Friday, December 17, 2010

U.S. Senator Johnny Isakson (R-GA)
Floor Statement on the Gold Standard Among Mortgages
Remarks as Delivered on the Senate Floor

Mr. President, on the 8th day of November of this year, I, along with Senator Hagan from North Carolina and Senator Landrieu from Louisiana, sent a letter to Secretary Donovan, Chairman Bernanke, Acting Director DeMarco, Chairman Sheila Blair, Chairman Schapiro, and Acting Comptroller Walsh, asking them to look closely at the 941(b) requirements of the Dodd-Frank bill relating to risk retention and to urge them to complete their work on carrying out the intent of that legislation through the amendment that the three of us cosponsored to create the exemption for risk retention requirements by the definition of a qualified mortgage.

I rise today, on one of the final days in this Congress, to raise the importance of this issue because of the current fragile condition of the U.S. housing economy and, most importantly, to underscore what a handful of Senators in this body did last summer in the financial reform bill to begin to improve and strengthen the eroding lending standards that got us into this position in the first place.

I ran a business for 22 years in residential housing in Atlanta. During that time, the average default rate, or delinquent rate, was about 3 percent on mortgages. The foreclosure rate was less than 1 1/2 . Things have changed dramatically in the last few years because of sloppy underwriting, no credit, and no documentation. We have seen some unbelievable new numbers. To give you some perspective, according to FDIC, in the third quarter of 2010, total mortgage delinquencies across the country were about 10 percent of the market, or 1 in 10. In Georgia, that number exceeded 12. In the 100-percent government-guaranteed FHA market, the delinquency rate is just above 13 percent and, sadly, in Georgia, in the third quarter that rose above 20 percent--1 in every 5.

We have mounting problems with growing housing inventory--problems that are only made worse with excessive fees currently charged by Freddie Mac and Fannie Mae, frankly, keeping many from being able to refinance into a more affordable mortgage, therefore, becoming delinquent and being foreclosed on.

I am extremely proud of the bipartisan provision that Senator Hagan, Senator Landrieu, and myself added to the financial reform bill. Earlier this year, I began working with Senators Landrieu and Hagan to develop the concept of a qualified residential mortgage, QRM or, as I call it, a ``new gold standard'' for residential mortgages, which ultimately was included in the credit risk retention title of 941(b) in the financial reform bill. While risk retention can serve as a strong deterrent to excessive risk taken by lenders, it also imposes the potential of a constriction of credit in the mortgage market.

I want to make this point clear. The risk retention provision of the Dodd-Frank bill would require an originator of a mortgage to retain 5 percent of that mortgage as risk retention. As we all know, tier one capital requirements by the banking system is only 8 percent for the solid footing for the entire bank, and we were going to add another 5 to it just because they make mortgages. What is going to happen is that very few mortgages will be made, and those that will be made will be only the most pristine ones, not necessarily the ones that meet the needs of middle America.

Likewise, our standard makes sure venturesome lending practice can never become qualified residential mortgages. We specifically delineate in the amendment that things such as balloon mortgages, no-doc loans, drive-by appraisals, and interest-only loans, loans with huge prepayment penalties, and negative amortization mortgages would never be considered a qualified mortgage. Against those loans, you should require risk retention and additional security on the part of the lenders.

But in terms of mainstream America, we need to go back to the good old days of the 1960s, 1970s, and 1980s, where if you got a residential mortgage, you had to get a letter from your boss saying that you had a job, your bank had to certify that you had the money in the bank account to pay the downpayment, your credit report had to be a good one saying you could pay your mortgage, the appraiser had to use legitimate information to appraise the house, and the underwriters had to match your debt against your income to ensure that they weren't at too high a risk. That is why in those wonderful days we only had 1.5 percent in foreclosures and less than 3 percent in defaults.

But the easy underwriting that started in 2006, and then accelerated, caused us lots of problems. That is what we are here to try to stop today. I am optimistic that our amendment will be the first step to correct the lending practices of the past and will set on a better path in the future.

In the law, we instructed the regulators to use specific criteria in conjunction with loan performance data to define the contours of the quality residential mortgage exemption. As we said in our November 8 letter to the regulators responsible for writing these rules:

It was our clear legislative intent that, underwriting and product features that data indicate a lower risk of default must be considered. Prior to sponsoring the Amendment, we were provided with analyses of loan level data that demonstrated that loans that satisfy the elements set out in our Amendment default less frequently and cure more often than riskier loans. We understand that each of your agencies have been provided with this analysis, updated to reflect loan performance in 2010. In particular this analysis demonstrates that historically tested standards, including full documentation of borrower income and assets, reasonable total debt-to-income ratios and restrictions on riskier loan features, such as negative amortization and balloon payments, significantly reduce the risk of default. In addition, for loans with lower down payments that have combined loan-to-value ratios greater than 80 percent, the protections provided by mortgage insurance result in lower losses for lenders and investors and fewer foreclosures for borrowers than similar loans that lack insurance. The mortgage insurance provision ensures that the qualified residential mortgage exemption can serve those consumers that cannot afford a 20 percent down payment while putting substantial private capital at risk to drive underwriting discipline.

I am aware these agencies are actively engaged and meeting. I recently received a response from the regulators assuring me that they will be implementing our QRM legislation ``in a manner consistent with the language and purposes of that section.'' It is my hope that these regulators will follow the intent of the legislation, by ensuring a broad spectrum of qualified borrowers will fit under the umbrella of protection under the qualified residential mortgage safety and soundness provisions.

I look forward to continuing to work with my colleagues on the other side in the new Congress to help to continue to improve our system of housing finance. It is with great anticipation that we await the administration's plans to do with Freddie and Fannie.

I have my own ideas, which I have expressed on this floor. I look forward to working with Chairman Tim Johnson and Ranking Member Shelby in the months ahead.

The crisis we have experienced in large foreclosures and defaults, the declines in housing values, and a protracted housing recession, will only be cured in time when we return to a strong and vibrant lending market, where qualified loans and borrowers come together to fuel the housing market once again. Until that happens, I fear that the recession and the recovery we are in will be protracted and will be slow, and the American dream will still be out of reach of too many Americans.