September 13, 2011


WASHINGTON – Today, Senate Banking Committee Chairman Tim Johnson (D-SD) held a hearing to discuss housing finance focusing on the role of a government guarantee, as well as the benefits and risks to taxpayers. This is the tenth in a series of hearings the Committee has been holding related to housing finance reform.
Below is Chairman Johnson’s statement as prepared for delivery:
“I would like to thank our witnesses for joining us today. This will be the tenth housing finance reform hearing held by the Committee and the need for a government guarantee has been an undercurrent in nearly all the topics we’ve covered so far.
“Before the Great Depression, homeowners often had short-term or balloon mortgages that they would roll over or renegotiate at the end of the term. However, when there were runs on deposits and credit tightened, those homeowners had few opportunities for financing and were forced to sell their homes or enter foreclosure if they couldn’t pay off the remainder of the underlying loan.
“Since the Great Depression, our housing market has been built around a structure that involves the government. Entities such as the GSEs, FHA, and Ginnie Mae; the TBA market, which Senator Reed explored in his subcommittee; and the widely available 30-year fixed-rate, prepayable mortgage all rely on a government role to some extent.
“I firmly believe that we need to reform our housing finance system but I am concerned about the unintended consequences for our housing market and economy that could result if a government role is eliminated completely. Returning to the housing system we had before the Great Depression would not be an optimal outcome.
“Rural states like South Dakota could suffer from a lack of credit and higher prices. With low population densities and housing turnover rates, access to the national mortgage market could be constrained depending on where investors were willing to put their money.
“Without a government guarantee, interest rates would likely increase across the country but it is unclear by how much.
“When I’ve asked financial analysts and academics about this, the answers ranged from a quarter of a percent to 3 percent. At the high end, using today’s rates, that would mean a monthly payment on a $200,000 mortgage would increase from about $975 to more than $1,350.
“The 30-year fixed rate mortgage would also likely take a different form and require substantial down payments and higher interest rates, restricting the number of borrowers to a small number compared to today. If we use recently issued private label securities as a guide, the average down payment was as high as 40 percent according to testimony submitted for one of our previous hearings.
“Since there has been a government role in the mortgage market for close to 80 years, completely eliminating a government guarantee would result in significant changes to the current market. We have four witnesses who have written extensively on this topic and I expect that they will help us navigate the arguments for and against a government guarantee, as well as the benefits and risks of a guarantee in good and bad economic times. While there isn’t a silver bullet answer to solving our housing problems, this discussion will help us better understand how individual families and communities might be impacted.”