Monday, July 18, 2011

U.S. Senator Johnny Isakson (R-GA)
Floor Statement on the Anniversary of the Dodd-Frank Financial Reform Bill
Remarks as Delivered on the Senate Floor

Mr. President, I commend the Budget Committee chairman on his contribution to this debate and his contribution to our country. I enjoy listening to his remarks and appreciate many of the ideas he has offered today.
I rise to talk about an anniversary today--no, it is not my anniversary or his but the anniversary of Dodd-Frank, which passed a year ago today.

This morning at a press conference, Barney Frank, then-chairman of the House Banking Committee and the Frank portion of the Dodd-Frank legislation, gave a speech before the National Press Club.
In it he made some comments that are very important, and I wanted to share my agreement and support for some of the things Chairman Frank said.

I did not vote for Dodd-Frank when it passed 1 year ago, but I did, along with Senator Hagan and Senator Landrieu, offer an amendment which was adopted by the Senate and ultimately agreed to by the House in the conference committee. It was an amendment known as QRM, qualifying residential mortgage, an amendment to carve out an exemption from risk retention for a well-underwritten mortgage loan.
The Dodd-Frank bill, as many in this room will remember, originally called for a total 5-percent risk retention on every residential mortgage made, which would have eliminated many people from making any residential mortgages at all. Ranking Member Frank today in his comments said: Well, we had a 100-risk retention prior to 1994.

He is right. That is when savings and loans made loans, and that is when the Federal Government insured the others, and savings and loans had preferential interest rate treatment so they could make preferential payments to people to save in their institution versus the bank. But the Federal Government took away the one-quarter percent differential that savings and loans had and the banks became competitive with savings and loans for short-term and long-term deposits of savings and all the savings money flowed to the banks that offered other products. So savings and loans went out of business. When they did, there was no residential mortgage money, at least no conventional money, available in America.

So what happened? The securitized market began. Freddie and Fannie began to play a significant role in providing conventional residential mortgage money. Until the collapse, which began in 2006 and culminated in 2009 and we still are suffering from today--until that collapse, securitization was a very reasonable and safe way of raising
capital for mortgages.

What happened in the mortgage collapse was not a failure of equity or skin in the game by the borrower; it was the collapse of underwriting. Mortgage lenders got into loosey-goosey underwriting--subprime credit. They made loans to people who were higher risk in order to price it at a higher rate, and they blurred qualifying requirements to where, all of a sudden, if you walked in and fogged up a mirror with your breath, you could probably get a mortgage loan and they could probably securitize it.

Dodd-Frank was designed to see to it that didn't happen again, and I commend them for it. But as government often does, sometimes it goes too far when the pendulum swings back the other way.
Thus is the dilemma we are in today, as the rule being proposed by the FDIC, the Federal Reserve, Comptroller of the Currency on the QRM rule is going to require, in addition to quality underwriting, a minimum 20-percent downpayment.

For years in this country we have had 90 percent and 95 percent conventional financing or, in terms of FHA, 3.5 percent downpayment and VA none at all. There have been various varieties of downpayments that have been allowed based on the loan and its insurance. But with this rule of requiring risk retention on any loan with a downpayment of less than 20 percent, except for an FHA or VA loan, it is going to literally destroy what is left of the residential housing market because it will extract what is probably 40 to 45, maybe 50 percent, of the current market today.

Senator Landrieu, Senator Hagan, and myself in QRM proposed that people have a qualifying ratio of debt to income that is sufficient to amortize the debt, a third-party verification they have a job, a credit score that indicates they are willing to pay their payments, an appraisal that indicates the house is worth what they are paying for, and a downpayment with mortgage insurance required if the downpayment was less than 20 percent.
Today, I wish to quote Ranking Member Frank. When talking about risk retention, he said: I am troubled because there is an assault now on risk retention--Barney Frank--adding that even though he believes the 20 percent requirement in the QRM rule being circulated is too high. When asked further what would be a good downpayment, he said at least 4 or 5, something above FHA.

I wish to commend the ranking member because he is precisely right. Although he in his original intent with Dodd-Frank did not want to bifurcate residential qualifying mortgages by some having risk retention and some not, he recognized the importance of doing some of that bifurcation and having some exception to risk retention. They would have realized that anyway, if you recognize they exempted Freddie Mac, Fannie Mae, and FHA from the requirements of Dodd-Frank and left them solely on the conventional market.

So I wish to thank Congressman Frank today for his comments as they related to QRM and his identifying the downpayment requirement currently being circulated is entirely too high. It is entirely too high, and it is very important that we get the final rule, which will be published on August 1, to have a reasonable downpayment of 5 percent or more, rather than 20 percent or more. Five percent or more will ensure there is skin in the game; and with the other qualifying and underwriting provisions in QRM, it will ensure that quality residential mortgages are being made.

I am not one to offer advice often to the President. He is the President. He can do as he wishes. But today in Politico there is an article about the President is now returning to revisit the residential housing market because he understands employment is not coming back until housing comes back; he understands the American dream is, for some people, now the American nightmare; and he understands what has been done so far has not been working.

I wish to suggest to the President that if he thinks what is happening now is a nightmare, you just wait until this QRM rule that is being circulated now actually goes into effect. Without it being changed and a continued requirement of a 20-percent downpayment, you will have a further lack of demand in the housing market, which already is almost at least anemic, if not feeble, because most Americans who want to buy a home can afford 5 percent or maybe 10 percent down, but they can't afford 20, and that is middle America. If you pull them out of what is already an anemic housing market, you would have no housing market at all.

So as this Dodd-Frank rule is being circulated in the next 2 1/2 to 3 weeks before it is finalized, I hope we can all keep up the drumbeat for the regulators to be reasonable in their approach--understand risk retention is important but also understand home ownership is important and understand we had a collapse that was not downpayment related. We had a collapse that was underwriting related.

So if you have strong underwriting and minimal skin in the game of at least 5 percent, you have a qualified residential mortgage that does not have to have risk retention; therefore, you will have enough capital raised in the mortgage markets to fund a housing demand which hopefully is going to continue to grow.

In the absence of securitization, in the absence of an exemption of risk retention for a qualified residential mortgage, there will be no housing market in the United States of America.

FHA is already under so much stress and duress, it is awful and it is frightful. The Veterans' Administration is a privileged loan for those who have served and made the ultimate sacrifice for our country, and they deserve it.

Freddie and Fannie are exempted because we have them in conservatorship. But they are not going to be a source of money for long. Something will have to replace them, a new entity, probably something with securitization. But if the QRM rule being circulated now does, in fact, go into place as it is written, with a minimum 20-percent downpayment, it will be the last nail in the coffin of the American housing market. The unintended consequence of reaching too far to react to the terrible crisis which we had will put the death knell of the housing market squarely on the shoulders of this Congress, this administration, and these regulators who are currently carrying out those rules.

I wish to commend Ranking Member Frank on his comments today, his recognition that the QRM rule being circulated asks too much, recognizing that a 5-percent or greater downpayment is a reasonable approach and recognizing that underwriting is the important key to see to it that we have a housing market.

I commend the gentleman from Massachusetts. I thank him for adding that comment today to the National Press Club. I hope the regulators, the FDIC, the Federal Reserve, the Comptroller of the Currency, and the Treasury heard it too. If they didn't hear it and they remain silent and continue with 20 percent, they will be doing exactly the opposite of what the President of the United States stated he wants to do; that is, bring the housing market back in America.