[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
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
EXAMINING THE EXPERIENCE OF CONSUMERS THROUGHOUT THE HOUSING FINANCE
SYSTEM FROM ORIGINATION TO SERVICING
OCTOBER 29, 2013
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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
C O N T E N T S
TUESDAY, OCTOBER 29, 2013
Opening statement of Chairman Johnson............................ 1
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 2
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
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
HOUSING FINANCE REFORM: ESSENTIALS OF A FUNCTIONING HOUSING FINANCE
SYSTEM FOR CONSUMERS
TUESDAY, OCTOBER 29, 2013
Committee on Banking, Housing, and Urban Affairs,
The Committee met at 10:05 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. Good morning. I call this hearing to
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 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
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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-
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
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
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
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
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
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
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
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
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-
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
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
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.
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
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
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
Do you think that accurately describes the servicer's
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
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
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
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
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
Mr. Thomas. Well, short sales are obviously problematic.
First of all, the name is incorrect. It is not ``short.''
Senator Brown. Long, yes.
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
Mr. Thomas. With the other mortgages it is still
persistent, but with the GSEs, it has vastly improved it. It is
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
Senator Tester. Anybody else like to comment on that? Yes,
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
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
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
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
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
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
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
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
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
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
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
\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).
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
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
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
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
\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,
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
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
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
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,
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
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
\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
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
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.
\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/
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\
\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
\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
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
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.
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.
\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).
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
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.
\6\ Based on Mortgage Insurance Companies of America (MICA) member
Mortgage Insurers Pay Claims Pursuant to the Terms of Their Master
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.
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
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
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.
\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
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
Imposing a fee or charge that the servicers lacks a
reasonable basis to impose upon a borrower (i.e., not bona fide
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
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
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
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
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
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
A borrower rejects all loss mitigation offers; or
A borrower fails to comply with the terms of a loss
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
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
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.
\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.
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.
\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://
\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://
\5\ R. Kochhar, et al., ``Wealth Gaps Rise to Record Highs Between
Whites, Blacks, Hispanics'' (July 26, 2011), available at http://
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\
\6\ Mortgage Bankers Association Delinquency Survey, Second
\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\
\10\ OCC Mortgage Metrics Report for the Second Quarter of 2013,
\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
\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/
\13\ OCC Mortgage Metrics Report for the Second Quarter of 2013,
\14\ OCC Mortgage Metrics Report for the Second Quarter of 2013,
\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).
A New Housing Finance System Should Be Focused on Access and
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
\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/
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
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
\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
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\
\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
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
\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/
\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).
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
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\ 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 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
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
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).
\32\ Fannie Mae, ``Request for Proposal: Lender Placed Insurance,
Insurance Tracking, Voluntary Insurance Lettering Program'' (Mar. 6,
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.
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
October 29, 2013
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
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,
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,
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
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\
\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
2012_HMDA.pdf. Accessed on October 25, 2013.
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.
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
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
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
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
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
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
\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_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
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
\11\ Joint Center for Housing Studies of Harvard University. 2013.
``The State's of the Nation's Housing'', Harvard University. http://
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://
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
\13\ Neil Mayer and Kenneth Temkin, ``Pre-Purchase Counseling
\14\ Neil Mayer, Peter A. Tatian, Kenneth Temkin, and Charles A.
Calhoun, ``National Foreclosure Mitigation Counseling Program
\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
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
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
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/
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/
\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://
\4\ Michael LaCour-Little and Jing Yang, ``Taking the Lie Out of
Liar Loans'', 2009 (available at http://www.fhfa.gov/webfiles/15048/
\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/
\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-
\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://
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
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/
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,
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
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
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
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
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
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
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
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
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
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
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
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
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.