Panel I of the Hearing of the House Committee on Financial Services

Statement

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. NYDIA M. VELAZQUEZ (D-NY): Thank you, Mr. Chairman.

Chairman Bernanke, some experts suggest making originators or assignees liable if the underwriting standards or mortgage originations are found unsuitable. Do you feel that this is an adequate solution to curbing unscrupulous securitization activity?

MR. BERNANKE: I'm not sure what you mean by adequate. There are many -- of course, many different ways we can go about addressing these issues, including some of the rulemaking that the Federal Reserve is doing about subprime lending and some of the disclosures we're working on, as well.

With respect to assignee liability, I would say that there may be circumstances where it might prove a useful adjunct to some of these other methods, and I think it is extraordinarily important that we make sure that if that exists, if assignee liability exists, that the rules be very, very clearly delineated, the responsibilities of the investors be very, very clearly delineated, and that there not be some uncapped damages or unspecified damages they would be liable for, because if you do that, then the investors will simply consider it too risky and they will pull out and simply will not have any investment in this whole sector.

REP. VELAZQUEZ: So what you are telling today is that they are (not/now ?) clearly defined?

MR. BERNANKE: Well, we've seen from different states different experiences. And there have been examples where assignee liability provisions have driven lenders out of the state.

REP. VELAZQUEZ: In your testimony on page 1, on page 9, you recognize that the values that FHA has been able to ensure have failed to keep pace with rising home values in some areas of our country; however, when evaluating the GSE's loan limit, you raise concerns about the effect it could have on market discipline. Can you explain how raising FHA loan limits is different from raising the GSE's? And why would the market discipline effect be different in the GSE's case and not for FHA's?

MR. BERNANKE: Well, I prefer the FHA as a vehicle for addressing these problems. It's specifically addressed towards lower and moderate income home buyers. It is a government explicit -- has an explicit government backstop. It's not an implicit government backstop. It's on budget. And it has an explicit mission, which is to help home buyers and not make profits for any stockholders. It's a very different kind of operation. So I think if we're going to be using a government agency to help people refinance their mortgages, that we need one that is, you know, accountable and is explicitly budgeted for, as the FHA is.

REP. VELAZQUEZ: Secretary Jackson, I want to focus on the development of affordable rental housing, which is particularly difficult and costly to finance, especially in urban areas like New York. In addition, many homeowners facing foreclosure might need to move to rental units, which might increase the demand for those units. With Fannie Mae and Freddie Mac approaching their portfolio caps and unable to play a significant role in this market because of the fact of the loans, how do you suggest we ensure that multi-family rental developments continue to thrive in this environment?

SEC. JACKSON: Congresswoman, I think in certain areas of this country, that's going to be very difficult to do. And I'm not going to tell you it will be easy, especially when you look at the area that you represent in New York City. We see the prices consistently rising.

And I think that if we can implement both FHA Secure and FHA Modernization to save a number of families, they will not have to go to the rental market. But it's still going to be very difficult.

We see serious problems, from Virginia all the way back to Maine and from Utah all the way back to California. I think what we can do is basically begin to work with these states to try to find a situation where we have affordable housing, as the case in -- (inaudible) -- we don't lose that affordable housing; we do everything in our power to maintain it. And that's what we've set out to do and we'll continue to do. But it's not going to be a very easy task, especially when the HAP payments of 30 years leave, and these landowners realize that they can get a much better -- bigger profit for their properties.

REP. VELAZQUEZ: Mr. Paulson, would you mind commenting on that very same issue?

SEC. PAULSON: Excuse me, you'd have to repeat the question.

REP. FRANK: Quickly.

REP. VELAZQUEZ: It's fine.

REP. FRANK: Thank you.

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