PANEL I OF THE HEARING OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES
SUBJECT: LEGISLATIVE AND REGULATORY OPTIONS FOR MINIMIZING AND MITIGATING MORTGAGE FORECLOSURES
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REP. RICHARD H. BAKER (R-LA): Thank you, Mr. Chairman.
Mr. Bernanke, in correspondence with Chairman Frank on September 17th, you were specific in a response relative to the advisability of increasing the portfolio limits -- excuse me -- the conforming loan limit, and you had three elements in that response. One was that the change must be explicitly temporary as well as promptly implemented, and thirdly, it would be ill-advised if it has the practical effect of reducing incentives to meaningful GSE reform.
Acting on the belief that Fed testimony is not casually constructed, I read very carefully your statement on page 11 addressing the same general subject matter, and you repeated two of the three -- "explicitly temporary, sufficiently promptly" -- but you did not include the language relative to the necessity "if we act (to tie ?) that expansion of portfolio to GSE reform." I just want to make clear with understanding, is it still your view that any modification to the portfolio would be ill-advised unless done in concert with an appropriate GSE reform?
MR. BERNANKE: Yes. First of all, let's be clear, we're talking about the conforming loan limit and not the portfolio --
REP. BAKER: Correct. I'm sorry.
MR. BERNANKE: There are several concerns that I describe in my letter expanding the implicit government guarantee into a new area of the mortgage market and so on. But I think the primary concern I have is that if this goes ahead without any reform, that somehow reform may not ever happen or be effective.
So I do believe it's important that this be done, if it is done, in the context of meaningful GSE reform. If it is done, as I indicated, I think it needs to be temporary, and if it's not prompt, it's not going to be productive because these markets will recover over the next few months. And if this comes on-line in March, it'll be counterproductive.
REP. BAKER: Thank you.
Secretary Paulson, in market observations it appears that much reaction in the marketplace was in response to improperly identified risk and their great risk aversion in worldwide markets where there was not a certainty that the mortgage origination process or review processes were in all cases done with appropriate due diligence, and therefore, there was a withdrawal by some investors from those mortgage obligations, whether they be securities or whole mortgages.
On a related matter, I have -- and I hope you agree with that observation. And secondly, I have the concern with regard to proposed reform and (assigning/assignee ?) liability, and that is, to a reasonable man, if you look at a document and fraud is not apparent on the face of the document, or you look at the security which you're requiring and there's no apparent fraud easily detected to you, the inappropriateness of assigning liability to that investor in that security or a holder of that mortgage in the process of a secondary market and beyond, when there is no contribution to the unprofessional or inappropriate conduct which led to the predatory behaviors, and the consequence of that, I believe, would be to have a withdrawal from the market from those unwilling to take improperly identified risk, thereby actually hurting the very individuals that we are trying to assist with enhanced (assigning/assignee ?) liability.
Do you agree with those perspectives?
SEC. PAULSON: Congressman, I do agree with that. Just to expand a bit, we've had great innovations in the capital markets. This has helped our society help homeowners. The history is innovation moves ahead of regulation or policy, so when we're going through a period like this, we need to readjust and say what things should we do differently, where do we need some additional regulation, where do we need some additional policy measures. We need to get the balance right and not go too far.
I do believe that in terms of assigning liability to those investors who purchased a mortgage, that that would have the negative of being a very big damper on securitization and would thereby curtail product to those who need it.
REP. BAKER: Let me if I may because my --
SEC. PAULSON: So there'd be some things I would do and that I probably wouldn't.
REP. BAKER: I want to get in before my clock runs, and that is, with regard the data already mined, it appears that as the subprime market lower-income households modest price on housing, where the delinquencies have bounced up a bit, whereas in the jumbo markets -- although, recognizing there's some liquidity concerns -- the problems are not as evident. So that in our effort to help people with the triggering questions and other mortgage aberrations, we should be focused on the lower-priced homes and the lower-income individuals.
And I would be interested if anyone has data -- given the fact that on the FHA side we've gone to about a $700,000 house, we're about 500 on the GSEs -- whether there's any data that indicate that poor people are having trouble getting access to $500,000 houses because that portfolio increase seems to be a problem.
SEC. JACKSON: We have a limit -- let me say this to you, Congressman. FHA is limited. That's why I'm very pleased, again, that you all passed the FHA modernization legislation, which will eliminate the present caps that we have.
So we are dealing with people really that are moderate-income.
But I want to say something, and I think both of my colleagues will say it's not just the low-income/middle-income market. The jumbo market, where we had a number of what we'd call today yuppies purchasing homes and cars -- that we have serious problem with too. So it's -- we can't minimize it at the level of middle-income people, basically firemen, police; we have some serious problems too at the top.
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