Rep. Scott Garrett (R-NJ), Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, delivered the following opening statement today at a hearing to review legislation to reform the secondary mortgage market:
"Today, the Subcommittee is holding a legislative hearing on the Private Mortgage Market Investment Act. The legislative text is a product of the many discussions we have had both formally, like the subcommittee's recent hearing in New York, and informally about the steps that need to be made to bring private capital back to our nation's secondary mortgage market.
"Currently, the federal government is guaranteeing or insuring over 90% of the U.S. mortgage market. Everyone on both sides of the aisle and all market participants claim that they support efforts to bring additional private capital back into the secondary mortgage market.
"There are two things that must be done to have private capital begin to reenter this space. First, we must begin to roll back the government's involvement in the housing market. The subcommittee has already passed 14 bills this year with the intent of reducing the government's footprint and setting the course for the abolishment of Fannie and Freddie. This is a key and vital part of getting private capital going again, because as long as the cheaper government option is available, that will be the chosen route.
"Second, we must take actions to facilitate increased investor interest in the secondary mortgage market. By facilitating continued standardization and uniformity within the market, increasing transparency and disclosure, and providing legal certainty through a clear rule of law, there will be robust investor participation in the housing market without exposing the American taxpayers to trillions of dollars of additional risk.
"The legislation we are discussing today essentially sets up a new qualified securitization market. The FHFA is tasked with establishing a number of categories of mortgages using traditional underwriting standards that have different levels of credit risk associated with each category. Also, FHFA is responsible for creating standardized securitization agreements for this market. These securitization agreements will standardize the servicing arrangements of the loans, the process a loan will go through to be modified, and the representation and warranties that provide investors the ability to put-back non-qualifying loans.
"For securities that meet the specific underwriting guidelines for a category and contain the standard agreements, those securities will be eligible for exemption from SEC registration. This standardization and registration exemption will allow for a forward market in these "qualified securities' and investors with varying credit risk appetites will be able to buy the securities that meet their investment needs.
"The legislation also removes one of the biggest regulatory impediments to private capital re-emerging by striking the risk-retention provision from the Dodd-Frank act. While I agree there are benefits to risk-retention, the way it is currently being implemented will create a multitude of negative unintended consequences.
"For starters, I am not sure what good the risk-retention rule will do if we exempt Fannie, Freddie, Ginnie and loans with a minimum down payment of 5%. That sounds like almost every loan that will be made. Also, Fannie and Freddie had risk-retention and we see where that got them. I believe that a better form of risk-retention is an improved and standardized rep. and warrant system including a structure that ensures investors' claims will be honored.
"The legislation also provides a much-needed fix to the qualified mortgage definition created by Dodd-Frank. We ensure that loans that meet the test laid out by the statute are able to qualify for a true safe harbor instead of remaining subject to unnecessary and burdensome legal liability.
"To bring private investment back to our mortgage market, it is essential that the rule of law is clear, specific and upheld. Investors' rights and contracts must be honored. By facilitating the adjudication of disagreements between investors and issuers, clarifying the rules around the rights of 1st lien holders, and preventing government-forced loan modifications that negatively impact investors, investors will finally have the certainty they need to re-enter and invest in our nations' housing market.
"In regards to additional transparency and disclosure, investors should be empowered and enabled to do their own analysis of the assets underlying the securities they invest in. By disclosing more detailed loan level data, while protecting borrowers' privacy and by allowing more time for investors to study the additional information, investors will be able to conduct more due diligence and lessen their reliance on the rating agencies.
"Finally, I'd like to take brief moment to discuss the Director's testimony regarding the ongoing work FHFA is doing to address the outstanding issues from the financial crisis. Director DeMarco, let me say directly to you, that I believe you are doing a very good job, especially considering the very difficult circumstances of the situation. I would urge you to continue to resist calls from extreme elements asking the American people to pay for people's mortgages. You are the last line of defense protecting taxpayers from billions and billions of additional losses and they are counting on you to remain steadfast."