Floor and Committee Statements

Tuesday, April 27, 2010

U.S. Senator Johnny Isakson (R-GA)
Floor Statement on Financial Reform and Mortgage Lending
Remarks as Delivered on the Senate Floor

Madam President, I rise for a second to talk about the financial services bill. I do want to say something in advance of that, and I am sorry Chairman Dodd is not on the floor.

This Friday is the last day Americans can go under contract on the first-time homebuyer tax credit and the move-up tax credit. I had the privilege of working with the banking chairman on that legislation in the fall of last year--and its extension--and I felt a sense of reward today when the announcement came out that for the first time in 36 months home values in the 20 test markets in the United States actually went up by six-tenths of 1 percent. That is not a lot of money, but it is the first time in 36 months. The chairman created an environment to allow that debate to take place, and this Senate voted 100 to 0 to pass it and the American people have benefited from it.

As I tell so many who call me, it is not going to be extended because credits such as that are designed to do what it has done; that is, to bring the marketplace back and hopefully stabilize values and move forward. I commend Senator Dodd for setting up the environment where that could take place.

That brings me to my point on the bill before us. Senator Feinstein did an excellent job of talking about Wall Street and some other people who certainly need to be held accountable where there wasn't any transparency, contributors to the problem, and the terrible problem the derivatives caused in the whole mess. But there is another story out there I wish to bring up, because when we do get to the debate on this bill, it is my hope we will truly have a debate and an amendment process because there are some things not in this 1,407-page bill that ought to be.

What I specifically want to talk about is Freddie Mac, Fannie Mae, Moody's, and Standard & Poor's. When the market began to collapse, a lot of those derivatives that were talked about were bets, one way or another, against the housing market, which in many ways had been overheated in America because of the approval of something known as a subprime mortgage. But the devil in those details that caused us so much problem is that there was originally no market for subprime mortgage. They were B, C, and D credits. They were downpayment assistance loans. They were higher risk loans by their definition, but they got securitized and two things happened: First, Moody's and Standard rated them as investment grade, AAA investment-grade securities; secondly, Freddie and Fannie, at the behest of the U.S. Government and its Congress--us--started buying those securities to meet the desire to have more affordable housing in America, a noble goal but a goal that was being achieved by loaning people money who could not pay it back, by loaning them the downpayment they didn't have, by not validating their credit, their employment or anything else.

So when this thing did collapse, when everything went down and went down fast, it was, in large measure, because Freddie and Fannie created the marketplace that started the buying of these securities around the world, these mortgage securities, No. 1. Equal with that is Moody's and Standard's rating them as investment grade when they obviously were not.

I would think that as we move toward a debate on this bill, when that time comes, and it will come, that it will be a bill that includes Freddie and Fannie and includes Moody's and Standard. I do understand there are some references to Moody's and Standard, but I will submit to you that the best accountability on Moody's and Standard is for them to be paid by the purchasers of the securities, not the creator of them, because then they are accountable to the people who actually get stuck holding the bag, not to the guy who created them and dumped them and ran, which is some of what Senator Feinstein was talking about.

I also wish to talk about the quality of lending. There are provisions in this bill that talk about shared risk and risk retention. There are provisions for a mortgage banker to retain 5 percent of the risk in a loan. That is a well-intended move, but as I said the other day on the floor and as I reminded people in this body, when the savings and loans collapsed, when the RTC, the Resolution Trust Corporation, was created--and that crisis cost the American people $ 3/4 trillion--savings and loans in America didn't have 5 percent of the risk, they had 100 percent of the risk. They made those loans with deposits they had of their depositors and they were paid back over time. But when we took away their preference for deposits on $10,000 or less against the banking industry, and when--because they began losing money--we allowed them to form service corporations and get into businesses they didn't know anything about, they finally collapsed and imploded with 100 percent risk, not just 5 percent.

So I would submit another thing that needs to be incorporated in this is for us to put in some underwriting standards--minimum standards--so anything that doesn't meet them has to be an insured mortgage by an MGIC or a PMI. We should go back to the good old days of the 1960s, 1970s, and 1980s, where you had to have a job and a verification to borrow money, where you had to get a credit report, where you didn't have a windshield appraisal, where an appraiser drove by on the street, but a legitimate appraisal, where they valued a property, and where you couldn't borrow money that would cause you to spend more than 25 or 30 percent on your monthly payment as a percentage of your gross income or a total of 38 percent on all debts you had, including that payment, for at least a year or more in duration.

The real estate industry, the housing industry in America, with those very standards--which were the standards of the 1960s, 1970s, and part of the 1980s--ended up having a vibrant housing market, with 65 percent home ownership--the largest of any country in the world. But when Wall Street got greedy, when our idea of forcing Freddie and Fannie to be purchasers of resort, when all those things were created, the rush came to make the mortgage, to sell the paper, to produce the income that the investor wanted, and the quality of the house, the qualification of the buyer, and the legitimacy of the loan came in question.

So I look forward to the point in time when we get to this debate that we will talk about three things: No. 1 is that Freddie Mac and Fannie Mae were, in fact, government-sponsored institutions and today are a lot more government sponsored than they ever were. No. 2, if we exempt them, we leave the potential and the temptation for them to be used as a dictated purchaser of certain kinds of paper that will get us right back into the same situation. If Moody's and Standard do not have an accountability to their rating standards, when something such as the subprime loans happen, we will be leaving open the opportunity for most of what happened that was the principal cause of the collapse to happen again. I think we have a responsibility not to do that.

I hope to become a part of a debate on that part of this legislation that closes the loophole, that takes away this idea that if you just have a 5-percent shared risk, it is a safe loan, and instead make sure the underwriting to the borrower is what we count on because, after all, that is going to be how the money is paid back. We know for a fact that Freddie and Fannie were a major part of the problem, and we know that lack of quality underwriting was a major contributor to the quality of the security. Somewhere it ought to be addressed. But in these 1,407 pages, to the best of my reading and looking, it is not. That is unfortunate and it is a mistake. I hope, when we get to the final debate, we will correct that error or else we will not have addressed a major contributor to the problem for our taxpayers and our voters and our citizens.