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Veterans Jobs Corps Act of 2012--Motion to Proceed--Continued

Floor Speech

Location: Washington DC



Mr. REED. Madam President, first, let me express my disappointment that my colleagues on the other side of the aisle blocked consideration of vitally important cyber security legislation. The Secretary of Defense, when asked about a potential threat to the United States, declares emphatically that his biggest concern is that the next Pearl Harbor will be a cyber attack upon the United States and if we cannot at least fully debate, amend the bill, and pass the bill, then I think we are not performing up to the expectations of the American people.

So I am very disappointed that we were not able to complete this legislation in a timely fashion this week and give the necessary tools to our national leadership to protect the country against potential cyber threats.


Having said that, I also want to rise today to express my profound disappointment in the Federal Housing Finance Agency's decision to prohibit the use of principal reduction by Fannie Mae and Freddie Mac as one more tool to avoid foreclosure under the HAMP Principal Reduction Alternative (PRA).

As conservator, the acting FHFA Director, Mr. DeMarco, has a duty to not only carry on the business of both Fannie Mae and Freddie Mac but also to preserve and conserve the assets of both, which FHFA has stated repeatedly requires them to minimize losses. At the same time he has other statutory responsibilities. Under section 110 of the Emergency Economic Stabilization Act, there is a requirement that FHFA ``implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the servicers of the underlying mortgages, and considering net present value to the taxpayer, to take advantage of ..... available programs to minimize foreclosures.''

So there is a clear statutory direction to do all that he can to minimize foreclosures while he is also balancing the portfolio and minimizing losses to Fannie and Freddie.

To boil all of this down, FHFA has to minimize Freddie Mac and Fannie Mae losses, and pursuant to the Emergency Economic Stabilization Act, which passed this Chamber on a strong bipartisan vote of 74 to 25, this requirement to protect homes from foreclosure or the people from the threat of foreclosure is a strong bipartisan objective. FHFA was directed by Congress to throw its weight in favor of avoiding foreclosures, especially in those instances in which a policy decision may be a close call. I believe that is the plain meaning of ``maximize assistance'' to ``minimize foreclosures.'' Maximize assistance--not provide assistance but to maximize assistance to avoid foreclosure. I would further note that section 110 of the Emergency Economic Stabilization Act explicitly permits ``reduction of loan principal.''

So we consciously gave the Acting FHFA Director the specific tool of principal reduction and the specific directive to maximize assistance to minimize foreclosure. We did that in the context of the overall mission to try to minimize losses of the Fannie and Freddie portfolio. But to turn essentially a blind eye to the thousands of Americans who are facing foreclosure is to ignore a vital responsibility and a vital authority which he has been given.

After reading FHFA's July 31, 2012, letter to Members of Congress, my impression is that FHFA has done exactly the opposite of what we have asked them to do. Indeed, the letter contradicts itself in arriving at its conclusion. FHFA states in one part of the letter that it will not allow principal reductions under the PRA program. But in another part of the letter, FHFA goes on to write,

Short sales and deeds-in-lieu, which the Enterprises offer, result in principal forgiveness as part of exiting the house.

In other words, it seems, in their view, principal reduction is acceptable in some cases, especially if the owners leave their home.

Now, I think there are thousands of Americans who are facing huge challenges to stay in their homes. It is ironic that FHFA will reduce the principal, only after the person actually loses their home. But if it, through PRA, allows a person to keep their home, and avoid foreclosure, then FHFA will not do it.

In the same letter FHFA also states that:

Forgiving debt owed pursuant to a lawful, valid contract risks creating a longer-term view by investors that the mortgage contract is less secure than ever before. Longer-term, this view could lead to higher mortgage rates, a constriction in mortgage credit lending or both, outcomes that would be inconsistent with FHFA's mandate to promote stability and liquidity in mortgage markets and access to mortgage credit.

So forgiving debt is inconsistent with FHFA's mandate, but FHFA admits to allowing principal forgiveness in certain cases? Again, let me repeat their own words.

Short sales and deeds-in-lieu, which the Enterprises offer, result in principal forgiveness as part of exiting the house.

But FHFA also states:

Forgiving debt owed pursuant to a lawful, valid contract risks creating a longer-term view by investors that the mortgage contract is less secure than ever before.

Well, how does this make any real common sense? We will forgive principal if homeowners are going to get kicked out of their house, which presumably upsets the long-term perspective of investors and bonds that support those mortgages. But if homeowners are staying in their house, we will not reduce principal through PRA.

Turning to the point of moral hazard, which is implicit in all that has been discussed by FHFA, and given that FHFA has blessed principal forgiveness in these two instances of short sales and deeds-in-lieu, and additionally permits principal reduction as part of the Hardest Hit Fund, which also utilizes Treasury incentives, I can only assume that FHFA must have found a way to control and avoid moral hazard when they want to and use moral hazard as an excuse when they don't want to do something.

Either it is an issue that must be consistently addressed, which they don't do, or it is an after-the-fact rationalization for failure to pursue a policy which for other reasons they don't want to do.

Having made these points, let me give FHFA the benefit of the doubt here and assume for the sake of argument that FHFA wants greater certainty and assurances. I think they said as much when they wrote:

FHFA weighed these potential benefits and costs, recognizing the inherent uncertainties associated with these estimates, and concluded that the potential benefit was too small and uncertain relative to known and unknown costs and risks to warrant the dedication of additional taxpayer resources to Fannie Mae and Freddie Mac to implement HAMP PRA.

I have heard a couple of my Republican colleagues talk about how what FHFA should be doing is what the private sector is doing, looking to the business men and women, who protect their shareholders. In fact, I think that is a good place to look for some direction. But what is the private sector doing when it comes to principal reduction?

For one, Laurie Goodman, Senior Managing Director at the Amherst Securities Group, a broker/dealer specializing in the trading of residential and commercial mortgage-backed securities that performs extensive, data-intensive studies to keep its clients informed of critical trends in the residential mortgage-backed securities market, has testified before the Senate Banking Committee that principal reductions are, in her words, ``the most effective type of modification.''

Next, John DiIorio of 1st Alliance Lending, whose clients consist of major banks, investment banks, and sophisticated financial counterparties, has stated that his clients are in favor of principal reduction ``not out of a sense of charity, but because they believe it is in their best financial interest to do so.'' In other words, there is a very strong business case for principal reduction--a business argument, apparently, that FHFA has ignored or totally rejected.

Finally, when we look at the newest data from the Office of the Comptroller of the Currency, we see that banks have granted principal reductions on 28.9 percent of the loans they hold, which is up from 11.5 percent a year earlier. By the way, they also have lower default rates than Fannie Mae and Freddie Mac.

So when we look at the private sector, what they are doing appears to be different; indeed, perhaps the opposite, of what FHFA is doing. They are going through their portfolios and, in appropriate ways, reducing principal not because they want to provide charity, but because it is the best way to preserve their portfolio and generate value for their shareholders. That is what their business is doing. In fact, they have a fiduciary duty to do that.

So it would appear the private sector seems not only completely comfortable with principal reduction, but they, in fact, are doing it because it is good for their bottom line.

Yet, we have FHFA essentially saying, well, we can't do PRA. I think this is one of those examples where they just don't get it, frankly.

If principal reduction provides greater value than foreclosure to a private investor, such as these banks I cited, and on top of that keeps a family in their home, aren't these the types of decisions we should make and we should support?

The real moral hazard, if there is one, is that FHFA is inexplicably choosing not to use every available tool, especially one the private sector is already using extensively to help homeowners and investors time and time again.

There are people in this Chamber on both sides of the aisle who say we have to run this government more like a business. Well, guess what. The businesses are using principal reduction, and FHFA is saying they can't do PRA. This is shortsighted and it is wrong. I urge the FHFA to reconsider and, in the meanwhile, I am going to continue my efforts to do what I can do to help these homeowners who are facing foreclosure.

It is very difficult--and I know it is for my colleague from New Hampshire and my colleague from Utah--to go back home and see a homeowner who is struggling with a mortgage that might be 5 percent or 6 percent, knowing that banks can borrow at less than 1 percent, and this homeowner has difficulty getting access to a better mortgage rate because he or she is underwater.

I hope we adopt some of the smarter business practices around here and that FHFA leads the way, and I am going to do all I can to ensure that outcome becomes a reality.

With that, I yield the floor, and I thank my colleague from Utah for his consideration in letting me speak.


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