have an official position how to structure it, it would be very much 

like the FDIC, some type of insurance vehicle, just like we have for 

savings. 

Mr. WATT. Mr. Millstein, if you can use the rest of the time analyzing what we just talked about, that would be helpful. 

Mr. MILLSTEIN. Yes. I think in my materials, in an appendix, 

there is a chart on page 4 of the—if any of you have it, which I 

would just point you to, which shows you who bears mortgage credit risk today and the evolution of who bears mortgage credit risk 

over the last 40 years. And what you will see in the middle is a 

huge yellow swath where 50 percent of that credit risk has been 

residing with the government. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Campbell, for 5 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman. Do you want to finish 

that thought, Mr. Millstein? 

Mr. MILLSTEIN. I do. My point is that I think we can evolve to 

a market where less than 50 percent of the credit risk is borne by 

the Federal Government. But for the last 20 years, we have had 

a system in which the Federal Government has borne 50 percent 

of the credit risk in the market. It is going to take time to bring 

private capital back into taking credit risks. And if you look at, on 

this chart, who has borne credit risk, it is the banking system, 

which, as we all know, was the most recent beneficiary of the massive bailout from the Federal Government when its mortgage assets were impaired. 

So I think the notion that the Federal Government is just going 

to walk away and private investors are going to bear all the credit 

21 

risks in the system is a dangerous notion. It is going to take time 

to evolve this. And the market—just to finish the thought—what 

we had suggested as a way to protect taxpayers for its guarantee 

is not to do it as it has been done, on an implicit basis without a 

fee, but to do it with lots of private capital ahead of the government as a reinsurer for an explicit fee that is well-priced. 

Mr. CAMPBELL. Let me ask two questions following up on that. 

One is, we have been talking about the g-fee, and I keep hearing 

that FHA is close to market. And I guess market would be—everyone defines what is market for a government guarantee. But I 

guess it would be where at some point, there are some investors 

that say, you know what, for that margin, I will take that risk. I 

don’t want to pay the government to do that. How close is the 

FHA’s current g-fee to that, and also for the GSEs? 

Mr. MILLSTEIN. I will let Mr. Hughes answer that. My answer to 

that is, today, the government is not required—there is no hurdle 

rate on the government’s equity support for the GSE. So there is 

no built-in return on equity. And as a result, that margin is missing at least in the g-fee. I would say that other 15 basis points. 

They are an average today of about 50 basis points for the newly 

issued MBS. It has to get closer to 65, 75 basis points to be a market fee for that risk. 

Mr. CAMPBELL. Mr. Hughes? 

Mr. HUGHES. I would agree with that. And two things need to 

happen. One is the g-fee going up. But we also need active investors coming in, such that that spread we talked about comes in. 

Mr. CAMPBELL. Right. 

Mr. HUGHES. The combination of those two, and I would agree, 

probably 15 basis points and a combination of investors coming in 

would make the private sector— 

Mr. CAMPBELL. Let me ask you another question about phasing 

the government involvement out. If you were to do it by reducing 

how much LTV, if you will, loan to value, that the government will 

guarantee—arguably, right now, FHA will guarantee up to 97 percent. Right? If you reduce that and it got—at what point does it 

become effectively no guarantee? In other words, if it was 65 percent, then you are talking about a 2007, 2008 crash really—the 

government doesn’t even step in then. What is the point that you 

reduce and say, all right, the government will guarantee 80 percent, 75 percent, at what point does it become, as far as the market 

is concerned, not of any value? 

Mr. MILLSTEIN. Mr. Hughes is doing deals today without a government guarantee with a 40 percent equity cushion ahead of the 

senior note. 

Mr. CAMPBELL. Okay. So is that where it is, then, 60—if the government says, hey, we will guarantee up to 60 percent, that is— 

markets won’t care. 

Okay. In my last minute, I do want to get back to the eminent 

domain issue. Because in the proposals that I have in front of me, 

the investors take a huge haircut. The government guarantee takes 

a hit. And when we say investors, remember, we are talking about 

a lot of pension funds, 401Ks, life insurance, stuff like that. The 

city gets a 5 percent cut. So they get a nice 5 percent cut, and then 

it is refinanced with FHA. So the Federal taxpayer basically guarVerDate Nov 24 2008 18:15 Jul 19, 2013 Jkt 080882 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\80882.TXT TERRI
22 

antees so the city can get a 5 percent cut, and then the venture 

capital fund that is involved with this gets $4,500, which is why 

they are pushing the heck out of this thing. Does anybody on this 

panel think that is a good idea? 

Mr. HUGHES. No. 

Mr. CAMPBELL. Let the record show nobody thinks it is a good 

idea. 

If cities start doing this, what effect is that going to have in the 

mortgage market on private capital, on even government involvement with mortgages that exist today? 

Mr. KATOPIS. Again, the political risk of having this further nationalization from local communities and cities would chill private 

investment and could lead to a stop of lending in certain areas, certain States. It is very troubling, and we are happy to follow up offline about any questions that any of you or your colleagues have. 

Mr. CAMPBELL. Mr. Hughes? 

Mr. HUGHES. I think it would be catastrophic if en masse, we 

were going through eminent domain. I lose sleep over a lot of 

things, but that is not one of them. I think there is an easy solution 

for that. And that would be through SIFMA, that to the extent a 

city decided to go ahead with eminent domain, they could stop accepting loans from that city that would fall into securities. And I 

think that would take care of it. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes and apologizes to the gentlelady from 

New York, who, on the front row, is out of sight but never out of 

mind. She is recognized for 5 minutes. 

Mrs. MALONEY. Thank you very much, Mr. Chairman. 

And I thank all of you for your excellent testimony. But all of us 

listen to our constituents. And what I am hearing from my constituents is that even if they have an excellent credit rating and 

scores, they can’t get a mortgage or have tremendous difficulty getting a mortgage, or have tremendous difficulty refinancing. And so, 

I think that the role that Fannie and Freddie has played during 

this crisis under government conservatorship is that they have 

played a role in getting the system moving. 

So my question to all of you, and I would like to just go down 

the line, starting with you, Mr. Chris Katopis, do you think that 

the private market is ready to take the credit risk in the size that 

Fannie and Freddie are bearing? And I would like a detailed answer from each of you. Because that is the critical issue that is before us today. 

Mr. KATOPIS. Congresswoman, I think that investors are very 

good at pricing risk when they have the information. For them to 

step into the situation you have described, they would need a lot 

more transparency, a lot more effective remedies, and the other 

issues that I have outlined in testimony where they could step in. 

Ultimately, as has been described, there is a lot of liquidity in the 

market. But there would be an incremental process if those legal 

protections and transparency are available for investors. 

Mr. HUGHES. Certainly, the private sector today is not ready to 

step in and replace Fannie Mae and Freddie Mac. What we do 

think the private sector could do is provide on a risk-sharing basis, 

take the credit risk on a number of pools today. 

23 

In terms of the private sector, one of the things we are looking 

for, we had to start with the best of credit to get investors back. 

But we would look to expand that box over time, where it would 

be people who are good credit for exactly the reasons that you are 

saying to provide and widen the box today. 

Mr. MILLSTEIN. At its height, the private label securitization 

market in 2006 did $750 billion of issuance that year. This last 

year, 2012, we did $1.9 trillion of issuance of new mortgage originations or refinancings. So at its height, it was about 40 percent 

of the market today. I think credit investors will come back. But 

the idea that they can replace Fannie and Freddie any time soon, 

I think is fanciful. 

Mr. KLING. I guess my hope is actually that old-fashioned banks 

and savings and loans could replace Freddie Mac and Fannie Mae. 

It might take them awhile to gear up operationally, and the regulators might have to make it reasonably attractive for them to hold 

mortgage loans, not penalize them, as they have in the past, for 

holding mortgage loans. But there is a lot to be said for it. As I 

hear the problems of investors and servicers, I think if you hold the 

mortgage the way that savings and loans used to hold it, you don’t 

have to worry about your contractual relationship between the investor and the servicer. It is the same person, the same institution. 

So just consider that as one possible way of bringing private capital—of getting the credit risks into the private sector might be the 

old-fashioned banks and savings and loans. 

Mr. MILLSTEIN. Can I respond to that? One of the great financial 

innovations in America in the 1980s was the creation of 

securitization markets. It enabled pension funds and insurance 

companies which have long-term liabilities they need to fund to access the long-term mortgage market. And it was a proper matching 

of assets and liabilities in the system, and it helped, as you see 

from that chart on page 4, take mortgage credit risk out of the 

banking system, which collapsed in the 1930s as a result of the 

risk that it bore. 

There is something fundamentally really good about the 

securitization business because it diversifies credit risk. The question is how to do it in a sensible, rational way that protects taxpayers. Because right now, and for the last 20 years, 50 percent of 

the credit risk in the security—that the securitization market is 

bearing is really in the Federal Government, and it is going to take 

time to wean the market off that. 

Mrs. MALONEY. All of the Congress, Mr. Chairman, and my colleagues have testified that the private market is not ready to come 

in and assume this role, which is critical to our overall financial 

stability and the growth of our economy. My time has expired. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. Millstein, in your—there is an article we have access to that 

you had in the Washington Post on October 12, 2012. And in there, 

you made a statement something to the effect of we are transforming Fannie and Freddie into more of an insurance company 

24 

versus the entities that they are now, at least that is kind of the 

way I take it. Am I misreading that? 

Mr. MILLSTEIN. They are insurers today. They basically provide 

a guarantee of principal and interest on mortgage-backed securities. But they do it with—it used to be an implied government 

guarantee. Now, it is an express guarantee. 

Mr. LUETKEMEYER. But you are going to basically transform 

them into a different entity? 

Mr. MILLSTEIN. That is right. We are going to take the—what we 

propose to do is to take the private—sorry—the mortgage guarantee business that provides that insurance to investors and privatize it and privatize it with an appropriate level of capital to 

back those guarantees. 

Mr. LUETKEMEYER. And that would be a private entity, then, or 

is it going to be a government entity? 

Mr. MILLSTEIN. There would be private entities, and they would 

be able to buy reinsurance from the government for a fee. 

Mr. LUETKEMEYER. Okay. I just want to follow up on the eminent 

domain question that the gentleman from California had. 

Mr. Katopis, in your testimony, there is quite a bit of discussion 

about that. Would you like to elaborate on that? I think that is 

something a lot of us on the committee probably haven’t had a lot 

of exposure to, but I have had one of my major cities in my district, 

just outside my district actually go through this exercise, and it 

was rejected by the citizens of the city. But it certainly scared the 

financial community in my State because of the potential that 

could happen with this. 

Mr. KATOPIS. It is a proposal, as we understand, being developed 

by an investment company. It is not a charitable organization. And 

the idea is to do a short—massive short refi in a way that would 

take performing underwater mortgages, refinance them, and give 

the local community a cut of the action. We think that it is an idea 

that has—it is untried. Its constitutionality is dubious. I know that 

different communities, in response to the Kelo decision a number 

of years ago, have changed their laws. So it really can’t be implemented in a lot of jurisdictions. But it is troubling. We don’t really 

know the contours of the proposal. The company that is pursuing 

this, it is like, ‘‘Let’s Make a Deal.’’ They are constantly changing, 

upping the fee for the community to entice them. And it raises a 

lot of issues, including the liability to the community or the State 

should the valuations be off. 

So I think at the end of the day, we have to ask, is it a solution 

to a real problem. And when we look at some of these underwater 

performing mortgages, we have people who have been paying their 

mortgage for the last 12 to 72 months. So we understand that they 

may have some anxiety, but they are not necessarily at risk. And 

a number of them, when you do the research, they are underwater 

because they did cashout refi’s. We did analysis with an analyst for 

one of the California communities, and 50 percent of his mortgages 

were cashout refi’s. So they really weren’t underwater; the equity 

was recapitalized—reconstituted in some way. So that is troubling. 

Are you bailing out people who—while your neighbor paid their 

mortgage diligently for the last 72 months, you did a refi, cash out, 

bought a BMW, bought a plasma TV, did something else? So I 

25 

think you really have to look at what is trying to be achieved as 

part of this process, where are the consequences to the community 

if the legality— 

Mr. LUETKEMEYER. Do they undermine the lienholder position of 

the financial institution here with what they are doing? 

Mr. KATOPIS. It certainly poses a risk to institutions because it— 

again, who owns a lot of these securities and mortgages, some of 

them are by community banks; some are them are by State pension 

funds. So, there really are a lot of questions. 

Mr. LUETKEMEYER. That is where the concern is, that there is a 

gray line that has been established there, which is like, holy 

smokes, this goes against the— 

Mr. KATOPIS. The fundamental question seems to be how to help 

responsible homeowners who are hurting. And there are a number 

of tools that are available. I think that eminent domain is a drastic 

solution, and it is not something that should be pursued. 

Mr. LUETKEMEYER. I just have a few seconds left. I want to follow up on a couple of questions. I know that one of the other panelists asked about the QM, QRM securitization problems. Does 

that—are those rules going to impact you? Basel III, how is that 

going to affect to be able to securitize loans and the options of 

going to the market, private market folks? 

Mr. HUGHES. Clearly, one of the key things under Dodd-Frank 

that needs to get done is the definition of QRM, which I think is 

a good starting point, for it would be QM. But I think if we go 

through look the eyes of investors, QM alone is not enough to find 

a safe mortgage for investors. 

Mr. LUETKEMEYER. Is that a deal-breaker if we don’t do that? 

Mr. HUGHES. If you—the same—to me, QM, if you are protecting 

investors, needs to go beyond just—it needs full documentation. It 

needs loan to value. There needs to be a downpayment requirement 

of some size. 

Chairman HENSARLING. Regrettably, the time of the gentleman 

has expired. 

The Chair recognizes the gentleman from New York, Mr. Meeks, 

for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. 

There are a number of issues, so much to try to get through in 

5 minutes. I am concerned also about QRM and 20 percent and seeing whether or not that would make it almost impossible for some 

average American citizens to own a home, whether that is too high. 

You are taking into consideration the whole individual and their 

ability to pay, which I think is very important. So that debate— 

I know that we need to have some finalization in what the rule will 

be. But the question is, is it 20 percent? Is it 10 percent? Is it 5 

percent? What is best, as far as making sure of being as sure as 

you possibly can that an individual—that we are not closing out a 

whole segment of the American people from the possibility of owning a home. But I heard, Mr. Hughes, you saying 20 percent, you 

thought that 20 percent is where it should be. And so, therefore, 

a number of Americans should not be eligible to buy a home. Is 

that what you said? 

Mr. HUGHES. No, that is not what I said or not what I intended 

to say. I would say for the part of the market that is going to be 

26 

financed through the private sector, yes, I think they are going to 

need a downpayment. And whether that is 10 percent or 20 percent, it is going to need something. I think that is why we are 

going to have other parts of the mortgage finance market that will 

be at the discretion of the government here to provide financing. 

But, again, my lens today is what is it going to take to get the one 

segment out there back, which is the private sector side of it? 

Mr. MEEKS. Mr. Millstein, would you comment on that? 

Mr. MILLSTEIN. Yes. I think the risk potential requirements— 

right now, the QM effectively carves out the government sector for 

a limited period of time. Because I think the regulators themselves 

need to know where FHA and where Fannie and Freddie are going 

in order to actually create a comprehensive regulation here. So I 

think the concern you express is one that is real, but I don’t think 

the regulators yet have come down in a way that is definitively 

something that you would oppose because, in fact, I think they are 

all waiting for Congress and the Administration to tell them what 

is the fate of the FHA and Fannie and Freddie, who are currently 

carved out? 

Mr. MEEKS. I have a question, but I wanted to get to another 

area really quick, because I have real concerns during the lead up 

to the 2008 financial crisis, and that was dealing with the credit 

rating agencies. We know that a significant number of investors relied exclusively on the rating agencies’ evaluation of private label 

securities to inform the investors of their decision, and later, those 

ratings turned out to be completely inaccurate and the Wall Street 

Reform Act included several provisions aimed at improving the investor’s ability to understand how the rating agencies reviewed securities as well as provide a specific private right of action against 

rating agencies. So, given the failure to perform due diligence in its 

review of private label securities prior to the financial crisis, what 

role, if any, do you think that the credit agencies will play in the 

market going forward? 

Mr. HUGHES. Right now, most of the financial system and major 

investment firms as part of their asset criteria on what you can 

buy, the incentive is on the private side which requires a rating 

agency AAA rating. In many cases, it is two. So I think for the time 

being, and we are dealing with the rating agencies now, it is going 

to be required on the private side so there is a benchmark that the 

rating agencies’ AAA rating would be very important. 

Mr. MEEKS. Do you think that the credit rating agency reforms 

that were included in Dodd-Frank, the Wall Street Reform Act, restore any confidence in the use of these credit ratings? Do you 

think there are any additional reforms that are needed to improve 

the ratings industry? 

Mr. MILLSTEIN. Dodd-Frank is one of the great unresolved problems from the crisis—what to do with the rating agencies? We all 

want something other than them embedded in the system. But insurance company asset rating—I am sorry—capital ratios are still 

dependent on rating, as are banks. We haven’t gotten rid of them. 

What we can do and what the reforms that we have talked about 

on the panel today and that a number of bills that have been introduced address is create much greater transparency in the pools so 

investors could do their home work. 

27 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Ohio, Mr. Stivers, 

for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. 

I appreciate you holding this important hearing. And I appreciate 

all the witnesses for being here. 

I was struck by something the gentlelady from New York said 

earlier about how the market is not ready for privatization. And 

clearly, that is true. But if Congress does nothing, the market will 

never be ready. I was struck by the things that Mr. Hughes and 

Mr. Millstein both said about a plan for a gradual transition to a 

private market. Assuming Congress does some of the things that 

were in both of your testimonies, how long would it be before we 

could get to a private market? I will let both Mr. Hughes and Mr. 

Millstein answer that one. 

Mr. MILLSTEIN. So, again, I would direct you to page 4. Just that 

slide. It took 20 years for the government sector to get this big as 

the savings and loans effectively went out of this business, in large 

part. I think this transition could be at least that long. That 

doesn’t mean you don’t start. But it means you have to be prudent 

in— 

Mr. STIVERS. If you don’t start, how long will it take? 

Mr. MILLSTEIN. It will never happen. 

Mr. STIVERS. Exactly. 

Mr. Hughes? 

Mr. HUGHES. Markets need room to grow. Markets grow when 

there are active buyers and sellers, when there is a need. Unless 

you create a need and break the status quo, I don’t see how the 

markets are going to come back, given the opportunity, and just do 

it on a safe and measured basis. 

Mr. STIVERS. Thank you. 

And to something Mr. Millstein said, Mr. Kling, because you 

talked about it earlier. We all talk about community banks and 

how important they are to our communities. Do you think that allowing and encouraging community banks to have an originate and 

hold strategy, what my grandfather did before—my father ran a 

community bank and they started securitizing. But my grandfather 

originated and held those loans to term until they were paid off. 

Do you think that helps create a role for community banks in 

leveraging the capital that is in community banks to help transition to a private market? 

Mr. Kling? 

Mr. KLING. Let me repeat, all the money in the mortgage market 

today comes from the private sector. It is just that the risk, the 

credit risk is being absorbed by taxpayers. As taxpayers absorb less 

credit risk, then the prices will adjust, the suppliers will adjust, the 

intermediaries will adjust. Community banks can be suppliers, and 

so can national banks. The money is sitting out there. As an investor, I don’t care whether my money goes to a money market fund 

or a mutual fund that invests in mortgage securities or whether my 

money goes into a bank CD. That is not the issue. 

The issue is, who is going to bear the credit risk? And if the taxpayers gradually back off of bearing the credit risk, other interVerDate Nov 24 2008 18:15 Jul 19, 2013 Jkt 080882 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\80882.TXT TERRI
28 

mediaries—and we can’t necessarily dictate which ones, although 

some people would like to—will come in to take that credit risk. 

Mr. MILLSTEIN. A little comment on the community banks: When 

you think about a small bank, the question is, where does it get 

funding? Deposits are the clear primary source. But if you don’t 

give these banks access to the secondary market, they are significantly disadvantaged in competition with the large banks. And one 

of the really great features of the Fannies and Freddies of the 

world is their ability to give community banks access to funding 

sources in the secondary market. So, again, if you take that away, 

if that is no longer part of the— 

Mr. STIVERS. Although most of our community banks use the 

Federal home loan model ahead of the GSE model. 

Mr. MILLSTEIN. Ahead of it, but not in full replacement of it. Because, ultimately, the GSEs provide these guys funding that the 

big banks have access to. They can float bonds, they have access 

to the capital markets directly. The community banks rely on these 

intermediaries, Fannie and Freddie. 

Mr. STIVERS. Sure. 

Mr. Hughes, Mr. Luetkemeyer talked originally about Basel III, 

but I don’t think you got a chance to answer what the impact of 

that will be on the future of private capital return to the market. 

Mr. HUGHES. I am not the right guy to ask about Basel III. 

Mr. STIVERS. Sorry. Maybe Mr. Millstein? 

Mr. MILLSTEIN. It is going to force all banking entities to hold 

more capital against these assets. Again, one of the great lessons 

of the crisis was that almost everybody—banks, community banks, 

Fannie and Freddie—who held mortgage risk did not have enough 

capital against it. So from a point of view of financial stability, 

making sure the system is not undercapitalized is a key feature of 

reform. 

Mr. STIVERS. Mr. Chairman, I would like to enter into the record 

a couple of pieces of documentation. One is from the former CBO 

Director, Douglas Holtz-Eakin, that is a study about Basel III and 

DFA rules and what they would mean. And it suggests it would 

mean 3.9 percent fewer jobs and 1.1 percent— 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. STIVERS. Thank you. I yield back the balance of my nonexistent time. 

Chairman HENSARLING. There is no time to yield back. 

The Chair recognizes the gentleman from Georgia, Mr. Scott, for 

5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. 

I have to tell you, I am worried about the little fellow in this. 

And it seems to me that is the undercurrent of the question we 

need to raise here in terms of impact. There is a reason, as I said 

in my opening statement, for the GSEs. There clearly are certain 

things that the private sector is not going to respond to. And it is 

very important for the private sector to examine these. So as we 

examine the regulatory impediments to the private investment capital coming in, we also need to examine the culture of the private 

sector. There is a reason for both here. 

Let me give you an example. I have home foreclosure events in 

my area. I come out of Georgia, the metro area of Atlanta, which 

29 

has one of the highest foreclosure rates; they are underwater. And 

every time I have one of these events, we have representatives of 

Federal programs there to assist some of these homeowners. One 

was HAMP. And the only—when I talk to the banks, when I talk 

to those homeowners, and I say, why won’t you use HAMP for this? 

They say, we will only use HAMP if that mortgage is backed by 

Fannie or Freddie. So the question becomes, if we phase Fannie 

and Freddie out, what happens there? 

And so I think that what we have here is sort of like a square 

peg we are trying to fit into a round hole. 

I believe that having 90 percent of these mortgages backed by 

the government is not healthy for us, no doubt about it. But I think 

as we go forward, it shouldn’t be this or that, but maybe a combination here. And I think it is very important that each of the four 

of you have come to the conclusion, I believe, that you are aware 

that the private capital and the private investors cannot come in 

and replace Fannie. 

Can we agree that is a statement here? 

All right. Moving forward, what I understand we should do here 

is to come up with a way in which we could deal with this. And 

I think you mentioned, Mr. Katopis, something called the Trust Indenture Act as a model that was done back then that we need to 

work to. 

And, Mr. Millstein, I think you dealt with the guarantee fee, of 

how we can manipulate that to—as two levers. 

So can each of you kind of explain going forward how that would 

work as a way of easing in private capital and yet being sensitive 

to the safety net value of Fannie and Freddie? 

Mr. KATOPIS. Thank you, Congressman. 

I just want to make some brief observations. And I invite you to 

see the testimony where we say that since the financial crisis, the 

amount of capital available in the system is at an all-time low. So 

I think the conversation has to be about not only the people who 

need assistance, who are hurting and are looking to HAMP and 

HARP as vehicles for assistance, as well as the other dozen Federal 

programs and other State assistance programs, but how do we help 

the first-time homeowner, the person coming into the system, 

maybe just graduating from a college in Georgia, who are looking 

to buy their first home, or the veteran, how do we help them? 

We need to have a system where private capital comes into the 

market. Because as I mentioned in my opening statement, the 

mortgage system is about private capital investors to borrowers 

and back. So the Trust and Indenture Act is a system—you know 

what it is? It is an investor bill of rights and a bank originator 

quality control measure. And it is detailed in our testimony. We 

think that it will set the rules of the road, create standards in the 

systems that will allow that private capital to come back for both 

people who need refinancing and new homeowners. 

Mr. SCOTT. Mr. Millstein, very quickly, could you tell us about 

the guarantee fees? To what extent do guarantee fees that are 

charged by Fannie and Freddie need to rise in order to bring in private capital? 

Mr. MILLSTEIN. As I said earlier today, Fannie and Freddie are 

not being required to earn a return on capital. Government is proVerDate Nov 24 2008 18:15 Jul 19, 2013 Jkt 080882 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\80882.TXT TERRI
30 

viding its capital effectively without requiring the entities to earn 

a return on it. If they were to have private enterprise-like capital 

return on equity hurdles, they would probably have to raise the gfees another 15 basis points. 

Mr. GARRETT [presiding]. I thank the gentleman for the answer. 

The gentleman from South Carolina, Mr. Mulvaney, is recognized 

now for 5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. I have enjoyed the 

opportunity to have this hearing. So thank you for calling it. 

Thank you for coming, gentlemen. 

I want to focus on some smaller steps. I know we have had some 

discussion about some large ideas and some large plans for possibly 

reforming these entities. I want to start with something relatively 

simple that I can get my hands around, which is the fees. 

Mr. Millstein, you had mentioned in your testimony, I think, that 

you had encouraged a program whereby fees would be properly 

calibrated to cover taxpayers against risk of loss. I guess my question to you is, is that really possible? If, so what, would it look like? 

Mr. MILLSTEIN. Just because individuals go into the government, 

it doesn’t mean they lose their ability to do credit ratings and credit analysis. In this last crisis, obviously, everyone in the private 

sector got it wrong. Banks took it on the chin; private investors 

took it on the chin. There was lots of bad underwriting and credit 

analysis that went on, not only in the government in its oversight 

of Fannie and Freddie but in all of the major financial institutions. 

So the point is, is that we can impose on the government-sponsored 

entity or the government reinsured entity, in my universe, a requirement to charge fees that are proper to the risk they are taking 

and for a government reinsurer to charge fees calibrated to the risk 

they are taking. And I will tell you that we have done some modeling with some of our friends on Wall Street, and we think that 

the government needs to charge for a reinsurance; it needs to 

charge 6 to 10 basis points for the privilege of providing that catastrophic guarantee. But you don’t—and it doesn’t have to charge 

more than that because you need to have a well-capitalized firstloss insurer ahead of you. If you don’t have somebody who is wellcapitalized ahead of you, you have to charge an awful lot more. 

Mr. MULVANEY. Mr. Katopis took the position that fees by themselves are probably not enough to level the playing field to encourage private capital into the market. 

Mr. Millstein, would you agree with that? 

Mr. MILLSTEIN. I’m sorry, sir? 

Mr. MULVANEY. Mr. Katopis stated in his testimony that he 

thought raising the fees might be something we should look at and 

should encourage. But that by itself would not be enough. Do you 

agree with that? 

Mr. MILLSTEIN. No. I agree with that for the reasons that he 

cited, which is that when you look back at private label 

securitization market and the period 2007–2008 and then the aftermath of the crisis, it was clear that the legal protections of investors were inadequate to protect them against conflicts with second 

lienholders, inadequate to protect them against conflict with 

servicers, and inadequate to get their trustees in these trusts to actually enforce their rights. 

31 

Mr. MULVANEY. Let’s talk about another tool, then, if fees aren’t 

enough, and we all agree that fees are not enough. Let’s look at the 

lending limits. I was struck by something that my colleague from 

Georgia just said, which is he is interested in how we treat the little fellow. I happen to agree with that. In fact, that is one of the 

original missions of these entities. The lending limit in Chester 

County, South Carolina, is $417,000. I have news for you; I don’t 

think you can buy a house in Chester County, South Carolina, for 

$417,000. We are covering much more than just the little fellow. 

What I am hearing from you, Mr. Hughes, is that there is a functioning private market above jumbo, or in the jumbo realm right 

now. And if we slowly were to lower those lending limits below 

$417,000, we may well still be able to deal with the folks that Mr. 

Scott and I are so interested in, but still allow private capital to 

enter the market below $417,000. Am I wrong about that? What 

am I missing? 

Mr. HUGHES. I would agree. If we look back and went back to 

the OFHEO model, which was calibrated based on changes in home 

prices, if we went back to what the loan limit would have been 

under those models, where Fannie and Freddie would transact, the 

loan limit would be about $330,000 today. So, yes, I think on a safe 

basis, one of the ways to bring the private sector in would be to 

guarantee fees and give an opportunity to open up more of the 

market to the private sector. 

Mr. MILLSTEIN. But don’t go there too fast, because if you lowered it in your county to 3—whatever it is—30, the people between 

$330,000 and above would have to have a 40 percent downpayment 

for Mr. Hughes’ firm to actually finance them. 

Mr. HUGHES. It is not 40 percent, for the record. 

Mr. MILLSTEIN. Thirty-five. 

Mr. HUGHES. It is not 35 percent. 

Mr. MILLSTEIN. Isn’t that the average LTV? 

Mr. MULVANEY. Thank you for that, gentlemen. 

One unrelated question, because I heard something from you, Dr. 

Kling, that grabbed my attention. And I don’t know the answer. At 

the risk of asking a question I don’t know the answer to, you said 

that taxpayers were taking interest rate risk in ways that no one 

anticipated. What type of interest rate are we taking that we didn’t 

anticipate? 

Mr. KLING. Freddie and Fannie used a huge book of derivatives 

to hedge their risk. We don’t know ultimately who is holding those 

derivatives, just as we didn’t know that AIG was holding a lot of 

the credit risk before. So if there had been an interest rate spike, 

there would have somewhere in the shadow banking system, somebody who would have taken a big hit and we could have faced that 

problem. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Cleaver, for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

I think it was Warren Buffett, I am not sure—I don’t think I 

missed a single meeting when we were dealing with Dodd-Frank. 

So I think people began to quote Warren Buffett with the whole 

deal of declaring that we needed to—in Section 941, need to make 

32 

sure that people had ‘‘skin in the game,’’ in terms of securitization, 

because where I grew up, we said, ‘‘dog in the fight.’’ But we don’t 

have as much money as Mr. Buffett, so we said ‘‘dogs.’’ 

But my concern is, in this Section 941 of Dodd-Frank, the skin 

in the game requirement would require that securitizers retain 5 

percent interest in the securitization. And given that the risk retention proposal provides significant flexibility, how does the proposal impact the asset-backed security market, or does it? 

Mr. Millstein? 

Mr. MILLSTEIN. Interestingly, Mr. Hughes will tell you that his 

investors require him to have skin in the game. And he had skin 

in the game, actually greater than 5 percent. He is taking that subordinated tranche in his pools to himself. Right? 

Mr. HUGHES. Correct. 

Mr. MILLSTEIN. So the market has sort of—at least as the market is today, a very small private label securitization market but 

growing, has actually adopted this requirement and requires the 

securitizer to have the junior tranche taking first loss ahead of the 

senior creditors. 

Mr. CLEAVER. Now, Fannie and Freddie, 100 percent. Correct? 

Mr. MILLSTEIN. Yes, that is right. They have skin in the game, 

but they don’t have any capital to back it. 

Mr. CLEAVER. So they don’t have to retain 5 percent, correct? 

Mr. MILLSTEIN. They have been carved out by Congress—sorry, 

by the regulators, not by Congress. 

Mr. CLEAVER. Do you think that will limit the private security 

market? 

Mr. MILLSTEIN. Yes. 

Mr. CLEAVER. How so? 

Mr. MILLSTEIN. I think if Fannie and Freddie are to persist, either in government-sponsored form or in privatized form, we are 

going to have to build into—we are going to have to let them have 

capital, first, to protect taxpayers against loss in either system, a 

cushion to absorb losses, and they are going to have to have skin 

in the game. 

Mr. CLEAVER. Yes—anybody else? Mr. Hughes? 

Mr. HUGHES. Yes. I would just like to clarify a couple of things. 

One, investors haven’t sat there and pounded the table, Redwood, 

you need to hold 5 percent. We hold it as part of our business 

model to show alignment of interests with investors. 

And second, in terms of the GSEs, I think another interesting 

model underfoot, rather than the GSEs having dollar one of loss 

through dollar 100 is to sell to the private sector, have them invest 

in the first tranche or the first credit loss of the securities that they 

are issuing, I think is a very interesting model. 

Mr. CLEAVER. Yes, sir. 

Mr. KATOPIS. Congressman, AMI’s position is that the best skin 

in the game is effective reps and warranties that can be followed 

up in court. Certainly, if you buy anything in America, you buy an 

iPod, you buy a car, you get a warranty. If your State, your union 

is investing in mortgage-backed securities, they should have some 

recourse. So we would hope that effective reps and warranties are 

part of any future system. 

Mr. CLEAVER. Mr. Kling, do you agree with everyone else? 

33 

Mr. KLING. I am just not sure that the best place to design the 

allocation of risk is with a government agency. When I was with 

Freddie Mac, we had all sorts of systems in place for dealing with 

what we thought were ultimately scum bags as lenders. And— 

Mr. CLEAVER. Let’s not get technical, sir. 

Mr. KLING. And some of it was saying, well, since we don’t trust 

you, you are going to have to sell your loan through somebody else. 

There are all these issues. I just think that if you try to have a 

government agency dictate the process by which you manage the 

whole loan origination to securitization process, there are going to 

be mistakes of both kinds, mistakes of allowing risky processes 

that you shouldn’t allow and maybe adding to costs unnecessarily. 

Mr. CLEAVER. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Garrett, for 5 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman, and thank you to the 

panel. 

When we talk about private securitization and you talk about investors, the investors class, all investors, I guess, are not created 

equal or are not similarly situated. Is that correct, in the sense 

that some are looking for long-term investment and some are looking for short term? I see, Mr. Hughes, you are on the button. 

Mr. HUGHES. Correct. 

Mr. GARRETT. Okay. So, then, if that is the case, going back to 

you, can you tell us, were you able to structure some of your deals 

in a way that you are cognizant of the fact that investors are looking for either short or long term, and so you are able to adjust or 

modify the cash flow in accordance with that? Yes, exactly. For 

some of our transactions, one of the things you can do is to take 

the AAA tranche, which is a one set series of cash flows, and be 

able to divide that cash flow up to meet the needs of different investors. So you could be an investor. And it is a zero-sum game, 

but you could be an investor that has a short duration that says, 

I am willing to accept a lower yield, but I would like my money 

first. You can trade somebody in the middle, and you may have an 

insurance company on the back end that says, fine, I want the 

highest yield, I feel comfortable with this, and take their money 

last. But, yes. 

Mr. GARRETT. Okay. And so, there is a lot of talk about trying 

to make sure that whatever we do, we end up, at the end of the 

day, with a 30-year instrument that is out there. Right? So is there 

a—well, let’s turn it around. By barring prepayment penalties, is 

that something that gets in the way of providing for a 30-year fixed 

without a wrapper on it? 

Mr. HUGHES. Excuse me. I didn’t quite understand. 

Mr. GARRETT. All right. So if you want to establish a 30-year 

fixed in the market, in the private sector, without a wrap, without 

a guarantee, if that is the goal, do prepayment penalties help or 

hurt the situation? 

Mr. HUGHES. I think prepayment penalties would help the situation, knowing that the duration of the cash flows would be longer. 

Mr. GARRETT. Right. 

Mr. HUGHES. 3 or 5 years. 

34 

Mr. GARRETT. Spend 30 seconds explaining why prepayment penalties or the borrower on prepayment penalties is adverse to an investor’s interest, or could be adverse to an investor’s interest? 

Mr. HUGHES. It could be on the agency side as well as the private 

side, to the extent that you pay a premium for a security and a 

yield, to the extent that you paid, not par but you paid 102, with 

an expectation that you are going to get a higher yield, and that 

higher yield will last for a longer period of time. To the extent that 

it gets prepaid in 6 months, you are going to end up losing money 

on that investment. So matching the duration of the expectations 

for what premiums you are paying and your expectation. 

Mr. GARRETT. But those are interest rate risk variations that you 

have, there. That if you thought you had—as an investor, you 

thought you had a 30-year instrument there and all of a sudden, 

like I say, 6 months later, because the markets have changed and 

now I can refinance my mortgage, I am going to do that, it is good 

for the homeowner, but may not be good for the investor. Right? 

Mr. HUGHES. Correct. 

Mr. GARRETT. So if we can adjust that and allow that to be a 

variable, it could actually help getting a 30-year fixed in this market. 

Mr. HUGHES. Yes, it could. 

Mr. GARRETT. Are there other factors that we could look at, 

standardization, as such, to get a TBA market and a forward-looking market to make sure that we end up with a 30-year fixed? 

Mr. HUGHES. Yes. And I think your bill would go a long way toward trying to get us there. 

Mr. GARRETT. That is nice to hear, sir. 

Mr. HUGHES. I would say that standardization, at least as a 

guide, one of the things I think would be very helpful for private 

investors is one of the things, and this has happened over the last 

month-and-a-half, going through documents that are incredibly 

dense to try and figure out differences in private deals. I think one 

thing that would be very helpful is to have an industry best practices, top to bottom from seconds, whatever, and make that clearly 

identifiable in a prospectus so an investor can clearly see which 

ones agree with best practices and which ones have deviations. 

Mr. GARRETT. That is pretty neat. So what would happen today 

or tomorrow, for example, if FHFA said, we are going to issue two 

pools of securities for sale, right? One over here is just what have 

all the standardization that you just described which FHA currently does, right, and has the wrap or the guarantee around it and 

another pool identical to it in all ways that you can. Would there 

be—obviously, there is interest in the first. Is there any interest if 

that were to happen tomorrow by some investors depending on the 

price? The price would be different, correct? 

Mr. HUGHES. The price would be different. 

Mr. GARRETT. Okay. So there would be—for some investors, they 

may find an interest in that. Do you know, could anybody— 

Mr. HUGHES. I think the key thing is that what investors want 

is clear transparency so they know what they are buying, and if 

the expectations of PSA look this way and if there are deviations 

to it, what they just don’t want to have to do is go to page 130 to 

35 

figure it out. They would like on the front page to know, here are 

the deviations, and make true transparency and make it simple. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman, for 5 minutes. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

It was interesting hearing from Mr. Mulvaney. When he used the phrase, ‘‘You couldn’t find a home in Chester County for $417,000,’’ 

I thought his area was like mine, that you couldn’t find a home in 

that county for as little as $417,000. It took Mr. Watt’s translation 

ability to tell me that, no, you couldn’t find a home in his county 

that sold for as much as $417,000, and I think this illustrates why 

we need some differential in the conforming loan limit between 

high-cost areas and areas where homes sell for different prices. 

Over the last year or so, the guarantee fees of Fannie and 

Freddie, the g-fees, have been raised in an attempt, among other 

things, to level the playing field for private capital. I wonder if the 

gentlemen could tell the committee if the increased g-fees have 

spurred your members, your organizations or others that you focus 

on to take the first step back into the market below the jumbo 

level, and if the folks are still on the sidelines when we have the 

guarantee fee at 50 basis points, how much higher does that guarantee fee have to go to get private capital involved below the jumbo 

level? It looks like Mr. Hughes is interested. 

Mr. HUGHES. Yes. I would say an increase of somewhere in the 

neighborhood of 15 to 20 basis points would begin to get private 

capital back, but as I said, that has to work in concert with all the 

other recommendations around safety so investors know that there 

is safety in the investments so that the prices they are willing to 

pay begins to tighten, and I think the combination of investors paying at slightly tighter spreads together with higher guarantee fees 

would bring much more capital into the market. 

Mr. SHERMAN. Now, what is stopping particularly the large 

banks from originating and then keeping and not even securitizing 

the mortgage loans? They don’t have the cost of securitization. 

They don’t have to hire a lawyer to tell them whether they have 

to keep 5 percent of it or not because they would be keeping the 

whole thing; they are not paying. There is no guarantee fee to pay, 

and banks have the lowest cost of capital in, certainly in my memory. So what is keeping banks from just doing what they used to 

do in ancient times, and that is loan money and collect payments 

from the borrower? 

Mr. HUGHES. There are many banks today, some of the major 

banks with larger balance sheets that are actually holding their 

jumbo loans today. One of the risks out there that Dr. Kling mentioned is that the 30-year fixed, bad things happened in the S&L 

crisis so that people hold on their books 30-year fixed rate mortgages and their funding comes from deposits or shorter terms, you 

can get kind of upside down, and we had a bad chapter in our history. 

Mr. SHERMAN. Yes. Is there—I realize many borrowers aren’t interested in adjustable rate, but those products are still out there. 

Is there any real interest in the big banks holding adjustable rate 

mortgages? 

36 

Mr. KLING. What I heard at a conference last week is that in the 

jumbo market, there is a notable price differential between a 5-year 

adjustable and a 30-year fixed, and borrowers are willing to take 

the 5 year, given that price differential. 

Mr. SHERMAN. Okay. The Basel III rules have raised the amount 

of capital banks have to hold, and as to non-government-backed 

mortgages with a less than 20 percent downpayment, that can be 

almost 50 or 100 percent more of a reserve. What effect will this 

have on private investment in non-government-guaranteed mortgages and mortgage-backed securities? 

Mr. MILLSTEIN. That is clearly going to raise pricing. It will have 

an impact on banks’ ability to hold those loans without higher capital charges, and it is, therefore, going to have higher pricing. 

Mr. KLING. I would also just add— 

Mr. SHERMAN. Yes, Mr. Kling? 

Mr. KLING. The Basel agreement is really what got us where we 

are today. 

Mr. SHERMAN. What got us—speak louder, please. 

Mr. KLING. The original Basel agreement, which made AAArated mortgage securities cheaper for banks to hold, even if they 

were backed by total garbage loans, than holding a safe loan as a 

whole loan, and unless—so the capital requirements are a big deal 

in determining the nature of mortgage finance. 

Mr. SHERMAN. I underlined the words AAA and realize we need 

reform with the credit rating agencies. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Royce, for 5 minutes. 

Mr. ROYCE. Mr. Hughes, you are the only one I know right now 

who is involved in the private securitization market, and I remember in 2011, you made some comments that most borrowers now 

qualify for loans backed by government agencies, and you said one 

of the reasons that the private securitization market is not properly 

functioning is because the government is crowding out the private 

market through loan programs that make 90 percent of borrowers 

eligible for a below-market-rate government-guaranteed mortgage 

loan. Private capital simply cannot compete with government-subsidized mortgage programs. 

You mentioned the problems that may arise from the premium 

capture cash reserve account provisions also in the proposed rule 

on Section 941 of Dodd-Frank, and going through the comment letters, you notice, we all notice that critics have noted with respect 

to the letters to the regulatory agency, simply speaking, this provision needs to be removed in order to prevent a material contraction 

in securitization activity. Certainly, it is relatively difficult to imagine a contraction in the private label mortgage market which is already severely contracted, but we seem to be doubling down here. 

What will this do in terms of the future viability of a private mortgage securitization market, in your opinion, if we don’t get this adjusted? 

Mr. HUGHES. I think it would tremendously hamper—if premium 

capture as written stays in there, it will hamper not only the 

RMBS market, it will also be the CMBS market. It is complex. I 

can go through it what the provisions are, but it essentially makes 

37 

sure that if you are a securitizer, if you originated loans, that you 

are going to sell into fair market value, that you cannot make any 

money on that transaction. 

Mr. ROYCE. You hinted earlier at interest rate policies. The Fed’s 

quantitative easing program is having an impact on mortgage valuations and the ability, I think, for private label mortgages to be 

issued, but on top of all of the rest, let’s go to the transparency and 

standardization in the market, label market, in the private label 

market and go to the issue of what investors are looking for. We 

have seen a proactive effort led by the American Securitization 

Forum with Project RESTART, which Acting Director DeMarco 

said will provide a real-time test of a new standardized contractual 

framework for transactions where the private sector is absorbing 

credit risk. So this is a good first step, I think, toward standardizing all loan level information. 

How do we ensure that future issuers continue to comply with 

the standards—and I would ask that of any members here on the 

panel—set by this Project RESTART, and in a similar vein, is it 

possible for standardization to include information on the due diligence process being employed by new private label issuers where 

end users will then have full transparency of how the process 

works? I think it is also important which vendors are performing 

the due diligence. Would that be possible in terms of this transparency and consistency for investors and how much would that 

help? 

Mr. KATOPIS. Congressman, thank you for raising these issues 

which are very important to AMI and its members. In summary, 

we share the objectives that are being stated by ASF with this 

Project RESTART. We are concerned that after 5 years, there has 

not been a result of this restart project. That is one of the reasons 

why AMI is here to testify today to explain that all the goals that 

you have mentioned—enhanced transparency, greater standardization—are things that we need the sort of light hand of government 

to set standards and systems for the market to move forward and 

private capital to return. So I think there is probably a parallel effort that needs to go on. 

Mr. HUGHES. I would say also there is a balancing act because 

we try—we are completely transparent—to tell investors whatever 

we can about the loans, but that is in conflict at times with privacy, and one of the things that is in conflict with privacy would 

be due diligence results, street address, name, and things like that. 

So we need to balance privacy with transparency. 

Mr. ROYCE. Thank you, Mr. Hughes. 

Any other observations by other members of the panel? 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The gentleman’s time has expired. The 

Chair now recognizes the gentleman from Delaware, Mr. Carney, 

for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. 

Thank you to the panelists for coming in today. I appreciate this 

hearing. This is the second or third hearing we have had on housing finance reform. It has been very enlightening and interesting 

to me. I am not smart enough to figure out, though, some of the 

difficulties in transition. Each of you, I think, has warned us about 

38 

transitioning to a very different system. There seems to be an 

emerging agreement or consensus around the fact that we need to 

bring more private capital in. What that looks like as an end state 

remains to be seen, and more importantly, how you transition to 

that end state. 

Mr. Millstein, I haven’t read your whole written statement, but 

we have met before, and I have listened to your proposal, and it 

seems very interesting and one that we ought to think about seriously. I have two concerns, or rather a question and a concern. Are 

you familiar with what Mr. DeMarco is doing? Are each of you familiar with what Mr. DeMarco is doing in terms of setting up a 

platform, I think he calls it for future securitization? Are you familiar with that, and is that consistent with any of the models that 

we might be moving toward? 

Mr. Millstein, you are shaking your head. 

Mr. MILLSTEIN. Yes, I am. It is a massive reengineering of software for both companies. They are doing it on a joint venture basis 

to be able to track a loan from origination into the pooling ultimately the servicing of that. So it is an important project and could 

create both greater transparency and a utility that other market 

participants could use. 

Mr. CARNEY. So, in that sense, Mr. Katopis, in your piece you 

raise a lot of concerns about the legal structure that again I don’t 

really understand it so much, but do we have that framework? You 

talk about the Trust Indenture Act as a model for what needs to 

be done now. Do we need to do that so that Mr. DeMarco is setting 

up something consistent with the new legal structure? 

Mr. KATOPIS. Congressman, I think the key is what Mr. DeMarco 

appears to be doing is establishing a platform for agency, and we 

are private label, so I think his endeavor could be very valuable, 

especially if it was open access to all market participants, and likewise the development of something along the lines of the Trust Indenture Act provisions would be a very important complement and 

help private capital return to the market. 

Mr. CARNEY. Do you have something specific in terms of what 

that model, what that Act might look like modeled after the Trust 

Indenture Act? 

Mr. KATOPIS. We have an exemplary draft bill that we are happy 

to share with anyone, and come by and spend some time with you 

about it, so I would be happy to follow up. 

Mr. CARNEY. That is great. 

Mr. Millstein, back to you. This is a great graph here, and I am 

wondering if you could explain to us what it might look like beyond 

2011 or what these—how it might transition and what might be included in the yellow and what the red might look like, and one of 

the things I am—the follow-up question is going to be, there was 

a time prior to the mid-1980s where savings and loans and credit 

unions had a much larger part of this market, and we know what 

happened at the end of that period of time, and what worries me 

a little bit is as we change, we invite private capital in, let’s assume it all comes back in, and then something happens where they 

don’t get it right, and if all that private capital leaves the market, 

then what are we left with if we don’t have—what is the public role 

that could fill in at that point? 

39 

Mr. MILLSTEIN. Congressman, if you were to actually flip to page 

10 of that, because what I want to do is explain what I think the 

yellow on page 4, where that yellow segment is going or should go, 

where I would highly recommend to you that it go. 

So the old system is on the left side; this is how is the government guarantee delivered. The old system is on the left side where 

you have homeowner equity and Fannie and Freddie undercapitalized with very little capital required by the regulator to support the 

credit risks they were bearing. The current system is you have 

homeowner equity and private mortgage insurance and the Treasury Department is backing, it basically bears all the credit risk in 

the Fannie and Freddie book. The new system we propose is one 

where homeowner equity is first in line; then you have effectively 

the risk retention either by a guarantor, a private guarantor such 

as we would make Fannie and Freddie, or an issuer such as Redwood Trust, taking the next layer of risk. And only after those two 

layers would the government reinsurance kick in, only after those 

two layers of risk. 

Mr. CARNEY. So what happens if all of a sudden the red block 

in the new system goes away? 

Mr. MILLSTEIN. The government can tune it up to deal with, turn 

up the attachment point. 

Mr. CARNEY. Thanks very much. My time has expired. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Ross, 

for 5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

Mr. Hughes, I just have to ask you, you spoke of your jumbo 

loans, and as I understand it, you have a robust market in the 

jumbo loans? 

Mr. HUGHES. Yes, we do. 

Mr. ROSS. At a 60 percent loan to value? 

Mr. HUGHES. We are, just to correct, again, I didn’t say 60 percent loan to value. Today, we are offering jumbo loans up to a million dollars for 80 percent. 

Mr. ROSS. Okay. Do you put those on the secondary market afterwards, or do you hold those yourselves? 

Mr. HUGHES. No, we then take those and securitize those 

through private securitization. 

Mr. ROSS. I understand. 

Mr. Katopis, you testified earlier about the inflated mortgage 

debt that we have out there. Would you say that there is enough 

private capital in terms of capacity to meet a market if a market 

were to come back? 

Mr. KATOPIS. There are three sources of mortgage finance: banks; 

the Enterprises; and the private markets, PLS. There is a lot of liquidity, as has been testified about. So it can come back, provided 

the systems and safeguards are there, and it will increase as the 

Enterprises are wound down. 

Mr. ROSS. So you feel that over time, there will be sufficient capacity to meet the demand? And some of the problems we have 

that I think you touched on were the cost of compliance, I mean 

the cost of regulatory compliance. If Basel III is implemented, you 

40 

will have the cost of capital compliance, so that is going to further 

suppress any reentry of the private market, won’t it? 

Mr. KATOPIS. As we have testified, regulatory and legal pressures 

will be a head wind for private capital coming back. 

Mr. ROSS. And at one time, I guess back when it was a purer 

system, back in the 1970s and 1980s when you had companies that 

would originate and hold a mortgage, and they would originate and 

hold a mortgage because they managed the risk. And then I think 

as the GSEs became more involved, you saw a lowering of standards to the point where the FICO scores didn’t matter, to the point 

where employment didn’t matter, where there was no verification 

of income even, and you moved to a system of, I think, what is 

called originate and sell. And it created this moral hazard, if you 

will, I think that more and more companies were trying to just 

originate a loan and then sell it to the secondary market, which 

then led to our collapse. Would you agree that there is a way 

maybe we can bring this back if we had originate and hold for 5 

years or just—I say that 5 years arbitrarily, so that the market in 

and of itself would have to have some standards of risk? 

Mr. KATOPIS. Thank you, Congressman. 

In response to that, we would offer that effective reps and warranties as part of a standardized PSA or standardized docs would 

achieve the goal I think you are suggesting. 

Mr. ROSS. Right. 

Mr. KATOPIS. Do you want to weigh in? 

Mr. HUGHES. Yes. I don’t think there would be enough liquidity 

in the system if, in fact, people had to hold mortgages for 5 years. 

I think going— 

Mr. ROSS. Is there a magic period of time, though? 

Mr. HUGHES. I think the most important thing is for the mortgages that they produce, that they stand behind those mortgages, 

so that there are real reps and warrants. 

Mr. ROSS. I agree. So it is truly risk-based? 

Mr. HUGHES. Correct. 

Mr. ROSS. Yes. 

Dr. Kling, the chairman had a couple of questions about the Canadian system and the 30-year amortization with a 5 year revisiting of the interest rate. You mentioned that and I understood this 

to be that had we done something like that it may have caused 

Freddie and Fannie to go into bankruptcy. Is that correct? 

Mr. KLING. No. My concern with Freddie and Fannie is that if— 

Mr. ROSS. Because they essentially went into bankruptcy anyway. 

Mr. KLING. Yes. 

Mr. ROSS. They were in receivership, and so— 

Mr. KLING. Right. My concern there is that if we go to any system where the 30-year fixed-rate mortgage is dominant, if we 

had—let’s say Freddie and Fannie had done fine on credit risk, but 

somehow we had had an interest rate spike sometime in the last 

5 years, I am not sure Freddie and Fannie would have been solvent. And— 

Mr. ROSS. I appreciate that. I apologize, I only have a minute left 

and I have to go to Mr. Millstein for just one quick second. I would 

love to explore that with you further. Mr. Millstein, you hit on 

41 

something that I think is really important. You talked about a reinsurance market being there as the guarantee, and the way I look 

at capital is that you have risk-based private capital, you have taxpayer-based capital, and you have debt-based capital, and the only 

one that really works that sends a message as to how to truly actuarially assess your risk is the private risk-based capital. You believe, then, that there is a way that reinsurance can be used to 

supplant the GSE system that we have today? 

Mr. MILLSTEIN. I do. 

Mr. ROSS. And how long do you think that would take? What incentives would it take? Is it affordable? Is it transitional? How 

would you suggest we get there? 

Mr. MILLSTEIN. I am happy to come back and talk to you. I have 

a whole transition plan that we have laid out. 

Mr. ROSS. I would be very interested in that. 

Mr. MILLSTEIN. It takes about 3 to 5 years. 

Mr. ROSS. I appreciate that. 

With that, Mr. Chairman, I will yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Maryland, Mr. Delaney, for 5 minutes. 

Mr. DELANEY. Thank you, Mr. Chairman. 

And thank you for this very constructive debate here today. I just 

had one specific question, but I wanted to set it up a little bit. It 

seems to me—and, Mr. Hughes, I think you touched on this—that 

for the private market to really get back in this business, and we 

should remind ourselves that the private market is also in the government business, right, because private investors buy an enormous number of agency securities, so it is really about migrating 

an already large pool of investors to an investment vehicle that 

doesn’t have explicit or implicit government support, and what we 

need is a convergence of credit regulation and pricing to come together to make that market attractive, and of those three things, 

credit is the one we control the least, but unfortunately, it seems 

like the environment for that is actually getting pretty good as we 

are seeing some recovery in housing. I thought the testimony on 

regulations, in other words, creating certainty around the regulatory environment is critical, and I generally agree with everything that was said in that regard because I think that would help, 

and then finally the guarantee fees if we can—the good news here 

is the aspect we control the least, credit, seems to be going in the 

right direction. So if we could actually adjust the guarantee fees 

and do things with regulatory changes, it seems like we could get 

into a pretty good place in terms of getting the private market active. 

Mr. Millstein, I think your proposal lays out a very good vision 

for the future of housing finance, something that has been lacking, 

and I think this notion of having government reinsurance that attaches to a mortgage so that mortgage could be held in any number 

of institutions, whether it be a bank or a securitization vehicle, is 

terrific provided the capital levels are the same so there is no real 

capital arbitrage. 

But the one question I have is you talk about wanting to take 

what remains of Fannie and Freddie and privatize those and start 

retaining the earnings of those Enterprises, and I understand why 

42 

that is good for the preferred stockholders, and I appreciate your 

disclosure that you are an investor in the preferred stock, because 

it is massively attractive for preferred stockholders to do that generally speaking—but that is not my question, and that is fine; that 

is actually not the point of my question. I worry about, as we look 

to privatize those Enterprises and the government has a stake in 

those Enterprises and we all want to do what is best for the taxpayer, I worry about the conflicts and the incentives to try to set 

up those institutions through some form of government support 

that makes that number that we sell them for as good as possible 

because that will look good and to some extent put in place some 

enterprises that permanently have a competitive advantage going 

forward as opposed to taking your plan and just saying we are 

going to have the mortgage insurance market like you described, 

but we are just going to have new infrastructure manage it and actually wind these things down. So why is one better than the 

other? 

Mr. MILLSTEIN. Okay. I will tell you a cautionary tale from the 

1930s. Under the Federal Housing Administration Act of 1934, 

they had a very similar idea to this idea, that we should create a 

government charter that gave you the right to access of the secondary market with a specialized government charter. And the 

Roosevelt Administration went to Wall Street and said, you guys 

should take these charters out because this will enable you to access mortgage funding cheaply that you can then provide to the primary mortgage market. No one came. They built it; nobody came. 

And so President Roosevelt went to the head of the Reconstruction 

Finance Corporation, the TARP of its day, and asked him to please 

set up a subsidiary and take one of these charters out, and who is 

that today? Fannie Mae. That is where Fannie Mae came from. So 

my concern is that we may build this mortgage reinsurance system, 

and no one will come. 

We have these two entities in our hot little hands today. We can 

turn them into private insurers and make sure that we have someone to come with a big layer of capital ahead of us on our reinsurance to protect the taxpayers against risk on that guarantee. 

Mr. DELANEY. But wouldn’t they come, and maybe, Mr. Hughes, 

if we create the reinsurance product and have the capital levels 

that attach to the guaranteed part be attractive enough, wouldn’t 

they come to that? 

Mr. HUGHES. I think they would come to that, on an individual 

pool basis, yes, I do. I think, if Fannie and Freddie were to issue 

pools—there are various ways under consideration to sell that. One 

of the issues right now is going to be transparency, loan level information, and right now, I would think that Fannie and Freddie do 

not—they are working on it—have the same level of transparency 

which private investors would want, but I think you could get 

there. 

Mr. DELANEY. I will close by saying, again, I like your plan quite 

a bit, Mr. Millstein. I just worry that by launching these two as 

private enterprises, we will somehow find ourselves with monopolistic businesses still in the mortgage market in some way or form, 

and it would be better to have that more dispersed throughout the 

private markets. 

43 

Mr. MILLSTEIN. You and I should discuss that. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

Thank you all for being here. A few questions. First of all, Mr. 

Katopis, I wonder if I could address to you, we heard testimony 

back in March about some of the competitive advantages for the 

GSEs, and that FHA has compared to their private competitors. I 

wonder if you could elaborate on this for us and how the GSEs and 

FHA pricing, how are they pricing investors out of the market? 

Mr. KATOPIS. I will be brief, and I would like to follow up because what I have said in the testimony that was provided is that 

we feel the investors are being crowded out and that there are a 

number of economic and noneconomic advantages that the Enterprises now have. We have discussed the g-fee issue. So, we have 

discussed a number of these. Some of these actually also affect the 

way the GSEs can impact servicing. They have certain advantages 

that do not exist in the private sector. Again, we would like a level 

competitive playing field. Our organization hasn’t really looked at 

some of the FHA issues in detail, but I am happy to poll my members and get back to you regarding that. 

Mr. HULTGREN. That would be great if we could follow back up 

with you, any suggestions you have. 

I will move over to Mr. Hughes. I know you have touched on this 

in different questions and also in your own testimony, but I wonder 

if you could just get into more specifics on a recommendation of 

how we can level the playing field? We talked a little about the gfees but tell me more about that as a potential solution and really 

as a way to increase investor interest in the private market. 

Mr. HUGHES. Yes, I think we have to work on two fronts. I think 

the g-fees is one side of it that helps the mass side of it opening 

up more opportunity to the market, but quite frankly, the more important thing is on the structural protections, transparency, and 

alignment of interests because that is what investors are waiting 

to see. There is plenty of money out there. If we can get those 

pieces in place, I think it would go a long way to bringing the private sector back. 

Mr. HULTGREN. On the g-fees side, I know you mentioned there 

is two, and the structural side is maybe the more important, but 

if we were to do something with the g-fee side, how high do you 

think that would need to go in order to be an incentive? 

Mr. HUGHES. I think, again, with the combination of the private 

sector coming in, and spreads tightening, I would say probably 

somewhere around 15 to 20 basis points should make it competitive. 

Mr. HULTGREN. Dr. Kling, are there other advantages Congress 

has given to the GSEs that we should reconsider if our desire is 

truly to level the playing field where public capital has no advantage over private investment? 

Mr. KLING. Traditionally, there have been advantages in terms 

of not having to register securities, and I can’t remember off the 

top of my head the litany of advantages that the GSEs have had, 

and so my suggestion is to simplify the problem by just lowering 

44 

the loan limits gradually and then opening it up to the private sector that way rather than trying to figure out which of these—and 

above all, you have the implied guarantee and what is that worth, 

now the explicit guarantee. 

Mr. HULTGREN. Okay. One last question, just in the last minute 

or a little over a minute that I have, and any of you who have a 

thought on this, if you could respond. The Treasury Department 

has advocated for gradually reducing conforming loan limits, as you 

have mentioned, to bring private capital back in to certain areas 

of the market. Is there private sector demand for loans that would 

fall into these elevated loan level limits? What do you think a reasonable time frame for changes like that, how gradual does it need 

to be? Could the market cover these changes very quickly, or would 

the process need to be gradual to guard against that market shock? 

So any thoughts you have? Again, I know, Dr. Kling, you have 

talked briefly on this, but any of the others? 

Mr. HUGHES. I think the platform that Redwood has set up, and 

everything goes with that platform, from structural protections to 

transparency all the way through to alignment of interests, I don’t 

see why the private sector would invest in prime loans of any size, 

as long as you get it together, but it has to come down in stages. 

But what we have built is transferrable; it is just not that the only 

people that we can lend to are rich people. I think it is a process 

and a platform that is transferrable down to lower limits. 

Mr. HULTGREN. Okay. Again, thank you all. I have just a few seconds left, so I will yield the few seconds I have back to the chairman. Thank you. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Indiana, Mr. Stutzman, for 5 minutes. 

Mr. STUTZMAN. Thank you, Mr. Chairman, and thank you for 

your time today in addressing this issue. I know all of us want as 

much capital into the market, I should say, as possible, but of 

course to meet the needs that we have for consumers and for a 

healthy economy, and I don’t care which one of you all want to 

touch on this, but could you, with the disparity and the differences 

between what the GSEs’ standards are—they are held to different 

standards since they are in receivership. What do you see as the 

disparity between category 1 and 2 loans due to the incentive to 

move more capital into the private mortgage market? Any of you? 

Mr. MILLSTEIN. I am sorry— 

Mr. HUGHES. I think all of us are—a definition of category 1 and 

2 would be helpful. 

Mr. STUTZMAN. It would be—I am sorry? The difference between 

category 1 and 2? 

Mr. HUGHES. Yes. 

Mr. STUTZMAN. With the higher the requirement for more capital 

or less capital with category 1 being backed by GSE and those who 

would be in category 2 not being backed by GSE. Does that make 

any sense? 

Mr. MILLSTEIN. I am not getting it. 

Mr. STUTZMAN. You are not getting that, okay. Let me go at it 

from a different angle then. As long as they are in conservatorship, 

there are differences, right, between what the GSEs are required 

to do compared to those in the private market; is that correct? 

45 

Mr. MILLSTEIN. Yes, they are serving different markets right 

now, and the private market itself is coming back slowly. 

Mr. STUTZMAN. But is that— 

Mr. MILLSTEIN. It is a much smaller market. 

Mr. STUTZMAN. I guess that is what I am trying to get to. Are 

we keeping money out of the market, private money out of the market because of those differences? 

Mr. MILLSTEIN. No. Look, there is a debate, I think, on the two 

sides of the aisle, are the GSEs crowding private capital out or is 

private capital not quite yet ready to take credit risk after the 

greatest credit crisis in 4 generations? And I think it is a little of 

both. This is a private capital market that is in need of repair, as 

you have heard from the two gentlemen to my right. There needs 

to be much greater standardization and transparency, an investor 

bill of rights in order to give investors comfort that if they buy into 

securitizations, their rights will be protected on the one hand, but 

there also needs to be a repair of their own balance sheets and willingness to take credit risk. 

Mr. STUTZMAN. Okay, so loans with a debt-to-income level about 

43 percent are only allowed transitional QM status if they are eligible for sale to the GSEs. Are there quality loans in this space that 

if they qualified for a QM without a government backstop, would 

that attract private capital? 

Mr. HUGHES. First, go back to the last one because I think one 

of the misconceptions is that there is a substantial difference from 

the loans other than loan size that Fannie and Freddie are 

securitizing today versus what the private sector has, and if I look 

at Fannie Mae versus Redwood, aside from loan size, loan to value 

for Redwood is 67, for Fannie Mae it is 75. FICO score for Fannie 

Mae is 761. It is 770 for those, for Redwood Trust, and then primary residence is 93 percent and Fannie Mae is 89 percent. So 

there isn’t a wide disparity for the majority of what Fannie and 

Freddie does from what the private sector would do. 

Mr. STUTZMAN. You say there is not a wide disparity? 

Mr. HUGHES. In the quality of the loans, no. Other than loan 

size, they are similar. 

Mr. STUTZMAN. Okay. 

Mr. KATOPIS. Congressman, I feel the necessity— 

Mr. KLING. If I could just add for a second, what that says, and 

FHA is the same story, at least in terms of FICO scores, really 

high, and what that says is it is the originators and servicers who 

are scared of the market right now. It isn’t a matter of which investor is scared; it is the originators and servicers who don’t feel confident that they can originate or service anything other than a 

squeaky clean loan. 

Mr. KATOPIS. Briefly, AMI members would say that we would, 

private capital would pursue without a government backstop, including some type of 30-year mortgage. It would have different 

characteristics, but private capital would pursue something without 

a backstop. 

Mr. STUTZMAN. Do you think they would be more aggressive if 

GSEs and private capital were on the same level playing field? 

46 

Mr. KATOPIS. Absolutely, as we have testified, a level playing 

field with certain characteristics would definitely be a good signal 

for our investors. 

Mr. STUTZMAN. Okay, thank you. I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from North Carolina, Mr. McHenry for 5 minutes. 

Mr. MCHENRY. Thank you, Mr. Chairman, and thank you for 

your patience with this long hearing. 

Thank you all as well for your patience and fortitude, if you will, 

to get through this. This is an important hearing to understand. 

Just to reiterate, and I know you have heard this, but Ed 

DeMarco, whose responsibility is to oversee Fannie and Freddie, 

said at a hearing a month ago, ‘‘It is possible to rebuild a secondary 

mortgage market that is ‘‘deep, liquid, competitive, and operates 

without an ongoing reliance on taxpayers or at least a greatly reduced reliance on taxpayers.’’ And he also talked about just the urgency and the need for this. 

So, Mr. Hughes, in terms of private label mortgage 

securitization, what percentage of the market are you in? Just in 

the last 2 or 3 years? 

Mr. HUGHES. Redwood? If we hit our goals for what we expect 

this year, we will be probably 5 percent of the jumbo market. 

Mr. MCHENRY. Okay. So in terms of securitizations, in terms of 

mortgage securitizations outside of government, where are you? Is 

that a similar percentage? 

Mr. HUGHES. Again, we would expect to do about $7 billion. 

Mr. MCHENRY. Okay. So if Fannie and Freddie and the government went from, what are we, about 90 percent of the mortgage 

market roughly? Let’s say that pulled back. How much more business could you do? 

Mr. MILLSTEIN. I am not— 

Mr. MCHENRY. Again, I am asking you— 

Mr. HUGHES. If pulling back is done on a safe basis, and the pulling back happens with increases of guaranteed fees over time, 

bringing back loan limits, and again, I can’t emphasize enough, we 

need to make the structural reforms to bring investors back because it is not a money problem. There is plenty of money out 

there. Historically, of the jumbo market, 50 percent of that market 

was securitized with the risk. The difficulty now is the uncertainty 

of investors who need to wade back into the water. 

Mr. MCHENRY. So, going back to my question I asked you, which 

was could you enhance your business, could you do a lot more business with less government in the mortgage securitization marketplace? 

Mr. HUGHES. Yes, if there was a level playing field. 

Mr. MCHENRY. If there was a level playing field. And is there 

currently a level playing field? 

Mr. HUGHES. Currently, there is not a level playing field, but we 

are getting there. 

Mr. MCHENRY. Does anybody on the panel think that there is a 

level playing field for private capital and government capital? 

Mr. Millstein, you think there is? 

Mr. MILLSTEIN. Well, no. What I would say is this, that the private, the PLS market is broken, these guys are doing a great job 

47 

of fixing it, creating transparency, creating structures that investors will invest in, but it is still rife with conflicts, rife with confusion about enforcement rights. These are things you guys can help 

fix, and if you do fix them, you will help bring private capital back. 

But in the last crisis, what investors in PLS found is that the 

rights they thought they had, they didn’t have, and as a result, 

they are very reluctant to put aside the government’s advantages 

on funding. As a result, they are very reluctant to step back into 

these. 

Mr. MCHENRY. Okay. So the title of this hearing is, ‘‘Building a 

Sustainable Housing Finance System: Examining Regulatory Impediments to Private Investment Capital.’’ That is the subject matter here today, and removing those impediments, I think, is a necessary and proper and good thing to the point where the Minority 

witness on the panel agrees with that motivation. 

Mr. MILLSTEIN. Amazing. 

Mr. MCHENRY. Right? It is amazing. It is fantastic. So everyone 

agrees we need to get more private capital into the mortgage marketplace. Will anybody say they disagree on the panel? 

Mr. MILLSTEIN. The question is, how? How? 

Mr. MCHENRY. Thanks. And that is the next thing I was going 

to say. You beat me to the punch. 

Mr. MILLSTEIN. Just trying to help you. 

Mr. MCHENRY. Thank you. So the question is how we get that 

back into the marketplace. And I think the agreement here is that 

it is not very easy to compete with government when it comes to 

this, that you need to have—we talk a lot about disclosures to 

those who are getting mortgages, the individual consumers, but 

there also needs to be that same level of clarity for those who are 

investing or trying to securitize or are interested in purchasing the 

securitization. Is that a fair assessment? You can just say yes. 

Mr. MILLSTEIN. Yes. 

Mr. MCHENRY. Great, fantastic. 

So, with that, I will yield back, and thank you, Mr. Chairman. 

Chairman HENSARLING. There are no other Members seeking recognition, so I would like to thank each of our witnesses for appearing at this hearing today. Thank you for your testimony. 

Prior to adjourning, pursuant to the committee’s organizing resolution, I hereby name the gentleman from Wisconsin, Mr. Duffy, 

the vice chairman of the Subcommittee on Financial Institutions 

and Consumer Credit. 

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. 

This hearing is adjourned. 

[Whereupon, at 12:43 p.m., the hearing was adjourned.] 

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