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Prepared Remarks for Richard F. Syron
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Chairman Frank, Ranking Member Bachus, members of the Committee.
Thank you for the opportunity to discuss current developments in the subprime market – and what can be done to help borrowers who may find themselves in an untenable financial situation.
Freddie Mac shares the Committee's deep concern that low- and moderate-income and minority families may be disproportionately hurt by the rising levels of subprime foreclosures, and that some communities with high concentrations of these mortgages will be seriously affected.
Let me quickly summarize what Freddie Mac is doing about it:
As announced two months ago, in the future, Freddie Mac will restrict our subprime investments in securities backed by short-term adjustable-rate mortgages (ARMs) to those that have been underwritten to a fully-indexed, fully-amortizing level. In addition, we are eliminating the use of so-called no-income, no-asset verification loans – or NINAs, and will significantly restrict the use of stated income. Finally, we will encourage subprime lenders to escrow borrower funds for taxes and insurance.
These efforts follow in a long leadership tradition. Since 2000, Freddie Mac has taken a number of significant unilateral, voluntary leadership positions that have helped improve subprime market practices.
These include our bans on:
- Single-premium credit life insurance
- Prepayment penalties greater than three years
- And mortgages with mandatory arbitration contracts.
As I describe in my written testimony, some of our initiatives have been followed by other market participants, others not. To the degree other market participants do not follow our lead, our ability to positively influence this market is limited.
In addition to tightening underwriting standards, we are currently working on a major effort to develop more consumer-friendly subprime mortgages. Ready by mid-summer, these offerings will include 30-year and possibly 40-year fixed-rate mortgages and ARMs with reduced margins and longer fixed-rate periods. We are designing these products to have a significant ameliorative effect on subprime going forward.
To address more immediate borrower needs, we are considering modifications to our existing Home Possible® mortgage offering. Home Possible allows very high loan-to-value ratio loans to borrowers with blemished credit and who may be more highly financially extended relative to their income. These characteristics overlap with those in the subprime market, providing viable upstreaming opportunities for some segment of subprime borrowers.
While these efforts will help cushion the expected rise in foreclosures, we need to be clear that these offerings are not a panacea. The problems we're facing in subprime are complex and long in the making. I wish there was a simple, single solution. But unfortunately, there is not. It is going to take all of us – Congress, the mortgage industry, and the GSEs – working together to find workable solutions.
First and foremost, regulation is needed to ensure that borrowers have the information they need to make informed mortgage choices. To be most effective, consumer disclosures need to be uniformly and consistently applied.
Second, good regulation also would set prudent guidelines on what I call the “socially acceptable” level of defaults. As a nation, we need to set some limit on the level of risk we are willing to take in order to promote higher levels of homeownership. We need to be honest that there's a major tension between putting as many families into homes as possible – and ensuring they can sustain homeownership over the long term.
Third, good regulation should ensure a level playing field. As long as some institutions operate under different, or no, regulatory strictures, potential for these sort of excesses and abuses will exist. There are a lot of investors in this market, and relying on any one set of participants will be ineffective. As a case in point, relying on the GSEs to “regulate” the behavior of other entities will not work because non-GSE investors account for the vast majority of subprime mortgages that have been securitized.
We also should carefully distinguish between those borrowers who can be “rescued” and those who cannot. I realize such a triage will not be easy or popular, but policy prescriptions such as widespread “bailouts” or foreclosure moratoriums should be considered only in certain extreme situations. Broad application of such prescriptions could have lasting, unintended consequences that harm the housing finance system in the long term.
Finally, I would humbly suggest that we resist the impulse to overcorrect this market. Many borrowers have benefited from the innovation available in subprime. Without the ability to get a subprime mortgage, many borrowers would not be homeowners today. Helping this market transition into a more viable, stable source of financing is a desirable policy objective.
I would also be remiss if I did not caution the Committee that as corrective measures begin to take effect, there will be some unfortunate tradeoffs. These could include a possible reversal in homeownership gains and further softening of house prices, particularly in hard-hit communities.
Regardless of the outcome, Freddie Mac remains committed to doing our part to create opportunities for safe, sustainable homeownership for millions of America's families.
Thank you again for the opportunity to appear before the Committee today. I look forward to your questions.
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