Tuesday, May 11, 2010

U.S. Senator Johnny Isakson (R-GA)
Floor Statement on Underwriting Standards
Remarks as Delivered on the Senate Floor

Mr. President, I thank the Senator from Tennessee. I commend the Senator from Tennessee who has worked tirelessly for months on this legislation but in particular has worked tirelessly on this particular amendment.

I rise to try and make my point as strongly as I can. This body, I know, always wants to do the right thing. We want to address the concerns that made the market begin to collapse 2 years ago. We want to restore confidence in real estate finance. We want to bring back the vibrant housing industry. We do not want to reincarnate subprime loans. And we ought to do one simple thing today: We ought to learn from history. I want to give everybody a small history lesson.

The underlying bill answers the question of better underwriting by putting risk retention as a requirement on a newly originated mortgage, a risk retention of 5 percent. The tier 1 minimum capital requirement of a nationally chartered bank is 8 percent. You are going to tell me the banks of America are going to reserve another 5 percent against the mortgages they originate? No, they are just not going to originate mortgages whatsoever.

Secondly, risk retention is no insurance for a better mortgage having been made. The fact is, in the late 1980s, the American savings and loan industry, which was chartered for the purpose of financing American homes, went under, and they had a 100-percent risk retention.

What causes bad lending is bad underwriting. Risk retention has nothing to do with it if you have bad underwriting or, as we had in late 2007, 2008, 2009, no underwriting at all.

First of all, Senator Corker's amendment is an outstanding amendment that strikes at the heart of the problem that got us here, while at the same time according the opportunity for the American finance industry to bring back competitive mortgage lending. If it is not FHA and it is not VA and it is not a Freddie Mac or Fannie Mae loan right now, you are not getting one. We do not have people in the market anymore because they are scared. There is no standard.

This brings us back to a standard of underwriting that is right. It recognizes somebody has a job, has an ability to pay, has reasonable credit, and has some skin in the game so they will pay that loan back. Historically, the default rate on the mortgage industry in the United States of America, outside the last 3 years, was around 1.2 percent to 1.4 percent--very little; in fact, probably the highest best risk investment an investor could make.

What happened was, when underwriting failed and we got into exotic instruments, when Congress told Freddie and Fannie to make affordable loans and they created market subprime loans, the genie got out of the bottle and everything failed.

I want to say to the body, if we let this bill pass with risk retention in it thinking we have done something, the only thing we will have accomplished is a total absence of mortgage money for the American home buyer and American real estate industry. That is a bad mistake.

Facts are stubborn things. If a guy has a job, makes a downpayment, he will repay his loan. If he does not, he might not.

Let's get back to the roots that got us to where we are as a great country. Let's restore home ownership and ability to finance it, but let's recognize the weakness was in underwriting. It was not in the retained risk of the originator.

I commend Senator Corker, Senator Shelby, Senator Gregg, Senator LeMieux, and the others who have worked on this issue. If this amendment fails, then this entire legislation fails in meeting the standard it set upon itself. That would be a tragedy and a mistake for the United States of America.