Friday, December 16, 2011

U.S. Senator Johnny Isakson (R-GA)
Floor Statement on Mortgage Financing

   Mr. ISAKSON. Mr. President, this morning it was announced that the former officers of Freddie Mac and Fannie Mae are going to be prosecuted, or cases have been filed, for their misrepresentation of the liabilities that both of those institutions posed to the American Congress and American taxpayers.
   Last year when we passed the Dodd-Frank amendment on mortgages and on risk retention, we exempted Freddie Mac and Fannie Mae from the liability that every other company in the country had to go through. We find ourselves today in a place where Freddie Mac and Fannie Mae have cost the American taxpayer at least $171 billion. That number is rising because of the exemption from Dodd-Frank; Freddie and Fannie, other than FHA, are the only act in town.
   A week ago I introduced a piece of legislation to deal with this issue. It is a piece of legislation that will terminate Freddie Mac and Fannie Mae and create a bridge, or a transition, from where we are to a privatized mortgage securitization and guarantee program.
   I want to briefly address how that takes place because in the end it will pay back the American taxpayer. It will put Freddie and Fannie out of business, and we will have a robust mortgage market available to the American people as the housing market begins to recover in this country.
   First of all, the legislation creates a new entity called the Mortgage Finance Agency. It is an agency with directors that are appointed by the President with advice-and-consent approval by the Senate. Its directors are members of the government that deal with financial institutions and financial regulations. It will have advisory groups for people affiliated with housing, and it will be established with the following goals: Within a year it will be up and running so it can be a guarantor of quality residential mortgages--and I underline QRM, quality residential mortgages.
   The mortgage disaster America has today was a failure of underwriting. We didn't make good loans. We made high-risk loans because they had high coupon paper and securitized it on Wall Street. People made a lot of money, but America lost and today our economy suffers because of it.
   The new mortgage finance agency would be able to guarantee and wrap high-quality residential mortgages. In those wraps and in those guarantees they would receive a fee which would go into a catastrophic fund to back up the risk on those mortgages.
   In addition to that, the QRM requirements would make it essential that no loan was made 95 percent loan-to-value. Any loan above 70 percent would have private mortgage insurance on the amount up to 95 percent, and within 36 months the agency would be required to have supplemental insurance coverage to take the risk down to 50 cents on the dollar.
   It would be required by the fifth year to have a game plan established and a plan of liquidating the asset and privatizing the guarantee to the private sector. That is a very important process because it is the bridge to the end of Freddie and Fannie and the taxpayer guaranteeing of residential mortgages. We would have a situation with a downpayment of 5 percent, private mortgage insurance of 25 percent, and supplemental insurance of 20 percent, and the risk to the government would be 50 cents on the dollar.
   In the great recession values fell 31 percent. In this recession they have fallen 33 percent. So the government's coverage would be 17 percent in addition to the liability that exists today. It is a very good place to have the government and to build an entity that brings us back to a mortgage market in the United States of America that is viable and that works.
   I don't like Freddie Mac and Fannie Mae, and I don't like what happened, but it has happened. I know everybody wants to terminate them, and I do too. But we have a difficult housing market in America that will only come back when this robust capital is flowing into the mortgage markets, and that will only take place when we get ourselves out of the current dilemma and on a path toward privatization.
   The American private sector is a tremendous entity. It has proven in many ways they can find a solution to most all problems we have, but we have to create a bridge to that privatization. We have to create an entity that works, an entity that is self-sustaining, and change some of the principles of lending back to the way it used to be in this country so that when people borrow money on their houses, they really have a job, and it is verified, and their credit score indicates they can make the payments they are going to be required to make; that their credit history is a good history, and the house appraises and the underwriting is sound. Most importantly of all, the borrower has skin in the game, and there is insurance on the mortgage above 70 percent and supplemental insurance down to 50 percent. When we do that, we have qualified residential mortgages, an entity that in the beginning can secure those and can guarantee those and can, at the end of 10 years, have an institution that can be privatized.
   Here is the real kicker. Upon privatization, the money that is made by the government on the sale of the entity goes to pay back the taxpayer for the $171 billion or more they lost, and any excess money, which more than likely there would be, goes to reduce the national debt.
   So I hope everyone in this body will look at the Mortgage Finance Agency proposal I introduced last week. When we come back next year, instead of griping about the problems we have had, let's start looking to the solutions that will take us back to the America we love economically and the housing market that is absolutely critical to our country.
   I yield the floor.