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JOHNSON ON RISK SHARING IN HOUSING FINANCE MARKET

December 10, 2013

WASHINGTON – Today, Senate Banking Committee Chairman Tim Johnson (D-SD) held a hearing titled “Housing Finance Reform: Fundamentals of Transferring Credit Risk in a Future Housing Finance System.”

Below is Chairman Johnson’s statement as prepared for delivery:

“I call this hearing to order.

“This hearing is the last in our in-depth series of policy hearings to explore the benefits and challenges of reforming the housing finance system. At the urging of Committee Members and with the help of witnesses representing stakeholders across the industry, consumer, and policy spectrum, Ranking Member Crapo and I established an aggressive hearing schedule focusing on what we agreed were essential pieces for consideration in a new housing finance system. I would like to thank Ranking Member Crapo and his staff for their good partnership and coordination in undertaking this complicated effort. I would also like to thank all the witnesses that have participated. There are numerous players in the housing finance system that have structured their businesses and household decisions around the current system contributing to nearly 20 percent of the economy. As we draft changes to the system, we must keep that in mind.

“Witnesses in previous hearings overwhelmingly agreed that any new housing finance system should include an explicit government guarantee with private capital taking the first loss position. However, as we explored during the hearing regarding the transition, we must be certain that there will be enough interest from private capital to prevent the reduction of liquidity and mortgage credit. Today’s hearing will examine several ways that private capital can take on additional credit risk in front of a government guarantee and the features that are required to attract private capital.

“When considering options for expanding private capital’s role in the secondary mortgage market, I believe the structures should be compatible with the TBA market in order to ensure continued availability of the 30 year fixed rate mortgage. It is not clear that certain transactions envisioned by S. 1217 are TBA compatible, but the recent credit risk transfer transactions conducted by Fannie Mae and Freddie Mac may provide one blueprint that is. I look forward to learning more about those transactions today and how we can improve on S. 1217 in this respect.

“I’m also concerned that in a system with multiple private capital structures as options, not all forms of private capital will provide equal protection for taxpayers. As we saw during the recent housing boom and subsequent crisis, private capital will participate during a boom and flee in a downturn. If we are going to construct a new system that is even more dependent on private capital, we must work to ensure that private capital is stable and appropriately allocated, and that any new structure functions well so that responsible homebuyers are not priced out of the market.

“Last, for any future system to function and maintain the trust of consumers, investors, and taxpayers, there needs to be clear guidelines regarding how loan modification requests are evaluated and how principal and interest are paid to investors in the event of a modification or a borrower default. I would like to thank our witnesses for being here today, and I look forward to your thoughts regarding how the different private capital structures could perform in various economic circumstances and what a new system would need to be able to maintain the TBA market.”

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