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73–179 PDF 2012

S. HRG. 112–318 

NEW IDEAS TO ADDRESS THE GLUT OF 

FORECLOSED PROPERTIES 

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 

EXPLORING NEW IDEAS TO ADDRESS THE GLUT OF FORECLOSED 

PROPERTIES AND MOVING THE NATION’S HOUSING MARKET FORWARD 

SEPTEMBER 20, 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 

ANU KASARABADA, Deputy 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, Staff Director 

JEFFREY R. MURRAY, Republican Staff Director 

(II)
C O N T E N T S 

TUESDAY, SEPTEMBER 20, 2011 

Page 

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

Opening statements, comments, or prepared statements of: 

Senator Reed ..................................................................................................... 2 

Senator Merkley ............................................................................................... 2 

WITNESSES 

Allan H. ‘‘Dutch’’ Dechert, President, New Jersey Association of Realtors ........ 3 

Prepared statement .......................................................................................... 31 

Responses to written questions of: 

Senator Corker .......................................................................................... 61 

Senator Wicker .......................................................................................... 62 

Robert Nielsen, Chairman of the Board, National Association of Homebuilders ................................................................................................................. 5 

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

Chris Krehmeyer, President and CEO, Beyond Housing ..................................... 7 

Prepared statement .......................................................................................... 38 

Responses to written questions of: 

Senator Corker .......................................................................................... 63 

Senator Wicker .......................................................................................... 64 

Laurie Goodman, Senior Managing Director, Amherst Securities ...................... 8 

Prepared statement .......................................................................................... 42 

Responses to written questions of: 

Senator Corker .......................................................................................... 65 

Senator Wicker .......................................................................................... 66 

Stan Humphries, Ph.D., Chief Economist, Zillow ................................................. 10 

Prepared statement .......................................................................................... 58 

Responses to written questions of: 

Senator Corker .......................................................................................... 66 

Senator Wicker .......................................................................................... 67 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Washington Post article: Steven Pearlstein: How about Refi.gov?, submitted 

by Senator Reed ................................................................................................... 68 

(III)

(1) 

NEW IDEAS TO ADDRESS THE GLUT OF 

FORECLOSED PROPERTIES 

TUESDAY, SEPTEMBER 20, 2011 

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

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

The Subcommittee convened at 10:02 a.m. in room 538, Dirksen 

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

Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ 

Senator MENENDEZ. This hearing of the Subcommittee on Housing, Transportation, and Community Development is called to 

order. Thank you all for being here today. 

This hearing, the second in a series to explore the best ideas for 

moving our Nation’s housing market forward, will focus on new 

ideas to address the glut of foreclosed properties. 

Last, we looked at refinancing options and heard from Senators 

Boxer and Isakson about how we can break down some of the costs 

of barriers to refinancing and also heard from experts on the bill 

I will be introducing to encourage principal write-downs by allowing both the lender and the borrower to share in the upside of an 

appreciation of home value. 

In my view, we need to do even more to fix the housing market, 

get the broader economy moving again, and create jobs, as the 

housing market often anchors the broader economy. Too many families, including those who have never missed a mortgage payment 

in their lives, are suffering from a housing hangover caused by 

years of risky behavior in our over-indulgence of the market. 

Today, our witnesses will explore the question posed in the 

Obama administration’s request for information about how the 

Government should dispose of the millions of foreclosed properties 

that it has or will have on its books within the next few years. 

These properties are at the GSEs and the FHA, which are half of 

the foreclosed properties in the country. 

Currently, the Government sells these properties one by one, but 

I would question whether that is always the best policy right now 

for all areas of the country. Although that policy might make sense 

in areas where home sales are strong, in areas where home sales 

are weak, converting those properties to rentals or even looking at 

other options might make more sense. Continuing to sell foreclosed 

properties into an already depressed market in some areas leads to 
2 

further drops in home prices, which hurts other homeowners in the 

neighborhood. And then there is a need for rental housing right 

now because many people who lost their homes or who cannot get 

financing to buy a home now need to rent, and as a result, we have 

seen rents go up, as well. 

One idea that has been widely suggested is selling foreclosed 

properties in bulk to nonprofits or to investors with a requirement 

that they be converted into single-family rentals for a certain period of time. There are different views of that and we look forward 

to the views of the panel on those suggestions. And the witnesses 

will also explore whether and under what conditions the Government should help finance such sales for conversion into rentals. 

We must do all we can to stop the slide in home prices and stabilize neighborhoods by turning millions of vacant foreclosed homes 

into occupied homes, and that is the focus of the Committee’s work. 

With that, I am happy to recognize any other Members who wish 

to make an opening statement. Senator Reed. 

STATEMENT OF SENATOR JACK REED 

Senator REED. Mr. Chairman, I simply want to commend you for 

not just this hearing, but the series of hearings you have undertaken addressing critical issues in the housing market, and I share 

the same presumption that you have articulated, which is until we 

get the housing market stabilized and moving forward, the broader 

economy will not begin to move forward in a sustained and appropriate way. Many of the ideas that we will explore today, I think, 

are important aspects of getting that market moving. 

But I thank you for your leadership and I thank you particularly 

for accommodating this hearing so we can have a broader participation. Thank you, Mr. Chairman. 

Senator MENENDEZ. Senator Merkley. 

STATEMENT OF SENATOR JEFF MERKLEY 

Senator MERKLEY. I echo the compliment on holding these hearings. The cloud of foreclosures, the five to eight million additional 

foreclosures is a huge problem for our economy and holding these 

hearings to try to wrestle with how we can be more aggressive in 

addressing them, both for the millions of families’ success and for 

our economic success, is so important. Thank you. 

Senator MENENDEZ. Thank you. 

Well, let me introduce our panel. We have a great panel here to 

help us go through some of these options. 

Allan Dechert is the President of the New Jersey Association of 

Realtors. He has been a Realtor since 1981, owns Ferguson Dechert 

Real Estate in beautiful Avalon, New Jersey. Those of you who 

have not visited should visit Avalon, New Jersey, I assure you. He 

has served the Realtors in many capacities over the years and the 

Subcommittee and I are certainly pleased to welcome his Garden 

State experience here today. 

Bob Nielsen is the current Chairman of the National Association 

of Homebuilders. He currently works in Reno, Nevada, brings over 

25 years of industry experience with him. He has also been very 

active in the affordable housing sphere, contributing to the creation 
3 

of the Nevada Low-Income Housing Trust Fund, and we look forward to your testimony and thank you for being here. 

Chris Krehmeyer is the President and CEO of Beyond Housing, 

a NeighborWorks Organization in St. Louis, Missouri. He has 

served in that capacity since 1993 and has led the organization 

through fivefold growth, adding a nonprofit property management 

company with Beyond Housing, currently controlling assets worth 

nearly $50 million, and we appreciate your perspective here today. 

Laurie Goodman is a Senior Managing Director at Amherst Securities responsible for research and business development. Before 

joining the firm in 2008, she was the head of Fixed Income Research at UBS, also worked at CitiGroup, Goldman Sachs, Merrill 

Lynch, and the Federal Reserve Bank of New York. She has appeared before the Subcommittee before and we are looking forward 

to her expertise once again. Thank you. 

Dr. Stan Humphries is a Chief Economist at Zillow, a home and 

real estate marketplace that helps homeowners, buyers, renters, 

and professionals share information about homes, real estate, and 

mortgages. He oversees the production of housing market metrics 

and economic research and he has contributed to housing market 

price algorithms for Zillow. The Subcommittee looks forward to his 

testimony and thanks you for being here. 

So I would ask you all to synthesize your statement in about 5 

minutes or so. We will include your entire written statement in the 

record, and then we will have an opportunity for our Members and 

you to have a conversation and some questions. 

So, Mr. Dechert, we will start with you. 

STATEMENT OF ALLAN H. ‘‘DUTCH’’ DECHERT, PRESIDENT, 

NEW JERSEY ASSOCIATION OF REALTORS 

Mr. DECHERT. Thank you. Chairman Menendez, Ranking Member DeMint, and Members of the Committee, thank you for holding 

this timely hearing on new ideas to address the Nation’s continuing 

mortgage problem. 

My name is Allan Dechert and I am the 2011 President of the 

New Jersey Association of Realtors, and I am proud today to testify 

on behalf of the more than 1.1 million members of the National Association of Realtors. 

The U.S. housing sector is in a precarious state. According to 

many economists, the market appears to have reached bottom and 

sales volumes and prices are beginning to stabilize. However, the 

uncertainty and lack of consumer confidence that has plagued the 

sector could be reintroduced and impact the absorption rate of 

bank-owned real estate, which will place downward pressure on 

prices and jump-start the cycle that has debilitated the housing 

sector to date. 

Realtors appreciate the Administration’s attempts over the last 

two-and-a-half years to keep families in their homes and its recognition that home ownership matters. Those several Federal programs were put in place to keep families in their homes, nearly all 

have fallen short of their goals. 

Realtors believe that another attempt must be made to fix the 

housing sector if a broad recovery of the overall economy is to 

occur. In particular, focus should be placed on the large inventory 
4 

of real estate owned, REO properties, that continues to grow. Realtors recommend that any foreclosure solution must focus on providing mortgage financing to qualified home buyers and investors 

to prevent increases to the existing REO inventory. Expand preforeclosure efforts, including loan modifications and short sales, 

since foreclosures typically cost more than loan modifications and 

short sales. And continue the timely and orderly disposition of REO 

inventory assets, relying on the expertise of local contractors, real 

estate brokerage firms, and professional property management 

companies. 

NAR supports strong underwriting standards. However, potential 

home buyers and investors have been discouraged by high fees, unduly tight underwriting standards, and the lack of availability of 

private mortgage capital. Realtors respectfully request that regulators and lenders reassess their policies in order to increase lending. 

In particular, Realtors believe that the Government should temporarily modify some policies governing FHA and the GSEs to encourage investors to step in and absorb some of the REO properties. Two examples of policies to be modified are, one, FHA’s Section 203(k) lending program, which HUD should expand to include 

investors, and remove the limitations on the number of outstanding 

loans held by an investor. 

Since early 2008, NAR has urged the lending industry to take 

every feasible action to keep families in their homes with a loan 

modification, or, where it is not possible to avoid foreclosure, a 

short sale. Realtors recommend that the Government reassess current policies to make sure that as many loan modifications and 

short sales are approved as possible. This will reduce adding to the 

ever-increasing glut of REOs. Moreover, repurposing a portion of 

housing funds designated under TARP to increase borrower participation in loan modification and short sale programs will improve 

them and reduce the number of mortgages ending in foreclosure. 

Also, streamlining the short sale process would result in a properly 

functioning loss mitigation mechanism that prevents additional 

foreclosures. 

Last, in August, the Administration requested advice from market participants on the pooling and disposition of GSE and FHA 

REO properties inventories, I should say. Though bulk sales may 

quickly alleviate the critical mass of REO inventory held by the 

agencies, bulk sales will likely result in larger losses than is necessary. Realtors strongly believe that every effort should be made 

to incentivize individual versus bulk sales because individual sales 

maximize recovery of the assets and minimize the impact on housing values. 

An option that combines REO disposition with affordable rental 

is a lease-to-own program. NAR recommends that any lease-to-own 

solution should first focus on keeping families in their homes, after 

which the following principles should be considered. Lease-to-own 

ventures should be privately administered by local investors or 

local nonprofits that understand the specialized needs and challenges of markets. Use local real estate agents to market the property to ensure visibility. Have clearly defined expectations. Have 

guidelines in contracts that are specific regarding maintenance, 
5 

purchaser responsibility, purchase price, and percent of payment 

allocated toward the down payment. Include condominiums, and 

minimize detrimental effects on neighborhoods by implementing 

strict guidelines on the rehabilitation and continued maintenance 

of properties. 

Finally, NAR recommends the creation of an advisory board 

made up of public and private industry participants. Advisory 

board members should include Government staff, asset managers, 

real estate sales professionals, property managers, and others with 

extensive real estate industry experience. The charge of this board 

will be to ensure the efficient disposition of Government-owned 

REO properties in order to minimize taxpayer losses and negative 

effects on local real estate markets. 

In conclusion, every decision that we make today regarding our 

housing finance system will have a significant impact on the ability 

of future generations to purchase a home and our Nation’s overall 

economy. 

I thank you for this opportunity to present our thoughts. As always, the National Association of Realtors stands ready to work 

with you and our partners to make the future brighter for all 

Americans. Thank you. 

Senator MENENDEZ. Thank you very much. 

Mr. Nielsen. 

STATEMENT OF ROBERT NIELSEN, CHAIRMAN OF THE BOARD, 

NATIONAL ASSOCIATION OF HOMEBUILDERS 

Mr. NIELSEN. Chairman Menendez and Ranking Member DeMint 

and Members of the Subcommittee, I am pleased to appear before 

you today on behalf of the National Association of Homebuilders to 

share our views on how to address the glut of foreclosed homes 

that are currently on the market. My name is Bob Nielsen. I am 

the 2011 NAHB Chairman of the Board and a homebuilder from 

Reno, Nevada. 

Home mortgage foreclosures continue to have a significant negative impact on the housing market and contribute to the lag in the 

Nation’s economic recovery. While the majority of foreclosures have 

been concentrated in a handful of States, no State has avoided the 

negative effects on prices created by the foreclosures. 

Home prices have fallen by a record amount across the country, 

making consumers hesitant to undertake home purchases and 

making it more difficult for homeowners to sell their current home 

in favor of a new residence. Many times, foreclosed or distressed 

property sales are used as comparable sales in appraisals, which 

further depresses home values and puts new construction at a disadvantage. The downward spiral in values is also adversely affecting outstanding residential construction loans, as lenders demand 

equity pay-ins to offset declines in collateral value and making it 

more difficult for builders to obtain adequate funding to start new 

projects. 

Ultimately, stopping this trend in foreclosures will have benefits 

beyond the housing industry. Stabilizing home values will improve 

the balance sheets of financial institutions and will reassure homeowners that their biggest asset will retain its value. 
6 

NAHB recently submitted comments in response to a joint request for information, soliciting ideas for strategies on disposing of 

the substantial inventory of real estate owned properties held by 

Fannie Mae, Freddie Mac, and FHA. We support the agencies’ goal 

of reducing the REO portfolio in a cost-effective manner, reducing 

average loan losses to the enterprises and FHA, addressing property repairs and rehabilitation needs, responding to the economic 

and real estate conditions in specific geographies, and stabilizing 

neighborhoods and local home values. 

While my written statement covers NAHB’s specific recommendations in great detail, we believe that it is extremely important for the enterprises and FHA to take a balanced approach 

in disposing of their large inventories of REO properties to avoid 

further disruptions to pricing and markets and to limit losses to 

the enterprises and FHA. 

In particular, the enterprises and FHA should avoid bulk sales 

to large investors that have no stake in the neighborhoods in which 

these properties are located. Local and small businesses should be 

the driving force behind the disposition of REO inventory, which 

will result in the creation of jobs and the stabilization of neighborhoods. Federal Government programs such as FHA Section 203(k) 

and the Neighborhood Stabilization Program should be modified to 

allow for-profit investor participants to provide the capacity and 

the innovation needed to tackle this problem. 

Fannie Mae and Freddie Mac programs are also currently biased 

against investors, as they have very tight limits on the number of 

homes one individual can finance. These limits must be increased 

to enable the private sector to partner in an effective REO disposition effort. 

Additionally, NAHB suggests that several new programs could be 

pursued that could contribute to the reduction of the REO inventory, specifically, the creation of an investment fund that would be 

open to individual investors and a new lease-to-own program 

geared to all income levels. 

It is also essential to return to more balanced credit requirements for home purchasers. Current GSE credit requirements and 

further discretionary overlays by private lenders are frustrating 

many creditworthy borrowers who otherwise would make an REO 

property their home. 

And finally, with the current GSE and FHA loan limits set to expire on September 30, I would like to thank the Chairman for his 

leadership and efforts to extend the higher limits beyond the current deadline. As the Chairman fully understands, allowing the 

limits to expire would exclude many homes and home buyers from 

critical Government loan programs, particularly in areas of the 

country where there is substantial foreclosure inventory. 

Thank you again for the opportunity to testify today. I look forward to your questions. 

Senator MENENDEZ. Thank you very much, Mr. Nielsen. 

Mr. Krehmeyer. 
7 

STATEMENT OF CHRIS KREHMEYER, PRESIDENT AND CEO, 

BEYOND HOUSING 

Mr. KREHMEYER. Chairman Menendez, Ranking Member 

DeMint, and all Committee Members, it is truly my honor to be 

here to talk about this very serious problem of foreclosures happening all across the country. In addition to my role as being President and CEO of Beyond Housing, I am also on the board of the 

National NeighborWorks Association and a founding member of 

Practitioners Leveraging Assets for Community Enhancement, 

PLACE, trying to unify the voice of our community development 

field. 

Day in and day out, in neighborhoods and communities back in 

St. Louis, we see this problem day in and day out. My organization 

touches foreclosures from just about every vantage point, from providing home ownership advisement services on the front side to 

create sustainable, successful long-term homeowners, to providing 

foreclosure counseling services to keep families in their home, to 

buying and rehabbing foreclosed properties, and just created a 

Community Land Trust as another tool to try to get after the problem. 

First and foremost, I think the best way to deal with the problem 

is keep families in their homes, so I am grateful that the Chairman 

is proposing principal reductions in a more significant way, because 

certainly my foreclosure accounting staff has begged us, can we 

please get more principal reductions to keep families in their 

homes. 

In addition to that, can we convert some of this portfolio to rental 

properties. My organization owns 340 scattered site single-family 

homes and we rent them to low-income families and have done so 

for 30 years. It is possible. It is feasible. It is a challenge. It is not 

easy. It is a long-term asset accumulation plan. It is not a shortterm windfall to put your investment dollars in and try to take 

them back out. It is about investing in that, not only in that home, 

but in that community and providing affordable rental opportunities, and certainly, as has been said, there is a great need for affordable housing all across this country. Folks are suffering, and 

we need to see if we can provide more of those opportunities. We 

have proven it can be done. It takes significant debt reduction relative to the price points. It takes sound property management and 

ensures that, again, you have to create that asset that will serve 

that community well long-term. 

Can we create other possibilities, and we think there are opportunities to do some bulk purchases with the GSEs. I have talked 

to a number of my peers across the country and we think there is 

a great opportunity to do so, particularly if we design a vehicle that 

says, can we build on the existing work and really move the needle 

on getting homes back in productive use. 

A partnership model that we proposed leverages many institutions, created by the community development industry in response 

to the crisis. This includes the National Community Stabilization 

Trust, which was created by NeighborWorks America and many 

other enterprises. The NCST provides a function to aggregate REO 

inventory among servicers and creates a platform for offering this 
8 

inventory to not-for-profits across the country and simplifying the 

execution process to transfer these assets. 

That particular model can take a number of forms in terms of 

what it can look like, but here are some of the key elements. GSEs 

and FHA identify and reserve homes that are located in either 

Neighborhood Stabilization markets or similar target geographies 

being worked by not-for-profits. These assets can be made available 

through a first look clearinghouse of loans to qualified not-for-profits. These assets then are available for acquisition for a short period of time to see if they can be disposed. If not, they will be put 

back on the marketplace. 

Qualified not-for-profits working in the target markets would 

purchase the assets at a prudent, transparent discount price that 

considers the balance between the cost of acquisition, rehabilitation, and management and feasible rents to families in these markets. In consideration for these discounted prices, the not-for-profits 

would execute an agreement to share any gain on sales that would 

occur with the GSEs or with FHA. Not-for-profits would take title 

to the property, would rehab the housing stock to an appropriate 

level, considering the appraised value, and that will improve the 

longevity and operating costs of the home by including energy efficiency and green improvements within that budget. 

To facilitate this rehabilitation, the GSEs and FHA will offer the 

not-for-profits an opportunity to take out a mortgage as the mortgagor from the GSEs that covers rehabilitation costs of the homes. 

The mortgage would be assumable by a future buyer of the property. The not-for-profit improves the property and makes them 

available to a low-income family or moderate-income family. The 

not-for-profit manages the assets of the rental property and uses 

the income to cover the mortgage note payment. And at a point of 

time when the values have stabilized, the not-for-profit makes the 

property available for sale to families in the community, and once 

that sale is made available, the not-for-profit again shares that 

asset appreciation with the GSEs or the FHA. 

Gentlemen, you guys know this is a big problem, day in and day 

out. My organization sees the struggles of what is happening in the 

community. We need big, bold solutions. Everything we have tried 

to date on our foreclosure problem, regrettably, has not met with 

our expectations. I hope we can continue to talk about this topic, 

and again, come up with some big, bold and aggressive solutions 

that are harming families in our country. 

Thank you very much. 

Senator MENENDEZ. Thank you. 

Ms. Goodman. 

STATEMENT OF LAURIE GOODMAN, SENIOR MANAGING 

DIRECTOR, AMHERST SECURITIES 

Ms. GOODMAN. Mr. Chairman and Members of the Subcommittee, thank you for your invitation to testify today. My name 

is Laurie Goodman and I am a Senior Managing Director at Amherst Securities, a leading broker dealer specializing in the trading 

of residential mortgage-backed securities. I am in charge of the 

strategy and business development efforts for the firm. We perform 

extensive data-intensive research as part of our efforts to keep our-
9 

selves and our customers informed of critical trends in the residential mortgage-backed securities market. 

One of the trends we have documented is the very significant 

supply demand imbalance in the housing market. Distressed loans 

are moving very slowly through the delinquency foreclosure pipeline. These loans weigh heavily on the residential real estate market and are often referred to as shadow inventory. In addition, 

many of the borrowers that are not delinquent on their loans have 

a tainted credit history and/or are seriously underwater, suggesting 

many more defaults to come. Thus, there are many distressed 

homes that will need to change hands over the next five to 6 years. 

At the same time, mortgages are becoming increasingly difficult 

to obtain. Overall credit availability is tightening, and the pool of 

qualified mortgage applicants is shrinking dramatically. A large 

number of borrowers who are delinquent on their current mortgage 

and do not have the financial profile to purchase another home are 

likely to be converted to renters. 

Despite this cloud surrounding the mortgage market, we see 

housing as very affordable by most traditional measures. Given 

this backdrop, we believe that long-term investors in one- to fourfamily residential real estate are the key to a housing recovery. 

They are the only potential buyers of many of the distressed homes 

that are likely to hit the market over the next five to 6 years. Investors need to be part of the solution to the housing crisis. 

At the same time, this represents a good business opportunity for 

interested investors whose goal would be to rent the distressed 

homes as the rental market strengthens. Given the large decline in 

home prices, rental yields are high enough now to attract a limited 

amount of private capital. With modest governmental action, not 

assistance, more private capital can be attracted to this market, 

helping to stabilize home prices, neighborhoods, and communities, 

and more importantly, ensure that the housing needs of the distressed homeowners and their families are met. In fact, my firm, 

Amherst Securities, along with several of our partners, has successfully launched such a program. 

We would argue that successful governmental action must have 

four objectives. First, it must be scalable enough to have an impact. 

Second, it must hold homes off the market for several years to give 

the market a chance to stabilize. Third, it must place the risks and 

responsibilities of owning the real estate with financially strong 

and operationally sound managers. Finally, it needs to maximize 

the economics for the GSEs and the taxpayers. 

We believe these objectives could best be accomplished by allowing for a program in which, one, opportunities were provided for 

bulk purchases of REO properties as well as non-performing loans, 

and two, financing was more available to investors. 

The difficulty of buying up sizable blocks of distressed properties 

inhibits large-scale investors from participating in the market. In 

order to build out a rental organization, which include rental 

agents and property managers, it is necessary to obtain a critical 

mass of properties in a given area. Thus, we would strongly urge 

the FHFA, working with Fannie and Freddie, to bundle together at 

least 200 properties in a given MSA and conduct an auction on an 

all or none basis. We believe this would maximize the economics 
10 

for the GSEs. Bulk sales are the most efficient distribution vehicle 

and homes that are vacant or occupied by homeowners not paying 

their mortgage or maintaining their property lose value very, very 

quickly. In addition, we would suggest imposing the requirement 

that at least 80 percent of the properties be held for a three-year 

period. 

One very important point. A program that includes nonperforming loans as we as REO properties would be more effective 

than an REO program alone. Bidding a portfolio of nonperforming 

loans and REOs would allow for the bundling of a larger group of 

properties in a given geographic area. In addition, since the borrower is often a suitable tenant for a property, it saves the transactions and emotional costs of a move and may allow the loan to 

command a higher price as it is being sold with a ready-made 

renter. 

This is not just a theoretical idea to my firm, Amherst Securities. 

We believe in it and put our own capital to work, purchasing the 

first block of homes auctioned by Fannie Mae with a tenant in the 

home. 

Conservative financing of 60 to 75 percent of the purchase price 

would serve to stimulate investor demand and further cushion 

home price declines. An example will make this clearer. Assume 

the net distress rental yield was 7 percent. Assume further that an 

investor was able to obtain financing on 60 percent of the purchase 

price at a 4.5 percent rate. The return to investors would rise to 

ten-and-three-quarter percent. We expect conservative investor financing to encourage more investor participation and higher bids 

from participating investors. 

Again, thank you for the opportunity to appear before the Subcommittee. We look forward to working with you on practical solutions that will help ease the housing crisis and promote housing 

market stability. 

Senator MENENDEZ. Thank you. 

Dr. Humphries. 

STATEMENT OF STAN HUMPHRIES, PH.D., CHIEF ECONOMIST, 

ZILLOW 

Mr. HUMPHRIES. Thank you, Chairman Menendez, Ranking 

Member DeMint, and Members of the Subcommittee for the invitation to speak today. My name is Stan Humphries. I am Chief Economist at Zillow, the leading real estate information marketplace, 

where I closely follow and report on the state of the housing market. 

I would like to preface my statements this morning by noting the 

perspective from which Zillow approaches analysis of the housing 

market. We launched our Web site in 2006 with the goal of creating more transparency of real estate information for consumers. 

As a media-supported business, we have relatively little vested interest in the outcome of this particular debate other than the hope 

that whatever is decided will best address the needs of consumers, 

buyers, sellers, and homeowners who have no intention of selling 

any time soon. 

Today, I would like to make three points about the housing market and about how to address foreclosures. The first is, let us not 
11 

underestimate the ability of the market to fix itself. Second, let us 

focus on fundamental drivers of the housing market itself, not on 

symptoms of the housing recession. And third, the first objective of 

any policy response should be do no harm. 

Regarding my first point about the ability of the market to fix 

itself, yes, there are a large number of foreclosures in the open 

marketplace right now. The latest estimates put that number at 

about 4.1 million foreclosures or seriously distressed homes in the 

marketplace. That cheap, abundant inventory is going to put downward pressure on prices over the near term, and over the long 

term, it is going to put a firm lid on price appreciation that we 

should expect over the next few years. 

But that dismal side that we spend so much time talking about 

in the housing market is just one side of the housing market. It is 

the purchase side. If you look at the other side of the coin, the rental side, that side of the housing market is actually doing quite well. 

We expect effective rental rates to rise four to 5 percent this year 

alone, and the rental supply right now is back down to pre-recession levels. So there is a lot of demand in the rental side of the 

housing market and investors smell a distinct opportunity here. 

They are—in terms of arbitraging from the distressed purchase 

side over into the rental side where there is strong demand. 

How do we know this is happening? One-third of all home sales 

nationally right now are going to all-cash buyers, the bulk of whom 

are investors. True, this process is not always pretty and does take 

time, but it is a natural market process that is and will slowly heal 

the market. Unfortunately, economic recovery cannot always happen overnight. 

A second point. Many policies addressing foreclosures are simply 

addressing symptoms, not fundamental drivers of a healthy housing market. I believe the fundamental drivers of the housing economy in the next 2 years can be summed up in two factors, negative 

equity and unemployment. 

Negative equity is very important to the housing market for two 

reasons. One is on the supply side, it is the key contributor to foreclosures, which increase supply and, therefore, put downward pressure on prices. Negative equity is also a problem on the demand 

side because it suppresses demand because it traps people in their 

homes and prevents them from going out and buying new homes. 

And unfortunately, negative equity is a fairly difficult problem to 

address through policy means for a variety of reasons which I can 

go into in questions if it is relevant. 

This pains me that this is the fact because the aggregate numbers that I cited about foreclosures and seriously delinquent mortgages mask the tremendous suffering for millions of homeowners. 

So I wish that there was more of a silver bullet for negative equity, 

but unfortunately, as you drill down into a lot of responses for how 

to eliminate negative equity, they become quite problematic, typically because of issues involving moral hazard. We, therefore, expect negative equity to be a problem that will slowly recede over 

the coming years once normal home value appreciation returns to 

the marketplace. 

Unemployment is a second big factor in the housing market and 

it is also very critical, of course, to housing for a variety of reasons, 
12 

and fortunately, it is one that is more easily addressable through 

policy means. Unemployment and job growth is very important to 

the housing market for a few reasons. I will just list two, consumer 

confidence and household formation. The more confident consumers 

are about their jobs and about the overall economy, the more likely 

they are to get off the fence and buy homes. 

Household formation is also important. We were just reminded 

last week when the Census Bureau reported that 22 million households in the United States are doubled up. If you want to know 

where a lot of the housing demand has gone during the housing recession, that represents a lot of it. These are adult children living 

with their parents in the basement and multiple families living 

under the same roof. If we want to get those families moved out 

and into new housing units and, therefore, increase housing demand, we have got to grow jobs. So make no mistake that a plan 

for unemployment is a plan for housing, as well. 

My third and final point is that the objective of Government policies should be to do no harm. For example, one of the ideas that 

we have been exploring, or, rather, that we in America have been 

exploring over the past few months more seriously is the idea of 

the Government getting more involved in some fashion in the rental market as a solution for disposing of its stockpile of REO and 

foreclosed homes. 

I believe that we should tread cautiously in examining proposals 

like this because, as I already noted, the private sector is already 

stepping in fairly briskly to do exactly this, to arbitrage from the 

purchase side over to the rental side where there is strong demand. 

Allowing the GSEs or FHA to get into the rental market more directly could have a definite chilling effect on private investment in 

this area, and as I noted, the rental area is an area that is actually 

performing fairly well and is actually indirectly helping the purchase side, as well, through contributing to demand on the purchase side. I believe we would be naive if we think that we can 

only address the supply side through these proposals without also 

affecting the demand side of that proposal. 

So, in summary, forces in the housing market are already at play 

that will ultimately lead to long-term stabilization. Again, it is not 

always pretty and it may take longer than we would desire, but the 

likely long-term consequences of policy intervention should be well 

understood before the Government steps in to help the market 

along. 

Thank you again for the opportunity to address you today and 

I look forward to answering any questions you might have. 

Senator MENENDEZ. Well, thank you all very much for your testimony. There are a few cross-current here and I want to explore 

them. 

The question of the whole issue I heard in your statements, the 

question of investors being able to purchase groups of properties 

and there is a countervailing view here. How do—in this step-bystep process that we have right now—how do we move that whole 

universe of that housing market if we continue on the individualby-individual sale at the end of the day? Mr. Nielsen or Mr. 

Dechert. 
13 

Mr. NIELSEN. Well, I do not think that is what we are advocating. In fact, what we are advocating is that the financing vehicles that keep folks from going to larger numbers of homes being 

sold be allowed to go forward. In other words, Fannie Mae and 

FHA both have limits on the way they finance some of those 

things. Our guys would be out there buying much greater numbers 

of homes if they could use those financing mechanisms to purchase 

them. 

So I think I would agree with Ms. Goodman. A lot of what Laurie 

said, however, we would probably ratchet it down to 50 units as a 

salable bulk and then maybe up to 200, as she suggested. So I 

think there is a lot of commonality in what we are all saying here, 

but I think what we are concerned about is the financing mechanisms need to be loosened up so that our guys can participate. 

Senator MENENDEZ. Mm-hmm. And what would you want to see 

in that respect, the number of individual properties that could 

be—— 

Mr. NIELSEN. Well, like I said, I think as far down as maybe 50, 

you know, allow Freddie and Fannie and FHA to finance 50 units 

as opposed to the limits that they have today. 

Senator MENENDEZ. Ms. Goodman, how does that sound to you? 

Ms. GOODMAN. Obviously, the more units, the better. I think 

bulk execution actually will give the GSEs much better pricing in 

the end. I mean, from a large investor’s point of view, we cannot 

afford to buy three properties in Cincinnati, four in Atlanta, six in 

Cleveland. It is virtually impossible to maintain. You need the incentive to build out the infrastructure for bulk. So certainly 200 

would be preferred. Could we live with 50? Yes. Would more be better? Yes. 

One-by-one does nothing for anyone. First, it does not encourage 

us to build out the infrastructure. Second, not all properties are 

going to trade one-by-one, so the absolutely all in execution is going 

to be worse. Third, if you trade them one-by-one, you cannot impose the conditions on selling to keep homes off the market for a 

period of time, which I think is very, very important, which you 

can do if you sell in bulk. Fourthly, bulk can be executed far more 

efficiently. Property deteriorates very, very quickly if it is not 

maintained, and this alone argues for very quick disposition. And 

finally, quick execution is very important from a macro perspective 

because it will serve to stabilize the housing market more quickly 

and, hence, the economy, as well. 

Senator MENENDEZ. In this respect, there is a concern that when 

you have institutional investors buy in bulk, and the larger the 

bulk, there is this lack of connection locally and the ability to execute with management of those properties once owned. What type 

of processes would you advocate putting in place in order to screen 

and monitor bulk investments, if any? 

Ms. GOODMAN. I think you have got to make sure the investor 

is strong and can afford to maintain the properties. But, basically, 

it is in their financial interest to maintain the properties. They 

have just paid for these properties. If investors do not maintain 

them, they are unable to rent them out. The vacancy rate would 

be really high. And current pricing is not such a bargain that it is 

a slam-dunk. 
14 

That is, investors really have to maintain the properties or they 

cannot really meet their financial targets. Investors have to maintain the properties in order to get the rent that is making their 

numbers work. And they are looking at sort of 8-percent type returns. They are not looking at 12-percent type returns after the 

costs of maintaining and the costs of renting the property out. 

Senator MENENDEZ. Mr. Krehmeyer, you do this in a different 

context. What is some of your experience in terms of what is necessary? 

Mr. KREHMEYER. Certainly, I would agree with the other panelists that one at a time is not going to work. The problem is too big. 

Whether it is 50 or 200, I think the smaller is better for us in the 

not-for-profit world to secure what limited capital we can for challenges like this. 

I would suggest that partnering with local communities, with 

folks on the ground who know communities, who know neighborhoods, pushing political jurisdictions at the local level, hold folks 

accountable, whether they are local neighborhood folks or out-oftown investors. Hold everybody to high standards and how are you 

going to maintain that property, how are you going to take care of 

it, and if you do not, there should be some penalties associated 

with that. Failure to do so just means this downward spiral in communities and neighborhoods will continue. 

Again, if we do not take an aggressive approach and force people 

to say, let us align the incentives of, whether it is an out-of-town 

investor, a local organization, that local political jurisdiction, align 

the incentives and the goals of what are we trying to accomplish 

and stop working in silos, because we have tried that and it just 

has not worked. 

You know, my organization would be happy to work with an outside investor to come work in our communities, buy some properties, work with us, because we are rehabbing other homes. We 

know the folks in the community. We are doing after-school programs. We are doing all that other community-building work. We 

would love to have somebody else’s capital and somebody else take 

a little risk with us in the community. 

Senator MENENDEZ. Let me take one last moment. Mr. Nielsen, 

you mentioned in your comments, although we are talking about 

foreclosure here, one of the goals here in these hearings is to make 

sure we get this housing market moving again. The expiration of 

the higher loan limits take place September 30. Senator Isakson 

and I and others have this effort to try to extend that, particularly 

the 125 percent of area median home price standard for 2 years for 

FHA, VA, and GSE. What effect do you think happens if the loan 

limits are not extended and if they expire at the end of this month? 

Mr. NIELSEN. Well, there are specific markets that are going to 

be dramatically affected, basically, those on the coasts where folks 

just cannot buy a home if you do not have those loan limits where 

they are today. Any reduction in the loan limits is going to dampen 

that market, and with a housing market that is in critical need of 

everything that they can get to purchase homes today, to do that 

is just piling on, and it seems to me that—and thank you for your 

leadership on that—if we could keep those numbers where they are 
15 

today, that is going to be the very best situation for folks that are 

trying to buy homes and trying to sell homes today. 

Senator MENENDEZ. Mr. Dechert, is that the Realtors’ view? 

Mr. DECHERT. Yes, Senator, that is our view, and again, we appreciate your sponsoring this legislation. I mean, when you look at 

our State, even, within New Jersey, Hudson County, your home 

county, this would be a $104,250 drop in loan limits there if this 

change would go through. Down my way, Cumberland County, 

which is not a high-cost area, but there is a drop there from 

$405,000 to $271,050 in loan limits, which is $133,950. That is 

going to have an impact on the market. As Mr. Nielsen said, we 

do not need more piling on. We need to incentivize the market, not 

de-incentivize it. That is very important to us, yes. 

Senator MENENDEZ. Thank you. 

Senator Reed. 

Senator REED. Well, thank you, Mr. Chairman. 

Let me make two initial points. The Chairman held last week a 

hearing on some innovative approaches, not to REO but to the 

other aspects of the mortgage market, and I commend you for that. 

Steve Pearlstein wrote a thoughtful opinion piece in the Washington Post, which I would like to put as part of this record, too. 

Senator MENENDEZ. Without objection. 

Senator REED. He is one of the most, I think, thoughtful commentators on the economy operating in the media. That had to do 

with refinancing and how we break through the issue of refinancing and give homeowners the benefit of historically low Federal Reserve rates that are not translating, for many reasons, into 

refinancings, and that is something I think the Realtors are very 

sensitive to, also. That would be very, very helpful. So point one. 

But point two, when we talk about the REO, we have been collectively working with Senator Menendez, Senator Merkley, and others, trying to get FHFA to kind of begin to think about creative 

ways of doing this, and there has been some progress. There was 

a request for information. I think many of your organizations submitted comments that they were moving on this front. 

And one of the issues, and let me open it up with Ms. Goodman, 

is the appetite, not just your company but for the investment community at large, to get into the acquisition of these properties as 

affordable rental properties. You think that is a real positive force 

out there? 

Ms. GOODMAN. Absolutely. There is a lot of capital being raised 

for exactly this purpose. Housing is quite affordable in a historical 

context. Buy-to-rent looks OK. It produces reasonable returns at 

current prices. And then there are two sources of upside. 

First, rents are likely to rise. That is because borrowers who are 

not making their mortgage payments at some point are apt to become renters and are apt to put more pressure on this market. Actually, we would argue that the homeownership rate is more like 

61 percent than 66 percent—— 

Senator REED. Right. 

Ms. GOODMAN.——as four million of the 4.5 million delinquent 

borrowers are going to be unable to make it in the end. 
16 

And third, home prices—investors have the option that home 

prices rise at some point. So I think it is a good investment and 

you are actually seeing a lot of capital raising for that purpose. 

Senator REED. One of the other aspects that we have tried to 

stress is not only simply transferring the property to an investor, 

either not-for-profit or for-profit, but also encouraging retrofits or 

renovations so that you capture some of the new energy technologies, which in the long run is a benefit not only for the tenant, 

but also for the owner because it is more effective and efficient, and 

in the short-run also puts people to work, which is a desperate 

need. Instead of building new houses, retrofitting and weatherizing 

existing houses. Is that something that in the context of private investors would be looked at as a positive, I hope? 

Ms. GOODMAN. I think you would have to weigh the economics, 

how much does it cost, and build it into the purchase price. So the 

analysis would be on a home-by-home basis, and again, you would 

just have to weigh the economics. 

Senator REED. The other aspect of this, we have found out, is 

that the FHFA, as the conservator, has a legal obligation to maintain value. I am sure there is another specific legal phrase. But essentially, when we get into this argument of is it a 200 unit minimum purchase or a 50 unit purchase, is it to small groups, et 

cetera, one of the decisive factors, I think, is going to be, frankly, 

FHFA looking to see what is their best return, and you might want 

to comment on that, also, in terms of being able to convince the 

GSEs, Fannie and Freddie, but more importantly the FHFA Director, that this approach is not only good for potential renters, not 

only good for kind of the industry, but this basically enhances the 

value, because the sense we have is that they feel it does not add 

value or diminishes, they cannot do it even legally. So I would like 

your comment, Ms. Goodman, and then open it up to the panel. 

Ms. GOODMAN. I think this would enhance value. The economics 

are such that what investors want to do is, at the minimum, continue to maintain the property, and more likely enhance the property so it can be rented out at the maximum rent. 

If Fannie and Freddie feel like they are giving too much away, 

there is the conceptual alternative that they join as joint venture 

partners. And, in fact, the FDIC has implemented this very effectively on their Legacy Loan Programs, where they basically are coinvestors and also provide some financing. There is no reason why 

that could not be adopted to this environment. 

Senator REED. Essentially along the lines of they would share in 

any appreciation upon a disposition of the property—— 

Ms. GOODMAN. Right. It would be a partnership. Exactly. 

Senator REED. And the other side—again, I will get to other people—I am running out of time—the other side of this, if—the status 

quo seems to be absolutely unacceptable for the real estate industry, for renters, et cetera. These properties sitting, and these are 

mostly single-family homes we are talking about, are sitting in the 

middle of the neighborhoods. The grass is not cut. The values are 

going down. It is a challenge. And again, I am sometimes frustrated because it seems so clear to us this makes sense, and yet 

we have had—it has been like pulling teeth, trying to get FHFA 

I have to say it properly—enthusiastic. 
17 

Ms. GOODMAN. Every day you do not maintain the property, its 

value just continues to decline, and that is actually one of the big 

arguments for bulk sales. 

Senator REED. I have got just a minute. Would anyone else like 

to comment on this general line of questioning? 

Mr. NIELSEN. I absolutely agree. You need to maintain those. 

And, frankly, that is the reason why we think that the number of 

units that could be sold together should come down. We think that 

those that will maintain a community the best are those that are 

in that community. And we also think that has an effect on pricing, 

where FHA and Freddie and Fannie need to get the most money 

that they can for those houses. If you bring it down to a point 

where more and more people can bid on those, it is going to have 

an effect on pricing. 

Senator REED. Well, I think from the perspective, and I am being 

presumptuous about FHFA, their whole notion would be, how do 

we maximize the price to us—— 

Mr. NIELSEN. Exactly. 

Senator REED.——because that is what their legal—and if you 

can make that case effectively. 

The other issue, too, and just a comment more than a question 

because the Chairman has been most indulgent, there would seem 

to be a natural kind of connection between a national investor, particularly going to an unknown market, to reach out, I do not know 

if we make that a requirement, but to reach out to the local industry or at least someone in the local industry to be the representative. And I would think, again—— 

Ms. GOODMAN. Absolutely. You would end up using local contractors, et cetera, who know the neighborhood. You would have to. 

Senator REED. Local Realtors in terms of rental capacity so 

that—— 

Ms. GOODMAN. Local contractors, local property managers. 

Senator REED. Yes. 

Ms. GOODMAN. You need someone who knows the area and 

knows the community, absolutely. 

Senator REED. I do not think it is necessarily kind of a disconnect between a big 200 units and no local participation. 

Mr. KREHMEYER. I think we just need a little help in getting us 

aligned. We, as a general rule, do not work together well without 

some incentives and a little prodding to get us there. 

Senator REED. No, I think you are absolutely right, Chris. 

Mr. DECHERT. Yes, Senator. The Realtors are not opposed to the 

bulk sale. We just have some concerns and want to have some 

guidelines and maintain the local involvement like you are talking 

about. That is what we want to do, too. 

Senator REED. Well, one thing you have to do is thank your Senator, because he has been terrific in making sure that your voice 

is heard. 

Mr. DECHERT. Yes. 

Senator REED. I have never been to Avalon, but some day, he 

will invite me. 

Senator MENENDEZ. All right. I will. 

Mr. DECHERT. I will give you my card after the hearing. 
18 

Mr. NIELSEN. But, Senator, you want to be sure that the term 

‘‘bulk’’ does not preclude people from participating. You want to 

make sure that it is small enough so that everyone can participate, 

or as many people as possible can participate in the process. 

Senator REED. And the auction price determines—— 

Mr. NIELSEN. Exactly. 

Mr. HUMPHRIES. It is probably also worth pointing out, if I may, 

while a lot of the conversation has focused on bulk purchase, the 

vast bulk of properties being bought by investors are being bought 

by relatively small investors, and it is the long tail that actually 

drives a lot of this marketplace. So, certainly, there is a place for 

bulk investors, but I think things that do stimulate smaller investors, people in their communities who want to buy a house down 

the street for turning it into a cash-flow positive property, I think 

that is really where the bulk of—a lot of these sales go, and making sure that we continue—and that is these people who are buying 

all cash, paying all cash for homes and turning it around and turning it into rental properties, that is these people. And we need to 

make sure that we continue to have programs like FHA and 

Fannie Mae that are facilitating that part of the market, because 

that is the long tail and that is who is doing all this buying. 

Senator MENENDEZ. Thank you. 

Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chair. 

Mr. Dechert, I wanted to start with your mention of your support 

for lease-to-own strategies. Could you share your vision for how 

that would work? 

Mr. DECHERT. Our vision, you know, as we had talked about earlier, there are just—we think it is a great program. We think it 

should be privately administered by local investors, I had said, 

local nonprofits. We would like to see local real estate agents involved, involved in the process there, and have some guidelines in 

contracts that are specific regarding the maintenance, purchaser 

responsibility, purchase price, percent of that downpayment. And 

then, also, which we think is very important, is minimize the detrimental effects on neighborhoods by implementing strict guidelines 

as far as the rehabilitation and continued maintenance of the property, and also setting up guidelines with the percent of payment allocated to downpayment, too. So I think it could be a good process. 

Senator MERKLEY. So you are picturing not just an option, but 

a negotiated purchase price arranged up front? 

Mr. DECHERT. Yes, I think so. I mean, I have to really check a 

little bit more with our staff on that and get back to you on it, but 

yes, I think it might be something along those lines. Yes. 

Senator MERKLEY. OK. And, Ms. Goodman, you noted you support renting to current occupants. Do you have a specific vision of 

how you would like to see that executed? 

Ms. GOODMAN. Yes. I think you have to evaluate this property 

on a—you have to evaluate each piece of property on a one-by-one 

basis. There are some cases in which the current occupant cannot 

afford the rental income, cannot afford to be in the house at all, 

and there are other instances in which they can. I think you basically have to have an experienced manager work with borrowers on 

a one-by-one basis. But certainly to the extent the current borrower 
19 

who is not paying his mortgage because he cannot afford his mortgage payment, but can afford to rent that property, there is no reason to kick the borrower and his family out and rent the property 

to a third party with a similar financial profile. There is no reason 

why the borrower has to dislocate his family, move from the community, and rent another home. 

Senator MERKLEY. Should the families have some sort of option 

to repurchase? 

Ms. GOODMAN. I think the answer is you want to give them the 

right of first refusal, but I think it is very, very hard to lock in a 

price up front. 

Senator MERKLEY. I want to turn to a concept that none of you 

have mentioned, at least not as advocating for, and that is homebuyer tax credits. In my work with low-income families through 

Habitat, I saw neighborhoods where the primary obstacle to homeownership was the downpayment, and one strategy is sweat equity, 

like Habitat. Another is an IDA strategy, Individual Development 

Account strategy, where you have matching grants. So there is certainly money being put in by the homeowner, but they earn over 

time through their savings matching grants to help them purchase 

a home. Those programs recognize that home ownership is one of 

the three main pathways to the middle class, one being small business, one being education, the third being homeownership. 

I look at the fact that we subsidize homeownership through the 

home mortgage interest deduction, about $100 billion a year, 

roughly. Why not, in addition, spend a little bit of money up front 

helping working families help absorb this inventory of foreclosed 

homes by being able to purchase a home now when the prices are 

very low, likely near their bottom. Why not spend a little money 

in a matching grant program, not simply on a temporary basis, and 

I think, Dr. Humphries, you have noted that a temporary basis 

simply shifts buyers forward, but as a longer-term aspect. 

I just want to know one other thing, is that for a working family, 

the 5 percent on a $200,000 house is less than the standard deduction, so a working family does not get any help from the mortgage 

deduction to become a homeowner in the first place. So we are 

spending all this money to help reduce the price of a house in the 

longer term. Why not spend a little bit of money up front to help 

working families become homeowners? Any thoughts? 

Mr. KREHMEYER. Yes, Senator. We in St. Louis carry out an Individual Development Account program. We have done so for about 

10 years. Right now, we have about 400 account holders, and certainly we think it is a great idea, the idea of having people think 

long-term to build their assets and to build their wealth and provide them with the incentives. You commit, you make the sacrifices 

to save and get prepared for home ownership and we will, in turn, 

provide you with that financial support. I think it is a fantastic 

idea if we can create a national model that says we are going to 

create an Individual Development Account for households all across 

the country. I think that would be a great benefit to the current 

problem we are facing. 

Mr. NIELSEN. And the Homebuilders would certainly support 

that program. 
20 

Senator MERKLEY. What about tax credits, which are a little bit 

faster version of providing support to families’ matching so it is not 

simply substituting for a homeowner’s own, but the up-front costs 

are substantial. What if we had a $2,500 tax credit per person, 

$5,000 per person, had to be matched dollar-for-dollar by the homeowner, to help people become homeowners right now, when the 

prices are low? 

Mr. NIELSEN. Absolutely. Any program that makes it easier for 

folks to get into a home makes total sense to us. 

Senator MERKLEY. Mr. Dechert, what is your—— 

Mr. DECHERT. I was going to say, Senator, I agree with that, and 

the first-time home buyer tax credit program that was in effect last 

year and extended was great as far as getting people into the market and getting first-time home buyers involved. So I think anything that could be done along those lines would be great for the 

market. 

Senator MERKLEY. Mr. Humphries, I know you had concerns 

about a short-term program just shifting demand, but we have 

long-term programs. Why not a long-term working family matching 

tax credit? 

Mr. HUMPHRIES. Yes, I think it is an interesting idea, and if I 

understand—I do not understand all the details of what you are 

proposing, but certainly in terms of the shorter-term version, as 

you already mentioned, Senator Merkley, the tax credits in 2009– 

2010, we did extensive research and survey work at that time and 

we believe that it did primarily just shift demand around within 

the year. So we definitely saw a boost in home sales during the period of the tax credits, but we did see a fairly—almost a commensurate decrease in home sales following the expiration of that tax 

credit. So our sense is that it did not have a long-term impact on 

the trajectory of the housing market but did have a short-term impact. 

In terms of a longer-term stimulus as you are suggesting, and I 

do not know all the details of what you are proposing, I guess a 

mild concern I would have is whether—is the possible distortive 

impacts of that policy. We do have extensive—a host of other ways 

that we do make homeownership advantageous. You mentioned the 

mortgage deduction, certainly the implicit, now explicit, backing of 

Fannie and Freddie behind the mortgage market has kept rates 

low and it was an implicit subsidy to the housing market. We have 

numerous ways in this country that we do stimulate housing because we consider it to be very useful for, as you said, a pathway 

to the middle class. 

I guess I would be concerned that, one, about the distortive impacts and whether we are over-subsidizing housing at that point 

and distorting people’s choices from some people for whom renting 

is actually a very good option, based on the long-term stability of 

their income and some other factors, perhaps their mobility preferences, and whether we are then incentivizing them to actually 

buy when actually renting is right for their financial situation. 

Senator MERKLEY. Thank you. 

Senator MENENDEZ. Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman, and thank you so 

much for holding this hearing. 
21 

Sometimes in this town, I feel like people are forgetting what 

people in our States are really going through, through this incredibly difficult economic period. It manifests itself, I think, very clearly in housing, where there are these twin problems that people are 

suffering through. One is the negative equity issue that I want to 

hear you on, Dr. Humphries, and the second, the other, is the cashflow issue, people that are underemployed or unemployed and cannot afford to stay in the houses. They are related, obviously, but 

distinct, and I wonder if you would talk a little bit about the observation in your testimony that negative equity is much harder to 

solve, more than the other pieces of this. 

Mr. HUMPHRIES. Yes, and this is—I guess this is an issue that 

I wrestled with a great deal, because I do not have an ideological 

position on it. My—— 

Senator BENNET. Another—I am sorry. Another way of saying 

negative equity, the issue is is there a way to prop up the values 

of people’s homes, or do we need to take the pain as an economy 

going forward? 

Mr. HUMPHRIES. Well, I think, in general, I guess I tend to advocate taking the—you can pick your poison. Either you are going to 

take the pain now and you are going to get back to a normal market sooner, or we are not going to take the pain and we are going 

to go through a longer period of malaise before we get back to normal market conditions. And I think that both are quite detrimental 

to homeowners and U.S. citizens, and I tend to prefer probably getting the pain over with and getting back to normal market conditions with the realization that anything we can do through forbearance and refinancing programs that do try to stretch out the length 

of the payments and other things that try to keep people who can 

reasonably need some help in their homes is a good idea. 

I guess in terms of directly answering your question about negative equity, the reason it is a thorny problem, I think, is because, 

essentially, there are three classes of homeowners out there. We 

have got a large number of homeowners who do not need our help. 

They are in mortgages, and they may be down from where they 

bought—their home value may be down from where they bought it 

at, but they can still afford the mortgage. 

And then we have got the second group of people who do not 

really—who cannot benefit from our help—— 

Senator BENNET. Because they are so underwater. 

Mr. HUMPHRIES. They are so underwater. They are in long-term 

unemployment and essentially no amount of help that we are able 

to give them is going to keep them in that house. 

And then there is this third group of people who a little bit of 

help could actually make the difference for them. Reducing their 

payments $200 or $300 a month could actually keep them in their 

home, and that is the group that I think we are all united in saying, we should find something to target that group. 

The trouble is that that group is very small relative to the first 

and second groups, and it is very hard to target policies at that 

group without the first and second group coming in to avail themselves of those policies, and that tends to drive up the cost of these 

programs enormously, like we saw with the tax credits, where by 

our research, on the first round of tax credits, four out of five peo-
22 

ple who took the tax credit were going to buy a house anyway. So, 

basically, we were paying money for people who were going to buy 

a house, making the effective cost of that tax credit, instead of 

$8,000 per house, it ended up being almost $45,000 per house of 

the new homes that we were incentivizing because most of the people were going to buy the house anyway. 

So these programs, while if there was a silver bullet to solve negative equity and keep foreclosures at bay, I would definitely—want 

that silver bullet. It is such a thorny problem because, typically, of 

moral hazard problems. 

Senator BENNET. Ms. Goodman, do you have something you 

would like to add? 

Ms. GOODMAN. Yes. I would like to add on something to that, and 

I think, actually, Senator Menendez hit the nail on the head there. 

I think the way you have to deal with negative equity is by doing 

principal reductions. We know exactly what it takes to do a successful modification. You need to modify early. You need a significant payment reduction. And you need to do principal reduction to 

re-equify the borrower. 

If the question is, how do you deal with the moral hazard issue. 

Well, I am sitting there at a 150 LTV. I get a principal reduction 

down to 115 in exchange for giving up 50 percent of my upside. 

Stan Humphries, a much better borrower than me, is sitting there 

at a 120 loan-to-value ratio. He is not willing to give up 50 percent 

of his upside to get written down to 115. So, basically, a shared appreciation mortgage allieviates the moral hazard issue. If you accept a principal reduction, you then have a shared appreciation 

mortgage. This deals very nicely with the moral hazard issue. 

Essentially, we have to stop thinking of mortgage default as a 

moral issue and we have to start thinking of this as an economic 

issue. How do you put into place the economic incentives to get 

people to make the decision you want them to make. That is, you 

want me, at 150 LTV, to accept the principal reduction. You want 

him, at 120 LTV, not to, and you can easily do that. 

Senator BENNET. How do you feel about that? 

Mr. HUMPHRIES. Well, I guess I would have to understand, in 

terms of when I say moral hazard, I do mean the economic sense 

of moral hazard—— 

Senator BENNET. Right. 

Mr. HUMPHRIES.——not the actual ethics of that issue. But I 

would have to understand in terms of—so you are suggesting a 

product, I guess, which does not exist out there 

Ms. GOODMAN. It actually does. It actually exists. There is one 

major servicer who is currently doing it. 

Mr. HUMPHRIES. OK, so—— 

Senator BENNET. And who is that? 

Ms. GOODMAN. That is Ocwen. 

Mr. HUMPHRIES. And I guess if you were then to walk away 

from—if I were to sell my home subsequently, would I be left with 

a second mortgage equal to the amount that I had not paid on that 

shared appreciation upside possibility? Is that how that would 

work? 
23 

Ms. GOODMAN. That would be a principal reduction to, say, 115 

percent of the mark-to-market LTV, and then you would share your 

upside with your lender. 

Mr. HUMPHRIES. But if I took the shared appreciation mortgage 

and 2 years later sold that house, am I left with any debt burden 

in that scenario—— 

Ms. GOODMAN. No. No. 

Mr. HUMPHRIES.——because I certainly would see the upside, but 

I could—— 

Ms. GOODMAN. No. 

Mr. HUMPHRIES.——at that point, I am walking away from that 

debt. Is that how that would work? 

Ms. GOODMAN. You do not owe anything more than what you 

have been written down to. It would be essentially a forgiveness 

program. 

Mr. HUMPHRIES. Right. So I guess the concern there, would that 

be moral hazard in slow motion, then? Would you get a shared appreciation mortgage now and then you would incentive people to a 

year or two later walk away and release themselves of the debt at 

that point? Is that how—— 

Ms. GOODMAN. No. They still have 50 percent of the upside, so 

they would stay in their home at payments they can afford and—— 

Mr. HUMPHRIES.But I guess in the scenario where I have got, let 

us say, a $150,000 mortgage and my home is only worth $100,000, 

you are going to write me down to $100,000 and then you are going 

to give me a shared appreciation mortgage so that I can participate 

in the upside. But, I guess, what is to prevent me from then selling 

my house a year or two later and I have now shorn myself of 

$50,000 of debt? Is that how that would potentially work? 

Ms. GOODMAN. You probably want to include the requirement 

that you buy into that principal forgiveness over, say, a 3-year period. 

Senator MENENDEZ. The Chair has been—— 

Ms. GOODMAN. I do not want to—— 

Senator MENENDEZ.——extremely liberal here—— 

[Laughter.] 

Senator MENENDEZ.——in trying to maximize the discussion, 

both by Members’ time as well as by interaction between the panel, 

which I am happy, as long as the Senator is using his time for this 

purpose. 

Senator BENNET. I appreciate it, Mr. Chairman. The only thing 

that I would ask Mr. Nielsen, who looked like he wanted to get in 

on this, to comment, and then I will get out of your way. 

I do think it is—throughout all the hearings that we have had 

and the work that has been done, I think it is very clear that what 

continues to elude us here is an alignment of incentives that could 

help create some velocity in the market. I do not think we could 

prop up these values myself. I think we have to let the market do 

what the market does. But to the extent that there are impediments and there are incentives that are unaligned from the outcomes that we would all like to see, that is the place where we 

need to be in order to begin to see this market start turning 

around. Obviously, employment being a big piece of all this. 
24 

But, Mr. Nielsen, you get the last word in. You stand between 

me and the Chairman’s patience. 

Mr. NIELSEN. Well, to that end, Senator, you heard the dialogue, 

so there is lots of devil in the details. 

Senator BENNET. Yes. 

Mr. NIELSEN. And those details need to be worked out. But I 

think it is important to understand that even though, as Laurie 

said, there are servicers that are doing some of these workout programs and there are States like the State of Nevada which mandate workouts between banks and homeowners, it is not getting 

done. 

Senator BENNET. Right. 

Mr. NIELSEN. So whatever we are going to do, it has to be hard 

and fast and probably legislated. So thank you very much. 

Senator BENNET. Thank you. Thank you, Mr. Chairman. 

Senator MENENDEZ. Well, thank you. 

I just want to just come back to revisit a central point here. I 

appreciate moral hazards as much as anyone else. I think there are 

moral issues into how people were led into mortgage products they 

should have never been into. That is a whole issue, as well. There 

is a moral issue when 4 million families will find themselves outside of their home, and the list goes on. 

So I am concerned about how we move this market forward, and 

it seems to me that one of the fundamental issues that we have 

talked about here a little bit, but I would like to just, if I can, nail 

it a little further down with the panel, and that is the whole question—the primary concern for the GSE about bulk sales is taxpayer 

reimbursement, and, of course, that is something this Committee 

is sensitive to. But I look at it in a little bit broader picture. 

Right now, who is the biggest holder of this liability? It is all of 

us as Federal taxpayers through the GSEs and the FHA? So I 

would want to limit that liability as much as I can and at the same 

time try to get a market moving. So I look at it maybe in a little 

different way because surely holding on to the proposition that I 

want 100 percent of what I have got when 100 percent of what I 

have got is dramatically different in terms of value today than it 

was is a write-down in and of itself. 

And so looking at this in a way that—I think the GSEs think 

that selling properties in bulk will result in lower prices for taxpayers, but bulk sales also force investors to buy both the homes— 

the desirable properties and the less desirable ones, as well, and 

that has a value to it in and of itself when that is done in one bundle rather than in cherry picking the best. Others would suggest 

that improvements to the overall housing market from the bulk 

sales approach would help with individual sales and taxpayer returns on other properties, as well. 

So I get a sense that there should be a broader view as to how 

we ultimately get the taxpayer in the best position as well as stabilize neighborhoods and create greater values, and I would like to 

hear some direction to that, because I think that goes to the very 

heart of the matter. Do the GSEs and the FHA, you know, their 

concern for getting the best return for taxpayers by selling homes 

one on one or selling them in bulk, you know, how do you address 
25 

that question? I open that to anyone on the panel who wants it. 

Mr. Nielsen. 

Mr. NIELSEN. We hope there is a happy medium there, and that 

is why we are advocating that the number of homes be smaller, because it gives you more participants in that auction concept. In addition to that, I would say, with deference to Mr. Krehmeyer, that 

we should not limit anything to nonprofits. They are good at what 

they do and they should be equal participants with for-profit organizations. I think the more folks you have involved, the better off 

the pricing will be to the GSEs and to FHA. 

Mr. KREHMEYER. Yes. I think there is not an easy answer. Otherwise, we would have moved forward, Senator, and I think you 

framed it perfectly in terms of the two ends of the spectrum, about 

how do we manage taxpayers’ dollars and how do we move the 

housing market forward. 

The genesis of our financial meltdown was the housing market. 

If we are going to return to being strong and healthy, my opinion 

is we have got to get the housing market going quickly, and again, 

we have to be bold and aggressive and say, short-term, this may 

not be the best thing that we feel comfortable with, but if we do 

not start moving units, if we do not start getting them reoccupied 

and positive use for new homeowners and for rental property, 

strengthening communities, pick up property values, increase the 

tax base, create some more jobs, we are going to continue to struggle. 

And again, I hope we can find a way to be bold and to be aggressive and to not be timid on this, because each and every day we 

wait, the problem gets bigger and bigger. 

Ms. GOODMAN. We have talked a lot about getting as many investors as possible involved. The current one-by-one system actually squeezes out the large investors because they are not able to 

buy in bulk and put into place the infrastructure that is necessary. 

Mr. HUMPHRIES. I guess I would suggest that it is fundamentally 

an issue of the flow of foreclosures by the GSEs and by the FHA. 

Are they happy with the current pipeline and the flow in which 

they are being released onto the marketplace? If they are not, then 

there is a price issue. They could lower the price, and from the investors’ side, yes, I think the reason more bulk investors are not— 

they could move into the marketplace now and buy them individually and over time aggregate enough supply in individual markets 

to actually make a workable business. I think the issue that prevents investors from doing this is the fact that the price point is 

not right for investors. 

So, yes, they would like the prices lower, but if individual buyers 

are willing to buy them at a higher price, then I think the GSEs 

should sell them at the higher price. If they cannot sell them, then, 

yes, they will have to lower the price and that might become more 

interesting for larger bulk investors if they did so. 

Senator MENENDEZ. While we have focused here on the foreclosure element of the marketplace, while I have the expertise on 

the panel, let me ask this final question. What about getting the 

GSEs to just let people who are presently in place lower rates to 

refinance at lower rates today? This would create, number one, certainty in that universe that that would not add to potential de-
26 

faults. Second, it would create, obviously, a whole flow of money 

into the economy that individuals would have. Is that something 

that is desirable? Mr. Dechert. 

Mr. DECHERT. Yes, I think it is, Senator. I think it could be very 

helpful, as long as we could work that out. You know, what we are 

seeing is—I mean, the pendulum as far as the banks were concerned, first, it was over here. It was way over here back in 2006– 

2007. They were giving some mortgages out that should not have 

been and they were pretty liberal. And now it has swung over here 

and they are being so tight and so strict with all the guidelines 

that it is tough to get the flow of money in there. And if we could 

get the pendulum back in the middle and work to maybe do something like you are talking about there, that would be very helpful, 

I think. It really would be, because keeping the homeowner in the 

property is a benefit for everybody all the way around and ultimately the taxpayer, too. 

Mr. NIELSEN. But it clearly needs to be a specific policy. I mean, 

it needs to be stated so that there is no unequivocal decision to be 

made there. A good example—this may be a little bit off-track, but 

a good example is in multi-family, where there are some foreclosures where people have tried to work with the GSEs and sometimes have to resort to the Bankruptcy Court to set those issues 

aside and make it work, and that is wrong. But if there were a policy that you all decided on, this is the way it is going to work, then 

I think it would work. 

Mr. HUMPHRIES. That, if I may—— 

Senator MENENDEZ. Yes, Mr. Humphries. 

Mr. HUMPHRIES. I think that policy response—it is intriguing to 

me. I guess it has grown on me, the more I look at it. If you were 

to entertain that idea, I think you would have to do so as a form 

of economic stimulus for the economy, rather than a housing solution. I think that, for the reasons I articulated when I discussed 

negative equity, this program will not have a huge impact on the 

housing market. I think we are not going to avoid a lot of defaults. 

We will avoid some defaults by doing that, but I think we will not 

materially change the outcome of that in that marketplace there. 

But certainly it does offer the potential of $50 to $70 billion of 

stimulus, which may be helpful on the stimulus side, on the larger 

economic stimulus side. But I would not do it for reasons of helping 

housing. 

Ms. GOODMAN. I actually think that enhancing refinancing opportunities is a very noble goal, and, in fact, those most prone to 

default are paying the highest rates and oftentimes are the most 

difficult to refi. 

Having said that, I think it is very difficult to refi, enhance refi 

opportunities significantly in such a way that it is not NPV negative to Fannie and Freddie and, therefore, would not be inconsistent with the idea of conservatorship. I think the goal is noble. 

I think it is incredible difficult to get it done. 

Senator MENENDEZ. Well, I guess that the conservatorship would 

have to look at what it is going to get at the end of the day if people default, what is the real value there. I mean, there is this presumption that there is, you know—if you bought your home, for argument’s sake, at $400,000, and it is now worth $250,000, well, the 
27 

entity that has backed the loan is looking at a valuation of 

$250,000, not $400,000. And so the question is, if I can allow that 

individual to refinance, stay in that home, and be able to, in doing 

so, over time, have an appreciation again that we expect, that that 

would be a whole different ball of wax. But if you want to just go 

and say, you know, I want to get that piece of property now, let 

us foreclose on it, it is not worth what the loan amount was. So 

it just seems to me that that has got to be part of the equation 

when we are trying to determine what is value at the end of the 

day. 

Senator Merkley, do you have anything else? Senator Merkley. 

Senator MERKLEY. Well, thank you, Mr. Chair. Yes. 

I wanted to explore a little bit more this bulk sale concept, and, 

Ms. Goodman, you note that you bring in the big investors when 

you do very large sales, but certainly you are providing a convenience to big investors, but there is nothing that stops them from 

acquiring homes in smaller batches, but you definitely exclude 

smaller investors. There are very few folks who can buy 200 homes 

at a time, for sure. 

There has to be a discount involved in that, and I am familiar 

with one bulk sale that occurred from a savings and loan in a 

neighborhood that I am very familiar with in which the investor 

bought the homes at roughly a 50 percent discount on what they 

would have sold individually. What do you estimate the discount to 

be if one investor buys 200 homes? 

Ms. GOODMAN. I think we actually have not seen that, so it is 

really hard to estimate what the discount would be, if there would 

be a discount at all. I would argue that there is so much capital 

raising going on for investors to participate in this market, and if 

you have several large bidders, there may not be a discount at all— 

and, in fact, you might end up getting better execution than you 

would one-by-one because, in fact, the large investors could accumulate the properties as a group and could put in place the necessary management structure all at once. 

Senator MERKLEY. I am slightly dubious about that because I 

have not seen large sales that were not done at substantial discount. Dr. Humphries, what do you think? 

Mr. HUMPHRIES. I mean, just to ballpark it, not looking at a specific deal, but if you look at some of the deals that were done 

through the PPIP where bulk purchases of FDIC inventory, those 

were oftentimes 50 percent of the outstanding mortgage balance, 

and that was—oftentimes those portfolios were, if you think that 

they were nationwide and home values are down 30 percent, then 

that puts about a 20 percent discount, roughly, on those deals, just 

as a ballpark. 

Senator MERKLEY. I guess one thing I would be interested in is 

whether there is a way in which homes could be offered, if you will, 

to homeowners for a month or some period of time at the level that 

they would otherwise be included in the investment package. If 

they do not sell, then you include them in the investment package. 

My point is that if you are going to do a substantial discount, 

why not give individual families who have suffered with so much 

difficulty in this economy the chance to be a homeowner first and 
28 

take advantage of that discounted rate? Any thoughts about that? 

Yes. 

Mr. DECHERT. I would agree with that, Senator. I mean, the affordability index now is—I mean, it is at an all-time high and rates 

are low. If there could be some type of an opportunity for home 

buyers to get involved in a process like that, it could be very beneficial. I think it would be very helpful, and maybe even help to 

keep the property values up some, too. 

Senator MERKLEY. Ms. Goodman, would that kind of hybrid both 

accomplish what you are looking at, which is to be able to bring 

larger investors in to help clear this inventory and have them well 

managed, but also give individual families a chance to participate 

at whatever discount the homes are going to sell at? 

Ms. GOODMAN. I think the problem is that a lot of the distressed 

homeowners are not going to be able to buy a new home. They are 

going to be turned into renters, and it is not the way you or I 

would want it, but that is the economic actuality. They are not 

going to be able to afford a downpayment on a new home, and if 

there is one thing we have learned from the crisis, it is that you 

need to have some—the borrower needs to have some skin in the 

game. 

So I think it would be very disruptive to offer the homeowner the 

ability to buy the home for a month. And to the extent that you 

offer someone a free option for a month, I think you end up with 

cherry-picked homes that end up being substantially less valuable 

at the end of the day. And I think maybe you do some as bulk sales 

and some as individual sales, but I do think you need the bulk aspect. It would not be improper to maintain some individual sales, 

as well, but I think allowing cherry picking is just going to guarantee you a worse price at the end of the day. 

Senator MERKLEY. Yes. Mr. Krehmeyer. 

Mr. KREHMEYER. Yes. I would suggest on the idea of bringing 

distressed homeowners, I think it has some possibilities, but I 

would urge, put some home buyer education and training with that 

to make sure, OK, are we positioned, are we ready, have we done 

all the analysis, are we positioned for long-term success and do not 

have any short-term challenges. 

And I would also suggest that the idea of taking a family that 

is being foreclosed and let them stay in their home as a renter, 

about 3 or 4 years ago, that idea was not very palatable, in my estimation. As the problem continues to grow and get worse, right 

now, it seems, quite frankly, anything we do to keep families in 

their homes seems to me to make a great deal of sense. If we can 

create a structure where, again, the ownership can be transferred, 

that family stays, the children do not get uprooted, the neighborhood does not lose another homeowner, another asset goes down 

the tubes, if we can create a model like that, in addition to everything else we are talking about, I think that makes a ton of sense. 

Ms. GOODMAN. I could not agree with him more. 

Senator MERKLEY. Well, Ms. Goodman, in your concept, not all 

those homes would be occupied by families, because many of them 

are empty, right? A lot of the homes that would be in these inventories—— 
29 

Ms. GOODMAN. Yes. I mean, I really like the idea of investors 

buying up blocks of nonperforming loans and, where the borrower 

is clearly not going to make it in the end and wants to stay in his 

home, turning him into a renter. As Chris suggested, I think that 

makes a ton of sense. My firm is already doing it on a very small 

scale. 

Senator MERKLEY. I would argue with the point you made earlier 

a little bit in which you said, if there is one thing we have learned, 

it is that there needs to be skin in the game. I would say, if there 

is one thing we learned, liar loans are unacceptable. Predatory 

teaser rate loans are unacceptable. And steering payments in 

which the mortgage originators have an incentive undisclosed to 

the buyer to steer people into predatory loans are unacceptable. 

And I say this because I saw so many families who were able to 

become homeowners and pay less as a homeowner than they did 

in rent, and they had a huge incentive to stay in those homes even 

if they did not have a huge amount of money up front for a downpayment. But the families that got tossed out, or largely got tossed 

out because they were steered into predatory loans or they lost 

their jobs in this downturn of the economy, I mean, there are other 

factors that have a much bigger impact on what occurred than, I 

would say, the size of the downpayment. I will just throw that out. 

Yes, Mr. Nielsen. 

Mr. NIELSEN. You know, we would absolutely agree. We think it 

has a whole lot more to do with underwriting than it does the size 

of the downpayment. If they are underwritten properly, if people 

are underwritten properly, they are in the home. In fact, there are 

programs with very small downpayment requirements, from historically, that worked very, very well because they were well underwritten. 

Senator MERKLEY. Thank you all very much. 

Senator MENENDEZ. Let me thank the panel. 

I know that prices, home prices, are low, and interest rates are 

about as low as they get. That still has not moved the market forward. So there are challenges here beyond that. You cannot have 

lower interest rates, and you cannot have prices that have significantly gone down and still see no action. So there are other challenges here. 

Certainly, I get concerned when I see the suggestion that a qualified residential mortgage is now 20 percent. And while I totally believe, Ms. Goodman, that there has to be skin in the game, no 

question about that, I also think that when you say 20 percent, it 

seems to me that the broader criteria of determining the lending 

criteria is important. 

This is going to take a whole universe out of the market who can 

be responsible borrowers at the end of the day and help the market, and the market seems to have gone there notwithstanding that 

there has not been any regulation to that effect yet. So this is a 

little bit chilling to me, so I hope we can deal with that issue, as 

well. 

It is the focus of the Subcommittee from its last hearing and 

today and continuing to, as a result of some incredibly good testimony here and on the panels we had last week, to try to devise 

an overall plan as to how we work with the Administration and get 
30 

this market moving again, because it is difficult to be optimistic 

about the economic future without having a housing market that 

is more robust than it is today. 

So with the thanks of the Committee to all of you for your testimony, the record will remain open for 1 week so that any of our 

colleagues who may not have been able to attend, or who attended 

and have further questions, can do so. We would ask you to respond to those as quickly as you can in pursuit of our efforts here 

to have some action in the very close days ahead. 

With that, this hearing is adjourned. 

[Whereupon, at 11:28 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 
31 

PREPARED STATEMENT OF ALLAN H. ‘‘DUTCH’’ DECHERT 

PRESIDENT, NEW JERSEY ASSOCIATION OF REALTORS

SEPTEMBER 20, 2011 

INTRODUCTION 

On behalf of the more than 1.1 million members of the National Association of 

REALTORS® (NAR), thank you for holding this timely hearing on new ideas to address our Nation’s continuing foreclosure problem. 

My name is Dutch Dechert, and I am the 2011 President of the New Jersey Association of REALTORS®. I have been a REALTORS® since 1981, and am the broker/coowner of Ferguson Dechert Real Estate, Inc. in Avalon, N.J. Over the years, I have 

served the New Jersey Association of REALTORS® in many capacities (e.g., director, 

division officer, and committee chairperson), and in 1990, and again in 2001, was 

selected as REALTOR® of the year by the Cape May Association of REALTORS®. In 

addition to my involvement within the REALTOR® community, I am a trustee of the 

Avalon Chamber of Commerce, where I served as president from 2004 to 2007, and 

am also a member of the Cape May Chamber of Commerce. 

The U.S. housing sector is in a precarious state. According to many economists, 

it appears to have reached bottom and sales volumes and prices are beginning to 

stabilize. However, the uncertainty that has plagued the sector’s recovery looks like 

it could be reintroduced as expirations dates for the national flood insurance program and loan limits quickly approach. As we begin the process of repairing the 

housing sector, let us remember that the first goal should be to do no more harm. 

ADDRESSING THE NATION’S FORECLOSURE CRISIS 

REALTORS® appreciate the Administration’s attempts over the last two and half 

years to keep families in their homes, and its recognition that homeownership matters. The foundation of our economy is housing. Over a million small businesses 

have developed from it, and many more thrive because of it, including real estate 

sales services, housing finance, and construction and rehabilitation services. 

Though several Federal programs were put into place in an effort to keep families 

in their homes, nearly all have depended on the efforts of large financial institutions 

to assist consumers. To date, all of these programs have fallen far short of their ambitious, but achievable goals. REALTORS® are concerned that many of these same 

financial institutions, who received vital funding from both the Treasury Department and Federal Reserve Board at the onset of the economic crisis, continue to 

deny similar support for distressed households across the country. A key purpose 

of the extraordinary support that these institutions received was to ensure that liquidity—for all types of lending—was available throughout the crisis. Yet many 

creditworthy households, specifically those requiring new or refinanced mortgages, 

are unable to obtain fair and affordable loans. 

REALTORS® know firsthand that another attempt needs to be made to fix the 

housing sector, particularly the large inventory of real estate owned (REO) properties that exists and continues to grow. REALTORS® believe the any proposal designed to address this issue must: 

• Focus on providing mortgage financing to qualified home buyers and investors 

to increase the absorption rate of the current REO inventory and prevent increases to existing REO inventory, 

• Expand resources dedicated to pre-foreclosure efforts, including loan modifications and short sales (foreclosures are typically more costly than loan modifications and short sales, so this would minimize the need for more taxpayer dollars 

being used to support the GSEs), and 

• Continue the timely and orderly disposition of REO inventory assets, and in 

limited geographic areas where alternatives are needed, rely on the expertise 

of local businesses including contractors, real estate brokerage firms, and professional property management companies. 

NAR suggests that, as the Government evaluates proposals in response to the recent request for information regarding the renting of Government-backed foreclosed 

properties, the basic principles of any proposal should be to assist in reducing the 

number of properties in the foreclosure process that will add to the REO glut, maximize the recovery on REO assets currently held by FHA and the GSEs, and preserve housing values in neighborhoods across the country. 

FINANCING 

In response to the 2008 economic crisis, the Obama and Bush administrations 

have taken extraordinary steps to ensure that most of our large financial institu-
32 

tions survive. Most of these large institutions received funding from both the Treasury Department and Federal Reserve at extremely favorable rates considering the 

inherent risk. Yet, private capital in support of the mortgage market—meaning 

without Government participation via FHA, VA, or the GSEs—virtually disappeared. 

The lack of financing is putting downward pressure on home values, increasing 

the number of homeowners whose mortgages exceed the value of their home, and 

increasing foreclosures. Since the beginning of the crisis, the GSEs and FHA have 

provided about 90 percent of all mortgage lending. During this time, FHA has raised 

its insurance premiums, the GSEs have raised their upfront fees (including loanlevel pricing adjustments), and the lending industry as a whole has tightened underwriting standards to the point that only those with pristine credit histories have 

access to reasonably priced mortgage credit. Increasing access to financing for qualified borrowers and investors by reassessing the higher fees and excessively tight underwriting standards will increase the availability of mortgage lending for all types 

of housing, and will go a long way in allowing potential homeowners and investors 

to absorb excess foreclosed (REO) inventory. 

Increasing Consumer Lending 

As a consequence of extreme economic events, most notably high unemployment, 

lower home values, and tighter credit, many families now find that renting is their 

default option. Moreover, many creditworthy consumers continue to experience difficulties in obtaining fair and affordable mortgage loans. NAR supports strong underwriting standards; however, potential home buyers have become discouraged 

during this time of unprecedented housing affordability due to high fees, unduly 

tight underwriting standards, and the lack of availability of private mortgage capital. 

REALTORS® ardently believe that the lending industry should reassess its policies 

and increase lending. The excessively stringent underwriting standards that are 

preventing creditworthy buyers from obtaining loans now need to be weighed 

against the broader recovery of the economy, because they are impeding the confidence of potential mortgage applicants and threatening to reproduce cracks in a 

very fragile housing recovery. 

Liquidity for Investors 

REALTORS® firmly believe it is important to have private capital return to the 

mortgage market and give the Government the ability to reduce its market share. 

Unfortunately, the refusal of financial institutions to return in support of the housing finance sector and provide mortgage financing means all borrowers, including 

investors, are finding it more and more difficult to obtain affordable mortgage options. 

REALTORS® recognize the importance of affordable rental housing. For markets 

with large numbers of REOs and a high foreclosure pipeline, REALTORS® support 

giving local investors the opportunity to finance the purchase of distressed REO 

properties for rentals until the market recovers or to rehabilitate for more immediate resale. In order to facilitate this, the Government should implement temporary 

financing policies to give local investors the opportunity to purchase properties. 

Here are two examples of existing Agency policies that can be modified to offer incentives to investors: 

(1) HUD should open up the FHA Section 203(k) rehabilitation program to investors. This will facilitate the rehab of the existing housing stock and increase 

the availability of financing for rental housing, and 

(2) The GSEs should temporarily suspend investor financing limitations, especially the limit on the number of mortgage loans allowed for any one investor/ 

borrower (currently 4 for Freddie and 10 for Fannie), to enhance affordable 

rental opportunities. 

Amending these policies will give small, private investors the opportunity to absorb some of the excess inventory, resulting in the stabilization of prices for existing 

REO properties. Also, hard hit communities would benefit from improvements made 

to the vacant properties, and local economies would improve as small businesses 

would have the opportunity to participate in the rehabilitation of these properties 

by providing, as an example, renovation and property management services. 

PRE-FORECLOSURE 

The current economic and political environments are very budget conscious. 

Therefore, REO disposition programs that appear to increase taxpayer losses while 

seeming to enrich large institutions would raise concerns among Congressional 
33 

members and millions of taxpayers, who remain angry that ‘‘Wall Street’’ received 

Federal support while ‘‘Main Street’’ was left behind. REALTORS® believe the best 

opportunity to reduce costs to taxpayers and assist in the stabilization of housing 

values and neighborhoods is to respond more effectively to, and provide more resources for, pre-foreclosure efforts on loans insured by FHA or owned or guaranteed 

by the GSEs. These efforts not only are net-positive outcomes for homeowners, but 

taxpayers as well. 

Since early 2008, NAR has continually urged the lending industry to take every 

feasible action to keep families in their homes with a loan modification or, in cases 

where it is not possible to avoid foreclosure, a short sale. 

Commitment to Loan Modification and Short Sales 

REALTORS® are acutely aware of the downward pressure that foreclosures have 

on housing market prices. To relieve this, REALTORS® recommend that the Government reassess current policies to make sure that as many loan modifications and 

short sales are approved as possible. This will reduce adding to the ever increasing 

glut of REOs. A recent Office of the Special Inspector General for the Troubled Asset 

Relief Program (SIGTARP) report noted that less than 5 percent of TARP funds allocated for housing support programs, such as the Home Affordable Modification 

Program (HAMP) and Home Affordable Foreclosure Alternatives Program (HAFA), 

has been used. The success of these programs depends on the resources available 

and efforts of participating large financial institutions. Repurposing a portion of the 

existing housing focused funds to increase borrower participation will improve the 

performance of these programs, and will reduce the pipeline of severely delinquent 

mortgages that end up in foreclosure. Loan modifications keep families in their 

homes and reduce the probability of default. 

Short sales, for those unable to meet their mortgage obligations, stabilize home 

values and neighborhoods, by keeping homes occupied. Also, short sales help reduce 

taxpayer losses by selling the probable foreclosure at a premium over its potential 

REO sales price. Unfortunately, our members’ report that many potential home buyers still choose to simply walk away from a short sale due to the length of time it 

takes for the lender to complete the transaction. The dependence on large financial 

institutions has resulted in a short sale market that is clearly not functioning as 

it should. REALTORS® believe that homeowners and taxpayers deserve better. 

IMPROVED DISPOSITION OF REO INVENTORY 

Bulk Sales 

In August, the Administration requested advice from market participants on the 

pooling and disposition of GSE and FHA REO inventories. FHFA, Treasury and 

HUD expect these disposition strategies to involve REO assets totaling at least $50 

million in value, and in the case of joint ventures, up to $1 billion. Though bulk 

sales may quickly alleviate the critical mass of REO inventory held by the agencies, 

these types of proposals will likely require taxpayers to accept larger losses than 

is necessary. 

As described earlier, REALTORS® strongly believe that every effort should be made 

to incentivize individual versus bulk sales because individual sales maximize recovery on the assets and minimize the impact on housing values. Exclusively selling 

in bulk to large national investors at deep discounts will only work to further consolidate a large section of the housing market into the hands of a few market participants 

REALTORS® are also concerned that the unintended consequences of bulk sales at 

the proposed scale could devastate communities across the country. Providing a few 

large, private investors access to cheap assets for rentals could very likely erode 

market rent and sales prices. The consolidation of a large number of rentals to an 

institutional investor could mean that small landlords would be unable to match the 

rental prices that an institutional purchaser of a discounted pool of agency assets 

could offer. Rather than encouraging bulk sales across the board, bulk sales should 

only be considered in small geographic areas with high rental demand and should 

contain rigorous stipulations that ensure the revitalization and stability of local 

communities. It is also important that consideration be given to the pricing of these 

pooled assets to prevent the negative effect bulk discounts could have on the rest 

of the market and smaller competitors if the discount is so large that the bulk purchaser can sell these properties quickly at a deep discount. 

Structuring Bulk Sale Proposal 

Should a pilot program be implemented for the bulk sale of distressed properties, 

the Federal Government should first offer local governments, investors, and housing 

authorities, with vested interests in their communities, the opportunity to purchase 
34 

the properties. Such limited sales could be made to non-profit and for-profit organizations that must meet specific program requirements and are familiar with the 

needs of the communities where the homes are located. Ultimately, the success of 

any program will be determined by its stabilizing effect on a particular locale and 

whether it maximizes value for taxpayers. 

Maximizing recovery on the assets will depend on the determination property 

valuations and the assurance that the valuations are accurate, appropriate, and reflective of current market conditions. REALTORS® strongly recommend that entities 

investing in pools of distressed REO inventory be required to have a local presence 

and work locally with contractors, real estate brokerage firms, and professional 

property management companies. Knowledge of regional and local markets is crucial 

in the orderly disposition of REO assets and minimizes taxpayer losses related to 

REO properties. 

Lease-to-Own 

REALTORS® believe that sustainable rental housing is an integral component of 

the housing market. Furthermore, they understand the opportunities affordable 

rentals provide for potential home buyers as they save for down payments. Therefore, an option to combine REO disposition with affordable rental is a lease-to-own 

program. NAR recommends that any lease-to-own solution should be first focused 

on keeping families in their homes. FHA and GSE policies should minimize foreclosures that will result in the sale of the properties at a very large discount to a 

purchaser in a bulk sale, regardless of whether the purchaser has a lease-to-own 

component in place. Where lease-to-own programs are an appropriate solution, they 

should focus on the rehabilitation of blighted properties, affordable homeownership 

and, where it makes sense due to excess REO supply and significant rental demand, 

rental opportunities without an initial purchase requirement. 

Structuring Lease-to-Own Programs 

As the Government considers REO disposition solutions, REALTORS® believe that 

the following principles supporting affordable rental and homeownership opportunities should be considered. Lease-to-own joint ventures: 

• Should not be run or administered by the Government, 

• Should be administered, whenever possible, by local investors or local non-profits that can manage the specialized needs and challenges of local markets, 

• Should be widely marketed by real estate agents to ensure visibility and encourage homeownership, 

• Should have clearly defined expectations, 

• Should have guidelines and contracts that are specific regarding maintenance, 

purchaser responsibility, purchase price, and percent of payment allocated toward a down payment, 

• Should include Condominiums, and 

• Should minimize detrimental effects on neighborhoods by implementing strict 

guidelines on the rehabilitation and continued maintenance of properties, ensuring that the properties do not become rentals that are in disrepair. 

ADVISORY BOARD 

Finally, as the President recently noted, a recovery of the housing market cannot 

be accomplished solely by the public sector. As the Government reviews ideas for 

alleviating the foreclosure crisis, including the pooling of properties for bulk sales 

and lease-to-own joint ventures, NAR recommends the creation of an advisory board 

made up of public and private industry participants. A wide range of board members including Government staff, asset managers, real estate professionals, professional property managers, and others with extensive real estate industry experience 

can work to ensure that the efficient disposition of Government-owned REO properties minimizes taxpayer losses and negative effects on local real estate markets. 

CONCLUSION 

The recovery of the broader economy depends on housing. The last two and half 

years have shown that, with housing prices bumping along the bottom, a robust economic recovery will remain exceedingly difficult. NAR believes that the best way to 

extinguish the glut of foreclosed properties is through an expansion of financing opportunities to qualified home buyers and investors, bolstering loan modifications 

and short sale efforts, and focusing on enhancing the orderly and efficient disposition of REO assets. Where bulk sales or lease-to-own programs are unavoidable, 

NAR urges you to consider our recommendations. Doing so will reduce taxpayer 
35 

losses on REO assets, minimize the impact distressed assets have on local real estate markets, and ensure the stabilization of neighborhoods. 

I thank you for this opportunity to present our thoughts on the foreclosure crisis, 

and as always, the National Association of REALTORS® is at the call of Congress, 

and our industry partners, to help continue the housing and national economic recovery. 

PREPARED STATEMENT OF ROBERT NIELSEN 

CHAIRMAN OF THE BOARD, NATIONAL ASSOCIATION OF HOME BUILDERS

SEPTEMBER 20, 2011 

Chairman Menendez, Ranking Member DeMint and Members of the Subcommittee on Housing, Transportation and Community Development, I am pleased 

to appear before you today on behalf of the National Association of Home Builders 

(NAHB) to share our views on how to address the glut of foreclosed homes that are 

currently on the market. We appreciate the invitation to appear before the Subcommittee on this important issue. My name is Bob Nielsen and I am the 2011 

NAHB Chairman of the Board and a home builder from Reno, Nevada. 

NAHB represents over 160,000 members involved in home building, remodeling, 

multifamily construction, property management, housing finance, building product 

manufacturing and other aspects of residential and light commercial construction. 

NAHB commends this Subcommittee for seeking solutions to the major problem of 

home mortgage foreclosures, through this hearing on reducing the inventory of foreclosed homes as well as last week’s hearing on new ideas for refinancing and restructuring mortgage loans. As these sessions illustrate, there are two distinct components to the foreclosure program—shrinking the large pool of foreclosed homes 

and reducing the flow of additional homes into that pool. 

Home mortgage foreclosures continue to have a significant negative impact on the 

housing market and contribute to the lag in the Nation’s economic recovery. While 

the majority of foreclosures have been concentrated in a handful of States, no State 

has avoided the negative effects on prices created by foreclosures. Home prices have 

fallen by record amounts across the country, making consumers hesitant to undertake home purchases and making it more difficult for homeowners to sell their current home in favor of a new residence. Many mortgage borrowers are ‘‘underwater’’—with their house values lower than what is owed on their mortgages. Not 

only is this impacting household wealth and spending, more recently there is a 

growing problem of strategic defaults, where borrowers who could afford to make 

their monthly payments instead choose to walk away from their homes. 

The decline in house prices makes it difficult for new home construction to compete in current market conditions, as the cost of building a new home can be higher 

than the final appraised value. Many times foreclosed or distressed property sales 

are used as comparable sales in these appraisals, which further depresses home values and puts new construction at a disadvantage. As a result, new home construction is at a record low level. The downward spiral in values is also adversely affecting outstanding residential construction loans, as lenders demand equity pay-ins to 

offset declines in collateral value, and making it more difficult for builders to obtain 

adequate funding to start new projects. Ultimately, stopping this trend in foreclosures will have benefits beyond the housing industry. Stabilizing home values 

will improve the balance sheets of financial institutions and will reassure home 

owners that their biggest asset will retain its value. 

NAHB Recommendations 

The Federal Housing Finance Agency (FHFA), in consultation with the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of 

Treasury, recently issued a Request for Information to solicit ideas for strategies on 

disposing of the substantial inventory of Real-Estate Owned (REO) properties held 

by Fannie Mae and Freddie Mac (the Enterprises) and the Federal Housing Administration (FHA). NAHB appreciates that the agencies are seeking input from industry stakeholders before moving forward with disposition strategies. We support the 

agencies’ goals of reducing the REO portfolio in a cost-effective manner; reducing 

average loan losses to the Enterprises and FHA; addressing property repairs and 

rehabilitation needs; responding to economic and real estate conditions in specific 

geographies; and stabilizing neighborhoods and local home values. NAHB submitted 

comments to the agencies in response to the Request for Information, and we would 

like to share those comments with the Committee as they are relevant to today’s 

hearing topic. 
36 

General Principles 

NAHB believes that it is extremely important for the Enterprises and FHA to 

take a balanced approach in disposing of their large inventory of REO properties 

to avoid further disruptions to pricing and markets and to limit losses to the Enterprises and FHA. In particular, the Enterprises and FHA should avoid bulk sales to 

large investors that have no stake in the neighborhoods in which these properties 

are located. Local and small businesses should be the driving force behind the disposition of the REO inventory, which will result in the creation of jobs and the stabilization of neighborhoods. In addition: 

• The FHFA should allow a more decisive approach to mortgage modifications, 

which would help reduce the number of foreclosures. 

• The excessive bias against investors in the current system must be removed in 

order to facilitate innovative solutions and assure adequate capacity to effectively reduce the REO inventory. 

• For-profit companies should be permitted to fully participate in all aspects of 

the disposition of the REO properties, including the purchase, management, 

leasing, and rehabilitation of the properties. With the scale of the problem so 

large, it is necessary to deploy all resources in both the private and nonprofit 

sectors. 

• The disposition process should facilitate local job creation. Local businesses and 

small businesses should be primary players in this effort, particularly local 

home builders and remodelers, as well as property managers and realtors. 

• The disposition process should not further adversely affect values. Do not allow 

‘‘fire sales’’ of REO properties. It is critical that the disposition process helps 

stabilize house prices, not contribute to further devaluation. 

• The process should facilitate homeownership opportunities where feasible and 

available. 

• Rental opportunities should be created where appropriate, but the agencies 

should ensure that the disposition of REO properties does not result in concentrations of large numbers of rental properties in any single neighborhood. 

• It is essential to return to more balanced credit requirements for home purchasers. Current credit requirements are so restrictive that it is difficult for 

many potential purchasers to obtain a loan. 

• NAHB strongly suggests extending the higher Economic Stimulus Act (ESA) 

loan limits beyond the September 30, 2011, expiration date. This is not a time 

to lower loan limits as the lower limits will exclude many homes and home buyers from FHA and the Enterprises loan programs, particularly in areas like 

California where there is substantial foreclosure inventory. NAHB would specifically like to thank the efforts of Subcommittee Chairman Menendez for his 

leadership in extending the loan limits past the current expiration date, and 

strongly supports his legislation (S. 1508) to extend the higher loan limits 

through December 31, 2013. 

• NAHB understands that establishing credit risk retention rules was required by 

the Dodd-Frank Act. However, NAHB is very concerned about the immediate 

impact this proposed rule will have at this precarious point in the economic recovery. We are also concerned about the implications of overly restrictive rules 

on future growth of the housing market and the entire economy. NAHB has recommended the elimination or postponement of any new restrictive regulations. 

The proposed rule has far-ranging implications across the housing and development sectors, particularly the narrow definition of a Qualified Residential Mortgage (QRM), which, if implemented, would have a severe adverse impact on the 

availability and cost of residential mortgages. 

Modify Federal Housing Programs To Allow Investor Participants 

Modifications to Federal housing programs to allow investor participation in disposing of REO properties is appropriate at this time. These modifications could be 

made on a short-term basis while the inventory of REO properties remains high. 

• Modify the FHA Section 203(k) program to allow for-profit investors, which will 

help expedite the sale of vacant and distressed properties until the foreclosure 

crisis is alleviated. Understanding that investor/non-owner occupant loans 

present higher risks, FHA could impose prudent restrictions such as higher 

down payments and providing owner-occupants a first look before offering to investors. In addition an incentive could be developed to encourage investors to 

sell the property to an owner occupant within a reasonable period of time 

through lease purchase or other targeted programs. 
37 

• Encourage HUD to provide guidance to participating jurisdictions (PJs) on the 

use of HOME funds to help purchasers buy foreclosed properties. Although PJs 

set their own priorities for spending HOME funds, HUD can play a role by providing best practice approaches for using HOME funds to help with neighborhood stabilization. 

• Improve the Neighborhood Stabilization Program (NSP) to allow more for-profit 

participation, expand income levels served and generally streamline the process. 

States and localities should be encouraged to undertake both homeownership 

and rental programs. 

• Encourage USDA Rural Development to use Section 502 to help homeowners 

purchase foreclosed homes or REO properties. 

• Consider changes to loan terms in all Federal programs (e.g., stretch amortization to 40 years; allow higher loan-to-value). 

• Considering the most recent data, FHA-financed condominium purchases are 

performing stronger than other purchase loans with a delinquent/claims rate of 

1.14 percent, which is less than half of the overall claims rate. The FHA condominium rules should be relaxed to provide greater liquidity to this sector of the 

market. We support enhancements that would 1) eliminate owner-occupancy ratios, enabling more buyers to purchase units and help stabilize those developments and the community; 2) amend or, at least, temporarily suspend the FHA 

concentration limit; 3) increase the investor ownership percentage owned by one 

investor, particularly if the investor is the builder or developer; 4) reduce or 

eliminate pre-sale requirements; and 5) extend delinquent Home Owner Association (HOA) assessments from 30 days to 90 days. 

Modify Fannie and Freddie Programs 

The economic crisis pushed the Enterprises to implement overly stringent credit 

requirements and other restrictions, in addition to ceasing programs that were once 

in operation. However, prudent modifications to several programs could greatly assist in the reduction of the REO inventory without excessive risk to the Enterprises. 

• The Enterprises should prudently modify existing mortgage programs that are 

overly restrictive and prohibit originators from adding any overlays that would 

be more restrictive. 

• The Enterprises should remove excessive bias against investors by increasing 

the number of GSE loans an investor can have. Currently Fannie Mae limits 

investor properties to 10, including their primary residence, and investors with 

5 to 10 properties face more rigid underwriting criteria. Freddie Mac is even 

more restrictive, allowing only four. 

• The Enterprises’ renovation programs like Fannie Mae’s HomeStyle Renovation 

should be reevaluated. The guidelines should be targeted to include investors 

and to provide incentives to home buyers to acquire deteriorated inventory and 

recondition them. 

• Both Enterprises have operated lease-to-own programs in the past which are 

now dormant; the Enterprises need to do more in this area by facilitating the 

creation of investor lease-to-own programs that can be operated at scale. 

• The Enterprises should ease their condo policies to provide needed liquidity to 

reduce the excessive inventory. Similar to recommendations for FHA, we support enhancements to owner-occupancy ratios, investor ownership ratios, presale requirements and delinquent HOA assessments. Enhancements to the Enterprises’ condominium rules will ensure the still-fragile recovery stays on track 

and will protect the long-term value of homeownership in the United States. 

New Programs 

NAHB suggests that new programs, such as described below, could contribute to 

the reduction of the REO inventory. 

Investment Fund 

The Enterprises could transfer REOs to a newly created investment fund (REITlike) that is open to individual investors. The funds would have full faith and credit 

backing by the Federal Government and a guaranteed rate of return similar to the 

current Ginnie Mae (GNMA) rates. Local real estate management companies should 

be used to inspect and manage the properties and report quarterly on the condition 

of properties to the fund. 
38 

1 NAHB estimates that for every $100,000 spent on residential remodeling, 1.11 jobs are created. 

Lease-To-Own 

A new lease-to-own program should be developed that is geared to all income levels, as the foreclosure crisis has affected families from all walks of life. Such a program could be operated at various scales, with 50 to 100 units as a minimum. An 

effective program would include the following elements: 

• A 12 to 24-month lease period to allow time to save for the downpayment, repair credit, bring up FICO scores; downpayment funds would be escrowed over 

this period. There would be a penalty if the participant drops out (some or all 

of the escrowed funds would be forfeited; those funds revert to the builder/investor to be used to repair the unit and remarket it). 

• Downpayment escrow of 5 percent of the purchase. 

• Mandatory homeownership counseling to consist of both financial literacy (understanding mortgages, credit requirements, etc.) as well as home maintenance 

and responsibilities of being a homeowner. 

• Participant responsibilities during the lease period to include interior maintenance; exterior maintenance responsibilities would depend on whether there is 

a homeowners association and if those services are included otherwise. 

Project Rebuild 

The President proposed in his American Jobs Act of 2010 to create ‘‘Project Re- build.’’ Project Rebuild would authorize $15 billion to rehabilitate and refurbish vacant and foreclosed homes. Two-thirds of the funding would be allocated by formula 

to State and local governments, with the remainder allocated through a competitive 

process. NAHB is particularly pleased that the proposal would allow for-profits 

builders to compete directly for the funds. NAHB commends the Administration for 

recognizing the urgent need to deal both with vacant and foreclosed homes as well 

as to promote job creation in the construction industry. 

While Project Rebuild has the potential to create more than 100,000 jobs 1 in the 

remodeling and home building sector, the draft legislation also seeks to impose the 

prevailing wage and administrative requirements of the Davis-Bacon Act of 1931 on 

the use of these funds. Extending Davis-Bacon in this manner will undermine the 

very objective of the legislation: job creation. The vast majority of home building and 

remodeling companies are very small businesses who simply lack the ability to tackle the complex administrative requirements of Davis-Bacon. Congress has previously 

imposed Davis-Bacon requirements on the use of stimulus funds in the American 

Recovery and Reinvestment Act (ARRA), and this requirement became a significant 

barrier preventing struggling construction companies from accessing these funds. A 

February 2010 Government Accountability Office report analyzing the effects of 

Davis-Bacon under ARRA noted that ‘‘ . . . Davis-Bacon administrative requirements would require a more detailed payroll tracking system, which would be particularly burdensome for small companies.’’ [page 16] Additional Government regulation is not the path to successful small business job creation. 

Conclusion 

Thank you again for the opportunity to testify on this important issue. NAHB 

stands ready to work constructively with this Subcommittee, as well as the full Senate Banking Committee, to address the critical issue of foreclosures and their impact not only on the current housing market but on the economic recovery of the 

Nation as a whole. 

PREPARED STATEMENT OF CHRIS KREHMEYER 

PRESIDENT AND CEO, BEYOND HOUSING

SEPTEMBER 20, 2011 

Chairman Menendez, Ranking Member DeMint and all Committee Members, it 

is my honor to be here today to discuss the very critical issue of the glut of foreclosed homes that are currently on the market. I am the President/CEO of Beyond 

Housing, a Neighborworks America network organization and a 35-year-old not for 

profit in St. Louis, Missouri. In addition, I am on the Board of Directors of the National NeighborWorks Association, a national membership group that works to unite 

housing and community development practitioners to advocate for affordable housing and economic opportunities for individuals, families, communities and neighbor-
39 

hoods across the country. I currently chair the Association’s External Policy Committee. 

Furthermore, I am a founding board member of Practitioners Leveraging Assets 

for Community Enhancement, or PLACE. PLACE is the single unified voice of housing and community development practitioners who build, preserve, and maintain 

adequate and affordable housing and promote community development for low- and 

moderate-income families across the country. Our members are the expert end-users 

of Federal, State and private housing and community development funding, 

leveraging various sources of capital to build and strengthen America’s communities. 

So, I’m the local guy; the practitioner on the ground who works with housing programs and policies to get things done in local communities. 

My organization tries to tackle the problem of foreclosures and the damage it does 

to families and communities each and every day. Our staff confronts this issue from 

every angle starting with prevention in our first time home buyers work where we 

provide the needed and necessary guidance to ensure that families are truly prepared for long term, sustainable homeownership. Prevention continues with foreclosure counseling work using the National Foreclosure Mitigation Counseling 

(NFMC) program that is run in an incredibly efficient manner by Neighborworks 

America. Our efforts also include the purchase and rehab of foreclosed homes using 

the Neighborhood Stabilization Program (NSP) and other resources we are able to 

secure. In the past twelve months we have used NSP funds to buy and rehab 30 

homes that were added to our rental portfolio of over 340 single family homes. Just 

last month we created a community land trust to use as a vehicle to secure property 

in our targeted community in St. Louis. We plan to purchase and rehab six vacant/ 

foreclosed properties before the year is out with the land trust. 

Our work was recently cited by the White House in their July 2011 ‘‘Neighborhood Revitalization Initiative Report’’. 

So what can be done to stem the tide of foreclosed properties causing such great 

damage to the neighborhoods and communities across the country? I would be remiss to not state that the best thing that can be done is to keep families in their 

homes. This is not the focus of this hearing but it is indeed critical and greater action such as across the board principle reduction must be looked at right away if 

we are to slow down the pace of foreclosed homes coming in the market place. 

Here are critical, over arching principles that need to be in place no matter the 

end use or type of developer that were created by myself and group of peers from 

across the country who are all a part of the Neighborworks America network: 

• Recent and emerging neighborhood stabilization could be put at risk if there is 

no alignment of the investment by third-parties with the commitments to community stabilization activities underway in these communities. 

• Long-term affordability would not be served by a blanket transfer of properties 

without consideration for pricing discounts to be provided along with affordable 

income qualifications. 

• Long-term downward drag on these communities would continue if for-profit investment is not able to manage a long-term investment strategy (3 to 5 years). 

Short-term investment strategies may require assets to be sold at distressed 

values and thus perpetuate the current situation. 

• Community value is not strengthened if non-local investors neglect maintenance 

and repair of properties. Good stewardship of properties during the transition 

phase is important to strengthen viability of communities and protect other 

asset values in neighborhoods. 

• Property values continue to suffer unless sufficient reinforcement of appraisal 

guidelines on valuing in distressed communities so that the bulk transfers do 

not further erode value in these communities. 

The following address the specific methods of disposition called out in the testimony confirmation letter. 

Conversion to Rental Properties 

Managing and maintaining a scattered site, single family portfolio is challenging 

but as my organization’s 35-year track indicates it is possible. As recent data sadly 

reflect more families live in poverty today than ever. The need for safe, affordable 

rental housing has never been bigger. There are a number of for-profit and not-forprofit developers and property managers across the country that can both perform 

the management services and train others to also be successful. The key elements 

of this strategy will be: 
40 

• Aligning the goals of the public sector, servicers, investors, community leaders, 

for-profit developers and not-for-profit developers. Failure to do so will create 

a delivery system that fails to meet expectations as we have seen in the foreclosure counseling work. 

• Significant discounts in pricing to acknowledge the financial challenges in 

bringing the home back on line as a sound asset for the community and for the 

owner. (Detailed financing structure is presented later in testimony) 

• Ensuring the debt structure subsequent to total development costs provides a 

debt coverage ratio of at least 1.2, i.e., given reasonable occupancy rates and 

after paying mandatory costs (insurance, taxes, management, maintenance, utilities, etc.) there is still enough revenue to pay the debt service plus 20 percent. 

The 20 percent is for reserves and unanticipated costs. 

• Securing experienced and qualified property management firms to ensure that 

the home remains in good condition and an asset to the community. 

Demolition 

There will be a portion of the foreclosed properties that simply need to be demolished. In most cases the only possible way to dispose of a home in this situation 

would be to donate the parcel to the local government or qualified entity with a 

guarantee that the home will indeed be demolished. The use of land banks or land 

trusts should be expanded across the country to be the holder of these properties 

until redevelopment can occur. There are instances where demolishing a home on 

a block can provide much needs emotional and psychological assistance to existing 

community residents to let them know positive things can occur. 

Bulk Sales Partnership with Government-Sponsored Entities (GSEs) 

A partnership model that was designed by a group of my Neighborworks America 

network peers and I would create a great vehicle to address the glut of foreclosures. 

The model builds on existing work and could really move the needle on getting 

homes back into productive use. 

The partnership model proposed below leverages many institutions created by the 

community development industry in response to the crisis. This includes the National Community Stabilization Trust, which NeighborWorks America, Enterprise, 

LISC, Housing Partnership Network, National Council of La Raza, and the Urban 

League helped form. The NCST provides a critical function to aggregate REO inventory among servicers and create a platform for offering this inventory to nonprofits 

across the country and simplifying the execution process to transfer these assets. 

This partnership model can deliver on several fronts: 

• It can collectively reach a substantial volume of property transfers that individual relationships would not be able to achieve—thus creating a wholesalelike execution. 

• It can connect REO assets in these communities to nonprofit community builders that are paramount to rebuilding the communities and establish new residents and quality housing. 

• It can assure that those assets of most strategic value to the community and 

most influence community value are handled by local interests. 

• It leverages the established tools in the marketplace (e.g., the National Community Stabilization Trust (‘‘NCST’’)) to handle aggregation and transfer of multiple assets to multiple locations from multiple servicers. 

• It allows for quality rehab to take place (including energy efficiency to create 

long-term financially and environmentally sound properties) and returns housing assets to productive use. 

• It can ensure that when assets are made available for sale as owner-occupied 

units that low- and moderate-income households have opportunity and options 

to purchase these assets. 

• It recognizes that GSE’s and FHA should be able to be compensated for the 

asset if the market returns. 

In general terms, the nonprofit community development/affordable housing program alternative would carry the following characteristics: 

• GSE’s and FHA identify and reserve assets that are located in either NSP markets or similar targeted geographies being worked by nonprofits (‘‘target markets’’). 

• These assets are made available to NCST as the ‘‘First Look’’ clearinghouse of 

assets to qualified nonprofits. The assets are available for acquisition by quali-
41 

fied nonprofits for a set period of time after which the assets revert for broad 

market sales. 

• Qualified nonprofits working in the target markets would purchase assets at a 

prudent, transparent discount price that considers the balance between the 

costs of acquisition, rehabilitation, and management and feasible rents to lowand moderate-income families in these markets. In consideration for this discounted price the non profits would execute an agreement to share gain on sales 

if they would occur with the GSE’s or FHA. 

• Nonprofits take title to assets from Enterprises or FHA. 

• Nonprofits rehabilitate the housing stock to appropriate levels at a target percentage of appraised value and improve the longevity and operating cost of the 

home by including as much energy efficiency and additional green improvements within the budget. To facilitate this rehabilitation, the Enterprises or 

FHA offer the nonprofits the opportunity to take out a mortgage as the mortgagor from Enterprises or FHA that covers the rehabilitation costs of the home. 

The mortgage would be assumable by a future buyer of the property. (Alternatively, the nonprofit could use a working capital lines to finance rehabilitation.) The nonprofit improves the property and makes the home available to a 

low-/moderate-income family. 

• The nonprofit manages the asset as rental property and uses rental income to 

cover mortgage note payment (or line of credit costs) and operating costs; any 

additional rental income proceeds are kept by nonprofit to further its community improvement strategy. 

• At a point in time when values have stabilized, the nonprofit markets the property as an affordable housing unit to a low-/moderate-income family. 

• The GSE’s and FHA make available specific mortgage products with flexible 

terms to allow low-/moderate-income families to purchase the homes. 

• Nonprofit sells asset and shares an established percent of the difference between costs of asset (e.g., rehabilitation costs, holding costs, sales costs, developer fees) and sales price with the GSE’s or FHA. 

The nonprofit community development/affordable housing approach is offered as 

a strategy to deliver quantities of quality affordable housing and simultaneously address the destabilizing influences of foreclosure. It achieves these goals by creating 

strong, community-based owners of assets with an interest in community improvement through a partnership between the GSE’s and FHA in the redevelopment of 

these communities along with fair consideration for the assets. The outcomes of this 

approach are many. Existing homes are used to provide affordable housing and meet 

the demand for this product throughout the Nation. Properties are improved to 

make them longer-term assets that meet higher energy efficiency standards; thus 

preserving assets for the long term and making the homes more economic to operate 

for lower income households. 

The rental properties are maintained to high standards in the community. The 

property values are not diminished in the community as the nonprofit will market 

to preserve value in the community as sales will occur when market stabilizes. The 

Enterprises and FHA get performing assets on their books in the rehabilitation 

loans and they are compensated for assets through a shared gain on sales approach. 

And, in the end quality, affordable homes are returned to low-moderate-income families for rental and eventual homeownership. 

Coordination of Strategies 

The strategy detailed above would fit in perfect alignment with existing work already taking place using the NSP and NFMC programs all across the country. Overt 

and intentional coordination needs to occur if we are to derive the collective impact 

of these programs. Local community leadership, not-for-profit developers, for-profit 

developers and local units of government will be tasked to ensure and prove levels 

of coordination through Memorandums of Understanding (MOU). These MOU’s will 

call out specific objectives, deliverables and responsibilities for all parties. Failure 

to work in this intentionally integrated fashion will hinder any opportunity for community wide success. 

Again, thank you for the opportunity to present my ideas and the ideas of my not 

profit peers from across the country to address the serious challenges we face each 

in every day as we try to make a difference in the lives of those we serve. 
42 
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PREPARED STATEMENT OF STAN HUMPHRIES, PH.D. 

CHIEF ECONOMIST, ZILLOW

SEPTEMBER 20, 2011 

Introduction 

Thank you Chairman Menendez, Ranking Member DeMint, and Members of the 

Subcommittee, for the invitation to speak today. I am the chief economist of Zillow, 

the leading real estate information marketplace, where I closely follow and report 

on the state of the housing market. 

I’d like to preface my statements by noting the perspective with which Zillow approaches analysis of the housing market. We launched our Web site in 2006 with 

the goal of creating more transparency of real estate information for consumers. As 

a media-supported business, we have no vested interest in the outcome of this debate, other than the hope that whatever is decided will best address the needs of 

consumers (by which I mean sellers, buyers and homeowners with no intent of moving). 

Today I’ll make three points about the housing market and about how to address 

foreclosures. 

First, don’t underestimate the market’s ability to fix itself. This is, in fact, already 

happening. We may not like the timetable, but economic recovery can’t always happen overnight. 

Second, many policies addressing foreclosures are simply addressing symptoms, 

not fundamental drivers of a healthy housing market. Yes, declining values have led 

to foreclosures, which have created an excess supply of housing. But eliminating 

this excess supply can’t easily be achieved via policy. But policy can help the demand side, chiefly when targeted at decreasing unemployment. 

Third, in trying to speed up the recovery of the housing market, the first priority 

of the Government should be to do no harm. The Federal home-buyer tax credits 

of 2009 and 2010, while they stimulated sales in the short term, did not materially 

change the trajectory of the housing market in the long term. In fact, it is arguable 

that they delayed the ultimate market bottom. We should be sure not to make similar mistakes in the future which are incredibly costly to taxpayers but net very few 

positive long-term results. 

How the housing market is fixing itself 

Regarding my first point about the ability of the housing market to fix itself, there 

are several reasons I believe this is already happening. It is true that there is a 

large pool of previously foreclosed properties owned by banks, and by entities like 

Fannie Mae and Freddie Mac. Estimates suggest that there are more than a half 

million real-estate owned properties held by lenders and Government-sponsored enterprises, about 2.2 million more homes in the foreclosure process, and still another 

1.9 million homes with mortgages that are delinquent more than 90 days. These 

homes are flooding the marketplace with abundant, cheap inventory which pushes 

prices down near-term and will keep a firm lid of price appreciation in the longterm even after the bottom in home values has been reached. 

But, while we often focus on the dismal state of the purchase side of the housing 

market, the other side of this same coin is a booming rental market. With the foreclosure epidemic converting many homeowners into renters, rental supply is reportedly as tight now as it was prior to the recession, and effective rents are estimated 

to rise 4 percent this year. The homeownership rate crested in 2004 at 69.2 percent, 

fueled by easy lending, low rates, and a positive feedback loop of appreciation and 

irrational expectations. During the housing recession, this rate has fallen to 65.9 

percent currently, still not even in line with the longer term historical average of 

64 percent. 

Investors smell a distinct opportunity in this situation: The chance to buy an 

asset cheaply and rent it out dearly. In fact, close to one-third of the purchases of 

existing homes this year have gone to all-cash buyers, the bulk of whom are real 

estate investors. 

The private market is stepping in briskly to buy up distressed homes and convert 

them to rentals (or, in some cases, fix them up and sell them on to other buyers). 

Additionally, thanks in part to these investors, the inventory of foreclosed homes 

owned by Fannie Mae, Freddie Mac and the FHA declined at the end of the first 

quarter. This market-clearing is sometimes hard to watch. It’s a slow process of 

healing, but one that plays out when natural dynamics are not disrupted. 

Addressing the continuing problem of foreclosures 

Regarding the second point I outlined, the two fundamental factors that will affect 

housing over the next several years are negative equity and unemployment. Nega-
59 

tive equity—estimated by Zillow as 26.8 percent of single-family homes with mortgages—contributes to foreclosures and also suppresses housing demand. Unemployment affects household formation and consumer confidence. Unfortunately, negative 

equity is a difficult problem to influence via policy and it will only recede slowly 

over time. 

But employment is more easily addressable by policy action. Make no mistake, the 

quickest and best way to improve the housing market is to grow jobs faster. Just 

last week, we were reminded where so much housing demand has gone during the 

recession when the Census Bureau reported that almost 22 million households are 

currently doubled up. Grow jobs and these households can start to uncompress and 

occupy additional housing units. A jobs plan is a housing plan. 

There have been numerous proposals to more directly stem the tide of foreclosures, many of which we have already tried, but which have unfortunately yielded more limited results than we hoped. I greet with great optimism each new idea 

about how to help prevent more foreclosures because the aggregate numbers defining this crisis mask such terrible suffering for millions of individual homeowners 

who experience foreclosure. 

But the reality is that most proposals to fix this issue become problematic or infeasible because targeting only the people who truly need and can benefit from help 

is exceedingly difficult. With respect to foreclosure risk, there are essentially three 

categories of homeowners: 1) those who don’t need our help; 2) those who need more 

help than we can possibly give them because they are facing a fundamental change 

in their household financial situation; and 3) those for whom modest assistance like 

principal reduction, reduction in mortgage rate, or unemployment forbearance can 

make a difference in outcomes. 

Helping this third group, which is the smallest, without spilling over into the 

much larger first and second groups, where our money is wasted because they don’t 

need it or because it won’t fundamentally help them, is extremely challenging. And 

ineffective targeting of any policy balloons the cost and creates substantial unintended consequences, usually involving moral hazard in which people will avail 

themselves of the remedy even when they do not truly need it. I believe that the 

need to thread the eye of the needle so closely here is why we’ve seen such lower 

than expected outcomes for programs like the Home Affordable Modification and Refinance Programs. 

Assuring Government policy does no harm 

Finally, let me return to my third point about Government policy doing no harm. 

One idea being explored is that of Fannie and Freddie getting into the rental market in some fashion. I’ve already discussed how private investors are soaking up distressed inventory and transforming many of these homes into rentals. The Government should be very careful about trying to interfere with this natural process. Investors have been and currently are betting that more foreclosures will create more 

renters, and they are moving to serve that market. Any plan that may upset this 

balance—such as Fannie and Freddie getting into the rental market and creating 

competition—will have a chilling effect on private investment in the one segment 

of the housing market that is performing well. Yes, Fannie and Freddie becoming 

landlords could decrease the number of foreclosed homes coming into the market, 

but at the expense of further decreasing demand because investors will no longer 

buy properties for conversion and buyers may choose to rent instead of buy. 

Our recent experience with the Federal home-buyer tax credits should tell us 

something about the limits of policy in shifting long-term market dynamics. Yes, we 

were successful in stimulating more housing demand during the period of the tax 

credits. Unfortunately, this demand was largely stolen from future months, resulting in a decline in sales after the tax credit expiration which was commensurate 

with the increase during the credits. We should be cautious about similar proposals 

that, like the tax credits, would stimulate the market only in the short-term, when 

what we really need is long-term recovery. 

In summary, forces in the housing market are at play that will lead to long-term 

stabilization. But it’s a delicate balance that should be well-understood before the 

Government steps in to help it along. 

Thank you again for the opportunity to address you today and I look forward to 

answering any questions that you might have. 
60 
(61) 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM ALLAN H. ‘‘DUTCH’’ DECHERT 

Q.1. I have heard from some banks that in order for renting to be 

a viable option from a ‘‘net present value’’ modeling perspective, 

there would have to be tax breaks on the rental income. That is, 

it doesn’t make economic sense for banks to undertake lease-to-own 

programs with loans on their book unless there are tax incentives. 

Have any of you seen similar analysis? 

• If homeowners cannot afford to make mortgage payments, are 

we sure they will be able to afford to make rental payments 

that are sufficiently high to offer the investor a sufficient return? This concept of turning REO properties into rentals is 

being billed as something of a panacea. But are you sure that 

there is a rental price low enough that people can afford but 

high enough for it to make sense to investors? 

• You all point out that negative equity is a major problem right 

now. I agree. If we are thinking about not having to live 

through a catastrophe like this ever again, doesn’t it make 

sense to require a sensible down payment so that homeowners 

have more of an equity buffer against price downturns? We are 

requiring banks to have more equity. What about homeowners? 

Isn’t equity a vital buffer to market downturns? 

A.1. Tax Incentives to Facilitate Lease-to-Own Programs 

Our research has uncovered no analysis that indicates that lenders would require a tax incentive to lease their real estate owned 

(REO) properties. Banks currently have the ability to rent their 

REO property for up to 5 years while they actively work to sell it. 

Moreover, if they require additional time, they may ask their regulator to extend the period of rental. Within these situations, there 

is the possibility that the renter would have an opportunity to purchase the rental unit. And as mentioned, our conversations with 

lenders have not revealed their need for a tax incentive in order 

to facilitate the rental or sale of their REO property. 

REO to Rental Properties 

NAR believes that the GSEs’ policies should first be focused on 

keeping families in their homes through loan modifications or short 

sales if that’s a better option, and that the agencies should not expedite foreclosures so that those properties could be included in a 

lease-to-own program. Moreover, REALTORS® believe that any 

lease-to-own programs should not be administered by the Government, but instead should include the participation of local investors 

or nonprofits that can manage the specialized needs and challenges 

of the local market. 

REALTORS® believe the Government has an opportunity to minimize the impact of distressed properties on local markets by ex-
62 

panding financing opportunities, bolstering loan modifications and 

short sales efforts, and enhancing the efficient disposition of REO 

properties. This will help stabilize home prices and neighborhoods 

and help support the broader economic recovery. 

NAR believes that the lack of available and affordable mortgage 

financing is hurting REO sales and the entire housing market, and 

urged increased consumer and investor lending. While NAR supports strong underwriting standards, the lack of private capital in 

the mortgage market, unduly tight underwriting standards, and increasing fees have discouraged many potential home buyers from 

applying for mortgages. NAR believes ensuring mortgage availability for qualified home buyers and investors will help absorb the 

excess REO inventory. 

To prevent further REO inventory increases, NAR also recommends that the agencies take more aggressive steps to modify 

loans and, when a family is absolutely unable keep their home, to 

quickly approve reasonable short sale offers that allow families to 

avoid foreclosure. 

Mortgage Down Payments 

Your question regarding the need for borrower equity via higher 

down payment is the issue that NAR, and a coalition of housing advocates, are discussing with the regulators who will determine the 

qualified residential mortgage (QRM) rule. 

NAR’s members believe the impact of the proposed narrow definition of QRM would be to curtail the ability of creditworthy households from obtaining mortgages to purchase a home. Focusing the 

QRM exemption on underwriting factors that do not significantly 

improve loan performance (e.g., a mandatory high percent down 

level) means millions of families will fail to qualify for a QRM 

mortgage and will have to pay higher rates and fees for a non-QRM 

mortgage, if they are even able to qualify. A review of loans originated in 2008 reveals that reducing the down payment from 20 

percent to 5 percent increases the default rate by only 0.6 percent, 

but makes 18 percent more borrowers eligible for a QRM loan. 

Moreover, based on NAR estimates, assuming that 100 percent 

of family savings are dedicated toward a down payment and closing 

costs, it would take more than a decade for a family with a median 

household income to save enough for a 20 percent down payment 

for a $150,000 home (lower than the current median). Even a 10 

percent down payment would take a family more than 8 years to 

save. 

RESPONSE TO WRITTEN QUESTION OF SENATOR WICKER 

FROM ALLAN H. ‘‘DUTCH’’ DECHERT 

Q.1. What existing programs, if any, are in place to help veterans 

or service members take advantage of the opportunity to prudently 

invest in rental property, and are they being utilized effectively? 

What could be done to make these programs more effective? What 

more could be done to help prepare veterans or service members 

to invest in homes that are available for sale (due to the recent 

surge in foreclosures or in the normal course of events) and to manage rental property? 
63 

A.1. Based on NAR’s research and inquiries with agencies that provide education for first-time home buyers, and potential real estate 

investors, there are no known programs that are geared specifically 

toward service members to help them understand and navigate 

real estate investment opportunities. There are numerous course 

offerings and software available to the general public on the topic 

of real estate investment, of which our service members can partake; however, none that are geared specifically to that population 

segment. 

The void in educational opportunity for service members on this 

topic may be an opportunity for the National Association of 

REALTORS® to provide our expertise to a population segment that 

could derive some benefit. I will work with the association to see 

if there is an opportunity within our forthcoming REALTOR® University for such an effort. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM CHRIS KREHMEYER 

Q.1. I have heard from some banks that in order for renting to be 

a viable option from a ‘‘net present value’’ modeling perspective, 

there would be have to be tax breaks on the rental income. That 

is, it doesn’t make economic sense for banks to undertake lease-toown programs with loans on their book unless there are tax incentives. Have any of you seen similar analysis? 

A.1. I have not but we rather see a simple conveyance model to the 

next owner/manager of the home and not make the transaction 

more complicated. Further, I have not seen a successful, scalable 

lease purchase model and therefore believe a conventional rental 

model is the correct approach. 

Q.2. If homeowners cannot afford to make mortgage payments, are 

we sure they will be able to afford to make rental payments that 

are sufficiently high to offer the investor a sufficient return? This 

concept of turning REO properties into rentals is being billed as 

something of a panacea. But are you sure that there is a rental 

price low enough that people can afford but high enough for it to 

make sense to investors? 

A.2. The complexity of this problem does not allow this or any 

other solution to be a panacea. The economic analysis will regrettably be on a parcel-by-parcel basis and for some this idea will not 

work due to the simple mathematics of the transaction. That being 

said, having a home sit vacant with no income and the great potential of deterioration and vandalism makes one believe it should be 

considered in a real and meaningful way. I am convinced that we 

can make this model work for a portion of the REO inventory currently sitting vacant and harming all those involved. 

Q.3. You all point out that negative equity is a major problem right 

now. I agree. If we are thinking about not having to live through 

a catastrophe like this ever again, doesn’t it make sense to require 

a sensible down payment so that homeowners have more of an equity buffer against price downturns? We are requiring banks to 

have more equity. What about homeowners? Isn’t equity a vital 

buffer to market downturns? 
64 

A.3. Prior to the sub-prime crisis prudent underwriting, modest (3– 

5 percent) down payment and home-buyer advisement services to 

those in the low- to moderate-income cohort created successful 

long-term homeowners and protected the market place. Once underwriting was dramatically loosened including the modest down 

payment requirement and no mandate of advisement services prior 

to purchase this is when the systemic failures occurred. Large 

down payments as put forth in the Qualified Residential Mortgage 

proposal would make it near impossible for so many hard working, 

fiscally responsible families to get their part of the American 

Dream. There is lots of blame to share on the mortgage mess we 

are all trying to clean up today but a radical shift in the amount 

of down payment required will not strengthen the system but rather inadvertently dramatically diminish who can participate in 

homeownership. 

Q.4. In your testimony you outline a cooperative partnership 

model. Does the local infrastructure exist to make these programs 

like block sales or rental conversations, successful while also protecting the taxpayer? I doubt very much that Fannie and Freddie, 

with existing personnel and resources in DC, can successfully manage such an undertaking, and I think you and I agree here. How 

would the taxpayer be protected in your model? 

A.4. I believe there is local infrastructure in place, to varying degrees across the country that could implement a cooperative partnership model. The question of taxpayer protection comes down to 

when will the haircut take place? We can take a hard stance on 

valuation of Fannie and Freddie’s REO’s today and have them sit 

vacant and lose more value or we can move property to productive 

use now garnering some return while executing a shared equity appreciation agreement with the local partner. I cannot speak to 

Fannie and Freddie’s capacity but do not believe we are curing cancer here—these are financial models that can be reviewed quickly, 

efficiently and determined which parcels can be moved on and 

which need to stay in the portfolio. In both cases trying to strike 

the balance of protecting the taxpayer and putting the home back 

in productive use and all the upside financial gains that will occur 

when this happens. 

RESPONSE TO WRITTEN QUESTION OF SENATOR WICKER 

FROM CHRIS KREHMEYER 

Q.1. What existing programs, if any, are in place to help veterans 

or service members take advantage of the opportunity to prudently 

invest in rental property, and are they being utilized effectively? 

What could be done to make these programs more effective? What 

more could be done to help prepare veterans or service members 

to invest in homes that are available for sale (due to the recent 

surge in foreclosures or in the normal course of events) and to manage rental property? 

A.1. I am not aware of any significant programs in this vain. 
65 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM LAURIE GOODMAN 

Q.1. I have heard from some banks that in order for renting to be 

a viable option from a ‘‘net present value’’ modeling perspective, 

there would have to be tax breaks on the rental income. That is, 

it doesn’t make economic sense for banks to undertake lease-to-own 

programs with loans on their book unless there are tax incentives. 

Have any of you seen similar analysis? 

A.1. I do not think tax breaks are necessary for renting to be a viable option. My employer, Amherst Securities, has purchased 100 

homes in Phoenix, and we are operating this profitably without tax 

incentives. It is the case that the current return on the initial investment, after costs, is reasonably modest (6–8 percent). However, 

with Treasury rates below 2 percent, this return looks reasonable 

to alternatives. Moreover, there is some potential upside to investors. The upside can come from either from increases in rental income over time, or increases in housing prices once the market stabilizes. 

Q.2. If homeowners cannot afford to make mortgage payments, are 

we sure they will be able to afford to make rental payments that 

are sufficiently high to offer the investor a sufficient return? This 

concept of turning REO properties into rentals is being billed as 

something of a panacea. But are you sure that there is a rental 

price low enough that people can afford but high enough for it to 

make sense to investors? 

A.2. You are correct. Selling properties to investors to rent them 

out is not a panacea. Not all homes will work for this purpose. The 

home price must be such that the rental income is sufficient to entice investors, and rental demand is available in that market at 

that price. It would be difficult to rent out higher priced homes, as 

the rental income cannot justify the purchase price. It is also hard 

to rent out homes in communities where the economy is so weak 

there is no rental demand. However, the majority of REOs are 

rentable, and this would be a very valuable program to help stabilize the housing market. 

Q.3. You all point out that negative equity is a major problem right 

now. I agree. If we are thinking about not having to live through 

a catastrophe like this ever again, doesn’t it make sense to require 

a sensible down payment so that homeowners have more of an equity buffer against price downturns? We are requiring banks to 

have more equity. What about homeowners? Isn’t equity a vital 

buffer to market downturns? 

A.3. I agree, it is critical that homeowners have equity in their 

home at the time of initial purchase. Down payments are critical, 

as equity is the single most important determinant of mortgage 

performance. 

Q.4. Your main thesis is that investors are the key to finding a bottom in home prices. So you advocate loosening standards for investors to get credit that is guaranteed by the taxpayer. Do you think 

this should be a permanent change to Fannie and Freddie guides? 

Or just temporary until we get through the overhang? One thing 

that concerns me about making this a permanent change is that in-
66 

vestor properties traditionally have higher default rates, and we 

need to be moving in a direction of reducing taxpayer exposure to 

risk, not increasing it. 

A.4. I don’t advocate loosening standards for investors to obtain 

credit that is guaranteed by taxpayers. I advocate loosening the 

hard caps on the number of properties that can be purchased, but 

maintaining conservative rules on necessary down payments to 

limit default risk. The down payments on investor-owned properties should be higher than on owner-occupied properties. We 

would suggest a minimum of 25–30 percent down on investor properties. Freddie currently allows for the purchase of only 4 properties by a single investor, Fannie allows for 10 properties. I don’t 

understand the rationale for this. I believe the cap should be unlimited, with a sufficient down payment. To use an extreme example, if an investor was willing to put 40 percent down on 2,000 

properties, I believe that Fannie and Freddie should be willing to 

finance all 2,000 properties. 

RESPONSE TO WRITTEN QUESTION OF SENATOR WICKER 

FROM LAURIE GOODMAN 

Q.1. What existing programs, if any, are in place to help veterans 

or service members take advantage of the opportunity to prudently 

invest in rental property, and are they being utilized effectively? 

What could be done to make these programs more effective? What 

more could be done to help prepare veterans or service members 

to invest in homes that are available for sale (due to the recent 

surge in foreclosures or in the normal course of events) and to manage rental property? 

A.1. I am not an expert in veterans programs. This question is better addressed to some of the other witnesses. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM STAN HUMPHRIES 

Q.1. I have heard from some banks that in order for renting to be 

a viable option from a ‘‘net present value’’ modeling perspective, 

there would have to be tax breaks on the rental income. That is, 

it doesn’t make economic sense for banks to undertake lease-to-own 

programs with loans on their book unless there are tax incentives. 

Have any of you seen similar analysis? 

A.1. No, I haven’t seen analyses related to this issue. In general, 

my sense is that rent-to-own programs are best administered by 

private companies that purchase the delinquent mortgages from 

the bank, not administered by the bank or loan servicer directly as 

this is not their core business. 

Q.2. If homeowners cannot afford to make mortgage payments, are 

we sure they will be able to afford to make rental payments that 

are sufficiently high to offer the investor a sufficient return? This 

concept of turning REO properties into rentals is being billed as 

something of a panacea. But are you sure that there is a rental 

price low enough that people can afford but high enough for it to 

make sense to investors? 
67 

A.2. The homeowner may not be able to afford the mortgage based 

on the original home value, but could afford a mortgage based on 

the current lower home value. Alternatively, the home could be 

bought by an investor, at the current lower home value, and rented 

back to the current occupant at a rent price which is lower than 

the occupant’s current mortgage payment but higher than the investor’s new mortgage payment based on the lower current price. 

Q.3. You all point out that negative equity is a major problem right 

now. I agree. If we are thinking about not having to live through 

a catastrophe like this ever again, doesn’t it make sense to require 

a sensible down payment so that homeowners have more of an equity buffer against price downturns? We are requiring banks to 

have more equity. What about homeowners? Isn’t equity a vital 

buffer to market downturns? 

A.3. Yes, equity in the home is one element of the overall default 

risk of a mortgage holder. But credit worthiness and debt-to-income 

ratios are also very important. All homeowners should be asked for 

some down payment, but the amount needed to influence default 

risk can vary depending on the other two factors. 

RESPONSE TO WRITTEN QUESTION OF SENATOR WICKER 

FROM STAN HUMPHRIES 

Q.1. What existing programs, if any, are in place to help veterans 

or service members take advantage of the opportunity to prudently 

invest in rental property, and are they being utilized effectively? 

What could be done to make these programs more effective? What 

more could be done to help prepare veterans or service members 

to invest in homes that are available for sale (due to the recent 

surge in foreclosures or in the normal course of events) and to manage rental property? 

A.1. I am not aware of any special programs targeted at stimulating real estate investment by current or former military service 

personnel. They presumably have equal access to credit from 

Fannie Mae for the purchase of up to 10 investment properties. 

There may be an opportunity to better raise awareness of these 

general opportunities to military personnel. 
68 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

STEVEN PEARLSTEIN: HOW ABOUT REFI.GOV? 

The Washington Post, September 17, 2011 

By Steven Pearlstein 

It’s been less than 2 weeks since President Obama spoke to Congress and the Nation about the urgency of taking additional steps to stimulate job creation by increasing public and private spending in the short term. Since then, two things have 

happened. 

The economic outlook has only gotten worse, largely because of the financial turmoil in Europe and further declines in consumer confidence. 

Meanwhile, the political outlook for actually doing something about it has gotten 

worse, because the business community and cowardly Democrats failed to rally behind the president’s plan, giving Republicans the political head room to continue 

peddling their Rotary Club nonsense that what’s holding back the economy is a 

crushing tax burden, stifling regulations and all-consuming worry over the budget 

deficit. 

Given the almost certain prospect of a continuing political stalemate, the president’s best option is to use the power he’s had all along to deliver tens of billions 

of dollars in additional stimulus by allowing millions more households to refinance 

their mortgages at today’s low rates. 

I’m not talking about significant modifications to troubled mortgages, which the 

banks and mortgage bond investors have done a fabulous job of preventing since the 

last years of the Bush administration. 

Nor am I talking about providing taxpayer relief to homeowners who have fallen 

behind on their payments and are facing foreclosure. 

I’m talking about the millions of households that are paid up on mortgages that 

still have interest rates of more than 5 percent and could use the lower rates engineered by the Federal Reserve to reduce annual payments by an average of $2,500 

a year. 

Here’s a statistic that tells you pretty much all you need to know: Back in the 

recession that began in 2001, roughly 85 percent of households that were eligible 

to refinance their mortgages did so, with an average decline in interest rates of 

about 1.3 percentage points. That freed up about $67 billion each year in bond payments that could be spent on other things. 

This time, only about 25 to 30 percent of mortgages has been refinanced, despite 

the lowest interest rates since the Great Depression. The average decline in rates 

on those refinanced loans has been less than half a percentage point, resulting in 

$45 billion in overall savings to borrowers. 

The biggest reason for this refinancing gap was a decision by Fannie Mae in 2008 

to increase the fees it charges to guarantee all new loans, including refinancings. 

The fee varies by borrower, but is particularly steep for those with low or middling 

credit scores, those with loans that are 90 to 125 percent of the current market 

value of the house and those living in areas where home prices declined the most. 

Given the shoddy underwriting during the credit bubble, this may have seemed 

like a reasonable step for Fannie to take as it related to guaranteeing new loans. 

But in terms of refinancing loans that it already guaranteed, it was rather shortsighted. Refinancing would have lowered the monthly payments and, therefore, the 

probability that the homeowner would default, which has turned out to be Fannie’s 

biggest risk and the biggest contributor to its quarterly losses. 

Essentially, Fannie’s clever strategy was to use its near-monopoly power to charge 

higher fees for assuming smaller risks knowing full well that the extra fee would 

discourage refinancing. The fees ranged from half a percentage point to 3 percentage 

points, which for many pretty much wiped out the potential benefit of refinancing. 

Why did Fannie do that? Because in addition to being in the business of providing 

mortgage bondholders a guarantee, or insurance, against the risk of default, Fannie 

also owns a huge portfolio of those bonds. And as a bondholder, refinancing a loan 

means it would receive less money every month from the borrower. The extra fees 

were designed not only to discourage refinancing, but to make up for any decline 

in monthly cash flow. 

Historically, whenever Fannie raised or lowered fees, its twin, Freddie Mac, would 

quickly follow. But this time when it did not, Freddie Mac executives were ordered 

by its new regulator to do so, apparently with the idea that it would lower the cost 

of the Government bailout. What may have been good for American taxpayers in 

the short run, however, turned out to be bad for the economy. Also contributing to 

increased refinancing costs were the handful of big banks that own or service most 
69 

of the mortgages in the United States. With the demise of aggressive (and foolhardy) players such as Countrywide, the mortgage banking industry went from 

being hyper-competitive in terms of price to being not very competitive at all. As 

a result the spread—the difference between what the banks pay for money and what 

they charge—widened considerably. 

The effect of all this was to thwart the impact of Fed’s ultra-low interest rate policy by allowing Fannie, Freddie and the big banks to capture much of the benefits 

rather than having them pass through to households and the broader economy. 

Those who still found it worthwhile to refinance tended to need the help the least— 

wealthier households with higher credit scores and lower loan-to-value ratios. Middle-income borrowers whose home values had fallen below the level of the outstanding loan were largely shut out. The result: a weaker economy, more foreclosures and a steeper decline in house prices. 

Over the past 2 years, there have also been numerous proposals for how to fix 

this problem by ordering Fannie and Freddie to roll back its fees and by somehow 

limiting the spreads charged by mortgage bankers. But these have been quietly opposed by bondholders who didn’t want lower interest payments and by industry executives and some top Administration officials who warned that it would raise the 

interest rates on all new mortgages in the future. Some Republicans also were so 

determined to kill Fannie and Freddie once and for all that they couldn’t stomach 

the idea of using them again as instruments for Government management of the 

mortgage market. 

Now, however, with prospects dimming for other stimulus proposals and the housing market still fragile, a bipartisan consensus for mass refinancing may be emerging. Obama mentioned it in his recent speech to Congress. And a Senate hearing 

last week found support from both parties as well as a number of prominent economists. 

The best proposal I’ve seen comes from Glenn Hubbard, a former economic adviser 

in the Bush White House, Chris Mayer, his colleague at Columbia Business School, 

and Alan Boyce, a trader in mortgage bonds. The trio’s idea is to order Fannie and 

Freddie to reduce its fee to a flat 4⁄10 of a percent for refinancing any fully paidup loan that it already guarantees. The process would be streamlined, eliminating 

appraisals and income verification. The fee would be lower than now, but higher 

than it has been in normal times, and sufficient to offset the reduced monthly cashflow from refinanced borrowers. 

As for the banks, those that accept a lower refinancing fee of 3⁄10 of 1 percent 

would be granted immunity from lawsuits stemming from loans issued during the 

bubble—a huge cloud that hangs over the big banks. Those who refuse the arrangement would lose their ability to sell their mortgages to Fannie and Freddie, which 

are pretty much the only games in town since the housing bust began. 

The big losers would be the private holders of mortgage bonds—mostly pension 

funds, hedge funds and other money managers, along with foreign governments— 

who might take solace in the fact that they have enjoyed three more years of interest payments at the old, higher rates than they would have if the Fed’s monetary 

stimulus had been allowed to pass through to homeowners. And because of the salutary effect of lower mortgage rates on the economy, bondholders eventually would 

recoup a fair portion of their ‘‘lost’’ income through reduced foreclosures. 

Hubbard, Mayer and Boyce estimate that their plan could allow as many as 25 

million households to refinance mortgages and have an extra $70 billion every year 

to spend and invest—the equivalent of a $70 billion-a-year tax cut that can be had 

at no cost to taxpayers. 

A new wave of mortgage refinancing is not an economic silver bullet, but it is a 

positive step that everyone can agree on conceptually and can be implemented 

quickly within existing law. What’s been missing so far has been the cooperation 

of Fannie and Freddie’s regulator and a determination on the part of the White 

House and the Treasury to get over all their technical objections and political 

qualms and just get it done.