Wednesday, March 2, 2011

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

Mr. President, I come at the end of a long day for all of us to talk about a subject that is off the subject from the bill on the floor but is one of tremendous importance to the United States and the recovery of our economy.

I want to also point out for the record--and hopefully also for the right people--that we are at a critical point in terms of housing in America, with Dodd-Frank having been passed and newly promulgated rules. It is essential that we don't make the mistakes that led us to the last collapse that caused the tragedy in the housing market in 2007, 2008, and 2009.

In the Dodd-Frank bill, there was an amendment called the qualified residential mortgage, which was offered by Senators Landrieu, Hagan, and myself to ensure that the risk retention provisions of Dodd-Frank would not apply to a well-underwritten, well-qualified loan. Risk retention, as the Chair remembers, is the 5-percent retention requirement of any lender who made a residential mortgage that was not qualified, but they were not specific in their definition of what a qualified mortgage would be. So we took the point to take the historical underwriting standards that have proven to work so well in this country and write them into the Dodd-Frank bill, which were that a mortgage that may be exempted from a risk retention would have to have 20 percent down, and if there was more than 80 percent loan to value, that amount above 80 percent would have to be covered by private mortgage insurance. We required third-party verification of bank deposits, third-party verification of employment, third-party verification of an individual's ability to make the payments and service the debt, credit records, and all the underwriting standards. As the Chair remembers, what got us into so much trouble from 2000 to 2007 is that we made subprime loans, used stated income, didn't do debt checks or anything else we should have done. We made bad mortgages.

My point is this. There is a committee that has been formed--made up of very distinguished Americans--that is promulgating the rules to carry out the intent of Dodd-Frank. That committee includes Sean Donovan from HUD; Ben Bernanke; Edward DeMarco, Acting Director of the Federal Housing Finance Agency; John Walsh, Acting Comptroller of the Currency; Mary Shapiro, head of the SEC; and Sheila Bair, head of FDIC. That is a very august group. They are in the process of promulgating rules to carry out the intent of Dodd-Frank. The rumors coming out of those negotiations--and I say rumors because I cannot verify it because I am not there. But I know the articles I have read in the papers in the last couple of days send a troubling signal to me.

Just for a few minutes, I wish to make the points that I think are so critical.

No. 1, it is my understanding they are considering memorializing 80 percent as the maximum amount of loan to value for a loan that would fall as a qualified residential mortgage and do not address private mortgage insurance for coverage above 80 percent.

Without getting technical, what that would mean is the only qualified residential mortgage that could be made and not require risk retention would have to have a minimum of a 20-percent downpayment. In the olden days of standard lending in the eighties, seventies, and sixties, when you borrowed more than 80 percent but not over 95 percent, you had private mortgage insurance to insure the top 30 percent of the loan made so the investors had the insurance of knowing, if there was a default, the top portion of that loan, which was the most in terms of loan to value, would be insured and would be paid.

If it is, in fact, correct that this committee is going to recommend a qualified residential mortgage require a 20-percent downpayment and not make provisions for PMI, we will be making a serious mistake because two things will happen. One, very few people will be able to get a home loan in the entry-level market or even in the move-up market because a 20-percent downpayment is significant. Second, by not utilizing PMI, we will be turning our back on 50 years of history in America, where PMI has been used to satisfactorily insure risk and insure qualified lending.

We must remember what happened in terms of the collapse of Freddie Mac and Fannie Mae. What happened was Congress directed they buy a certain percentage of their portfolio in what were called affordable loans, which became subprime securities, which became 13 percent of their portfolio, which brought them down when subprime securities collapsed. If we all of a sudden, through fiat, decide to pass regulations to define a qualified residential mortgage that is so prohibitive we run everybody to FHA, which is exempt, then we will be putting a burden on FHA that is unsustainable and create a situation of another collapse or another inability of the United States to meet housing needs through the private sector and through well underwritten loans.

My reason for coming to the floor tonight is, hopefully, to send a message, before the decisions are made, to be thoughtful in determining what the parameters will be on a qualified residential mortgage. Yes, I do think an 80-percent or less loan should be qualified and avoid risk retention. But a well-paid, well-verified, well-credit-evaluated individual who borrows more than 80 percent but less than 75 should be able to do so and be excluded from the risk retention as long as they have private mortgage insurance covering that top 30 percent of the debt created by that loan.

If you do that, you protect the equity provisions, you protect the investor, you make the qualified loan, you do not put the country at risk, but most important of all, you do not force everybody to FHA. That is what we are about to do because FHA is, by definition under Dodd-Frank, exempt from risk retention. All other loans are not, except those that will fall under the QRM, qualified residential mortgage. It would be a disaster for the recovery of American housing to force Americans to only one source of money to finance their home and put so much stress on the Federal Housing Administration that it collapses under the burden.

We need to be pragmatic when we look at issues facing housing. We need to be practical in taking Dodd-Frank and making it work for the American people. We need to recognize the value of private mortgage insurance, the value of good, solid underwriting and not put a risk retention in that is so high that we take most American mortgage lenders out of the business, isolated only for a few who dictate and write the parameters they want to write for housing. We are at a critical time in our recovery. Housing has hit the bottom, and it has bounced along the bottom, but it is showing some signs of coming back. Now would be the worst time to send a signal that mortgage money is going to be harder to get, the banks are going to have to hold 5 percent risk retention on even the best of loans and, worst of all, it would give the American people only one alternative for lending; that is, the Federal Housing Administration which, in and of itself, is already under a burden and stressed.

I appreciate the time tonight to bring this message to the floor that as we write the rules to promulgate the intent of the Dodd-Frank bill in terms of residential housing and finance, we be sure we do so in such a way that we meet the demands of a vibrant marketplace rather than restricting it, putting a burden on FHA, and protracting what has already been a long and difficult housing recession.