[Senate Hearing 113-146]
[From the U.S. Government Printing Office]








                                                        S. Hrg. 113-146


  HOUSING FINANCE REFORM: ESSENTIALS OF A FUNCTIONING HOUSING FINANCE 
                          SYSTEM FOR CONSUMERS

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE EXPERIENCE OF CONSUMERS THROUGHOUT THE HOUSING FINANCE 
                  SYSTEM FROM ORIGINATION TO SERVICING

                               __________

                            OCTOBER 29, 2013

                               __________

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




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

              Erin Barry Fuher, Professional Staff Member

                        Jeanette Quick, Counsel

                       Casey Scott, OCC Detailee

                  Kari Johnson, Legislative Assistant

                  Greg Dean, Republican Chief Counsel

            Chad Davis, Republican Professional Staff Member

                    Travis Hill, Republican Counsel

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)















                            C O N T E N T S

                              ----------                              

                       TUESDAY, OCTOBER 29, 2013

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2

                               WITNESSES

Eric Stein, Senior Vice President, Center for Responsible Lending     4
    Prepared statement...........................................    30
    Responses to written questions of:
        Chairman Johnson.........................................   121
        Senator Reed.............................................   123
Rohit Gupta, President, Genworth Financial, U.S. Mortgage 
  Insurance......................................................     5
    Prepared statement...........................................    76
    Responses to written questions of:
        Chairman Johnson.........................................   124
Gary Thomas, 2013 President, National Association of Realtors....     7
    Prepared statement...........................................    82
Laurence E. Platt, Partner, K&L Gates LLP........................     9
    Prepared statement...........................................   104
Alys Cohen, Staff Attorney, National Consumer Law Center.........    10
    Prepared statement...........................................   107
    Responses to written questions of:
        Chairman Johnson.........................................   126
        Senator Reed.............................................   131
Lautaro Lot Diaz, Vice President, Housing and Community 
  Development, National Council of La Raza.......................    12
    Prepared statement...........................................   113

                                 (iii)

 
  HOUSING FINANCE REFORM: ESSENTIALS OF A FUNCTIONING HOUSING FINANCE 
                          SYSTEM FOR CONSUMERS

                              ----------                              


                       TUESDAY, OCTOBER 29, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:05 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I call this hearing to 
order.
    For many Americans, home ownership is a lifelong dream and 
is often the biggest purchase a consumer will ever make. 
However, as became clear during the financial crisis, consumers 
face a complex housing finance system that may stack the odds 
against them. From steering consumers into higher-cost products 
in the ``originate to distribute'' model to poor servicing 
practices leading to improper foreclosures, the crisis exposed 
major flaws in the system for consumers.
    The Wall Street Reform Act included key reforms to protect 
consumers from abusive mortgages--one being the creation of the 
Consumer Financial Protection Bureau. The CFPB has worked hard 
to address these problems and, this year, finalized rules on 
mortgage servicing and defining how a lender should evaluate a 
consumer's ability to repay a mortgage. However, as the ongoing 
foreclosure settlements and recent CFPB report show, issues 
remain for consumers.
    Consumers today face tight credit conditions as only 
borrowers with pristine credit histories are able to receive 
loans. Yet history has shown that a substantial share of first-
time homebuyers has lower credit scores and that the majority 
pay on time. We must be mindful of the impact that strict 
underwriting standards will have on the ability of creditworthy 
borrowers to access the mortgage market, particularly in rural 
or underserved areas, and on the economic recovery. Many 
factors feed into an individual's ability to repay a loan, and 
no one factor will guarantee repayment.
    Last week, five Federal agencies released guidance to 
lenders on making loans in compliance with fair lending laws, 
and the Federal Reserve released a report showing that a high 
number of minorities may be impacted by stricter underwriting 
standards. These actions highlight the importance of being 
thoughtful in constructing new standards to ensure that the 
mortgage market is accessible to all responsible borrowers.
    I look forward to hearing our witnesses explain the home 
purchase process for consumers--including their interaction 
with the realtor, underwriting of the mortgage, pre- and post-
purchase counseling, and servicing. They will also discuss the 
current challenges in each area and their recommendations for 
clearer standards and better consumer protections in the 
housing finance system.
    Most consumers are not experts in mortgage lending, but our 
witnesses here today help them navigate the complex process. I 
believe their testimony will help inform the Committee as we 
decide how to best ensure access to credit for creditworthy 
borrowers. As we have learned in recent hearings, current 
reform proposals do not fully address important topics, such as 
multifamily, PLS, and as we will explore today, making sure a 
new system will function better for consumers purchasing homes. 
Any bill moving forward must seriously consider these issues.
    With that, I turn to Senator Crapo for his opening 
statement.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman.
    Today's hearing will focus on the consumer experience in a 
reformed housing finance system. Home ownership is central to 
our Nation's economy, offering financial and social benefits 
for families, communities, and the country as a whole. The 
policies we choose to adopt during this process will determine 
not only the sustainability of a robust housing market, but 
also the future economic opportunities for millions of American 
families and individuals.
    A reformed housing finance system can help consumers 
achieve their dream of home ownership, but this must be done 
responsibly. Doing this in a sustainable manner requires strong 
underwriting as well as real estate contracts which can be 
expected to protect the rights of all parties. Failing to meet 
these two critical objectives will increase the risks and costs 
to both taxpayers and consumers.
    One of the major causes of the financial crisis was a 
significant deterioration in underwriting standards. Many 
mortgages turned out to be unaffordable, and a large number of 
these mortgages were guaranteed by Fannie Mae and Freddie Mac. 
Staggering losses were ultimately paid for by taxpayers after 
the Federal Government bailed out Fannie Mae and Freddie Mac in 
July of 2008.
    In addition to the lessons Fannie's and Freddie's failures, 
the Federal Housing Administration has further demonstrated the 
importance of returning to responsible underwriting. Last 
year's actuarial report found that the FHA insurance fund's net 
worth was a negative $16 billion, and last month the FHA 
required a nearly $2 billion Federal bailout, the first in its 
history.
    With these experiences in mind, if we are going to consider 
options for reforming the housing finance system that include a 
taxpayer guarantee, we must ensure that the taxpayer is only 
guaranteeing mortgages that meet strong, basic underwriting 
standards.
    A bipartisan coalition of the Banking Committee Senators 
has introduced S.1217. This legislation required a number of 
compromises to secure support from Members of both sides of the 
aisle. One important compromise is that in exchange for 
including an explicit Government guarantee of mortgages, 
private capital would take a strong first-loss position and 
loans would need to have a minimum downpayment of 5 percent 
while meeting the CFPB's qualified mortgage definition. 
Fannie's and Freddie's current underwriting standards for 
guaranteeing loans are generally more difficult to meet than a 
QM loan with a 5-percent downpayment.
    Further, to my knowledge, no one is proposing to prohibit 
lenders from making loans that do not meet this standard. 
Existing proposals merely affirm that taxpayers will not be on 
the hook if those loans fail.
    In addition to protecting taxpayers, it is also important 
that the future housing system ensures there is adequate 
liquidity in the market so that qualified borrowers have ample 
access to mortgage credit. An essential element of ensuring 
that credit availability is preserving our system of secured 
lending in which a borrower's home is seen as adequate 
collateral for the mortgage that the borrower seeks.
    Some have proposed very prescriptive laws and regulations 
regarding how a mortgage can be serviced, including numerous 
restrictions on how the collateral could be obtained in the 
regrettable event that a borrower could not maintain his or her 
obligations.
    Currently servicing reforms are already being implemented. 
The CFPB issued new servicing rules earlier this year, and the 
National Mortgage Settlement last year established new service 
standards for the Nation's largest servicers. None of us like 
the idea of any borrower losing his or her home, and none of us 
have forgotten nor excused legal and contractual violations of 
the past. However, if we take actions that call into question 
whether mortgage contracts are viewed as adequately secured 
lending, homeowners across the country could pay a very 
considerably higher rate.
    I look forward to hearing from today's witnesses and 
working with the Chairman and the other Members of this 
Committee as we address these critical issues, and again, I 
thank you, Mr. Chairman, for holding this hearing.
    Chairman Johnson. Thank you, Senator Crapo.
    Are there any other Members who would like to give brief 
opening statements?
    [No response.]
    Chairman Johnson. I would like to remind my colleagues that 
the record will be open for the next 7 days for additional 
statements and other materials.
    Our first witness is Mr. Eric Stein, who is senior vice 
president of the Center for Responsible Lending and its 
affiliate Self-Help.
    Mr. Rohit Gupta is president of Genworth Financial, USMI.
    Mr. Gary Thomas is the president of the National 
Association of Realtors.
    Mr. Laurence Platt is a partner at K&L Gates LLP.
    Next is Analyses Cohen, staff attorney at the National 
Consumer Law Center.
    And, finally, we have Mr. Lautaro Diaz, vice president of 
housing and community development at the National Council of La 
Raza.
    We welcome all of you here today and thank you for your 
time. Mr. Stein, you may proceed.

  STATEMENT OF ERIC STEIN, SENIOR VICE PRESIDENT, CENTER FOR 
                      RESPONSIBLE LENDING

    Mr. Stein. Thank you, Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee. My name is Eric Stein, and 
I am senior vice president at the Center for Responsible 
Lending. Thank you for inviting me to testify today.
    The mortgage market in the U.S. is a $10 trillion market, 
and there is a lot at stake in getting things right. As an 
initial matter, I agree with the emerging consensus, as 
reflected in S.1217, that taxpayer risk must be insulated by 
private capital and that a Government guarantee must be 
explicit and paid for to prevent future taxpayer bailouts. I 
have six recommendations for the Committee about how to design 
a housing finance system that will work for borrowers, private 
investors, and the economy.
    First, in order to fix the misaligned incentives at Fannie 
Mae and Freddie Mac, I recommend requiring mutual ownership of 
joint issuer-guarantor entities instead of stock ownership. One 
of the key reasons that Fannie and Freddie ended up in 
conservatorship is because private shareholders pushed for 
short-term gains and quarterly earnings. In the face of 
declining market share, because of private label securities 
competition, management weakened credit standards to compete 
for Alt-A business. This decision proved disastrous as Alt-A 
loans were 10 percent of loans in 2008 yet 50 percent of 
losses. Mutual ownership would reduce the chasing market share 
problem and promote longer-term sustainability. Lenders would 
need to join one or more mutuals to sell loans to the 
conforming secondary market and invest equity commensurate with 
the amount that they sell. The pooled capital from all members 
would stand in first-loss position ahead of any Government 
reinsurance.
    Second, in order to give smaller lenders a level playing 
field, legislation should permit direct access to the secondary 
market through a cash window. Housing finance reform should not 
require smaller lenders to go through their larger competitors. 
If this happened, rural and underserved communities could face 
reduced access to credit.
    Third, secondary market entities should be required to 
serve a national market and accept all eligible lenders. 
Allowing the market to fragment where one entity serves 
California, another serves the Southeast, and no one 
effectively serves a predominantly rural State would exacerbate 
regional economic downturns as well as leaving borrowers 
behind.
    Fourth, while I am encouraged that S.1217 includes an 
explicit and paid-for Government guarantee, I recommend that 
this guarantee not be available for the kinds of private label 
securities that predominated during the subprime boom. These 
securities should be able to access a common securitization 
platform, but they do not provide enough systemwide benefits to 
warrant a Government guarantee and would make effective 
regulation impossible.
    Fifth, a future system needs to be able to complete 
successful loan modifications by retaining a portfolio for 
distressed-then-modified loans with a Government backstop in 
times of economic stress.
    Finally, legislation I believe should not hard-wire 
underwriting standards such as a 5-percent downpayment mandate. 
Some borrower contribution should be required, but the amount 
and how compensating factors should be used should be left to 
the regulator, bond guarantors, and lenders. Enshrining in 
statute who can get a mortgage in a future system would be 
harmful, I believe, for three reasons:
    First, it would dramatically reduce the number of families 
who could qualify for a mainstream loan. Younger families, 
African American, and Latino families are the future of our 
housing market, but they have lower levels of household wealth. 
Those with compensating factors who can afford the monthly 
payments on a loan should not be excluded. Many are better 
credit risks than borrowers with 5 percent to put down but who 
do not have these other factors.
    Second, downpayment requirements harm the housing market by 
reducing the pool of available buyers. Excluding creditworthy 
families would harm existing homeowners and reduce their 
equity. Who will buy the house of an elderly couple needing to 
move to a continuing care facility?
    Third, borrowers in well-underwritten, low-downpayment 
mortgages can succeed. CRL's affiliate, Self-Help, has 
purchased $4.7 billion of mortgages made to low-wealth families 
in 48 States--50,000 loans. Two-thirds of these borrowers had 
mortgages with downpayments of less than 5 percent. These 
homeowners have had median annualized return on equity of 27 
percent and built an average of $18,000 in wealth as a result. 
This is even through the crisis. Good underwriting requires 
looking at a number of factors, and legislation should not push 
out borrowers on account of just one, be it downpayment or 
debt-to-income ratios or FICO scores.
    In closing, if we learn what went wrong with Fannie Mae and 
Freddie Mac and fix those problems, and if we build on what has 
and is working, we can build a sturdy secondary market that 
will put private capital first in line, support the economy, 
and provide opportunities for all Americans.
    Thank you for the opportunity to testify today, and I look 
forward to your questions.
    Chairman Johnson. Thank you.
    Mr. Gupta, you may proceed.

 STATEMENT OF ROHIT GUPTA, PRESIDENT, GENWORTH FINANCIAL, U.S. 
                       MORTGAGE INSURANCE

    Mr. Gupta. Thank you, Chairman Johnson and Ranking Member 
Crapo. My name is Rohit Gupta, and I am the president of 
Genworth Financial's U.S. Mortgage Insurance business. We are 
headquartered out of Raleigh, North Carolina, and we operate in 
all 50 States. I appreciate the opportunity to be here today to 
talk about the issue of affordability and availability of 
credit for home buying and the role of private mortgage 
insurance to help with those issues.
    At its core, our business is evaluating and managing 
mortgage credit risk on prudent and sustainable low-downpayment 
mortgages. We put our own capital at risk in a first-loss 
position on every loan we insure. Today home prices are the 
most affordable they have been in years, and interest rates 
remain at historical lows. But mortgage credit is still very 
tight. That is why I am grateful that this Committee has 
convened this hearing.
    Congress has done a great deal to make our housing finance 
system safer and more sustainable in recent years. The final 
qualified mortgage rule is a significant milestone and one that 
we and our partners in the Coalition for Sensible Housing 
Policy applaud. QMs are exactly the kind of mortgages that our 
system should encourage.
    Now, I want to get right to the issue of downpayments since 
that is at the heart of current policy discussions.
    The amount of downpayment matters, but low-downpayment 
loans did not cause the crisis, and they should not be a 
barrier to buying a home moving forward. It is our job as 
mortgage insurers to understand mortgage credit risk. In fact, 
MIs are often referred to as a second set of eyes in the 
mortgage system. That is because MIs use our own set of credit 
policy guidelines to evaluate a loan.
    When I look at a loan, I want to see more than the 
downpayment. I want to see a stable employment record, a strong 
credit history, manageable debt ratios, a credible appraisal, 
and more. That is what responsible credit underwriting is all 
about.
    As mortgage insurers, we make sure low-downpayment 
borrowers with sound credit get the best loans with the best 
terms. Our underwriting guidelines are sound but not overly 
restrictive. Today lender and investor overlays and fees mean 
that our credit guidelines are not being fully utilized.
    As I am sure the Committee knows, the biggest hurdle for 
many homebuyers is the downpayment, especially for first-time 
homebuyers and borrowers with lower to moderate incomes. When 
you consider that it takes an average working family about 7 
years to save for a 10-percent downpayment or that half of the 
first-time homebuyers who got GSE loans made downpayments of 
less than 20 percent or that nearly one-quarter of the mortgage 
market over the last 15 years was loans with low downpayments, 
that is nearly $8 trillion in mortgages that have performed 
well through good cycles and bad. Only then can you appreciate 
how important it is for consumers and the U.S. economy to keep 
low-downpayment lending at a viable option in home buying.
    In fact, I would guess that a majority of homeowners in 
this room today bought their first house with less than a 20-
percent downpayment. MIs take first-loss risk, and we do it in 
a way that borrowers can afford and lenders can execute.
    Turning to the question of housing finance reform, we are 
encouraged by the hard work being done by this Committee. We 
were pleased to see S.1217 includes private MI at today's 
standard coverage levels for low-downpayment loans. Standard 
coverage MI puts private capital at risk ahead of any 
Government exposure. We think that is essential in any reform 
effort. It provides meaningful amounts of credit loss 
protection, it is well understood by investors and lenders, and 
it does not introduce any new borrower costs in the housing 
finance equation.
    If the GSEs only had lesser charter coverage and not deeper 
standard MI, MI companies would have been asked to pay less 
claims, and U.S. taxpayers would have had a much bigger burden 
to pay. Consider that mortgage insurers have paid nearly $40 
billion of claims to Fannie Mae and Freddie Mac through the 
cycle. That is a very significant amount of money that was 
taken off the shoulders of the GSEs, the Congress, and the 
taxpayers. The reason we could pay those claims is because we 
hold significant countercyclical capital and reserves against 
every loan we insure, and we are working closely with 
regulators and counterparties to make those requirements even 
stronger moving forward.
    The Committee has also asked if we believe mortgage 
underwriting standards should be fixed in statute. We do think 
that broad underwriting standards could be written into 
statute. For us, the most important thing is a clear mandate 
for prudently underwritten low-downpayment loans as part of a 
reformed system. When thinking about statute versus regulation, 
we need to keep in mind that mortgage credit underwriting is 
dynamic. Too detailed of an approach could limit credit 
availability or make it hard to fine-tune underwriting in the 
future.
    We also encourage the Committee to look beyond the 
traditional role that mortgage insurers have played in 
providing credit enhancement. For instance, there is no reason 
why our MI could not also substitute for bond guarantee 
coverage. The most important thing is that there be a level 
playing field that relies on well-regulated, well-capitalized, 
consistent credit enhancement.
    In closing, I want to commend the Committee for tackling 
this complex and emotionally charged issue. Keeping the 
interests of consumers and taxpayers in the forefront will help 
you arrive at a stronger and more resilient housing finance 
system. I applaud the provisions for private MI at standard 
coverage levels in S.1217 look forward to working with the 
Committee as your important work continues.
    That concludes my opening statement, and I look forward to 
answering any questions you might have.
    Chairman Johnson. Thank you.
    Mr. Thomas, you may proceed.

STATEMENT OF GARY THOMAS, 2013 PRESIDENT, NATIONAL ASSOCIATION 
                          OF REALTORS

    Mr. Thomas. Chairman Johnson and Ranking Member Crapo and 
Members of the Committee, on behalf of the 1 million members of 
the National Association of Realtors who practice in all areas 
of residential and commercial real estate, thank you for the 
opportunity to present our views on housing finance reform and 
the essentials of a functioning housing finance system for 
consumers. I am Gary Thomas, president of the National 
Association of Realtors, and I have more than 35 years of 
experience in the real estate business.
    The recovery of the housing market has been instrumental in 
pulling the economy out of the Great Recession. In the past 
year, home prices have increased 11.7 percent. Home sales were 
10.7 percent higher over the same period. While this is very 
welcome news, the market has not fully recovered, as evidenced 
by the fact that home sales are still stuck in the 2001 levels. 
Moreover, roughly 7.1 million homeowners are still underwater.
    These sobering statistics remind us that the housing market 
remains far from healthy and is facing certain headwinds. 
Access to mortgage credit continues to be tight as lenders 
remain leery of taking on risk as a result of new lending 
regulations that will go into effect early next year. 
Specifically, new ability-to-repay requirements along with 
uncertainty regarding the proposed risk retention rules have 
caused bankers to be apprehensive in issuing new loans.
    The changing regulatory landscape compounded with growing 
student debt will limit consumers' access to credit and 
contribute to an already tight lending environment by imposing 
standards that are even more stringent. At the same time, 
rising interest rates combined with meager increases in 
household income will continue to squeeze the affordability of 
home ownership.
    As Congress looks to reform our housing finance system, 
lawmakers must ensure the affordability and availability 
challenges faced by creditworthy borrowers are addressed, and 
realtors believe this can only be achieved through a secondary 
mortgage market upheld by an explicit Government guarantee.
    Moreover, realtors agree taxpayers should be protected. 
Private capital must return to the housing finance market, and 
the size of the Government participation in the housing sector 
should be decreased if the market is to function properly.
    With that being said, realtors believe it is extremely 
likely that any secondary mortgage market structure without a 
Government guarantee backing would foster mortgage products 
that are more aligned with business goals than the best 
interests of consumers. If the secondary mortgage market were 
to be fully privatized, we believe the greatest casualty would 
be the elimination of the 30-year fixed-rate mortgage, thus 
increasing the cost of mortgages to consumers. The 30-year 
fixed-rate mortgage is the bedrock of the U.S. housing finance 
system. Now more than ever, consumers are seeking fixed-rate 
30-year loans because they are easily understood and offer a 
predictable payment schedule.
    We applaud Senators Corker and Warner for introducing the 
Housing Finance Reform and Taxpayer Protection Act of 2013, 
which includes many of our suggested reform elements. The 
legislation provides for an explicit Government guarantee which 
should ensure the availability of the 30-year mortgage going 
forward.
    We do, however, have some concerns about the legislation. 
The 5-percent downpayment requirement is problematic because it 
will preclude creditworthy borrowers who have an issue saving 
the required amount from buying a home they could otherwise 
afford. Rather than focusing on downpayments, we are generally 
supportive of CFPB's qualified mortgage rule and believe this 
standard should be used to define qualified residential 
mortgage in any future housing finance system. This 
underwriting approach achieves the twin objectives of 
protecting the marketplace while ensuring borrowers have access 
to safe mortgages.
    NAR is also concerned with mandating a covered security to 
have a credit risk sharing structure under which private 
investors have to take at least a 10-percent first-loss 
position. Realtors are worried this arbitrary first-loss 
percentage will inhibit private investors from participating in 
the secondary mortgage market, especially during periods of 
economic distress.
    Finally, NAR opposes lowering loan limits at this time, 
especially because it unfairly discriminates against consumers 
living in high-cost markets. Lowering the loan limits restricts 
the liquidity and makes mortgages more expensive for households 
nationwide.
    The U.S. housing sector is in the midst of recovering from 
the worst economic downturn since the Great Depression. Any 
restructure of the secondary mortgage market must make certain 
that mortgage capital is available in all markets at all times 
under all economic conditions. Furthermore, we look forward to 
working with the Committee to ensure that the future reform of 
the secondary mortgage market will protect and preserve the 
American dream of home ownership for all responsible, hard-
working taxpayers.
    Thank you.
    Chairman Johnson. Thank you.
    Mr. Platt, you may proceed.

     STATEMENT OF LAURENCE E. PLATT, PARTNER, K&L GATES LLP

    Mr. Platt. Good morning, Chairman Johnson, Ranking Member 
Crapo, and Members of the Banking Committee. My name is Larry 
Platt. I am a consumer finance lawyer at the global law firm of 
K&L Gates LLP. Thank you for allowing me to participate today. 
I am appearing today in my personal capacity and not on behalf 
of either my law firm or any of the clients of my law firm.
    I want to focus on whether S.1217 should impose outcome-
based loss mitigation requirements on servicers and owners of 
securitized residential mortgage loans. By way of background, 
mortgage loan servicers are independent contractors. They work 
for the owners of the loans and the securities for a fee to 
collect and remit mortgage loan payments and enforce the loan 
documents.
    S.1217 presently does not impose outcome-based loss 
mitigation requirements on servicers for the benefit of 
consumers, in connection with either the Federal Mortgage 
Insurance Company or any uniform securitization agreement that 
may be created. I think that is the right approach.
    Earlier this year, the Consumer Financial Protection Bureau 
issued comprehensive loan-servicing regulations that take 
effect this January and that I believe are sufficient for this 
purpose. Some of the new regulations implement the provisions 
of the Dodd-Frank Act; others, though, are derived from earlier 
initiatives from the Government, such as the 2009 HAMP program 
of the Department of Treasury and the April 2012 global 
foreclosure settlement involving the Department of Justice, 49 
State Attorneys General, and 5 major banks.
    The result is that defaulting borrowers already have 
significant Federal Government protections to seek to avoid 
foreclosure, including in some cases a Federal private right of 
action to sue to stop a foreclosure.
    The CFPB regs comprehensively address, in my opinion, 
virtually all of the common servicing complaints of consumers 
and regulators that lead to claims of wrongful or unfair 
foreclosures. For example, they impose detailed requirements 
for responding to customer complaints and resolving alleged 
servicing errors. They impose early intervention requirements 
on servicers to attempt to establish live contact with 
borrowers shortly after delinquency. They require servicers to 
maintain a continuity of contact with delinquent borrowers to 
provide access to personnel. They require servicers to follow 
detailed procedural requirements to evaluate borrowers for 
available loss mitigation options, such as notifying borrowers 
if their applications are incomplete; promptly evaluating them 
for their eligibility for a modification; timely notifying them 
of the modification decision, including any rights to appeal; 
and prohibiting servicers from initiating foreclosures within a 
timeframe after delinquency or from initiating a final 
foreclosure while loss mitigation discussions are continuing.
    But despite these broad protections, the CFPB made a 
deliberate decision not to require servicers to offer or to 
require loan holders to accept specific forms of loss 
mitigation at all or on any specific terms. Many consumer 
advocacy groups questioned this approach. They asked in notice 
and comment for the CFPB to require servicers and loan holders 
to provide loan modifications that pass a positive net present 
value test to qualified borrowers. The CFPB rejected this 
approach. It acknowledged in the preamble of the final regs 
that those who take the credit risk on a mortgage loan do so in 
part in reliance on the security interests and the collateral. 
The CFPB wrote that it did not believe it presently could 
develop rules that are sufficiently calibrated to protect the 
interests of all parties involved in the loss mitigation 
process given their differing perspectives. And it expressed 
concern that overreaching loss mitigation requirements could 
have a material adverse effect on the availability and the cost 
of credit if creditors in the secondary market would no longer 
be able to establish their own criteria for determining when to 
offer loss mitigation to a defaulting borrower.
    Similarly, the recent final risk retention regulations 
abandoned the original 2011 proposal that would have tied the 
availability of the qualified residential mortgage exemption to 
requiring the servicer in the underlying mortgage loan 
documents to provide loan modifications regardless of the 
wishes of the loan holder.
    I think the robust requirements of the CFPB regulations, 
which go live in a little over 2 months, are sufficient. They 
came out following substantial input of virtually all 
interested stakeholders. I think S.1217 should follow the lead 
of the CFPB and not impose additional loss mitigation 
requirements that are outcome-based for consumers in default.
    Thank you for the opportunity to appear today. I look 
forward to questions.
    Chairman Johnson. Thank you.
    Ms. Cohen, please proceed.

STATEMENT OF ALYS COHEN, STAFF ATTORNEY, NATIONAL CONSUMER LAW 
                             CENTER

    Ms. Cohen. Good morning, Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee. Thank you for the 
opportunity to testify today on the key components of housing 
finance reform for consumers.
    Congress and the Nation face an important crossroads in the 
life of the housing finance system. While the housing market 
has improved somewhat from the height of the crisis, more needs 
to be done to restore a functioning and fair housing market.
    Communities without access to affordable credit become 
vacuums that can be filled by predatory lenders. When 
sustainable loans are unavailable, borrowers are susceptible to 
tricks and traps because they have no other options.
    In addition to properly funding the National Housing Trust 
Fund and the Capital Magnet Funds, the new system should 
promote broad access to lending by inhibiting credit rationing 
and ``creaming'' of the market. Lenders should be required to 
serve all population segments, housing types, and geographical 
locations.
    Yet any statute should not dictate specifics of 
underwriting that would result in less flexibility to meet 
these broad access goals. Housing finance legislation should 
leave open the specifics of downpayment requirements, credit 
scores and debt-to-income ratios. Downpayment requirements are 
keyed directly to wealth, which itself varies widely by 
demographics and is not always tied to creditworthiness or 
ability to repay.
    Debt-to-income ratios also are an incomplete measure of 
lending capacity. Credit scores often do not provide a reliable 
picture of a borrower's credit profile and often differ 
substantially by race.
    Housing finance reform also should support a healthy 
mortgage-servicing system. Foreclosure rates are still higher 
than at the onset of the economic collapse in 2008. Servicer 
incentives currently result in inflated fees and unnecessary 
foreclosures. Despite the creation of several programs and the 
recent adoption of procedural regulations by the CFPB, specific 
additional measures are needed.
    First, the new housing finance system must require 
affordable loan modifications that are consistent with investor 
interests. The CFPB, while it has issued a series of procedural 
requirements for servicers, has declined to issue such a 
mandate. Yet the data show that almost all delinquent 
homeowners still get no modification at all. Those homeowners 
lucky enough to receive a modification seldom get one with the 
best terms available. A clear, specific mandate can be crafted 
that provides the market the flexibility and predictability 
that it needs.
    Second, homeowners seeking loan modifications should not be 
faced with an ongoing foreclosure while they are processing 
their loan modification request. Doing so raises costs and 
results in wrongful foreclosures. Instead, such foreclosures 
should be put on temporary hold rather than subjecting the 
homeowner to the dual track of foreclosure and loss mitigation. 
Substantial flaws in existing requirements must be addressed, 
and the GSE system should continue its role as a leader in 
market developments.
    Third, the new housing finance corporation should be 
authorized to directly purchase insurance, including force-
placed insurance. The current system, in which the GSEs 
reimburse servicers for force-placed hazard and flood 
insurance, has resulted in vastly inflated prices for borrowers 
and, when borrowers default, the GSEs and taxpayers.
    The new housing finance system also should promote 
transparency and accountability. An Office of the Homeowner 
Advocate should be established to assist with consumer 
complaints and compliance matters. Loan-level data collection 
and reporting should include demographic and geographic 
information to ensure that civil rights are protected.
    Finally, any new Federal electronic registry for housing 
finance must be available to the public, mandatory, with 
sanctions for noncompliance, and supplemental to State 
requirements. A national registry should include records of 
servicing rights, ownership of mortgages and deeds of trust, as 
well as ownership of the promissory notes themselves.
    There has been much discussion about electronic mortgages, 
instruments entirely created and stored electronically. 
Electronic instruments must be permitted only when there is 
sufficient security to ensure authenticity. The records must 
actually be signed only by the homeowners, and the records must 
be maintained in such a way to ensure that the terms cannot be 
changed.
    Thank you for the opportunity to testify today. The 
Nation's housing finance system is in need of a revived sense 
of public purpose. Loan origination and servicing mechanisms 
should ensure broad and sustainable access to credit throughout 
the life of the loan. I will be happy to take any questions you 
may have.
    Chairman Johnson. Thank you.
    Mr. Diaz, please proceed.

  STATEMENT OF LAUTARO LOT DIAZ, VICE PRESIDENT, HOUSING AND 
       COMMUNITY DEVELOPMENT, NATIONAL COUNCIL OF LA RAZA

    Mr. Diaz. Chairman Johnson, Ranking Member Crapo, and 
distinguished Members of the Committee, thank you for inviting 
me to appear this morning on behalf of the National Council of 
La Raza, the largest national Hispanic civil rights and 
advocacy organization. I am Vice President for Housing and 
Community Development and have worked for years in the 
community development field with programs to serve low- and 
moderate-income families. I appreciate the opportunity to 
provide expert testimony before the Committee.
    For more than two decades, NCLR has engaged in public 
policy issues such as preserving and strengthening the 
Community Reinvestment Act and the Home Ownership Equity 
Protection Act. Also, for the last 13 years, we have supported 
local housing counseling agencies through NCLR's Homeownership 
Network, which is comprised of 49 community-based counseling 
providers that work with over 50,000 families annually and that 
has nurtured more than 30,000 homebuyers since its inception. 
Following the financial crisis, the NHN responded to the Latino 
community's needs by shifting its focus to helping families 
stay in their homes.
    My testimony today will focus on pre- and post-purchase 
counseling and the ways counseling assists the mortgage 
industry provide credit access to hard-to-serve markets. It 
also supports loss mitigation of individual mortgages by 
ensuring borrowers' readiness and ensuring they understand the 
process involved with mortgage delinquency. I will conclude my 
remarks with an observation of the necessity of preserving 
access to affordable housing finance options.
    Pre-purchase counseling, which helps families purchase a 
home, and post-purchase counseling, which assists after a 
family has closed on their mortgage or in the event of a 
mortgage delinquency, are the types of housing counseling most 
relevant to GSE reform legislation being considered.
    A counselor providing pre-purchase counseling does five 
important things: it educates the borrower on all aspects of 
the home-buying process; it analyzes the client's credit, 
savings, and family budget to help them understand what they 
can afford; it ensures that obligations and essential practices 
are understood; it assists the family in understanding the 
documents they are signing; and, finally, it provides community 
resources to address issues that could impact the long-term 
ability for them to manage their mortgage loan. These five 
steps help ensure prudent decision making by the client because 
they are fully aware of the obligations they are undertaking. 
Loan performance is demonstrably greater when a family obtains 
a loan with this kind of support.
    How pre-purchase counseling supports credit access can be 
seen in an example of an Ohio family who had filed bankruptcy 
at the height of the economic downturn. The family, however, 
still aspired to become homeowners despite their personal 
turmoil. The NHN counselor advised them to enroll in a 
homebuyer education class to start the process, and after 
completing an action plan developed with the housing counselor, 
the family successfully qualified for a VA loan and purchased a 
home.
    In instances when a client is confronting mortgage 
delinquency, they are better served with a counselor than 
facing the challenge alone. A situation of a Miami family 
illustrates this point. The family received a trial mortgage 
modification while working with an NHN counseling organization. 
The family had continued to make their payments on the trial 
modification on a timely basis but was unaware that the bank 
still continued the foreclosure proceedings. The property was 
sold, prompting the housing counselor to involve legal aid to 
try to reverse the sale. A judge ruled in the client's favor, 
but without the support of the counseling agency, the client 
would have lost their home.
    In addition to this anecdotal evidence I have provided, 
there is considerable research demonstrating the extent that 
housing counseling works. One 2013 pre-purchase counseling 
study by NeighborWorks found that borrowers with pre-purchase 
counseling and education were one-third less likely to be over 
90 days delinquent on their mortgage than those who did not. 
And a 2012 NeighborWorks report to Congress showed that 
homeowners who received counseling were nearly twice as likely 
to obtain a mortgage modification than those who did not 
receive counseling.
    NCLR believes counseling is an important part of the 
mortgage system to ensure access to credit to all communities, 
as well as to support safeness and soundness in the system. 
Without an obligation to serve all markets, communities of 
color in particular will find it extremely difficult to access 
mortgage credit. Without a duty to serve, private capital will 
gravitate to the cream of the crop, those with traditional 
borrowing profiles. This will result in an unsustainable 
housing finance market where creditworthy but lower-wealth and 
lower-income buyers, especially minorities, will be 
underserved. This is already evident today; the private market 
overwhelmingly caters to the traditional borrowers in well-
served locations.
    More information on preserving access and affordability as 
well as NCLR's specific recommendations can be found in my 
written comments. Thank you again for the opportunity to appear 
before this Committee. I would be glad to answer any additional 
questions you may have.
    Chairman Johnson. Thank you all for your testimony.
    As we begin questions, I will ask the clerk to put 5 
minutes on the clock for each Member.
    Mr. Thomas, we have heard that consumers face tight credit 
conditions today. If new legislation includes stricter 
underwriting, such as a minimum downpayment, what impact would 
that have on home borrowers and the housing market?
    Mr. Thomas. Well, it would be very restrictive. We feel 
that it would impede the first-time homebuyer and the 
underserved. The problem that we are facing with a tighter 
credit box is that you are really shutting out the first-time 
homebuyers. When you do that, that then has implications on the 
move-up market. It will stall the market completely and could 
reverse all of the trends that we have had so far. So if we 
make it more and more difficult by having an exact downpayment 
and make it more difficult for them, it is going to be much 
more problematic.
    You know, the 5-percent downpayment is not just 5 percent. 
If you add closing costs on top of that, you are getting closer 
to 6 to 7 percent. And so you have to take that into 
consideration. Downpayment is not always the most predictive 
analytic of whether a borrower is going to be able to repay. 
Just take a look at the VA loan and how well they have 
performed over the years with no downpayment. So I think you 
have to look at the underwriting criteria to make sure that the 
borrower can afford to make the payments and has the ability to 
repay rather than just downpayment.
    Chairman Johnson. Mr. Stein, Self-Help has been successful 
in underwriting and servicing home loans to borrowers with low 
credit scores and low downpayments. What factors are most 
relevant to a borrower staying current on a home loan? How 
could the structure of housing finance be improved to better 
serve consumers?
    Mr. Stein. Thank you, Chairman Johnson. Self-Help's program 
that I mentioned, where we purchased $5 billion worth of 
mortgages, you are correct had lower downpayments, and our loss 
rate has been approximately 3 percent, so they have performed 
well through a very tough time. But average income of the 
borrowers was around $31,000, so it is not the wealthy who 
received these loans.
    Why these loans performed well is not rocket science. They 
are all retail originated by lenders, fully documented income 
and assets, 30-year fixed-rate loans, amortizing, escrowed 
taxes and insurance, fully prepayable, low fees--basically meet 
all the Wall Street Reform Act requirements and QM requirements 
where there is full underwriting to make sure that the 
individual's credit issues and incomes are sufficient to repay 
the mortgage and use compensating factors where one is weak, 
others are stronger.
    In terms of structural features for the mortgage market, we 
believe that a joint issuer-guarantor model for pass-through 
TBA securities is the way to go. That is how our mortgages were 
securitized, through pass-through securities. Second, private 
capital in first-loss position as ours was--we were taking the 
risk--is important. Third, providing small lenders direct 
access to the secondary market through a cash window is 
important. Fourth, national coverage by accepting all eligible 
lenders; we purchased loans in 48 States. Many of them were 
going through a tough time, but we think it should be a 
national market. And, finally, a portfolio for modified loans, 
it was much easier for us and I think any lender if the loan is 
on Fannie Mae's balance sheet when it comes time to do a 
modification that is still net present value positive.
    Chairman Johnson. Mr. Diaz and Ms. Cohen, consumers who 
experience problems in loan repayment may turn to their 
servicers for help. How does counseling help consumers if this 
happens? And do you think that existing servicing standards do 
enough to fix the servicing issues we saw during this crisis?
    Mr. Diaz. I will take that. Relationship with servicers 
during the crisis changed as time went on. Initially counselors 
were seen as unnecessary players because they were in between 
the servicer and the consumer. As servicers had difficulty in 
collecting documents, underwriting the family, and reaching the 
family, counseling organizations played a more critical role. 
Servicers incorporated them into many of their processes, so 
the relationship improved over time.
    The essential problem--initially the volume of troubled 
mortgages--the difficulty in trying to orient the modification 
program a servicer had, and the consumer's ability to 
understand it was really, really tough. The counselors, when 
they were used in the best way, really closed that gap and 
brought the consumer up to the program's understanding of it. 
The servicer and the consumer could then finish the process 
they were engaged in.
    So it is almost like translating language and being able to 
advocate for the consumers. If a paper got lost, which was 
common, if there was a misinterpretation of income, which was 
common, there was another player who knew the process that was 
able to advocate and speak the language of a servicer to allow 
the modification to go through.
    So I think counselors played a really critical role, and I 
also believe the CFPB servicing standards are definitely an 
improvement. But, counselors still have this ability of being 
able to communicate with the servicer. And while we do not know 
the shape of the new market, my experience over the years has 
been that the market has never worked as designed. And so 
another advocacy point for the consumer I think is a really 
critical element to housing finance reform.
    Chairman Johnson. Ms. Cohen, do you have any follow-up?
    Ms. Cohen. My follow-up would be on the second part of your 
question about whether the standards are adequate. Before the 
Treasury's Home Affordable Modification Program was launched, 
most loan modifications increased payments and were very hard 
for homeowners to satisfy. And right now, although we have that 
temporary program, we have absolutely no permanent standards 
for what modifications should look like throughout the market.
    The cure rates are still very low, and it is clear that 
many people who need modifications are not getting them. So 
there are two things that have not yet been done that need to 
be done: one, modifications need to be assured to be affordable 
for homeowners; and, second, if they are consistent with 
investor interests, they should be required by the servicers 
because servicers tend to make money even if they do not and 
sometimes because they do no provide those modifications to 
homeowners, especially in a timely fashion.
    It is not going to change the costs in the market 
significantly because NPV positive loan modifications are good 
for all of the relevant stakeholders. They can be done in a 
predictable fashion and still provide control for the servicer 
and the investor over some of the details of how the 
modifications are done. And the CFPB situation is different 
because their rules are, A, procedural; and, B, in the context 
of a very particular statute, the GSEs have the ability to 
issue guides and to oversee what the loan modification process 
looks like. It is what they do now, and we hope it is what you 
will do in the statute.
    Thank you.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    Mr. Gupta, as we are looking at housing finance reform, one 
thing that we need to accomplish if we are to consider a 
taxpayer guarantee is to ensure that adequate private capital 
exists in all phases of the mortgage process. And this private 
capital must include a mix of borrower equity, private 
insurance and investment, and adequate Government reserves.
    How important do you consider the borrower equity to be in 
this context?
    Mr. Gupta. Thank you, Senator Crapo. Borrower equity is 
very important. We obviously are in the business of low-
downpayment lending so we take into account every single 
factor. But low-downpayment loans are not the reasons for this 
downturn, and they should not be actually held back as we come 
out of this downturn and actually create the new housing 
reform.
    We look at the loan, we look at the three factors, which is 
credit, capacity, and collateral. So instead of just looking at 
a downpayment, we would look across the file and see that the 
borrower is a ripe borrower, not only can they get into the 
home but they can stay in the home long term.
    Now, turning to Corker-Warner, S.1217, we really applaud 
the usage of mortgage insurance, deep mortgage insurance in 
that bill. And when we think about the standard coverage, the 
way it works is if a borrower comes in and puts 5-percent 
equity down, the mortgage insurance company puts additional 
coverage, that basically creates a remote coverage for the 
investor. So the investor is almost covered to 65 percent loan-
to-value. So the home will actually have to really incur a loss 
of more than 25 percent for the investor to take a loss, which 
actually removes the burden from the taxpayers and could also 
reduce the amount of bond insurance and bond guarantees needed.
    Senator Crapo. All right. Thank you. You answered the next 
question I was going to ask about the role of mortgage 
insurance, so let me turn to you, Mr. Platt. Some people have 
argued that some more proscriptive servicing rules are 
necessary because servicers have an economic incentive to 
pursue foreclosures rather than loan modifications, even though 
in some instances the modifications might be economically more 
advisable.
    Do you think that accurately describes the servicer's 
economic incentives?
    Mr. Platt. Thank you for your question. I do not agree with 
that assessment. I think servicers want to do the right thing. 
If they have the authority to modify and it makes sense to do 
so, they are willing. I do not believe that it is in their 
economic incentive to foreclose. I do not think that they have 
some nefarious plan to put money in their pockets at the 
expense of the borrower, and so I just completely disagree with 
that.
    Senator Crapo. We have heard some proposals that would 
restrict the ability of servicers to collect collateral in the 
event that a borrower defaults. Can you discuss how such 
restrictions would impact the cost of taking out a mortgage for 
the average borrower?
    Mr. Platt. Mortgage loans by definition are secured by a 
mortgage on the house. Unsecured loans have interest rates in 
the high teens; secured loans have interest rates 3 to 5 
percent in large measure, but not exclusively, because of the 
value and the availability of the collateral.
    If we reach a position where it is virtually impossible or 
practically infeasible to realize on the collateral of the 
home, as horrible as that could be for the individuals 
involved, I think what we essentially have done is invalidate 
secured loans as a method of offering consumer credit here. I 
think the natural consequence of that will be materially higher 
interest rates and lesser availability of credit.
    Senator Crapo. All right. Thank you. And one last question, 
Mr. Platt. Since 2010, a number of changes in servicing rules 
and practices have resulted from the National Mortgage 
Settlement, the interagency consent orders, the FHA Servicing 
Alignment Initiative, and then most recently the mortgage 
servicing rules from the CFPB. Can you discuss how these 
developments have impacted mortgage servicing practices, and 
especially--I assume that they have improved, but have they 
improved mortgage servicing practices?
    Mr. Platt. Well, first, the new regulations will not go 
into effect until January, and those are the first that will 
have common applicability across the entire industry. I do 
believe that both the 2011 consent orders with the Federal 
banking agencies and 14 banks as well as the global foreclosure 
settlement with the five major banks set a template for the way 
in which servicing will be done prospectively and really form 
the foundation in part for the CFPB regulations.
    It is a slow process trying to implement those regulations. 
They focus on various things. So, for example, the OCC consent 
orders focus a lot on systems and personnel, whereas the global 
foreclosure settlements were much more micro and detailed, 
dictating the way in which modifications and default servicing 
should be handled.
    The CFPB decided to take, as has already been mentioned, an 
approach based more on process, that it decided that it should 
not dictate what an owner should be required to do if a 
borrower were to default. But it could dictate that borrowers 
are treated fairly, that they are made aware of the options 
that may be available to them, and that they are given prompt 
and effective notice and access to personnel. And I think that 
is going to have a lasting impact on the quality of servicing.
    Senator Crapo. Thank you.
    Chairman Johnson. Senator Brown.
    Senator Brown. Thank you very much, Mr. Chairman.
    I was intrigued listening to Mr. Platt's testimony. Thank 
you. I appreciate the minority witness praising the CFPB for 
its work. Thank you for that.
    Ms. Cohen, you say in your testimony that, ``Getting 
mortgage servicing right must be a core piece of housing 
finance reform.''
    In 2011, Congressman Miller from Senator Hagan's State and 
I introduced legislation to address many of the problems in 
mortgage servicing. Since then, as Mr. Platt pointed out, 
several regulators and enforcement agencies have taken steps to 
correct some of the systemic deficiencies in the servicing 
industry, including the CFPB. But what we know the CFPB 
standards do not do is extending the Fair Debt Collection 
Practices Act to mortgage servicers, requiring loan 
modifications when they are beneficial to investors, 
prohibiting the so-called dual-track problem for mortgages, and 
the CFPB recently released the supervisory report over the 
summer that found systemic problems transferring accounts 
between servicers processing payments and engaging in loss 
mitigation.
    Your testimony was pretty clear about the problems with 
mortgage servicing, that those problems are not behind us. 
Should some of these ideas and expanding the powers of the CFPB 
be part of this GSE reform legislation?
    Ms. Cohen. Thank you for the question, Senator Brown. We do 
hope that some additional servicing measures will be part of 
the new legislation.
    On the overall question about why it is important to have 
servicing in a bill that is about origination of loans, people 
do not just get loans and then go away. They keep those loans 
for long periods of time, and during those times they often 
face hardship--medical problems, divorce, unemployment. They 
also may have other financial changes in their situation, and 
so it is essential that once you are in a loan, you can 
maintain that loan, especially when the taxpayer and the 
Government are picking up the bill if you cannot stay in your 
loan. So if it is good for the Government, good for the 
investors, and good for the homeowner, that needs to be a big 
part of the picture.
    In terms of your bill, there are definitely parts of your 
bill that have not been addressed by the CFPB, and they are key 
aspects of how homeowners will be able to stay in their homes, 
and with only procedural protections it is not clear that that 
will happen.
    Senator Brown. Thank you.
    Mr. Thomas, welcome back. Thank you for your insight, which 
I think helped to have an impact 2 or 3 weeks ago when you were 
in front of this Committee, the impact to your members with the 
absolutely unnecessary Government shutdown.
    Last week, I spoke with a number of your members, the 
Columbus Board of Realtors. About a hundred of them were there 
just to discuss some of these issues. The issue of short sales 
came up repeatedly. There is still concern about the lack of 
communications with servicers when they attempt to complete 
short sales. As you know, I have worked with Senator Murkowski 
on legislation to address this issue; Senator Reed from Rhode 
Island and Senator Menendez have also cosponsored.
    The FHFA has taken steps toward implementing our bill, but 
more needs to be done for non-GSE mortgages, even though newly 
issued mortgages are very few private label bills--private 
label secondary market, but with the old mortgages, and those 
are ones that your members talked about last week.
    Should we include these efforts, some of the language from 
the bill with Senator Murkowski, in the GSE reform package on 
short sales?
    Mr. Thomas. Well, short sales are obviously problematic. 
First of all, the name is incorrect. It is not ``short.''
    Senator Brown. Long, yes.
    [Laughter.]
    Mr. Thomas. So that is not a bad idea because it is 
problematic. The short sale process is fraught with difficulty. 
You know, having dealt with them myself, I know that you start 
down a path; very often they switch the person that is dealing 
with the short sale. You then have to deal with if there are 
secondary financing besides. You have to get those in line. You 
get an approval from one side. Then the other side drags their 
feet. You finally get the approval from the secondary, and then 
you have got to go back and get reapproval from the first. It 
is a can of worms. And so trying to get any kind of regulation 
around that, I would applaud that.
    Senator Brown. So the 60- to 90-day--the regulation, the 
new regulation for GSEs has been helpful----
    Mr. Thomas. Absolutely.
    Senator Brown. ----but the problem is still persisting with 
older mortgages.
    Mr. Thomas. With the other mortgages it is still 
persistent, but with the GSEs, it has vastly improved it. It is 
much easier.
    Senator Brown. But the frustration levels were pretty 
palpable. I mean, to listen to realtors that do not get 
callbacks, I mean they so often cannot even find the right 
people to talk to let alone see buyers and sellers walk away--
particularly buyers walk away from this process after 2 or 3 or 
4 or 5 months.
    Mr. Thomas. That is correct. That is the problem. You hit 
the nail right on the head. Like I said, you can start off with 
one point of contact, and that can change three or four times 
during the process. And when that changes, it is almost like 
starting all over again.
    Senator Brown. Thank you, sir.
    Chairman Johnson. Senator Tester.
    Senator Tester. Well, thank you, Mr. Chairman, and I want 
to thank you for holding this hearing and thank the folks who 
testified today. And I also want to thank the commitment from 
you, Mr. Chairman, and the Ranking Member to hold multiple 
hearings every week through Thanksgiving. I think that is a 
real commitment to getting something done and marked up before 
the end of the year and getting into the nitty-gritty specifics 
of what a housing finance system should look like. And so I 
very much appreciate that.
    I am going to really focus my questions on the role of 
community-based institutions. I am going to start with you, Mr. 
Thomas, if I might. You represent an association, have worked 
with your members, been in the business for 30 years. As you 
said, you undoubtedly work with lenders of all sizes or have 
worked with lenders of all sizes. Could you discuss the 
important role that community-based institutions play in 
facilitating strong competition in mortgage markets and the 
impact that competition has on the consumer experience both in 
terms of service and in terms of cost?
    Mr. Thomas. Well, it absolutely does, and especially in 
rural communities. Rural communities depend on community-based 
banks, and so you have to have that in the mix.
    The problem that we are getting to with such a tight credit 
box and the way we are--the path we re going down is that you 
are only going to be left with large major lenders, and that is 
a problem because that is going to dictate exactly what the 
consumer pays, how they pay it, and they are going to be very 
restrictive on who they loan to. You know, we have young people 
coming out of college with high student loans. We are going to 
have a problem getting them into the marketplace along with, if 
you look at the HMDA data for the last year, 51 percent of the 
African American borrowers were declined loans last year. So we 
are getting into a position where only the best can get loans, 
and that is a big problem for all of us in sustaining a 
mortgage process that, you know, promotes home ownership 
throughout the country.
    Senator Tester. Well, thank you. This is a question to any 
of the panel members who would like to respond, and I think as 
you folks know, the ability of smaller institutions, community-
based institutions, to provide their customers with competitive 
pricing and product offerings I think relies significantly on 
their ability to access the secondary market, much more than 
their larger competitors.
    Could any of you who wish highlight the importance of equal 
access both in fair pricing in the secondary market and 
facilitating vibrant and competitive mortgage markets? Go 
ahead, Mr. Stein.
    Mr. Stein. Thank you, Senator Tester. We do agree fully 
that having small lenders with direct access is very important. 
It is hard to create--if there are not lenders to serve a 
particular area, it is hard really to do much about that. But 
if there are lenders willing to make those loans, then it is 
very important that the secondary market be designed so that 
they have an outlet. And giving them direct access to a cash 
window so they do not have to go through their larger 
competitors and sell their servicing and potentially have their 
best customers poached is important. We think that that also 
says having the issuer and guarantor joined together for one-
stop shopping for smaller lenders would be preferable. And 
having a national mandate on those issuer-guarantors so that no 
part of the country is left behind, so that all eligible 
lenders would be able to join and participate, would also be 
important.
    Senator Tester. Anybody else like to comment on that? Yes, 
sir.
    Mr. Gupta. Senator Tester, I would add to this perspective. 
I think it is very important for community banks, credit 
unions, and smaller institutions to actually have access to 
credit across the board, and this is one place where private 
mortgage insurance companies in the current system and in the 
proposed system would actually facilitate availability of 
credit for low-downpayment loans in those markets. In the 
absence of an instrument like private mortgage insurance, that 
credit might not be available because the cost of capital 
market alternatives might not be predictable in the new finance 
system. So this is something where PMI, private mortgage 
insurance, can facilitate low-downpayment loans very actively, 
and that is a proven system.
    Senator Tester. Yes, OK. Would you agree that the current 
housing finance model really does not provide equal access 
because of the pricing due to volume?
    Mr. Gupta. There are certain disparities in the current 
housing finance system in terms of pricing. However, if you 
look at the number of lenders who originate high LTV loans or 
low-downpayment loans, there is broad access to low-downpayment 
loans across the board.
    Senator Tester. OK. Ms. Cohen, a couple questions for you. 
I want to talk a little bit about the role of community-based 
institutions and servicing and how critical it is to get these 
institutions to be able to continue to service mortgages and 
not be forced to relinquish their servicing rights. Can you 
just speak specifically about the quality of servicing when you 
compare community-based institutions to those of the large 
servicers? Is there a difference? And if so, what is that 
difference?
    Ms. Cohen. We speak to attorneys and other advocates around 
the country daily who represent primarily low-income consumers 
seeking loan modifications, and I personally get calls weekly. 
And in our experience, the largest servicers have the most 
difficult time addressing the needs of people in a timely and 
comprehensive way. Local institutions that have relationships 
with people in the community do do a better job. Sometimes they 
face challenges as well. You can set up a system in which they 
are able to have some input into how they structure their NPV 
analysis or other things. However, the basic things about 
communication still need to be done by mail and other methods 
like that because in general it is not going to be a face-to-
face thing. But it is in our experience that the biggest 
problems are the biggest servicers.
    Senator Tester. Well, thank you for that, and I want to 
once again thank you all for your testimony. I very much 
appreciate it. It is very helpful.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman and Ranking Member 
Crapo. Thanks for holding this hearing today.
    Mr. Stein, I wanted to start with you for a question, and 
thanks for being here, and I really do appreciate the 
tremendous work that the Center for Responsible Lending does, 
and Self-Help, to serve the people in North Carolina and around 
the country.
    In your testimony, you highlighted that since the financial 
crisis, the average borrower that was denied a GSE loan had a 
FICO score of 734 and was willing to put 19 percent down, and 
that the housing finance system should not push lower-wealth 
families and communities to FHA or high-cost products.
    If the GSEs and FHA are not the right way forward, what is? 
And would you agree that a reformed housing finance system that 
provides an explicit and paid-for Government guarantee protects 
taxpayers with private capital and explicitly supports 
affordable housing? Could that possibly be the right path? If 
you could expand on that.
    Mr. Stein. Thank you, Senator Hagan. I fully agree with all 
the last three points that you made, that whatever we do we 
need the explicit, fully paid-for Government guarantee, and 
private capital to come first. I fully agree with that, and it 
is true that the credit box for the GSEs I believe is too 
tight. A number of panelists have mentioned it, that there are 
people who can pay a mortgage, but they are having difficulty 
getting one because of one factor or another.
    I think what that means for the future, as I mentioned 
before, not to be repetitive, but we should not hard-wire 
individual underwriting criteria in the legislation, because if 
someone is weak on one point but strong on the others, they are 
actually a better risk than someone who is strong on whatever 
that point is that you pull, which could be downpayment, but 
weaker on the others. So that would be the first point.
    I think making sure that the new system is in all markets 
at all times, Mr. Thomas mentioned that. It needs to be a 
national system, and I think that means it cannot be a 
fragmented system. If you have national entities that are 
issuer and guarantor together and they are required to accept 
every eligible lender, they have minimum qualifications for 
lenders, but that way no part--western North Carolina for 
example--will not get left behind in that situation.
    Direct access to a cash window as opposed to having to go 
through larger competitors, and we think that having a mutual 
is an effective way to keep prices down as well.
    Senator Hagan. Thank you.
    Mr. Gupta, I know that over the last 5 years the mortgage 
insurance industry has paid claims to cover losses, and we have 
discussed this recently. How much has the industry paid in 
claims? And can you put that in a financial perspective?
    Mr. Gupta. Absolutely. Thank you, Senator Hagan.
    So as I mentioned earlier, mortgage insurance industry 
through this cycle worked exactly the way it was supposed to 
work. Our industry is based on a regime where we actually 
accumulate capital in good times and then use that capital in 
bad times to pay claims. So prior to this cycle, we actually 
accumulated a lot of capital by keeping 50 cents of every 
dollar of premium that we received in a reserve. Through this 
cycle, we served our role and we paid all those claims.
    So in financial terms, we paid close to $45 billion of 
claims out of which $40 billion were paid to Fannie Mae and 
Freddie Mac----
    Senator Hagan. Over what period of time?
    Mr. Gupta. This is through the cycle, from 2008 through 
2013, second quarter. So $40 billion of claims paid against 
Fannie Mae and Freddie Mac, thus taking the burden off from the 
GSEs, the taxpayers, and the Congress. And moving forward, the 
industry continues to serve its purpose in terms of writing new 
business, because in the last 5 years the industry is close to 
underwriting and insuring half a trillion of mortgages within 
the last 5 years, since 2009 to 2013.
    Senator Hagan. And can you expand a little bit more on the 
capital position of the industry today?
    Mr. Gupta. Absolutely. So as I said, the industry has 
served its role and worked exactly the way the industry was 
intended to work. As the industry goes through a bad cycle, the 
industry uses its loss reserves--or its reserves to pay its 
losses, and that is what we did. You would expect a mortgage 
insurance company to actually deplete its reserves as it is 
going through the cycle, and as we exit the cycle, we start 
replenishing our reserves. And if you look at the cycle, MI 
industry has raised $9 billion of additional capital out of 
which $2 billion of capital was raised within the last 12 
months. And the industry continues to have extra capacity on 
the sidelines, so if needed, we can raise additional capital 
from either capital markets or from reinsurance markets.
    Senator Hagan. From this most recent recession, have you 
changed that model in any way?
    Mr. Gupta. I think there have been learnings from this most 
recent cycle for all industry players. We are working on a 
stronger capital regime with all the regulators together. We 
are talking to the FHFA, the GSEs; we are talking to the 
Federal bank regulators; and we are talking to the National 
Association of Insurance Commissioners to work on industry 
capital standards that will make the industry more solvent and 
stronger coming out of the cycle.
    The second learning that we are also trying to incorporate 
is make that capital risk based, so when a market participant 
takes on more risk, then they are basically taking that with 
the capital set-aside for that risk.
    Senator Hagan. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    As you all know, in 2012 the four biggest banks originated 
more than half of all the mortgages in the country. So I am 
concerned that if we open up the secondary mortgage market to 
private capital but impose no meaningful requirements to 
protect smaller lenders, then the primary market dominance of 
the four biggest banks may lead to their dominance in the 
secondary market. And in turn, their dominance in the secondary 
market may help them become even more dominant in the primary 
market and allow them to further crowd out the small lenders.
    So I am worried about this. I know many of my colleagues 
are worried about this. So what I wanted to start with is, Mr. 
Stein, do you think that consolidation is a serious risk? And 
if there is more consolidation, what do you think will be its 
impact on access and affordability, particularly with lower-
income borrowers and rural borrowers?
    Mr. Stein. Thank you, Senator Warren. I do think it is an 
issue. I think that it is fine for lenders to pick their 
business strategies and decide where they are going to lend to. 
But there are smaller lenders who are making loans in rural 
communities and underserved communities, and it is important to 
promote that and provide an outlet for those loans. So I think 
having a diversified primary market competition is the most 
important thing to make sure of, so I agree with your premise.
    Senator Warren. You mentioned in your testimony that you 
and your organization support more mutuals as a replacement for 
Fannie and Freddie and that they would be responsible for 
issuing and guaranteeing more mortgages. Could you explain 
exactly how it is that mutual would make sure that there was 
adequate market access?
    Mr. Stein. Sure. We would turn Fannie Mae and Freddie Mac 
into mutuals that would be owned by the lenders that sell to 
them, just like the Federal Home Loan Bank system is; you have 
to put capital in before you can get capital out. And we think 
that would provide a seat at the table for smaller lenders in 
decision making to make sure their interests are considered. 
Large lenders are always going to have more influence, but this 
would provide smaller lenders with more influence, and we would 
require equal pricing. We think that that would do two things 
for access and affordability.
    First, it would align incentives since equity is at risk, 
so that the entity is less likely to go crazy in terms of 
buying Alt-A mortgages, for example, and they can be more 
careful. But on the other hand, lenders want to sell loans and 
earn origination fees, so there is going to be an offsetting 
focus on the credit box. We think that both sides of that would 
be covered. You need to get a good credit box to serve people.
    And, second, we do believe it would keep rates down for 
consumers. We primarily want competition at the primary market 
level. At the secondary market level, it is going to be an 
economies of scale business. There is not going to be a million 
of these entities, most likely, and understock ownership, the 
mission is to create value for shareholders. And so to the 
extent it is possible, there is going to be some oligopolistic 
behavior. With a mutual, members are not just trying to make 
money from the equity that they have invested. They are trying 
to provide a low-cost funding mechanism that earns them 
origination fees. So there is a countervailing pressure to keep 
prices down, and mutuals do tend to require a lower return on 
equity, which would translate to lower prices for borrowers.
    Senator Warren. Good. Thank you very much. I think it is 
critically important, as we think about the housing finance 
structure, that we focus on the access question and make 
certain that there is access all across the country and across 
different income levels for potential home borrowers. Thank 
you.
    I want to ask about another question, too, and that is, 
Fannie and Freddie's charters require them to promote access to 
mortgage credit throughout the Nation, including central 
cities, rural areas, and underserved areas. The broad duty to 
serve the entire market plays a critical role in making sure 
mortgages are affordable and available in all parts of the 
country. And it creates secondary market demand for loans that 
otherwise might not get written, even though people receiving 
these loans are perfectly creditworthy.
    So, Ms. Cohen, if Fannie and Freddie are replaced by 
secondary market entities that have no such duty to serve the 
entire market, what kind of impact do you think that will have 
on mortgage access and affordability in low-income communities 
and rural communities?
    Ms. Cohen. Thank you for the question, Senator Warren. The 
reason these hearings are happening now is because the market 
is quite restricted. It is mostly only a market for people who 
have wealth and who have the highest credit scores, even though 
there are many other people who are creditworthy. And so if we 
set up a system that does not provide a duty to serve, we are 
basically going to have a market like the one we have today 
where very many people who need housing cannot get the kind of 
housing that will build wealth. We have got many communities 
where wealth was gutted by the foreclosure crisis, and it is 
urgent that we get those people back into----
    Senator Warren. Thank you. And I know I am out of time, but 
if I could just ask Mr. Diaz to comment very quickly, 
particularly on the impact on Hispanic borrowers, if you could.
    Mr. Diaz. Yes, I think access to credit has always been a 
problem for low-income and minority communities. Without CRA, 
for instance, a lot of the early lending in the 1990s and 2000s 
would have been very difficult to orchestrate because we had to 
prove that low-wealth, low-income borrowers could be good 
credit risks.
    If you take that away, what is going to be the incentive 
for lenders to go that extra mile? It is completely uncertain 
to me. I worry we are going to turn back versus trying to 
strengthen a market that works. The market collapsed for 
reasons having nothing to do with low-wealth, low-income 
borrowers, but these borrowers again are going to bear the 
brunt of access to credit. There is no constituency really that 
is going to protect these consumers' interests.
    Senator Warren. Well, thank you very much. Given the 
importance of home ownership and wealth building, I think this 
is just a critical feature.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Well, thank you, Mr. Chairman. Thank you 
all for your testimony.
    Mr. Thomas, some commentators have argued that relatively 
low reported interest rates on jumbo mortgage loans provide 
evidence that families who would be pushed out of a conforming 
loan market and into the jumbo market by a reduction in the 
conforming loan limits would not face materially higher costs. 
But as I read it, most reports show that the current jumbo 
market is only serving a very narrow and exclusive subset of 
borrowers who have very high incomes, lots of assets, very 
large downpayments, and very low debt.
    So wouldn't it be a mistake to view these loans as 
representative of what most families in the conventional market 
would face if they were pushed into the jumbo market by a 
reduction in the loan limits?
    Mr. Thomas. Thank you, Senator, and you are absolutely 
correct. Those that are getting those jumbo loans are putting 
quite a bit down and have very high FICO scores, and so it is 
not representative of what would happen if we lowered the loan 
limits and then placed those people that were now left out of 
the conforming loan limits into the jumbo market. They could 
not compete in that market under the circumstances that we have 
right now. So you are absolutely correct. Higher downpayments, 
much higher, 30 percent down, and you are normally going to 
have very high FICO scores, too.
    Senator Menendez. So, for the record, Mr. Chairman, I am 
not talking about households with bad credit who cannot afford 
a loan in the conforming market. I am talking about regular 
families with normal credit who can afford to responsibly pay 
their mortgage under the current system, but who might not meet 
the extreme bar to qualify for special treatment in the jumbo 
market. And I think that needs to be corrected.
    Let me ask you another question, Mr. Thomas, using your 
expertise in the field. There have been some proposals made to 
reduce the maximum size of loans that Fannie and Freddie Mac or 
whatever replaces them in a new system can guarantee. Couldn't 
a reduction in these conforming loan limits disproportionately 
harm homeowners and homebuyers in high-cost areas?
    Mr. Thomas. Oh, absolutely, and it is not only high-cost 
areas, Senator. The lowering of the upper limit happens to the 
high-cost areas as well as the normal. You know, what is being 
proposed right now would be to lower the high cost to 600 and 
the normal down to 400. Well, that affects everybody across the 
country, not just the high-cost areas, and so it would have a 
bad effect on home ownership.
    We have calculated that it would remove all of the 
intended--or what we calculate as being the run-up of 
additional buyers next year, it would wipe that amount out, so 
we would be back to the same levels we are at today.
    Senator Menendez. So in addition to hurting new homebuyers, 
reducing the conforming loan limits also hurts existing 
homeowners by lowering demand and, therefore, reducing the 
value of their home.
    Mr. Thomas. Absolutely. It has that effect as well.
    Senator Menendez. Let me ask--and I am not picking on you, 
but you have expertise here that I am looking for. FHA Acting 
Director DeMarco last week announced his intention to 
unilaterally reduce the maximum size of mortgages guaranteed by 
Fannie and Freddie. And Senator Isakson, myself, and a group of 
bipartisan legislators, including Senator Schumer and Senator 
Warren, urged him not to do this, and I believe that your 
organization has sent him a similar letter, as well as others. 
And it seems to me a little bizarre for the FHFA to be making 
such a unilateral change while Congress is working on housing 
reform legislation. It is a topic that I believe clearly should 
be left to Congress to determine, particularly when our housing 
market and our economy still are recovering from the financial 
crisis and the recession that followed.
    Would you agree that it is a bad policy for FHFA to reduce 
unilaterally the loan limits? And with data showing that the 
larger loans under the current loan limits tend to perform 
better than other loans when you control for other factors, 
wouldn't reducing the loan limits to exclude these loans seem 
to be in direct contravention to FHFA's mandate as a 
conservator to improve the financial conditions of the GSEs?
    Mr. Thomas. I would agree, and I commend all of you for 
writing that letter. I also met with the Director and gave him 
our thoughts on it and why we felt it was a bad idea. And I 
might remind you that in 2011 he testified that he did not 
think he had the power to do it.
    Senator Menendez. That is something to pursue, Mr. 
Chairman. Thank you very much.
    Chairman Johnson. Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman and Ranking 
Member. I think these hearings are just so valuable for us to 
gather information, because one thing that I have learned 
coming here is that you do not often get a chance--I mean, we 
will not do this and then come back in a couple years. That is 
not how it works. And so whatever we do has to be done 
correctly.
    I obviously very much appreciate the ongoing comments, how 
we can improve what we have in front of us. Obviously there is 
some advocacy here for continuing the current structure. I 
think that there is probably a broader consensus that we need 
to look at a new structure and how that would work and making 
sure that consumers are protected and that access to the market 
for all borrowers is available--not guaranteed but available. 
And so housing, 20 percent of what we do, but we know that it 
is more than that. Home ownership is the bedrock of really our 
political philosophy, also the bedrock of wealth creation for 
many, many middle-class families. And so this has got to be 
done right.
    And, Mr. Thomas, thank you for your excellent testimony a 
couple weeks ago on the debt limit and what that would mean for 
borrowers. I think it had a huge impact. I think we were able 
to change public opinion about what that meant, and I think 
your contributions were greatly appreciated. I share Senator 
Brown's comments in that direction.
    But I want to throw you a little curve ball because we were 
talking about a lot of discrete and unique groups, but in my 
State, one of the most acute housing problems we have, other 
than rural housing, is Native American housing. It presents 
some real challenges for lenders because of how property is 
organized. It presents real challenges in terms of the legal 
structure just based on whether normal legal rules of 
foreclosure would apply. And I want to ask all of you, any of 
you, if you have thought about the unique challenges for Native 
American borrowers to improve the quality of housing and access 
to first-time homeowners or access to single-family housing on 
the reservations.
    [No response.]
    Senator Heitkamp. There we go. That answers my question. I 
make that point because we spend a lot of time talking about 
access, and we spend a lot of time talking about unique issues, 
and I will tell you, for me--and I know for the Chairman--we 
have seen it in our communities. It is a growth area. We 
desperately need to be thinking about how we protect consumers, 
how we get access to those markets. Yes, Ms. Cohen.
    Ms. Cohen. Thank you for the question. I would point out 
that Native Americans are part of a community of low-wealth 
borrowers who face a lot of hardship in paying their bills on a 
regular basis, and the legal services network around the 
country serves Native American communities in certain States 
and sees the problems with the initial issuance of a loan and 
also the problems that people face once they get a loan. And 
part of creating a housing finance system going forward that 
works for all borrowers, middle-class and working-class low-
wealth borrowers, is to create that flexibility not only in the 
underwriting but also in how servicing is done to make sure 
that people do get a solution and they get a solution that 
works for them. People who have very few dollars in their 
pocket do not really fit with the traditional DTI ratios.
    Senator Heitkamp. And I would agree with you in terms of 
off-reservation. But we have a unique situation as it relates 
to on-reservation housing and on-reservation borrowing. And so 
just put that thought into each one of your heads as you are 
thinking about how we can, in fact, meet some kind of standard 
there.
    My last question is to Mr. Gupta. Mortgage insurance 
obviously is key for many families, and especially first-time 
homeowners who are trying to buy a home. We see with student 
lending a lot of folks who were not qualified, cannot save a 
downpayment. The only access they are going to have is through 
some kind of mortgage insurance. We want to make sure we get 
this piece right in this bill.
    Are you satisfied that the mechanics that have been 
outlined in this bill will basically help maintain a robust 
mortgage insurance market?
    Mr. Gupta. Thank you, Senator Heitkamp. We completely agree 
with the outline of what has been recommended in the bill in 
terms of mortgage insurance and usage of mortgage insurance for 
deep coverage. In addition to that, what we would add is there 
is no reason that mortgage insurance can also not participate 
in the bond guarantor role. At the end of the day, mortgage 
insurance companies are credit managers for mortgages only. By 
law, we are required to only participate in the mortgage 
insurance business. We do not insure auto loans. We do not 
insure credit card loans. So this is a collateral class that we 
know how to manage. And it would be a good opportunity and a 
sustainable opportunity in terms of borrower economics, in 
terms of sustainable housing, to actually have mortgage 
insurance companies not only provide the deep coverage which 
actually sits in front of the taxpayers, but also provide bond 
insurance coverage right behind it.
    In addition to that, I would say we continue to have 
dialogs with the FHFA, with the GSEs, with the Federal bank 
regulators, as well as State regulators on strengthening the 
industry and making sure that the industry continues to be more 
solvent and stronger coming out of this cycle.
    Senator Heitkamp. Thank you.
    Chairman Johnson. Thank you again to all of our witnesses 
for being here today. I also want to thank Senator Crapo and 
all my colleagues for their ongoing commitment to this 
important topic.
    This hearing is adjourned.
    [Whereupon, at 11:32 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
                    PREPARED STATEMENT OF ERIC STEIN
         Senior Vice President, Center for Responsible Lending
                            October 29, 2013
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for inviting me to testify today about housing 
finance reform and its impact on borrowers.
    I am Senior Vice President at the Center for Responsible Lending 
(CRL), which is a nonprofit, nonpartisan research and policy 
organization dedicated to protecting home ownership and family wealth 
by working to eliminate abusive financial practices. CRL is affiliated 
with Self-Help, a nonprofit community development lender that creates 
ownership and economic opportunity, for which I also serve as Senior 
Vice President. Self-Help has provided $6 billion in financing to 
70,000 homebuyers, small businesses and nonprofits and serves more than 
80,000 families through 30 retail credit union branches in North 
Carolina, California, and Chicago.
    Housing finance reform has obvious consequences for consumers. It 
will impact which families are able to access mainstream mortgage 
credit and how expensive that credit will be. We agree with the 
emerging consensus, as reflected in S.1217, the Housing Finance Reform 
and Taxpayer Protection Act of 2013, that taxpayer risk must be 
insulated by more private capital, that an explicit and paid for 
Government guarantee is necessary, that additional funds should be 
created to support affordable housing, and that mortgage-backed 
securities (MBS) provided through bond guarantors must support the 
``to-be-announced'' (TBA). We also support current Federal Housing 
Finance Agency (FHFA) efforts to develop a common securitization 
platform, undertake experiments to test the market's willingness to 
purchase credit risk from the GSEs, wind down their investment 
portfolio, and hopefully move toward a common security.
    In my testimony today, we provide two sets of recommendations. 
First, we recommend ways to structure a reformed housing finance system 
and how different approaches, including S.1217, would impact borrowers. 
Second, we recommend against hard-wiring underwriting criteria, such as 
a downpayment mandate, into reform legislation, because this would 
needlessly restrict access to credit. Instead, a reformed housing 
finance system should allow the regulator, bond guarantors and lenders 
to use traditional underwriting practices, including compensating 
factors, for lower-wealth borrowers.
    The mortgage market in the United States is a $10 trillion market, 
and housing finance reform must be undertaken with care to ensure that 
it does not inadvertently harm the housing market and economy. If 
legislation fixes what was broken and builds on what has and is 
working, we can create reform that will support economic growth, 
provide loans to creditworthy families in good times as well as bad, 
and reduce Government's role in the mortgage market.
The Infrastructure of a Reformed Housing Finance System Will Have a 
        Significant Impact on Borrowers
    Our recommendations on how to structure a reformed housing finance 
system include requiring mutual ownership of entities that both issue 
and guarantee conforming securities. Additionally, we recommend 
retaining cash window access for smaller lenders, maintaining a 
national market by requiring secondary market entities to serve all 
eligible lenders, and prohibiting structured securities from accessing 
a Government guarantee. Lastly, we recommend allowing secondary market 
entities to have a portfolio for distressed-then-modified loans and to 
provide a Government backstop for this portfolio so these modifications 
can continue in times of economic stress.
    Secondary Market Entities Should Have Mutual Ownership Structure: 
In order to properly align incentives, we recommend requiring mutual 
ownership of secondary market entities instead of stock ownership. Our 
proposal does not call for a specific number of secondary market 
entities, but, like the 12 Federal Home Loan Banks, we believe that 
they should all be mutually owned. We also support requiring each of 
these mutually owned entities to do two things: issue securities and 
guarantee those same securities.
    One of the key reasons that Fannie Mae and Freddie Mac ended up in 
conservatorship is because their incentives were skewed toward short-
term gains. Shareholders looked to steady or increasing quarterly 
earnings reports. Therefore, in the face of declining market share 
because of growing numbers of private-label securities packaging 
subprime and Alt-A loans, Fannie Mae and Freddie Mac management decided 
to weaken credit standards to compete for the Alt-A business. This 
decision proved disastrous. While these Alt-A loans were roughly 10 
percent of Fannie Mae's outstanding loans in 2008, they were 
responsible for 50 percent of its credit losses. \1\
---------------------------------------------------------------------------
     \1\ See, Federal National Mortgage Association, SEC Form 10-Q, 
June 30, 2008, at 6; Federal Home Loan Mortgage Corporation, SEC Form 
10-Q, June 30, 2008, at 71.
---------------------------------------------------------------------------
    By not having private shareholders, mutual ownership of secondary 
market entities would curb incentives for short-term and volatile 
equity returns over long-term sustainability. Under a mutual model, 
lenders wanting to sell conforming loans into the secondary market 
would be required to make a capital investment in one or more of these 
mutually owned companies. This pooled capital would then stand in a 
first-loss position ahead of any Government reinsurance. (Borrower 
equity, private mortgage insurance for high loan-to-value mortgages, 
private investment in jumbo loans, and MBS investors taking on the 
interest rate risk of mortgages are the four additional primary ways 
that private capital would stand in front of Government reinsurance.) 
The combination of this equity investment and the absence of private 
shareholders would reduce the chasing-market-share problem that Fannie 
Mae and Freddie Mac exhibited pre-2008. Similarly, management would not 
be compensated based on quarterly stock prices, which would also result 
in fewer incentives for excessive risk taking.
    Requiring mutual ownership of secondary market entities would 
benefit consumers. Not only would the secondary market system be more 
stable, but it would also limit secondary market entities from driving 
up prices to lenders and borrowers. Securitizing and guaranteeing loans 
is inherently a scale business. Since the mission of shareholder owned 
entities is to increase shareholder value, they would undertake 
oligopolistic behavior to increase prices to the extent possible. For a 
mutual, on the other hand, lender-members have an interest in getting 
the best possible price and have influence to make this happen. Because 
the mutual would provide a low-cost funding source for lender-members 
to use to fund originations and earn origination income, return on 
equity invested would not be the only return from joining the mutual, 
as it would with shareholders. A recent paper highlights how the 
incentives created by mutually owned entities result in lower rates for 
borrowers. \2\
---------------------------------------------------------------------------
     \2\ Patricia Mosser, Joseph Tracy, and Joshua Wright, ``The 
Capital Structure and Governance of a Mortgage Securitization 
Utility'', Federal Reserve Bank of New York Staff Report no. 644, at 
18, 32-38 (October 2013).
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    Smaller Lenders Should Continue To Have Direct Access to the 
Secondary Markets Through a Cash Window: Housing finance reform should 
ensure that smaller and regional lenders--which often provide credit in 
rural and underserved communities that are overlooked by larger 
lenders--remain competitive in the secondary mortgage market. The 
current system provides smaller lenders with direct access to sell 
their loans to Fannie Mae and Freddie Mac, and a reformed system should 
retain this approach. The GSEs provide a ``cash window'' that gives 
smaller lenders an up-front cash payment--instead of a small interest 
in a security--in exchange for whole loans. This cash window access 
allows smaller lenders to avoid going through an aggregator, who could 
be a larger competitor. It also provides smaller lenders with the 
option of retaining servicing rights or selling those rights. Keeping 
servicing rights helps these lenders hold onto their best customers, 
rather than passing on customer contact information to larger 
competitors serving as aggregators.
    Reform proposals that would split the system into separate issuer 
and guarantor companies, such as S.1217, threaten to jeopardize this 
direct secondary market access for smaller lenders. Among other 
concerns, splitting the market in this way would allow larger lenders 
to create affiliated issuers. And, if they decided to, these lenders 
could also pool loans from other lenders. These affiliated issuer-
companies could make business decisions about the kind of mortgage 
products to aggregate and pool, how to price loan purchases from other 
lenders, and whether to require a transfer of servicing rights. The end 
result would be that larger institutions could control their own 
destiny, but smaller lenders would be at the mercy of competitors.
    In the event that Congress decides to bifurcate the system into 
separate issuer and bond guarantor companies, then it should prohibit 
lenders from being affiliated with or purchasing stock in either, 
except through mutual ownership, in order to protect small lenders. In 
addition, these separate entities should be prohibited from offering 
volume discounts to avoid discriminatory pricing in favor of larger 
sellers.
    Secondary Market Entities Should Be Required To Serve a National 
Market: A reformed housing finance system should continue to fulfill a 
national role where it serves all markets at all times, including rural 
and underserved areas. One of the relatively unnoticed success stories 
of the current housing finance system is the creation of a stable 
national housing market that can weather regional or even national 
economic cycles. Although we believe they could have done more to 
prevent overly constrained credit in recent years, the fact is that 
Fannie Mae and Freddie Mac have kept the housing market going during 
the worst economic crisis since the Great Depression.
    There is a risk that housing finance reform will jeopardize this 
national housing market, splintering the system so that anywhere 
between one entity to some 500 companies might act as issuers and 
another 5 to 10 as bond guarantors. Whatever the exact number, these 
companies could align their business models with specific lenders 
serving parts of the country--for example, only the Southeast or 
California. This would lead to a market with niche and regional players 
but no entity mandated to serve the entire market or filling the gaps. 
The regulator would be powerless to compel any individual company to 
purchase loans from lenders in certain States or communities.
    We have two recommendations to maintain a national market. First, 
we recommend having secondary market entities perform both issuer and 
guarantor functions. This will reduce market complexity, assist small 
lenders in accessing the secondary market, and make it easier for the 
regulator to assess whether the secondary market is not leaving parts 
of the country behind. Second, we recommend requiring secondary market 
entities to serve all eligible lenders across the country. This way, 
the housing finance system would be unable to ignore lenders serving 
rural areas or parts of the country facing a regional downturn. It is 
entirely appropriate for individual lenders to have business strategies 
that focus on specific regions or communities. But, reform legislation 
should not assume that these individual business judgments are an 
adequate substitute for a system that supports a national market.
    Structured Securities Should Be Prohibited From Accessing 
Government Reinsurance: We have two recommendations about the kind of 
securities that should be eligible for Government reinsurance. First, 
housing finance reform should preserve the pass-through securities 
currently used in the ``to-be-announced'' (TBA) market, which is also 
called the forward market. Investors commit to these transactions 
before the security is pooled together, meaning the individual loans in 
the pool are not ``announced'' until 1 to 3 months later. This is a 
unique way for a capital markets system to function, and it produces a 
number of benefits, including widespread liquidity, reduced borrowing 
costs for borrowers, countercyclical access to credit, and broad 
availability of the 30-year fixed-rate mortgage.
    Second, we also urge this Committee to prevent structured 
securities from obtaining a Government guarantee. These securities 
should be able to access a common securitization platform, but they do 
not provide sufficient benefits to warrant a Government guarantee. 
Structured securities were the kind used in private-label securities 
during the subprime boom years, and they involve slicing securities 
into subordinate tranches (taking losses first) and senior tranches 
(taking losses last). This requires examining the individual loans 
packaged into each pool in order to finalize the tranches and find 
appropriate investors, which makes it incompatible with the in-advance 
approach used in the TBA system.
    This incompatibility with the TBA system means that structured 
securities are unable to deliver the same benefits that come from pass-
through securities. For example, structured securities would increase 
mortgage costs for all borrowers because of lowered liquidity, and 
borrowers at the edge of the credit box would have additional costs on 
top of this. Borrowers in certain geographies would get penalized 
further still. Additionally, structured securities would reduce access 
to the 30-year fixed-rate mortgage, because subordinate investors would 
be more inclined to invest in securities with shorter-term and/or 
adjustable-rate mortgages. And, structured securities would cripple the 
regulator's ability to fulfill supervision and oversight duties, 
because it would turn the regulator into a huge ratings agency to 
ensure that every senior position in every structured security in the 
country had sufficient and real subordinate coverage. (The new 
regulator should have safety and soundness authorities similar to 
FHFA's in order to supervise bond guarantor/issuers.)
    Portfolio Capacity and Government Backing in Times of Economic 
Stress Are Needed for Successful Loan Modifications: One part of 
housing finance reform that seems at risk of being overlooked is the 
infrastructure needed to facilitate successful loan modifications. In 
order to prevent unnecessary and costly foreclosures that would put 
Government reinsurance at risk, housing finance reform should preserve 
the ability of Fannie Mae and Freddie Mac to modify distressed loans. 
This involves a portfolio capacity to hold distressed-then-modified 
loans and a Government liquidity backstop to support this portfolio in 
times of economic stress when modifications are most needed. \3\ In 
addition, we support servicing standards that require a standardized 
and publicly available net-present-value test for modifications.
---------------------------------------------------------------------------
     \3\ While new entities should not be permitted to hold investment 
portfolios, they also need the ability to hold loans for a maximum of 6 
months to aggregate cash purchases from lenders. Without a Government 
backstop, this function will also disappear in times of financial 
stress.
---------------------------------------------------------------------------
    Comparing the loan modification process for Ginnie Mae and GSE 
securities highlights the misaligned incentives that occur without a 
portfolio. Both Ginnie Mae and the GSEs use pass-through securities, 
and distressed loans must be purchased out of the portfolio in order to 
make investors whole. While the GSEs are able to pull distressed loans 
onto their portfolio and, as a result, do affordable modifications, 
servicers are required to purchase distressed loans out of Ginnie Mae 
pools. Because servicers have no economic incentive to hold modified 
loans on their balance sheet, they complete shallow modifications that 
can be resecuritized along with new loans. However, this results in 
higher redefault rates than more affordable GSE modifications. For 
loans modified in 2011, 19 percent of Fannie Mae loans had 60-day 
redefault rates 24 months after the modification compared with 49 
percent of Government-guaranteed loans. \4\
---------------------------------------------------------------------------
     \4\ ``OCC Mortgage Metrics Report, Disclosure of National Bank and 
Federal Savings Association Mortgage Loan Data, Second Quarter 2013'', 
at 35 (September 2013).
---------------------------------------------------------------------------
Housing Finance Reform Should Allow the Use of Compensating Factors in 
        Underwriting
    GSE reform legislation should not prohibit lenders from using 
compensating factors to make more informed decisions about credit risk. 
In the wake of the financial crisis and while under conservatorship, 
the GSEs have become overly conservative--only the most pristine 
borrowers can get a conventional mortgage. The average borrower denied 
a GSE loan had a FICO score of 734 and was willing to put 19 percent 
down. \5\ Purchase originations are at their lowest levels since the 
early 1990s. \6\ There is a risk of enshrining or exacerbating this 
narrow market as part of housing finance reform, which would result in 
pushing young and lower-wealth borrowers into a separate and more 
expensive system.
---------------------------------------------------------------------------
     \5\ See, Kenneth Harney, ``Mortgage lenders set higher standards 
for the average borrower'', The Washington Post (September 28, 2012).
     \6\ See, Governor Elizabeth A. Duke, ``Comments on Housing and 
Mortgage Markets at the Mortgage Bankers Association'', at 2 (March 8, 
2013).
---------------------------------------------------------------------------
    However, a dual market approach has never served the country well. 
For example, a dual market existed during the recent mortgage boom, 
when half of all African American families were steered into high-cost, 
abusive subprime mortgages, while most white borrowers received prime 
loans. Going forward, lower-wealth families and communities should not 
be pushed into FHA as a housing reform solution. Rather, families able 
to succeed in a mainstream mortgage should be able to access the 
mainstream market.
    A reformed housing finance system must serve the full universe of 
creditworthy borrowers that can afford a responsible loan. This will 
not only ensure that lower-wealth families have the opportunity to 
build wealth through home ownership, but it will also support the 
overall housing market. To this end, Congress should not hard-wire 
downpayment mandates, as is done with a 5 percent downpayment mandate 
in S.1217.
    Downpayment Mandates and Other Hard-Wired Underwriting Criteria 
Would Needlessly Restrict Access to Credit: Including downpayment 
mandates in housing finance reform legislation would unnecessarily 
restrict access to credit for lower-wealth families. As an initial 
matter, these mandates overlook the fact that borrowers must also save 
for closing costs--roughly 3 percent of the loan amount--on top of any 
downpayment required. And, the mandates would increase the number of 
years that borrowers would need to save for a downpayment. Using 2011 
figures that include closing costs, it would take the typical family 17 
years to save for a 10 percent downpayment and 11 years to save for a 5 
percent downpayment.
    Persistent wealth disparities for African American and Latino 
households would make downpayment mandates particularly harmful for 
these communities. In addition to taking years longer to save for a 
downpayment, the wealth gap makes it less likely that African American 
and Latino families could get financial help from family members. This 
combination could leave many individuals--who could be successful 
homeowners--with restricted access to credit.
    Similar obstacles exist with younger families. Downpayment burdens 
and other obstacles are preventing these families from joining the 
mortgage market, and their participation is necessary for a thriving 
economy. According to former-Governor Duke of the Federal Reserve 
Board, ``Staff analysis comparing first-time homebuying in recent years 
with historical levels underscores the contraction in credit supply. 
From late 2009 to late 2011, the fraction of individuals under 40 years 
of age getting a mortgage for the first time was about half of what it 
was in the early 2000s.'' \7\
---------------------------------------------------------------------------
     \7\ See, Governor Elizabeth A. Duke, Comments on Housing and 
Mortgage Markets at the Mortgage Bankers Association at 2 (March 8, 
2013).
---------------------------------------------------------------------------
    On top of harming lower wealth and younger borrowers, imposing 
downpayment mandates would also be harmful for the housing market 
overall. According to the Joint Center for Housing Studies at Harvard 
University, households of color will account for 70 percent of net 
household growth through 2023. Considering that many of these and 
younger households have limited wealth, downpayment mandates could 
significantly reduce the number of future first-time homebuyers. \8\ 
This reduced pool of buyers could lead to lower home prices, more 
difficulty selling an existing home, and even some existing borrowers 
defaulting on their mortgage. This would also harm older homeowners 
needing to sell their houses and use their home equity to pay for 
retirement, move to a managed-care facility or to a smaller house.
---------------------------------------------------------------------------
     \8\ See, ``The State of the Nation's Housing, Joint Center for 
Housing Studies'', at 3 (2013) (``Proposed limits on low-downpayment 
mortgages would thus pose a substantial obstacle for many of tomorrow's 
potential homebuyers.'').
---------------------------------------------------------------------------
    Not only is there a huge cost to putting these restrictions into 
law, but there is also a limited benefit in terms of reducing default 
rates. When looking at loans that already meet the basic requirements 
of the Dodd-Frank Act and product requirements for a Qualified 
Mortgage, a UNC Center for Community Capital and CRL study shows that 
these requirements cut the overall default rate by almost half compared 
with loans that did not. Layering on a downpayment requirement on top 
of these protections produces a marginal benefit. \9\ This makes sense 
because risky product features and poor lending practices caused the 
crisis by pushing borrowers into default, and the Dodd-Frank Act 
reforms address these abuses such as high fees, interest-only payments, 
prepayment penalties, yield-spread premiums paid to mortgage brokers, 
lack of escrows for taxes and insurance for higher priced mortgage 
loans, teaser rates that spiked to unaffordable levels, and outlawing 
no-doc loans.
---------------------------------------------------------------------------
     \9\ Roberto G. Quercia, Lei Ding, Carolina Reid, ``Balancing Risk 
and Access: Underwriting Standards for Qualified Residential 
Mortgages'', Center for Responsible Lending and UNC Center for 
Community Capital (Revised March 5, 2012).
---------------------------------------------------------------------------
    Given the parameters set by the Dodd-Frank Act's mortgage reforms, 
Congress should not go further and hard-wire specific underwriting 
criteria into legislation, especially since borrowers in well-
underwritten loans can succeed in mortgages with lower downpayment 
amounts. Laurie Goodman of the Urban Institute points out that a hard 5 
percent cutoff is not the best way to address default risk, since 
compensating underwriting factors are more important. Analyzing Fannie 
Mae data, she found that:

        The default rate for 95 to 97 percent LTV mortgages is only 
        slightly higher than for 90 to 95 LTV mortgages, and the 
        default rate for high FICO loans with 95 to 97 LTV ratios is 
        lower than the default rate for low FICO loans with 90 to 95 
        percent LTV ratios. . . . For mortgages with an LTV ratio above 
        80 percent, credit scores are a better predictor of default 
        rates than LTV ratios. \10\
---------------------------------------------------------------------------
     \10\ See, Laurie Goodman and Taz George, ``Fannie Mae Reduces Its 
Max LTV to 95: Does the Data Support the Move?'', The Urban Institute, 
MetroTrends Blog (September 24, 2013).

    In addition, for the last 17 years, CRL's affiliate Self-Help has 
run a secondary market home loan program, which has purchased 52,000 
mortgages worth $4.7 billion originated by 35 lenders in 48 States. 
Borrowers in 68 percent of these mortgages made less than a 5 percent 
downpayment and 32 percent put less than 3 percent down and the median 
income of these borrowers was less than $31,000. In addition, 38 
percent of borrowers received help with the downpayment and closing 
costs from another party, and use of assistance was not correlated with 
higher default when controlling for other factors. The vast majority of 
these loans did not have private mortgage insurance. These borrowers 
saw a 27 percent median annualized return on equity, which increased 
$18,000 even through the crisis. \11\ This high loan-to-value program 
resulted in Self-Help's cumulative loss rate of approximately 3 
percent, which includes performance during the recent foreclosure 
crisis and would have been substantially lower if the loans had had 
private mortgage insurance.
---------------------------------------------------------------------------
     \11\ See, Allison Freeman and Janneke Ratcliffe, ``Setting the 
Record Straight on Affordable Home Ownership'' at 48 (May 2012); see 
also, Christopher Herbert, Daniel McCue, and Rocio Sanchez-Moyano, ``Is 
Home Ownership Still an Effective Means of Building Wealth for Low-
Income and Minority Households? (Was it Ever?)'', Joint Center for 
Housing Studies, Harvard University, at 48 (September 2013) (Overall, 
owning a home is consistently found to be associated with increases of 
roughly $9,000-$10,000 in net wealth for each year a home is owned.).
---------------------------------------------------------------------------
    Similarly, legislation should not contain credit score or debt-to-
income cutoffs either. Private companies' proprietary scoring models 
should not be enshrined into legislation; we learned that lesson with 
the ratings agencies. Further, each loan is a combination of numerous 
factors and if one is factor is enshrined by legislation, that will 
reduce the pool of potential borrowers with strong compensating factors 
who could succeed as homeowners. Underwriting is multivariate and 
complex. It is not susceptible to legislation and should be left to the 
regulator, bond guarantors, and lenders through traditional 
compensating factors.
Conclusion
    Thank you for the opportunity to testify today. Attached as an 
appendix to my testimony is a recent CRL Working Paper on GSE reform 
that goes into these recommendations in greater detail. I look forward 
to answering your questions.
















































































                   PREPARED STATEMENT OF ROHIT GUPTA
         President, Genworth Financial, U.S. Mortgage Insurance
                            October 29, 2013
    Chairman Johnson and Ranking Member Crapo, my name is Rohit Gupta, 
President of Genworth Financial's U.S. Mortgage Insurance business in 
Raleigh, North Carolina. Genworth is one of seven private mortgage 
insurers active in the U.S. today. We operate in all 50 States, and are 
part of Genworth Financial, a global insurance company with established 
mortgage insurance platforms in the U.S., Canada, Australia, and 
Europe. I am pleased to be here today to discuss the role of private 
mortgage insurance in ensuring consumer access to mortgage credit as 
part of housing finance reform. Private mortgage insurers' sole 
business is insuring lower downpayment mortgages. We make sustainable 
home ownership possible for many first time homebuyers, homebuyers with 
moderate incomes and members of underserved communities.
    Mortgage insurers enable home-ready borrowers to safely buy homes 
without having to take as long as a decade to save for a high 
downpayment. As others testifying before you today will affirm, even a 
10-percent downpayment requirement would have the effect of making home 
ownership impossible for many creditworthy, responsible borrowers. That 
is not to say that the amount of a downpayment has no effect on the way 
a loan is expected to perform. When lower downpayment loans default, 
the risk of loss to the lender or investor is greater. However, that is 
precisely where mortgage insurance comes into play. Our role is to 
mitigate that loss, and to make home ownership attainable on terms that 
are affordable over the life of the loan. A majority of our business is 
insuring 30-year, fixed-rate mortgages--mortgages that are central to 
the functioning of a stable housing finance system (including a strong 
TBA market). We do this with a product that is understood and widely 
used in the market, available across cycles and affordably priced. We 
have decades of experience--and data--focused on understanding and 
managing mortgage risk. Our independent credit underwriting criteria 
helps to bring greater risk discipline to the mortgage market via the 
MIs' ``second set of eyes.'' If a loan is not sustainable, the capital 
of a mortgage insurance firm is at risk because it must pay a claim--
that is a strong incentive to maintain risk and price discipline.
    Congress and regulators have taken important steps toward ensuring 
that residential mortgages will be safe and sustainable. Dodd Frank's 
QM and QRM provisions were designed to make sure that one of the key 
lessons of the housing crisis--risky mortgages make for bad housing 
policy--would be embedded in our housing finance system going forward. 
The final QM rule published by the CFPB represents a significant 
milestone, and we, along with other members of the Coalition for 
Sensible Housing Policy, are pleased that the rule discourages risky 
products and encourages sound credit underwriting and access to credit. 
When properly underwritten and with appropriate loan level credit 
enhancement, QMs (and likely, QRMs, assuming that the final rule aligns 
QRM with QM) are the types of mortgages that our system should always 
encourage.
    In this testimony, I will discuss (i) the current affordability and 
availability of credit for single family homes, (ii) the impact housing 
finance proposals will have on affordability and the cost of mortgage 
finance for consumers, including the role that private mortgage 
insurance can play in ensuring affordability and access for consumers, 
and (iii) whether underwriting criteria should be established in 
statute. In addition, I will provide background on the role of MI and 
the fundamentals of the mortgage insurance business model, including an 
update on the state of the industry following the housing crisis.
Mortgage Credit Today
    Today, as a result of historically low home prices and interest 
rates, we are still at record levels of affordability in the U.S. \1\ 
And yet, many borrowers who are ``home ready'' are finding it hard to 
get a mortgage. \2\ For others, the costs are prohibitively high or 
their only affordable option is an FHA loan--which puts even more 
housing risk on the Government's balance sheet. Mortgage credit remains 
overly tight, and certain investor fees are adding significant costs 
for borrowers. Some of this is because lenders remain concerned about 
buy back demands from investors. Many mortgage market participants are 
struggling to understand and implement an unprecedented amount of new 
regulation. In addition, GSE loan level fees remain very high, and 
guarantee fees are being increased as part of their Conservator's 
strategy to deemphasize their role in housing finance. These fees add 
to borrower costs. Another factor is GSE credit policy, such as the 
decision to stop purchasing loans with LTVs above 95 percent, even when 
backed by private MI.
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     \1\ According to the National Association of Realtor's Home 
Affordability Index, home affordability for both first time and repeat 
home buyers remains well above historical averages.
     \2\ According to FHFA's Quarterly Performance Report of the 
Housing GSEs for the Second Quarter of 2013, Fannie Mae and Freddie Mac 
average LTVs are 68 percent, and average FICO scores are above 750 
(excluding HARP loans). Available at http://www.fhfa.gov/webfiles/
25515/2Q2013QuarterlyPerformanceReport091913.pdf.
---------------------------------------------------------------------------
    For housing to continue to recover, we must do more to incent 
responsible mortgage financing. Genworth and others in our industry 
understand this and we are doing our part. Our credit policy guidelines 
are prudent but not prohibitive. Our underwriting takes into 
consideration a range of compensating factors to ensure that 
responsible borrowers can get affordable, sustainable mortgages. This 
is exactly the kind of underwriting that should be part of our housing 
finance system going forward. But the reality is that if investors 
refuse to purchase certain loans, then those loans will not get made, 
even if an MI is willing to insure them.
Lower Downpayment Lending and The Role of MI
    The biggest hurdle for most home-ready consumers considering buying 
a home is whether they will be able to get a mortgage they can afford 
without having to amass a prohibitively large downpayment. For decades, 
our housing finance system has ensured that consumers have that access 
in large part by relying on private mortgage insurance to mitigate 
credit loss by assuming a first loss position in the event of a 
default. MI does this in a cost effective, consistent way that works 
seamlessly for originators, investors, and servicers. Even during the 
worst of the housing crisis, Genworth and other MIs continued to insure 
new mortgages in all 50 States.
    Because mortgage insurers are in the first loss position, our 
interests are aligned with those of borrowers, lenders and mortgage 
investors. Our business model relies on insuring mortgages that are 
well underwritten (which is why we rely on our own credit underwriting 
guidelines). We assume first risk of loss, so our business revolves 
around our ability to understand and manage credit risk. Our goal is to 
make sure that borrowers get mortgages that are affordable on day one 
and throughout their years of home ownership, including 30 year fixed 
rate mortgages that are central to our housing finance system.
    Having access to lower downpayment mortgages is especially 
important for first time homebuyers, moderate income homebuyers and 
members of underserved communities. For example, half of first time 
homebuyers with loans purchased by Fannie Mae and Freddie Mac made 
downpayments of less than 20 percent, and over 90 percent of those 
first time homebuyers made downpayments of less than 30 percent. Almost 
half of borrowers who received loans with private MI in 2012 had low-
to-moderate incomes. \3\
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     \3\ Fannie/Freddie first time homebuyer data based on data 
published by Fannie Mae and Freddie Mac for GSE MBS issued between July 
2012 and September 2013. MI data based on MICA industry data for 2012.
---------------------------------------------------------------------------
    As seen in the chart below, the data make it very clear that the 
amount of a downpayment does matter when it comes to loan performance. 
Loans with higher combined loan to value ratios (CLTVs) experience 
higher default rates than lower CLTV loans. But the data also make it 
very clear that there is a responsible way to offer high CLTV loans. 
The key is to make sure that they are prudently underwritten and have 
the benefit of credit loss mitigation (usually MI) in the event of 
default. This kind of lending is not new or exotic--in fact, it is how 
many of us in this room today first became homeowners. Over the past 15 
years, nearly one quarter of the mortgage market has relied on loans 
with downpayments of less than 20 percent--representing over $8 
trillion of mortgages that performed well across good and bad cycles. 
Lower downpayment loans are especially important to ensuring that 
creditworthy first time homebuyers and underserved borrowers have 
access to home ownership.


Housing Finance Reform
    Historically, detailed underwriting criteria have been established 
through regulation, investor guidelines and market practice, and 
generally have not been set in statute. The unprecedented housing 
crisis has caused some policy makers to question this approach. 
Genworth believes that today, regulators have a much clearer 
legislative mandate that will help them guard against a repeat of the 
bad products and lax standards that led to the housing crisis. In 
addition, certain broad underwriting criteria that define the ``outer 
edges'' of loans with a Government backstop could be written into 
statute (such as limiting the term of a mortgage, requiring a minimal 
downpayment so that all borrowers have some ``skin in the game'', or 
including a limitation on very high debt to income ratios (DTIs)). We 
caution however, that an overly prescriptive approach could have the 
effect of unnecessarily limiting credit for responsible borrowers. 
Also, locking too many underwriting requirements into statute could 
make it cumbersome to make appropriate adjustments to underwriting over 
time; as a result, a clear grant of regulatory discretion to make such 
adjustments should be included with any hard-wired statutory 
requirements. Many proposals for housing finance reform contemplate 
requiring a ``QM'' or ``QRM'' standard for loans subject to Government 
support. Genworth generally agrees with this approach, with the caveat 
that it will be important to have credit enhancement such as private MI 
assuming first loss on lower downpayment loans in order to ensure that 
the likelihood of calling upon any Government support is truly remote.
    In the current system, the GSE charters require credit enhancement 
for loans with a downpayment of less than 20 percent, and private 
mortgage insurance is the means most often used to meet this 
requirement. To satisfy the charter, the MI coverage must be sufficient 
to reduce remaining exposure to a maximum of 80 percent. This minimum 
coverage option is known as ``charter coverage'' because it is set at 
levels that satisfy the legal charter requirement.
    However, while charter coverage is legally sufficient, it does not 
afford any additional economic protection against loss from default, 
and is not commonly used in the market today. Instead, the GSEs and 
their regulator require greater coverage (generally referred to as 
Standard Coverage) in amounts that vary based on LTVs, but that are 
always greater than minimal coverage mandated in the GSE charters. \4\ 
Standard coverage provides significant protection even in the event of 
housing market downturns. During the housing crisis, home prices in 
many markets declined more than 30 percent from the market peak. If 
there had only been ``charter coverage'' on most loans, there would 
have been far less private capital in a first loss position, and far 
less economic protection for Federal taxpayers (and Fannie and 
Freddie).
---------------------------------------------------------------------------
     \4\ The GSEs charge significant Loan Level Price Adjustments in 
those limited instances when only shallow charter level mortgage 
insurance is obtained.
---------------------------------------------------------------------------
    MI at standard coverage is the prevailing form of credit 
enhancement in the market today. Standard coverage MI is relied upon by 
large and small lenders, by national banks, community banks, and by 
credit unions. And it enables consumers to get affordable lower 
downpayment mortgages.
    Genworth strongly supports S.1217's (the Housing Reform and 
Taxpayer Protection Act of 2013) inclusion of standard coverage MI. 
Private mortgage insurance at standard coverage levels can and should 
be an important part of a reformed housing finance system because it 
will ensure that there is meaningful private capital ahead of any 
Government exposure. At standard coverage levels, an investor's loss 
exposure for a 90 percent LTV loan goes down to 67 percent. That means 
that, if that loan defaults, an investor is better off with that 90 
percent LTV MI loan than it would be on an 80 percent LTV loan without 
MI. Private MI promotes market stability, especially when compared to 
other forms of credit enhancement that can be subject to volatile 
pricing and rapid market retreats. And private MI has minimal impact on 
consumer economics.
    As this Committee continues to work on housing finance reform, we 
urge you to consider the role the USMI industry can play not only 
through standard coverage loan level MI, but also by providing credit 
enhancement at the MBS level, whether in connection with S.1217's bond 
guarantor provisions or other similar approaches. Sound housing finance 
policy should encourage reliance on well-capitalized entities on a 
level playing field. Borrowers, investors, lenders, and taxpayers will 
all benefit when the right kinds of credit protection play a meaningful 
role in the new system.
MI Regulation
    Private mortgage insurers are subject to extensive State insurance 
regulation specifically tailored to the nature of the risk insured--
long-duration (our insurance remains in place until loans amortize down 
to specified levels), long-cycle (housing market performance generally 
performs in 10-year cycles) mortgage credit risk. State laws impose 
loan-level capital and reserve requirements that are held long term. In 
addition, MI providers are subject to strict limits on investments and 
limitations on dividend payments, and to provisions designed to address 
potential operational risk. Many States have adopted a version of the 
National Association of Insurance Commissioners (NAIC) Model Mortgage 
Guaranty Insurance Act (the ``Model Act''), which, in addition to 
imposing strong financial controls, requires that mortgage insurers 
only engage in the business of mortgage insurance, and imposes 
limitations on risk concentrations. The NAIC is in the process of 
updating the Model Act, including reconsideration of existing capital 
and reserving requirements.
    State Departments of Insurance have significant power of oversight. 
They perform regular, detailed examinations of mortgage insurers, and 
monitor and enforce insurers' compliance with financial standards. In 
addition, FHFA and the GSEs undertake regular assessments to determine 
which mortgage insurers are eligible to provide MI for the mortgages 
the GSEs purchase or guarantee with LTVs above 80 percent. Accordingly, 
they provide additional oversight of a mortgage insurer's operational 
risk capacity, credit underwriting standards and claims paying ability. 
Other federally regulated financial institutions also evaluate the 
financial condition and operational expertise of insurers that provide 
MI for their loans.
    There are two primary regulatory capital requirements for mortgage 
insurers. First, a mortgage insurer must maintain sufficient capital 
such that its risk-to-capital ratio (ratio of risk-in-force to 
statutory capital (which consists of its policyholders' surplus and 
contingency reserve)) cannot exceed 25:1 or it may not write any new 
business absent the consent of the applicable State insurance 
regulator. Second, in addition to the normal provision for losses, \5\ 
mortgage insurers are required under insurance statutory accounting 
principles to post contingency reserves, which are funded with 50 
percent of net earned premiums over a period of 10 years. The 
contingency reserve is an additional countercyclical reserve 
established for the protection of policyholders against the effect of 
adverse economic cycles.
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     \5\ MIs are required to provision for (i) case basis reserves for 
loans that are currently delinquent and reported as such by the lender 
or loan servicer and (ii) incurred but not reported loss reserves (for 
loans that are currently delinquent but not yet reported as such).
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    The risk to capital ratio is one of many tools State insurance 
regulators use to evaluate MI providers. The comprehensive nature of 
State regulatory oversight enables regulators to retain the flexibility 
to exercise appropriate discretion regarding the ongoing operations of 
insurers subject to their jurisdiction. In recent years, several States 
have used that discretion to issue revocable, limited duration waivers 
of the 25:1 cap on the risk to capital ratio. Those decisions were made 
based on extensive actuarial analysis conducted under the supervision 
of the State of domicile to assess our ongoing solvency. States still 
retain the ability to deem an MI provider to be in ``hazardous 
financial condition.'' A finding of hazardous financial condition could 
lead to the revocation of an MI provider's license to insure new 
business. State Departments of Insurance, including North Carolina, 
Genworth's State of domicile, actively monitor MI providers' operations 
and financial condition.
    These countercyclical capital and reserve requirements mean that 
the MI industry holds significant capital against each loan insured 
throughout the time a loan is outstanding, and should have the 
resources necessary to pay claims. In this regard, MI is significantly 
different from other types of investment and credit enhancement. One of 
the lessons learned from the housing crisis is that housing markets are 
not well served by capital markets instruments and other credit 
enhancement structures that encourage short-term investment without 
adequate regulatory oversight and capital and reserve requirements. MI 
represents material amounts of private capital and reserves in a first-
loss position that are committed for the long term.
The MI Model and Experience Across Cycles
    Mortgage insurance premium income, capital and reserve requirements 
combine to provide countercyclical protections against housing 
downturns. As illustrated in the graph below, during times of market 
stress (for example, the ``Oil Patch'' in the mid 1980s), mortgage 
insurers experience high levels of losses and their risk to capital 
ratios rise accordingly. As markets stabilize, higher earned premiums 
and lower claims paid typically enable the industry to replenish its 
capital base. This countercyclical model was severely tested by 2008's 
unprecedented crisis, and, as expected, risk to capital ratios rose in 
the face of unprecedented losses. In recent years, housing markets have 
begun to recover, loan performance has improved, and revisions to 
mortgage insurance guidelines and pricing have taken effect. Those 
factors, together with recent capital raises, have resulted in improved 
risk to capital ratios. Today, the mortgage insurance industry is well 
positioned, with the capital to pay claims and to write new business.


    Private mortgage insurers (unlike the FHA) do not insure against 
100 percent of loss. Typically, mortgage insurance provides first-loss 
coverage of approximately 25-30 percent of the unpaid loan balance 
(plus certain additional expenses) of a defaulted loan. By assuming a 
first-loss position, private mortgage insurance dramatically offsets 
losses arising from a borrower default. By design, however, the product 
does not completely eliminate the risk of loss. Private mortgage 
insurance is designed to be ``skin in the game'' that offers real 
economic benefit to lenders and investors while still incenting them to 
carefully underwrite mortgage loans and holding them accountable for 
fraud, misrepresentation, and lack of compliance in the origination 
process.
    When a loan goes to foreclosure, the private mortgage insurer is 
responsible for paying a claim. As a result, mortgage insurers have a 
clear financial incentive to work to keep borrowers in their homes. 
This directly aligns the interest of the mortgage insurer with the best 
interest of the borrower, and the MI industry has developed expertise 
in loss mitigation that is evidenced by its decades-long track record 
of actively working to keep borrowers in their homes. From 2008 through 
the second quarter of 2013, the industry facilitated loan workouts with 
approximately 660,000 borrowers on mortgage loans with an aggregate 
principal balance of approximately $130 billion. \6\ Genworth has 
invested significantly in resources, tools, and technology focused on 
keeping borrowers in their homes. We have workout specialists who work 
directly with borrowers and servicers to facilitate the best outcomes 
for homeowners at risk of foreclosure, and use programs that include 
borrower outreach as well as programs targeted to borrowers at risk of 
imminent default and borrowers who have received loan modifications and 
are at risk of redefault. From 2008 through the second quarter of 2013, 
Genworth has helped over 130,000 homeowners avoid foreclosure, 
facilitating nearly 105,000 home retention workouts and nearly 30,000 
short sales and deeds-in-lieu of foreclosure.
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     \6\ Based on Mortgage Insurance Companies of America (MICA) member 
company data.
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Mortgage Insurers Pay Claims Pursuant to the Terms of Their Master 
        Policies
    Mortgage insurers paid approximately $40 billion in claims from 
2007 to 2012, $35 billion of which was paid on loans purchased or 
guaranteed by Fannie Mae and Freddie Mac. In the first half of 2013, 
MIs paid an additional $4 billion in claims to the GSEs. From 2007 
through the second quarter of 2013, Genworth paid approximately $5.4 
billion in claims on nearly 120,000 defaulted mortgage loans.
    It has always been Genworth's practice to pay claims in full when a 
loan was properly originated, underwritten, and serviced. We rescind 
coverage (and refund premiums paid) on loans that do not qualify for 
insurance; typically rescissions occur following review of a loan when 
it becomes seriously delinquent. The extraordinary circumstances that 
led to the collapse of the housing market, and the unprecedented levels 
of mortgage market fraud and misrepresentation in the years leading up 
to that collapse, increased the incidences of rescissions. Genworth, 
along with other MIs, has taken significant steps in recent years to 
clarify our claims paying practices, providing greater clarity and 
transparency for lenders and investors.
MI Claims Paying Policy Going Forward
    Notwithstanding the extraordinary experience of the housing crisis, 
the MI industry has attracted over $8.9 billion in new capital since 
2008, including capital raised by two new entrants, both of which have 
filed registration statements with the SEC for initial public 
offerings. The recent capital inflows to the industry are indicative of 
investor confidence in the business model and its regulatory construct.
Conclusion
    Genworth commends the hard work of the Senate Banking Committee to 
tackle one of the most complex and emotionally charged issues that 
legislators have faced in many years. We believe that keeping the 
interests of home buying consumers and taxpayers in the forefront of 
deliberations will help us all arrive at a plan for a sustainable and 
fair housing finance system. We applaud the 10 Senators on this 
Committee who have crafted and supported S.1217. The provisions 
regarding private MI thoughtfully incorporate a prevailing market 
standard that is well known and easy to execute for consumers, lenders 
and investors. Importantly, this approach does not introduce any new 
costs for consumers, while at the same time it helps distance future 
losses from the Federal Government backstop. We at Genworth and other 
USMI companies appreciate the work of this Committee, and look forward 
to continuing to engage with you as your important work continues.
                   PREPARED STATEMENT OF GARY THOMAS
            2013 President, National Association of Realtors
                            October 29, 2013












































                PREPARED STATEMENT OF LAURENCE E. PLATT
                         Partner, K&L Gates LLP
                            October 29, 2013
    Good morning Chairman Johnson, Ranking Member Crapo, and Members of 
the Banking Committee.
    My name is Larry Platt. I am a consumer finance lawyer at the 
global law firm, K&L Gates, LLP. I have been involved in housing 
finance issues for over 30 years. Thank you for allowing me to 
participate in the consideration of this important subject. I am 
appearing today in my personal capacity and not on behalf of either my 
law firm or any client of my law firm. All views expressed today are my 
own.
    I have been asked to discuss whether the Housing Finance Reform and 
Taxpayer Protection Act of 2013 (the ``Proposed Act'') should impose 
stringent loss mitigation standards on servicers and owners of 
securitized residential mortgage loans for the benefit of consumers. 
Mortgage loan servicers are independent contractors, which for a fee 
paid by the mortgage investor pursuant to a servicing agreement, 
collect and remit mortgage loan payments and enforce the mortgage loan 
documents.
    I understand that the Proposed Act presently addresses loan 
servicing in two ways. First, a newly created Federal Mortgage 
Insurance Company (FMIC) would establish servicing standards for the 
residential mortgage loans within its purview. Second, a uniform 
securitization agreement with uniform servicing standards would be 
created for use by the FMIC and potentially by investors in private 
securitizations. Neither provision presently imposes detailed loss 
mitigation requirements for the benefit of borrowers in default. I 
believe the newly enacted loan servicing regulations of the Consumer 
Financial Protection Bureau are sufficient for this purpose and no new 
law is required.
    Over the last 4 years, the Federal Government has imposed increased 
obligations on residential mortgage loan servicers to avoid home 
foreclosures. For example, in March 2009, the U.S. Department of 
Treasury implemented President Obama's Home Affordable Modification 
Program requiring eligible borrowers to be provided loan modifications 
for loans originated prior to the financial crisis. The Federal banking 
agencies imposed loss mitigation obligations on the 14 banks that 
signed servicing-related consent orders in 2011. Fannie Mae and Freddie 
Mac expanded the loss mitigation requirements in their new default 
servicing guidelines in 2011. The April 2012 global foreclosure 
settlement between and among the five largest banks, the Department of 
Justice, 49 State attorneys general and various other branches of 
Federal and State Government incorporated detailed default loan 
servicing standards, including loss mitigation requirements.
    Drawing on all of these initiatives as well as provisions in the 
Dodd Frank Act, the Consumer Financial Protection Bureau (the ``CFPB'') 
earlier this year promulgated final loan servicing regulations (the 
``CFPB Regulations'') that take effect in January 2014. Of course, 
there is a myriad of new State laws also requiring servicers to offer 
loss mitigation to delinquent borrowers, including California's recent 
Homeowner's Bill of Rights, which codifies into State law various 
provisions from the global foreclosure settlement's national servicing 
standards. The result is that defaulting borrowers already have or will 
have significant Government protections to seek to avoid foreclosure 
under Federal law.
    The CFPB Regulations are complex and comprehensive. They materially 
expand the national standards for the residential mortgage servicing 
industry by amending Regulation X under the Real Estate Settlement 
Procedures Act (RESPA) and Regulation Z under the Truth in Lending Act 
(TILA) on nine major topics. \1\ Enforcement by the CFPB and in some 
cases by individual consumers in private rights of action ensures that 
the new provisions have sharp teeth.
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     \1\ The nine major topics included in the final rule are: 1. 
Periodic Billing Statements; 2. Interest Rate ARM Adjustments; 3. 
Payment Crediting and Payoff; 4. Force-placed Insurance; 5. Error 
Resolution and Requests for Information; 6. General Servicing Policies 
and Procedures; 7. Early Intervention Continuity of Contact; 8. Loss 
Mitigation. [sic]
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    The CFPB Regulations directly address common complaints of 
consumers and regulators that led to claims of wrongful or unfair 
foreclosures. Imposing procedural requirements for responding to 
written information requests or complaints of errors is one example. 
The rule requires servicers to comply with the error resolution 
procedures for 10 types of errors:

    Failing to accept a conforming payment;

    Failing to apply an accepted payment;

    Failing to credit a payment to a borrower's account in 
        violation of TILA requirement;

    Failing to pay taxes and insurance in a timely manner as 
        required by RESPA or failing to refund an escrow account 
        balance;

    Imposing a fee or charge that the servicers lacks a 
        reasonable basis to impose upon a borrower (i.e., not bona fide 
        fees);

    Failing to provide an accurate payoff balance;

    Failing to provide accurate information regarding loss 
        mitigation and foreclosure (in accordance with other provisions 
        of the rule);

    Failing to transfer accurately and timely information to 
        transferee servicer;

    Making the first notice or filing for foreclosure in 
        violation of other provisions of the RESPA rule;

    Moving for foreclosure judgment or sale in violation of 
        other provisions of the RESPA rule; or

    Any other error relating to the servicing of a consumer's 
        mortgage loan.

    Establishing or making good-faith efforts to establish live contact 
with borrowers by the 36th day of their delinquency and promptly 
informing such borrowers, where appropriate, that loss mitigation 
options may be available is a second requirement of residential 
mortgage servicers. This early intervention requirement also mandates 
that a servicer provide a borrower a written notice with information 
about loss mitigation options by the 45th day of a borrower's 
delinquency.
    A third requirement under the CFPB Regulations is continuity of 
contact with delinquent borrowers, commonly referred to as ``single 
point of contact.'' This requires residential mortgage servicers to 
maintain reasonable policies and procedures to provide delinquent 
borrowers with access to designated personnel to assist them with loss 
mitigation options where applicable.
    Residential mortgage servicers also are required to follow certain 
procedural requirements regarding their evaluation of borrowers for 
loss mitigation under the CFPB Regulations. ``Dual tracking'' (where a 
servicer is simultaneously evaluating a consumer for loan modifications 
or other alternatives at the same time that it prepares to foreclose on 
the property) is prohibited. Loss mitigation requirements include:

    If a borrower submits an application for a loss mitigation 
        option, acknowledging the receipt of the application in writing 
        within 5 days and informing the borrower whether the 
        application is complete and, if not, what information is needed 
        to complete the application.

    Exercising reasonable diligence in obtaining documents and 
        information to complete the application.

    For a complete loss mitigation application received more 
        than 37 days before a foreclosure sale, evaluating the borrower 
        within 30 days for all loss mitigation options for which the 
        borrower may be eligible in accordance with the investor's 
        eligibility rules.

      This includes both options that enable the borrower to 
        retain the home (such as a loan modification) and nonretention 
        options (such as a short sale).

      Servicers are free to follow ``waterfalls'' established 
        by an investor to determine eligibility for particular loss 
        mitigation options.

    Providing the borrower with a written decision, including 
        an explanation of the reasons for denying the borrower for any 
        loan modification option offered by an owner with any inputs 
        used to make a net present value calculation to the extent such 
        inputs were the basis for the denial.

    Authorizing a borrower to appeal a denial of a loan 
        modification program so long as the borrower's complete loss 
        mitigation application is received 90 days or more before a 
        scheduled foreclosure sale.

    Prohibiting a servicer from making the first required 
        foreclosure notice or filing until a mortgage loan account is 
        more than 120 days delinquent.

    Even if a borrower is more than 120 days delinquent, 
        prohibiting a servicer from starting the foreclosure process if 
        a borrower submits a complete application for a loss mitigation 
        option before a servicer has made the first required 
        foreclosure notice or filing unless:

      The servicer informs the borrower that the borrower is 
        not eligible for any loss mitigation option (and any appeal has 
        been exhausted);

      A borrower rejects all loss mitigation offers; or

      A borrower fails to comply with the terms of a loss 
        mitigation option.

    If a borrower submits a complete application for a loss 
        mitigation option after the foreclosure process has commenced 
        but more than 37 days before a foreclosure sale, prohibiting a 
        servicer from moving for a foreclosure judgment or order of 
        sale, or conduct a foreclosure sale, until one of the same 
        three conditions has been satisfied.

    The CFPB went to great pains to focus on the procedures that need 
to be followed rather than on the result in any one case. The CFPB 
Regulations do not require servicers to offer specific forms of loss 
mitigation at all or on any specific terms. During the notice and 
comment period for the CFPB Regulations, many consumer advocacy groups 
asked the CFPB to (i) mandate specific home-saving strategies, with 
affordable loan modifications ranked first and with an order of 
priority among types of modifications; (ii) require all servicers to 
offer affordable, net present value-positive loan modifications to 
qualified homeowners facing hardship; and (iii) establish rules for 
determining what constitutes an affordable modification by establishing 
a maximum or target debt-to-income ratio. The CFPB declined to be this 
prescriptive. The preamble to the final CFPB Regulations explains why.
    In deciding to reject prescribed modifications, the CFPB focused on 
the nature of a mortgage loan, the legitimate needs of mortgage 
investors, the difficulty in developing a ``one size fits all'' 
approach, and the potential impact on credit availability. For example, 
the CFPB acknowledged that, as with any secured lending, those who take 
the credit risk on mortgage loans do so in part in reliance on their 
security interest in the collateral. Indeed, what separates lower-
interest residential mortgage loans from higher-interest unsecured 
consumer loans is that a mortgage loan is secured by the borrower's 
home. While it may be in the interest of the holder to explore loss 
mitigation alternatives, foreclosure needs to remain a viable option.
    Different creditors, investors, and guarantors have differing 
perspectives on how best to achieve loss mitigation, explained the 
CFPB, based in part on their own individual circumstances and 
structures and in part on their market judgments and assessments. The 
CFPB did not believe it presently could develop rules that are 
sufficiently calibrated to protect the interests of all parties 
involved in the loss mitigation process. Expressing its concern that an 
attempt to do so may have unintended negative consequences for 
consumers and the broader market, the CFPB concluded that mandating 
specific loss mitigation programs or outcomes might adversely affect 
the housing market and the ability of consumers to access affordable 
credit.
    The CFPB emphasized that overreaching loss mitigation requirements 
could have a material adverse impact on the availability and cost of 
credit. It speculated that creditors who were otherwise prepared to 
assume the credit risk on mortgages might be unwilling to do so or 
might charge a higher price (interest rate) because they would no 
longer be able to establish their own criteria for determining when to 
offer a loss mitigation option in the event of a borrower's default. 
Purchasers of whole loans and mortgage-backed securities might 
similarly reduce their purchases or prices, posited the CFPB, which 
could result in creditors charging higher interest rates to maintain 
the same yield. The burden of complying with prescribed criteria for 
evaluating required loss mitigation outcomes could substantially 
increase the cost of servicing. Under these circumstances, the CFPB 
declined to prescribe specific loss mitigation criteria and instead 
required servicers to maintain policies and procedures reasonably 
designed to identify all available loss mitigation options of their 
principals and properly consider delinquent borrowers for all such 
options.
    Other Federal agencies have shared in this public policy reluctance 
to obligate specific loss mitigation outcomes. On August 28, 2013, a 
consortium of U.S. banking, housing, and securities regulators (the 
``Agencies'') reproposed the joint regulations to implement the risk 
retention rules under Section 15G of the Securities Exchange Act of 
1934, including the exemption for ``Qualified Residential Mortgages.'' 
When first proposed in 2011, the Agencies conditioned the ``Qualified 
Residential Mortgage'' exemption on the inclusion of loss mitigation 
requirements in the underlying mortgage loan documents. Specifically, 
the proposed provision called for the ``Qualified Residential 
Mortgage'' loan documents to require the servicer to take loss 
mitigation actions, such as engaging in loan modifications, in the 
event the estimated net present value of such action exceeds the 
estimated net present value of recovery through foreclosure, without 
regard to whether the particular loss mitigation action benefits the 
interests of a particular class of investors in a securitization. 
Several commentators objected to this proposal, which effectively would 
have given a defaulting borrower a contract right to a permanent 
principal reduction regardless of the willingness of the loan owner to 
do so at the time of the default. In the reproposal the Agencies 
abandoned this requirement.
    Other than requiring servicers to offer specific forms of loss 
mitigation on specific terms, it is not clear what more the Proposed 
Act would or could do in the area of loss mitigation. The CFPB and the 
Agencies explicitly rejected this approach in their 2013 rulemaking 
activities. Issued pursuant to notice and comment rulemaking, the 
robust requirements of the CFPB Regulations go live in a little over 2 
months. While I may not agree with all of the provisions in the CFPB 
Regulations, they were fully vetted and reflect substantial input of 
virtually all interested stakeholders. Given the potential for the 
undesired consequences identified by the CFPB if its regulations were 
to mandate loss mitigation outcomes on mortgage loan investors, I 
believe the Proposed Act does not need to impose additional loss 
mitigation requirements for the benefit of consumers.
    Thank you again for the opportunity to appear today.
                                 ______
                                 
                    PREPARED STATEMENT OF ALYS COHEN
              Staff Attorney, National Consumer Law Center
                            October 29, 2013
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for the opportunity to testify today on the key 
components of housing finance reform for consumers.
    I am a staff attorney at the National Consumer Law Center (NCLC). 
\1\ In my work at NCLC, I provide training and technical assistance to 
attorneys across the country representing homeowners who are facing 
foreclosure, and I also lead the Center's Washington mortgage policy 
work. Prior to my work at the National Consumer Law Center, I focused 
on mortgage lending issues as an attorney at the Federal Trade 
Commission's consumer protection bureau, where I was involved in 
investigations and litigation regarding lending abuses, and where I 
drafted the Commission's first testimony regarding predatory mortgage 
lending in the late 1990s. For over 15 years I have worked to address 
the harms caused by predatory mortgage lending and have seen firsthand 
the harms caused in communities nationwide. I testify here today on 
behalf of the National Consumer Law Center's low income clients and the 
National Association of Consumer Advocates. \2\ On a daily basis, NCLC 
provides legal and technical assistance on consumer law issues to legal 
services, Government and private attorneys representing low-income 
consumers across the country.
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     \1\ Since 1969, the nonprofit National Consumer Law 
Center' (NCLC') has used its expertise in 
consumer law and energy policy to work for consumer justice and 
economic security for low-income and other disadvantaged people, 
including older adults, in the United States. NCLC's expertise includes 
policy analysis and advocacy; consumer law and energy publications; 
litigation; expert witness services, and training and advice for 
advocates. NCLC works with nonprofit and legal services organizations, 
private attorneys, policymakers, and Federal and State government and 
courts across the Nation to stop exploitive practices, help financially 
stressed families build and retain wealth, and advance economic 
fairness. NCLC publishes a series of consumer law treatises including 
Mortgage Lending, Truth in Lending and Foreclosures. NCLC attorneys 
provide assistance on a daily basis to the attorneys and housing 
counselors working with distressed homeowners across the country. This 
testimony is based on the field experience of these advocates as well 
as our knowledge and expertise in mortgage origination and servicing.
     \2\ The National Association of Consumer Advocates (NACA) is a 
nonprofit corporation whose members are private and public sector 
attorneys, legal services attorneys, law professors, and law students, 
whose primary focus involves the protection and representation of 
consumers. NACA's mission is to promote justice for all consumers.
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    Congress and the Nation face an important crossroads in the life of 
the housing finance system. At a moment when many communities are still 
devastated from high foreclosure rates and when access to credit 
remains too scarce, the contours of a new housing finance system will 
determine the future of home ownership--who gets it, who doesn't, and 
how fairly it is distributed. Home ownership and housing finance 
contribute to family stability, stronger neighborhoods, and economic 
growth. The new system must incorporate mechanisms to assure access and 
affordability for a wide array of homeowners, including those hardest 
hit in the recent foreclosure crisis and currently marginalized in 
today's lending market--communities of color, low-income homeowners, 
and residents of rural areas. This sustainability must apply to the 
entire life cycle of a loan, including loss mitigation available during 
periods of hardship.
    My testimony today will provide a brief overview of the state of 
the housing market and the essential components of a new housing 
system's approach to lending to consumers while focusing primarily on 
one key aspect of housing refinance reform, mortgage servicing.
Current Trends Highlight the Need for Better Access and Affordability 
        Throughout the Loan Cycle
    While the housing market has improved somewhat from the height of 
the crisis, more needs to be done to restore a functioning and fair 
housing market. Approximately two-thirds of mortgage originations in 
the second quarter of 2013 were for refinancing, not home purchases. 
\3\ The percentage of home purchases by investors has increased 
substantially. While investor purchases may support housing prices and 
perhaps even inflate them, \4\ it is not a structure that builds a 
sound and broadly accessible housing finance system. Moreover, the 
wealth gap between whites and both Latinos and African Americans is 
larger than it has been since data on the size of the gap were first 
collected, nearly 30 years ago. \5\ The wealth of an entire generation 
has been eliminated. As these communities begin to rebuild their 
wealth, home ownership is likely to continue to be a cornerstone of 
their wealth acquisition.
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     \3\ Julia Gordon, Testimony Before the Senate Committee on 
Banking, Housing, and Urban Affairs (Sept. 12, 2013), citing U.S. 
Department of Housing and Urban Development and U.S. Department of 
Treasury, ``The Obama Administration's Efforts To Stabilize the Housing 
Market and Help American Homeowners'', (2013), available at http://
portal.hud.gov/hudportal/documents/huddoc?id=hudjulynat2013scd.pdf.
     \4\ Julia Gordon, Testimony Before the Senate Committee on 
Banking, Housing, and Urban Affairs (Sept. 12, 2013), citing Susan 
Berfield, ``A Phoenix Housing Boom Forms, in Hint of U.S. Recovery'', 
Bloomberg Businessweek, February 21, 2013, available at http://
www.businessweek.com/articles/2013-02-21/a-phoenix-housing-boom-forms-
in-hint-of-u-dot-s-dot-recovery.
     \5\ R. Kochhar, et al., ``Wealth Gaps Rise to Record Highs Between 
Whites, Blacks, Hispanics'' (July 26, 2011), available at http://
www.pewsocialtrends.org/2011/07/26/wealth-gaps-rise-to-record-highs-
between-whites-blacks-hispanics/.
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    While much of the discussion has moved to restoration of the 
lending market, many homeowners are still facing foreclosure. In the 
second quarter of 2013, 2.13 percent of prime loans and 11.01 percent 
of subprime loans were in foreclosure. \6\ These rates are still higher 
than the percent of loans in foreclosure at the onset of the economic 
collapse in 2008, \7\ a year into the subprime mortgage meltdown, \8\ 
and are much higher than any we have seen since before the turn of the 
current century. \9\
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     \6\ Mortgage Bankers Association Delinquency Survey, Second 
Quarter, 2013.
     \7\ Mortgage Bankers Association Delinquency Survey, First 
Quarter, 2012, at 12.
     \8\ See, e.g., Staff of the Jt. Econ. Comm., 110th Cong., 1st 
Sess., ``The Subprime Lending Crisis: The Economic Impact on Wealth, 
Property Values, and Tax Reveues, and How We Got Here'' (2007).
     \9\ See, National Consumer Law Center, Foreclosure Prevention 
Counseling 7 (2d ed. 2009) (showing rates of subprime and prime 
foreclosures dating back to 1998).
---------------------------------------------------------------------------
    Moreover, most homeowners with access to loss mitigation still do 
not get the best modifications available to them, and many who qualify 
get no modification at all. While HAMP loan modifications have the best 
results, with post-modification delinquency rates at half of other 
modifications, \10\ most homeowners receive either a proprietary 
modification with less advantageous terms or no modification at all. In 
fact, 3 percent of delinquent homeowners in the second quarter of 2013 
received non-HAMP modifications, while only 1 percent received HAMP 
trial modifications and another 1 percent received HAMP permanent 
modifications. The remaining 95 percent of delinquent homeowners 
received no modification. \11\
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     \10\ OCC Mortgage Metrics Report for the Second Quarter of 2013, 
at 36.
     \11\ These calculations are based on data from the MHA Performance 
Reports, the NDS Data, and the OCC Mortgage Metrics Report. According 
to the NDS Survey, 2,393,322 homeowners were 90+ days delinquent during 
the second quarter of 2013. We adjusted that data to reflect the NDS 
coverage of the market at 80 percent. Adding the numbers of new HAMP 
trial and permanent modifications for April-June 2013, we get a total 
of 50,000 and 46,077, respectively, or 1 percent and 1 percent of the 
delinquencies. The OCC Mortgage Metrics data reports an additional 
90,341 proprietary modifications during the same period or 3 percent.
---------------------------------------------------------------------------
    Even for those who receive loan modifications, they often are not 
adequately keyed to affordability. Homeowners who receive loan 
modifications with substantial reductions in loan payments fare much 
better than those with increased payments or even those with small 
payment decreases. \12\ Yet, there is insufficient standardization of 
payment reductions and post-modification debt-to-income ratios. 
Modifications that reduced monthly principal and interest payment by 20 
percent or more have, since 2008, consistently had the lowest 60-day 
delinquency rates in the first quarter of 2013, compared to other 
modifications. \13\ For loans modified in 2012, the 6-month 60+ day 
delinquency rate for loans with payment reductions of at least 20 
percent was 8.8 percent, while modifications with payments reduced by 
less than 10 percent showed delinquency rates at 22.1 percent. \14\ 
Modifications where monthly payments were increased showed the highest 
redefault rates at 29 percent, more than three times as high as the 
rates for payment reductions of 20 percent or more. \15\ HAMP, with its 
target DTI of 31 percent, has produced deeper payment reductions and 
more sustainable loan modifications than industry modifications without 
a standard measure of affordability. \16\ Moreover, even HAMP has 
failed to take into account the impact of back-end DTI, which can 
trigger redefault.
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     \12\ Roberto G. Quercia, et al., Ctr. for Cmty. ``Capital, Loan 
Modifications and Redefault Risk: An Examination of Short-Term Impact'' 
(2009), available at http://www.ccc.unc.edu/documents/
LM_March3_%202009_final.pdf; ``Modified Current Loans Are Three Times 
as Likely To Default as Unmodified Current Loans'', Moody's 
ResiLandscape (Moody's Investors Service), Feb. 1, 2011, at 10; Laurie 
S. Goodman, et al., Pew Ctr. on the States, ``Modification 
Effectiveness: The Private Label Experience and Their Public Policy 
Implications'' 6-7 (2012), available at http://www.pewstates.org/
uploadedFiles/PCS--Assets/2012/
Goodman_et_al_%20Modification_Effectiveness.pdf.
     \13\ OCC Mortgage Metrics Report for the Second Quarter of 2013, 
at 39.
     \14\ OCC Mortgage Metrics Report for the Second Quarter of 2013, 
at 38.
     \15\ Id.
     \16\ Compare MHA Performance Report Through April 2012 (median 
HAMP permanent modification has resulted in a 37 percent payment 
reduction) with OCC Mortgage Metrics Report for the First Quarter of 
2011, at 32 (in the fourth quarter of 2011 payment reductions for 
proprietary modifications were less than half those offered in HAMP, 
only 14.7 percent).
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A New Housing Finance System Should Be Focused on Access and 
        Affordability
    Focusing the new housing finance system on access and affordability 
for homeowners across the country will benefit homeowners, communities, 
lenders, and investors. The role of the secondary market is to provide 
housing to our Nation's families. However, lenders generally cater 
their loans to the preferences of their investors (which is how the 
abuses that caused the recent crisis developed--loans were made for 
investor profits at the expense of sustainability for homeowners). A 
secondary market focused on access and affordability will be more 
likely to produce an inclusive market.
    Communities without access to affordable credit create vacuums that 
can be filled by predatory lenders. Those abuses generally have had a 
disparate impact in low-income communities and communities of color. 
Subprime mortgage products were sold disproportionately to lower-income 
homeowners. \17\ Studies show that low-income homeowners are denied 
credit more often, even after adjusting for credit score and 
affordability. \18\ Thus, lower-income families are forced of necessity 
to seek higher-cost forms of credit. A higher-cost product sold 
overwhelmingly to lower-income homeowners will, by definition, have a 
disparate impact on borrowers of color, whose incomes (and assets) lag 
far behind that of whites--even further behind as a result of the 
recent crisis. One example of the cumulative disparate impact is that 
white neighborhoods typically experience housing costs 25 percent lower 
than similar neighborhoods with a majority of African American 
residents. \19\
---------------------------------------------------------------------------
     \17\ Center for Responsible Lending (CRL), ``Lost Ground'', p. 26 
(2011); Ira Goldstein, ``Bringing Supbrime Mortgages to Market'', 
Harvard Joint Center for Housing Studies, p. 4; Ginny Hamilton, 
``Rooting Out Discrimination in Mortgage Lending'' (Testimony before 
House Financial Services Committee) (2007).
     \18\ Christian Weller, Center for American Progress, ``Access 
Denied: Low-Income and Minority Families Face More Credit Constraints 
and Higher Borrowing Costs'', p. 1 (August 2007).
     \19\ Ojeda, ``The End of the American Dream for Blacks and Latinos 
11'' (June 2009), available at http://www.wcvi.org/data/pub/
wcvi_whitepaper_housing_june 2009.pdf.
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    The Nation's housing finance system must include mechanisms to 
ensure that equal housing opportunities are provided in places where 
sustainable lending has been harder to find. This should be done 
through several complimentary mechanisms. In addition to properly 
funding the National Housing Trust Fund and the Capital Magnet Funds, 
the new system should promote broad access to lending by inhibiting 
credit rationing and ``creaming'' of the market. Lenders should be 
required to serve all population segments, housing types, and 
geographical locations.
    Yet, any statute should not dictate specifics of underwriting that 
would result in less flexibility to meet these broad access goals. 
Housing finance legislation should leave open the specifics of 
downpayment requirements, credit scores, and debt-to-income ratios. 
Downpayment requirements are keyed directly to wealth, which itself 
varies widely by demographics and is not always tied to 
creditworthiness or ability to repay.
    Debt-to-income ratios are an inadequate measure of lending 
capacity. For some borrowers with very low income, the 43 percent debt-
to-income ratio in the CFPB Qualified Mortgage rule will still result 
in inadequate cash to cover basic living expenses. Yet the requirement 
of a 43 percent debt-to-income ratio also excludes some borrowers who 
can afford higher payments. Compensating factors and residual income 
\20\ are difficult measures to calibrate and should be left to the 
regulatory process.
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     \20\ For a discussion of why residual income can be a better 
measure of affordability than a straight debt-to-income ratio, see, 
Michael E. Stone, et al., ``The Residual Income Method: A New Lens on 
Housing Affordability and Market Behaviour'' (2011), available at 
http://works.bepress.com/michael_stone/8.
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    Credit scores often do not provide a reliable picture of a 
borrower's credit profile. They often contain errors and otherwise 
reflect disparate access to sustainable credit--a legacy of decades of 
redlining. Moreover, credit scores cannot predict if any particular 
person will actually engage in any particular behavior. In fact, often 
the probability is greater that a particular low-scoring person will 
not engage in the behavior. For example, a score of between 500 and 600 
is generally considered to be a poor score. \21\ Yet at the beginning 
of the foreclosure crisis in 2007, only about 20 percent of mortgage 
borrowers with a credit score in that range were seriously delinquent. 
\22\ Thus, if a score of 600 is used as a cut-off in determining 
whether to grant a loan, the vast majority of applicants who are denied 
credit would probably have not become seriously delinquent. A study by 
Federal Reserve researcher and a Swedish scientist, based on Sweden 
consumers, similarly found that most consumers with impaired credit did 
not engage in negative behavior. \23\
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     \21\ FICO, ``myFICO Insider's Guide to 2010 Credit Card Reform and 
New FHA Mortgage Rules'' (2010), (noting that under the Federal Housing 
Administration rules, ``it may be difficult for a borrower to even 
begin the process [of getting a mortgage] with FICO scores below 
600.''), available at www.myfico.com/Downloads/Files/
myFICO_Guide_CCFHA.pdf (visited Sept. 29, 2013).
     \22\ Yuliya Demyanyk, ``Did Credit Scores Predict the Subprime 
Crisis'', The Regional Economist (Federal Reserve Bank of St. Louis 
Oct. 2008), available at www.stlouisfed.org/publications/re/articles/
?id=963 See also, VantageScore Solutions, L.L.C., ``VantageScore 2.0: A 
New Version for a New World'', 2011 (consumers with VantageScore of 
690/-/710, or borderline between ``C'' and ``D'' grade, have about a 9 
percent risk of default).
     \23\ Marieke Bos and Leonard Nakamura, Federal Reserve Bank of 
Philadelphia, Working Paper No. 12-19/R, ``Should Defaults Be 
Forgotten? Evidence From Quasi-Experimental Variation in Removal of 
Negative Consumer Credit Information'', Apr. 2013, at 1, available at 
www.philadelphiafed.org/research-and-data/publications/working-papers/
2012/wp12-29R.pdf.
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    Credit scores also differ substantially by race. Congress should 
not enshrine these racial disparities into the law by mandating the use 
of scores. Requiring the use of scores does not just permit a practice 
with disparate impact--it actively mandates it. Studies showing racial 
disparities in credit scoring include: a 2012 study by the CFPB, which 
found that the median FICO score for consumers in majority minority ZIP 
codes was in the 34th percentile, while it was in the 52nd percentile 
for ZIP codes with low minority populations; \24\ a 2007 Federal 
Reserve Board report to Congress on credit scoring and racial 
disparities in which, for one of the two models used by the Federal 
Reserve, the mean score of African Americans was approximately half 
that of white non-Hispanics (54.0 out of 100 for white non-Hispanics 
versus 25.6 for African Americans) with Hispanics fairing only slightly 
better (38.2); \25\ and a 2006 study from the Brookings Institution 
which found that counties with high minority populations are more 
likely to have lower average credit scores than predominately white 
counties. \26\
---------------------------------------------------------------------------
     \24\ Consumer Financial Protection Bureau, ``Analysis of 
Differences Between Consumer- and Creditor-Purchased Credit Scores'', 
at 18, Sept. 2012, available at http://files.consumerfinance.gov/f/
201209_Analysis_Differences_Consumer_Credit.pdf.
     \25\ Board of Governors of the Federal Reserve System, ``Report to 
the Congress on Credit Scoring and Its Effects on the Availability and 
Affordability of Credit'' 80-81 (Aug. 2007).
     \26\ Matt Fellowes, Brookings Inst., ``Credit Scores, Reports, and 
Getting Ahead in America'' 9-10 (May 2006).
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    There should be flexibility going forward for determining 
underwriting requirements for the Nation's housing finance system. 
Without it, the promise of access and affordability would be empty.
Housing Finance Reform Should Contain Key Essentials of a Healthy 
        Mortgage Servicing System, Including a Requirement for 
        Servicers To Provide Loan Modifications That Benefit the 
        Taxpayer and the Homeowner
    Following the recent economic crisis, new mortgage servicing rules 
have been adopted in an effort to improve loss mitigation outcomes for 
homeowners facing foreclosure and for the investors in those loans. 
Despite the creation of the Home Affordable Modification Program 
(HAMP), changes to FHA and GSE servicing regimes, and the National 
Mortgage Settlement, the mortgage servicing companies have continued to 
circumvent existing requirements at the expense of investors, 
homeowners, and communities. While the CFPB issued regulations creating 
long-term procedural rules on default servicing, additional work is 
needed. A new GSE system should systematize loss mitigation that 
benefits investors while avoiding unnecessary foreclosures. Mortgage 
servicers often benefit from pursuing foreclosure over loss mitigation. 
Housing finance reform should realign incentives to maximize beneficial 
outcomes.
    Getting servicing right must be a core piece of housing finance 
reform. The Nation's housing finance system should not only make home 
lending broadly accessible but ensure that the entire life of the loan 
is supported. Routine processing of loan and insurance payments must 
not result in errors or abuse that lead to unnecessary costs, defaults, 
and foreclosures. Homeowners facing genuine hardship who can still make 
loan payments that benefit the investor or taxpayer must have options 
to save their homes. Properly functioning servicing infrastructure is 
good for individual families, communities, and the system as a whole.
Servicers' Incentives Incline Them Toward Modifications With Increased 
        Fees and Foreclosures Over Sustainable Modifications
    Once a loan is in default, servicers must choose to foreclose or 
modify. A foreclosure guarantees the loss of future income, but a 
modification will also likely reduce future income, cost more in the 
present in staffing, and delay recovery of expenses. Moreover, the 
foreclosure process itself generates significant income for servicers. 
\27\
---------------------------------------------------------------------------
     \27\ A fuller treatment of servicer incentives may be found in 
Diane E. Thompson, Nat'l Consumer L. Center, ``Why Servicers Foreclose 
When They Should Modify and Other Puzzles of Servicer Behavior'' (Oct. 
2009), available at http://www.nclc.org/images/pdf/pr-reports/report-
servicers-modify.pdf.
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    Servicers do not make binary choices between modification and 
foreclosure. Servicers may offer temporary modifications, modifications 
that recapitalize delinquent payments, modifications that reduce 
interest, modifications that reduce principal or combinations of all of 
the above. Servicers may demand up-front payment of fees or waive 
certain fees. Or servicers may simply postpone a foreclosure, hoping 
for a miracle.
    For servicers, the true sweet spot lies in stretching out a 
delinquency without either a modification or a foreclosure. Income from 
increased default fees and payments to affiliated entities can outweigh 
the expense of financing advances for a long time. This nether-world 
status also boosts the monthly servicing fee and slows down servicers' 
largest noncash expense, the amortization of mortgage servicing rights, 
since homeowners who are in default are unlikely to prepay via 
refinancing. \28\ Finally, foreclosure or modification, not delinquency 
by itself, usually triggers loss recognition in the pool. Waiting to 
foreclose or modify postpones the day of reckoning for a servicer. But 
delay can cost a homeowner the opportunity to obtain a modification.
---------------------------------------------------------------------------
     \28\ See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K) 30 
(Mar. 12, 2009): Servicing continues to be our most profitable segment, 
despite absorbing the negative impact, first, of higher delinquencies 
and lower float balances that we have experienced because of current 
economic conditions and, second, of increased interest expense that 
resulted from our need to finance higher servicing advance balances. 
Lower amortization of MSRs [mortgage servicing rights] due to higher 
projected delinquencies and declines in both projected prepayment 
speeds and the average balance of MSRs offset these negative effects. 
As a result, income . . . improved by $52,107,000 or 42 percent in 2008 
as compared to 2007.
---------------------------------------------------------------------------
    These dynamics require a housing finance system that promotes 
sustainable loss mitigation that benefits investors and homeowners. 
Without aligning the incentives of servicers with those of other 
stakeholders, public monies, and the welfare of communities will be 
jeopardized.
    Recent experience with GSE loss mitigation confirms the need to 
incorporate a stronger system of servicer accountability into the 
structure of a new housing finance system. While the U.S. Treasury 
Department's Home Affordable Modification Program established 
substantial loan modification rules keyed to affordability, the GSE 
program lagged behind in several significant ways. Homeowners with GSE 
loans facing hardship had no effective appeals process when servicers 
disregarded GSE requirements; yet many homeowners found that servicer 
noncompliance with GSE rules was endemic. Additionally, GSE rules 
regarding access to loan modifications for homeowners in bankruptcy 
(particularly the Fannie Mae rules) have lagged behind other programs. 
GSE rules allow and even incentivize servicers in many instances to 
pursue foreclosure while a homeowner is seeking a modification. 
Finally, the GSE standard modification is not keyed to affordability 
based on a debt-to-income ratio but rather to a percent of payment 
reduction that may or may not result in a payment that is affordable.
Housing Finance Reform Should Include Several Key Improvements to 
        Existing Mortgage Servicing Rules
    The new housing finance system must require affordable loan 
modifications that are consistent with investor interests. The CFPB, 
while it has issued a series of procedural requirements for servicers, 
has declined to issue such a mandate. Yet, the data show that almost 
all delinquent homeowners still get no modification at all. Those 
homeowners lucky enough to receive a modification seldom get one with 
the best terms available. The housing finance system should promote 
proven regimes for modifying loans with optimum loan performance. This 
should also include limited, Government-backed portfolio capacity to 
hold modified loans.
    Second, homeowners seeking loan modifications should not be faced 
with an ongoing foreclosure while they are processing their loan 
modification request. Instead, such foreclosures should be put on 
temporary hold rather than subjecting the homeowner to the ``dual 
track'' of foreclosure and loss mitigation. This is the most crucial 
procedural protection for homeowners. Homeowners dealing with a 
foreclosure often face skyrocketing costs and the challenge of 
repeatedly rescheduling foreclosure sales--as well as the danger and 
sometime occurrence of the home being sold before the loss mitigation 
review is complete. While CFPB rules provide some protections for 
homeowners who have not yet been put into foreclosure, many homeowners 
seeking assistance after the foreclosure has begun are locked out of a 
reasonable chance to save their homes. Homeowners in foreclosure should 
be able to obtain a temporary pause to a foreclosure to promote 
efficient evaluation of a loan modification application. Additionally, 
dual track protections must be keyed to the homeowner's initial 
application in order to promote timely loan modification reviews over 
foreclosures. Requirements keyed to a ``complete application'' invite 
manipulation of the process based on a subjective determination of an 
application's status.
    While existing regulations provide some level of protection against 
dual tracking, stronger GSE rules are nevertheless appropriate. Because 
a pause in the foreclosure process during a loss mitigation review is 
the key procedural protection that stands between a homeowner and an 
unnecessary foreclosure, substantial flaws in existing requirements 
must be addressed. Moreover, the GSE system has long been a leader in 
market developments. The housing finance system should promote the 
highest standards for loss mitigation, as it has for home lending. Such 
progress would promote broader market changes and demonstrate the 
viability of sustainable loan modification reforms. \29\
---------------------------------------------------------------------------
     \29\ The GSE guides are a more appropriate locus for some of the 
other details regarding mortgage servicing. While legislation can take 
on the structural issues and key needed changes, the regulatory process 
is the locus for more calibrated treatment of mortgage servicing (as 
well as lending).
---------------------------------------------------------------------------
    Third, the new housing finance corporation should be authorized to 
directly purchase insurance, including force-placed insurance. The 
current system, in which the GSEs reimburse servicers for force-placed 
hazard and flood insurance, has resulted in vastly inflated prices for 
borrowers and, when borrowers default, the GSEs and taxpayers. An 
investigation by the New York Department of Financial Services found 
that ``premiums charged to homeowners for force-placed insurance are 
two to ten times higher than premiums for voluntary insurance, even 
though the scope of the coverage is more limited.'' \30\ It also found 
that ``insurers and banks have built a network of relationships and 
financial arrangements that have driven premium rates to 
inappropriately high levels ultimately paid for by consumers and 
investors.'' \31\ Fannie Mae's Request for Proposal on lender placed 
insurance in 2012 highlighted the reverse competition typical of this 
market and the effect on investors and the taxpayer. The proposal noted 
that ``[t]he existing system may encourage Servicers to purchase Lender 
Placed Insurance from Providers that pay high commissions/fees to the 
Servicers and provide tracking, rather than those that offer the best 
pricing and terms to Fannie Mae. Thus, the Lender Placed Insurers and 
Servicers have little incentive to hold premium costs down.'' \32\ A 
mechanism allowing the new housing finance corporation to purchase 
force-placed insurance--as well as title insurance and private mortgage 
insurance--directly from insurers would decrease costs for borrowers 
and the corporation by circumventing the kickbacks to servicers that 
drive up insurance prices.
---------------------------------------------------------------------------
     \30\ Memorandum from Benjamin M. Lawsky, Superintendant, New York 
Department of Financial Services to State Insurance Commissioners, 
Reforming Force-Placed Insurance (Apr. 5, 2013).
     \31\ Id.
     \32\ Fannie Mae, ``Request for Proposal: Lender Placed Insurance, 
Insurance Tracking, Voluntary Insurance Lettering Program'' (Mar. 6, 
2012).
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    Fourth, the new housing finance system should promote transparency 
and accountability. An Office of the Homeowner Advocate should be 
established to assist with consumer complaints and compliance matters. 
This would help remedy the current situation in which noncompliance 
problems with GSE loans often go unaddressed. Moreover, loan level data 
collection and reporting should include demographic and geographic 
information, to ensure that civil rights are protected and equal 
opportunity to avoid foreclosure is provided. Aggregate information 
about complaints and the data about loss mitigation must be publicly 
available, as HMDA data is. Work to develop the new housing finance 
system, and to administer and oversee it, should include stakeholders 
such as community groups and representatives of homeowners, in addition 
to the corporate stakeholders on the lending and servicing sides. 
Finally, in order to ensure that the housing system meets its goals, 
there must be strong regulatory levers for securing compliance, 
including robust monitoring, reporting and supervision.
Any Federal Electronic Registry Must Be Transparent, Mandatory, and 
        Supplemental to State Rules
    Any new, Federal electronic registry for housing finance must be 
available to the public, transparent, mandatory, and supplemental to 
State requirements. Only a public, supplemental system will assure 
homeowners of access to key information in the foreclosure process 
while allowing States to continue their role as primary regulators of 
their own foreclosure procedures and land records.
    There are several important reasons why any Federal registry should 
be supplemental to State systems. First, local registries provide a 
unified system of records for all interests affecting a particular 
property: judgments, tax liens, assessments, divorce decrees. A 
national mortgage registry is unlikely to duplicate this. Second, in 
many States, such as Massachusetts, the mortgagee holds legal title to 
real property and the mortgage conveys a distinct property interest. 
The land registries establish property interests by guaranteeing title 
to recorded interests such as mortgages. Third, many State foreclosure 
laws, particularly in nonjudicial States, incorporate requirements to 
record documents in land records in order for a nonjudicial sale to 
convey valid title. These include various notices of default and sale, 
and even affidavits of compliance with State loss mitigation laws. 
Several States, such as Oregon and Minnesota, require that mortgages be 
recorded before a nonjudicial sale can take place. There has been 
disagreement about whether a nominee system like MERS (which designates 
a straw party to serve as a placeholder regardless of who owns the 
loan) can comply with one of these recording requirements. Even if the 
registry name is allowed to substitute for the real owner, use of a 
universal straw party nominee name destroys transparency. Finally, 
local land records are fully public and available to all who come to 
the examine records.
    A national registry system should include records of servicing 
rights, ownership of mortgages and deeds of trust, as well as ownership 
of the promissory notes themselves. All records should comply with 
Federal e-sign requirements to ensure there is only one authoritative 
electronic record. The system should assign each security instrument 
and related promissory note a unique identification number. 
Participation in the registry system must be mandatory. Enforcement of 
registry system requirements should include a schedule of sanctions for 
noncompliance, as well as a private right of action, and attorney's 
fees, for homeowners with noncompliant loans (with the recoupment 
serving as a setoff against the loan). Recent history has made clear 
that without the specter of private litigation noncompliance is common 
and too often goes unaddressed.
Conclusion
    Thank you for the opportunity to testify today. The Nation's 
housing finance system is in need of a revived sense of public purpose. 
Loan origination and servicing mechanisms should ensure broad and 
sustainable access to credit throughout the life of the loan. I will be 
happy to take any questions you may have.
                                 ______
                                 
                 PREPARED STATEMENT OF LAUTARO LOT DIAZ
Vice President, Housing and Community Development, National Council of 
                                La Raza
                            October 29, 2013
Introduction
    Chairman Johnson, Ranking Member Crapo, and distinguished Members 
of the Committee, thank you for inviting me to appear this morning on 
behalf of the National Council of La Raza (NCLR), where I serve as the 
Vice President for Housing and Community Development. I have worked for 
over 25 years in the community development field, serving low-income 
families, and I appreciate the opportunity to provide expert testimony 
about the work on which I have built my career and that has been a 
fundamental part of NCLR's mission.
    NCLR is the largest national Hispanic civil rights and advocacy 
organization in the United States, an American institution recognized 
in the book Forces for Good as one of the best nonprofits in the 
Nation. NCLR works with a network of nearly 300 Affiliates--local, 
community-based organizations in 41 States, the District of Columbia, 
and Puerto Rico--that provide education, health, housing, workforce 
development, and other services to millions of Americans and immigrants 
annually.
    For more than two decades, NCLR has actively engaged in public 
policy issues such as preserving and strengthening the Community 
Reinvestment Act and the Home Ownership Equity Protection Act, 
supporting strong fair housing and fair lending laws, increasing access 
to financial services for low-income families, and promoting home 
ownership in the Latino community. As evidence of our commitment to 
housing-related policy and programmatic research, NCLR has recently 
published a number of reports on Latinos' interaction with the market, 
including:

    Puertas Cerradas: Housing Barriers for Hispanics, published 
        by NCLR and the Equal Rights Center (July 19, 2013)

    Making the Mortgage Market Work for America's Families, 
        published by NCLR and the Center for American Progress (June 5, 
        2013)

    Latino Financial Access and Inclusion in California, 
        published by NCLR (June 4, 2013)

    In addition to policy research, NCLR has for the last 13 years 
supported local housing counseling agencies. The NCLR Homeownership 
Network (NHN), comprised of 49 community-based housing counseling 
providers, works with over 50,000 families annually and has nurtured 
more than 30,000 first-time homebuyers since its inception. Following 
the financial crisis, the NHN responded to the Latino community's need 
by shifting the focus to helping families stay in their homes. NCLR's 
combination of housing-related policy research and local community 
experience with the NHN gives us a unique perspective on how Latino 
families interact with the mortgage market, their credit and capital 
needs, and the impact of Government regulation on financial services 
markets.
    With this background, my testimony today will begin with a 
discussion of the impact of the housing crisis on low- and moderate-
income families, focusing on Latinos, which is the target of NCLR's 
work. My remarks will provide a framework to better understand the 
extent to which pre- and post-purchase housing counseling helps 
increase access to credit in hard-to-serve markets. It is also a 
critical loss mitigation tool to ensure that families are ready to buy 
and that they completely understand the processes involved in the event 
of delinquency. Finally, I will conclude my testimony with observations 
on the necessity of preserving access to affordable housing finance 
options, based on client interactions. It is my hope that this 
testimony will assist in clarifying some commonly held misconceptions 
about the origination of the housing crisis and, by extension, what 
policies are needed to remedy these issues.
Impact and Origination of the Housing Crisis
    We are now 5 years after the collapse of the subprime mortgage 
market and the ensuing financial crisis, and the Nation's housing 
market remains broken. An estimated 2.7 million homeowners lost their 
homes to foreclosure and many more are still at risk of foreclosure. 
Communities of color, and the Latino community in particular, were hit 
hardest by this crisis and suffered an extreme loss of wealth. While it 
will take considerable time to fully understand the implications of 
this recent economic and housing crisis, it is clear that these 
communities have borne the brunt of the impact. For example:

    Hispanic families lost 44 percent of their wealth between 
        2007 and 2010; by contrast, black families lost 31 percent and 
        white families lost 11 percent. \1\
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     \1\ Signe-Mary McKernan, Caroline Ratcliffe, C. Eugene Steuerle, 
and Sisi Zhang, ``Less Than Equal: Racial Disparities in Wealth 
Accumulation'' (Washington, DC: The Urban Institute, 2013).

    From 2005 to 2009, the median level of home equity held by 
        Latino homeowners declined by half--from $99,983 to $49,145. At 
        the same time, home ownership rates among Hispanics also fell, 
        from 51 percent to 47 percent. A disproportionate share of 
        Hispanics live in California, Florida, Nevada, and Arizona, the 
        States that experienced the steepest declines in housing values 
        during the crisis. \2\
---------------------------------------------------------------------------
     \2\ Rakesh Kochhar, Richard Fry, and Paul Taylor, ``Wealth Gaps 
Rise to Record Highs Between Whites, Blacks, Hispanics'' (Washington, 
DC: Pew Research, 2011).

    In the run-up to the financial crisis, the mortgage market did not 
serve these communities of color particularly well. More specifically, 
Latino and immigrant borrowers are prone to unique profiles, including 
a lack of traditional credit history, multiple coborrowers, and cash 
income, qualities that make them unattractive to lenders who rely on 
automated underwriting. This standardization in many instances does not 
capture a borrower's true credit risk, particularly in the 
aforementioned cases. While prime lenders, the Federal Housing 
Administration (FHA), and the Veteran's Administration (VA) offered 
loans designed to accommodate these unique profiles, the majority of 
private sector lenders referred these loans to their subprime 
affiliates or simply did not advertise in these communities at all. As 
a result of this market failure, a vacuum emerged that subprime and 
predatory lenders quickly filled, leading to a record-high foreclosure 
rate in Latino and minority communities. When compared to whites, 
Latinos were 30 percent more likely to receive high-cost loans at the 
height of the housing bubble when purchasing their homes. \3\
---------------------------------------------------------------------------
     \3\ Debbie Gruenstein Bocian, Keith S. Ernst, and Wei Li, ``Unfair 
Lending: The Effect of Race and Ethnicity on Price of Subprime 
Mortgages'' (Durham, NC: Center for Responsible Lending, 2006).
---------------------------------------------------------------------------
    Today the market is not serving communities of color significantly 
better. Even though housing prices are on the rise, the market remains 
broken. Housing prices in many urban markets with heavy minority 
populations are once again rising faster than income. At the same time, 
the so-called credit box continues to tighten. Creditworthy, low-income 
homebuyers cannot meet the overcorrection in today's lending standards 
that have stemmed from the housing collapse. As a result, mortgage 
credit currently serves only the most pristine customers with FICO 
scores over 760, with downpayments above 20 percent, and with the 
capacity to buy jumbo loans. \4\ These trends point to an unsustainable 
housing market that has not yet fully recovered.
---------------------------------------------------------------------------
     \4\ Neil Bhutta and Glenn B. Canner, 2013, ``Mortgage Market 
Conditions and Borrower Outcomes: Evidence From the 2012 HMDA Data and 
Matched HMDA-Credit Record Data'', Federal Reserve Bulletin 
(Forthcoming). http://www.federalreserve.gov/pubs/bulletin/2013/pdf/
2012_HMDA.pdf. Accessed on October 25, 2013.
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    Housing counseling was created in part as a response to many of the 
problems underscored by the most recent housing crisis. More than 
simply increasing financial literacy, counseling is a tool to combat 
some of the unethical and at times illegal practices employed by a 
number of subprime lenders targeting of communities of color.
    As a result, local housing counseling agencies are on the front 
lines witnessing these macro trends firsthand and providing assistance 
to families in traditionally underserved communities. In essence, the 
services provided by counselors are designed to correct the precise 
market failures that were integral to the economic downturn. Yet, as I 
will speak to in a moment, support for this work has not kept pace with 
demand. Housing finance reform must commit to integrating and 
strengthening the counseling infrastructure, which will help ensure 
that these services are widely available to expand access to credit in 
hard-to-serve markets. It would also combat foreclosures by helping 
future homebuyers fully understand the implications of their mortgage 
terms and avoid predatory lending practices.
Housing Counseling
    Within this framework of a true market failure to serve low- and 
moderate-income buyers, housing counseling plays a critical role in the 
today's housing market. I will describe how housing counseling works, 
the communities it serves, and its proven effectiveness in helping 
families stay in their homes.
    The Department of Housing and Urban Development's (HUD) Housing 
Counseling Program funds a number of housing counseling organizations--
a total of 277 local agencies, 22 State Housing Finance Agencies, and 
27 national and regional intermediaries. As a national intermediary, 
NCLR distributes funding to its network of 49 housing-focused community 
organizations based on work plan, goals, and outcomes. To support our 
network's local operations, we provide quality control and training, 
build capacity, facilitate industry partnerships, pioneer products, and 
offer technology support. All organizations compete for funding on an 
annual basis, and NCLR works closely with HUD to expand the 
availability of counseling services to new communities and promote the 
nonprofits that serve them. HUD has comprehensive standards on how 
housing counseling is conducted and must certify all agencies that 
receive funding. To ensure compliance, HUD audits housing counseling 
agencies every 2 years to measure adherence to the standards. Only 
audited agencies or agencies within intermediary networks are deemed 
``HUD certified'' and therefore eligible for funding.
    Creating home ownership opportunities in low- and moderate-income 
Latino communities has been a particular priority of NCLR's for well 
over a decade. HUD-certified housing counselors play a crucial role in 
these efforts as third parties that offer unbiased information and 
advice to homebuyers, renters, victims of predatory lending, and 
families facing a financial emergency. NCLR's NHN counselors emphasize 
one-on-one counseling--in-person whenever possible--which has proven a 
more effective way of generating positive outcomes for Latino families 
specifically. \5\ This approach helps the family feel more comfortable, 
allows them to have private questions answered, and gives the counselor 
an opportunity to evaluate their situation and develop tailored 
solutions for the family's personal finances. As the foreclosure crisis 
hit, this same method was used for at-risk homeowners.
---------------------------------------------------------------------------
     \5\ Ryan M. Johnson and Elsa Macias, ``Home To Own: A New Model 
for Community-Based Low-Income Mortgage Lending'' (Arizona: Morrison 
Institute for Public Policy, 1995). See also, Brenda Muniz, ``Financial 
Education in Latino Communities: An Analysis of Programs, Products, and 
Results/Effects'' (Washington, DC: National Council of La Raza, 2004); 
Janis Bowdler, ``Financial Literacy and Education: The Effectiveness of 
Governmental and Private Sector Initiatives'' (Washington, DC: National 
Council of La Raza, 2008); and Eric Rodriguez, ``Licensing and 
Registration in the Mortgage Industry'' (Washington, DC: National 
Council of La Raza, 2005).
---------------------------------------------------------------------------
    Along with the aforementioned face-to-face counseling, our network 
also uses classroom instruction and telephonic counseling where easy 
access to a counseling organization may prove difficult. Recently, 
counseling over the Internet using Skype has extended the geographic 
reach of individual organizations. Whether assisting a family with 
rental housing, a first-time home purchase, or mortgage delinquency, 
all HUD-approved counseling has to follow pre-specified comprehensive 
guidelines. These guidelines dictate that all counselors must advocate 
for the best interest of the client and not for a proprietary interest. 
This fiduciary duty in tandem with vital education on housing credit 
processes are the central factors contributing to housing counseling's 
effectiveness.
    HUD counseling agencies assist with an array of housing crises 
faced by members of their respective communities. The primary 
counseling services that impact today's Government-sponsored enterprise 
(GSE) reform discussion are pre-purchase counseling that helps families 
purchase a home, and post-purchase counseling after a family has closed 
on their mortgage or in the event of a mortgage delinquency. Not only 
are these services beneficial to the client, the lender and investor 
also benefit from having a more informed consumer.
    A housing counselor providing pre-purchase counseling does five 
important things: (1) educate the borrower on all aspects of the home-
buying process, including the various private interests integral to 
this process; (2) review the client's income, credit, savings, and 
family budget to help them understand what they can and cannot afford; 
(3) ensure that the obligation and essential practices that are central 
to owning a home are understood; (4) assist the family in understanding 
the documents they are signing and the obligations implied; and finally 
(5) provide community resources to address any issues that could impact 
the long-term ability to manage the mortgage loan. These steps are 
codified in HUD's guidelines and upheld by the members of NCLR's 
network. Furthermore, these five steps also help to ensure prudent 
decision making by the client because they make clients more fully 
aware of the obligations they are undertaking. Loan performance is 
demonstrably greater when a family obtains a loan with this kind of 
support, as opposed to loan performance without it.
    For example, an Ohio-based counseling agency worked with a family 
who had filed for bankruptcy at the height of the economic downturn. 
This family, however, still aspired to become homeowners despite their 
financial turmoil. The counselor advised them to enroll in an education 
class. After following an action plan developed with a housing 
counselor, the family shortly thereafter successfully qualified for a 
VA loan; they purchased a home.
    In instances when a client is confronting delinquency, they are 
better served with a counselor than facing the challenge alone. In this 
circumstance, counseling follows an almost identical rubric to pre-
purchase processing with an emphasis on helping clients fully 
understand their options and ushering them through whatever process 
they decide is best for their financial situation.
    As a concrete example of post-purchase counseling, one of our 
counseling agencies reported a story about a family seeking help after 
falling behind on their mortgage as a result of traumatic medical debt. 
The economic downturn left the family with little to no emergency 
savings. The family was facing foreclosure proceedings and they were 
understandably frightened and upset, having lived in their home for a 
number of years. The counseling agency reviewed all necessary 
documentation and worked with the bank in advance of a settlement 
conference to get a trial mortgage modification that could lead to a 
permanent modification. This case is illustrative of a best-case 
scenario where the bank was quick to confirm receipt of paperwork and 
generally responsive.
    Frequently, however, the post-purchase counseling process is less 
supportive. For example, a Miami family working with a counseling 
agency had negotiated a trial mortgage modification with their loan 
servicer. Even though the client had continued to make their payments 
on the trial modification, the bank had continued foreclosure 
proceedings. The property was sold, prompting the housing counselor to 
involve legal counsel to reverse the sale. A judge ruled in the 
client's favor, but without the support of a counseling agency the 
client would have lost their home. There are countless examples like 
this from our NHN organizations where counselors must help families 
confront lengthy and complex processes and work with unresponsive 
banks--issues that are all the more complicated when there are language 
barriers.
    The NHN and similar counseling organizations are delivering 
mortgage-ready borrowers by following the processes outlined. All of 
the NHN counseling agencies focus on the atypical borrower--lower-
income individuals with barriers to entering the market. Of particular 
importance to NCLR, our bilingual counselors play a critical role in 
helping future homeowners overcome language barriers to understand and 
access information. Housing counselors provide their clients with 
access to information about products and standards available in the 
current marketplace, information they may have never obtained without 
third-party assistance.
The Benefits of Housing Counseling
    The positive impact of individuals having access to housing 
counseling services is significant for the mortgage industry. Housing 
counseling supports safety and soundness for several reasons and should 
be more fully integrated into the credit process by encouraging 
borrowers to utilize this service through pricing discounts or as a 
compensating factor for higher-risk borrowers.
    A better-prepared borrower makes the entire housing system safer 
and more secure. Prior to the increased participation of private hedge 
funds and the dramatic increase in liquidity eager to create and buy 
mortgage-backed securities in the mid-to-late 1990s, lenders exercised 
intense scrutiny to ensure that a borrower was prepared for their 
mortgage obligations. At that time, NCLR's work focused less on 
mortgage modifications and more on creating lender pilot programs. 
These programs were designed to assure the lending community that a 
family who received HUD-certified housing counseling was fully educated 
and prepared for their mortgage obligation, which would decrease the 
risk of default; these efforts demonstrated that low-income borrowers 
with the right knowledge and tools posed acceptable credit risk. This 
changed dramatically in the period leading up to the foreclosure 
crisis.
    The 21st century ushered in an era of shoddy mortgage underwriting 
and the conventional wisdom that ``if you can breathe, you can get a 
mortgage.'' While a majority of lenders exercised responsible 
underwriting practices, pressure to create ever more originations by 
the capital in the market generally drove down underwriting standards. 
In the late '90s, the FHA also fell prey to this pressure when it 
discontinued discounts on the insurance premium for borrowers who 
received homebuyer education. Due to weaker underwriting standards, 
counselors began to see overly flexible products that allowed borrowers 
to take on more risk with less stringent underwriting standards. This 
in turn spurred some of the escalation in housing prices and was a 
prime driver of the foreclosure crisis that depleted so much wealth in 
communities throughout the country.
    Essentially, a family that goes through a HUD-certified housing 
counselor is doubly underwritten, with a clear understanding of the 
true risk of each individual borrower. Housing counselors do not start 
the conversation with rates or features of a mortgage product; instead, 
they start by building a client's financial profile in order to 
determine an individual's readiness to borrow. Only after reviewing 
income, credit, savings, and family expenses in a structured way will 
the counselor recommend client preparedness. We believe that a borrower 
who has completed this process is less at risk of default, and research 
that I'll highlight later confirms this.
    The foreclosure crisis presented a different challenge for lenders 
who were ill prepared to manage the ever-growing number of defaults. 
Loan servicers were faced with a collapsing housing market, and 
thousands of borrowers had to contend with not only their underwater 
mortgages but also higher rates of unemployment or underemployment. The 
housing counseling community responded by offering other avenues for 
distressed borrowers to obtain relief. For instance, counselors very 
early in the crisis raised concerns of nonfunctioning and inadequate 
modification programs and also helped educate clients about emerging 
Federal and private modification plans. Many worked to provide 
servicers with assessments of their clients' financial capability to 
qualify them for programs that would best keep them in their homes 
whenever possible. One example of ways counselors helped distressed 
borrowers was through an active effort to distill information regarding 
common programs like HAMP and HARP or other private label programs. 
Many clients were confused, did not know if they could qualify, or were 
even unaware of available programs.
    While the role of the counselor is ultimately to find optimal 
solutions for clients in times of need, the scale of the crisis and an 
initial reluctance from servicers to incorporate housing counselors 
into the modification process limited the reach of counseling at a time 
when foreclosures peaked. Insufficient resources to support counseling 
further exacerbated this shortcoming. As the number of foreclosures 
decline, however, and the market shifts back toward home ownership, the 
role of housing counselors in determining a borrower's readiness for a 
mortgage will be ever more critical.
    Evidence that counseling helps borrowers continues to mount, though 
there is the limiting factor of the difficulty in having to identify 
loans held by a borrower receiving homebuyer education, pre-purchase 
counseling, or both. In addition to the anecdotal evidence I have 
provided, there is considerable research demonstrating the extent to 
which housing counseling works. Whether the consumer is a first-time 
homebuyer navigating the pitfalls of predatory lending or a distressed 
homeowner trying to stay in their home, housing counseling produces 
noticeably better outcomes. For example, a 2013 study measuring the 
impact of pre-purchase counseling and education provided by the 
NeighborWorks housing counseling network on 75,000 loans originated 
between October 2007 and September 2009 found that borrowers with pre-
purchase counseling and education were one-third less likely to be over 
90 days delinquent than those who did not receive counseling. \6\
---------------------------------------------------------------------------
     \6\ Neil Mayer and Kenneth Temkin, ``Pre-Purchase Counseling 
Impacts on Mortgage Performance: Empirical Analysis of 
NeighborWorks' America's Experience''.
---------------------------------------------------------------------------
    Similarly, a 2012 NeighborWorks report to Congress showed that 
homeowners who received National Foreclosure Mitigation Counseling 
(NFMC) were nearly twice as likely to obtain a mortgage modification 
than those who did not receive this counseling. Moreover, NFMC clients 
who modified their mortgages were at least 67 percent more likely to 
remain current on their mortgage 9 months after this modification. 
Through counseling efforts, the report estimated that local 
governments, lenders, and homeowners saved roughly $920 million in 2008 
and 2009. \7\
---------------------------------------------------------------------------
     \7\ Neil Mayer, Peter A. Tatian, Kenneth Temkin, and Charles A. 
Calhoun, ``National Foreclosure Mitigation Counseling Program 
Evaluation: Preliminary Analysis of Program Effects'' (Washington, DC: 
Urban Institute, 2010).
---------------------------------------------------------------------------
    Several other studies all conclude that access to pre-purchase 
counseling lowered delinquency rates, prevented the likelihood of 
foreclosure (in part through greater education about subprime loans), 
and had long-term economic benefits on a family's ability to manage 
future household economic shocks.
Access and Affordability
    After decades of working to help low-income Latino families become 
homebuyers, I have a few observations on the importance of preserving 
access and affordability for low- and moderate-income families, as well 
as protecting a duty to serve.
    As I discussed, there remains a prevalent narrative that blames the 
foreclosure crisis on the affordability goals and mandated duty to 
serve in the Community Reinvestment Act. Yet this narrative is not 
borne out by existing research. A number of studies have established no 
causal connection between duty to serve and the housing crisis, 
including the Financial Crisis Inquiry Commission's report which found 
that the cause of the crisis flowed from a regulatory failure. \8\ 
Similarly, a 2012 independent study published through the Research 
Division of the Federal Reserve Bank of St. Louis found no evidence 
that affordable housing mandates of the GSEs played a role in the 
crisis. \9\
---------------------------------------------------------------------------
     \8\ Financial Crisis Inquiry Commission. 2011. ``Financial Crisis 
Inquiry Report: Final Report of the National Commission on the Causes 
of the Financial and Economic Crisis in the United States''. http://
fcic-static.law.stanford.edu/cdn_media/fcic-reports/
fcic_final_report_full.pdf. Accessed on October 25, 2013.
     \9\ Hernandez-Murillo, Andra C. Ghent, and Michael T. Owyang. 
2012. ``Did Affordable Housing Legislation Contribute to the Subprime 
Securities Boom?'' Federal Reserve Bank of St. Louis Working Paper 
Series, No. 2012-005B. http://research.stlouisfed.org/wp/2012/2012-
005.pdf. Accessed on October 25, 2013.
---------------------------------------------------------------------------
    These findings are critical because without an obligation to serve 
all markets, communities of color in particular will find it extremely 
difficult to access mortgage credit. Without a duty to serve, private 
capital will gravitate to the cream of the crop: those with traditional 
borrowing profiles. This will result in an unsustainable housing 
finance market where creditworthy but lower-wealth and lower-income 
buyers, especially minorities, will be underserved. This is already 
evident today; the private market overwhelmingly caters to traditional 
borrowers in well-served locations. \10\
---------------------------------------------------------------------------
     \10\ Neil Bhutta and Glenn B. Canner, 2013, ``Mortgage Market 
Conditions and Borrower Outcomes: Evidence From the 2012 HMDA Data and 
Matched HMDA-Credit Record Data'', Federal Reserve Bulletin 
(Forthcoming). http://www.federalreserve.gov/pubs/bulletin/2013/pdf/
2012_HMDA.pdf. Accessed on October 25, 2013.
---------------------------------------------------------------------------
    This trend does not just harm borrowers in minority communities, 
but rather the whole housing sector. Although Hispanics and blacks are 
already significant segments of the housing market, they are projected 
to be an even larger portion of the market over the next 10-20 years. 
According to the Joint Center for Housing Studies at Harvard, 
minorities will account for 70 percent of net new households over this 
period and 33 percent of all households by 2020. These households will 
be younger than traditional borrowers and will likely have lower 
incomes and less credit history. These new borrowers will therefore 
need access to affordable housing credit to become homeowners. Without 
affordable access to credit for these prospective buyers, there will be 
a large supply of housing stock left unsold, leading to decreasing 
prices and wealth. As a result, the retirement prospects of many 
Americans depending on income from the sale of their homes will be 
threatened. \11\
---------------------------------------------------------------------------
     \11\ Joint Center for Housing Studies of Harvard University. 2013. 
``The State's of the Nation's Housing'', Harvard University. http://
www.jchs.harvard.edu/sites/jchs.harvard.edu/files/son2013.pdf. Accessed 
on October 25, 2013.
---------------------------------------------------------------------------
    Similarly, when it comes to underwriting, there has been an 
overcorrection in underwriting standards. Although it has been widely 
acknowledged that tightening the so-called credit box was necessary to 
prevent harmful products, such as low documentation loans, from being 
marketed to consumers, today the credit box remains overly restrictive. 
The majority of loans to low- and moderate-income families since 2007 
have been FHA or GSE-backed loans due to lack of private capital. Since 
2009, the typical GSE-issued loans have a loan-to-value ratio under 80 
percent with FICO scores over 760. This is indicative of the trend I 
spoke to earlier in which those with traditional credit profiles are 
being served. Moreover, FHA loans have become more expensive and harder 
to obtain in minority communities. The result of these factors taken 
together is that many creditworthy minority borrowers are effectively 
barred from participating in today's housing market. Any housing 
finance legislation must not include provisions that exacerbate today's 
dire credit conditions for minorities. For instance, proposals to raise 
downpayment requirements in a move to reduce mortgage lending risk 
would severely limit access to mortgage finance for future generations 
of creditworthy young households, with little to none of the desired 
reduction in systemic risk. \12\
---------------------------------------------------------------------------
     \12\ Joint Center for Housing Studies of Harvard University. 2013. 
``The State's of the Nation's Housing'', Harvard University. http://
www.jchs.harvard.edu/sites/jchs.harvard.edu/files/son2013.pdf. Accessed 
on October 25, 2013.
---------------------------------------------------------------------------
Recommendations and Conclusion
    As I have emphasized throughout my testimony, HUD-approved housing 
counselors have a proven track record of pairing consumers with an 
appropriate mortgage. Buyers working in tandem with a counselor are 
more likely to have lower mortgage delinquency rates, \13\ and in the 
event of foreclosure, are more likely to get a loan modification to 
prevent default. \14\ Thus, any housing finance proposal should 
encourage increased access to housing counseling. In an October 11, 
2013, letter from the National Housing Resource Center to this 
Committee, \15\ there are three main principles that reform should 
address:
---------------------------------------------------------------------------
     \13\ Neil Mayer and Kenneth Temkin, ``Pre-Purchase Counseling 
Impacts''.
     \14\ Neil Mayer, Peter A. Tatian, Kenneth Temkin, and Charles A. 
Calhoun, ``National Foreclosure Mitigation Counseling Program 
Evaluation''.
     \15\ The National Housing Resource Center is a 501(c)(3) 
organization that advocates for the nonprofit housing counseling 
community, as well as for housing consumers, for communities of color, 
for the elderly, and for underserved populations. NCLR is a board 
member of the organization. More information is available on 
www.hsgcenter.org.

  1.  Improve the effectiveness of HUD-approved housing counseling 
        agencies by integrating housing counseling into the programs of 
        the Federal Mortgage Insurance Corporation (FMIC), or other 
        entity that replaces Fannie Mae and Freddie Mac. Some options 
        within this broad category would involve the inclusion of 
        housing counseling data fields in the Uniform Mortgage 
        Database; the inclusion of housing counseling as a risk 
        reduction tool in evaluations by the Office of Underwriting; 
        and the inclusion of housing counseling as an eligible activity 
---------------------------------------------------------------------------
        in the Housing Trust Fund.

  2.  Increase access and affordability in the mortgage market. While 
        there are a number of ways to do this within proposed 
        legislation, the establishment of strong affordability 
        requirements is paramount. Additionally, affordability and 
        accessibility ought to be made explicit purposes, duties, and 
        responsibilities of FMIC or any other entity replacing the 
        GSEs. This entity ought to be required to approve originators. 
        A distinct Market Access Fund, similarly, to address home 
        ownership and rental housing for low- and moderate-income 
        people would add value, as would a focus on programs to reach 
        traditionally underserved markets. Finally, in support of this 
        principle, legislators should not mandate downpayment 
        requirements in underwriting standards.

  3.  Incorporate measures to help homeowners at risk of default 
        recover and return to timely payment or exit gracefully, and to 
        improve mortgage-servicing standards. To achieve this end, 
        services ought to be required to work with and support HUD-
        approved housing counseling agencies; homeowners should be 
        provided with access to all loss mitigation options; and 
        servicers must be required to stop improper servicing practices 
        such as dual tracking.

    The letter offers additional specifications on each of these 
pillars.
    My testimony this morning was designed to examine the effectiveness 
of pre- and post-purchase housing counseling and its proven record in 
helping low- and moderate-income families, particularly in underserved 
and hard-to-serve communities, stay in their homes. As I have 
emphasized throughout, NCLR's on-the-ground experience and research 
show that housing counseling services help homebuyers avoid scams, 
particularly with mortgage modification schemes and predatory lending 
practices that frequently target precisely these communities. As 
legislation to overhaul our housing finance system moves forward, it is 
important to keep in mind the root causes of the crisis and understand 
that housing counseling is a critical buttress against these.
    Thank you again for the opportunity to appear before this 
Committee. I would be glad to answer any additional questions you may 
have.
               RESPONSES TO WRITTEN QUESTIONS OF
                CHAIRMAN JOHNSON FROM ERIC STEIN

Q.1. What factors better predict default than downpayment? Are 
there certain product features or servicing practices that are 
more linked to high default rates than downpayment?

A.1. At its core, the foreclosure crisis was caused by risky 
product features and poor underwriting. Loans that failed in 
large numbers had harmful mortgage features, such as built in 
payment shock and costly prepayment penalties that stripped 
away borrower equity. Abusive lending practices such as loans 
with little to no documentation and broker compensation driven 
by yield-spread premiums also contributed to high loan failure 
rates. A 2011 CRL report, Lost Ground: Disparities in Mortgage 
Lending and Foreclosures, highlighted the link between risky 
mortgage features and foreclosure rates. \1\ For mortgages 
originated between 2004 and 2008, this report showed that loans 
originated by a mortgage broker, containing hybrid or option 
ARMs, having prepayment penalties, and featuring high interest 
rates (i.e., subprime loans) had much higher foreclosure rates 
than loans without these features. Lost Ground also 
demonstrated that, while the majority of foreclosures have 
affected white borrowers, African Americans and Latinos have 
suffered foreclosure rates roughly twice that of whites, likely 
reflecting the fact that borrowers of color were much more 
likely to receive loans with risky features, even after 
controlling for credit scores.
---------------------------------------------------------------------------
     \1\ Debbie Gruenstein Bocian, Wei Li, Carolina Reid, and Roberto 
Quercia, ``Lost Ground, 2011: Disparities in Mortgage Lending and 
Foreclosures'', 2011 (available at http://www.responsiblelending.org/
mortgage-lending/research-analysis/Lost-Ground-2011.pdf).
---------------------------------------------------------------------------
    Further research demonstrating the relationship between 
these risky mortgage features and lending practices and 
defaults is substantial. Ambrose, LaCour-Little, and Husza find 
elevated rates of default attributable to the initial payment 
adjustments of 3/27 Hybrid ARMs. \2\ Pennington-Cross and Ho 
also find a positive and significant association between hybrid 
ARMs and default rates. \3\ In addition, they find significant 
increases in defaults for loans with limited documentation 
levels. The impact of reduced documentation levels is further 
supported by LaCour-Little and Yang, who find a significant 
increase in defaults associated with stated income loans and no 
documentation loans. \4\ Jiang, Nelson, and Vytlacil find, 
after controlling for other risk factors, higher default rates 
for broker-originated loans. \5\ They suggest this is the 
result of the misaligned compensation structure of brokers. The 
authors also find a positive and significant association 
between low documentation and default. A 2011 report by the 
University of North Carolina at Chapel Hill conducted an 
analysis of the relative risk rates of subprime loans compared 
with Self-Help's portfolio of purchased loans to low-income 
families for a comparable set of borrowers. \6\ The researchers 
found that the subprime loans had worse performance because 
they were more likely to be originated by brokers and had a 
higher incidence of adjustable rates and prepayment penalties. 
All of these links were confirmed by the Department of Housing 
and Urban Development in its final report to Congress on the 
causes of the crisis. This report found that, while softening 
housing prices were clearly a triggering factor, the 
foreclosure crisis itself was ``fundamentally the result of 
rapid growth in loans with high risk of default--due both to 
the terms of these loans and to loosening underwriting controls 
and standards.'' \7\
---------------------------------------------------------------------------
     \2\ Brent Ambrose, Michael LaCour-Little, and Zsuzsa Huszar. ``A 
Note on Hybrid Mortgages'', 2004 (available at http://ssrn.com/
abstract=591660).
     \3\ Anthony Pennington-Cross and Giang Ho, ``The Termination of 
Subprime Hybrid and Fixed-Rate Mortgages'', Real Estate Economics, 
38.3. 2010 (available at http://ssrn.com/abstract=1660737 or http://
dx.doi.org/10.1111/j.1540-6229.2010.00271.x).
     \4\ Michael LaCour-Little and Jing Yang, ``Taking the Lie Out of 
Liar Loans'', 2009 (available at http://www.fhfa.gov/webfiles/15048/
website_lacour.pdf).
     \5\ Wei Jiang, Ashlyn Aiko Nelson, and Edward Vytlacil, ``Liar's 
Loan? Effects of Origination Channel and Information Falsification on 
Mortgage Delinquency'' (available at http://www.columbia.edu/wj2006/
liars_loan.pdf).
     \6\ Lei Ding, Roberto G. Quercia, Wei Li, and Janneke Ratcliffe, 
``Risky Borrowers or Risky Mortgages: Disaggregating Effects Using 
Propensity Score Model'', Journal of Real Estate Research 33.2, 2011 
(available at http://ccc.unc.edu/contentitems/risky-borrowers-or-risky-
mortgages-disaggregating-effects-using-propensity-score-models/).
     \7\ U.S. Department of Housing and Urban Development, Office of 
Policy Development and Research 2010. Report to Congress on the Root 
Causes of the Foreclosure Crisis (2010) p. 29. (available at http://
www.huduser.org/Publications/PDF/Foreclosure_09.pdf).
---------------------------------------------------------------------------
    The Qualified Mortgage and Ability to Repay reforms 
included in the Wall Street Reform and Consumer Protection Act 
address the kind of risky features and abusive loan practices 
that caused the housing crisis. These reforms outlaw no-doc 
loans, require that lenders consider the borrower's ability to 
repay the loan, and restrict high fee loans, interest-only 
payment loans, and loans with prepayment penalties. Further, 
yield-spread premiums paid to mortgage brokers must be counted 
in points and fees, loan originator compensation cannot vary 
with the terms of the loan, and higher priced mortgage loans 
must have escrow accounts for taxes and insurance. Lastly, 
loans can no longer have built in payment shock. These reforms 
address the unaffordable and abusive loan products that caused 
the crisis.
    Research confirms how strong the impact of these 
protections are on reducing defaults. The 2012 report Balancing 
Risk and Access by the Center for Community Capital at the 
University of North Carolina at Chapel Hill and CRL analyzed 
nearly 20 million mortgages made between 2000 and 2008. \8\ The 
study found that, while the loan pool as a whole had an 
aggregate default rate of 11 percent, loans that met Qualified 
Mortgage standards had a default rate of 5.8 percent, lower 
than that for conventional prime loans (7.7 percent) and a 
fraction of that of subprime loans (32.3 percent).
---------------------------------------------------------------------------
     \8\ Roberto Quercia, Li Ding, and Carolina Reid, ``Balancing Risk 
and Access: Underwriting Standards for Qualified Residential 
Mortgages''. January 2012 (available at http://ccc.sites.unc.edu/files/
2013/02/QRM_Underwriting.pdf).
---------------------------------------------------------------------------
    Pursuing downpayment mandates as part of housing finance 
reform would result in learning the wrong lesson from the 
foreclosure crisis. Loans with risky product features and 
originated using harmful practices caused the foreclosure 
crisis, not lower-downpayment loans.
    Underwriting is an inherently multivariate process. For 
many lenders, this involves using compensating factors to 
assess a borrower's creditworthiness. However, if one 
underwriting factor--such as a downpayment mandate--is 
enshrined in legislation, this will limit the ability of 
lenders to use compensating factors to make loans to borrowers 
who are strong in other areas and may have a lower propensity 
to default than borrowers who have the required downpayment but 
are weaker in other areas. Ultimately, this will cut 
individuals who could succeed as homeowners out of the housing 
market and harm the ability of current homeowners to sell their 
homes. As a result, housing finance reform legislation should 
not reduce underwriting to a single variable. Instead, reform 
should allow the future regulator, bond guarantors, and lenders 
to use compensating factors in the underwriting process.

Q.2. What role do common mortgage servicing standards and 
pooling and servicing agreements play in increasing the 
fungibility of mortgage-backed securities for investors? Should 
the future public mortgage finance system include common 
servicing standards and pooling and servicing agreements?

A.2. The TBA market is the backbone of a highly liquid capital 
market for mortgage-backed securities. The key to this 
liquidity is having standardized pass-through securities and a 
streamlined investment process. All pass-through securities 
provide a credit guarantee to investors, pro-rata payments to 
investors, and only include mortgages meeting common 
underwriting standards. In addition, the system uses a standard 
set of up-front disclosures for investors. When taken together, 
this standardization makes securities highly fungible and, 
therefore, liquid.
    The standardization and fungibility of the TBA market must 
be preserved as part of housing finance reform, including the 
creation of a common securitization platform. Just as FHFA sets 
standards for servicers of GSE loans, a reformed housing 
finance system should require the future regulator to establish 
common servicing standards for Government backed loans. 
Additionally, maintaining standardization for key components of 
master contracts for loans subject to Government reinsurance 
will also promote liquidity and fungibility.
    Structured securities should not be able to access 
Government reinsurance, but should be able to access a common 
securitization platform. The platform can offer standardized 
terms for structured securities. The liquidity benefits of 
using a common securitization platform would be an incentive 
for PLS issuers to use the platform.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                        FROM ERIC STEIN

Q.1. In an earlier hearing, Martin S. Hughes, Chief Executive 
Officer of Redwood Trust Incorporated, recommended that we 
establish servicer performance triggers to serve as benchmarks 
and as objective means for possible removal of the servicer. 
This is similar, but not identical, to a provision I pushed in 
the FHA Solvency Bill which was cleared by this Committee 
thanks especially to Chairman Johnson, Ranking Member Crapo, 
Senators Brown, Merkley, and Warren. Could you please discuss 
why servicer performance triggers would be helpful to 
consumers?

A.1. Servicer performance has obvious impact for borrowers, 
particularly when borrowers are in financial distress. Just as 
FHFA currently has a responsibility to set servicing standards 
and to oversee servicers, a reformed housing finance system 
should also provide the future regulator with the authority to 
set servicer standards and enforce them, though these 
complicated benchmarks should not be hard-wired in legislation. 
This could lead to unintended consequences in the event of a 
future economic downturn or spike in borrower delinquencies. 
Reform legislation should also allow the regulator and bond 
guarantor to hold servicers accountable in meeting these 
standards by being permitted to remove servicing from one that 
is nonperforming and transfer servicing, including to a 
specialty servicer.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
               CHAIRMAN JOHNSON FROM ROHIT GUPTA

Q.1. You stated in your testimony that mortgage insurers would 
be interested in acting as bond insurers in a new system. As a 
bond guarantor, do you anticipate that your company would be 
able to, or interested in, guaranteeing 100 percent of 
principal and interest payments associated with the mortgage-
backed securities it guarantees?

A.1. Thank you for the opportunity to expand on the testimony I 
offered in the October 29 hearing before the Committee on 
``Essentials of a Functioning Housing Finance System for 
Consumers.'' Genworth believes it is able to provide coverage 
that guarantees the timely payment of principal and interest to 
MBS holders, and if the Committee determines to include private 
bond guarantee protection ahead of a Government guarantee, we 
would be very interested in participating in that market. Our 
initial assessment is that we could do so either through 
structured ``pool'' mortgage insurance that backstops an all of 
the collateral that securitizes an MBS, or through a separate 
entity that would be organized and capitalized as a State 
regulated bond insurer.
    In considering whether to require a separate, private 
sector bond guarantee as part of housing reform, it is 
important to recognize the difference between the role of a 
mortgage insurer and that of a bond guarantor (whether 
organized as a licensed insurer or some other type of entity). 
Loan level mortgage insurance protects against losses stemming 
from mortgage defaults. MI providers assess mortgage credit 
risk on individual loans and insure against credit related 
losses, and we are required to hold capital and reserves 
against each loan we insure. Typically, mortgage insurance is 
provided on a loan level basis, although we also can provide 
insurance on a pool of loans. Traditionally, pool insurance 
provided by private MI companies protects against losses 
arising in the event a mortgage loan goes into foreclosure. But 
we do think pool coverage could be structured to guarantee 
payment of principal and interest to MBS holders.
    The ``standard'' MI coverage provisions in Corker Warner 
build upon the well-established market practice of requiring 
private MIs to assume first loss arising from foreclosure, with 
meaningful levels of insurance coverage offered at pricing that 
is affordable and transparent. This approach to credit loss 
protection mitigates the exposure of lenders and investors, and 
also ensures that the housing market benefits from the risk 
oversight that is central to the MI business model. As a 
reminder, MIs are in the business of underwriting and managing 
mortgage credit risk. We assume first loss position when a loan 
goes into foreclosure, and we rely on our own, independent 
mortgage credit risk guidelines when making the insurance 
decision. An MI's book of insured loans benefits from diversity 
of risk across geographies, lenders, and origination years.
    Bond insurers, on the other hand, guarantee payments of 
principal and interest to holders of mortgage backed 
securities. The obligation of a bond insurer arises only when 
cash flows from the pool of loans that collateralize a security 
is insufficient to pay bondholders, regardless of the reason 
for the cash flow shortfall. While an MI has an obligation to 
pay a claim whenever a loan goes into foreclosure, that same 
foreclosure may not trigger any obligation for a bond insurer, 
because cash flows from other pooled mortgages may be 
sufficient to make timely payment of principal and interest. 
Because bond insurers are not exclusively insuring against 
credit losses, they may lack the same incentive that an MI has 
to impose independent credit risk guidelines on the loans 
serving as collateral.
    In the U.S., mortgage insurers are regulated as 
``monoline'' insurance companies. As a matter of state law, we 
are not permitted to engage in any business other than 
providing mortgage insurance. In the event Congress includes a 
role for private bond guarantee coverage as part of housing 
reform, we believe mortgage insurers could provide that 
coverage through pool insurance that was structured to 
guarantee timely payment of principal and interest. In the 
alterative, an MI could create a separately organized, 
separately capitalized entity licensed as a bond insurer. We 
believe an MI's mortgage expertise makes it well suited to 
operate a separate bond guarantee company, and there may also 
be some operational efficiencies that would make an MI 
especially well suited to offer reliable, cost efficient bond 
guarantee protection. To the extent that a housing reform 
proposal contemplates the use of bond insurance ahead of a 
Government backstop, it will be important to make sure that the 
amount of any bond guarantee be calculated after giving effect 
to the benefits of loan level mortgage.

Q.2. From 2007 to 2013, how many States granted mortgage 
insurance companies waivers from their capital requirements?

A.2. Following the downturn in the housing market in 2007, 
Genworth's main U.S. mortgage insurance subsidiary, GEMICO, 
received explicit waivers of the 25:1 risk to capital 
requirement from 13 States. Another 34 States deferred to our 
state of domicile, North Carolina, which had granted us a 
waiver. Given that risk-to-capital is a very simple measure of 
an insurer's capital, State regulators performed extensive 
analysis of our claims paying capabilities before they granted 
waivers, and they continue to update those analyses.
    GEMICO's risk to capital ratio is 23.2 to 1 (as of 
September 30, 2013), so we do not currently require waivers to 
continue writing new business.

Q.3. From 2007 to 2013, how many mortgage insurance companies 
paid out 100 percent of the claims to policy holders? How many 
mortgage insurers issued deferred payment obligations to pay 
claims?

A.3. Of the eight mortgage insurance companies insuring new 
business in 2007, five companies continue to write new business 
and have full regulatory authority to pay 100 percent of claims 
consistent with the terms of our master policies (Genworth, 
MGIC, Radian, United Guaranty and CMG (which is in the process 
of being acquired by Arch Reinsurance)). \1\ Three MIs ceased 
writing new business (went into ``run off''): Triad, PMI and 
RMIC. RMIC's parent, Old Republic, elected not to infuse 
additional capital into RMIC to permit them to continue 
insuring new business. The MIs that are in run off continue to 
pay claims, partially in cash, and partially via a deferred 
payment obligation. Triad currently pays 75 percent of claims 
in cash, PMI pays 55 percent and RMIC pays 60 percent. Each of 
those MIs has increased the amount of claims being paid in cash 
since they initially went into run off, and it is possible that 
the ultimate disposition to policy holders will be even greater 
than their current ``pay rate.''
---------------------------------------------------------------------------
     \1\ MI companies do deny claims payments in the event an insured 
party has not complied with its contractual obligations. Claims denials 
are typically the result of fraud or misrepresentation.

Q.4. Does your business use a ``one size fits all'' standard in 
deciding whether to insure a loan, or do you look at a variety 
---------------------------------------------------------------------------
of factors in an individual loan application? What factors?

A.4. Our decision of whether to insure a loan is driven by a 
dynamic assessment of a loan file that includes a variety of 
factors. We consider those factors in a ``holistic'' way that 
allows us to fully consider the ``three Cs'' of underwriting: 
credit history, collateral and capacity to pay. In particular:

    Genworth looks at a range of factors, including 
        loan type, level of documentation, property type, 
        source of downpayment, appraised value, loan-to-value 
        ratio, loan amount, credit score and credit history, 
        and debt to income ratio (DTI).

    Our underwriting is not simply formulaic; we often 
        evaluate a loan giving consideration to compensating 
        factors. For example, a higher DTI might be acceptable 
        for a borrower with significant cash reserves or 
        relatively high disposable income. Conversely, a 
        borrower with a high credit score but other indicia of 
        weak credit might not be approved for mortgage 
        insurance.

    To ensure that we are appropriately assessing and 
        managing credit risk, Genworth conducts formal monthly 
        reviews of our insured business to monitor actual 
        experience compared to a set of risk metrics that are 
        designed to serve as an early warning system for 
        potential shifts in risk within our book of business.

    Our underwriting guidelines are complemented by our 
        pricing approach, which varies based on certain key 
        criteria such as loan type and downpayment amount. In 
        this regard, private MI differs from FHA's ``one size 
        fits all'' pricing.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
                CHAIRMAN JOHNSON FROM ALYS COHEN

Q.1. We saw during the crisis that the interests of servicers, 
investors, and consumers were not always aligned, partially due 
to servicer compensation or servicers holding second liens on 
mortgages that they serviced. Have these issues related to 
incentive alignments been addressed in existing standards? If 
not, how should housing finance legislation address these 
issues?

A.1. The foreclosure crisis, and the failure of servicers to 
provide efficient, affordable outcomes for qualified homeowners 
facing hardship, demonstrate the lack of alignment between 
servicer interests and those of homeowners, investors, and the 
economy at large. A foreclosure guarantees the loss of future 
income to the servicer, but a modification also will likely 
reduce future income, cost the servicer more in the present in 
staffing, and delay the servicer's recovery of expenses. 
Moreover, the foreclosure process itself generates significant 
income for servicers. Income from increased default fees and 
payments to affiliated entities can outweigh the expense of 
financing advances for a long time. A dragged out foreclosure 
process also boosts the monthly servicing fee and slows down 
servicers' largest noncash expense, the amortization of 
mortgage servicing rights, since homeowners who are in default 
are unlikely to prepay via refinancing. Finally, foreclosure or 
modification, not delinquency by itself, usually triggers loss 
recognition in the pool. Waiting to foreclose or modify 
postpones the day of reckoning for a servicer. But delay can 
cost a homeowner the opportunity to obtain a modification.
    The lack of alignment between servicers and other market 
players has not been addressed by existing standards and thus 
housing finance legislation should include several key elements 
to ensure that servicer interests are aligned with the rest of 
the market. First, the new housing finance system must require 
servicers to provide affordable loan modifications that are 
consistent with investor interests. The housing finance system 
should promote proven regimes for modifying loans with optimum 
loan performance and should include a standardized, publicly 
available net present value analysis. This approach should also 
include limited, Government-backed portfolio capacity to hold 
modified loans. The modification mandate should be included 
both in the servicer approval requirements and in uniform 
securitization agreements.
    Second, homeowners seeking loan modifications should not be 
faced with an ongoing foreclosure while they are processing 
their loan modification request. Instead, such foreclosures 
should be put on temporary hold rather than subjecting the 
homeowner to the ``dual track'' of foreclosure and loss 
mitigation. Homeowners in foreclosure should be able to obtain 
a temporary pause to a foreclosure to promote efficient 
evaluation of a loan modification application. Additionally, in 
order to promote timely loan modification reviews over 
foreclosures, dual track protections must be triggered by the 
homeowner's initial application. A system that brings 
protections into play only when the homeowner submits a 
``complete application'' invites manipulation of the process 
based on the servicer's subjective determination of an 
application's status.
    While existing regulations provide some level of protection 
against dual tracking, stronger GSE rules are nevertheless 
appropriate. The housing finance system should promote the 
highest standards for loss mitigation, as it has for home 
lending. Such progress would promote broader market changes and 
demonstrate the viability of sustainable loan modification 
reforms. Dual track protections in GSE reform legislation 
should be included both in the servicer approval requirements 
and in the uniform securitization agreements.
    Third, the new housing finance corporation (or the 
bondholders themselves) should be authorized to purchase 
insurance directly, including force-placed insurance. A 
mechanism allowing the purchase of force-placed insurance--as 
well as title insurance and private mortgage insurance--
directly from insurers would decrease costs for borrowers and 
the corporation by circumventing the kickbacks to servicers 
that drive up insurance prices.
    Fourth, the new housing finance system should promote 
transparency and accountability. An Office of the Homeowner 
Advocate should be established to assist with consumer 
complaints and compliance matters. This would help remedy the 
current situation in which noncompliance problems with GSE 
loans often go unaddressed. Moreover, loan level data 
collection and reporting should include demographic and 
geographic information, to ensure that civil rights are 
protected and equal opportunity to avoid foreclosure is 
provided. Aggregate information about complaints and the data 
about loss mitigation must be publicly available, as HMDA data 
are. Work to develop the new housing finance system, and to 
administer and oversee it, should include stakeholders such as 
community groups and representatives of homeowners, in addition 
to the corporate stakeholders on the lending and servicing 
sides.
    Finally, in order to ensure that the housing system meets 
its goals, there must be strong regulatory levers for securing 
compliance, including robust monitoring, reporting, and 
supervision.

Q.2. Post-crisis, there have been a number of actions taken 
related to mortgage servicing, including the CFPB rule, the 
FHFA's mortgage servicing alignment initiative, the FHFA's 
servicing compensation discussion paper, and enforcement 
actions by the prudential regulators. Please comment on the 
effectiveness of these efforts, and whether there are 
recommendations or findings from these actions that should be 
incorporated into housing finance legislation.

A.2. While a number of Government actions and initiatives have 
called attention to the need for reform of the mortgage 
servicing industry and have in many cases moved the ball 
forward, the results have been incomplete at best. Below I 
review the various actions individually. What they have in 
common is that they leave several important pieces of work 
undone. As noted above, important work still to be done 
includes: a mandate to provide affordable NPV-positive loan 
modifications to qualified homeowners facing hardship, a full 
pause in foreclosure for homeowners seeking loan modifications 
until such review is completed, and a dismantling of the 
reverse competition that characterizes the force-placed 
insurance system. Broader systemic changes relating to 
transparency and accountability also are still needed.
    The Consumer Financial Protection Bureau should be 
commended for initiating a significant set of rules governing 
mortgage servicing. The new rules, set to take effect in 
January, address a wide array of servicer duties. Yet, while 
the rules provide substantial procedural protections to 
homeowners, including the requirement to review a completed 
loan modification application prior to initiating a 
foreclosure, they still subject many homeowners already in 
foreclosure to the ``dual track'' of foreclosure and loan 
modification. The rule also relies on a servicer finding that a 
``complete'' application has been submitted--a term that easily 
can be gamed by servicers, who are the party defining that 
term. The CFPB also declined to include the key component 
needed to align servicer incentives with those of the rest of 
the market: a mandate for servicers to provide homeowners with 
affordable loan modifications when doing so is consistent with 
investor interests. While the CFPB rules include some enhanced 
protections on force-placed insurance, a new GSE system is 
uniquely positioned to affect how such insurance is bought and 
administered. Finally, even where the CFPB protections are 
strong, the rules appear to apply only the first time a person 
faces hardship in the life of a loan. Many homeowners will face 
more than one hardship over the decades they may be repaying a 
loan.
    Various enforcement actions by State and Federal agencies, 
including State Attorneys General and the prudential 
regulators, have been able to substantially increase the amount 
of principal reduction offered by mortgage servicers and to 
provide limited direct compensation to homeowners harmed by 
abusive servicer practices. Moreover, the National Mortgage 
Settlement was the first action that established substantial 
standards for servicer conduct. These Federal and State 
measures, however, have been primarily retrospective and the 
standards themselves are temporary.
    FHFA's work touches servicing in several ways. First, the 
FHFA Servicing Alignment Initiative, like the CFPB rules, 
requires loan modification reviews to be completed prior to 
foreclosure while still allowing homeowners in foreclosure to 
be subjected to foreclosure during many loan modification 
reviews. It also goes beyond what the CFPB has established by 
setting up a modification waterfall. Yet the GSE guidelines for 
``standard'' modifications, while providing flexibility by not 
being keyed to a net present value (NPV) analysis, are not 
adequately focused on homeowner affordability because they 
operate based on a percentage of payment reduction not a target 
debt-to-income ratio. Second, with regard to force-placed 
hazard and flood insurance, the current system, in which the 
GSEs reimburse servicers for force-placed hazard and flood 
insurance, has resulted in vastly inflated prices for borrowers 
and, when borrowers default, the GSEs and taxpayers. Lender-
placed insurers and servicers do not have the incentives to 
control premium costs. A new GSE system is well situated to 
address problems in the insurance market through the direct 
purchase of insurance. FHFA recently had an opportunity to 
improve this situation and declined.
    Third, FHFA announced that it will be charging more for 
mortgages in States with long foreclosure timelines. We believe 
this policy is misguided (and the incoming FHFA director Mel 
Watt has announced that he will delay implementation of the 
policy pending further study). While some States with better 
consumer protections have longer foreclosure timelines, in most 
cases the protracted timeframe is not due to a delay mandated 
by the rules themselves, but by the unwillingness of servicers 
to follow those rules. Better consumer protection rules prevent 
avoidable foreclosures, which ultimately saves money both for 
the GSEs and for communities while protecting home values and 
the housing market. It does not appear, however, that FHFA 
factored the long-term savings achieved in States with stronger 
homeowner protections into their cost calculations. Homeowners 
engaging in prospective borrowing in those States should not be 
penalized on the front end for living in a State with better 
foreclosure protections, and for the failure of servicers to 
properly comply with those protections. Moreover, delay in 
foreclosure is multilayered. Rather than penalizing consumers, 
FHFA should continue encouraging servicers to process loan 
modification and foreclosures expeditiously, particularly as 
consumers are hurt by foreclosure delays, while servicers are 
not.
    Finally, FHFA has failed to reform how servicers are 
compensated. FHFA worked with the GSEs and HUD to propose 
changes to the structure of servicer compensation but failed to 
make any changes. Moreover, the joint proposal did not address 
the misaligned incentives in the current compensation system. 
Nothing in the proposal tied servicer compensation closely to 
either the actual cost of servicing loans or the performance of 
the loans. Servicers under the current regime profit from their 
own bad behavior because they are permitted to retain all 
ancillary fees. Any new system should promote a modified fee-
for-service model, coupled with rigorous servicing standards 
and limited ancillary fees. Such a model could improve 
servicing for both homeowners and investors, as long as it also 
restricts the incentive to push a loan into default servicing 
in order to recover enhanced compensation and fees.

Q.3. S.1217 specifies that a new Government agency, the Federal 
Mortgage Insurance Corporation (FMIC), will approve mortgage 
servicers for participation in the Government-guaranteed 
secondary mortgage market, and may suspend their approval if 
certain minimum standards are not met. What role should the 
FMIC have in the ongoing regulation of servicers? Should the 
FMIC have enforcement, supervisory, or examination powers?

A.3. Homeowners are unable to choose their mortgage servicer. 
Thus, the FMIC's role in approving mortgage servicers takes on 
even greater importance because it is the primary means for 
assuring that servicers comply with appropriate standards. 
These standards should include requirements for servicers to 
provide sustainable loan modifications consistent with investor 
interests and to otherwise structure their loss mitigation 
operations to align servicer incentives with those of 
investors, homeowners, and communities. In order to provide the 
FMIC with the necessary tools to promote these outcomes, it 
should have enforcement, supervisory, and examination powers 
and should also coordinate with prudential regulators. In order 
to promote timely responses to compliance challenges, the FMIC 
also should house the Office of the Homeowner Advocate, which 
would serve as a locus at FMIC for consumer complaints and 
resolution of individual compliance-related matters. While 
enhanced Government authority would promote better outcomes, 
legislation also should provide homeowners with a private right 
of action to enforce their rights to proper mortgage servicing 
on FMIC-insured loans.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                        FROM ALYS COHEN

Q.1. In an earlier hearing, Martin S. Hughes, Chief Executive 
Officer of Redwood Trust Incorporated, recommended that we 
establish servicer performance triggers to serve as benchmarks 
and as objective means for possible removal of the servicer. 
This is similar, but not identical, to a provision I pushed in 
the FHA Solvency Bill which was cleared by this Committee 
thanks especially to Chairman Johnson, Ranking Member Crapo, 
Senators Brown, Merkley, and Warren. Could you please discuss 
why servicer performance triggers would be helpful to 
consumers?

A.1. While homeowners are able to choose their lender, the 
servicer is designated by the owner of the loan and the 
homeowner has no choice in the matter. Thus, when a servicer 
does not properly fulfill its duties a homeowner does not have 
the option of terminating the relationship with the servicer in 
favor of one who provides better customer service. While 
servicers work for investors, a variety of circumstances, 
including a collective action problem, often make it difficult 
for investors to hold servicers responsible for noncompliance 
with servicer duties. In a newly reformed GSE system, the FMIC 
or similar corporation is in the best position to hold 
servicers accountable for performance on an individual and 
systemic basis. The contractual relationship between the 
servicer and FMIC gives the FMIC the ability to establish 
parameters concerning servicer performance. By establishing 
triggers to be used as benchmarks for performance and potential 
removal of a servicer, the FMIC would be able to implement a 
transparent and uniform system of accountability. Such a setup 
would benefit consumers who otherwise have little leverage to 
address servicer misconduct. Moreover, the market in general 
would benefit because servicer conduct and incentives would be 
better aligned with other stakeholders.