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THE U.S. HOUSING FINANCE SYSTEM 

IN THE GLOBAL CONTEXT: STRUCTURE, 

CAPITAL SOURCES, AND HOUSING DYNAMICS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INTERNATIONAL MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

OCTOBER 13, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–73 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON INTERNATIONAL MONETARY POLICY AND TRADE

GARY G. MILLER, California, Chairman 

ROBERT J. DOLD, Illinois, Vice Chairman 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

BILL HUIZENGA, Michigan 

CAROLYN MCCARTHY, New York, Ranking 

Member 

GWEN MOORE, Wisconsin 

ANDRE ́ CARSON, Indiana 

DAVID SCOTT, Georgia 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

October 13, 2011 ............................................................................................... 1 

Appendix: 

October 13, 2011 ............................................................................................... 43 

WITNESSES 

THURSDAY, OCTOBER 13, 2011 

Dorfman, Richard A., Managing Director and Head of Securitization Group, 

The Securities Industry and Financial Markets Association (SIFMA) ............ 9 

Farrell, Michael A.J., Chairman, CEO, and President, Annaly Capital Management, Inc. ........................................................................................................ 7 

Veissi, Moe, 2011 President-Elect, National Association of REALTORS® ......... 11 

Wachter, Susan M., Richard B. Worley Professor of Financial Management, 

The Wharton School, University of Pennsylvania ............................................. 13 

APPENDIX 

Prepared statements: 

Miller, Hon. Gary ............................................................................................. 44 

Dorfman, Richard A. ........................................................................................ 47 

Farrell, Michael A.J. ........................................................................................ 67 

Veissi, Moe ........................................................................................................ 70 

Wachter, Susan M. ........................................................................................... 78 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Wachter, Susan M.: 

‘‘Research Paper No. 06–12, The American Mortgage in Historical and 

International Context,’’ by Richard K. Green, George Washington University, and Susan M. Wachter, The Wharton School, University of 

Pennsylvania, dated Fall 2005 ..................................................................... 82 

‘‘The Rise, Fall, and Return of the Public Option in Housing Finance,’’ 

by Adam J. Levitin, Georgetown University Law School, and Susan 

M. Wachter, The Wharton School, University of Pennsylvania, dated 

September 12, 2011 ...................................................................................... 105 

(1) 

THE U.S. HOUSING FINANCE SYSTEM 

IN THE GLOBAL CONTEXT: STRUCTURE, 

CAPITAL SOURCES, AND HOUSING DYNAMICS 

Thursday, October 13, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON INTERNATIONAL MONETARY

POLICY AND TRADE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

2128, Rayburn House Office Building, Hon. Gary G. Miller [chairman of the subcommittee] presiding. 

Members present: Representatives Miller of California, Dold, 

Huizenga; McCarthy of New York, Scott, and Perlmutter. 

Also present: Representatives Garrett, Green, and Watt. 

Chairman MILLER OF CALIFORNIA. This hearing will come to 

order. Without objection, all members’ opening statements will be 

made a part of the record. The hearing today is entitled, ‘‘The U.S. 

Housing Finance System in the Global Context: Structure, Capital 

Sources, and Housing Dynamics. 

I ask unanimous consent that Mr. Garrett and Mr. Green, both 

of whom are members of the Financial Services Committee, be permitted to sit with members of the Subcommittee on International 

Monetary Policy and Trade for purposes of delivering an opening 

statement, hearing testimony, and questioning witnesses. 

We have limited the opening statements to 10 minutes for each 

side. With the ranking member in agreement, I recognize myself 

for the first 5 minutes. 

Today, the subcommittee meets to discuss the U.S. housing finance system in the global context: structure, capital sources, and 

housing dynamics. As Congress grapples with how to change the 

current U.S. housing finance system, it is important to understand 

the domestic and global economic implications of such changes. 

In addition, as we contemplate changes to our system, it is useful 

to consider differences between the U.S. mortgage structure and 

housing finance systems in other countries. Our goal today is to 

shed light on these important considerations. There is no question 

that instability in the housing market is harming our U.S. economic recovery. Housing has historically led economic recovery in 

this country, and if you look back at every recession, it has always 

been there. This time it is not. 

According to the Federal Reserve, the slowdown in the aggregate 

demand is centered on the household sector. People are not conVerDate Nov 24 2008 18:17 Apr 26, 2012 Jkt 072614 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\72614.TXT TERRIE
2 

suming because of the wealth lost in the housing sector. We must 

stabilize the housing market. 

The importance of the U.S. mortgage market to the global economy is substantiated by the average amount of agency mortgagebacked securities traded each day. In the second quarter of 2011, 

it was $302 billion. Only the U.S. Treasury had a higher trading 

volume, of over $600 billion. 

Given this significance, changes to the U.S. housing finance system have the potential to impact the national housing markets, financial markets, and the domestic and global economy. Banks, 

pension funds, insurance companies, and foreign investors are the 

most significant non-U.S. Government investors in agency mortgage-backed securities, MBS—meaning Fannie Mae, Freddie Mac, 

and Ginnie Mae securities. 

Foreign sources of capital include investment companies, foreign 

wealth funds, and other government entities. Foreign investors 

hold approximately 14 percent of agency MBS. Risk-averse investors, both foreign and domestic, prefer agency mortgage-backed securities because of their safety and liquidity. 

The U.S. securitization process facilitated private investment 

capital from investors around the world that has flowed to U.S. 

home mortgages. Change to the safe investment options of agency 

MBS could impact investment decisions for these investors and, as 

a result, limit the flow of capital to the mortgage market. 

Such a result could cause a reduction in the availability of, and 

increase in, the cost of mortgage credit. This would impact lenders, 

investors, consumers, and ultimately the domestic and global economy. 

The ideological approach in the discussion about what changes 

need to be made to the U.S. mortgage finance system has resulted 

in a stalemate on reform. This is not what working Americans 

need. It is leading to confusion and a lack of consumer confidence. 

People need to be confident that their home price will not continue 

to fall. 

It does not help consumer confidence in the housing market 

when proposals are being considered in Congress to eliminate 

Freddie and Fannie, with no viable replacement and no concern for 

the health of the housing sector. 

The American people deserve better. We need to put ideological 

absolutes and politics aside and have a thoughtful, honest, and constructive discussion about a U.S. housing finance system that is 

based in fact. We must be mindful how critical the housing market 

is to the economy, and not contribute to uncertainty in the housing 

marketplace with conversations about unrealistic policy approaches. 

Today’s hearing is about getting the conversation about U.S. 

mortgage finance back on track. It can be instructive to compare 

the structure of the U.S. market with other countries. The size of 

the U.S. mortgage market is greater than any other country in the 

world. It exceeds the entire European mortgage market combined. 

While there is not a housing system in another country that is directly comparable to the United States, characteristics of the U.S. 

market are found in other housing systems. 

3 

At today’s hearing, we will focus on the following: the relation between the health of the U.S. housing finance system and global financial stability; how the U.S. mortgage market structure compares to other countries, including with respect to the U.S. 

securitization system and a mortgage product offering; the unique 

features of the U.S. finance housing system and the benefits and 

weaknesses of the characteristics; and foreign involvement in the 

U.S. housing finance system, including the motivations for foreign 

investors to purchase residential mortgage-backed securities. 

I look forward to hearing from the distinguished panel today. I 

strongly believe that housing is a critical and stabilizing force in 

the economy. The housing market requires action now. There is no 

question that private capital must be the dominant source of mortgage credit in the future, but we have to get to the point that we 

can attract private capital back to the market. A viable secondary 

marketplace is key. 

I introduced a bill with my colleague, Ranking Member McCarthy, to refocus the debate on real solutions now. Our bill presents 

a way forward for the mortgage finance system. We provide comprehensive reform of the housing finance system to other countries 

in desperate need. While this is not a legislative hearing on that 

specific legislation, I do think our witnesses will help us begin the 

process of refocusing the conversation to ensure that this confidence and liquidity in the U.S. market is achieved. 

We have to do something in Congress other than just talk. Talking and offering different confusing directions, without moving in 

any given direction, is creating so much instability in the marketplace that it is hampering the recovery. We need to do something 

to focus the debate on what is good for the American people, how 

do we return mortgage value to the housing, and how do we get 

the market stabilized. 

And I yield to the ranking member for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. And 

I thank you for holding this important hearing. I also will say that 

I stand by your words. 

Restoring our housing market is a vital component to our economic recovery. The Financial Stability Oversight Council recommended comprehensive reform of our housing financial system, 

which the Treasury Secretary reaffirmed when he testified before 

the full committee last week. 

As we contemplate how to reform our housing system, it is important to understand its role in facilitating the flow of private capital and liquidity to our mortgage market. Through our 

securitization system, private capital provides the liquidity necessary to fund mortgage lending. Because of the integration of 

housing finance into marketplaces, the United States has formed a 

strong link to global capital markets. 

Traditional housing finance that was limited and funded through 

savings deposits has increased through the transition to marketbased systems. Although there is not a housing system in another 

country that exactly mirrors the U.S. model, we must find characteristics of other housing systems that are similar to our own. 

4 

I look forward to hearing from the witnesses today, and learning 

more about how other countries have structured their housing systems, as well as the successes and failures of those systems. 

Most importantly, we must keep in mind that any reforms instituted in our housing finance system have the potential to impact 

the Nation’s housing market, the financial markets, and the domestic and global economy. That should serve as a stark reminder that 

we must proceed with reforms that bring confidence, stability and 

certainty back into our housing market. Without a stable housing 

system, we cannot achieve a full economy recovery. 

With that, I yield back the balance of my time. 

Chairman MILLER OF CALIFORNIA. Thank you. 

Mr. Dold is recognized for 21⁄2 minutes. 

Mr. DOLD. Thank you, Mr. Chairman. And I certainly want to 

thank you and the witnesses for your time here today. The 30-year 

fixed-rate mortgage has been the primary American mortgage financing instrument for many decades. But from a lender’s perspective, it is a very difficult loan product, assuming a reasonably low 

30-year fixed-rate. 

Carrying a particular individual borrower’s credit risk for 34 

years is a particularly difficult proposition, and a 30-year fixed-rate 

loan subjects the lender to 30 full years of interest-rate risk and 

30 full years of inflation risk. 

Even if the borrower fully performs, inflation over 30 years can 

effectively reduce or eliminate the lender’s real inflation-adjusted 

returns. Meanwhile, both increasing and decreasing interest rates 

over 30 years can negatively impact the lender, as many of you 

know. 

Increasing interest rates leaves the lender with capital tied up 

in long-term assets that produce lower returns than those available 

at the higher subsequent market rates. Decreasing interest rates 

leads many borrowers to refinance and return to lender’s capital 

when the lender’s capital redeployment will likely result in lower 

returns than those that had existed under the original loan. 

To help deal with these and other problems, the Federal Government and the American housing finance system developed the 

GSEs and securitization. Lenders could now always transfer mortgages directly or indirectly to the GSEs or to private investors 

while also having access to GSE credit default guarantees. 

So lenders could offer mortgages with reasonably low 30-year 

fixed-rate interest rates, while diminishing or eliminating longterm credit risk, inflation risk, and interest rate risk. The system 

worked reasonably well for many years. However, beginning in the 

early 1990s, the Federal Government went much further in promoting homeownership by pressuring the GSEs and private sector 

lenders to substantially reduce traditional underwriting standards 

and by turning the GSEs into the always-available market outlet 

for lower-quality loans. 

Over time, more and more lower-quality loans entered the system. Inevitable increasing default rates led us to the financial crisis, as the mortgage-backed asset values decreased suddenly and 

dramatically. 

Mark-to-market accounting immediately degraded the bank capital ratios, and the credit market fear and uncertainty quickly imVerDate Nov 24 2008 18:17 Apr 26, 2012 Jkt 072614 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\72614.TXT TERRIE
5 

periled liquidity and solvency. Housing prices declined severely, 

and the Federal Government made the American taxpayer liable 

for hundreds of billions of dollars in GSE losses. 

And now, those same troubled GSEs that exposed taxpayers to 

so much liability are essentially the only remaining market participant in the mortgage industry as private sector lenders and investors have abandoned the field. So we need to somehow create the 

conditions for more private sector entities to reenter the mortgage 

market, diminish the taxpayer liability risk, and stabilize the housing market. 

I look forward to hearing your testimony today, and I appreciate 

your time. 

Mr. Chairman, my time is up, and I yield back. 

Chairman MILLER OF CALIFORNIA. Thank you. 

Mr. Scott, you are recognized for 3 minutes. 

Mr. SCOTT. Thank you, Chairman Miller and Ranking Member 

McCarthy, for holding this very important hearing. The DoddFrank financial reform legislation addresses a number of weaknesses in the financial regulatory system—in particular, Title 14. 

It responded to pervasive concerns about lending practices in the 

mortgage lending market that produce loans that had great uncertainty of being repaid. This practice thus adversely impacted the 

loan holders as well as the borrowers, who often did not have a 

complete understanding of the agreement or did not have the 

means to repay the loan. 

Title 14 was enacted to correct such abuses, including new duties 

on the part of the mortgage originators to act in consumers’ best 

interests, ensuring that they will have the ability to repay such 

loans. Clearly, the crisis in our housing finance has contributed to 

the domestic economic climate we all face now. 

Many Americans continue to struggle to stay in their homes, especially in my congressional district in Georgia—I represent the 

suburbs of Georgia—where the problem is very, very serious. Most 

recent data shows that in my district, 12 percent of mortgages are 

over 90 days delinquent, and nearly 4 percent of homes are in foreclosure. 

And this is why, each year, I bring the banks, I bring the lenders, I bring Treasury together and hold a major, major home foreclosure prevention event in my district, which has been one of the 

most successful ventures that we have done to correct this problem. 

In some cases, my constituents purchased homes obtaining mortgages that many of them originally thought they could repay. However, with unemployment passing 10 percent in my home State— 

in many communities, it is over 20 percent—many Georgians are 

finding it very difficult to do just that. 

I know that the reforms enacted by the financial reform legislation will prevent Americans from falling into similar situations 

when seeking to purchase a home. But despite the progress in the 

United States, I am concerned about the implications that a financial crisis in other nations could have on the economy in our own 

country. 

I am interested to know if the lending practices that contributed 

to the United States’ financial crisis are still in use in other counVerDate Nov 24 2008 18:17 Apr 26, 2012 Jkt 072614 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\72614.TXT TERRIE
6 

tries. This is important for us to find out, and how this might affect 

our own economy. 

Also, I am curious to know if there has been similar legislation 

enacted to prevent such abuses. So I want to thank the witnesses 

for coming and I particularly want to say hello to Dr. Susan 

Wachter of the Wharton School of the University of Pennsylvania. 

I received my MBA from the Wharton School of Finance. So when 

you go back, please give my regards to Dietrich Hall. 

I yield back, Mr. Chairman. 

Chairman MILLER OF CALIFORNIA. Thank you. 

Mr. Garrett, you are recognized for 11⁄2 minutes. 

Mr. GARRETT. I thank the chairman for holding this hearing. And 

because the focus of the hearing is to look at the U.S. housing market and policy in a global context, I went back and reviewed an 

analysis by the International Monetary Fund back in April on 

housing finance issues. 

And in it, it says, ‘‘Compared to other developed countries, only 

a couple even come close.’’ According to the economist and one of 

the authors, John Kip, ‘‘Everything you could possibly name for 

supporting homeownership for everybody, regardless of whether 

they can afford it or not, it’s all in the United States.’’ 

The IMF report states, ‘‘Since the 1930s, the U.S. authorities 

have provided a wide range of support to facilities to access mortgage credit. And while this has provided access to stable and affordable long-term mortgage financing, there is very little evidence 

that it has actually boosted homeownership, made the system more 

efficient, or provided buffers against economic stress.’’ 

‘‘Meanwhile,’’ it said, ‘‘it may have exacerbated the boom-andbust cycle.’’ The report went on to note, ‘‘During the pre-crisis boom 

period, government participation in housing finance tended to amplify the relationship between housing prices and mortgage credit 

growth, particularly in advanced economies.’’ 

‘‘Also, countries with more government participation experienced,’’ note, ‘‘a deeper house price decline in this recent crisis. 

These findings suggest that the government participation exacerbates house price swings for advanced economies over a long period 

of time.’’ 

Further, it said, ‘‘The results might reflect both the lower cost of 

pre-crisis due to government subsidization, and a relaxation in 

lending standards by the private sector due to increased competition between the private sector and the government.’’ That is all in 

the report. 

And so, it is clear that with the extraordinary and unprecedented 

levels of subsidy the United States provides this mortgage market 

directly, it benefits mortgage market participants before us today. 

There is much less evidence that all these subsidies actually provide much benefit to the borrower. In fact, based upon the objective 

look of the IMF and the terrible impact on our country’s housing 

finance policies we have had, I believe a strong case can be made 

that at least some of these policies, at the end of the day, do more 

harm than good. 

And with that, I yield back. 

Chairman MILLER OF CALIFORNIA. I would like to welcome our 

distinguished panel today. 

7 

Mr. Michael A.J. Farrell is the chairman, CEO, and president of 

Annaly Capital Management, Inc., the largest residential mortgage 

REIT in the country. 

Prior to founding Annaly, Mr. Farrell was the managing director 

of Wertheim, Schroder & Company, Inc. in the fixed income department. He had previously served on the executive committee of the 

Public Securities Association, Primary Dealer Division. And as 

chairman of the Primary Dealer Operating Committee and its 

mortgage-backed securities division, Mr. Farrell served on the executive board of the National Association of Real Estate Investment 

Trusts. Welcome. 

Dr. Richard Dorfman is managing director and head of the 

securitization group in the Securities Industry and Financial Market Association, SIFMA. Prior to joining SIFMA, Mr. Dorfman was 

the president and CEO of the Federal Home Loan Bank of Atlanta. 

Prior to that role, he was managing director and head of the U.S. 

agencies and mortgage business at ABN AMRO. He also worked for 

Lehman Brothers mortgage division as the managing director and 

head of the organization for U.S. Government and agency business. 

Welcome. 

Mr. Moe Veissi is the 2011 president-elect of the National Association of REALTORS®. Mr. Veissi has been a Realtor® for over 

40 years. He is a broker-owner of Veissi & Associates in Miami, 

Florida. Welcome, sir. 

Dr. Susan Wachter is the Richard B. Worley professor of financial management and professor of real estate and finance at the 

Wharton School at the University of Pennsylvania. Dr. Wachter 

served as Assistant Secretary of Policy Development Research at 

HUD and was Principal Adviser to the Secretary, responsible for 

national housing and urban policy. 

Dr. Wachter is the author of over 200 publications regarding 

housing and real estate finance. She served as president to the 

American Real Estate and Urban Economic Association and co-editor of Real Estate Economics, and currently serves on multiple editorial boards. 

It is a distinguished panel. We are glad to have you here. 

First of all, I would like to thank you all for your flexibility. We 

have had this hearing scheduled, as you know, on numerous occasions and had to reschedule it. I want to thank you for being here 

today. Without objection, your written statements will be made a 

part of the record and you can summarize your statement in a generous 5 minutes, as you so choose. 

And Mr. Farrell, you are recognized first for 5 minutes. 

STATEMENT OF MICHAEL A.J. FARRELL, CHAIRMAN, CEO, AND 

PRESIDENT, ANNALY CAPITAL MANAGEMENT, INC. 

Mr. FARRELL. Good morning. My name is Michael Farrell. I am 

the CEO of Annaly Capital Management, the largest residential 

mortgage real estate investment trust, or REIT, in the country. 

Through Annaly and our subsidiaries and affiliates, we own or 

manage a wide range of mortgages and other real estate-related assets, including agency and non-agency residential mortgage-backed 

securities or MBS. 

8 

I represent the mortgage REITs and the other secondary mortgage market investors who provide the majority of the capital to finance America’s homes. Through our MBS holdings, my company 

and its affiliates alone are responsible for funding almost 1 million 

American households. 

At this point in history, while our Nation’s banks have about $13 

trillion in total assets, the amount of mortgage debt outstanding totals about $10.5 trillion. There is not enough capacity in our banking system to hold the outstanding mortgage debt. And as a result, 

about two-thirds of that total, or $6.8 trillion, is held in 

securitization, $5.5 trillion in agency mortgage-backed securities, 

and the balance in private-label mortgage-backed securities. 

The American mortgage finance system needs to have an effective long-term holder of mortgage credit outside of the banking system. It is thus axiomatic that without a healthy securitization market for our housing finance system, we would have to undergo a 

radical transformation. Some have argued that this should not be 

a problem because other countries have similar homeownership 

rates and manageable low mortgage costs. These arguments miss 

some very significant points. 

First, the U.S. mortgage market is unique. In the United States, 

securitization is the largest mortgage funder, with banks a distant 

second—while Europe is almost exactly the opposite, with about 

two-thirds of mortgages funded by bank deposits, covered bonds a 

distant second, and very little securitization. 

So the European model is largely dependent on the deposits and 

individual credit ratings of European banks. As proof, consider that 

in the United States, bank assets total about 80 percent of GDP, 

while in Canada, Denmark, France, Germany, and Spain, bank assets are anywhere from 2 to 4 times their GDP. 

Moreover, most mortgages in other countries are recoursed to the 

borrower, shorter term, pre-payable only with a penalty and a variable rate, which makes it a much more different product than the 

typical American mortgage with much different risks for the borrower and the lender. 

Second, our current housing finance system is the most efficient 

credit delivery system in the world. Securitization allows borrowers 

of similar creditworthiness using similar products to receive the 

benefits of scale and pricing. In addition, the government guarantee to make timely payments of interest and principal of a large 

portion of these mortgages scales the process even further. 

The TBA, or To Be Announced, market is the window through 

which much of this scale occurs. It maintains a consistent underwriting standard, levels the playing field for smaller loan originators and community banks, and enables lenders to offer longerterm rate locks to borrowers. It is an important tool for making 

possible the availability of the very popular 30-year fixed-rate prepayable mortgage with a manageable downpayment for a wide 

swath of creditworthy borrowers. 

Third, unlike the smaller domestically-financed housing markets 

of other countries, our system attracts a much broader investor 

base for residential mortgages, including institutional investors 

here and around the world. 

9 

These investors include U.S. and foreign banks, central banks 

and sovereign wealth funds, mutual funds, State and local governments, and the GSEs themselves. According to Freddie Mac, foreign investors constitute the third largest single holder of agency 

MBS. What attracts these investors to fund U.S. residential mortgages? It is the size, scale, and flexibility of the agency MBS market, its homogeneity, liquidity, ease of pricing and, importantly, 

their capital risk weightings. 

Finally, I want to get to the heart of the matter of the current 

debate. Can the private label MBS market come back and fill the 

credit gap that is currently filled by the GSEs? The short answer 

is, not at the same level of mortgage rates, and certainly not in the 

same size. Many, if not most, investors and agency MBS will not 

invest in private label MBS at any price or in any reduced amounts 

because of their need for liquidity or the restrictions of their investment guidelines. 

Some of these are so-called rates investors, and they could cross 

over. And investors in other asset classes might be attracted to a 

deeper private label MBS market, but we cannot say for sure how 

many or at what price or in what timeframe. 

Analysts at Credit Suisse have estimated that the U.S. housing market could lose $3 trillion or $4 trillion in funding from domestic 

and foreign investors if agency MBS were replaced by credit-sensitive products. The impact of this loss could have adverse consequences for the housing market and the economy for years to 

come. 

In conclusion, the American mortgage market and the sources of 

funding for Americans’ mortgages are unique. The domestic and 

global investors who provide so much capital to buy American 

homes will adapt to whatever Congress decides to do with housing 

finance policy, but they may adapt by not investing at all. 

I believe that a housing finance system that does not include the 

homogeneity of liquidity made possible by government involvement 

will be smaller, more expensive, and potentially have negative consequences for home prices and homeowner flexibility. 

I welcome any questions that you may have. 

[The prepared statement of Mr. Farrell can be found on page 67 

of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you very much. 

Mr. Dorfman, you are recognized for 5 minutes. 

STATEMENT OF RICHARD A. DORFMAN, MANAGING DIRECTOR 

AND HEAD OF SECURITIZATION GROUP, THE SECURITIES 

INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. DORFMAN. Good morning, Chairman Miller. 

Chairman MILLER OF CALIFORNIA. I think you need to turn your 

microphone on. We will start your time over. Thank you, sir. 

Mr. DORFMAN. There we go. Good morning, Chairman Miller, 

Ranking Member McCarthy, and distinguished members of the 

subcommittee. I am Richard Dorfman, managing director and head 

of securitization for the Securities Industry and Financial Markets 

Association, known in the trade as SIFMA. 

We appreciate the opportunity to discuss key issues affecting 

housing and housing finance from the perspective of international 

10 

products, policies, and practices. I am personally pleased to have 

played a central role in the development of international markets. 

And certainly, I am honored to be here today. 

We estimate that non-U.S. investors currently hold 15 percent of 

all mortgage-backed securities or privately issued non-agency MBS 

and government-guaranteed agency MBS. The markets for both 

agency and non-agency MBS have become truly global markets. 

Further, concerning unsecured longer-term debt, the GSEs— 

Fannie, Freddie and the Federal Home Loan Banks—have historically seen about 20 percent of their debt investors come from the 

global markets. At that market’s high point in 2008, approximately 

$3.2 trillion was outstanding. And that figure is today approximately $2.3 trillion, with about 20 percent still held abroad. 

However, in terms of late news, we are concerned, according to 

press reports, that a growing number of central banks are reporting not feeling comfortable with the U.S. Government guarantee of 

MBS and implied guarantee of debt products, and so may be progressively withdrawing from that market, with some concern. 

Foreign holdings of both agency and non-agency MBS create a 

strong correlation between the health of the U.S. housing finance 

system and global financial stability. I note that only a few years 

ago, I observed that The Economist news weekly carried a cover 

story about the U.S. housing market being the dominant driver of 

the U.S. economy, and perhaps even of the world economy. Over 

the last 20 years, the housing sector has represented approximately 

15 percent of U.S. GDP. 

U.S. MBS structures are generally based on traditional 30-year, 

fully-amortizing, fixed-coupon and fixed-payment-structure home 

loans, although there are MBS based on adjustable-rate mortgages 

and other more complex secured loans. Other countries prefer to 

seek a different balance of these risks, through adjustable rate or 

renewable loans. In these instances, the interest rate risk portion 

of the loan dominantly remains with the borrower. 

We caution, however, about direct comparisons to other nations. 

Although instructive, they are not determinative. The size of the 

U.S. mortgage market enormously exceeds other mortgage markets. Additionally, it differs in that the funding of the U.S. mortgage market is largely through securitization, whereas in many 

countries securitization is less prominent and mortgage lending is 

more of a bank balance sheet activity. 

Foreign investors, especially central banks, hold vast sums of 

U.S. dollars. Therefore, foreign investors hold vast sums of very liquid, low-risk agency MBS and debt, especially Ginnie Mae MBS. 

Some foreign investors became significant players in the markets 

for non-agency MBS until those markets froze in 2008. Foreign 

agency MBS far exceeded non-agency investment because many 

foreign investors simply will not invest in products with credit risk. 

The critical TBA, or To Be Announced, trading market provides 

vast liquidity and plays a key role in attracting tremendous global 

capital. The TBA market also gives the consumer the important 

ability to obtain long-term rate locks, by allowing lenders the ability to confirm forward MBS sales into a liquid market and, through 

this mechanism, to recycle investment capital back into the community as rapidly as possible. 

11 

The daily trading volume and TBA markets over the past 3 years has, indeed, exceeded $300 billion a day, second only to U.S. Treasuries and fixed-income markets. We discuss this market extensively in our written testimony. 

The U.S. housing finance system has features that create both 

historic benefits and current policy questions that must be addressed in the near term. A few such examples are long-term fixedrate loan structures and their relation to the distribution of interest-rate risk. And secondly, U.S. home mortgage loans have more 

recently featured downpayments below the traditional 20 percent, 

implying lower credit standards, but greater homeownership accessibility. 

It is critical for our country that we restore, modernize, and rationalize the housing business model in order to restore housing 

markets, including those for housing finance and securitization, to 

their maximum sustainable potential. 

Without this important engine of housing driving the U.S. economy, we will continue to see weak growth in jobs, income, and the 

overall economy. The global financial markets have been a critical 

component sustaining the financing of housing in America, and we 

must ensure that this continues in the future. 

I thank you very much for this opportunity and, of course, I will 

be pleased to take your questions. 

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

47 of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you, sir. 

Mr. Veissi, you are recognized for 5 minutes. 

STATEMENT OF MOE VEISSI, 2011 PRESIDENT-ELECT, 

NATIONAL ASSOCIATION OF REALTORS® 

Mr. VEISSI. Chairman Miller, Ranking Member McCarthy, and 

members of the subcommittee, thank you for holding this important hearing to examine the United States housing finance system. 

My name is Moe Veissi, and I am the 2011 president-elect of the 

National Association of REALTORS®, which represents 1.1 million 

members. They all practice some area of residential or commercial 

real estate. When my father purchased his first home for my mother in the late 1960s, it was more than just an act of love or even 

an investment. For a first-generation European, it was a symbol of 

a place to celebrate family, friends, and to help knit a broader base 

for the community that he and my mother lived in. It was both of 

their American dreams realized. 

So in addition to our members, it is my honor to give voice to 

the 75 million Americans who own a home, of which 50 million 

have mortgages, as well as the 310 million Americans who require 

shelter and want to own a piece of the American dream. I would 

like to share NAR’s review on why the U.S. housing finance system 

and its key product, the fixed-rate mortgage, remain the key element in the system for the American consumer. 

Realtors® believe that the U.S. housing finance system, which 

utilizes securitization to recapitalize mortgage lenders, works best 

for a nation like ours, the size of ours, and with the population who 

have a deep desire for homeownership. This does not mean, however, that Realtors® are opposed to reforming the current system. 

12 

To the contrary, Realtors® have indicated time and again the need 

for repairs to the U.S. housing finance system. 

It is our strong belief that from its creation in the 1930s until 

very recently, the underlying system worked well to provide wellqualified American families the ability to purchase a home. Realtors® are some of the most fervent believers in free markets. However, our members are also practical and understand that in extreme economic conditions, private capital will retreat from the 

housing market. 

They understand that a well-functioning housing market, indeed 

a well-functioning economy, requires mortgage financing available 

to qualified buyers in all markets, regardless of economic conditions. 

And finally, Realtors® agree that taxpayers should be protected. 

Private capital must return to the housing market, and the size of 

government participation in the housing sector should decrease if 

the market is to function properly. Where we continue to disagree 

with some is how these aspirations would be accomplished. 

Congress has chartered Fannie Mae and Freddie Mac to support 

homeownership and provide a solid foundation for our Nation’s 

housing finance system. The Government-Sponsored Entities’ housing mission and the benefits that are derived from it, such as longterm fixed-rate mortgages, have played a vital role in the success 

of our Nation’s housing system and its overall economic growth. 

As the market turmoil reached its peak in late 2008, it became 

apparent that the role of the GSEs, even in conservatorship, was 

critical, as private mortgage capital effectively fled our marketplace. If no government-backed conventional mortgage market entity existed as private mortgage capital fled to the sidelines, the 

housing market would have receded even more significantly and 

thrown our Nation into an even deeper recession and maybe even 

a depression. 

Currently, consumers are moving toward the 30-year fixed-rate 

mortgage more than ever before. It is the financial product of 

choice because of its easily-understood terms and predictability in 

its payment schedule. In these uncertain times, predictability becomes even more important to consumers. 

For this reason, the 30-year fixed-rate mortgage has been, and 

continues to be, the bedrock of the U.S. housing finance system. If 

there is a full privatization of the secondary mortgage market, we 

run the real risk of elimination of long-term fixed-rate mortgage 

products and an increase in the cost of mortgages to consumers. 

In fact, based on early data from a survey that NAR is conducting on the impact of new lower FHA and GSE loan limits, we 

are already seeing that consumers looking for mortgages above the 

conventional conforming loan limit are experiencing significantly 

higher interest rates and are being required to come up with substantially larger downpayments. Making matters more difficult, according to this data, this experience is leading to a loss of interest 

in real estate sales. 

Lose a healthy real estate market and you jeopardize any chance 

of economic recovery. I encourage you to resist this course of action. 

Realtors® firmly believe that comprehensive reform of the secVerDate Nov 24 2008 18:17 Apr 26, 2012 Jkt 072614 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\72614.TXT TERRIE
13 

ondary mortgage market is in the best interests of the consumer 

and the long-term viability of America’s housing finance market. 

Toward that end, the National Association of REALTORS® supports H.R. 2413, the Secondary Market Facility for Residential 

Mortgages Act of 2011. The legislation, introduced by Chairman 

Miller and Ranking Member McCarthy, will serve homeowners 

today and generations into the future, as well as support a strong 

housing market and economic recovery. 

It offers a comprehensive strategy for reforming the secondary 

mortgage market. It gives the Federal Government a continued role 

to ensure a consistent flow of mortgage credit in all markets, all 

economic conditions, and it protects the taxpayers and ensures 

safety and soundness through appropriate regulation and underwriting standards. 

Moreover, the bill supports and emphasizes the use of long-term 

fixed-rate mortgage products in a manner that is consistent with 

qualified residential mortgages, exemptions to the Dodd-Frank Act 

as it was crafted by Senators Isakson, Landrieu, and Hagan. This 

is important. The bill’s comprehensive reforms will open the door 

to lenders of all sizes, without favoring large lenders over small or 

mid-size institutions. 

In conclusion, I thank you for the opportunity to present our 

thoughts on the U.S. housing finance system, which we believe is 

unique and serves a unique group of people who strongly desire to 

own a piece of America and participate in our country’s community 

fabric. 

As always, the National Association of REALTORS® is at the 

call of Congress as we continue to work toward the best solutions 

for consumers, the housing industry, the economy, and our Nation. 

Thank you very much. 

[The prepared statement of Mr. Veissi can be found on page 70 

of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you, sir. 

I ask unanimous consent that Mr. Green, who is a member of the 

full Financial Services Committee, be allowed to participate in the 

subcommittee. Without objection, it is so ordered. 

Ms. Wachter, you are recognized for 5 minutes. 

STATEMENT OF SUSAN M. WACHTER, RICHARD B. WORLEY 

PROFESSOR OF FINANCIAL MANAGEMENT, THE WHARTON 

SCHOOL, UNIVERSITY OF PENNSYLVANIA 

Ms. WACHTER. Thank you, Chairman Miller, Ranking Member 

McCarthy, and members of the subcommittee. 

The U.S. housing finance system relies on global capital sources 

for funding. The mortgage-related bond market, as of the second 

quarter of 2011, amounts to approximately $7 trillion, most of 

which today is securitized and guaranteed by the U.S. Government. 

As the subprime crisis demonstrated, disruptions in the U.S. 

mortgage system destabilized financial markets across the world. 

The structural soundness of this sector is important for U.S. home 

borrowers, the U.S. economy, and for overall global financial stability. 

The U.S. housing finance system prior to the crisis was financially sound. The system prevalent in the United States provided 

14 

U.S. homebuyers, unlike buyers elsewhere, a choice of fixed and 

variable rate mortgage products, and provided financial stability 

for mortgage borrowers and for global capital markets. 

The unique features of housing finance in the United States, 

which undergird the system, include access to stable, long-term, 

fixed-rate mortgages and the financing of these mortgages by a 

sound securitization system. The long-term, fixed-rate mortgage 

prevalent in the United States, what Richard Green and I term the 

‘‘American mortgage,’’ in research that I request be entered into 

the record, is unique to the United States. 

In most developed countries, with few exceptions, the adjustable 

rate mortgage prevails. The fixed-rate pre-payable mortgage, with 

the ability to lock in financing at the point of home selection, is 

found solely in the United States. While adjustable rate mortgages 

are a good and safe alternative to fixed-rate mortgages in periods 

of stable or declining interest rates, the weakness of such mortgages is that they threaten borrowers with payment shock when interest rates rise. 

Shocks to household balance sheets due to rising interest rates 

or limited availability of finance threaten the financial system as 

a whole in a system of variable rate mortgages. Indeed, versions of 

this scenario played out in the subprime crisis and in the Great Depression. 

The U.S. mortgage system also differs from most of our developed country peers in the use of securitization, as opposed to the 

holding of mortgages on bank balance sheets. In research with coauthor Adam Levitin, which I also request be entered into the 

record, we show why the fixed-rate mortgage requires 

securitization. 

Securitization first arose out of the need to replace short-term, 

variable rate mortgages with so-called ‘‘bullet payments’’ implicated 

in the high foreclosure rates of the Great Depression. While the 

fixed-rate, long-term, self-amortizing mortgage developed in the 

aftermath of the Great Depression protects borrowers against interest rate spikes, as shown by the savings and loan crisis, short-term 

demand deposits cannot be relied upon to fund these long-term 

mortgages. 

Securitization is a necessary replacement for demand deposit 

bank portfolios, and can appropriately deal with interest rate risk. 

The system of fixed-rate mortgages financed through stable 

securitization provided for a period of remarkable stability in the 

U.S. economy, coinciding with what economists termed, ‘‘the Great 

Moderation,’’ a period of economic growth, sustainable homeownership, uniform and intrinsically safe underwriting practices, and, 

importantly for the committee, the ability to access global capital 

markets. 

This system underwent major shifts beginning in the late 1990s. 

The changes over the subsequent decade caused the system to fail, 

undermining global financial stability with outcomes that still 

threaten the U.S. economy. In the period from 2000 to 2006, nontraditional mortgages, previously niche products—such as adjustable rate teasers, subprime, interest-only with bullet payments— 

grew to represent, in 2006, almost half of mortgage originations. 

15 

The origin of the mortgage system failure was credit expansion 

through private-label securitization accompanied by the undermining of lending standards, despite the Triple-A credit rating 

granted for much of the MBS debt. Global capital funded this expansion, in part relying on credit ratings. Foreign investors purchased residential mortgage-backed securities guaranteed by 

Fannie Mae and Freddie Mac, and they did so because these instruments are perceived to have essentially no credit risk. 

Private-label securities, which were also purchased by foreign investors, were understood to have little credit risk, in part due to 

high credit ratings, and in part because the U.S. mortgage and 

housing market was perceived to be impervious to decline. The expansion of credit that this perception allowed, and the deterioration 

in lending standards, fueled the price bubble and bust when the 

limits to lending expansion were reached, accompanied by the epidemic of foreclosures and value destruction that we currently face. 

Failure in the U.S. mortgage system directly caused the 2009 recession. We were not alone in this. The United Kingdom, Spain, 

and Ireland suffered recessions, accompanied by mortgage market 

crises and sharp housing price declines. Nonetheless, the size of the 

U.S. market means that it relies on global finance, and the failure 

of the U.S. financing system put the global finance system at risk. 

The response in the United States—bailouts of failing financial 

institutions and the conservatorship of Fannie and Freddie—is ongoing. Private securitization has not come back and we are reliant 

on a Federalized system. 

The key in moving forward is rebuilding confidence in the U.S. 

mortgage system. This is necessary for potential homebuyers to 

come back to the market, and is also key for global investors on 

whom this market depends to provide capital for what, once again, 

must be perceived to be, and must be, a system that is structurally 

sound and safe for home purchasers, investors, and the overall 

economy. 

I thank you. 

[The prepared statement of Dr. Wachter can be found on page 78 

of the appendix.] 

Chairman MILLER OF CALIFORNIA. I want to thank the witnesses 

very much. I will now recognize myself for 5 minutes. 

There is little doubt that the GSEs went beyond the intent of 

their original mission, and reform is necessary. But if the United 

States were to end all government guarantees for housing products, 

how would that affect the overall economy? And what are the consequences of actually delaying GSE reform? 

Anybody who would like to answer? Yes, Mr. Farrell? 

Mr. FARRELL. We operate three public companies, Annaly, Chimera, and Crexus. Chimera does non-agency securities in a residential side. The securitization market in that part of the credit 

curve is extremely difficult to price at the current interest rate levels. 

We estimate from our research that in order to get 

securitizations operating in the private sector for all of the re-pooling of these assets would probably be 200 to 300 basis points higher in terms of cost to the consumer. You can see that in the falloff of private securitizations over the past couple of years espeVerDate Nov 24 2008 18:17 Apr 26, 2012 Jkt 072614 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\72614.TXT TERRIE
16 

cially. So it would be a very painful experience to move to that kind 

of rate structure. 

The GSE balances have changed in terms of what those origination fees are. And, in fact, we have found that investors still continue to embrace that. We have grown dramatically over the past 

few years especially, and navigated through 2008 with a company 

that was totally exposed to agency debt. 

So globally, we still think that there is a market for this which 

is well-structured and financed, but it is important to understand 

that there are two sides to the market: the assets; and the liabilities. 

The assets themselves, that we have all described here today, are 

part of an important infrastructure within the United States to 

provide credit. The liability side, much of this secures bank balances and credit balances from investments throughout the world 

that are all dollar-denominated that would need to be filled by 

some other entity that would be similar in credit structure. If not, 

they will have a higher price. 

Chairman MILLER OF CALIFORNIA. Mr. Dorfman, you had a— 

Mr. DORFMAN. Thank you, Mr. Chairman. It was very appropriate that Mr. Farrell speak first because, really, it must be understood that as we engage in reengineering the mortgage financing system in the United States, the final judge, the court of appeals so to speak, will always be the institutional investor. 

Will the institutional investor invest? Will they come to the bid? 

And what will they bid at what spread, at what price? What will 

it cost the consumer in order to participate in a given structure? 

So it is important to note that the institutional investor, in the 

end, is the final determinant, and must be convinced by traditional, 

respected, analytical methods and models that any substitute idea 

which may evolve for the U.S. Government guarantee is creditworthy and worthy of the institutional investor’s attention and bid 

at a level that works for the consumer. 

It is also very important to recognize that no matter what anyone may wish or believe in terms of whether the government guarantee is good or not good, we must take the market just as we 

must take the golf ball, if I may say, where it is and play it from 

where it is. 

And where it is today is that the government guarantee provides 

the degree of security to the vast world of non-credit risk investors 

who will not buy that product without the guarantee or whose participation will be diminished or at a far higher price. 

Thank you for recognizing me. 

Chairman MILLER OF CALIFORNIA. On that, could it be structured 

in a way where the taxpayers’ exposure is minimized and the longterm benefits are basically capitalized on, expended? Because the 

goal right now is making sure we protect taxpayers. 

Mr. FARRELL. I would say, my perspective as a risk taker who 

has to go around the world and raise this capital to provide the return for investors, it essentially negotiates a compromise between 

borrowers and lenders in our structure. 

There are two elements that I think really need to be understood. 

And the perspective that I want to bring to it is that when you look 

at the guarantee fee and what went off of the wheels in the 

17 

1990s—from the perspective of a private company operator providing private capital—if we did not have Fannie Mae and Freddie 

Mac’s balance sheets at the size that they were in the late 1990s, 

trillion-dollar companies who essentially were serving two separate 

masters—they were serving Congress and they were serving the 

private markets simultaneously as listed companies. And were, as 

we viewed them, friendly competitors in the market. 

Once those balance sheets went over a trillion dollars each, that 

created a competitive edge in the markets for others to go in and 

dilute the credit. If we were not still unwinding those legacy portfolios, I would suggest to Congress that the total balance and 

issues that we have been faced with would be similar to what we 

faced in the RTC on a inflation-adjusted basis. We would already 

be past this and moving on. 

So the structure that you suggest in your legislation I think is 

very important because it discusses a well-priced insurance ‘‘G’’ fee, 

no portfolio intervention by the government at any level—I do not 

think there is any appetite for that any longer—and let the private 

market everyday do what we do, which is price that against its 

benchmarks off of either treasuries or corporate rates. 

That, to me, is the way it would work and it would minimize the 

risk to the taxpayers. 

Chairman MILLER OF CALIFORNIA. Hopefully, we can come back. 

My time has expired. 

The ranking member is recognized for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

Dr. Wachter, at what point do we begin to see less investment 

in the securitization markets due to the uncertainty of the GSE reform as well, as our own long-term economic recovery? 

Ms. WACHTER. That is a very difficult, but very important, question. I do not think there is a definitive answer. 

I think, as we have heard from Mr. Dorfman, that markets may 

already be, to some degree, considering risk issues. That is, will 

there be a replacement to Fannie and Freddie that brings about a 

safe and sound investment structure? 

Mortgage markets are forward-looking. And, indeed, if there is 

not in place a structurally sound mortgage system, then today’s investors in these long-term instruments will begin to appreciate the 

risk. Exactly when that will happen, exactly how that will unravel, 

is very difficult to say. But clearly, uncertainty will have a potentially dire impact at some point. 

Mrs. MCCARTHY OF NEW YORK. Mr. Veissi, what impact do the 

legislation proposals aimed at reforming the GSEs have on the 30- 

year fixed-rate mortgage products? 

Mr. VEISSI. Would you repeat that question? 

Mrs. MCCARTHY OF NEW YORK. Sure. What impact do the legislative proposals aimed at reforming the GSEs have on the 30-year 

fixed-rate mortgage products? 

Mr. VEISSI. Let me first say that while we concentrate on the secondary market and the investor side of the secondary market, we 

pay less attention to the consumer invested in the performance of 

both the purchase and the sale of a real estate home. 

They do not have the expertise, nor do they care to become invested in understanding the expertise of the secondary market. 

18 

What they do know and what they do understand is that they have 

been privileged to have the benefit of a marketplace that offers 

them a fixed-rate mortgage for a long period of time with no uncertainty. They know what their payment is going to be. 

The average holding time for that mortgage is about 7 years. 

Now, that was not the case during the period of time from 2005 

to 2007. It was a much smaller period of time, about 2 or 3 years. 

So on average, the investor is expected to have the mortgage, that 

30-year mortgage, satisfied in the average time of about 7 or 8 

years, and in good times, was about 2 or 3 years. 

When you take away the opportunity for an individual to buy 

with the kind of securitization that they feel comfortable with, especially the ones that show less than 20 percent down, NAR has 

found that about 70 percent of every new home or first-time homebuyer uses an instrument that has less than a 10 percent, or a 10 

percent down, structure. 

So all of those instruments are important to our marketplace and 

important to the first-time homebuyer and to American homebuyers. To take that away from the home-buying market might further cause a recessionary cycle, and certainly would inhibit both 

the construction of residential and commercial property and the resale properties which generally help us assume a better economic 

spiral. 

Mr. DORFMAN. Thank you, Mrs. McCarthy. 

I wanted to further comment very briefly that in terms of the 

GSEs going forward, first, SIFMA, on behalf of its members, absolutely applauds each and every bill that comes to the table. That 

contributes to the dialogue that is so difficult and so necessary to 

repair the housing finance system. And that is important. Every 

bill is a contribution. 

Now having said that, in terms of GSEs, the market, the institutional investor, again, must come to the view, necessarily, that the 

GSEs have products that have integrity, are assembled with skill; 

that the guarantee of the GSE without the government behind 

them is immensely creditworthy and believable; and that there is 

integrity throughout the process. 

Next, it is essential that GSEs be able to finance themselves as 

efficiently and as liquidly as they have in the past. High volume 

and liquidity hold each other’s hands. They work together. And we 

must be very careful that GSEs, whatever they may be in the future, are able to address the market with their individual securities 

perhaps with a single combined security. 

Whatever that form may be must be a huge predictable flow that 

will serve the liquidity needs of investors worldwide who use those 

investments from the GSEs just as though they were United States 

Treasury securities with the same liquidity and the same utility. 

If we do not achieve that, it may be all right. But the price to 

the consumer will be higher, as every cost will be traced back to 

the homeowner. We want to be protective of that homeowner, and 

we want to be protective of the housing market in the United 

States. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

My time is up. 

19 

Chairman MILLER OF CALIFORNIA. Mr. Huizenga, you are recognized for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman, and I appreciate that. 

I just wanted to maybe continue that conversation, Mr. Dorfman. 

If I recall, what you were just saying in your closing is you want 

to protect the homeowner and protect the marketplace. Is that correct? 

Mr. DORFMAN. Yes, sir. 

Mr. HUIZENGA. Obviously, there have been actions that did not 

do that. And you have to understand my perspective. I am a former 

Realtor®. My family has been involved in construction for about 

40, 45 years. I have been a developer, primarily single-family housing. I have been extremely concerned about what happened. 

And one of my concerns has been, when first getting out of college, doing my first real estate development, the lesson I learned 

is that you owned the lot. You used that lot as collateral to go get 

a construction loan. Now, I am not saying that the 50 percent down 

that my parents used was maybe a good number, but having significant skin in the game. 

For me, buying my first home almost 20 years ago and seeing 

those standards of 20 percent down being the norm and being able 

to make that up with PMI, private mortgage insurance, was a positive thing. But we saw the 20 percent become 15, become 10, become 5, become 2, become zero, become 120 percent loan-to-value. 

And that concerns me because we have now put people into homes 

that they frankly cannot afford. 

And I take blame for that as somebody involved in the construction industry. Speaking as a 42-year-old, I will take blame for a 

generation that demands it now. ‘‘What do you mean I cannot have 

the three-car garage and a walk-in master bathroom suite? We 

have expectations, and doggone it, they better be met.’’ We have 

distorted the marketplace here. 

And I think the question is, how do we restore that common 

sense? How do we get back to an equilibrium here, where we have 

good, solid housing stock that people can afford and they can be in? 

And, now with the literally hundreds of millions of dollars that people are upside down in their homes across the Nation, that does 

not add to that. 

Mr. Veissi, I think you were just sort of wanting to address that 

a little bit? 

Mr. VEISSI. Yes. Your questions are pointed, and they are fair 

and accurate. Our problem, especially during the middle part of the 

2000s, was maybe that we did not understand the value of real estate and the longevity of real estate. 

Real estate has never been a short-term investment. It never has 

been a turn-and-flip. If you want to do that, you go into equities. 

Vegas might even be a better place than real estate. But real estate 

on a long-term investment has always has been a substantial 

wealth-builder. 

The other thing that is really interesting, your comment about 

skin in the game is important. And my knee-jerk reaction would be 

yes, the more cash you put in the less likely you are to walk away 

from that deal. 

20 

But I take a look at some of the mortgages that are out there 

today—especially those that were put forth in 2004, 2005, and 

2006—and those underwriting standards were horrible. They were 

not horrible; they were atrocious. They should never have been 

placed. The consumer should never have had that responsibility for 

those underwriting standards because they just did not exist. 

Take VA for example, with a zero downpayment. One of the lowest, as a matter of fact the lowest foreclosure rate in the entire 

country is a veteran loan. And there are two good reasons for that. 

Number one, education. The veteran is educated on what happens: 

one, if they should get into trouble; two, what they do immediately 

upon getting into trouble; and three, how they react when that situation occurs. And, too, their underwriting is absolutely terrific. 

Mr. HUIZENGA. Very different standards, yes. And I believe that. 

When I was first in real estate, it was extremely unusual to have 

an FHA loan. And now, everybody has FHA loans. What is it, 

about a third of all transactions, roughly, something like that? 

Dr. Wachter? 

Ms. WACHTER. Yes. Thank you for recognizing me. The deterioration in underwriting conditions that Mr. Veissi just referred to is 

absolutely key here. A very large percentage of the homes that are 

in foreclosure and in default in fact were 10 percent and 20 percent 

down loans. And part of the reason that they are in foreclosure and 

default today is that loan values were artificially propped up. 

With a 30 percent decline in home values—and in fact, in the 

United States, home values on average declined 30 percent. Even 

with 20 percent down, you will have underwater loans, and you 

will have few options if you lose your job and do not have an income flow but to go through default and foreclosure. 

What we must avoid going forward is volatility in housing prices, 

to which underwriting deterioration contributed. 

Mr. HUIZENGA. I think my time is up. But ultimately, this is 

about making sure people have jobs. We have to create an atmosphere here that is going to allow people to have a good, solid job. 

I just want to make sure when that is happening—as someone who 

lost a significant amount of his value on a home, all in those areas 

of those years—we have to make sure then that we have some sort 

of reasonable level of skin in the game, from my perspective. 

And I do not think that there is anything magical about 2 percent or 20 percent. But somewhere in there, we have to make sure 

that consumers know what they are getting into and that there is 

significant responsibility with that. 

My time is up. Thank you, Mr. Chairman. I appreciate that. 

Chairman MILLER OF CALIFORNIA. Mr. Scott is recognized for 5 

minutes. 

Mr. SCOTT. Yes. Thank you very much. 

Let me just start off with a general question that each of you 

might answer very quickly for me. You have great expertise. I 

would be interested to know, how much longer do you think that 

we have before we can dig our way out of this hole and get back 

to normalcy, or do you we think ever will? Is it too deep? 

Mr. VEISSI. Let me give you really quick numbers that might 

help you out. I am from Miami, Florida. During the period of time 

when you could fog up a mirror and get a mortgage, about 2006, 

21 

we were consuming, or absorbing, about 1,000 brand new condo 

units a year. That is not used product. That is just brand-new 

condo units. 

We had on the books—permitted, ready to come out of the 

ground or coming out of the ground—at that same time, 67,000 

units: almost 70 years’ worth of inventory. 

Mr. SCOTT. Right. 

Mr. VEISSI. Now, about a third of those never got built. Folks 

walked away from their deposits. About a third of those are holes 

in the ground in Miami. But about 20,000 to 25,000 got built. The 

reality is that most people looked at that and said, ‘‘How are you 

going to absorb 20 years to 25 years worth of brand-new condo inventory?’’ 

Mr. SCOTT. I know, Mr. Veissi. 

Mr. VEISSI. It is almost gone. 

Mr. SCOTT. Right. Is there anybody here willing to say 5 years, 

10 years? To give us some hope about how long you think it is 

going to take for us to— 

Mr. VEISSI. Some of the statistics that we see, we think places 

that were overbuilt like Miami—portions of California, Arizona, 

Nevada, but especially Miami—may see double-digit appreciation 

even in 2012, predicated upon the absorption of existing oversupply. 

Mr. SCOTT. Five years from now, do you see us being in this 

same mess? 

Mr. VEISSI. No, absolutely not. 

Mr. SCOTT. Right. Anybody? Three, four years? What is our— 

Mr. FARRELL. I would say that, from our view, the underwriting 

standards tightened up in 2007. So we are in the fourth year of the 

recovery of underwriting standards that were diluted. 

And just to weave this into the previous testimony in question, 

with a 45-year history in the family of building properties, this 

window of dilution, and this reach for homeownership up into the 

70 percent range, is a very small sample, but a very powerful deterrent to what has happened in underwriting and dilution of underwriting to get there. 

So for the past 4 years, we have been underwriting loans and accepting loans in our secondary market companies with much better 

underwriting standards and, as a result, much better performance. 

Mr. SCOTT. I only have 2 minutes left, and I have another question. I want to get to Dr. Wachter here. You all are hopeful that, 

let us say within the next 5 years, we will be above water on the 

situation of housing? 

Mr. DORFMAN. I think that is fair. 

Mr. SCOTT. All right. 

Mr. DORFMAN. But it must be added that whatever set of reforms 

we come to institute through the U.S. Congress must be right the 

first time. 

Mr. SCOTT. Okay. 

Mr. DORFMAN. Therefore, we must not take this cake out of the 

oven before it is baked. 

Mr. SCOTT. Very good. All right. Thank you. 

22 

Dr. Wachter, let me ask you this: My concern is what happened 

overseas and some of the abuses. Were the abuses experienced in 

the United States mortgage market present in other countries? 

Ms. WACHTER. Yes, sir. 

Mr. SCOTT. And how have these other countries responded? 

Ms. WACHTER. They are also undergoing a period of tightening 

of underwriting standards similar to that in the United States and 

are also considering long-term reforms. I must say, a country which 

did not experience our turmoil, Canada, is considering reforms at 

this point. 

Mr. SCOTT. Would you say, then, that we do not have anything 

to fear from these other countries having a negative impact on our 

own economy? 

Ms. WACHTER. No, by no means. I do think we have a tremendous amount to fear from these other countries coming through 

sovereign debt failure. For example, Spain has a banking crisis 

which is very much related to its housing and mortgage market. 

Mr. SCOTT. And they have GSE structures in these other countries, as well. Are there any differences— 

Ms. WACHTER. I am sorry. I missed that point. 

Mr. SCOTT. The GSEs? They have GSEs? 

Ms. WACHTER. No, they did not have GSEs in Spain. They had 

a similar problem, but without the GSEs. It is a bank-led crisis 

with underwriting. And it was essentially with the cajas, which are 

similar to savings and loans. 

Mr. SCOTT. With these other GSEs that are overseas, what are 

the differences in the structure between the GSEs that are in foreign countries and our GSEs? 

Ms. WACHTER. Most other countries do not have GSEs. What 

they have is a banking system which has implicit and explicit government backing. The governments come to the rescue of failed 

banks, for example, Northern Rock in the U.K. 

So these large banks, four or five large banks, in some sense, operate as though they are GSEs, with implied, and in some cases 

explicit, government backing. 

Mr. SCOTT. And is there any reason why some countries have put 

together GSEs and others have not? 

Ms. WACHTER. Absolutely. Countries with fixed-rate mortgages 

have securitization systems. We have a few examples other than 

the United States. There is Denmark, and to some degree Germany 

as well. 

Germany did not have a crisis. It maintained lending standards. 

That is a fixed-rate system, and they maintain lending standards. 

No crisis. Denmark did have a crisis. There was a bubble and a 

bust, and the bust was associated with a sudden shift to adjustable-rate mortgages. 

Mr. SCOTT. Thank you. My time has been expired. Thank you for 

giving me a few extra seconds there, Mr. Chairman. I appreciate 

it. 

Chairman MILLER OF CALIFORNIA. Vice Chairman Dold, you are 

recognized for 5 minutes. 

Mr. DOLD. Thank you so much, Mr. Chairman. I appreciate it. 

Mr. Dorfman, if I can start with you, in your testimony you 

talked about the housing industry in the United States repVerDate Nov 24 2008 18:17 Apr 26, 2012 Jkt 072614 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\72614.TXT TERRIE
23 

resenting roughly 20 percent of the GDP. That has fallen to about 

15 percent of GDP. What share of the GDP does the housing market represent in other developed nations? 

Mr. DORFMAN. In other developed nations, as a general statement, it is significantly less. 

Mr. DOLD. Ballpark? Five percent, eight percent, roughly? It depends, obviously, on the nation. But can you give me a ballpark figure? 

Mr. DORFMAN. Can be. It is a big world. Those numbers are fair 

to work with. 

Mr. DOLD. Okay. 

Dr. Wachter, if I can just jump to you for a second. Government 

guarantees obviously are, I think, one of the reasons why we are 

in part of the mess that we are in. We have the guarantee, and yet 

we still have the private sector upside with the GSEs. 

Why has the government guarantee been so important in the 

United States, when many other countries around the world do not 

provide that government guarantee? 

Ms. WACHTER. If I may, Congressman, other countries do provide 

government guarantees to the banking system and make loans 

through the banking system. In our country, we have made loans, 

to some degree, through the banking system. 

And again, we have implied guarantees, or explicit through demand deposit, and also securitization—and up until the conservatorship, there was an implied guarantee. So I would say that 

most countries do have implied guarantees. 

Mr. DOLD. Okay. I appreciate it. Then just building on that, not 

only for you, Dr. Wachter, but for the rest of the panel as well. 

When we look at that guarantee, certainly we know that an overhaul of Fannie and Freddie, I think, is certainly something that we 

are talking about over here. 

What should we be doing? What should this panel take away and 

bring back to our colleagues in terms of saying, what do we need 

to do to make it better, more efficient, for the housing sector and 

for our economy in general? 

Ms. WACHTER. I think the legislation that has been already presented is a very good starting point. And I would say that in whatever legislation that you go forward with, the key is transparency. 

The problem in the 2000–2006 deterioration was that the deterioration in underwriting standards was not known except 

anecdotally. So we need to have transparency in the mortgages 

that are being underwritten and in the structure of the 

securitizations themselves so regulators can track and investors 

can also can bring market discipline to bear. 

Mr. DOLD. By all means, Mr. Farrell, please chime in. 

Mr. FARRELL. Thank you. I would like to introduce the thought 

that if we did not have the GSEs today, we would be trying to create them, because of the support that they have created over the 

past few years. And, in fact, when Congress created the GSEs, they 

were dealing with the same sorts of issues of private mortgage capital, along with public capital and GSE fees dealing with it. 

I think it is extremely important to understand the structure of 

the United States for jobs when you talk about the government 

guarantee. And that is the perspective that I think we need to realVerDate Nov 24 2008 18:17 Apr 26, 2012 Jkt 072614 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\72614.TXT TERRIE
24 

ly think about how we re-craft the government guarantee, if it is 

to be done. 

The 30-year mortgage, and the GSE fees nationally, allow American consumers the flexibility to move to where the jobs are. And 

if you look at the 1930s, you were not able to do that nationally 

because you could not sell your house with the certainty of pricing 

in one State and moving to another State to move to jobs. 

If you are moving from New York to Texas, or you are moving 

from New Jersey to California, one of the things that the GSE market allows you to do is have capital formation for 120 days, as a 

family, to make that move. And to have the certainty that that 

mortgage is going to be available for you when you buy your house 

under the same standards. 

That is much different than any of these other countries, and it 

is very unique to the United States and it is unique to the structure of the United States. And I think that needs to be respected 

in the way that we think about the legislation and the way we 

think about what we want to provide our homeowner population 

with. 

I am not saying that we should be 70 percent. I am saying that 

we should find a balance between whatever the right insurance 

amount is at the GSE form, and allow that flexibility for consumers 

to continue to move between States to where the jobs are. 

Ultimately it led to job creation, for most of my life. Unfortunately, for a 10-year period in there, it has now led to a bubble that 

is broken and being cleaned up. That will be dealt with. But the 

purity of the mobility in the United States and job creation off of 

that I think is an important feature to understand. 

Mr. DOLD. Mr. Dorfman? 

Mr. DORFMAN. Very briefly, I would just like to cite a historical 

example. We, as Dr. Wachter said, look to Canada today as an excellent example of a banking system and a housing finance system 

that has been relatively unaffected by this crisis. And they have 

done many things right. 

I had the privilege of helping to create the first mortgage-backed 

security in Canada, and that security was issued and remains 

under the guarantee, and remains guaranteed directly by the 

Crown, as they call it. Treasury directly guarantees Canadian securities. 

So when you go outside the banking balance sheet into the global 

capital markets, some anchor of credit must be there to give confidence to all of those who are rapidly making choices about whether to invest or not, and at what price. 

Mr. DOLD. Can you give us a better understanding in terms of 

the underwriting principles that they are putting in place? 

Mr. DORFMAN. I am sorry, I missed— 

Mr. DOLD. Underwriting principles? Obviously, that would be one 

of the problems I would argue that the GSEs—yes. 

Mr. DORFMAN. Underwriting principles, or the larger rubric— 

which I like, regrettably, to call the failure of discipline across the 

industry—are absolutely essential to have integrity in their creation and integrity in their audit and review and enforcement. All 

levels, private and public, who are looking at mortgages must be 

acutely conscious of quality. 

25 

Mr. DOLD. Thank you, Mr. Chairman. 

Chairman MILLER OF CALIFORNIA. Mr. Perlmutter, you are recognized for 5 minutes. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

That last question by Mr. Dold prompts a question for me. I 

would like to break this down into two timeframes, if we could: all 

time; and then that period from 2004 to 2007. Because having sat 

on this committee now for several years, there were some abuses 

in the period of 2004 to 2007. 

Mr. Dorfman, you mentioned the fact that there was a big accumulation of foreign holdings of our Fannie Mae and Freddie Mac 

types of debt. There was a whole foreign policy aspect to this to repatriate money from other countries that then may have let us get 

into some poor underwriting standards. 

So let us go back to the underwriting standards question Mr. 

Dold just asked. In that period, we had loose underwriting standards. Would you agree, Mr. Dorfman? 

Mr. DORFMAN. Progressively? 

Mr. PERLMUTTER. Looser. Answer it however you want. 

Mr. DORFMAN. Yes. Ever more loose until we had a crash. 

Mr. PERLMUTTER. And now the pendulum has swung to the other 

side, which is very restrictive. Pretty loose, pretty restrictive, and 

we need to get back in balance so that we can sell some houses out 

there, in my opinion. But how, in these two different periods, did 

our Federal Home Loan Banks, which are other GSEs that we 

have, compare to Fannie Mae and Freddie Mac? 

Mr. DORFMAN. Federal Home Loan Banks as a group outperformed, meaning they did not suffer anything close to the economic financial demise of Fannie Mae and Freddie Mac. And the 

essential reason for that, despite the fact that Federal Home Loan 

Banks are as large as Fannie Mae, is that the Federal Home Loan 

Banks own virtually no mortgages for their own accounts on their 

balance sheet. 

The hundreds of billions of dollars held by Federal Home Loan 

Banks are held as collateral against obligations of member banks, 

not as directly-owned assets of the Home Loan Banks themselves. 

Mr. PERLMUTTER. Okay. 

Mr. Farrell, you talked about the RTC for a moment. Is there a 

way, as we go through this process—because I believe a lot of this 

had to do with the underwriting standards in that period of time 

of 2004 to 2007, which may have been appropriate for other reasons, but ultimately were not so good for the housing market. 

Is there a way to do a good-bank/bad-bank kind of a system, 

where maybe we do not throw Fannie Mae and Freddie Mac out 

with the bathwater, but we separate what appears to be a period 

of time where we had some lousy loans and put that over here. 

Just deal with it, pay it. If we owe China, if we owe Saudi Arabia, 

if they are the investors in that, we continue to pay it—that is a 

foreign policy decision we are making—and then just move forward 

with Fannie Mae and Freddie Mac? 

Can we do that? And I will just add one more thing—in this public-private setting that exists for those two entities? 

Mr. FARRELL. I would say two things. If I may, one of the things 

that we need to understand as a nation is that there are only two 

26 

companies in the entire world that can do what Fannie Mae and 

Freddie Mac do. And that is Fannie Mae and Freddie Mac. 

And I would argue—and I have discussed this in our earnings 

calls with investors and discussions with investors globally—that 

they are, for many of the elements of what they provide, a national 

asset that needs to be protected. 

And I am not sure that we are protecting them right now. What 

I mean by that is, if you look at them as an integral part of the 

banking system, they hold insurance deposits, municipal escrow receipts. They take cash flow monthly from investors and borrowers 

throughout the world, and flow it through into the banking system. 

And we are certainly not creating jobs there, where 20-somethings are coming in and going to build their career. Those systems 

are extremely unique. I have watched them my entire career. They 

are a valuable asset to the government. And I urge you all to consider that they need to be protected in some way, shape or form. 

And, in fact, I agree with the precepts of this legislation that 

Congressman Miller has put in, about merging those two companies to get the best, strongest asset that we can, nationally, to do 

that. That servicing aspect is an extremely important piece of the 

way that our Nation’s mortgage market works. And a bad step for 

us would be that anything happen to that. A disgruntled East German hacker breaking into that system? You want to break into a 

bank? They are over there. 

So I would say, yes, the RTC concept is doable. There is the ability to have a bad-bank/good-bank scenario. We need to allow clearance of prices, which means the unfortunate pieces of having some 

parts of the system fall to distressed prices that would occur faster 

than they would have occurred if we had not tried to manage the 

spiral down the way we have. 

But I would be the first one to get on the road and go get the 

money to do that. The RTC was a pretty good example of bipartisan work in putting that together to cleanse the system, do it 

quickly, provide risk capital standards and risk-takers the window 

to come in and provide tax receipts ultimately back to the government. 

Mr. PERLMUTTER. Thank you. 

Thanks, Mr. Chairman. 

Chairman MILLER OF CALIFORNIA. Mr. Garrett, you are recognized for 5 minutes. 

Mr. GARRETT. And I thank the Chair. 

I thank Dr. Wachter for her comments, early on, with regard to 

the problems here with this housing market in this country causing 

the ripple effect, if you will, over in Europe as well as on the results that came from it. And also to the point as to what this all 

caused, which was one of the seminal questions of the chairman. 

And, Mr. Dorfman, I think you answered this and said what is 

the overall cost. And other members of the panel, too, answered 

that question as far as what is the cost if we did not have the GSEs 

and what is the cost of, basically, in essence, answering that in 

terms of we are going to see higher basis points of 100, 200, 300 

basis points. 

I guess that is one way of putting what the price is, what the 

cost is to the system as if you did not have the GSEs there as the 

27 

backstop, if you did not have the taxpayers there as a backstop to 

the system, that you would see higher basis points. 

I guess I look at it, though, in a different way. I look at the fact 

that we did have the GSEs, and what was the fact that they basically drove the market off the cliff and what that cost has been 

overall to the economy. That cost has been without a price. The fact 

that people have lost their homes is a cost. The fact that people 

have lost their livelihoods has been an insurmountable cost. 

The fact that we have an economic situation in this country of 

9 percent sustaining unemployment and people cannot ever again 

get jobs in the later part of their lives now, that is a cost that we 

cannot put a price on. That is a significant cost because of the fact 

that we have relied upon these two entities for so long. 

There is a cost also to the taxpayers. There is a cost right now 

of around $150 billion. There is a cost over the next 10 years up 

to $400 billion. Now, how does that relate to what we do in some 

other things? 

This past week, I have had people meeting with me in my office 

saying, ‘‘What is Congress going to do in the area of more dollars 

for breast cancer research? What is Congress going to do in the 

area of more money and more investment in the area of Alzheimer’s research? What is Congress going to do in the area of benefits for senior citizens and their needs?’’ 

And we have to say, ‘‘We are in deficit now.’’ And they say, 

‘‘Where is all the money going that we pay in taxes?’’ And one of 

the quick answers I can say is, ‘‘To bail out the GSEs to the tune 

of $150 billion, to the tune of over $400 billion, and who knows how 

much more than that.’’ But it is going to all the myriad of other 

programs, good and bad, that Congress has put in place since that 

time to try to help sustain some of the neighborhoods. 

Maxine Waters is not here. But she can speak most eloquently 

as to what is happening in neighborhoods because of the effects of 

the GSEs, and the fact that they have created bubbles in the marketplace, and neighborhoods are now devastated. And now, we 

have put in place other programs to try to stabilize those neighborhoods. 

That is a cost that I think goes beyond when we make somewhat 

of a trite answer, and say, ‘‘It is going to be a little bit more expensive in the future if we do not have the backstop of the GSEs 

there.’’ 

I know we are talking about a global message, a global look at 

this. I looked at it from a U.S. perspective and sort of a back-ofthe-envelope sort of analysis. What do we have here so far to try 

to make sure that we have a housing market of whatever range— 

5, 10, 15 percent of the marketplace? This is what we have. 

The range for institutional backstop, if you will: the FHA as a 

government mortgage insurer; Ginnie Mae as a government MBS 

guarantor; Fannie and Freddie as GSE guarantors—we have had 

those—Fannie and Freddie as a GSE portfolio investor; we have 

had that. Federal Home Loan Banks as GSE lenders through their 

advanced program; we have had that. Federal Home Loan Banks 

as the GSE portfolio investors through their housing programs, we 

have had that. 

28 

What else do we have? We have the promotion of affordable 

housing generally. FHA, Fannie, and Freddie affordable housing 

goals, HUD’s National Homeownership Strategy, Community Reinvestment Act, HUD’s best practices initiative, Federal Home Loan 

Banks Affordable Housing Program. 

On top of that, what do we have? Promotion of additional borrowed leverage and increased reliance on debt. You have FHA’s 

leadership and loan downpayment lending, HUD’s regulations of 

the GSE affordable housing, Fannie and Freddie’s leverage in preferred stocks, risk-based capital rules, stable rules for secondary 

mortgage lending, tax deductibility of interest, overreliance on the 

Fed of lower interest rates. 

On top of that, you have limited use of prepayment penalties, de 

jour and de facto limits on recourse and deficiency judgments, liberal capital gains exceptions, procyclical loans. We have all that 

here. 

Can anyone on the panel compare this to any other country in 

the world that has anything close to this, any other country in the 

world that has anything close to this that manages theirs in an effective, perfect implementation of these? 

And if so, how is it that these other countries without this myriad—and I did not go into all of them; this is just what we came 

up with—are able to sustain their mortgage rates and not have the 

crisis that we have had in this country in housing? 

Mr. DORFMAN. Your examples, your exhaustive examples, are 

compelling and accurate, and I would add the postscript that before 

Fannie Mae and Freddie Mac and others throughout the housing 

and finance system lost all discipline and success went to their 

heads, and then some— 

Mr. GARRETT. By the way, Dr. Wachter said that was in the 

2000s. That really goes back to 1992 or so, is that not, when it 

began— 

Mr. DORFMAN. Oh yes, but there certainly was a time when they 

were, Fannie and Freddie, great net Federal taxpayers and far 

more simple than they were in the days of demise. So may I argue 

on behalf of SIFMA? It is not necessarily true that the fundamental architectures of Fannie and Freddie are useless and decrepit, but how did something good become so bad? 

Chairman MILLER OF CALIFORNIA. Your time has expired. 

Mr. GARRETT. I think, Mr. Farrell, you want to— 

Mr. FARRELL. If I may add to that, I think when I listened to 

that litany of programs and elements of government support, many 

of those programs were Band-Aids for problems that were bleeding 

out of different cuts in the housing system. 

I would question today, and I am sure this is part of your 

thought too, how valuable those are and how active are they? If we 

look at some of these other programs that have been implemented 

only in the past few years with the genuine goal of trying to keep 

people in homes, very few people qualify for those programs. And, 

in fact, they are very hard to put through the system. 

And I would say, as a mortgage investor, that, ultimately, mortgage investors are going to judge the cash flow of American mortgages against the cash flows of any other asset class on the debt 

side, including Greek debt. And one of the things we need to decide 

29 

as a nation, is do we support our neighbors or do we support Greek 

debt and other asset allocations like that? 

So I would be in favor of a complete review of a lot of these programs, and trying to figure out exactly how effective they have 

been and how much support do they cost and why we are doing 

them. 

Mr. GARRETT. It is pretty hard to get rid of a program, I will tell 

you that. 

Ms. WACHTER. If I may quickly just say that many other countries have much deeper involvement in the housing market than 

the United States. Canada is an example of a country with government guarantees, both implicitly and explicitly, whose system 

works quite well. 

I also just quickly wanted to address that it is not simply a matter of 200 to 300 basis points if we withdraw Fannie and Freddie. 

It is probably a matter of a second double-dip, a recession, for the 

United States. 

Chairman MILLER OF CALIFORNIA. Thank you. 

Mr. Green is recognized for 5 minutes. 

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

ranking member for allowing me to participate in the hearing. 

It seems that invariably when we have these hearings, we get 

into a discussion of what actually caused the crisis, and we relate 

that to Fannie and Freddie. Before I go on, I would like to say to 

Mr. Farrell, I just want to thank you and other members for some 

of your comments, your comments about Fannie and Freddie, that 

if we did not have it, we would probably try to create it. That is 

a pretty strong comment, and it is not a comment that you hear 

too often. Thank you for taking a position with reference to an institution, or institutions, that were of benefit to us. 

Now back to where I was. When we talk about Fannie and 

Freddie and what caused what we will call, for my purposes, the 

demise of Fannie and Freddie, we do not always remember that the 

products they received became the problem. And they received 

faulty products because of changes in the law in 1980 and 1982. 

In 1980, we did away with the usury rates. We made it possible 

for loans to become predatory, in a sense, by not having those 

usury rates. Then in 1982, we passed the Alternative Mortgage 

Transaction Parity Act. And that one allowed for a lot of what we 

call the exotic products, because it allowed for us to go to the adjustable rates. 

For a long time, we had the 30-year fixed-rate mortgages. And 

then when we got into adjustable-rate mortgages, we had prepayment penalties that coincided with teaser rates. We decided that 

we would have 3/27s and 2/28s and they became almost commonplace. So a lot of the products created the problems that we ultimately had to, and still are, dealing with. 

So I just want to get that side of the record out there, that 

Fannie and Freddie continued to do what they were designed to do. 

But the products, when you have originators who no longer concerned themselves with the quality of the mortgage—just the quantity they can originate—that has an impact, and it had an impact. 

They were originating these products and pushing them into 

other markets, and not concerning themselves with whether the 

30 

person who qualified for the teaser rate would qualify for the adjusted rate. And we are still having some of that to contend with 

currently. 

So the products became a real problem for us. And I cite two 

laws, the Alternative Mortgage Transactions Parity Act of 1982 

and the Depository Institutions Deregulation and Monetary Control 

Act of 1980 as part of the problem. 

Having said that, I want to now ask—let us start with Ms. 

Wachter, is that correct? You said a very strong statement. You 

said only the United States has a fixed-rate long-term product. Did 

I correctly state your position? 

Ms. WACHTER. There are other countries with fixed-rate products. A 30-year product is unusual. But more to the point, a prepayable with lock-in capacity is unusual. In fact, all of those features together are characteristics solely of the United States. 

Mr. GREEN. All right. Now, what I would like to ask each of you 

is this. Give me the one difference between the GSE’s as currently 

structured, or perhaps the system as constructed before FHAFHFA took over the GSEs. The difference between that structure 

and the structure being proposed that is important? A significant 

difference. 

And if you could each just give me one quickly, I would greatly 

appreciate it. If my time expires, I will accept that it is expires. 

Mr. FARRELL. I would say it is most important that the government does not run portfolios, and that capital is brought in by the 

private sector. Where I think the wheels went off the bus was in 

trillion-dollar balance sheets at the Fannie Mae and Freddie Mac 

level, which essentially forced the banking system into a lot of dilutive activities. 

Mr. GREEN. Thank you. 

Mr. Dorfman? 

Mr. DORFMAN. I want to agree with Mr. Farrell entirely. It was 

as I mentioned before, the portfolios as the mark of difference between Fannie Mae and Freddie Mac and the Federal Home Loan 

Banks, for example. Or between the U.S. GSE’s and Canada. There 

is no need for those Enterprises to be investment companies. 

Mr. GREEN. And this new system would prevent that? 

Mr. DORFMAN. As I read it. 

Mr. GREEN. As you read it. 

Okay. Mr. Veissi? 

Mr. VEISSI. I would say the explicit government guarantee that 

backs those is enormously important, plus one thing we have not 

said. We have talked about underwriting standards. We have 

talked about the impractical investment standards in the 2006– 

2007 era. We never talked about educating the public about the instrument itself. And you are right. 

Mr. GREEN. Ms. Wachter? 

Ms. WACHTER. I think the portfolios are a key difference. 

Mr. GREEN. Okay. 

Thank you, Mr. Chairman. I apologize for going over. 

Chairman MILLER OF CALIFORNIA. We are going to go a second 

round of questioning. I think this is a very informative panel. If we 

are in agreement with that, does the panel agree to a second round 

of questioning? 

31 

There has been a lot of discussion in Congress about Freddie and 

Fannie and the marketplace. And a lot of it is justified. Freddie 

and Fannie made some big mistakes. The problem with much of 

the debate is Freddie and Fannie are outperforming the rest of the 

marketplace. 

So, are they the largest? They are. Is their default rate less than 

the private sector? It absolutely is. Have they made mistakes? 

Without a doubt, they have made mistakes. 

A lot of the problems that we have seen out there were caused 

by underwriting standards. They did not have them. If you could 

sign your name on the line, people made a loan, and that was a 

problem. And the bill the ranking member and I introduced deals 

specifically with that. You have to be an approved lender. If you 

do not comply with underwriting standards, you buy the loan back. 

Very simple. 

This should have been the case with Freddie and Fannie. I think 

the biggest problem that went wrong with Freddie and Fannie was 

they went public. All of a sudden, they were looking for market 

share, rather than looking to be a conduit for secondary money into 

the market, as they were intended to be. 

And as they fought for a market share they lowered their standards, closed their eyes. And many things Congress did enabled 

them to do that, and encouraged them to do that. Some say that 

there is a secondary market out there without government involvement. If you are talking about Countrywide, that has to be the 

greatest example of what went wrong in the marketplace. 

They were trying to emulate the GSE’s in coming up with a 

mortgage-backed security that looked like a GSE. But the problem 

is, it was not. They were junk bonds. I know in 2000, I started introducing language in this committee that said we should define 

predatory versus subprime, got it to the Senate 5 times, but could 

never get the Senate to act on it. 

Had we done that, we could have defined what a good subprime 

loan was versus predatory, which is what they were making, in the 

last few years, that basically were bad. The best loans the GSE’s 

are making today are in the high-cost areas. They have written underwriting standards that are very good, solid. And these loans are 

performing very well. 

The problem I have with putting our head in a hole like we have 

done, and allowing GSE’s to continue as they do today, is we are 

continuing to lose money and the taxpayers are going to pay for it. 

You have reviewed my bill. If you took and put all the assets of 

GSE’s into that bill, allowed them to take the foreclosures, hold 

them for up to 5 years, lease them out, they would recoup all of 

their money invested. And they would not continue to lose money 

in the future. 

So the problem is, by doing nothing, they are putting the taxpayers more at risk. Would you agree or disagree with that today? 

Anybody on the panel? 

Mr. DORFMAN. Certainly, doing nothing allows the clock to tick 

and the calendar to turn. American taxpayers and American homeowners are suffering every day. And SIFMA members are acutely 

aware of this. 

32 

On the other hand, as I said before, we cannot take this cake out 

of the oven before it is baked. As we have seen by all these intelligent questions this morning, this is an enormously complex issue 

that resists easy resolution. But the debate has to occur. The debate absolutely, sir, yes, has to occur. And I applaud this committee for pushing it on, and SIFMA is prepared to study exhaustively each and every proposal coming out of Congress and to 

render a view. 

Chairman MILLER OF CALIFORNIA. One question I will let each 

of you answer if you would like to, the housing bubble was, in part, 

the result of increased access to credit in the form of mortgages. 

Without correct balance of risk assessment analysis and financial 

controls, how can that balance be corrected? 

Mr. FARRELL. I think that the market has corrected. Darwinism 

has taken place. 

Chairman MILLER OF CALIFORNIA. I agree. I wanted to hear you 

say that. 

Mr. FARRELL. We cannot fund—and everyone who is in the mortgage market, including us, we just celebrated our 14th year as a 

public company—navigated that differently. And some of us navigated it better than others. One of the most interesting aspects, I 

think, of the past 3 years’ experience for me, is that for the first 

time in my career, I am not competing with Fannie Mae and 

Freddie Mac for issuance in the market for their portfolio. 

And in fact, mortgage REITs have absorbed almost the entire net 

supply being created out of the 95 percent market share that the 

GSE’s create today. Private capital is available. It is mostly domestic. It comes to us in the form of REITs and REIT-share offerings. 

So we have a domestic solution for a domestic problem. 

This is clearly, in our business model, investors nationally and 

internationally and of all sizes supporting their neighbors. And we 

have these solutions in place. The underwriting standards that occurred were unfortunate, but recognizable by significant players. 

And I always go with the one-man statement. If one man could recognize it, whether he is running a hedge fund or a public company, 

and he can identify that risk, then those information points were 

open to everybody and all could have avoided it. 

But the markets run on two aspects, greed and fear. And as Warren Buffet would say, it is best to be greedy when everyone else 

is fearful, and it is best to be fearful when everyone else is greedy. 

And I think that Darwinism has already occurred in these markets, 

and that a lot of the instruments that existed will not exist because 

the history now is out there. 

Chairman MILLER OF CALIFORNIA. I agree with you. I think 

whatever facility is created to replace the GSE’s, these will actually 

act as a conduit. As the private sector is willing to step up, the 

GSE or facility should step down in percentage. They should not 

fight for 60 or 70 percent of the marketplace or even 50 percent. 

If they are only needed for 30 percent, that is adequate if the private sector is putting the funds in there. 

But when they start to recede, and the private sector is not available, that is when the facility needs to step back up to keep liquidity in the marketplace and the balance in the marketplace. But the 

big mistake, like I said, I believe is when they went public they 

33 

started fighting for market share. They should never be put in a 

position to fight for market share. They should strictly be a conduit. 

I yield to the ranking member. 

Ms. WACHTER. I have a partial disagreement with Mr. Farrell, 

although I agree with almost everything he has said. However, regarding the statement that what was known to a few was therefore 

known to everybody, or knowable to everybody, it certainly was 

known to insiders that credit conditions were deteriorating and 

how they were deteriorating 

However, it was not systematically known. It was anecdotally 

known to regulators, and even to the Federal Reserve Board. In 

2006, according to the public record, the Federal Reserve Board did 

know that housing prices were probably in a bubble of about 20 

percent. But they did not have systematic information on the nature of the underwriting conditions. 

It would have been very difficult to actually take note of all of 

the possible ways that underwriting was being undermined. Also, 

the validity of the data, of the reporting of the underwriting data, 

is clearly in question. Now going backwards and attempting to 

verify the underwriting is difficult. 

Chairman MILLER OF CALIFORNIA. The ranking member will be 

recognized for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

This has been actually very educational. One of the things that 

I have been doing, not only on this committee, but also on the Education Committee, is financial literacy. You brought that up as far 

as people do not really understand what their debt ratio is or anything like that. 

In the housing market, we have found that those who went for 

counseling to buy housing—it is not just a mortgage, it is the insurance, it is your taxes, it is utilities—these are all things that add 

up. So people who were buying homes and were not educated about 

what they were doing obviously got into trouble. 

And some the instruments that were being used, in my opinion, 

were way out of line. Someone who is earning $40,000 a year 

should have never been allowed to buy a $700,000 house. That is 

common sense. And yet it was happening, and we saw it. 

There are two questions that I basically want to ask, one to Ms. 

Walker? 

Ms. WACHTER. Ms. Wachter. Thank you. 

Mrs. MCCARTHY OF NEW YORK. Wachter, sorry. 

One of the things, basically for this hearing was talking about 

what other countries are doing on how they do their mortgages. So 

how do mortgage products offered in other developed countries 

shape views on homeownership? 

We have been pushing homeownership. That is the great American dream. And yet I know that over in Europe, homeownership 

is there, but it is not as prevalent as here, or they do not seem to 

be pushing it as much. 

The second part, for Mr. Farrell, and I am not sure whether anybody can answer this, when we look at the private mortgages and 

the mortgage market, it is another part of the economy. Our penVerDate Nov 24 2008 18:17 Apr 26, 2012 Jkt 072614 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\72614.TXT TERRIE
34 

sion funds that have invested. And they can only invest in something if it is backed, basically, by the Federal Government. 

So if we could have those two answers? 

Ms. WACHTER. Yes. It is very difficult to make homeownership 

comparisons that are fair across countries. Many countries do not 

have a vibrant rental market. In fact, the expansion of REITs is 

now ongoing in other countries to establish financing for a rental 

market. 

There may be rent controls or social housing for rentals. However, because of this, many countries do not have the option for 

renting. Homeownership is very high in these countries. 

Other countries do have a vibrant rental market, and some of 

them, with mortgage markets similar to ours have lower homeownership rates. In particular, Germany has a homeownership rate 

which is significantly lower—in the 50 percent range. 

Mrs. MCCARTHY OF NEW YORK. Mr. Dorfman? I saw you shaking 

your head ‘‘yes.’’ 

Or Mr. Farrell? 

Mr. DORFMAN. I was only agreeing with Dr. Wachter. 

Mrs. MCCARTHY OF NEW YORK. Oh, okay. I am sorry. 

Mr. DORFMAN. Thank you very much. 

Mrs. MCCARTHY OF NEW YORK. I thought I saw you shaking your 

head when I was talking about the securities market. 

Mr. FARRELL. I would like to, if I may, answer the second part 

of your question about the private mortgages. First off, there is a 

very good report, with a summary of comparisons, that I would like 

to make available for everyone on the committee—that was sponsored by the Research Institute for Housing American Mortgage 

Bankers Association—called, ‘‘The International Comparison of 

Mortgage Products Underwriting’’ by Dr. Michael Lee, which gives 

you a full picture of the different products and the different kinds 

of policy measures being taken in different countries. 

But to your question to me about investment, one of the characteristics of mortgages is their cash flow. And that is a characteristic that is endemic to every investment, whether it is an equity or a debt instrument. And big investors and small investors 

alike—but for the most part people who are making significant 

amounts of capital injections into the market everyday, whether 

they are rolling over debt or they are purchasing new debt for a 

liability that they have, a pension fund, retirement fund, etc.—essentially are analyzing those cash flows. 

And they will price on top of that what they think that guarantee 

is. I would submit that most sophisticated mortgage investors 

never valued private mortgage insurance as added into cash flow, 

because mortgager products in general, that guarantee, is extremely difficult to put back through the system and get claims on. 

It is not an efficient thing. 

So you need to compare the post-bubble market and the pre-bubble market the same way, as though mortgage insurance would not 

pay off. In the case of Fannie Mae, Freddie Mac, and Ginnie Mae, 

that mortgage insurance has proven to be reliable. It may be 

mispriced, it should have a higher guarantee fee against it, which 

should be beneficial for the communities and beneficial for the taxpayers. It should provide some sort of revenue income. 

35 

But there is a risk in unwinding that guarantee too quickly. Because many investment entities across the globe are invested on 

the precept that guarantee is sacrosanct. And because of that, they 

trade it and they give it a benchmark status in terms of risk status, risk-adjusted status, on their balance sheets. And that includes 

our own pension funds here, our own banks, and other investment 

companies throughout the world that we speak to. 

I would say that one of the most interesting outcomes in the past 

50 years for me personally has been that you would have thought 

that the safest mortgage market in the world was the Irish mortgage market. It was almost 100 percent variable rate, so it would 

have adjusted with anything that happened in interest rates and, 

in fact, had a homeownership rate around 50 to 60 percent. When 

in fact, Ireland has suffered the most, and they had no government 

guarantee behind it. It was all linked into the banking system. 

So this was almost inescapable. It is unfortunate that it has 

leaked into the government’s coffers the way it has, but this is 

global problem. We can be the first out. And we have a huge opportunity in front of us if we get this answer correct. 

Mrs. MCCARTHY OF NEW YORK. Thank you. My time is up. 

Chairman MILLER OF CALIFORNIA. Thank you. 

Vice Chairman Dold is recognized for 5 minutes. 

Mr. DOLD. Thank you, Mr. Chairman. And I certainly want to 

thank you again for your time. It has been informative. 

One of the things that I think we have not really discussed as 

much in the hearing is foreign investment in the U.S. market, and 

certainly with our mortgage-backed securities. What I would like to 

do if I can is just talk about the structure that we have right now. 

Do foreign investors still consider the United States a good place 

to invest in terms of our mortgage-backed securities? Are they an 

attractive investment? 

Mr. FARRELL. I would say there are questions about the ongoing 

commitment because of the noise and the actions that have happened over the past 2 years. But I would say domestically that gap 

is being filled by investment companies within the United States. 

Certainly, as I said earlier in my testimony, we have absorbed in 

the mortgage REIT industry almost all of the supply that has been 

created over the past 3 years, primarily through domestic investments. 

Some of that is linked to the dollar, the weakness in the dollar 

and the currency transactions against it. That is one of the judgment calls. We have investment pools throughout the globe. It is 

easier to do it in the United States today than it is to do it offshore. 

Ms. WACHTER. Absolutely key to the stability in the housing 

market and recovery of the overall economy is the willingness of 

foreign investors to hold Fannie and Freddie mortgage-backed securities. In fact, the ability of the Fed to assist the overall economy 

in keeping interest rates low, at historic rates—and that is the one 

major plus for the U.S. economy today is low mortgage rates—is, 

hand-in-hand, requiring also confidence by foreign investors and 

domestic investors. But in mortgage-backed securities, and the 

guarantee by the Federal Government at this time. 

Mr. DORFMAN. There are certainly a significant number of foreign investors who simply will not buy an un-guaranteed mortgageVerDate Nov 24 2008 18:17 Apr 26, 2012 Jkt 072614 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\72614.TXT TERRIE
36 

backed security. However, there are also a significant number, especially those who are heaviest in investable funds, who recognize 

that behind the guarantee there ought to lie, there must lie, and 

at an earlier time, did lie an underwriting checks-and-balances system that was intended to ensure that the guarantee would never 

have to come to be exercised. 

Unfortunately, that came out rather differently. But it is very 

critical to stress, as many of you have, that the quality of the product going into the process is the very first step to ensure that it 

is going to go out the back end to an institutional investor, whether 

domestic or international, on terms that are eagerly bid for and on 

spreads that are ultimately affordable in financing costs to the U.S. 

worker and taxpayer. 

Mr. DOLD. Thank you, Mr. Dorfman. 

There is no question, when we talk about underwriting standards of old and how we got into this mess, that we are longing to 

try to make sure we are holding more people accountable, which 

I think, Dr. Wachter, goes into your transparency argument. 

If we can, obviously, I am of the belief that the GSEs hold far 

too much of the mortgage market right now. I think that is not 

really healthy, from my perspective. But can you, Mr. Farrell, talk 

to me—or anybody else on the panel—with regard to, if we were 

to go in more of a privatized route. 

You were talking about the REITs taking up and soaking up a 

larger portion, or putting additional capital at play. How would 

that affect foreign investment? How does that affect foreign investment, especially if we are going to see additional— 

Mr. FARRELL. The REITs are internationally accepted. In fact, 

many countries are trying to replicate the U.S. REIT laws in order 

to create the same kinds of liquidity that we have in this Nation. 

In fact, REITs, whether they are property REITs or mortgage 

REITs, have indeed absorbed much of the supply from the deleveraging that is going on globally across the world. 

We have done transactions in the U.K., taking back U.S. assets 

into the United States. So it is a recognized, internationally recognized, investment vehicle to do that. That capital in the private 

capital sector is available. It is not available at the same price as 

it was 2 years ago. We would concur with you that the GSEs hold 

way too much debt. 

We think that overhang needs to be cleared out. It is like an 

overhang of inventory that needs to be cleared out into the secondary markets. We will be in favor of a more rapid downsizing of 

those portfolios to establish those clearing prices into the private 

sector while the environment is in the position it is today to finance 

that. 

Mr. DOLD. Okay. And, obviously, the glut of excess inventory, if 

you will. How do we get around that? Because that is obviously significant. And I talk to a number of people who are in the financial 

markets. They are saying we have way too much inventory out 

there right now. 

How do we solve that? How do members of this panel try to deal 

with that? Is there some suggestions that you have? And I recognize that my time has expired, but that is obviously a critical point 

that we need to address. 

37 

Ms. WACHTER. That is the key question. And that goes back to 

the previous point that we do need to, at some point deal with the 

portfolio. But at this point, there is no way that the portfolio can 

be priced and absorbed by investors without a guarantee behind it. 

If it were, it would not be a matter of 200 or 300 basis points. 

It would be a matter, I believe, of a perception of a much greater 

risk to the overall economy. 

Mr. DOLD. And I know I am stating the obvious, but is not it any 

investment that is guaranteed always a more attractive investment? Of course— 

Ms. WACHTER. And it is a question of the moment of time. 

Mr. DORFMAN. Not necessarily. It is always a question of what 

is the risk versus what is the return. So, clearly your lowest risk, 

the guaranteed product, is going to get you a return which is commensurately less because it is less risky, and vice versa. 

If I may just take an additional second to expand on Mr. Farrell’s 

comment, there is no question that REITs are playing, and growing 

in their activity to play, a critical role in this market in terms of 

absorbing flows of product. On the other hand, it also needs to be 

recognized that in terms of maintaining that critical global sector, 

a key factor, especially for a foreign central bank, is liquidity. 

The ability to trade at or near par at a moment’s notice because 

central banks have certain duties, including defending the national 

currency when they need cash quickly. The way you get liquidity 

is through uniformity. And guarantee is an immense help there because it takes away the question is there a credit risk here. We are 

only dealing with interest rate risk. That is, too, a factor to be 

borne in mind. 

Chairman MILLER OF CALIFORNIA. Mr. Green, you are recognized 

for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. 

Mr. Chairman, I would like to take just a moment and thank you 

and the ranking member for this straightforward piece of legislation. I think it deals with the concern raised about the explicit nature of the guarantee, which is something that seems to be of paramount importance in terms of impacting the global markets. 

Have we done enough to deal with the underwriting standards? 

Are there some things that we should do more to help with underwriting standards? Because those standards did have a significant 

role in the crisis that was created. 

So if I may, I will start with the lady and just this time go from 

my right to left. 

Ms. WACHTER. I do not believe we have done enough, Congressman. I think that we need more transparency going forward. If 

there was more transparency, then we would have more involvement from the private sector at the table. And the private sector 

itself would be more assured, going forward, of investor discipline. 

I believe that the Office of Financial Research, the new office 

under Dodd-Frank, could have a role to play in the tracking, transparently, of underwriting standards and how they evolve over time. 

Today’s underwriting statements, as has already been noted, have 

swung the other degree of the pendulum. 

That approach will not and should not be maintained going forward. But where will the pendulum swing? Will it swing all the 

38 

way over to the other side again? I do not think so, not in the short 

run. But who knows? And that very uncertainty is, I think, troubling and will, going forward, undermine confidence in the housing 

and mortgage market. 

I think we need to take that on. So to address the question that 

was raised earlier by the Chair regarding predatory subprime lending, we need to be able to track—in this important capital market 

for homeowners and for the United States—the conditions of the 

underwriting. We need to do a far better job of that than is currently being done. 

And that means that there need to be additional steps. Whether 

they are on the regulatory side or on the legislative side, they need 

to be forward. 

Mr. GREEN. Mr. Veissi? 

Mr. VEISSI. The buyback rate, as you mentioned, from Fannie 

and Freddie was probably 3 percent or 4 percent during the same 

period of time as the major banks were at 15 percent and 18 percent of foreclosure base. What was said here is enormously important to understand, especially in the marketplace. And that is that 

you can go to Fannie and Freddie and their parameters for accepting a loan are fairly adequate. 

But the lenders are so conservative today that they have constricted themselves not to be in a position to be forced to buy back 

any loans at all. So, if you do not have a 800-plus credit score, if 

you are not lily-white, if you do not have 20 percent down, if you 

do not register all those things—which you do not have to do to sell 

that loan back to Fannie or Freddie—but if you do not do that, they 

will not loan. 

So yes, the underwriting standards are enormously important 

both in the areas of the 2005–2006 area, where it was completely 

out the window, and today where it swung in the opposite direction. 

Mr. GREEN. Thank you. 

Mr. Dorfman? 

Mr. DORFMAN. Just a few comments. First, the market, largely 

because of huge losses taken, has self-cleansed. There is no bid for 

trash. The trash business is finished. 

Second, consumer education is absolutely critical. SIFMA is a 

large supporter of consumer education. Homebuyers, homeowners, 

must understand, as you illustrated before, that there is a whole 

lot more than the mortgage coupon involved in owning a house. It 

is a compendium of expenses. 

And third, and very importantly, just as consumers must know 

what they are doing, institutional disclosure laws and institutional 

due diligence laws—in other words, explain in high detail what you 

are selling and understanding in high detail what you are buying 

and that your price is reasonably arrived at—has been introduced. 

It is under consideration, and will ultimately be a tremendous additive to the overall health and growth of the market. 

Mr. GREEN. Thank you. 

Mr. Farrell, I am going to have another question for you. I apologize. I will get your answer, but I have another question. You mentioned the $1 trillion threshold. And are you referencing this number as it relates to the share of the market that Fannie and 

39 

Freddie had at that moment in time? Hence it could be a trillion, 

but if the share of the market is a lot less, then it could be acceptable. 

Could you just give me a brief explanation? 

Mr. FARRELL. Sure. Thank you for letting me clarify that. I am 

speaking about their debt-to-equity on their balance sheets as publicly traded companies, which we estimate from our research was 

around 77-to-1 debt-to-equity when you include derivatives. 

So it is not about market share, per se, as it was actually the 

stretch of those balance sheets and the ability to hedge those balance sheets, and using tools and techniques that really proved unworthy of the size of the dimensions of that balance sheet. 

But to answer your other question, I would say that you have 

gotten a very good summary from my colleagues here. I would 

agree with all their bullet points. But I would offer also one or two 

observations. 

From an investor’s point of view, the consumers actually behave 

very rationally. When we give them money for nothing, they take 

it. When we offer them 4 percent money, and they have to bring 

more money to the table in order to provide that rate because underwriting standards are tight, they are doing that. 

For the first time in my career, most of the closings that are 

going on now involve consumers bringing money to the table that 

they did not have to bring before in order to keep their loan-tovalue ratios in time. So the Fannie-Freddie credit stack, if you will, 

is getting much stronger as we sit here today because of rational 

behavior by consumers. 

Where we failed was offering them an un-rational rate and an 

un-rational expectation about what the buyout would lead to in 

terms of house price depreciation, etc. None of the models could do 

that. And I think that is—to my colleague’s statement—‘‘trash is 

no longer for sale.’’ 

For a long time, as investors we assumed that house prices 

would always go up 3 percent to 5 percent per year. Every investment model also agreed with that. In fact, when it went flat and 

it went negative, that is what destroyed these assets. 

Mr. GREEN. Thank you, Mr. Chairman. 

Chairman MILLER OF CALIFORNIA. Mr. Garrett, you are recognized for 5 minutes. 

Mr. GARRETT. Just very quickly, because I was due on the Floor 

5 minutes ago. 

The entire panel believes that there should be more transparency 

in underwriting. Yes? So there should be more transparency in the 

securitization process? And would there also be more transparency 

as long as we have the GSEs, as far as going to fair-value accounting for the GSEs? 

Mr. FARRELL. Yes, I think GAAP accounting is extremely important. 

Mr. GARRETT. Okay for that. So basically the GSEs, both their 

debts and their liabilities, should be corporately represented on the 

balance sheet? 

Mr. DORFMAN. In order to attract private capital, private capital 

must know what it is buying into. 

40 

Mr. GARRETT. Right. And so far, the Administration has opposed 

all of that. But you would all support that? 

Ms. WACHTER. I have not spoken to that. 

Mr. GARRETT. Okay. So you disagree? 

Ms. WACHTER. I do not have enough information to respond. 

Mr. GARRETT. I would like to take a look at that. Because that 

is something that we will be looking at. 

Ms. WACHTER. Absolutely, sir. 

Mr. GARRETT. Also, because my time is limited, I would appreciate—in my opening comments, I spoke about the IMF report back 

in April. And you do not have to give me your opinion now, but I 

would appreciate—since they seem to be somewhat contrary to 

some of the opinions here, where they said their study showed, 

with regard to these, that there is limited evidence that it boosted 

homeownership, made the system more efficient, and provided buffers against economic stress. So I would appreciate that. 

And finally, on the issue of foreign investment, I think Hank 

Paulson wrote the book, ‘‘The Brink.’’ And in it, he talked about the 

fact that somewhere in the year 2008 when all this was all happening, there were phone conversations between some of our largest foreign investors, which would be Russia and China—the largest investors, holders of the GSE debt—that perhaps they should 

get together and begin dumping that on the marketplace. You probably heard those stories back then. 

If that is true, and I realize, Mr. Dorfman, all of your comments 

with regard to the importance of foreign investors. Is that really 

something that we need to be concerned about? That we are looking to those very same type of investors to be holding the debt that 

potentially could put us in this quagmire again? 

Mr. FARRELL. I think international investment is an important 

piece of any diversification. The large outstanding share of United 

States GSE debt, I would say more than 78 percent is held domestically. 

Mr. GARRETT. And what was the percentage back in the 1990s, 

ball park? 

Mr. FARRELL. That study is actually in this paper here. I think 

that it is pretty consistent that it would be somewhere in the 75 

percent to 80 percent range. 

Mr. GARRETT. Yes. 

Mr. FARRELL. It is mostly held by the banking system. REITs 

have grown. We were 1 percent a few years ago, and now we are 

at 3 percent to 4 percent because we have been filling the gap. So 

other domestic entities have grown to do that. 

But I think you do need diversification of capital across. It becomes a currency issue, if I may introduce that thought. If we are 

doing trade with China and we are doing trade with Russia, and 

they are getting dollars back, they are going to look for the highest 

investment asset that they can put that into. 

And in many cases, it is going to wind up being things that are 

not linked to treasuries. They are not going to buy treasuries. 

Mr. GARRETT. So you also agree, from their comments, that they 

probably have other interests other than economic. They have political issues, as well. 

41 

Mr. FARRELL. I would love to have a self-dependent, independent 

United States. 

Mr. GARRETT. Yes. And just a clarification. I think it was Mr. 

Green, but maybe not—someone made the point with regard to the 

nature of the defaults that are out there and the fact that we have 

all the 30-year fix. That is what everybody wants and that sort of 

thing, and they are sort of better for various reasons. 

But generally speaking, the default rates that we are looking at 

right now, is it not something like 80 percent or 88 percent of the 

defaults that you are looking at are in the 30-year fixed marketplace? 

Mr. FARRELL. That is because the vast amount of our assets are 

30-year fixed— 

Ms. WACHTER. But the fixed-rate mortgages have lower— 

Mr. GARRETT. So then, basically— 

Ms. WACHTER. If I may say so, the fixed-rate mortgage rates, all 

else being equal, have a lower rate of default. 

Mr. GARRETT. How can that be? What is the percentage? 

Ms. WACHTER. A lower rate of default. But as we just heard from 

Mr. Farrell, they comprise a very large part of the market. 

Mr. GARRETT. Yes. 

Mr. DORFMAN. Yes. If I may? 

Mr. GARRETT. Sure. 

Mr. DORFMAN. Investors everywhere ought to responsibly review 

their holdings and rebalance, or even enter or exit markets completely as they see fit, in their own self-interest. 

Mr. GARRETT. Okay. 

Mr. DORFMAN. One. And so in your example, China, Russia, whoever it may be—and we hold no brief for anyone for or against 

them—whatever they may be, they are very likely not suicidal. And 

the idea, if that is the idea, of a rapid-fire wholesale dumping-off 

of a portfolio would be suicidal. Its value would plummet, and that 

becomes a very problematical scenario. 

Mr. GARRETT. Sure. 

Mr. DORFMAN. I thank you very much. 

Mr. GARRETT. Thank you. 

Chairman MILLER OF CALIFORNIA. I want to thank the witnesses. 

You are very, very wise in what you have said. You are educated. 

You spoke from your heart. I think we have come away with something I have believed all along, that we have to do something to 

correct the problem. This economy is not going to start to turn 

until we correct the housing problem. 

If you just could put that sector back to work again, the unemployment rate would be well below an acceptable rate. And the 

problem that many have and they do not want to accept is that 

GSEs have done poorly but they are doing better than the private 

sector as far as default rates. They just happen to be the large elephant in the marketplace. They have the largest holdings. 

I agree with you. We need to move forward with something that 

is very thoughtful. We need to not have a knee-jerk reaction. Whatever we do, we need to do it right, do it the first time. We need 

to create stability in the marketplace, confidence where people do 

not assume that their house is going to be worth less next year 

than this year. 

42 

We have to do something to stop these foreclosures being thrown 

to the marketplace, further driving the value of homes down and 

creating just unrest out there. I know a lot of builders are having 

problems because their appraisals are coming back with liquidation 

values rather than completion values, and it is killing them as far 

as being able to get loans. 

That concludes our hearing. The Chair notes that some members 

may have additional questions for the panel—and I want to thank 

you for your time on that again—which they may wish to submit 

in writing. Without objection, the hearing record will remain open 

for 30 days for members to submit written questions to these witnesses and to place their responses in the record. 

At this point, the hearing is adjourned. Thank you. 

[Whereupon, at 12:12 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

October 13, 2011 

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