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S. HRG. 112–382 

NEW IDEAS FOR REFINANCING AND 

RESTRUCTURING MORTGAGE LOANS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING, TRANSPORTATION, AND COMMUNITY 

DEVELOPMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING NEW IDEAS FOR REFINANCING AND RESTRUCTURING 

MORTGAGE LOANS 

SEPTEMBER 14, 2011 

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

( 

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

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT

ROBERT MENENDEZ, New Jersey, Chairman 

JIM DEMINT, South Carolina, Ranking Republican Member 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

MICHAEL PASSANTE, Subcommittee Staff Director 

JEFF MURRAY, Republican Subcommittee Staff Director 

(II)

C O N T E N T S 

WEDNESDAY, SEPTEMBER 14, 2011 

Page 

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

WITNESSES 

Senator Barbara Boxer of California ..................................................................... 2 

Prepared statement .......................................................................................... 35 

Senator Johnny Isakson of Georgia ....................................................................... 3 

Prepared statement .......................................................................................... 35 

Richard A. Smith, Chief Executive Officer, Realogy Corporation ....................... 6 

Prepared statement .......................................................................................... 37 

Mark A. Calabria, Director, Financial Regulation Studies, Cato Institute ........ 8 

Prepared statement .......................................................................................... 63 

Ivy Zelman, Chief Executive Officer, Zelman & Associates ................................. 10 

Prepared statement .......................................................................................... 69 

David Stevens, President and Chief Executive Officer, Mortgage Bankers 

Association ............................................................................................................ 20 

Prepared statement .......................................................................................... 87 

Marcia Griffin, President and Founder, HomeFree-USA ..................................... 22 

Prepared statement .......................................................................................... 94 

Mark Zandi, Chief Economist and Co-founder, Moody’s Analytics ..................... 23 

Prepared statement .......................................................................................... 97 

Anthony B. Sanders, Distinguished Professor of Real Estate Finance, and 

Senior Scholar, The Mercatus Center, George Mason University ................... 25 

Prepared statement .......................................................................................... 116 

Christopher J. Mayer, Paul Milstein Professor of Real Estate, Columbia Business School ............................................................................................................ 26 

Prepared statement .......................................................................................... 125 

(III)

(1) 

NEW IDEAS FOR REFINANCING AND 

RESTRUCTURING MORTGAGE LOANS 

WEDNESDAY, SEPTEMBER 14, 2011 

U.S. SENATE, SUBCOMMITTEE ON HOUSING, TRANSPORTATION, AND

COMMUNITY DEVELOPMENT, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 2:02 p.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Robert Menendez, Chairman of the 

Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ 

Chairman MENENDEZ. This hearing of the Senate Banking Committee’s Subcommittee on Housing, Transportation, and Community Development will come to order. I was trying to give a little 

time to my colleagues who are going to be on our first panel to get 

here. I am sure they are on their way. So I will start off with our 

opening statements, and then hopefully by then they will have arrived, and we will recognize them. We have got a very robust agenda here. We want to hear from all of the expertise that we have 

assembled and try to move it along. 

This hearing of the Subcommittee on Housing, Transportation, 

and Community Development will focus on both the state of the 

housing market as well as new ideas for refinancing and restructuring mortgage loans. This is a very important hearing not only 

for me but I think for those of us who are concerned because the 

housing market is often what anchors the broader economy. We 

need to fix the housing market to get the broader economy moving 

again to create jobs as well as meet the challenges of present homeowners as well as keeping the aspirations alive of future homeowners. 

On a regular basis, I hear from New Jersey homeowners who 

have trouble with their home loans, whether it is being denied the 

opportunity to refinance at today’s lower interest rates because 

they are underwater or banks are not willing to do a principal reduction from them when they have hit hard times. 

It is hard to be optimistic about economic growth if the housing 

market remains in its present status. For most families in America, 

their home is their single largest asset and their source of appreciated wealth. 

So the hearing today is divided into three panels. The first panel 

consists of my two distinguished Senate colleagues to discuss their 

bill, which I am proud to cosponsor, the Helping Responsible 

2 

Homeowners Act, S. 170, which will help homeowners who are underwater to refinance more easily. The second panel will discuss 

the state of the housing market and specifically the state of home 

sales, home prices, consumer demand, short sales and foreclosures, 

rents and rental availability, and whether these problems continue 

to be nationwide in scope or are they becoming more regionalized. 

And the third panel will discuss ideas to refinance or restructure 

existing home loans, including shared appreciation, mortgage modifications, refinancing existing loans to take advantage of historically low interest rates and the barriers to doing so, and allowing 

the FHA short refinance program to be used on the GSE inventory. 

It is my hope through this hearing and a subsequent one that we 

will follow up on next week that we can develop a housing policy 

and promote initiative that gets our housing market moving again. 

With no other Member that I see wishing to make an opening 

statement, let me call upon my two distinguished colleagues for 

their statements, Senator Boxer of California and Senator Isakson 

of Georgia. I am happy to welcome them. They both have strong 

records in housing policy, and they will talk about a bill they have 

introduced to jump-start the housing market and help millions of 

homeowners refinance their mortgages. And with that, Senator 

Boxer. 

STATEMENT OF BARBARA BOXER, A U.S. SENATOR FROM THE 

STATE OF CALIFORNIA 

Senator BOXER. Thank you so much, Mr. Chairman. I am very 

proud to be here with Senator Isakson, and he has a long profession, a long time in his profession, which was before he came here 

he was in the real estate business. So I am very proud that he is 

on this bill. 

And just to say this before I read any of my statement. Our bill 

is based on a very simple premise. If you have paid your mortgage 

all along through all these difficult times, and it is at a high interest rate, but you never missed a payment, as the value of your 

home went down and down and down, you find yourself underwater, Mr. Chairman, and you are still stuck at that 7-percent, 6- 

percent rate, you should be rewarded with a program like this. And 

what we say is you should have a chance, if you want, to refinance 

at the current levels. This is such a win-win. 

Number one, Fannie and Freddie, because these would all be 

home mortgages that are backed by Fannie and Freddie, Fannie 

and Freddie actually make money on this, as we looked at the CBO 

analysis, about $100 million, because it would stop many people 

from defaulting right away. 

Second, if you are the homeowner, you are going to have thousands of dollars in your pocket because you refinanced. And I remember the years when Bill Clinton was President, and one of the 

reasons there was such a prosperity there is the tremendous number of refinancings. It is the best way to get money into our economy quickly. 

So essentially this is what our bill does. It says if you have a 

loan that is backed by Fannie and Freddie, and if you have a high 

interest rate and you would like to take advantage of these lower 

rates, then you should have a chance to do that, not be disqualified 

3 

because you are underwater, and have those ridiculous fees that 

they have in place now waived so you can take advantage of these 

rates. We call it the Helping Responsible Homeowners Act. We are 

heartened that the President mentioned something like this in his 

address to the Congress. We are heartened that you are on our bill. 

We are thrilled with that. Our bill has been endorsed by Mark 

Zandi, who I know is going to testify later, the chief economist at 

Moody’s Analytics; by William Gross, managing director and coCIO of PIMCO; and then Thomas Lawler, housing economist. It 

has been endorsed by the National Association of Realtors, the National Consumer Law Center, the National Association of Mortgage 

Brokers, and many others. So it is a win-win for Fannie and 

Freddie. 

Now, they can do this without our legislation, and Senator 

Isakson and I are saying today, please, if they are listening somewhere or out there somewhere, please do this. This will save you 

money. You know, this will save Fannie and Freddie $100 million. 

This will help, by the way, CBO says, up to 2 million homeowners. 

But when they made that estimate, that is when interest rates 

were higher, and we believe you are looking at perhaps 3 to 4 million homeowners, 5 million are actually—close to 5 million are eligible for this. 

So that is our story and we are sticking to it, and we are strong 

on this. The FHFA we hope will follow through on some of the nice 

statements they have been making recently. But this is going to 

help our economy. It is going to keep people in their homes. And 

for once, Mr. Chairman, I beg you, let us get out in front of this 

crisis. We are, you know, a dime late and a dollar short. We have 

been following this along. Let us get in front of these folks. These 

are the good folks who have never missed a payment. Let us help 

them stay in their homes, and I think you help America when you 

do it. 

I thank you very much. 

Chairman MENENDEZ. Thank you, Senator Boxer. 

Senator Isakson. 

STATEMENT OF JOHNNY ISAKSON, A U.S. SENATOR FROM THE 

STATE OF GEORGIA 

Senator ISAKSON. Well, thank you very much, Mr. Chairman, and 

I would ask unanimous consent that my prepared statement be 

submitted for the record. 

Chairman MENENDEZ. Without objection, it shall be. 

Senator Isakson, thank you very much for calling this very appropriate hearing on the housing industry, and I am particularly 

pleased to join with Senator Boxer of California in this particular 

piece of legislation which addresses a new phenomenon that has 

taken place in the most protracted housing recession America has 

seen since the Great Depression, and that is called ‘‘strategic foreclosure.’’ 

There are 10,900,000 American homeowners who are underwater 

right now today, as estimated. That is 10,900,000 people who are 

making payments on mortgages that the payoff is more than the 

house is worth. A new phenomenon is something called ‘‘strategic 

foreclosure’’ where homeowners who are underwater are looking at 

4 

the future of real estate, looking at the future of values, and they 

are walking away from their loans and going off and buying a foreclosed house down the street thinking they will be better off. This 

has made the marketplace worse, put more foreclosures in place, 

and continues to contribute to the downward pressure on home values. 

What this bill basically says is that of that 10,900,000 people 

who are underwater, up to 2 million of them—and as Senator 

Boxer has stated, maybe more since rates have gone down—can 

make the strategic decision, instead of walking away from a loan 

that is underwater, to refinance that existing balance at the current lower rates, put more money in their pocket, and make the 

maintenance of that mortgage better for them in the long run when 

housing recovers. That is all it does. It is not a boost to the housing 

market from the standpoint of creating sales, but it is a depressant 

on more foreclosures. It does make it less likely that people will use 

strategic foreclosure as a mechanism to deal with their financial 

situation. And it should help to stabilize home values in the long 

run and in the short run. 

I commend Senator Boxer on her leadership. She originated this 

thought. I have been proud to work with her, and I think it is 

something Fannie and Freddie ought to do. I am not interested in 

pride of authorship. If they will do it tomorrow by policy, we are 

ready for them to do it. And it does make good sense, and the CBO 

score is outstanding. 

Let me address a second subject, if I might, Mr. Chairman, dealing with housing. Your second panel is terrific, and I am not going 

to be able to stay for all of it, but I want to commend to you in 

particular Mr. Richard Smith of Realogy and Ivy Zelman who are 

going to testify on this panel. They are two of the best authorities 

in the real estate industry that I know of. Realogy has about 25 

percent of the market share of the residential housing market in 

the United States. It is an outstanding consortium of companies 

that deal with residential brokerage. Ivy Zelman, I have attended 

her seminars. I know people who she consults with. She is as good 

as anybody I have ever heard, and both of them will make a significant contribution. 

Second, I appreciate your leadership on the loan limit situation 

which is confronting us by the end of this month. We do not need 

to do things that make things worse in the housing market. We 

need to do things that make it better. 

What Senator Boxer is proposing along with me and my help to 

her on this is good for waiting off strategic foreclosures, but keeping loan limits and expending them after the end of this month is 

important to maintain the housing market that we do have. It is 

not the time for the Government to constrict availability of mortgage capital for people who are qualified to buy houses because of 

a limitation on those loan limits, and I commend you on your leadership on that and look forward to answering any questions you or 

Senator Merkley may have. 

Chairman MENENDEZ. Well, let me thank you both for your initiative and your insights, and I hope our friends over at the agencies hear it and get it and do not wait for us to push through legislative action, but we will if we have to. And I appreciate your obVerDate Nov 24 2008 12:50 May 17, 2012 Jkt 048080 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\09-14 PM DISTILLER\91411PM.TXT JASON
5 

servations, Senator Isakson, and am proud to have you with me on 

the efforts of ensuring that the present loan limits are retained before the end of the year. I think it is a critical part of the element 

of the things we have to do in the market, so I appreciate your 

long-term leadership in this field and joining with me and others 

in trying to preserve this. 

I have no questions for either one of you. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and I wanted to express my appreciation for the work you have done on this. 

Helping homeowners stay in their homes and decreasing the number of foreclosures is absolutely essential. 

I would ask a short question in regards to the CBO score. My understanding is this would save money for the GSEs, but because 

the Fed holds a number of the securities that might diminish in 

value with the lower interest rates, there is some cost they estimated. Could either one of you kind of just clarify what the CBO 

was pointing to? 

Senator BOXER. Yes. Just a second. I have it here. 

How much will the bill cost? Fannie and Freddie actually gain, as we said before, from the changes in the bill by up to $100 million because the savings realized by a reduction in defaults and 

foreclosures would outweigh any lost revenue due to the elimination of the risk-based fee and the reduced portfolio income. Because of large holdings of Fannie and Freddie mortgage-backed securities, the Fed would experience reduced investment income of 

$2.6 billion over 10 years. So this means there is a net cost—so although this means there is a net cost to these changes, the Federal 

Government should not be profiting—this is my feeling—from borrowers paying higher interest rates than they should have to. The 

fact that the Fed holds these securities should not create perverse 

incentives for the Government to keep borrowers trapped in highercost loans. So that is the answer. That is how I feel about that. 

Senator MERKLEY. That is excellent, and I appreciate the work 

you all have done on this. 

Senator BOXER. Thank you. 

Senator ISAKSON. If I can just add to that? 

Chairman MENENDEZ. Yes, Senator. 

Senator ISAKSON. You know, you are dealing with what we refer 

to in business as ‘‘inside baseball.’’ You have got the conservatorship control of Freddie Mac and Fannie Mae, and you have got the 

Federal Reserve buying paper. And, yes, if you lower the rate or 

the yield on a mortgage, you will lower the value financially of that 

instrument. But if, on the other hand, you are stabilizing a loan 

that would otherwise have been defaulted on under any form of dynamic scoring, this is a net gain to the U.S. housing economy and 

the U.S. Government. There is just no question about it. 

Chairman MENENDEZ. What is the interest rate on walking away 

on your—— 

Senator ISAKSON. I am sorry? 

Chairman MENENDEZ. What is the interest rate on walking away 

on your obligation? 

Senator ISAKSON. Well, that is a great question. Let me tell you 

what the consequences are. You probably would not be able to borrow money for 7 years at best, and Richard Smith can address that 

6 

subject, but that would be my guess. If you walk away from your 

mortgage and default, your credit score goes in the tank, and every 

interest rate you pay on credit cards and car finance, student loans, 

whatever else, is going to go up, not down. You are probably not 

going to be able to get a home mortgage for 7 years, if that soon, 

and the disruption it does to your financial statement and to your 

credibility as a homeowner goes away. So the cost is far greater to 

the country for somebody to default on the loan and have it foreclosed on than it ever would be a loss to help them stay in the 

house. 

Chairman MENENDEZ. Absolutely. With that and the thanks of 

the Committee, thank you to both of you. 

Senator BOXER. Thanks so much. 

Chairman MENENDEZ. Let me ask our next panel to come up to 

the table, and I will introduce them as they come up and be seated. 

Let me welcome my fellow New Jerseyan, Richard Smith. He is 

president and CEO of Realogy Corporation, a global provider of 

real estate and relocation service which is headquartered in Parsippany, New Jersey. Mr. Smith oversees the Realogy Franchise 

Group consistent of many well-known companies such as Better 

Homes and Gardens, Century 21, Coldwell Banker, and Sotheby’s 

International Realty, among others. He is a member of the Business Roundtable, and the Committee looks forward to his testimony today. 

Mark Calabria is the director of financial regulation at the Cato 

Institute and has worked there since 2009. Before that, he was a 

senior member of the professional staff of this Committee. In that 

position, he worked on issues relating to housing, mortgage finance 

economics, banking, and insurance for Ranking Member Shelby. He 

has appeared before this Committee many times, and we thank 

him for his present this afternoon as well. 

Ivy Zelman is the CEO of Zelman & Associates and has over 19 

years of experience in the housing and related industries. Zelman 

& Associates, which she founded in 2007, delivers research on the 

housing market and has been repeatedly recognized for its expertise. Prior to that, she worked at Credit Suisse Group, including 8 

years as a managing director, and we are pleased to have you 

today to discuss the state of the housing market. 

With that, Mr. Smith, welcome and we look forward to your testimony. I would ask you each to synthesize your testimony to about 

5 minutes or so. We are going to include your full statements for 

the record, and we look forward to having a discussion with you. 

Mr. Smith. 

STATEMENT OF RICHARD A. SMITH, CHIEF EXECUTIVE 

OFFICER, REALOGY CORPORATION 

Mr. SMITH. Good afternoon, Chairman Menendez and distinguished Members of the Subcommittee, and thank you for those 

kind introductions. 

As to the current state of housing, we will make the bold statement that existing home sales in our view have stabilized on a unit 

basis in the range of 4.9 to 5.1 million units on an annual basis. 

However, average price will continue to move in a range of down 

4 percent to up 2 percent. 

7 

New homes should see slight improvement in year-over-year 

growth for new homes, and price we think is also going to move 

in that range, but more on the positive side from flat to up about 

2 percent. We think the high-end and the first-time buyers make 

up the majority of the market. The middle market or the move-up 

buyer is noticeably absent. High-end buyers are typically paying all 

cash. First-time buyers are financing with FHA and less than 20 

percent down. 

It is important to note that 25 to 27 percent of all homeowners 

have little to no equity, which is a point that you made earlier in 

the Chairman’s opening comments. 

Renting is certainly in vogue. It is a very popular topic in the 

media these days. It will run its course, however. It is certainly 

most cost-effective today to own in most markets in the United 

States than to rent. Rents are increasing at the rate of about 5 to 

7 percent annually. New York City as an example is 10 percent 

year over year. 

What is holding back housing? High unemployment, the foreclosed inventory overhang, low consumer confidence, and failed or 

marginally successful Government intervention programs. 

We are going to recommend some remedies. We are going to start 

with jobs. I would be remiss in not stating that the unemployment 

number that concerns us in housing is not the 9.1 or 9.2, but the 

U.S. Bureau of Labor Statistics standard, which is currently at 

16.2. Underemployed or temporary employees do not buy homes. 

Foreclosure is a major issue for us. It is depressing prices nationally. Although most foreclosures occur in ten States, predominantly 

in five, it is nevertheless an overhang that needs to be addressed. 

The continued delay in the foreclosure process is harmful to housing. The sooner the foreclosures are permitted to continue and accelerate, the sooner we will see some balance in average sales 

price, and thus the equity that is in the homes owned by taxpayers. 

We are very much in favor of efforts to mitigate or prevent foreclosure. We are strong proponents of the short-sale process. We like 

in particular the debt-for-equity program that has been recommended by a number of people where both the lender and the 

homeowner share in the equity of the home. 

We also like assumability. We think that in the current environment some measure of loans could be assumed or have an assumable loan characteristic so that at some future date a new buyer 

could be in a position to assume those very low interest rates that 

we enjoy today. 

We are strongly in favor of refinance programs. We think that, 

again, is an effort to mitigate and prevent foreclosures. So the expansion of HARP or any program that makes it possible for homeowners to refinance at the current rate of 4, 4.5 percent we are 

very much in favor of. 

We also are very much in favor of not permitting the current 

GSE loan limits to expire in October. We think that is damaging 

to a very fragile market. We are strongly in favor of the Chairman’s and Senator Isakson’s efforts to extend those for at least 2 

years. This is not a time to run the risk of upsetting again a very 

fragile market. 

8 

The National Flood Insurance Program needs to be extended. If 

not, that is going to put about 500,000 homes at risk. We would 

encourage an extension very strongly. 

And I would be remiss in not mentioning for the benefit of this 

Committee and for others who may be watching the very substantial concerns we have with respect to Dodd-Frank, in particular the 

qualified residential mortgage component of Dodd-Frank, which we 

think is particularly punitive to low- to moderate-income home buyers. 

GSE reform is not something that we view should be entertained 

in this environment. The market is too fragile and too uncertain. 

GSE reform can certainly be handled at a later date. It is working 

quite well now. We know there are fundamental reasons for a focus 

on GSE reform. That will come. It is just not appropriate in this 

environment. 

We very much appreciate the opportunity to speak to the issues. 

We know that we will have an opportunity to elaborate on these 

items when we go to panel discussion, and I want to thank the 

Chairman for his leadership on this very important issue. And, 

again, we are available as a resource in any manner you think is 

appropriate. 

Thank you. 

Chairman MENENDEZ. Thank you very much. You actually had 

time left on your 5 minutes. 

Mr. SMITH. I did my very best. 

Chairman MENENDEZ. You have led the way here. 

Mr. Calabria. 

STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL 

REGULATION STUDIES, CATO INSTITUTE 

Mr. CALABRIA. I will try to keep within that. 

I want to start by saying that there is actually a fair amount of 

consensus in terms of what is going on in the market, and I think 

the differences would be the hows, whys, and wheres. So I want to 

emphasize that. I am not going to talk about the things we agree 

upon and put most of my time on the attention that I think where 

some of the disagreements and some of the details are. That is not 

to undermine the widespread agreement, and I really do want to 

emphasize jobs is incredibly important, and we think we are at the 

point where the labor market is more so driving the housing market than the labor market, although obviously there is a feedback 

between the two. And I also want to emphasize the point that Mr. 

Smith made about the foreclosure process really does need to be 

fixed and needs to be sped up; otherwise, we are continuing to have 

a huge overhang of homes out there, and I think that is important. 

So I just want to touch on a couple of facts, the first of which 

is that, despite the price declines we have seen, in many parts of 

the country housing is still very expensive relative to income. Nationally we have seen median home prices fall to about 3 times the 

median income, and that is about historical average. So overall it 

looks like housing is back to the affordability it should be, but if 

we look at places like San Francisco, you are still looking at median house prices being about 8 times income. So it is important 

to keep in mind we are looking at a lot of different markets. There 

9 

are lots of markets that are still unaffordable by any stretch of the 

imagination. There are also a number of markets where new home 

prices still remain above production costs. Over the long run, in a 

competitive market prices are going to fall to meet the price of production. Up until about 2003, that was actually the trend. I do 

think as we see in other markets that reassert itself, prices are 

going to continue to fall in those markets. 

I think it is also worth noting the total existing home sales in 

2010 were only 5 percent below their 2007 level. But if you look 

at new home sales, they were 60 percent below the 2007 level, and 

I think the primary reason for this difference is that existing home 

prices have fallen considerably more than new home prices. To me 

as an economist, this illustrates that markets actually work. If you 

let prices fall, volumes will clear. And I think we need to not be 

so concerned about any price declines. I recognize there are costs 

to price declines, but there are also costs to keeping prices above 

market-clearing levels. 

It is also worth noting that for the first 6 months of this year, 

existing home sales were 12 percent above the last 6 months of last 

year, and that is on a seasonally adjusted basis. So as you have 

seen these minor price declines continue, you have actually seen 

sales start to go up, and I want to echo again something Mr. Smith 

said, which is I think we are near about the bottom in terms of volume of sales, and I think we will continue to slowly climb our way 

out. I do want to emphasize we are years away from seeing anything that looks like the activity of 2005–06. So I think it is going 

to be a slow climb getting there. 

I think there is also a fair amount of consensus about you have 

got a number of units, about 2 million, in pent-up demand that I 

think once you get to the point where people—where confidence is 

back in the market, prices are back where people still feel comfortable, I think this demand will start to come back. But I think 

we are a ways away from it. I think borrowers still are very much 

concerned that if they buy today, they are going to continue to see 

price declines. My recommendation would be I really believe we 

need to get to a point where buyers believe prices can go no further. And that absolutely risks overshooting on the downside, but, 

again, I think the risks of overshooting on the upside outweigh the 

risks of overshooting on the downside. 

I would also emphasize I look at housing as one of life’s basic necessities, so I do not see it becoming cheaper is a bad thing. And 

so I think in many markets, again, the San Franciscos of the world, 

I would like to see house prices actually decline even further because I think that would open up opportunity for middle-class families to actually buy houses that they are priced out of buying today. 

I also am very concerned about interactions between the unemployment and the mortgage policies we have. I like to use the example of if you are a carpenter in Tampa, you are unlikely to find 

a job as a carpenter in Tampa anytime in the next couple of years. 

We need to encourage you, assist you, help you move to someplace 

like Austin where they might be creating jobs. And so I do think 

we have locked people in place in a way that has hurt the labor 

market. There are a number of statistics in my testimony that 

show some of the discrepancies, and I want to emphasize to me it 

10 

is really illustrative of, for instance, San Jose is a very tight market, whereas Riverside is a very loose market. So even within the 

same State, you can have housing markets that are very different, 

and we need to target our policies in a way to keep that in mind. 

Let me talk very briefly about the rental market, which is we 

have started to see some minor declines, but we also still have 

about 4 million vacant rental units although that is down about 

500,000 vacant units from last year. Again, the ease or the tightness of rental markets tends to mirror the overall housing market 

we are in. 

But let me end emphasizing I think a point sometimes we overlook when we talk about the housing market, which are those without homes. And while there are a variety of statistics that are not 

as good as what we have on the other side of the housing market, 

by any indication homelessness has increased over the last year, 

the last 2 years, several years, and it has increased particularly 

among family homelessness, and it has increased particularly in 

suburban areas. So I do think a rethinking of our current homelessness assistance programs to see that they assist people in these 

newer areas instead of the traditional focus on central cities is 

something that merits attention. 

Chairman MENENDEZ. Thank you. 

Ms. Zelman. 

STATEMENT OF IVY ZELMAN, CHIEF EXECUTIVE OFFICER, 

ZELMAN & ASSOCIATES 

Ms. ZELMAN. Good afternoon, and thank you, Mr. Chairman and 

Senator Merkley, for having me here today to talk about the state 

of the U.S. housing market. 

As we enter the sixth year of the worst recession in housing since 

the Great Depression, many have suggested that we have become 

a ‘‘Renter Nation’’ and the American dream of home ownership is 

dead. I do not believe this to be the case. We believe that—or I 

should say I believe that our great Nation is still forming households, which is supported by population growth, and we expect that 

population growth and household formation will translate into 

nearly triple the activity from today’s depressed levels. 

With that said, there has clearly been a disconnect between the 

longer-term demographics and the near-term reality. I estimate 

there are currently 2.5 million ‘‘excess’’ vacancies that need to be 

absorbed before a return to ‘‘normal’’ building activity levels can be 

justified. This number has the potential to move even higher given 

the current pipeline of 4.1 million mortgages that are either in the 

foreclosure process or 90 days delinquent. 

I believe the most powerful tool that Washington can provide is 

a rental program to dispose of these vacant REO and future foreclosures in an orderly manner. The most efficient and cost-effective 

way to achieve this goal is for the GSEs to ease financing terms 

and expand financing options to investors that would purchase 

properties at low LTVs and pursue a single-family rental strategy. 

Over the past 5 years, single-family rental has been the fastest 

growing residential asset class. From 2005 to 2010, single-family 

rentals grew at 21 percent versus just a 4-percent increase in total 

housing units. In the hardest-hit markets, such as Nevada, AriVerDate Nov 24 2008 12:50 May 17, 2012 Jkt 048080 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\09-14 PM DISTILLER\91411PM.TXT JASON
11 

zona, and Florida, single-family rental grew at approximately 48 

percent while apartment units were basically flat or unchanged. 

Facilitating an orderly transfer of these distressed units should 

also have a favorable impact on pricing. Given modest improvement in the economy, record levels of affordability, and a reduction 

in inventory, through the first 7 months of 2011 home price deflation has diminished. In fact, prices of traditional homes, excluding 

foreclosures, only declined 1 percent year over year as of July, according to CoreLogic; whereas, the total decline was approximately 

5 percent, suggesting double-digit deflation for distressed sales, 

which currently account for approximately one-third of transactions. 

The second piece of the equation is demand, which remains at 

all-time record lows measured by sales activity. Despite favorable 

affordability and historic low interest rates, this has not been 

enough to drive more home buyers off the sideline. Nevertheless, 

according to the University of Michigan Consumer Sentiment Survey, 72 percent of respondents believe that now is a good time to 

buy a home. Furthermore, a recent survey by our firm of 1,500 

renters conducted in five markets showed that 67 percent of those 

surveyed want to become homeowners over the next 5 years, with 

82 percent of renters in the key 25–34 age group expressing their 

desire to buy a home. 

So if people want to purchase a home and think now is a good 

time to do so, why aren’t they doing it? The answer, I believe, is 

twofold. First is the weak condition of consumers’ balance sheets, 

which are still laden with high levels of net debt and negative equity. Indicative of these challenged consumers, our renter survey 

showed that just a third of respondents were able to come up with 

the 3.5-percent downpayment necessary to purchase a medianpriced home using FHA financing today. 

The second issue is uncertainty, which I believe is a nationwide 

problem negatively impacting home sales and prices given the volatility created by prior tax credits, fear of job loss, and mixed messages sent by the Government around future housing policy. 

However, regional differences are significant, with major dichotomies dependent upon levels of unemployment, distressed inventory, 

negative equity, delinquencies, and vacancies. 

Nationally, one of the most significant problems prospective 

home buyers face today relates to stringent underwriting criteria, 

magnified by strict credit overlays being imposed by banks due to 

unknown risk related to putbacks or other future unexpected Government burdens. As a result, many qualified home buyers are 

being turned away. 

Creating a business environment that would encourage banks to 

remove these stringent overlays that are above and beyond already 

tight lending criteria would be a catalyst to spur housing activity. 

I also believe that given the still-tenuous nature of the housing 

market, allowing the GSE and FHA loan limits to roll back to 

lower levels on October 1st is a significant mistake and should be 

put off until the market is on more solid footing. 

Similarly, any legislation related to eliminating or reducing the 

mortgage interest deduction should be carefully crafted and only 

considered with a longer-term implementation in mind. 

12 

In closing, housing has historically been a significant driver of recessions and recoveries. Currently, residential investment represents just 2.2 percent of GDP, representing an all-time trough 

and well below the long-term median of 4.4 percent, suggesting 

that the industry has been a significant head wind on economic 

growth. Housing’s recovery is essential to the overall success of a 

broad economic recovery, and without it the economy will continue 

to languish. 

Thank you again for the opportunity to testify today. 

Chairman MENENDEZ. Well, thank you all. You have covered a 

lot of waterfront here and we will continue to do a little bit more 

in our question and answer. We will start a round and then we will 

see how our time goes. 

If I were to ask you, you have a magic wand and outside of the 

issue of jobs, which clearly the President was focused on, came to 

the Congress, laid out his vision, and I would hope all of us are 

focused on that as the number one job before the country, getting 

people to work. Obviously in an economy that 70 percent GDP is 

consumer demand, and without a job, there is no income, and without an income, there is not demand, so that is critical and I think 

we collectively can agree on that. 

The next question is, so, setting that aside for the moment as 

something that we have a plan, there are different views how else 

we might do that, what specifically on the housing front, if you had 

one or two initiatives that could come from the governmental side 

to incentivize moving this marketplace forward, what would you 

say would be? Mr. Smith. 

Mr. SMITH. Well, we would begin with the comment I made regarding the foreclosure problem. It is a major overhang. It is, in 

fact, impacting values across the board, not only in the 10 States 

that I mentioned but nationally. We need to accelerate that and get 

it behind us. We need to get those nonperforming assets back into 

the marketplace as performing assets that generate true economic 

value. It is inevitable that there are going to be foreclosed assets 

at some point. Accelerate it, get it behind us, and let the market 

correct. 

I agree with many of the comments that the market will correct 

itself, but it needs a little help in this case. This overhang needs 

to be lifted permanently, and—— 

Chairman MENENDEZ. What is the size of that? Can you quantify 

it? 

Mr. SMITH. The size of the foreclosure problem, there are, depending on who you are listening to, there are about 1.6 to 1.7 million homes. I think the latest S&P estimate is about 1.7 million 

homes that are at some stage of foreclosure that need to be moved 

through the pipeline. That is probably a low estimate. I think Ivy 

and others may actually be of the view that it is much higher than 

that, because not only those that are in foreclosure but those that 

are likely to be in foreclosure. You will see estimates as low as 1.3. 

You will see estimates as high as seven million units. The good 

news is that inventory is shrinking a bit. 

The banks are very hesitant to proceed on the foreclosure for the 

Attorney General lawsuit reasons and a number of other regulatory 

reasons. But it is definitely a major overhang. In fact, in many of 

13 

our conversations with buyers and sellers, principally with buyers, 

they are generally of the view, more often than not, certainly in 

those 10 States, that if they just wait, that foreclosure inventory 

will be released, bringing pricing down even lower, creating better 

opportunities. So they are literally sitting on the sidelines, well 

prepared, perfectly capable of proceeding with the transaction, but 

they are waiting, and that is taking a lot of wind out of the market. 

Chairman MENENDEZ. Waiting, thinking that they will get even 

a lower—— 

Mr. SMITH. A much lower price, yes. That is a common problem 

that we—— 

Chairman MENENDEZ. So your answer to my question is dealing 

with the overhang issue. 

Mr. SMITH. I do not know how we can move beyond that. I think 

that fundamentally must be put behind us. 

Chairman MENENDEZ. Mr. Calabria. 

Mr. CALABRIA. I want to echo that, and I certainly would include 

that as one of my two. And maybe to flesh out the numbers a little 

bit, my estimate, which is from the Mortgage Bankers Association, 

is you have about 1.6 million loans that are at least 90 days late. 

Of that, my own estimate is you are looking about between 400,000 

and 500,000 that are over 2 years late. So those core, you can start 

with a pretty good assumption that someone who has not been able 

to make a payment for 2 years is very, very unlikely to become current again. 

So what I would say is I think you need a triage process. We 

need to decide who is savable, who can we keep in the home, who 

can we help, who can we not, and we have to be realistic about it 

because this is a triage and we will not be able to save everybody. 

So I would say for those segment in which the owner has not 

paid for a very long time, we need to streamline the process. We 

need to get those houses back into inventory very quickly, let the 

prices adjust. So that would be my number one. 

My number two, which might be echoed by Ivy, I think we need 

to find a way to get some of this excess inventory held by Freddie, 

Fannie, FHA, out into the private market, back into the market, 

either via investors—now, some of it does make sense to me as a 

rental. For instance, I would much rather—I go back to my carpenter in Tampa argument. I would rather help pay that guy’s rent 

in Austin where he can find a job than to encourage him to stay 

in the house that he is in because he is not going to have to pay 

the mortgage. So we do need to change the dynamics in helping 

people adjust in their life. 

So those are my two, but I will also emphasize it is important 

to keep in mind that, first, it should be do no harm. I think we do 

need to think through proposals and make sure that we are sending the right signal to buyers, make sure we are sending the right 

signal to investors, and all that does need to be kept in mind. 

Chairman MENENDEZ. Ms. Zelman. 

Ms. ZELMAN. Well, first, I would say that we need to instill confidence in the asset class, and the way you instill confidence is you 

mitigate deflation. How do you mitigate deflation? You have demand and supply back in balance. How do you get supply back in 

balance? You absorb it through a rental program that the GovernVerDate Nov 24 2008 12:50 May 17, 2012 Jkt 048080 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\09-14 PM DISTILLER\91411PM.TXT JASON
14 

ment has the ability to implement. That rental program is appropriate given the consumers’ balance sheets are too weak for consumers to purchase homes today, yet households need dwellings. 

Single-family dwellings today by far outpace the magnitude of population living in 50-plus unit apartment buildings and these people 

that have been displaced, if they were living in a single-family 

rental with three kids and two cars and a dog, they are moving 

across the street to a single-family rental. So there would be orderly disposition. 

By doing so, we would mitigate new dwellings on the market. 

That would put pressure on prices and we would stabilize home 

prices, which would take the consumer who is sitting on the sidelines just because he is afraid, actually allow him to be back in the 

market. That is my first response. 

My second response would be, today, consumers that are qualified are being turned away because we have now taken underwriting to an extreme. The stringent underwriting is important and 

needs to be sound, but because of a black and white underwriting 

process, as well as incremental credit overlays, very strong potential home buyers with downpayments exceeding 30, 40 percent are 

being turned away in some cases because of a situation where they 

are self-employed, for example. We have made it very difficult for 

qualified buyers who have credit scores that might be a 639, it falls 

below the 640, which, by the way, FHA will insure a mortgage at 

580 or higher, but underwriters will not underwrite a mortgage unless it is 640 or higher. So we have taken the pendulum and swung 

it too far to bring in real qualified buyers. 

So I think really two-fold, all of which would bring back confidence, and confidence, we think, is the biggest impediment to recovery in the housing market. But first, eliminate deflation through 

getting rid of the supply. 

Chairman MENENDEZ. Mr. Smith, what about the rental idea? 

Mr. SMITH. Well, two, with the Chairman’s permission, two 

points. There is the thought in the marketplace that foreclosed 

properties are not selling. I would dispute that. We are one of the 

largest resellers of foreclosed properties in the United States. Sixty 

percent of our sales are going to individual investors. They are 

typically small. They are not institutional. They are family owned 

and operated. The balance are first-time buyers. The investors are 

paying cash and the first-time buyers, the 40 percent, are generally 

FHA financing with less than 5 percent down. 

So there is a very robust market. From the list date to the actual 

close of the transaction is taking us 80 days. So we are turning our 

inventory over every 80 days. So there is a very robust market for 

this. We should not think that they are in a warehouse somewhere. 

They move rather briskly. So that is an important point. 

As to the rental, we think rental programs can be effective to the 

extent it is not being used to create subsidized housing. Subsidized 

rental programs, in the cases that we are familiar with, which in 

one case we manage, it was a dismal failure. They were taking a 

home that was a GSE inventory, putting it into a market, it was 

a single-family marketplace, and they were making those homes 

available at half the local market rate. That created property value 

problems. It created significant problems with the local taxpayer, 

15 

the local homeowner. It just—if that is the intent, that is, I think, 

a poor strategy and is not going to benefit anybody long-term. If, 

however, the intent is to put it back in the marketplace at market 

rental rates, I think that is perfectly acceptable. 

Chairman MENENDEZ. Let me ask one final question. I exceeded 

my time, but since it is only Senator Merkley and me here at this 

point, I will yield to him in a moment. 

Twenty percent down is a constant. Is that a good idea? 

Ms. ZELMAN. I think 20 percent is probably too high. I think that 

we have sound underwriting with 10 percent probably as a more 

reasonable level, along with FHA financing today, which is critical 

to stay at the 3.5 percent downpayment level. But I think 20 percent is too high. 

Chairman MENENDEZ. I get the sense that, institutionally, there 

has almost been an adoption of the 20 percent, even though there 

has not been, in fact, any, obviously, regulations to that effect. That 

is concerning to me because that takes a whole universe of responsible borrowers off the marketplace. I think we definitely need to 

deal with that. 

Ms. ZELMAN. If I may, Mr. Chairman—— 

Chairman MENENDEZ. Surely. 

Ms. ZELMAN. ——just say that the single family renter is actually 

getting the unit made available to him by the purchase of the foreclosure that Richard Smith spoke of by investors. And so they are 

rehabbing those homes and they are putting tenants into those 

homes. So the process of disposition is happening, but because of 

rental yields for investors need to be at a certain level. Today, they 

are running about 6 to 8 percent. With leverage, like multifamily 

is provided Government funding to do construction loans and development loans at very attractive financing, but yet single-family 

renters have no financing available to them. Only the single-family 

mortgage market and the multifamily mortgage renter has Government assistance of funding. 

With leverage, the Government can get a better return, because 

if you provide leverage to investors, there is significant demand for 

this type of asset class. We would get a higher bid, the Government 

would get a better return, and everybody wins. 

Chairman MENENDEZ. Very good. 

Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and I apologize. After I ask my questions, I will have to head to the floor to 

preside. I would be very interested in the second panel, but I will 

not be able to be here and so I apologize for that. 

I wanted to ask a little bit about if anyone has a take on how 

the Boxer-Isakson bill differs from what the President is proposing. 

I have not seen details yet on what the President is proposing so 

I am not sure if you all have, and if you have, it would be helpful 

to give some insight. 

Mr. SMITH. I, for one, have not seen the President’s bill, so I—— 

Mr. CALABRIA. I would say I have not seen the President’s bill. 

I am not sure that there is a detailed plan. But it would seem to 

me to be the difference is—I mean, the concept is the same. You 

are going to try to refinance underwater borrowers. There certainly 

are a couple important questions that would go along with that. 

16 

One, is it voluntary, and under the Isakson-Boxer bill it seems like 

the borrower has to come forth and request. What are the fees that 

are going to be waived? What is the LTV going to be? For instance, 

under the Isakson-Boxer bill, there is no LTV. You could arguably 

have a 300 percent loan-to-value ratio and you could still get refinanced. 

I have a hard time thinking that FHFA on its own—I mean, my 

understanding is their current discussions at FHFA are to raise the 

125 under HARP higher. Again, I would have a hard time seeing 

it removed altogether. So those, I think, are important details in 

how it functions, but the core concept is basically the same. 

Senator MERKLEY. And Ms. Zelman. 

Ms. ZELMAN. Thank you, Senator Merkley. From what I—I have 

not seen more specifics other than talking. The President mentioned something about a Rebuilding America, which would take 

foreclosure units through some type of partnership with maybe investors and refurbish foreclosure units. That is the only thing that 

was mentioned as far as I know in the President’s Create Jobs bill. 

As it relates to Senator Boxer and Senator Isakson’s bill, you 

know, I think today the Administration is more focused on improving upon the existing HARP program, and I think the challenges 

of executing implementation of a mass refi are significant and 

could cause some major unexpected consequences. I am supportive 

of helping consumers, but I also realize that there could be unexpected consequences, one of which is breaking contract law by 

waiving appraisals, also the mortgage-backed security investors 

that today would get prepaid could have significant consequences 

on the secondary mortgage market as they would lose several hundred basis points of what they have in their portfolios. Also, and 

more importantly, I think right now, we do not know for certain 

if these people who are going to be refinanced still do not walk 

away, if they still have negative equity even though you have reduced their payment. 

So I am not against it. I just think it would be difficult to execute 

successfully with unexpected consequences. 

Senator MERKLEY. Thank you. And in that context, do either of 

you want to share what you think the strengths or weaknesses are 

of the Boxer-Isakson approach? 

Mr. CALABRIA. Well, I think—I will first reiterate something that 

Senator Isakson said, which is this is not really as much about the 

housing market as it is about trying to create consumption because 

you are just refinancing people who are already in their existing 

home. I think there is actually some argument to be said by lowering their rate, you reduce the chance that they will buy another 

home in the future because they have to take that into consideration 5 years from now when they might buy a house and the rate 

might be 6 or 7 percent and they have a four. That is something 

that is going to interact their decision making. 

So I would reiterate, this is not about the housing market. It is 

about are you creating increased consumption by lowering somebody’s monthly payment so that they have money to go and spend 

it on other things. And so the core of this is about getting the economy going in terms of spending. 

17 

The question that I have in my mind, which essentially is an empirical question and I do not really know if there is any way you 

can answer it without a fairly detailed study, is a mortgage is one 

person’s liability, it is another person’s asset. So you are increasing 

somebody else’s wealth by reducing their monthly payment. You 

are decreasing somebody else’s wealth by reducing their bond payment. 

It is not clear to me as an economist that the effect on consumption is going to be any different than zero. So I think that that is 

something that needs to be studied fairly significantly before we 

know there is actually a positive consumption impact. And again, 

my read of it and my read of Senator Isakson’s statements is this 

is all about trying to create a boost to consumption, and that is 

where the focus should be. 

I would raise one concern. I will preface, I am an economist, not 

a constitutional lawyer. But the resubordination of second liens 

within the bill strikes me as coming very close to a takings, and 

I certainly think that somebody—any investor out there who has 

got a pool of second mortgages is likely to challenge that. I can almost guarantee you that somebody will challenge that in court. But 

again—— 

Senator MERKLEY. If I understand right, this person in the second position would be in no worse shape than they are currently. 

So they do not suffer, if you will, a reduction of their position, and 

it is contingent upon access to a future privilege, if I understood 

the bill correctly. It cannot be a taking if they are not in a worse 

position—— 

Mr. CALABRIA. Exactly. So it would depend on how—well, it 

would depend on how it would be interpreted. You would argue 

that you would be in a better position with the refinance, but I 

think that is something that would definitely be dragged out in the 

courts. And again, we have seen this, for instance, in the Countrywide settlements and—— 

Senator MERKLEY. Yes. Yes. No, it gets messy quickly. 

Mr. CALABRIA. Yes. 

Senator MERKLEY. Mr. Smith. 

Mr. SMITH. Sir, I think Senator Isakson said it well in his statement that this was not going to impact sales. It was to create stability where stability does not exist. And arguably, it is complex. 

It will run afoul of contract law in general, I believe. But given the 

circumstances, which are unique, and given the possibility of strategic default, which is a real event happening on a daily basis, this 

is an attempt on the part of Congress to get ahead of that, as Senator Boxer said, and to be more proactive than we have been in the 

past. So I applaud that effort and I fully recognize there are a lot 

of details that are going to have to be worked out. But I think the 

end goal is to create stability where it does not exist. 

Senator MERKLEY. Thank you all very much. 

Chairman MENENDEZ. Let me take advantage of one more set of 

questions before I bring over our next panel. We love having your 

expertise here. 

So, just so I understand well, Ms. Zelman, in reference to getting 

an asset class that would be purchased and then rented, what is 

the incentive there? Is it just market incentive or is it something 

18 

the Government will do, and what is the guarantee that the person 

will move toward a rental along the way? 

Ms. ZELMAN. Well, first, there is very strong demand for the 

rental product. With respect to occupancies right now, they are in 

the 90 percent range. So I think that the incentive to the Government is to allow for an orderly disposition to a product that is deflating the current market and do so with a rental would basically 

mitigate that from occurring. So their recoveries on the assets 

would actually stabilize and we would see the cost of holding these 

REO the cost of holding REO every day is annually running about 

12 percent, 1 percent per month to pay for property insurance, 

taxes, safeguarding the property. All of those are mitigating or increasing severities daily. So we would stabilize the losses or reduce 

the losses on the Government balance sheet and we would put people in homes that cannot afford to buy them through investors purchasing them with provided leverage. 

Chairman MENENDEZ. And finally, under the guise of do no harm 

that Mr. Calabria has suggested, it seems to me that if we do not 

act and have the mortgage loan limits at the end of this month expire, the higher loan limits, it is going to further destabilize the 

mortgage market. Certainly, I hope that our legislation, the Home 

Ownership Affordability Act of 2011, which Senator Isakson and I 

have introduced so that we can keep the maximum loan limit right 

now for the next 2 years for FHA, VA, and GSE insured home 

loans, will take effect. If it does not, what is the consequences of 

that, briefly. 

Mr. SMITH. Well, you would substantially limit the availability of 

financing in certain markets. To a point that was made earlier by 

one of the panelists, there are certain markets in the United States 

that are high-cost markets. They are going to suffer, principally the 

coastal markets, I think, in an environment that is as fragile as 

this one. 

Further limiting the availability of credit, to Ivy’s point, is not 

a good strategy. It is certainly not going to be helpful. The unintended consequence will be a slowdown in sales and, again, the restriction of credit, and I think that is a bad outcome given the environment. 

Mr. CALABRIA. As an economist, I am always reluctant to generalize from anecdote, particularly my own, but it seemed like an appropriate place to start since I am in the middle of a refinancing 

and I live here in the District of Columbia. And as you could imagine, prices are kind of expensive here and it is a market in which 

it is going to go down. And the options that are facing me are getting a loan just below that limit and a soft second at a higher rate. 

Now, looking at the rates I have been offered, 4.25 for my first 

one and 4.5 for the soft second, that does not strike me as terribly 

onerous to me. I am not happy about it necessarily, but I recognize 

I think we need to transition at some point, sooner rather than 

later. I do remember in the past when many of us tried to fix 

Freddie and Fannie in the past and we were told the housing market was too strong then, and now we are told it is too weak. So 

those who say we should not ever do anything about Freddie and 

Fannie, maybe they could at least help me detail what are the marVerDate Nov 24 2008 12:50 May 17, 2012 Jkt 048080 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\09-14 PM DISTILLER\91411PM.TXT JASON
19 

ket qualifications in which we are able to take reform and so when 

I get there I can know. 

But I do think that, A, if you look at the segment of the market 

that is there that we would shift, there is a tremendous amount 

of bank capacity to do that. So we are not talking a very large segment of the market. We are talking fairly high income. So I guess 

my point would be I think we need to start transitioning away from 

Freddie, Fannie, FHA, to the private market. I am very open to 

ways to do that and say which part should go first. But maybe it 

is the progressive deep inside of me that says rich people are the 

place to start. 

Ms. ZELMAN. Well, Mr. Chairman—— 

Chairman MENENDEZ. I am tempted, but I will just go on. 

[Laughter.] 

Ms. ZELMAN. Mr. Chairman, in response to the—we believe, as 

well—I believe that conforming loan limits should not be allowed 

to roll back to their normal limits. Looking at FHA endorsements, 

the negative impact, at least for FHA, quantified for the Nation 

would be approximately 3 percent. The hardest-hit States would be 

Connecticut and the District, Washington, about 8 percent with respect to FHA. 

I would say when you look at the level of sales activity, let me 

put it in perspective for you today. We are running at 300,000 

annualized new home sales. This is an all-time record low, since 

records have been ever kept. We are at housing start levels today 

approximately 600,000. That level of housing starts compares to 

1982’s trough when unemployment was 10.7 percent and mortgage 

rates were 16 to 18 percent were over a million. We are at such 

a depressed level of activity. Even though existing home sales have 

actually been increasing, if you excluded foreclosures, distress 

sales, which are deflationary, we are at all time record low traditional home sales. So putting that in perspective, anything that you 

take away from housing today is going to be a negative in further 

eroding the level of sales and activity, putting further pressure on 

home prices. 

Chairman MENENDEZ. I appreciate that. That is my concern. 

With thanks to the panel, we appreciate your insights. I look forward to being able to continue to pick your brains as we move 

through this process and thank you very much. 

Let me call up our next panel and ask them to come forward to 

the witness table. David Stevens is the President and CEO of the 

Mortgage Bankers Association in Washington, and prior to this 

current position, he was the Federal Housing Administration, 

FHA’s, Commissioner, appointed by President Obama, confirmed 

by the U.S. Senate. Many Members of the Committee have worked 

constructively with Mr. Stevens and I am pleased to welcome him 

back to the Committee one more time. 

Marcia Griffin is the President and Founder of HomeFree-USA, 

which is a nonprofit home ownership development, foreclosure 

intervention, and financial empowerment organization. Ms. Griffin 

was moved to found HomeFree-USA after working at a loan servicing center and witnessing firsthand the abuses that many families were subjected to. Her experience will be very informative for 

the Committee and I thank her for her presence today. 

20 

Mark Zandi is the Chief Economist of Moody’s Analytics, where 

he directs research in analytics. Some of Mr. Zandi’s recent research has looked at the causes of mortgage foreclosure, personal 

bankruptcy, as well as appropriate policy responses to bubbles in 

asset markets. He has been quoted widely by major media outlets 

and has appeared before many of the Senate’s committees as well 

as this one. We are thankful to have his expertise with us again. 

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

Management at George Mason University. He has previously 

taught at the University of Chicago, the University of Texas, the 

Ohio State University, and although he is from Rumson, New Jersey, we wish he would come back and teach somewhere like Princeton or Rutgers. 

[Laughter.] 

Chairman MENENDEZ. His research and teaching focuses on financial institutions, capital markets, real estate, finance and investment. We welcome him to the Committee again. 

And Professor Christopher Mayer is the Paul Milstein Professor 

of Real Estate and Codirector of the Richmond Center for Business 

Law and Public Policy at Columbia Business School. I would like 

to see your business card. There must be a lot of room on that card 

to get that all in. His research explores many topics in real estate, 

financial markets, including real estate cycles, credit markets, debt 

securitization, mortgages, and many other topics. He has advised 

many policy makers in the past and we look forward to his testimony and expertise today. 

Thank you all. As I said to the previous panel, we are going to 

include your full statements for the record. We ask you to synthesize your statement in about 5 minutes or so so we can have a 

discussion. 

With that, Mr. Stevens, welcome back and we look forward to 

your testimony. 

STATEMENT OF DAVID STEVENS, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, MORTGAGE BANKERS ASSOCIATION 

Mr. STEVENS. Thank you, Chairman Menendez, for the opportunity to be here today and talk about ideas for refinancing and restructuring mortgage loans. 

I am encouraged that the focus of today’s hearing is toward the 

future and the role that private capital can play in driving our 

housing recovery. MBA and its members strongly believe that 

housing will be a key factor to our economic recovery. 

The MBA recognizes that our ability to effect change depends on 

rebuilding badly shaken trust by restoring credibility, transparency, and integrity to our industry. We all know that there are 

many who share responsibility for the mistakes that led us to this 

place, including mortgage bankers and servicers. However, rather 

than pointing fingers today, all stakeholders need to work together 

to stabilize and revitalize the housing industry. MBA is grateful for 

the variety of relief efforts undertaken by Congress and two Administrations, including HARP, HAMP, 2MP, and the variety of 

other efforts that have been implemented. Clearly, the challenge is 

greater than these programs could support on their own. 

21 

Mortgage services have already participated by completing 4.8 

million loan modifications in the last 4 years, and any successful 

solution must include those entities as part of the effort. Additionally, any new programs must give lenders adequate time to implement these changes. 

In searching for solutions, MBA members continue to be concerned about the ongoing conflicting policy objectives emanating 

from all stakeholders. The regulatory and legal ambiguity is causing consumers to pay an uncertainty premium in the form of increased costs and diminished access to credit. The MBA recently 

convened a task force to develop new solutions to reinvigorate the 

housing market by bringing private capital back to absorb excess 

supply. We believe any program to help spur the housing recovery 

should be prioritized in the following order, and I elaborate on each 

of these in my written testimony. 

First, we need to help the large number of borrowers unable to 

refinance at today’s near record low interest rates. While policy 

makers have introduced programs to help some distressed borrowers, eligibility criteria excludes a significant number of borrowers who would benefit from refinancing. Some advocates have 

called for other types of large scale mortgage refinance programs 

that would include principal forgiveness by lenders and new mortgage rates below current market rates. Although such programs 

could have a positive impact on the housing market and the economy, the CBO and other analysts indicate that the programs could 

also entail significantly higher costs. 

The MBA believes the preferred approach is adjusting the guidelines of existing programs. Policy makers should consider reducing 

the GSE’s loan level price adjustments on HARP-eligible loans, 

which would reduce costs to borrowers that are arguably unnecessary because the GSEs already assume the credit risk of the existing loan. Other options include considering streamlining the appraisal process and closing requirements in order to reduce the 

time and expense of refinancing and raising HARP’s LTV, loan-tovalue, requirements to enable more otherwise qualified underwater 

borrowers to refinance into a lower mortgage rate. Finally, FHFA 

should expand the loans eligible for HARP refinance to loans that 

were originated after June 2009. 

Senator Menendez and others have suggested a shared appreciation mortgage, where a lender agrees to reduce the principal balance of a troubled borrower’s mortgage in exchange for the borrower sharing any future increase in the home’s appreciation with 

the lender. We look forward to further discussions with you on this 

and other possible solutions to help borrowers. 

Second, we should encourage local investment in the existing 

housing inventory. Local investors understand the local rental market and have a long-term stake in the community. Existing Government programs should be modified to support financing and availability for local investment in rental housing. Unfortunately, individual sales and local investors cannot provide the economies of 

scale required to recover the housing market, so the MBA also supports bulk investor sales of properties in order to alleviate the REO 

inventory. 

22 

In order for any large scale program to be successful, it needs to 

be simple, quick to administer, and attractive to investors. Safeguards need to include investor screening, buy and hold covenants, 

revenue sharing, rehabilitation incentives, though they should not 

be so restricted as to sabotage the program’s success. 

We also believe the GSEs should consider a mechanism to allow 

investors to identify and aggregate REO properties, likely enhancing multiple property sales. 

Mr. Chairman, thank you again for the opportunity to testify 

today. I look forward to working with you and other Members of 

the Committee to find creative solutions to these critical issues. As 

we work to attract private capital back to the housing market, I 

urge you to pay careful attention to the relationship between housing an the overall economy, as well as to the importance of certainty for consumers, lenders, and investors. I believe it is important to remember that no part of the housing market operates in 

a vacuum. Instead, the housing market is a series of complex but 

interdependent systems, and well-intentioned changes may result 

in unintended consequences that could result in increased cost and 

diminished access to credit for consumers. 

I look forward to taking your questions. 

Chairman MENENDEZ. Thank you very much. 

Ms. Griffin. 

STATEMENT OF MARCIA GRIFFIN, PRESIDENT AND FOUNDER, 

HOMEFREE-USA 

Ms. GRIFFIN. Thank you very much, Senator. I appreciate the opportunity to be here with you today. 

At HomeFree-USA, we represent the marriage between the interest of the mortgage servicers and the investors and the borrowers. 

Since this mortgage crisis began in 2008, among our 21—well, we 

fund 66 organizations there in HomeFree-USA, but 21 of our nonprofit counseling organizations focus primarily on this foreclosure 

crisis. 

I am here to say that despite all that is said and heard, and it 

is good to hear some great things from the testimonies today, that 

the people—many of the borrowers that we interact with, and we, 

as I said, have worked with over 30,000 to date, many of these borrowers cannot afford to pay a mortgage. They perhaps cannot afford to pay the mortgage that they have right now. But they can 

afford to pay something. These people are employed. They are trying to do the right thing. You know, they want to be good citizens. 

We are here certainly on the ground working with—working between the servicers and investors and the borrowers and are here 

to say that this idea of the shared appreciation modification is a 

sound one. We encourage and certainly would be honored, you 

know, to work with you in any way in the bill that Senator Boxer, 

the Homeowners Responsibility bill, because we want you to know 

that homeowners do want to be responsible. These borrowers need 

an opportunity. 

And, you know, it is really important, too, that through the work 

that you are doing and through the work that our Government is 

doing, we have to really bring back a level of fairness, and this is 

one of the advantages that the shared appreciation modification 

23 

provides. So you reduce the mortgage payment for the person for 

a period of time so that they can afford to pay that mortgage, and 

at the back end when they sell the mortgage or they refinance, everyone would share. The investor would share. The homeowner 

would share in the appreciation. 

It is really key as we move forward that these homeowners understand that this is a partnership here. We are trying to work together. I can tell you that the sentiment on the level of the borrowers is simply that the lender is trying to take my home away 

from me, and everyone that we work with, you know, everyone cannot keep their home, but there are a lot of people who can. And 

this particular shared appreciation modification program not only 

would minimize foreclosures, it would increase property values because, obviously, people would not have to move out of their homes. 

It creates a sense of fairness. It gives people an incentive to stay 

rather than just walking away, because now there is no incentive 

when their house is so underwater. 

People need to be brought back. We need to give more consideration to our borrowers and give them a sense that we are all working together, the Government, the mortgage industry, the investor. 

We are all here as a win-win for each other, and with that, I think 

that is the only way that we are going to be able to turn around 

our mortgage crisis and really improve the economic conditions of 

our country. 

I thank you very much. You have my much longer written testimony and I am certainly open for any questions that you may 

have. 

Chairman MENENDEZ. Thank you very much. 

Mr. Zandi, I see you are technologically advanced. You have your 

testimony on—— 

Mr. ZANDI. I do, I do, but these guys have iPads. They are even 

a step ahead of me. 

Chairman MENENDEZ. Oh, OK. 

Mr. ZANDI. I have got one, but I just have not really gotten 

around to working through it yet. 

STATEMENT OF MARK ZANDI, CHIEF ECONOMIST AND COFOUNDER, MOODY’S ANALYTICS 

Mr. ZANDI. I want to thank you for the opportunity. My remarks 

are my own views, not that of the Moody’s Corporation. I will make 

three points in my remarks. The first point is that the housing and 

mortgage markets remain under significant stress, and as you 

pointed out, this is a significant impediment to the economic recovery. 

I think the housing market, broadly speaking, has hit bottom, 

but this is still very unusual. At this point in the economic recovery, housing would be contributing significantly to economic 

growth. 

So, for example, if you look at the economic recovery since World 

War II, at 2 years into the recovery, and we are now 2 years into 

this one, housing would have contributed about one-fourth of GDP 

growth to overall economic activity, and, of course, this go-round, 

it has not been a contributor at all. 

24 

There are two fundamental problems. One is excess vacant inventory because of the overbuilding in the boom. We just have way 

too many vacant homes. By my calculation, the number of excess 

units is close to 1.25 million, and the current housing demand 

which is depressed, it will not be until 2013 before we work 

through that. 

The other fundamental problem is, as we have been talking 

about, the foreclosure issue. By my calculation, there are 3.5 million first mortgage loans that are in foreclosure, or 120 days delinquent and, thus, obviously pretty close. And at the current of resolving these foreclosed properties, it will not be until 2015–2016 

before we work through those properties. So a long haul. 

Given that, this gets to point number two and that is, I think, 

policy makers should consider a number of steps to help facilitate 

addressing the excess inventory and foreclosure issue. There are a 

number of initiatives that are underway that I think are helpful. 

The Neighborhood Stabilization Fund, the President proposed 

some more money for that in the American Jobs Act, I believe 

about $15 billion. I think it is a very popular program and is very 

helpful for blighted communities. The Administration has also proposed trying to facilitate efforts by Fannie and Freddie to partner 

with private investors to move their REO to rental as opposed to 

selling it into the marketplace and driving down prices, and I think 

that is a laudable goal. 

And then your own effort with regard to shared appreciation 

mortgages, I think, is a good initiative and I think it has significant potential for helping in this regard. 

I would suggest two other things that could help quickly and 

meaningfully. First is, and this has been proposed already by many 

of the members of the group, that is, I would not allow the conforming loan limits—the higher conforming loan limits to expire. 

I was of a different view at the beginning of the year. I understand the argument that it is important that Government steps out 

of the market to see if we cannot get the private market back up 

and running and stepping in. That is something we need to do. 

And at the beginning of the year when the housing market and 

the economy looked better, I thought this would be a good opportunity to take a crack at it, but given what is happening in the 

economy and the housing market, I think that would be an error 

at this point. I would at least extend the conforming loan limits, 

current conforming loan limits for another year. 

The second thing I would do is I would HARP. You know, HARP 

is a reasonable program. It has fallen short of goals, but 850,000 

folks have benefited from the program. The President, when he 

proposed the program back in ’09, had a goal of 4 to 5 million. I 

think that should be the goal. And I think there are a few things 

that could be done to the program to get to that goal. 

The most obvious policy step to facilitate more mortgage financing is rolling back the GSE’s loan level pricing adjustments. This 

is a key part of Senator Boxer and Senator Isakson’s legislation 

and why I support it. That just makes eminent sense to me, and 

I think that should be done. 

I think efforts to streamline the underwriting process is very, 

very important with respect to appraisals, with respect to income 

25 

verification. The GSEs own this credit risk and we can work 

through these underwriting issues more quickly, lower the costs so 

that closing costs are lower for borrowers. 

Third, I think it would be important for Fannie and Freddie to 

think about waiving reps and warranties on HARP loans. These 

are loans under the current program that had to have been originated more than several years ago, January 2009. So I think it is 

perfectly prudent to allow that to be waived. There are a number 

of other things that are in my testimony, but I think I would do 

that. 

Finally, let me just end by saying that this is going to be hard. 

There is no magic bullet here. All the things we are talking about 

here are on the margin. This is going to take a long time. So everyone’s expectations should be in the right place. 

And moreover, I think it is important not to overreach. Uncertainty is an issue in the mortgage market and I think what lenders, servicers, everyone needs is policy clarity so they can nail this 

thing down. Thank you. 

Chairman MENENDEZ. Thank you. Dr. Sanders. 

STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED PROFESSOR OF REAL ESTATE FINANCE, AND SENIOR SCHOLAR, 

THE MERCATUS CENTER, GEORGE MASON UNIVERSITY 

Mr. SANDERS. Thank you, Mr. Chairman—— 

Chairman MENENDEZ. If you would just put your microphone on? 

Mr. SANDERS. And I will start over again. Thank you for the opportunity to speak to you today and thank you for reminding me 

that I wish I was at Princeton. 

According to the recent data, owner equity in the household real estate fell around $7.4 trillion from the peak of the housing market 

to today. Headline unemployment remains at 9.1 percent. Real 

GDP is under 2 percent. And real personal consumption expenditures fell in the second quarter of 2011. So we can see we have a 

major problem still on our hands. 

One way to jump-start the economy and reduce mortgages that 

default is to streamline mortgage financing. When you add the additional savings to borrowers’ disposal income, they might spend it 

in the economy or reduce delinquency and default, and that is a 

very tempting thing to look at. 

We have discussed why borrowers have not been able to refinance, due to degraded credit after the housing market collapse; 

negative equity; and servicing industry conflicts. To be sure, 

streamlining the mortgage financing process could help American 

households stimulate the economy and reduce defaults. 

The CBO, however, using a stylized program, estimated that 2.9 

million mortgages would be refinanced—again, this is not under 

any specific program—and that would lead to 111,000 few defaults 

on these loans. But 2.9 million mortgages being refinanced at 4 

percent or so would generate about $7.4 billion for the economy in 

the first year. Depending on the assumptions, that could, of course, 

be higher or lower. 

In many of the high LTV loans we are talking about in some of 

these programs are located in Florida, Arizona, and California, so 

the stimulus effect would be more concentrated in those States. 

26 

The stimulative benefits of $7.4 billion in 1 year, after the refis 

take place, are actually relatively small compared with personal 

consumption expenditures, which in the second quarter of 2011, 

were $9.43 trillion. So again, $7.4 billion as a percentage of $9.43 

trillion is much less than 1 percent added. So I am not sure it is 

going to have the stimulative effect that someone would like to see, 

unless, of course, the program is much larger than the CBO is estimating. 

Another way to stimulate the housing market is to raise the conforming limits for 1 year or 2 years. As I opined in previous testimony before the House Financial Services Committee with regard 

to a draw-down plan for Freddie and Fannie, I felt it was appropriate to reduce the conforming loan limit to allow the private sector back in the market. 

However, I stated that if the housing market stalled, which it 

has, then alternative strategies to be considered are regarding the 

conforming loan limit such as letting it stay in place for an additional year or two until the housing market gets back on its feet 

and running. 

Now, Senator Menendez has proposed an interesting idea and 

that is a shared appreciation mortgage solution to try to overcome 

the negative equity problem. The shared appreciation mortgage, or 

SAM, has been used in the United States for decades, although in 

low volumes, has been tried in the United Kingdom to permit borrowers who have paid down their principal, for example, 50 percent 

of their share of equity in return for, say 50 percent of future gains 

in house price. 

The Menendez proposal has a similar intention. The borrower receives a write-down of principal, or such, in exchange for giving 

away a percentage of appreciation and property value in the future. 

Now, there are problems with the SAMs, twofold. First, capital 

markets have shown very little interest in it as a product for investment, so generally, if you make it, you have to keep it on your 

books. But second, there are some moral hazard problems related 

to the incentive to maintain property once someone receives the 

capital gain. 

The third problem in the Menendez proposal has solved and that 

is about trying to get independent appraisals. So again, it has some 

issues, but it also has tremendous potential, and it is one thing I 

would like to see them do a trial program for SAMs. Now, whether 

or not this is done by private financial institutions or the GSEs is 

a topic for later debate. 

But again, I think it is one of the most innovative ways to try 

to get out of the negative equity problem, because as I said earlier, 

the program from Isakson and Boxer, I think, when looked at the 

numbers, I looked at the CBO report, I do not think that is going 

to get us much truck. But I think this one has better legs on it. 

Thank you very much for the opportunity to testify. 

Chairman MENENDEZ. Thank you, Professor. Mr. Mayer. 

STATEMENT OF CHRISTOPHER J. MAYER, PAUL MILSTEIN 

PROFESSOR OF REAL ESTATE, COLUMBIA BUSINESS SCHOOL 

Mr. MAYER. Thank you very much, Chairman Menendez. I appreciate the opportunity to be here today. Ten-year Treasury rates are 

27 

as low as they have been since the Great Depression. Nonetheless, 

too few borrowers have been able to take advantage of low interest 

rates to refinance their mortgage hampering monetary policy and 

dampening consumer spending. 

Unable to refinance their debt the way corporations have, consumers are left with weak balance sheets and mortgage payments 

often above the cost of renting, contributing to excess delinquencies, foreclosures, and falling home prices. 

Numerous frictions contribute to the slow rate of refinancing. 

The GSEs charge up-front fees for refinancing a mortgage for borrowers with moderate credit and the loan-to-value ratio of 60 percent or more. Lender fears of litigation from reps and warranties 

further discourage refinancing. Many borrowers are underwater. 

A streamlined refinancing program could benefit 25 million or 

more borrowers with Government-backed mortgages. Decreasing 

annual mortgage payments by up to $70 billion, about $2,800 per 

year per borrower. The majority of savings accrue to borrowers 

whose original mortgage was under $200,000. 

This plan would function like a long-lasting middle class tax cut 

without impacting the budget deficit. A copy of this proposal made 

with coauthors Alan Boyce and Glenn Hubbard is attached to my 

testimony, along with a State-by-State breakdown of benefits under 

this program. 

Under our plan, every homeowner with a GSE or FHE or VA 

mortgage can refinance his mortgage at a current fixed rate of 4.2 

percent or less, with the rate subject to changes in the market 

price of bonds. So it is a market rate. FHA borrowers would face 

slightly higher rates. 

To qualify, the homeowner must be current on his or her mortgage, or become so for at least 3 months. This plan rewards responsible borrowers. These must be low-cost, minimal paperwork refinancing, no appraisals, no income verification, no tax returns, and 

a minimal title insurance policy. After all, the Government already 

guarantees these mortgages. 

Issuers of new mortgages would be indemnified against other 

reps and warranties violations, a critical part of this program. 

Under our plan, the GSEs would charge a guaranteed fee of 40 

basis points per year, more than offsetting any losses they might 

face. 

The GSEs would also benefit through fewer defaults by borrowers with lower mortgage rates. Our plan would pay 30 basis 

points per year to cover the cost of originating and servicing new 

mortgages, making it possible for originators and servicers, making 

it profitable for originators and servicers, given the streamlined 

process. 

The plan must be attractive to market participants. Servicers 

should have a short period of time to offer this program to their 

customers on an exclusive basis, but only a short time. Existing 

servicers, including the largest banks, benefit by lower legal liabilities associated with reps and warranties violations. 

Second liens and home equity lines of credit are safer when borrowers have lower first mortgage payments. Banks should find 

streamlines refinancings increase both profits and customer satisVerDate Nov 24 2008 12:50 May 17, 2012 Jkt 048080 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\09-14 PM DISTILLER\91411PM.TXT JASON
28 

faction. Mortgage insurers and second lien holders should be required to modify policies and claims to facilitate this plan. 

The housing market benefits from our program. Lower mortgage 

payments, reduced future defaults helping stabilize house prices. 

More free financing activity should improve consumer confidence in 

the financial viability of being a homeowner. Reducing financial 

pressure on servicers, originators, and mortgage insurers will help 

the mortgage market start to recover, enabling new home buyers 

to get mortgages. 

Most gains from this plan come at the expense of investors who 

understood and accepted interest rate risk. Private sector or foreign 

owners hold about two-thirds of GSE bonds. Agency bondholders 

have received unanticipated windfall from many Government actions during the crisis, including policies that led to extremely low 

refinancing rates, the decision to explicitly guarantee GSE bonds 

against losses, and the Federal Reserve’s purchase of 1.25 trillion 

of agency mortgage-backed securities. 

Even with potential losses, some bondholders such as PICO have 

publicly supported this plan because of its benefits to the economy. 

Implementing this proposal would have a tremendous affect and 

make a real difference on families. Until we fix the housing market, it will be hard for the economy to recover. 

I have also responded—put forward a proposal to RFI and I very 

much support a number of the other proposals that people on this 

panel, the previous panel, have made, including the expansion of 

private institutional capital for rental, encouraging efforts, such efforts, to have local partners, and to provide responsible financing 

for investors who are going to come in and help absorb some of the 

excess inventory. 

I also think that there are many things that one could do as 

shared appreciation mortgages, and one idea that I would toss out 

to add to the mix is the idea of not necessarily just tying it to one 

mortgage, but have that payback be across gains from other residential property over time which might make such a shared appreciation mortgage safer for the lenders who do it and bring it closer 

to kind of, I think, a cost-effective basis. So I think there is a lot 

of positives to do here. 

So I appreciate the opportunity and be happy to answer questions. 

Chairman MENENDEZ. Well, thank you all very much. It is a 

broad swath of ideas. Let me start off taking off of your suggestion, 

Mr. Mayer, and asking the panel in a broader context beyond Mr. 

Mayer’s specific proposal, is it not, at the end of the day, I look at 

this and I say, Well, who is the biggest holder of the major part 

of—significant part of the liability here? It is Fannie and Freddie. 

And who is Fannie and Freddie? It is the American taxpayer at the 

end of the day. 

So would it not make sense for Fannie and Freddie to seek initiatives that mitigate the potential of its, you know, bosses and help 

us moving in the mortgage market? So that is a broad proposition, 

but I just do not get the sense that that is where Fannie and 

Freddie are headed, at least at this point in time. Are there observations about that? Am I wrong on this? 

29 

Mr. STEVENS. I think like everything we talk about here, Senator, as you are well-aware and have been actively engaged, these 

questions are often more complicated than the answer. Actually, 

the answer is more complicated than the question. 

The challenge of Fannie and Freddie is they are—they still are 

essentially independent companies in conservatorship. They have 

cost the taxpayers $150 billion. It is acknowledged, at least by their 

conservator, that they were under-pricing the guarantee fees when 

they originated these loans. 

And so, I think the tradeoff we have to consider as we utilize 

these two agencies, which are critically important, obviously, considering the size and scope and influence on the housing market, 

is it is clearly recognizing with eyes wide open that anything they 

would do to participate more aggressively, whether it is lowering 

loan level price adjustments or changing loan-to-value requirements or reducing documentation or relieving reps and warranties 

or all these things are being discussed, that those are all—those 

bring incremental risk associated with each of those steps. 

And as long as that is acknowledged and recognized in the process, I think good decisions can be made. I think it is difficult, however, because they are in conservatorship and there is no clear direct governance capability here, that it makes it much more difficult to direct them to take action, which may not be in their own 

best interest, especially at a time when they are trying to bring 

themselves back to a level of operating profitability. 

Chairman MENENDEZ. But I would assume—I understand what 

you are saying, but I would assume the conservatorship, ultimately 

its goal is to maximize or limit, actually, the scope of the liabilities 

at the end of the day. And it just seems to me that you have this 

stated public policy goal of trying to limit the liabilities, and yet, 

not being able to do some of the things that are essential to limit 

those liabilities. 

Mr. STEVENS. And you are absolutely right. I mean, even the 

CBO, which is, I am sure, not the most detailed at this point because we do not know what the proposed specifics would be on a 

refinance plan, but it clearly shows that it reduces risk to the 

GSE’s portfolio to make some adjustments, at least to the HARP 

program, and I think all of—after hearing all the panelists so far, 

it sounds like there is almost universal belief that there is room to 

make changes there. 

So I think our collective objective as stakeholders has to be to 

continue those discussions with FHFA and the GSEs in hopes that 

they do make the changes that are on the margin, would be helpful 

here, knowing even to Tony’s point that while it may not have an 

extraordinary influence on stimulus, it will have some impact on 

the 2.9 million families who would potentially benefit from it. 

Chairman MENENDEZ. Any other observations from anyone? 

Mr. ZANDI. Well, I think if you look at the CBO work of the assessment of the Boxer-Isakson plan, Fannie and Freddie come out 

even, at least, to make a little bit of money on the deal. It costs 

the Federal Reserve money on a mark-to-market basis, but it is important to point out that the Fed is holding these securities to maturity, and they do not mark their books. So this is just an accounting loss. It is nothing more than that. 

30 

So, there are ways to do things here that do not cost taxpayers 

money at all, any money, and I think this is one of those things. 

Yes, it is true Fannie and Freddie are going to take on some additional risk here, there are some costs here, but they are also reducing the potential for default and credit loss, and so net looks like 

it is a wash, maybe a little bit down. 

The thing I would point out is if HARP hits its goal of 4 to 5 million borrowers and that is another, say, 4 million borrowers who 

get refinanced down and let us say they go from—the average coupon or the median coupon on a Fannie or Freddie loan is 5.5 percent. 

So you have got half of borrowers that are over 5.5 percent. Let 

us say they can refi down to 4.25 percent, or something like that. 

They save a little over a percentage point. You do the math, that 

is about $10 billion in annualized interest payments. That is not 

going to solve our problems, but that is not insignificant, particularly with those households, and many of them are in very distressed parts of the country which could use that cash and use that 

money. It is something that could happen quickly. 

Chairman MENENDEZ. But we would have to change HARP from 

where it is now to accomplish that. 

Mr. ZANDI. Well, Fannie and Freddie, through the FHFA would 

have to make some modest adjustments, roll back the LLPAs, 

make some adjustments with reps and warranties, look at underwriting and the cost of underwriting and appraisals, maybe even, 

I think, change policy and become a little bit more proactive in 

reaching out to potential borrowers because right now they do not 

do that. 

They reach out and say, you can make a real saving on your 

monthly mortgage payment if you did this. These are the kinds 

that are reasonable to do. I do not think they are difficult to do and 

I think they could make a difference, a substantive difference. 

Chairman MENENDEZ. Professor. 

Mr. SANDERS. Thank you. First of all, I do agree with what Dave 

said. While it is trivial in terms of percentage of the consumption 

expenditures for consumers, it is 2.9 million would really appreciate the help, I am sure. 

The one part of the CBO report, and I have greatest respect for 

the CBO, in particularly Professor Lucas, is I am a little squishy 

on the benefits to the GSEs from this program. I have not heard 

Fannie, Freddie, or the FHFA come out with any positive statements regarding it in that respect, so I am a little nervous that it 

may be overestimated. 

So I would actually make it more on the decision, do we really 

think it is going to help borrowers avoid default and would it actually help stimulate the economy? I think those are the bigger selling points. But again, I think that the—I sure like the shared appreciation mortgage idea the best. 

Mr. MAYER. I would observe a couple of things. One, we have referred a little bit to the CBO report. I would cite private sector estimates from Goldman and Sachs, J.P. Morgan, Morgan Stanley, 

even work that Mark has done that suggests an appropriately 

structured program would generate $25 to $50 billion a year. 

31 

The J.P. Morgan report came out after the CBO report. They respectfully disagreed. I am not sure anybody on Wall Street thinks 

that a well-structured program would be as small as the CBO estimated. So I do think there are good reasons to believe that this 

would have a much bigger stimulus on the economy than the CBO 

suggested. 

I just point out that in 2002 and 2003, the last time rates fell 

like they have so far this time, about 85 percent of borrowers who 

could save 100 basis points on their loan took advantage of prepaying over a 2-year period. The CBO estimates a take-up rate, 

even among the most constrained households, of 30 percent. 

So I think there the CBO estimate, predominantly on the takeup rate, has been a bit conservative relative to kind of other folks. 

I would go out and say, I think this can be a much bigger effort. 

The key is appropriately structuring this, and you rightly pointed 

out, Senator Menendez, that conservatorship is a real barrier to 

this. 

I think there are a number of ways to deal with that. One of 

them is, if it does look like this is not so neutral to the GSEs, as 

Professor Sanders has talked about, you could raise the GSE fee 

a little bit—sorry—the GE fee, the guarantee fee a little bit under 

such a program, which would ensure it was a budget-neutral program to other parties and still benefit homeowners enormously. 

So I think the other thing that we have not discussed that is 

really critical is mortgage insurance. There are a large number of 

people, estimated 25 percent of the population, that will not even 

get inside a door without a deal to think about mortgage insurance. 

So they have to be brought into the mix as well importantly. 

Chairman MENENDEZ. What about the—I raised this with the 

previous panel—about the QRMs, the 20 percent? It seems to me 

we take out a huge class of individuals in the country who could 

be responsible borrowers and help us in this process. Are there 

views on that, Mr. Stevens? 

Mr. STEVENS. Yes, I completely agree. I think that the intentions 

of QRM were very dead-on accurate and effective in terms of eliminating products with high risk characteristics. So the QRM, as we 

all know, requires limits to owner-occupied primary residence, full 

amortizing loans, loans that are fully documented. 

When you look at the actual default data, if you isolate to those 

characteristics and not bring in the downpayment requirement that 

is in QRM, you have solved 95 percent of the problem just simply 

by isolating those characteristics. 

The problem with downpayment, once you throw that variable in, 

is it becomes particularly punitive to families without amassed 

wealth or high income earners. And so, it tends to hit those that 

need access to affordable home ownership the most, first-time home 

buyers, African Americans, Latinos, traditionally demographics in 

this society that do not have large amounts of inherited wealth and 

maybe, at least demographically, at the lower end of the income 

earning spectrum simply the way that incomes are structured in 

this country. 

So we believe that you can implement a very safe and sound 

QRM rule based on all the parameters, but that the loan-to-value 

requirement ends up being particularly punitive and is likely to set 

32 

up some sort of separate but equal financing system where a certain set of Americans go to FHA for all their mortgages and then 

the wealthy get some other products set through QRM, and that 

is something that I think we are very concerned about as an organization looking at making sure there is available liquidity for all 

Americans who can responsibly pay for a home mortgage over the 

years to come. 

Chairman MENENDEZ. Ms. Griffin. 

Ms. GRIFFIN. I just wanted to mention one thing, Senator, if I 

could on your last question. I did not respond to that. I am going 

to let the experts talk about the mortgage side of it. But where 

Fannie and Freddie are concerned, I am going to say that, you 

know, I just do not think they know what to do and that is why 

having you and our Senate and our Congress are so important. 

I think they really are trying to, with the conservatorship and 

with FHFA, are trying to figure out a long-term profitable arrangement that will benefit the taxpayers. I can say that Fannie and 

Freddie both, on the ground, have created environments where 

they are reaching out to homeowners in a very unique way, using 

counseling organizations, setting up borrower help centers and 

mortgage help centers, and really using people who can interact on 

a face-to-face basis with these homeowners and influence their behavior and really help the servicers on the back end to make a determination help these people, as to whether they can keep their 

mortgage or not, and also help—if a lot of people are not going to 

be able to stay in their homes, what will happen to these families? 

Someone has to deal with this, and I just want to encourage you 

and encourage FHFA and the GSEs and FHA. You know, the counseling environment is so important because we are on the ground 

with these homeowners and home buyers. We can convince them, 

we can work with them, we can help them to understand what they 

should and should not do. 

Chairman MENENDEZ. Very good. Thank you. Mr. Zandi. 

Mr. ZANDI. Turning back to QRM, I think the QRM, as currently 

proposed, is overly restrictive for two reasons. One, I think Dave 

said it nicely. If you look at credit risk at higher LTDs or lower 

downpayments, I think there is strong evidence that it makes perfect sense to allow for lower downpayment loans, that it is not— 

after you control for all the other risk factors, it is perfectly reasonable to allow for lower downpayment loans. 

The second reason, and this goes to broader GSE reform, if you 

look at the FHFA data, under the current rule, I believe, over time 

on average, only about a third of all mortgage loans are QRM. And 

so, in a future world we do something about the GSEs, I think that 

would be very restrictive. 

It would mean that Government’s role in the mortgage market 

would be very, very limited, and I think that leads to all kinds of 

problems with respect to the ability for borrowers to get 30-year 

fixed rate mortgages, the cost of mortgage credit to borrowers. 

I think a more reasonable goal would be something closer to twothirds of mortgages, and if you adjust the LTD requirement and 

allow for lower downpayments, you can, I think, quite reasonably 

get to about two-thirds of the market and I think that is a much 

more reasonable goal, not only with respect to what is happening 

33 

now, but long run in what we are going to do about the mortgage 

market and Government’s role in the mortgage market. 

Chairman MENENDEZ. Dr. Sanders. 

Mr. SANDERS. Just to add to what Dave and Mark said, you can 

actually go to the FHA Web site and they actually have the listing 

of the data and what loans would qualify under QRM, and it is 

very, very restrictive. And again, although well-intended legislation 

died in terms of mortgage lending, does, in a sense, represent a 

clear and present danger to the future of the housing market if we 

do not do something about it. Way too restrictive. 

Chairman MENENDEZ. Well, it seems like you have universal 

agreement on that. Hopefully those who are going to make the decision are listening. Mr. Mayer, let me ask you two final questions 

here and then I will let this panel go. How does your refinance proposal differ from Boxer and Isakson’s legislation? If you could give 

me some sense of that? 

Mr. MAYER. Sure. Let me just pull up my notes here. So I think 

there are several things. As I commented earlier, mortgage insurers are a really big issue that I think we need to address. The 

mortgage insurance industry, almost all the companies, are rated 

Single-B. I am not sure their insurance is as good as we would like 

to count on, as we do now. 

So we are going to have to deal with the large number of potential folks who have mortgage insurance, and I think there are ways 

to do it. But that is going to be one key issue, and reps and warranties is a related issue which gets to the mortgage insurance 

question. Those issues, I think, are really holding back a lot of people from being able to participate in HARP, and if we do not address them, I do not expect that we are going to get the take-up 

that we should. 

I think, also, trying to take steps to bring down closing costs is 

important, and I think we have to take seriously what the cost is 

to the GSE on the balance sheet. I applaud the Congressional 

Budget Office for having looked at that. But I do think one may 

need to adjust the G-fee, the guarantee fee a little bit to help adjust to ensure that it scores as a budget-neutral program from the 

Congressional Budget Office. 

But I do think there is some chance that a legislative solution 

would succeed where we may or may not succeed with an administrative one, particularly some of the parties involved are kind of 

holding up the process. I do not think, by the way—there was a 

discussion in the earlier panel on second liens. 

I am not sure that resubordination of second liens is actually a 

big problem today. I think most of the major lenders will do what 

they see as in their interest, to have a lower payment on the first 

lien. So I am not sure that is the biggest issue. I think it is in other 

areas. 

Chairman MENENDEZ. One question, Mr. Stevens, while I have 

you here. It is a question related to your tenure as the Commissioner of the Federal Housing Administration. As I understand, 

FHA is required to have a capital reserve ratio of 2 percent, and 

for the past 2 years, the FHA’s capital reserve has been below that 

figure. 

34 

So given that number and FHA’s critical role in the housing market, are you confident that it can continue to be a source of funding 

for low and moderate income borrowers? 

Mr. STEVENS. Well, as you said, Senator, and other members of 

the panel have said, FHA is a critical resource for providing financing, particularly to first-time home buyers, and most data shows 

that in the first-time home buyer market, FHA is making up the 

vast majority of the funding because of the loan-to-value requirement. 

The other variable I would highlight is FHA is one of the few entities in the housing finance system that has operated entirely on 

its own ability with its own capital. 

However, that capital was stressed, it did drop below the threshold of 2 percent on the capital reserve ratio, and the actuarial studies over the last couple of years have expected that the capital ratio 

would grow and there would be actually net receipts, negative subsidy, as it were, on the budget side. 

But all of that assumed that the home price index would show 

some growth which is the flattening of that index has continued to 

extend out year after year, and so despite a variety of measures 

that have been taken under, particularly, Secretary Donovan’s administration with raising mortgage insurance premiums three 

times, changing the underwriting requirements, putting minimum 

FICO scores in place, changing product terms, eliminating many 

lenders that were not originating responsibly, it is still subject to 

the economics of the housing system. 

I have no inside information, obviously. I have left the Administration, but I am concerned that just given the softness in the 

housing market and the seasoning of some of these big portfolios 

like the 2009 portfolio and other potential impacts from the reverse 

mortgage program, that there may be some impact to the capital 

reserve ratio, and I would hate to see it go negative. 

The good news about the program, it is operated under the full 

faith and credit of the U.S. Treasury. But I am certain it will bring 

extraordinary criticism and focus should it drop negative. The 

study comes out at the end of the fiscal year that ends at the end 

of September and usually is released somewhere early November. 

So I am anxious to see how that fund is doing given all the additional stresses that have occurred in this housing market over the 

last 12 months. 

Chairman MENENDEZ. Well, I am anxious as well. We will have 

to make sure we pay attention to the report. 

Well, thank you all for your input, your expertise. I appreciate 

all of our witnesses sharing their insights today. I think the testimony here can be very useful in exploring both problems that 

homeowners face in refinancing and restructuring their loans in 

ways are potential actions that we can take. 

The record is going to remain open—of this hearing—for a week 

from today if any Senators wish to submit questions for the record. 

And with the thanks of the Committee, this hearing is adjourned. 

[Whereupon, at 3:46 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 

35 

PREPARED STATEMENT OF SENATOR BARBARA BOXER OF 

CALIFORNIA 

Thank you, Chairman Menendez and Ranking Member DeMint, for scheduling 

this important hearing and for the opportunity to address the Committee. 

Interest rates for 30-year home mortgages are at 4.12 percent—the lowest rate 

in 60 years. Yet of the 27.5 million mortgages guaranteed by Fannie Mae and 

Freddie Mac, over 8 million still carry an interest rate at or above 6 percent. 

That is why Senator Isakson and I have introduced S. 170, the Helping Responsible Homeowners Act of 2011—and I would also like to thank you, Chairman 

Menendez, for cosponsoring this bill. 

When interest rates were higher, CBO projected this bill would allow up to 2 million additional responsible homeowners to refinance by removing the barriers that 

have kept them trapped in higher interest rate loans, and it would put thousands 

of dollars back in the pockets of struggling families. With interest rates now at 

record lows, we—and many economists—believe that number would be even higher. 

Our bipartisan bill has been endorsed by Mark Zandi, chief economist at Moody’s 

Analytics—who will testify later in this hearing—William Gross, managing director 

and co-CIO of PIMCO, housing economist Thomas Lawler, the National Association 

of Realtors, the National Consumer Law Center, the National Association of Mortgage Brokers, and others. 

One reason existing refinancing efforts have fallen far short of their goals is that 

Fannie and Freddie continue to charge homeowners high, risk-based fees up front 

to refinance their loans. Fannie and Freddie already bear the risks on these loans; 

yet this policy actually makes it less likely that borrowers will be able to take advantage of low rates and increases the chance they will eventually default. 

The Helping Responsible Homeowners Act would eliminate these risk-based fees 

on loans for which Fannie and Freddie already bear the risk, and would also remove 

refinancing limits on underwater properties for borrowers who have been paying 

their mortgages on time. 

Fannie and Freddie hold or guarantee the mortgages for approximately 5 million 

homeowners whose homes, through no fault of their own, are now worth less than 

what they owe. For those borrowers who have been doing the right thing, struggling 

to make their payments on time, this bill gives them hope—and a reason not to simply walk away. 

Although we have introduced this legislation, most of what we propose could be 

implemented administratively by Fannie and Freddie on their own. We have urged 

them to take immediate action to remove these barriers and were greatly encouraged to hear President Obama recognize the benefit that doing so could provide in 

his jobs speech last week. 

I was also heartened by the statement issued by the Federal Housing Finance 

Agency following the President’s speech that it is now serious about reducing the 

barriers that have kept millions of homeowners from refinancing, including those 

identified in our bill. But it will be important to make sure that FHFA follows 

through on this commitment. 

Implementing the provisions of this bipartisan bill, whether through passage or 

administratively, would result in up to 54,000 fewer defaults and produce a net savings up to $100 million for Fannie Mae and Freddie Mac. 

Homeowners would see immediate relief. A one and a half percent reduction in 

their interest rate would save the average homeowner with a $150,000 loan over 

$1,600 annually. And with up to two million additional borrowers refinancing, this 

would pump up to $3.2 billion annually into the economy. 

Interest rates remain at historic lows, and they likely will remain low for the immediate future. But they will not remain low forever. Every day that we wait means 

more struggling homeowners who fall behind on their payments and greater losses 

for Fannie Mae and Freddie Mac. 

We cannot wait any longer. The Helping Responsible Homeowners Act will be 

good for borrowers, good for Fannie Mae and Freddie Mac, and good for the economy. 

PREPARED STATEMENT OF SENATOR JOHNNY ISAKSON OF GEORGIA 

Chairman Menendez, Ranking Member DeMint, and Members of the Committee, 

thank you for permitting me to attend today’s hearing. 

I began my career in residential real estate in 1967 as a real estate agent specializing in FHA and VA home sales with an average price of $17,900. In 1968, I experienced the first of four housing recessions I would face during my 33 years in the 

36 

business. That first housing recession was brought on by the failed FHA 235 nodownpayment program. 

In 1974, I was a branch office manager for Northside Realty in Atlanta when our 

country experienced what at the time was the worst housing recession our Nation 

had ever faced. That recession ended in 1976 after Congress passed a $2,000 income 

tax credit for the purchase of a single family home in 1975. That tax credit effectively reduced a standing vacant 3-year supply of housing to less than a 1-year supply. 

In 1981, I was President of Northside Realty, and experienced my third housing 

recession. Interest rates rose to 16.5 percent, and for the first time ever lenders 

made negative amortization loans to make monthly payments affordable. 

In the late 1980s, the savings and loan crisis caused institutional failures across 

the Nation, and the Resolution Trust Corporation was created. This brought on the 

housing recession of 1990–91, and mortgage-backed securities became the primary 

source of capital to fund residential conventional loans. This is when Freddie Mac 

and Fannie Mae became dominant in housing finance. 

In 1995, I was asked to serve on the advisory board of Fannie Mae. In 1999, I 

was elected to Congress and stepped down as President of Northside Realty, which 

had grown into a residential brokerage company with 1,000 agents, 25 offices, 

11,000 annual home sales and volume exceeding $2 billion dollars. 

During my 33-year career in real estate, I experienced many challenges and difficult markets, but never anything like the current housing market in America. 

Even some 3 years after the initial collapse, our Nation is still facing a total collapse 

of new residential construction and development. The upcoming decline in mortgage 

loan limits on September 30th will only further exacerbate this problem and I encourage my colleagues to support the bipartisan Home ownership Affordability Act 

of 2011 which will extend, and not change, the current maximum loan limit of 

$729,750 for 2 years through December 31, 2013, for FHA, VA, and GSE insured 

home loans. These expirations will make a weak housing market even weaker, and 

it will make it harder for middle class home buyers in 42 States to get mortgages 

and buy homes when credit is already tight. 

According to a recent CoreLogic report, 10.9 million Americans who borrowed to 

buy their homes, or 22.7 percent of all homeowners with a mortgage nationwide, are 

underwater. Congress should allow those that are paying their payments on time 

and meeting their obligations to refinance at current interest rates to free up capital. 

Currently, interest rates for 30-year home mortgages remain at historically low 

levels—at 4.12 percent. Yet of the 27.5 million mortgages guaranteed by Fannie 

Mae and Freddie Mac, over 8 million still carry an interest rate at or above 6 percent. For the average homeowner—with a $150,000 loan—lowering the interest rate 

by 1.5 percent would save $1,600 a year. With up to two million additional borrowers refinancing, this would pump up to $3.2 billion annually into the economy. 

The Boxer-Isakson Helping Responsible Homeowners Act of 2011 is a bill which 

I strongly support. It will help up to two million nondelinquent homeowners refinance their mortgages at historically low interest rates by keeping them in their 

homes and boosting economic growth. 

To remove the barriers preventing responsible borrowers current on their payments from refinancing their loans, I encourage Fannie Mae and Freddie Mac to administratively: 

• Eliminate risk-based fees on loans for which Fannie and Freddie already bear 

the risk; 

• Remove refinancing limits on underwater properties; 

• Make it easier for borrowers with second mortgages to participate in refinancing programs; and 

• Require that borrowers are able to receive a fair interest rate, comparable to 

that received by any other current borrower who has not suffered a drop in 

home value. 

I was happy to hear that President Obama recognized the benefit of these refinancing provisions in his speech before congress last week and I, along with Senator 

Boxer, continue to urge that these changes be done administratively by Fannie Mae 

and Freddie Mac. By removing the barriers that have kept these nondelinquent 

homeowners trapped in higher interest rate loans, it would put thousands of dollars 

back in the pockets of struggling families and have a direct impact on the housing 

sector. 

Thank you. 

37 

1 National Association of Realtors (NAR) historical data. 

2 NAR Economic Outlook, September 2011; and Fannie Mae Housing Forecast, August 2011. 

3 ‘‘New CoreLogic Data Reveals Q2 Negative Equity Declines’’, Sept. 13, 2011; and Zillow Q2 

2011 Market Report, Aug. 9, 2011. 

PREPARED STATEMENT OF RICHARD A. SMITH 

CHIEF EXECUTIVE OFFICER, REALOGY CORPORATION

SEPTEMBER 14, 2011 

Introduction 

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

the Subcommittee. Thank you for the invitation to speak to you this afternoon regarding the state of the U.S. housing market. I am Richard A. Smith, the president 

and CEO of Realogy Corporation, a global provider of residential and commercial 

real estate franchise services, real estate brokerage, employee relocation and title 

insurance services. Our brands and business units include Better Homes and Gardens® Real Estate, Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, 

The Corcoran Group®, ERA®, Sotheby’s International Realty®, NRT, LLC, Cartus, 

and Title Resource Group. Collectively Realogy’s franchise system members operate 

approximately 14,400 offices, with operations in all 50 States and 100 countries and 

territories around the world. We are headquartered in New Jersey. 

State of Housing 

I will open my comments with the statement that in our view existing home sales 

appear to have essentially bottomed, and the national average sales price for existing homes is close to its low. New home sales have reached historic lows and may 

still see slight downside on both unit sales and average sale prices. 

From its peak at 8.3 million total new and existing home sale units in 2005 and 

an average national sales price of $271,000, the U.S. housing market steadily declined to 5.2 million total units in 2010 and an average national sales price of 

$223,000, 1 and thus far has recorded a peak-to-trough price correction of approximately 30 percent. This has been the worst housing correction on record. The 

headwinds of the past almost 6 years have been substantial and persistently stubborn. In spite of enormous challenges, we believe housing in the macro sense appears to have essentially stabilized for now, although at depressed levels. 

The current industry forecasts for full-year 2011 and 2012 call for annualized existing home sales in the range of 4.9 million to 5.1 million units, and the median 

sales price is expected to go from a range of down 3 percent to down 4 percent yearover-year in 2011 to between minus 1 percent and plus 2 percent in 2012. 2 Residential real estate values and home sales are historically determined by local market 

influences such as the local job market, population growth, quality of the schools, 

quality of life, and the features of the home relative to the local market. The macroeconomics have substantially influenced home sales during the past 6 years. Insomuch that housing activity is now beginning to vary market-by-market it appears 

that the microeconomics are beginning to overshadow the macroeconomics, which is 

certainly a good sign. 

The current housing market, although stabilized, is at depressed levels both in 

terms of sales and price. But the good news is we have a stabilizing market. The 

not-so-good news is that it is very fragile and only functioning for limited segments 

of the market. The make-up of the market is noticeably different than it was just 

5 years ago. The very high end of the market, characterized as all-cash buyers, has 

been very active representing a large percentage of sales in many of the major markets. The balance of the market has been dominated by first-time buyers and investors. The first-time buyer is compelled by historically low mortgage rates and unprecedented pricing. In many of our markets, take Florida as an example, more 

than 50 percent of our sales are all cash. The middle of the market, characterized 

by the move-up buyer, is noticeably absent. By most accounts about 25 percent of 

homeowners are ‘‘underwater’’ on their mortgages, 3 meaning that they have little 

to no equity and thus cannot sell their current house to ‘‘move up’’ to the next home. 

That has clearly had a major impact on national home sales. 

Investors, on the other hand, have a seemingly endless appetite for distressed and 

foreclosed homes. As one of the largest brokers of foreclosed homes in the United 

States, we currently have about 60 percent of our distressed inventory being sold 

to investors with the balance going to first-time buyers as owner-occupied homes. 

The investors are all-cash buyers and the first-time buyer is typically using FHA 

financing with less than a 20 percent downpayment. Our REO, or Real Estate 

Owned, inventory, which we believe is representative of the national foreclosed 

38 

4 Bureau of Labor Statistics, Table A-15. Alternative measures of labor underutilization, Sept. 

2, 2011. 

housing stock, is typically a 3-bedroom 2-bath home with 1,800 square feet. The list 

price is typically half the unpaid principal balance and sells within 80 days at 98 

percent to 99 percent of the list price. The typical buyer spends $10,000 to $16,000 

to prepare the home for occupancy. The market for foreclosed homes is very strong 

nationwide. 

Distressed property sales, often called short sales, involve a lender agreeing to accept a purchase price from a prospective buyer that is less than the remaining principal value of the mortgage. If accepted, the seller is often released from the obligation and the bank avoids the cost and the difficulties of a foreclosure. According to 

the most recent monthly survey information from the National Association of Realtors, distressed properties—meaning foreclosures and short sales typically sold at 

deep discounts—accounted for 29 percent of existing home sales in July. 

What are buyers experiencing? Mortgage lending, although available, is very difficult. Lenders are requiring unprecedented levels of disclosure and documentation. 

Appraisals are often conducted by inexperienced personnel with little to no local 

market experience often resulting in flawed value assessments, the outcome of 

which is a rejected loan. The market value is no longer determined by what the 

buyer and seller agrees is a fair price. It is now determined by an appraiser and 

often an inexperienced one at that. 

Renting is certainly in vogue for the moment and given the lack of consumer confidence and the extraordinarily high rates of unemployment, it is not a surprise. In 

most markets it is more cost effective to own as rents continue to escalate nationally 

at a rate of 5 percent to 7 percent. In New York City alone, where we are the largest 

rental broker, year-over-year rents will likely increase this year by 10 percent. Renting is not a long-term solution. In our view, home ownership continues to be the 

goal of most Americans. 

So what is holding back a housing recovery, and what are the solutions? Unfortunately there are no silver bullets. We believe the immediate issues are high unemployment, the persistent overhang of foreclosed properties, low consumer confidence 

and failed Government intervention programs. 

Jobs 

Unemployed and underemployed people do not buy homes. So for the purpose of 

housing, our focus is on the U.S. Bureau of Labor Statistics monthly underemployment report, which as of September is 16.2 percent, a staggering number. 4 When 

the full-time employment numbers rise, a housing recovery will follow, marked by 

pricing stability and the return of the move-up buyer. 

Foreclosures 

The Government’s repeated efforts to mitigate the foreclosure problem facing our 

country have done little but prolong the recovery. In our view, lenders should be 

permitted to accelerate foreclosures in the cases where reasonable efforts to avoid 

foreclosures have failed. A resold foreclosed house generates economic value and 

aids the process of stabilizing local market home values. Delaying the process has 

the opposite effect. The Government’s well-intentioned programs are burdened with 

extensive layers of red tape that have substantially limited the effectiveness of the 

effort. 

Short Sales 

A short sale, an agreement between a mortgage holder and a seller to accept a 

sale price that is less than the mortgage, could be an effective private sector solution. However, although short sales entail a much improved process compared to 

foreclosures, the process has been less effective in part because lenders are slow to 

respond to the purchase offer and a frustrated buyer moves on. Nevertheless, short 

sales should be encouraged as a superior alternative to foreclosure. 

Debt-for-Equity 

A debt-for-equity solution is a concept that we believe has merit for underwater 

homeowners as well as lenders and/or loan servicers. In place of foreclosure, a lender agrees to exchange the outstanding mortgage for a new loan with a lower principal and, equally as important, shares in the equity of the house. The homeowner 

agrees to maintain the house, stay current on the new loan and when the house 

is eventually sold the lender receives the proceeds from the retirement of the loan 

as well as its share of any appreciated value. The full description of the proposal 

is attached to our submitted comments as an addendum (see, Addendum 1, ‘‘Debtfor-Equity Solution for Underwater Homeowners’’). 

39 

Assumable Loans 

Mortgage rates are at historic lows and locking in those rates for the benefit of 

future buyers would stimulate current sales. Any Government-backed loan originated during the next 2 years should be assumable for the term of the loan. A new 

buyer would be required to qualify under current underwriting standards but would 

assume the historically low interest rate. We believe this provision should apply to 

any size loan that is Government guaranteed. 

Fannie Mae Rental Proposal 

Much has been said of late about a Fannie Mae proposal to convert foreclosed 

homes into affordable rental housing. Our experience with a similar effort has thus 

far proven ineffective and usually detrimental to neighborhoods. In the case of a 

similar effort in Florida, single-family homes in owner-occupied neighborhoods were 

rented at rates deeply discounted to the market rental rates. The result was lower 

local property values and high eviction rates. In one instance, 50 percent of the renters were evicted after 6 months. At least on the basis that has been described, we 

strongly oppose such a strategy. 

Refinance Programs 

The proposed expansion of the Home Affordable Refinance Program (HARP) program to encourage the refinancing of loans guaranteed by the U.S. Government, regardless of the lack of equity, will help reduce foreclosures and stabilize select housing markets in the near term. We caution, however, that an improved economy and 

value appreciation are essential to any long-term solution. Underwater equity today 

that remains underwater equity 5 years from now does little to improve the longterm state of housing. 

Loan Limits 

A reduction in conforming loan limits for Fannie Mae, Freddie Mac, and the FHA 

is scheduled to occur on October 1, 2011. It is often argued that higher loan limits 

only benefit higher-cost markets but that is not supported by the facts. The National 

Association of Realtors estimates that reducing the current loan limits would reduce 

the availability of mortgage loans in 612 counties in 40 States plus the District of 

Columbia. We believe the current loan limits should be extended for two or more 

years. 

National Flood Insurance 

The National Flood Insurance Program is the only source of insurance in the case 

of at least 500,000 annual home sales according to the National Association of Realtors. About 8 percent of the Nation’s housing inventory—or 10 million homes—is located in FEMA’s 100-year flood plains. Until such time that an alternative private 

market solution is available, the current National Flood Insurance Program must 

be extended in order to avoid the risk of another near term set-back for housing. 

Dodd-Frank 

The residential mortgage provisions of the Dodd-Frank Act will negatively impact 

housing, which we addressed in our formal reply to the Notice of Proposed Rulemaking released on March 29, 2011, specifically with respect to the proposed Qualified Residential Mortgage (QRM) and risk-retention criteria for securitization. As 

written, the proposed QRM definition focuses almost entirely on a minimum downpayment requirement. Had the proposed QRM definition’s 20 percent downpayment 

requirement been in effect in 2009, 2010 and 2011, then more than 70 percent of 

all home buyers would not have qualified for a mortgage that could be securitized, 

resulting in higher costs to the borrower. 

Realogy supports the position taken by the Coalition for Sensible Housing Policy 

that urges the redesign of QRM to make loans accessible to a broad range of creditworthy borrowers. The data is very clear that a 20 percent downpayment would be 

punitive to low- to moderate-income borrowers, clearly not an intended outcome. 

This requirement will make homes less affordable for the vast majority of the population that doesn’t have the means to make a 20 percent downpayment. The higher 

rates that low- to moderate-income borrowers will be forced to pay means that middle-class Americans who are otherwise prudent borrowers from an underwriting 

standpoint would be priced out of home ownership. That’s an unintended consequence waiting to happen, but it is avoidable. The focus should be on underwriting standards, the inadequacy of which caused this crisis, not on a minimum 

downpayment, which as best we can determine played little to no role in creating 

the current circumstances. 

Dodd-Frank requires that lenders retain 5 percent of the face value of the securities sold into the secondary market. The 5 percent retention rule, although clearly 

40 

well intentioned, will effectively limit the private mortgage market to those lenders 

with the balance sheets sufficient to commit such high amounts of capital. By some 

estimates, more than 75 percent of private lending would accrue to the top five 

FDIC lenders, further limiting the availability of mortgage financing. In our response to the request for public comments, Realogy outlined an alternative proposal 

that we labeled an ‘‘Enhanced Disclosure Approach’’, requiring extensive loan portfolio data that surpasses any previous SEC requirement (see, Addendum 2, 

‘‘Realogy’s Comments to Regulators Regarding Dodd-Frank Mortgage Rules’’, July 

22, 2011). The required disclosures would provide prospective residential mortgagebacked securities investors with data that provides a thorough and transparent risk 

profile of the securities (and the underlying mortgage portfolio). Independent of rating agencies, investors will be better able to evaluate the risks and the quality of 

the investment. We believe the Enhanced Disclosure Approach is far more effective 

than the proposed retention/QRM provisions of Dodd-Frank. 

GSE Reform 

The uncertainty regarding the future of the GSEs and the onerous provisions of 

Dodd-Frank are contributing to the headwinds preventing a housing recovery. The 

Federal Government’s role in the housing finance industry is institutionalized and 

will not change easily. Those advocating no Government role fail to adequately appreciate the circumstances that originally created Fannie Mae and Freddie Mac. 

Both were created to support housing finance when the private markets completely 

shut down, just as they did in 2008. 

A pure private sector solution is not practical unless Congress is willing to accept 

extended periods of time during which home mortgage financing would not be available. In addition, it is also very unlikely that the 30-year fixed conventional mortgage would survive in a purely private market, resulting in almost exclusively variable rate mortgages with higher rates, which is a less than desirable outcome for 

millions of American families. 

We have proposed a solution that consolidates all Federal Government home lending—VA, FHA, U.S. Department of Agriculture, etc.—into a restructured Fannie 

Mae and spins off Freddie Mac to the private sector, in effect reducing its capacity 

and role, paving the way for a stronger private sector. Redundant costs would be 

eliminated, streamlining the Federal Government’s role in home lending. Fannie 

Mae would continue to operate as the Government guarantor, and, when necessary, 

as the market maker in times of economic stress. The U.S. Government would take 

warrants in Freddie Mac, and in the event it is acquired and/or taken public, the 

U.S. taxpayer would recoup some or all of its value. 

Closing Comments 

In summary, it is noteworthy that when housing sales improved in the first two 

quarters of last year as a result of the Homebuyer Tax Credit, we clearly saw the 

economy begin to follow an upward trend in the third and fourth quarters. Likewise, 

once housing sales declined in the third and fourth quarters of 2010, the effect on 

the economy was visible as GDP fell noticeably in the first and second quarters of 

2011. 

That said, housing will recover when unemployment and underemployment decline and consumer confidence is restored. Private sector alternatives to foreclosure 

should be encouraged but when they fail, lenders must be permitted to expeditiously 

pursue their legal rights under the applicable foreclosure laws and regulations. Prolonging the inevitable is not helpful to the housing market or the economy. And last, 

but certainly not least, GSE reform and Dodd-Frank entail major structural issues 

that must be approached with great care and caution. 

Thank you again for the opportunity to appear before this Committee. 

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1Denk, Dietz, and Crowe, ‘‘Pent-up Housing Demand: The Household Formations That Didn’t 

Happen—Yet’’, National Association of Home Builders. February 2011. 

PREPARED STATEMENT OF MARK A. CALABRIA 

DIRECTOR, FINANCIAL REGULATION STUDIES, CATO INSTITUTE

SEPTEMBER 14, 2011 

Chairman Menendez, Ranking Member DeMint, and distinguished Members of 

the Subcommittee, I thank you for the invitation to appear at today’s important 

hearing. I am Mark Calabria, Director of Financial Regulation Studies at the Cato 

Institute, a nonprofit, nonpartisan public policy research institute located here in 

Washington, DC. Before I begin my testimony, I would like to make clear that my 

comments are solely my own and do not represent any official policy positions of 

the Cato Institute. In addition, outside of my interest as a citizen, homeowner and 

taxpayer, I have no direct financial interest in the subject matter before the Committee today, nor do I represent any entities that do. 

State of the Housing Market 

The U.S. housing market remains weak, with both homes sales and construction 

activity considerably below trend. Despite sustained low mortgage rates, housing activity has remained sluggish in the first half of 2011. Although activity will likely 

be above 2010 levels, 2011 is expected to fall below 2009 levels and is unlikely to 

reach levels seen during the boom for a number of years. In fact I believe it will 

be at least until 2014 until we see construction levels approach those of the boom. 

As other witnesses are likely to provide their economic forecasts of housing activity, 

which are generally within the consensus estimates, I will not repeat that exercise 

here. 

Housing permits, on an annualized basis, decreased 3.2 percent from June to July 

(617,000 to 597,000). While permits for both single family units and smaller multifamily units increased slightly, the overall decline in housing permits was driven 

by an 11.9 percent decline in permits for larger multifamily properties (5+ units). 

Single family permits increased from 402,000 to 404,000 in July. Permits for 2–4 

unit properties climbed to the highest level of the year (21,000 to 22,000) in July. 

Permits for 5+ units dropped to 171,000 in July from 194,000 in June. 

According to the Census Bureau, July 2011 housing starts were at a seasonally 

adjusted annual rate of 604,000, down slightly from the June level of 613,000. Overall starts are slightly up, on an annualized level, from 2010’s 585,000 units. This 

increase, however, is completely driven by a jump in multifamily starts, as singlefamily starts witnessed a significant decline. Total residential starts continue to 

hover at levels around a third of those witnessed during the bubble years of 2003 

to 2004. 

As in any market, prices and quantities sold in the housing market are driven 

by the fundamentals of supply and demand. The housing market faces a significant 

oversupply of housing, which will continue to weigh on both prices and construction 

activity. The Federal Reserve Bank of New York estimates that oversupply to be approximately 3 million units. Given that annual single family starts averaged about 

1.3 million over the last decade, it should be clear that despite the historically low 

current level of housing starts, we still face a glut of housing. NAHB estimates that 

about 2 million of this glut is the result of ‘‘pent-up’’ demand, leaving at least a million units in excess of potential demand. 1 Add to that another 1.6 million mortgages 

that are at least 90 days late. My rough estimate is about a fourth of those are more 

than 2 years late and will most likely never become current. 

The Nation’s oversupply of housing is usefully documented in the Census Bureau’s Housing Vacancy Survey. The boom and bust of our housing market has increased the number of vacant housing units from 15.6 million in 2005 to a current 

level of 18.7 million. The rental vacancy rate for the 2nd quarter of 2011 declined 

considerably to 9.2 percent, although this remains considerably above the historic 

average. The decline in rental vacancy rates over the past year has been driven 

largely by declines in suburban rental markets. Vacancy rates for both rental and 

homeowner units remain considerably higher for new construction relative to existing units. 

The homeowner vacancy rate, after increasing from the 2nd and 3rd quarters of 

2010 to the 4th quarter of 2010, declined to 2.5 percent in the 2nd quarter of 2011, 

a number still in considerable excess of the historic average. 

The homeowner vacancy rate, one of the more useful gauges of excess supply, differs dramatically across metro areas. At one extreme, Orlando has an owner vacancy rate approaching 6 percent, whereas Allentown, PA, has a rate of 0.5 percent. 

64 

2 Edward Glaeser and Joseph Gyourko, ‘‘The Case Against Housing Price Supports’’, Economists’ Voice, October 2008. 3 Also see, Robert Shiller, ‘‘Unlearned Lessons From the Housing Bubble’’, Economists’ Voice, 

July 2009. 

Other metro with excessive high owner vacancy rates include: Toledo, OH (5.5), Las 

Vegas (5.1), Raleigh, NC (5.0), Riverside, CA, and Jacksonville, FL. Relatively tight 

owner markets include: Springfield, MA (0.7), San Jose, CA (0.9), and Honolulu, HI 

(1.0). 

The number of vacant for sale or rent units has increased, on net, by around 1 

million units from 2005 to 2011. Of equal concern is that the number of vacant units 

‘‘held off the market’’ has increased by about 1.5 million since 2005. In all likelihood, 

many of these units will re-enter the market once prices stabilize. 

The 2nd quarter 2011 national home ownership rate fell to 65.9 percent, the first 

time it broken the floor of 66 percent since 1997, effectively eliminating all the gain 

in the home ownership rate over the last 12 years. Declines in the home ownership 

rate were the most dramatic for the youngest homeowners, while home ownership 

rates for those 55 and over were stable or saw only minor declines. This should not 

be surprising given that the largest increase in home ownership rates was among 

the younger households and that such households have less attachment to the labor 

market than older households. Interestingly enough, the percentage point decline in 

home ownership was higher among households with incomes above the median than 

for households with incomes below the median. 

While home ownership rates declined across the all Census Regions, the steepest 

decline was in the West, followed by the Northeast. The South witnessed the smallest decline in home ownership since the bursting of the housing bubble. 

Homeowner vacancy rates differ dramatically by type of structure, although all 

structure types exhibit rates considerably above historic trend levels. For 2nd quarter 2011, single-family detached homes displayed an owner vacancy rate of 2.2 percent, while owner units in buildings with 10 or more units (generally condos or coops) displayed an owner vacancy rate of 8.7 percent. Although single-family detached constitute 95 percent of owner vacancies, condos and co-ops have been impacted disproportionately. Interestingly enough, over the last year homeowner vacancy rates have been stable for single-family structures, but have declined, albeit 

from a much higher level. 

Owner vacancy rates tend to decrease as the price of the home increases. For 

homes valued under $150,000 the owner vacancy rate is 3.1 percent, whereas homes 

valued over $200,000 display vacancy rates of about 1.4 percent. The vast majority, 

almost 75 percent, of vacant owner-occupied homes are valued at $300,000 or less. 

Owner vacancy rates are also the highest for the newest homes, with new construction displaying vacancy rates twice the level observed on older homes. 

While house prices have fallen considerably since the market’s peak in 2006—over 

23 percent if one excludes distressed sales, and about 31 percent including all 

sales—housing in many parts of the country remains expensive, relative to income. 

At the risk of oversimplification, in the long run, the size of the housing stock is 

driven primarily by demographics (number of households, family size, etc.), while 

house prices are driven primarily by incomes. Due to both consumer preferences and 

underwriting standards, house prices have tended to fluctuate at a level where median prices are approximately 3 times median household incomes. Existing home 

prices, at the national level, are close to this multiple. In several metro areas, however, prices remain quite high relative to income. For instance, in San Francisco, 

existing home prices are almost 8 times median metro incomes. Despite sizeable decline, prices in coastal California are still out of reach for many families. Prices in 

Florida cities are generally above 4 times income, indicating they remain just above 

long-run fundamentals. In some bubble areas, such as Phoenix and Las Vegas, 

prices are below 3, indicating that prices are close to fundamentals. Part of these 

geographic differences is driven by the uneven impact of Federal policies. 

Household incomes place a general ceiling on long-run housing prices. Production 

costs set a floor on the price of new homes. As Professors Edward Glaeser and Joseph Gyourko have demonstrated, 2 housing prices have closely tracked production 

costs, including a reasonable return for the builder, over time. In fact the trend has 

generally been for prices to about equal production costs. In older cities, with declining populations, productions costs are often in excess of replacement costs. After 

2002, this relationship broken down, as prices soared in relation to costs, which also 

included the cost of land. 3 As prices, in many areas, remain considerably above production costs, there is little reason to believe that new home prices will not decline 

further. 

65 

It is worth noting that existing home sales in 2010 were only 5 percent below 

their 2007 levels, while new home sales are almost 60 percent below their 2007 

level. To a large degree, new and existing homes are substitutes and compete 

against each other in the market. Perhaps the primary reason that existing sales 

have recovered faster than new, is that price declines in the existing market have 

been larger. Again excluding distressed sales, existing home prices have declined 23 

percent, whereas new home prices have only declined only about 10 percent. I believe this is clear evidence that the housing market works just like other markets: 

the way to clear excess supply is to reduce prices. 

State of the Mortgage Market 

According to the Mortgage Bankers Association’s National Delinquency Survey, 

the delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 8.44 percent of all loans outstanding for the 

end of the 2nd quarter 2011, 12 basis points up from 1st quarter 2011, but down 

141 basis points from 1 year ago. 

The percentage of mortgages on which foreclosure proceedings were initiated during the second quarter was 0.96 percent, 12 basis points down from 2001 Q1 and 

down 15 basis points from 2010 Q2. The percentage of loans in the foreclosure process at the end of the 2nd quarter was 4.43 percent, down slightly at 9 basis points 

from 2011 Q1 and 14 basis points lower than 2010 Q2. The serious delinquency rate, 

the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.85 percent, a decrease of 25 basis points from 2011 Q1, and a decrease of 126 basis points from 2010 Q2. 

The combined percentage of loans in foreclosure or at least one payment past due 

was 12.54 percent on a nonseasonally adjusted basis, a 23 basis point increase from 

2011 Q1, but was 143 basis points lower than 2010 Q2. 

Mortgage Policies 

For those who can get a mortgage, rates remain near historic lows. These lows 

rates, however, are not completely the outcome of the market, but are driven, to a 

large degree, by Federal policy interventions. Foremost among these interventions 

is the Federal Reserve’s current monetary policy. Of equal importance is the transfer of almost all credit risk from market participants to the Federal taxpayer, via 

FHA and the GSEs. Given massive Federal deficits as far as the eye can see, and 

the already significant cost of rescuing Fannie Mae and Freddie Mac, policy makers 

should be gravely concerned about the risks posed by the current situation in our 

mortgage markets. Immediate efforts should be made to reduce the exposure of the 

taxpayer. 

In transitioning from a Government-dominated to market-driven mortgage system, we face the choice of either a gradual transition or a sudden ‘‘big bang.’’ While 

I am comfortable with believing that the remainder of the financial services industry could quickly assume the functions of Fannie Mae and Freddie Mac, I recognize 

this is a minority viewpoint. Practical politics and concern as to the state of the 

housing market point toward a gradual transition. The question is then, what form 

should this transition take? One element of this transition should be a gradual, 

step-wise reduction in the maximum loan limits for the GSEs (and FHA). 

If one assumes that higher income households are better able to bear increases 

in their mortgage costs, and that income and mortgage levels are positively correlated, then reducing the size of the GSEs’ footprint via loan limit reductions would 

allow those households best able to bear this increase to do so. As tax burden and 

income are also positively correlated, the reduction in potential tax liability from a 

reduction in loan limits should accrue to the very households benefited most by such 

a reduction. 

Moving beyond issues of ‘‘fairness’’—in terms of who should be most impacted by 

a transition away from the GSEs—is the issue of capacity. According to the most 

recent HMDA data (2009), the size of the current jumbo market (above $729k) is 

approximately $90 billion. Reducing the loan limit to $500,000 would increase the 

size of the jumbo market to around $180 billion. Since insured depositories have excess reserves of over $1 trillion, and an aggregate equity to asset ratio of over 11 

percent, it would seem that insured depositories would have no trouble absorbing 

a major increase in the jumbo market. 

Given that the Mortgage Banker Association projects total residential mortgage 

originations in 2011 to be just under $1 trillion, it would appear that insured depositories could support all new mortgages expected to be made in 2011 with just 

their current excess cash holdings. While such an expansion of lending would require capital of around $40 billion, if one is to believe the FDIC, then insured deVerDate Nov 24 2008 12:50 May 17, 2012 Jkt 048080 PO 00000 Frm 00069 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\09-14 PM DISTILLER\91411PM.TXT JASON
66 

positories already hold sufficient excess capital to meet all new mortgage lending 

in 2011. 

Moving more of the mortgage sector to banks and thrifts would also insure that 

there is at least some capital behind our mortgage market. With Fannie, Freddie, 

and FHA bearing most of the credit risk in our mortgage market, there is almost 

no capital standing between these entities and the taxpayer. 

The bottom line is that reducing the conforming loan limit to no more than $500,000, if not going immediately back to $417,000, would represent a fair, equitable and feasible method for transitioning to a more private-sector driven mortgage 

system. Going forward, the loan limit should be set to fall by $50,000 each year. 

As this change could be easily reversed, it also represents a relatively safe choice. 

Reducing the competitive advantage of Fannie Mae and Freddie Mac via a mandated increase in their guarantee fees would both help to raise revenues while also 

helping to ‘‘level the playing field’’ in the mortgage market. Given that the Federal 

taxpayer is covering their losses and backing their debt, along with the suspension 

of their capital requirements, no private entity can compete with Fannie Mae and 

Freddie Mac. We will never be able to move to a more private market approach 

without reducing, if not outright removing, these taxpayer-funded advantages. 

An increase in the GSE guarantee fee could also be used to recoup some of the 

taxpayer ‘‘investment’’ in Fannie Mae and Freddie Mac. Section 134 of the Emergency Economic Stabilization Act of 2008, better known as the TARP, directed the 

President to submit a plan to Congress for recoupment for any shortfalls experienced under the TARP. Unfortunately the Housing and Economic Recovery Act of 

2008, which provided for Federal assistance to the GSEs, lacked a similar requirement. Now is the time to rectify that oversight. Rather than waiting for a Presidential recommendation, Congress should establish a recoupment fee on all mortgages purchased by Fannie Mae and Freddie Mac. Such a fee would be used directly 

to reduce the deficit and be structured to recoup as much of the losses as possible. 

I would recommend that the recoupment period be no longer than 15 years and 

should begin immediately. A reasonable starting point would be 1 percentage point 

per unpaid principal balance of loans purchased. Such as sum should raise at least 

$5 billion annually and should be considered as only a floor for the recoupment fee. 

In any discussion regarding costs in our mortgage market, we must never forget 

that homeowners and home buyers are also taxpayers. Using either current taxes 

or future taxes (via deficits) to fund subsidies in the housing market reduces household disposable income, which also reduces the demand for housing. None of the 

subsidies provided to the housing and mortgage markets are free. They come at 

great costs, which should be included in any evaluation of said subsidies. 

Contribution of Federal Policy 

Federal Government interventions to increase house prices, including Federal Reserve monetary and asset purchases, have almost exclusively relied upon increasing 

the demand for housing. The problem with these interventions is they have almost 

the opposite impact between markets where supply remains tight and those markets 

with a housing glut. In areas where housing supply is inelastic, that is relatively 

unresponsive (often the result of land use policies), these programs have indeed 

slowed price declines. Areas where supply is elastic, where building is relatively 

easy, have instead seen an increase in supply, rather than price. For these areas 

the increase in housing supply will ultimately depress prices even further. 

A comparison of San Diego, CA, and Phoenix, AZ, illustrates the point. Both are 

of similar population (2.5 million for Sand Diego, 2.2 million for Phoenix), and both 

witnessed large price increases during the bubble. Yet the same Federal policies 

have drawn different supply and price responses. In 2010, about 8,200 building permits were issued for the greater Phoenix area; whereas only about 3,500 were 

issued for San Diego. Existing home prices (2010) in Phoenix fell over 8 percent, 

whereas prices in San Diego actually grew by 0.6 percent. This trend is compounded 

by the fact that prices are almost three times higher in San Diego than in Phoenix. 

The point is that Federal efforts to ‘‘revive’’ the housing market are sustaining 

prices in the most expensive markets, while depressing prices in the cheapest markets, the opposite of what one would prefer. As home prices are correlated positively 

with incomes, these policies represent a massive regressive transfer of wealth from 

poorer families to richer. 

Among policy interventions, the Federal Reserve’s interest rates policies are perhaps having the worst impact. It is well accepted in the urban economics and real 

estate literature that house prices decline as distances from the urban core increase. 

It is also well accepted that the relative price of urban versus suburban house prices 

is influenced by transportation costs. For instance, an increase in the price of gas, 

will, all else equal, lower the price of suburban homes relative to urban. If loose 

67 

monetary policy adds to increases in fuel prices, which I believe it has, then such 

monetary policies would result in a decline in suburban home prices relatives to 

urban. One can see this dynamic play out in California. In general, prices in central 

cities and urban cores, have witnessed only minor declines or actual increases over 

the last year. According to the California Association of Realtors, overall State 

prices are down just 2 percent from January 2010 to January 2011. Yet prices in 

the inland commuting counties—Mariposa (-27 percent), San Benito (-14 percent), 

Butte (-29 percent), Kings (-16 percent), Tulare (-16 percent)—are witnessing the 

largest declines, in part driven by increases in commuting (gas) costs. 

Foreclosure Mitigation and the Labor Market 

There is perhaps no more important economic indicator than unemployment. The 

adverse impacts of long-term unemployment are well known, and need not be repeated here. Although there is considerable, if not complete, agreement among 

economists as to the adverse consequences of jobless; there is far less agreement as 

to the causes of the currently high level of unemployment. To simplify, the differing 

explanations, and resulting policy prescriptions, regarding the current level of unemployment fall into two categories: (1) unemployment as a result of lack of aggregate demand, and (2) unemployment as the result of structural factors, such as 

skills mismatch or perverse incentives facing the unemployed. As will be discussed 

below, I believe the current foreclosures mitigation programs have contributed to 

the elevated unemployment rate by reducing labor mobility. The current foreclosures mitigation programs have also helped keep housing prices above marketclearing levels, delaying a full correction in the housing market. 

First we must recognize something unusual is taking place in our labor market. 

If the cause of unemployment was solely driven by a lack of demand, then the unemployment rate would be considerably lower. Both GDP and consumption, as 

measured by personal expenditures, have returned to and now exceed their precrisis 

levels. But employment has not. Quite simply, the ‘‘collapse’’ in demand is behind 

us and has been so for quite some time. What has occurred is that the historical 

relationship between GDP and employment (which economists call ‘‘Okun’s Law’’) 

has broken down, questioning the ability of further increases in spending to reduce 

the unemployment rate. Also indicative of structural changes in the labor market 

is the breakdown in the ‘‘Beveridge curve’’—that is the relationship between unemployment and job vacancies. Contrary to popular perception, job postings have been 

steadily increasing over the last year, but with little impact on the unemployment 

rate. 

Historically many job openings have been filled by workers moving from areas of 

the country with little job creation to areas with greater job creation. American history has often seen large migrations during times of economic distress. And while 

these moves have been painful and difficult for the families involved, these same 

moves have been essential for helping the economy recover. One of the more interesting facets of the recent recession has been a decline in mobility, particular among 

homeowners, rather than an increase. Between 2008 and 2009, the most recent Census data available, 12.5 percent of households moved, with only 1.6 moving across 

State lines. Corresponding figures for homeowners is 5.2 percent and 0.8 percent 

moving across State lines. This is considerably below interstate mobility trends witnessed during the housing boom. For instance from 2004 to 2005, 1.5 percent of 

homeowners moved across State lines, almost double the current percentage. Interestingly enough the overall mobility of renters has barely changed from the peak 

of the housing bubble to today. This trend is a reversal from that witnessed after 

the previous housing boom of the late 1980s burst. From the peak of the bubble in 

1989 to the bottom of the market in 1994, the percentage of homeowners moving 

across State lines actually increased. 

The preceding is not meant to suggest that all of the declines in labor mobility, 

or increase in unemployment, is due to the foreclosure mitigation programs. Far 

from it. Given the many factors at work, including the unsustainable rate of home 

ownership, going into the crisis, it is difficult, if not impossible, to estimate the exact 

contribution of the varying factors. We should, however, reject policies that encourage homeowners to remain in stagnant or declining labor markets. This is particularly important given the fact that unemployment is the primary driver of mortgage 

delinquency. 

Conclusion 

The U.S. housing market is weak and is expected to remain so for some time. 

Given the importance of housing in our economy, the pressure for policy makers to 

act has been understandable. Policy should, however, be based upon fostering an 

unwinding of previous unbalances in our housing markets, not sustaining said 

68 

unbalances. We cannot go back to 2006, and nor should we desire to. As the size 

and composition of the housing stock are ultimately determined by demographics, 

something which policy makers have little influence over in the short run, the housing stock must be allowed to align itself with those underlying fundamentals. Prices 

should also be allowed to move towards their long run relationship with household 

incomes. Getting families into homes they could not afford was a major contributor 

to the housing bubble. We should not seek to repeat that error. We must also recognize that prolonging the correction of the housing market makes the ultimate adjustment worse, not better. Lastly it should be remembered that one effect of boosting prices above their market-clearing levels is the transfer of wealth from potential 

buyers (renters) to existing owners. As existing owners are, on average, wealthier 

than renters, this redistribution is clearly regressive. 

69 

PREPARED STATEMENT OF IVY ZELMAN 

CHIEF EXECUTIVE OFFICER, ZELMAN & ASSOCIATES

SEPTEMBER 14, 2011 


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1The Mortgage Bankers Association (MBA) is the national association representing the real 

estate finance industry, an industry that employs more than 280,000 people in virtually every 

community in the country. Headquartered in Washington, DC, the association works to ensure 

the continued strength of the Nation’s residential and commercial real estate markets; to expand 

home ownership and extend access to affordable housing to all Americans. MBA promotes fair 

and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 2,200 companies includes all elements of real estate finance: mortgage companies, 

mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and 

others in the mortgage lending field. For additional information, visit MBA’s Web site: 

www.mortgagebankers.org. 

PREPARED STATEMENT OF DAVID STEVENS 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, MORTGAGE BANKERS ASSOCIATION

SEPTEMBER 14, 2011 

I. Introduction 

Chairman Menendez, Ranking Member DeMint, and Members of the Subcommittee, thank you for the opportunity to provide this statement on behalf of the 

Mortgage Bankers Association (MBA) 1 on the occasion of this hearing on new ideas 

for refinancing and restructuring mortgage loans. My name is David Stevens and 

I am MBA’s President and Chief Executive Officer. Immediately prior to assuming 

this position, I served as Assistant Secretary for Housing at the U.S. Department 

of Housing and Urban Development (HUD) and Federal Housing Administration 

(FHA) Commissioner. 

My background prior to joining FHA includes experience as a senior executive in 

finance, sales, mortgage acquisitions and investments, risk management, and regulatory oversight. I started my professional career with 16 years at World Savings 

Bank. I later served as Senior Vice President at Freddie Mac and as Executive Vice 

President at Wells Fargo. Prior to my confirmation as FHA Commissioner, I was 

President and Chief Operating Officer of Long and Foster Companies, the Nation’s 

largest, privately held real estate firm. 

We all know there is plenty of blame to go around for the mistakes made in getting to where we are today. Rating agencies overrated bonds; Fannie Mae and 

Freddie Mac relaxed the terms of their loan requirements; insurers provided credit 

enhancements to loans that were not creditworthy; borrowers falsified key credit 

characteristics like income, employment and occupancy status; lenders relied on 

overly optimistic property appreciation assumptions; servicers were ill-prepared to 

address significant loan performance and volume shifts, and so on. Although I have 

said this publicly many times, it bears repeating—mortgage lenders need to take responsibility for their share of excesses during the recent housing boom. Since the 

market collapsed in 2008, we have had to face some basic, if unpleasant truths— 

some people who were given loans should not have received them. And as an industry we excused, or at least overlooked, the unethical people and practices, and the 

perverse incentives that motivated them. 

I am encouraged by the fact that the focus of today’s hearing is toward the future 

and the role that private capital can play in recovering from this extraordinary collapse of the housing market. MBA is grateful for the variety of relief efforts undertaken by Congress and two Administrations to bolster the markets such as the 

Home Affordable Refinance Program (HARP), first-time home buyer tax credits, and 

the Hardest Hit Funds. Clearly, the challenge is greater than these programs could 

support on their own. The private sector also has risen to the challenge of assisting 

borrowers in need by refinancing approximately four million mortgages—five times 

as many as all Federal programs combined. This is why MBA believes a long-term 

sustainable remedy will only come from a return of private capital to the housing 

finance sector. 

Unfortunately, significant, but not insurmountable, obstacles are preventing sufficient levels of private capital from returning to the market. But I am convinced 

these obstacles can be overcome and we will eventually be able to replace the Federal Government with private investors as the primary source of housing finance liquidity. MBA recognizes that our ability to affect change depends on rebuilding 

badly shaken trust by restoring credibility, transparency and integrity to our industry. 

I also want to highlight the fact, as shown in recent MBA data on delinquencies 

and foreclosures, that the foreclosure overhang is heavily concentrated in just a 

handful of States. This has important policy implications because more aggressive 

measures may be required in some areas, while they may not be needed in others. 

For example, bulk sales of real estate owned (REO) properties may be necessary and 

88 

helpful in severely impacted markets, but may be harmful in markets that are currently muddling through. Different prescriptions may be needed in different geographies. 

In my remarks below, I will identify what MBA views as the primary obstacles 

to a more robust level of housing finance transactions. I will then offer possible solutions with which they can be overcome. 

II. Obstacles to Recovery 

Obstacle 1: High Unemployment 

In his address to Congress last week, the President acknowledged that the number one impediment to an economic recovery is the current jobs situation. MBA 

looks forward to learning more about the Administration’s proposed solutions. In the 

meantime, I would like to amplify the President’s concerns by providing context to 

the relationship between today’s high unemployment rate and low real estate finance activity. 

• Economic growth was disappointingly slow in the first half of 2011, and job 

growth essentially halted during the summer. 

• The unemployment rate remained stuck at 9.1 percent as of August, as no new 

jobs were created during the month. Private sector job growth remains weak, 

while State and local governments continue to cut back employees. 

• MBA expects the unemployment rate to be little changed through the remainder of 2011, and only slight declines in the unemployment rate in 2012, decreasing to 8.8 percent by the end of 2012. 

• MBA forecasts economic growth to run at 1.3 percent for 2011, and 2.2 percent 

for 2012—barely enough to bring down the unemployment rate over time. 

• On the housing front, we expect the purchase market will remain slow. In 

short, the key obstacle to a more robust market continues to be unemployment. 

Obstacle 2: Conflicting Policy Objectives 

Another obstacle to a sustained economic recovery is the numerous conflicts that 

exist for policy makers. For example, as conservator of Fannie Mae and Freddie 

Mac, the Federal Housing Finance Agency (FHFA) has a duty to preserve the value 

of these two Government sponsored enterprises (GSEs). However, using the GSEs 

as vehicles to support the housing recovery could further jeopardize their long-term 

viability. 

It is well-recognized that the mortgage market is functioning today because of 

heavy Government support—a position that is neither sustainable nor desirable 

long-term. Providing borrower relief through the GSEs or existing Government 

channels could make it even harder for that to change. 

Nevertheless, MBA believes it is possible for the GSEs to increase their support 

for housing finance without significantly impacting their safety and soundness profile. For example, MBA believes the GSEs could expand their lending guidelines, or 

the origination deadline for HARP-qualification could be extended. Specific consideration should be given to maintaining the existing conforming loan limits in high cost 

areas. 

Obstacle 3: Regulatory Uncertainty 

We also recognize that changes are needed to ensure such excesses will not be 

repeated in the future. Nevertheless, the continuing onslaught of regulations and 

supervisory actions, all targeting the mortgage industry, are doing more harm than 

good to the mortgage market, and are clouding the future of our business. The sheer 

quantity of new rules under consideration is placing great stress on lenders, particularly smaller lenders who serve communities throughout the Nation every day. 

Lenders are scaling back the number of production employees as business declines, 

but are offsetting those cuts with new compliance hires. This unfortunate allocation 

of resources runs counter to any hope of recovery in the housing sector. 

The avalanche of regulations triggered by passage of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (Dodd-Frank) is intended to ensure that no 

single financial institution becomes too big to fail; it also has spawned concerns 

about being too small to comply, raising the very real possibility that borrowers may 

ultimately suffer from decreased credit availability and the economic inefficiencies 

of a less competitive market. For example, rules to implement Dodd-Frank’s risk retention and ‘‘ability to repay’’ frameworks have yet to be finalized. Unless both of 

these overlapping frameworks are resolved with clear and specific safe harbors, uncertainty will persist in the housing finance markets. Evidence from Securities and 

Exchange Commission (SEC) filings from Real Estate Investment Trusts (REITs) 

and other hedge funds suggest an increasing level of interest in the housing market 

89 

from private investors. Unfortunately, these investors have expressed a willingness 

to either refrain from participation or impose an ‘‘uncertainty premium’’ until the 

level of regulatory ambiguity dissipates. 

Obstacle 4: Repurchase and Litigation Risk 

Another key obstacle that prevents many qualified borrowers from being able to 

refinance is the loan repurchase demands made by the GSEs to lenders. These repurchase demands are based on representations and warranties (reps and warrants) 

to the GSEs when lenders sell the loan to them. These reps and warrants certify 

that the lenders have met the investors’ standards on the loans, covering items like 

property valuation, and borrower characteristics such as income, employment status, assets and liabilities, and required documentation to evidence these. 

Under normal circumstances, if a loan goes into default, the GSE may demand 

that the originator repurchase the loan if the originator cannot prove the loan was 

adequately underwritten. Nowadays, the GSEs are reportedly using repurchase requests to manage their own performance profile by requiring lenders to buy back 

loans even though the rep and warrant breach was unrelated to the performance 

of the loan. 

Additionally, refinancing a loan extinguishes the original loan’s reps and warrants 

and subjects the refinancing lender to a new set of reps and warrants. As a result, 

few lenders are willing to accept the rep and warrant risk on refinancing a higherrisk loan, even one with a reasonably clear payment history and existing GSE guaranty. This is because the GSEs consider a newly refinanced loan that defaults in 

the first 6 months an ‘‘early payment default’’ and subject to repurchase regardless 

of the payment history of the original loan. 

MBA believes legitimate repurchase requirements are an effective means of holding originators accountable for the quality of the loans they underwrite. However, 

MBA believes originators should not be held accountable for the performance of a 

loan if it met the GSEs’ guidelines and all applicable laws and regulations, but 

failed due to changing economic circumstances. In light of the elevated repurchase 

activity from the GSEs recently, MBA anticipates that lenders will remain concerned about underwriting new mortgages, even if they are already guaranteed by 

Fannie Mae and Freddie Mac. All lenders are necessarily cautious with respect to 

protecting their capital base given the widespread uncertainties in this environment. 

For these reasons, MBA believes policy makers should consider setting a clear 

limit on the duration of an originator’s repurchase obligation following the origination date. 

Policy makers also should be mindful that litigation and penalties to make reparations for past mistakes reduce the availability of funds to extend to borrowers 

in the future. The ultimate impact of both increased litigation and repurchase activity could be lenders holding back capital to hedge against growing litigation and repurchase risk, liquidity that is needed not just for mortgages, but for all sorts of 

lending that helps drive investment in the economy and creates jobs. 

Obstacle 5: Inconsistent Foreclosure Regimes 

Foreclosures continue to be highly concentrated in just a few States. According to 

MBA’s National Delinquency Survey, in the second quarter of 2011 five States accounted for 52 percent of the Nation’s foreclosure inventory. The single biggest factor determining whether or not a State has a large backlog of foreclosures is whether the State has a judicial foreclosure system, meaning whether or not a foreclosure 

needs to go through the courts. In nonjudicial States, foreclosures can proceed much 

more quickly simply because the procedure is not limited by available court dates. 

Moreover, the process tends to be less cumbersome. Particularly during this downturn, judicial States have been overwhelmed by a backlog of foreclosure cases, while 

nonjudicial States have been able to process the volume much more quickly. In the 

second quarter of 2011, of the nine States that had foreclosure inventory rates above 

the national average, eight have judicial regimes. The only exception was Nevada, 

which has been particularly hard hit. 

One of the reasons the percentage of loans in foreclosure in California (3.6 percent) is considerably lower than States like Florida (14.4 percent), New Jersey (8.0 

percent), Illinois (7.0 percent), and New York (5.5 percent) is that California has a 

nonjudicial foreclosure system. Therefore, as we work toward resolving the foreclosure overhang in the housing market, we should be careful to distinguish between the economic impediments to resolution and the legal impediments to resolution. 

90 

Obstacle 6: Excess Housing Inventory 

Today the Nation faces a disproportionately large inventory of homes in the face 

of weak market demand. As of July 2011, there were roughly 3.8 million new and 

existing homes for sale representing a combined total of 9 months’ supply. These 

numbers do not include the so-called shadow inventory of properties with owners 

who are significantly behind on their mortgages. These properties will likely come 

on the market in the upcoming months as distressed sales, short sales, foreclosure 

auctions, or as bank-owned properties. MBA estimates that this shadow inventory 

of loans that are three or more months delinquent or already in the foreclosure process totals approximately four million homes across the country. MBA expects about 

one to 1.2 million foreclosure sales and short sales per year; based on that estimate 

it will take the market 3.5 to 4 years to digest this shadow inventory overhang. 

Credit availability to borrowers who traditionally would have comprised the demand for these homes has been limited. An Amherst Securities Group study conducted in 2011 indicates that of the borrowers with mortgages in June 2007, 19 percent of those borrowers would not qualify for a mortgage today due to their credit 

histories. For the population of potential home buyers who currently are interested 

in purchasing a home, credit availability is an issue. The average individual home 

buyer must meet increasingly stringent credit qualifications. As it has been widely 

reported, average loan-to-value (LTV) ratios for GSEs have declined from 75 percent 

to 68 percent in 2010 and average credit scores are 762. 

First-time home buyers and minority home buyers are often the engine in the purchase money market; however, the recession has impacted these groups dramatically, and proposed regulations regarding the Qualified Residential Mortgage (QRM) 

and the Qualified Mortgage (QM) may further tighten underwriting. Therefore, we 

cannot rely on these populations to fuel the housing recovery. Thus, our historical 

home buying population is declining, the need for rental housing is growing, and 

the economy is stagnating. 

III. MBA’s Recommended Solutions 

With these obstacles as a possible backdrop, I will now offer possible solutions 

that the public and private sectors can jointly implement to overcome them. They 

are not mutually exclusive solutions; rather they should be undertaken in a combined approach. 

Solution 1: Restructuring Existing Mortgages 

In addition to the significant numbers of foreclosed properties and mortgages in 

some stage of delinquency or default, many borrowers are unable to refinance to 

take advantage of historically low mortgage rates. The unusually low level of refinancing has prompted policy makers to introduce programs such as HARP, and others offered by FHA. Although those programs have helped some borrowers, program 

features and eligibility criteria exclude a significant number of borrowers who would 

benefit from a refinancing. 

In response, some advocates have called for other types of large-scale mortgage 

refinance programs that would include principal forgiveness by lenders. Mandatory 

principal write down raises several serious concerns regarding the contractual rights 

of investors and determining whether sufficient documentation exists upon which to 

execute the transaction. MBA does not support mandatory principal write down but 

does, however, support voluntary principal write down programs such as the FHA 

Refinance Option, where such a transaction is appropriate under the factual circumstances. We however stress that these write downs must originate from a voluntary agreement between the parties, not a Government imposed mandate. 

Others have called for refinancing programs that would offer borrowers new mortgage rates below current market rates. Although such programs could have a positive impact on the housing market and the economy, the Congressional Budget Office (CBO) and other analysts indicate that the programs would entail significantly 

higher costs to the Government. 

Shared appreciation mortgage modifications also have been discussed as a potential vehicle to help reduce the home foreclosure rate. Under a shared appreciation 

mortgage modification, a lender agrees to reduce the principal balance of a troubled 

borrower’s mortgage in exchange for the borrower sharing any future increase in the 

home’s appreciation with the lender. The shared appreciation is based on a predetermined calculation and occurs upon the sale of the property. While we endorse 

all safe and sound efforts to assist borrowers in need, we note that shared appreciation mortgage modifications involve additional risk layering to the lender who, in 

this scenario, is now reliant on the home increasing in value in order to make this 

a truly favorable transaction. 

91 

2 Rev. Rul. 83-51; 1983-1 C.B. 48 (1983). 

This type of instrument can also be quite complicated and confusing for borrowers 

who, upon selling the home, may actually find themselves owing more to their lender then they anticipated if the property does increase in value. We also note shared 

appreciation loan modifications can raise tax issues for borrowers, as described in 

an Internal Revenue Service (IRS) revenue ruling. 2 For these reasons, MBA continues to have some concerns about this product and its value to homeowners. 

MBA believes the preferred approach is adjusting the guidelines of existing programs. However each possible adjustment has its own unique policy conflict. For example, reducing the GSEs’ loan level price adjustments (LLPAs) on otherwise 

HARP-eligible loans would reduce borrower refinancing costs and are arguably unnecessary because the GSEs already assume the credit risk of the existing loan to 

be refinanced. On the other hand, reducing LLPAs increase taxpayer exposure to 

paying for the GSEs’ credit losses while the GSEs are under Federal conservatorship. Another option to consider is streamlining appraisal and other closing requirements in order to reduce the time and expense of refinancing. Raising HARP’s 125 

percent LTV requirement also could enable more otherwise qualified ‘‘underwater’’ 

borrowers to refinance into a lower interest rate mortgage. However, existing requirements of the ‘‘To-Be-Announced’’ (TBA) market and tax law may pose insurmountable constraints to pricing securities with loans in excess of 125 percent LTV 

at a level that attracts investor interest. 

Given the multitude of conflicting policy objectives, MBA believes programmatic 

changes should be conducted in a deliberate and transparent manner that appropriates sufficient funding to offset additional expenditures. 

Solution 2: REO Inventory Sales 

Of the excess inventory on the market a significant number of properties are bank 

owned, or real estate owned (REO), properties. In August, the FHFA, in consultation with the Department of Treasury (Treasury) and HUD, released a request for 

information (RFI) soliciting input on new options for selling single-family REO properties held by Fannie Mae, Freddie Mac, and FHA. To respond to the RFI, MBA 

formed an interdisciplinary REO Asset Disposition Working Group of industry practitioners with expertise in this area. 

MBA believes a top priority should be to stabilize neighborhoods and long-term 

home prices through actions to reduce the overhang of distressed properties. A reduction in the current REO inventory will provide for the swiftest and most efficient 

return to market stability. However, it is critical that public and private lenders balance consumer protections and taxpayer interests to ensure responsible asset disposition. 

As many economists and policy makers have noted, the ideal disposition of REO 

properties is sale to owner occupants because of the market stabilizing nature of 

such transactions. Home buyers who intend to occupy REO properties are likely to 

have the longest time horizon, and the largest incentive to rehabilitate and maintain the homes. Getting more REO properties into the hands of owner-occupiers 

would be the best option for stabilizing neighborhoods. While sales to home buyers, 

including first-time home buyers, cannot be the entire solution for reasons stated 

previously, Fannie Mae, Freddie Mac, and FHA programs that provide preferential 

financing to owner-occupiers (such as the ‘‘FirstLook’’ programs) should be retained, 

expanded and marketed to a much greater extent to enable them to reach their 

maximum potential. 

The next best option for REO disposition is sale to local investors. Local investors 

understand their local rental market and have a long-term stake in the stabilization 

of the neighborhood. Existing Government programs should be modified to support 

the financing and availability of local investment. Providing affordable, responsible 

financing options to investors not only eliminates REO properties, but also empowers neighborhoods by giving local residents an increased stake in its success. These 

tools would be especially beneficial in older, urban neighborhoods that face the challenges of aging housing stock and neighborhood blight. 

For example, FHA should introduce an investor program, specifically one that includes a renovation option. One solution would be to temporarily lift the moratorium 

on investors participating in the Section 203(k) Rehabilitation Loan Program. The 

FHA Section 203(k) Rehabilitation Loan Program helps buyers of properties in need 

of repairs reduce financing costs, thereby encouraging rehabilitation of existing 

housing. With a Section 203(k) loan, the buyer obtains one FHA-insured, marketrate mortgage to finance both the purchase and rehabilitation of a home. Loan 

amounts are based on the lesser of the sum of the purchase price and the estimated 

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3Fannie Mae, Loan-Level Price Adjustment (LLPA) Matrix and Adverse Market Delivery 

Charge (AMDC) Information, 12.23.2010, 2011. 4Freddie Mac Seller Servicer Guide, 22.22.1. 

5Fannie Mae Seller Servicer Guide, B2-2-03. 

cost of the improvements or 110 percent of the projected appraised value of the 

property, up to the standard FHA loan limit. 

HUD began promoting Section 203(k) to homeowners, private investors and nonprofit organizations in 1993. Private investors were often able to find undervalued 

properties, renovate them and sell them for more than the purchase price plus the 

cost of improvements, or provide much needed rental housing. Motivated by this 

profit potential, many investors successfully renovated and sold properties ranging 

from individual homes to entire blocks, thereby expanding home ownership opportunities, revitalizing neighborhoods, creating jobs, and spurring additional investment 

in once-blighted areas. 

In 1996, however, following a report by the Inspector General describing improprieties concentrated in New York and insufficient HUD oversight, HUD placed a moratorium on all Section 203(k) loans to private investors. The Inspector General 

noted rampant fraudulent activity that resulted in financial gain for the participants and unrehabilitated houses in the neighborhoods. 

MBA recommends that FHA lift the moratorium on investors participating in the 

203(k) and reinstate it as a pilot to facilitate the purchasing and rehabilitating of 

REO properties by local investors. In recognition of the historical abuses of the program, MBA also recommends that the program be modified to ensure responsible 

lending and minimize fraudulent activity. Potential program requirements could include, but would not be limited to, the following: 

1. Requiring a 15–20 percent downpayment, depending on the number of units; 

2. Requiring that investors demonstrate a proven track record in managing properties; 

3. Providing financing to REO property owned by FHA, the Department of Veterans Affairs, the Department of Agriculture, Fannie Mae, and Freddie Mac; 

4. Requiring contractors to be insured and bonded; 

5. Requiring an inspection by an independent third party to ensure that all of the 

work was completed, thus mitigating against fraud; and 

6. Limiting the number of 203(k) loans that any single investor can have at any 

given time to ten, as well as limiting the number of homes in the process of 

rehabilitation at one time to four properties, with the option of a higher 

amount on an exception basis. 

Fannie Mae and Freddie Mac can also implement temporary program changes to 

their HomePath and HomeStep programs respectively, such as adjustments to 

LLPAs and an increase in the maximum number of properties owned, if the investor 

has demonstrated the ability to manage multiple properties. To illustrate, currently, 

with the Fannie Mae’s HomePath program, investors who put down 20 percent on 

an investment property have to pay three points in fees (or about an additional 1.5 

percent in rate). If the investor puts down 40 percent, the fees are 1.75 percent. 3

These fees assume that the investor has a credit score above 700. If the credit score 

is below 700, the investor must pay another one point. Thus, a typical investor’s 

rate could be seven percent to 7.5 percent even in this historically low rate environment. 

Additionally, Freddie Mac limits investors to four properties 4 and Fannie Mae 

limits investors to ten properties, in certain circumstances. 5 Care should be taken 

not to stretch the capacity of the small, single-family investor; however, for investors 

who can demonstrate significant experience with managing multiple properties, 

FHFA should consider making the policy consistent between Fannie Mae and 

Freddie Mac. 

So long as the concerns raised above are addressed, MBA supports bulk investor 

sales in an effort to move the U.S. housing market out of its problematic housing 

supply and demand imbalance and alleviate the REO inventory; however, it is imperative that safeguards be implemented to protect against fraud and that the process chosen to dispose of the assets be clear, transparent, and equitable to all interested and qualified investors. The challenge in designing appropriate safeguards is 

to avoid constraining the disposition process or to make the program so restrictive 

as to sabotage its success. MBA recognizes in order for the any program to be successful it should be simplistic, quick to administer, and attractive to investors. 

93 

Bulk Sales Should Incorporate Mandatory Hold or Recapture Provisions 

One of MBA’s chief concerns is to ensure that bulk property purchases do not contribute to the destabilization of home prices. Any program must also protect Fannie 

Mae, Freddie Mac, and FHA against fraud and provide the greatest recovery so as 

to protect the taxpayer. To achieve these objectives we believe that FHFA and HUD 

should consider adopting one of the following approaches: 

• Mandatory Hold Period—One of the objectives of the RFI is to remove the significant numbers of REO from the market that are placing enormous downward 

pressure on home prices. Ideally, converting these homes to rental properties 

removes at least some of the REO supply from the market and helps improve 

the stock of affordable rental housing. To increase the likelihood that REOs sold 

to investors actually become rental properties and do not simply get flipped, we 

suggest that Fannie Mae, Freddie Mac, and FHA consider a mandatory hold period of 3 years. Such a hold requirement could be managed through deed restrictions. We recognize, however, those deed restrictions may reduce the pool 

of bidders or negatively impact bid prices. 

• Profit or Equity Sharing—Profit sharing would allow Fannie Mae, Freddie Mac, 

and FHA to share in gains on sales of REO properties later sold by the investor. 

MBA prefers equity sharing provisions over mandatory hold periods because it 

allows more asset liquidity. Such equity sharing could be structured as a waterfall so that Fannie Mae, Freddie Mac, and FHA would share in a greater percentage of the profit from sales in earlier years. The equity sharing should decrease incrementally over a period of time, such as 3 to 10 years. The equity 

sharing concept might be preferable over a mandatory hold period because it 

allows the investor to sell homes at any time when the housing market improves more rapidly than anticipated or for other liquidity purposes, but protects the Fannie Mae, Freddie Mac, and FHA against fraud in valuation (e.g., 

flopping). Importantly, terms of the waterfall may be unique to each bulk deal, 

with clearly defined terms outlined in the prospectus of the deal and the bidding process, and an open and transparent bidding process. Profit or equity 

sharing should not apply if companies sold the homes to a related company, to 

achieve balance sheet management for example. MBA notes that equity sharing 

agreements currently exist in the market, so model agreements are readily 

available. 

Evaluate Capital Gains Treatment 

Currently the long-term capital gains rate is 15 percent but assuming that the 

2001–2003 tax provisions will expire, and with the new Medicare tax on investment 

income the long-term capital gains rate will increase to almost 25 percent. Thus, 

any policy which would shield investors from this tax would be a significant incentive, as it could increase the after-tax return substantially. It might be possible to 

design a program that provided relief from these high capital gains tax rates for investors in REO properties. However, it might be operationally difficult to ensure 

that only REO investors benefit, and may perhaps be inequitable to investors in distressed assets that may have been purchased through short sales or foreclosure auctions. The goal of such a policy would be to stabilize the market through incentives 

to buy now, regardless of the channel of purchase. 

The CBO would likely score any reduction in the capital gains tax as revenue negative. However, if the policy works to stabilize certain housing markets, in actuality 

it could be revenue neutral or positive because the Government would gain revenue 

if home prices begin to increase again, and if the pace of home sales were to return 

to more typical levels. 

As noted above, policy makers should consider methods provide neighborhood stability such as requiring certain holding periods for the properties, perhaps 3 to 5 

years, or to mandate profit sharing over the first 3 years after purchase so that investors have little incentive to flip the properties. 

This recommendation would require a change in the current tax code, which 

would be difficult to accomplish in these budgetary sensitive times. However, providing targeted, favorable tax relief would provide significant incentive for investors 

and help expedite the return of a normal balance of supply and demand as well as 

positively impacting bid prices as the assets are sold. 

Create Incentives for Investors To Rehabilitate REO Properties 

MBA estimates that 30–40 percent of the existing REO properties require significant renovation. A focus of the RFI is to address housing needs in strong rental 

markets by turning REO properties into safe rental properties for families who are 

no longer homeowners. MBA is concerned that REO properties will transfer from 

94 

the Government’s balance sheet to the private sector’s balance sheet without addressing the goals of the RFI. MBA is also mindful of over-interference by the Government in an already highly regulated market and does not want to suggest program restrictions that constrain the investor or are cumbersome for the Government 

to administer. 

MBA recommends that FHFA conduct extensive due diligence on investors who 

bid on the pools, with an emphasis on evaluating the investor’s record on properties 

being rented and experience with rehabilitation. This due diligence would provide 

an indication of the investor’s willingness and ability to meet the program goals outlined in the RFI. 

Moreover, to incent investors to rehabilitate and rent or sell properties quickly, 

Fannie Mae, Freddie Mac, or FHA could escrow a percentage of the investor’s proceeds, which would be returned if a portion of the pool was rented within a predetermined time period, such as 6 to 12 months. Being able to rent the home would 

indicate that the property met local code requirements without Fannie Mae, Freddie 

Mac, or FHA having to perform on-site inspections. If the homes were not rented, 

there would not be a penalty imposed on the investor. 

Limiting the bidding to qualified investors might reduce bid prices to some extent. 

However, this cost is offset by the substantial benefit of having long-term dollars 

committed to stabilizing neighborhoods. Over time, this will help the market. 

IV. Implementation Logistics 

MBA notes that even minor changes to existing programs will entail significant 

modifications to a host of customer service, sales, underwriting, and servicing operations platforms. With relatively low origination volumes in recent years and significant investments required in the servicing area to handle delinquent loans and foreclosures, many lenders may lack the resources to accommodate greater demand. Existing personnel also will need to be educated and retrained. Successful implementation, therefore, depends on providing lenders and servicers as much lead time as 

possible. 

V. Conclusion 

MBA believes that restoring a strong and stable housing market in a safe and 

sound manner is imperative to the financial well-being of this country. MBA urges 

policy makers to carefully consider our suggestions. We look forward to working 

with you on this very important initiative. 

PREPARED STATEMENT OF MARCIA GRIFFIN 

PRESIDENT AND FOUNDER, HOMEFREE-USA 

SEPTEMBER 14, 2011 

Introduction 

Thank you Chairman Menendez, Ranking Member DeMint, and distinguished 

Members of the Subcommittee for the opportunity to participate in this hearing 

today. My name is Marcia Griffin and I am President and Founder of HomeFreeUSA. HomeFree-USA is a HUD-approved 501(c)(3) not-for-profit home ownership 

development, foreclosure intervention and financial empowerment organization. As 

a HUD intermediary, HomeFree-USA funds 66 nonprofit organizations, 21 of which 

focus their attention on the foreclosure crisis. These organizations spend every day 

working to marry the needs of mortgage loan servicers and homeowners who are 

in need of a mortgage loan modification. 

Since 2008, we have worked with more than 30,000 homeowners. Many of the 

families we’ve worked with can afford to pay a mortgage, just not the mortgage that 

they currently have. While many assume that those in crisis bought homes they 

could not afford, or were in no financial position to be homeowners, in many cases, 

the opposite is true. We have worked with thousands of people who had good credit 

and a stable financial life before they ran into mortgage trouble. Many of these people are employed, they want to do the right thing, they want to pay their mortgage, 

they want to stabilize their neighborhoods, and they want to keep their families together. What they need is an opportunity. After working in this space for several 

years, it has become more and more evident that innovative ways need to be 

brought to the table and tested in order to restore the housing and mortgage industry in this country. 

At HomeFree-USA, we share your sense of urgency to find a lasting solution to 

our daunting foreclosure crisis—a crisis that lies at the very heart of our Nation’s 

economic problems and threatens millions of families with the loss of their American 

Dream—their home. 

95 

With the bursting of the housing bubble, home prices declined dramatically in virtually every market throughout the United States. As a result, many American families are now living in homes that are worth less than their mortgages. According 

to published statistics, this ‘‘underwater mortgage’’ or ‘‘negative equity’’ problem affects some 11 million homeowners, or about 24 percent of all mortgages in the 

United States. 

Upwards of two million underwater homeowners are expected to go into foreclosure. Many will be the result of ‘‘strategic defaults’’—borrowers driven to give up 

home ownership in favor of renting rather than to continue to make monthly payments with no real prospect of regaining positive equity in their home. From our 

work in foreclosure prevention, we find that homeowners in a negative equity position are far more likely to default on their mortgages than those with positive equity. 

Principal Reduction Modifications 

The most effective way to prevent foreclosures due to the negative equity problem 

is to modify delinquent mortgages by both reducing the interest rate and forgiving 

a portion of the outstanding principal. The principal should be reduced at least by 

the amount the home is underwater, based on a reliable property valuation. In so 

doing, the homeowner is provided a reduced monthly payment that is affordable and 

restored hope of regaining positive equity in the home—for many families, this is 

the primary, if not the only, means by which to build net worth and financial stability. To build in an incentive for the homeowner to stay current on the modified 

payment obligation, the principal can be forgiven in increments over time so long 

as the homeowner does not redefault. 

Along with modifications, I would like to stress the importance of financial counseling. One way that lenders can get consumers to be more proactive about their 

financial troubles is to enlist the help of HUD-approved counseling agencies, which 

can serve as intermediaries between consumers and the mortgage industry. Consumers do not blame nonprofit counseling agencies for their financial troubles, as 

they do the big banks. Therefore, they are more likely to approach counseling agencies for help. Also, HUD-approved counseling intermediaries spend the majority of 

their time communicating with people in their communities and developing relationships with them—relationships that mortgage servicers do not have. 

Of course, all modifications—with or without principal reductions—must be designed to return to the loan investor greater cash flow, on a net present value basis, 

than foreclosure proceeds. This is what is referred to as a ‘‘NPV-positive’’ modification. The lender or servicer designing the modification must take into account a 

number of factors such as homeowner income, home valuation, degree of delinquency, borrower acceptance of the modification, prepayment and redefault probabilities, resolution timelines, and other relevant data. With home prices so severely 

depressed in many areas, however, we believe that principal reduction modifications 

of underwater mortgages can be fashioned to be NPV-positive in the overwhelming 

majority of cases. 

The Shared Appreciation Feature 

We are familiar with and support the idea of adding a shared appreciation feature 

to principal reduction modifications. In a Shared Appreciation Modification, the 

homeowner agrees to pay to the loan owner a portion of any postmodification gain 

in the value of the home upon a sale or refinance. In determining the percentage 

sharing, the right balance must be struck between, on the one hand, maximizing 

borrower acceptance of the modification—thereby avoiding foreclosure—and, on the 

other hand, providing the loan owner with the prospect of a meaningful payback in 

the future against the loss sustained due to the principal write down. We believe 

most underwater homeowners would be willing to make this trade off. The shared 

appreciation feature thus ameliorates, to some extent, concerns that loan modifications create the so-called ‘‘moral hazard’’ by rewarding imprudent over-borrowing by 

consumers. 

The shared appreciation feature also provides a fair opportunity and an incentive 

for people to stay in their homes rather than walk away from an underwater mortgage. It creates a level of fairness within the mortgage industry. Right now everyone 

is pointing fingers at everyone else. There is no trust among homeowners, lenders, 

and investors. But in order to get through the mortgage crisis, we have to pull everyone together to work profitably. The shared appreciation feature will benefit all 

involved. 

In addition, the shared appreciation feature holds everyone accountable. Lenders 

and investors must offer sustainable solutions. Families can stay in their homes and 

96 

keep their families together, but they have got to pay their mortgage on time. So 

this creates a level of responsibility on the part of everyone. 

In sum, we believe the principal reduction modification that is NPV-positive and 

contains a shared appreciation feature is an effective and balanced approach to preventing foreclosures of underwater mortgages to the benefit of mortgage loan investors, homeowners, and, ultimately, the housing market and our national economy. 

We recommend that this idea not only be tried out across the country, but that 

HUD-approved intermediaries like HomeFree-USA, be utilized as a resource to 

bring homeowners and servicers together. We can create mutual benefit for the 

mortgage industry, the homeowners and the local communities. 

I thank you again for inviting me to testify today. I will answer any of your questions and I ask that my full written statement be entered into the record. 

97 

PREPARED STATEMENT OF MARK ZANDI 

CHIEF ECONOMIST AND CO-FOUNDER, MOODY’S ANALYTICS

SEPTEMBER 14, 2011 


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PREPARED STATEMENT OF ANTHONY B. SANDERS 

DISTINGUISHED PROFESSOR OF REAL ESTATE FINANCE, AND SENIOR SCHOLAR, THE

MERCATUS CENTER, GEORGE MASON UNIVERSITY

SEPTEMBER 14, 2011 


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PREPARED STATEMENT OF CHRISTOPHER J. MAYER 

PAUL MILSTEIN PROFESSOR OF REAL ESTATE, COLUMBIA BUSINESS SCHOOL

SEPTEMBER 14, 2011 


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ADDENDUM 


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