SPEAKERS CONTENTS INSERTS
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H.R. 607--THE HOMEOWNERS INSURANCE PROTECTION ACT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
MARCH 18, 1997
Printed for the use of the Committee on Banking and Financial Services
Serial No. 1059
HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
JAMES A. LEACH, Iowa, Chairman
BILL McCOLLUM, Florida, Vice Chairman
MARGE ROUKEMA, New Jersey
DOUG BEREUTER, Nebraska
RICHARD H. BAKER, Louisiana
Page 2 PREV PAGE TOP OF DOCRICK LAZIO, New York
SPENCER BACHUS, Alabama
MICHAEL N. CASTLE, Delaware
PETER T. KING, New York
TOM CAMPBELL, California
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
JACK METCALF, Washington
ROBERT W. NEY, Ohio
ROBERT L. EHRLICH Jr., Maryland
BOB BARR, Georgia
JON D. FOX, Pennsylvania
SUE W. KELLY, New York
RON PAUL, Texas
DAVE WELDON, Florida
JIM RYUN, Kansas
MERRILL COOK, Utah
VINCE SNOWBARGER, Kansas
BOB RILEY, Alabama
RICK HILL, Montana
PETE SESSIONS, Texas
STEVEN C. LaTOURETTE, Ohio
HENRY B. GONZALEZ, Texas
JOHN J. LaFALCE, New York
Page 3 PREV PAGE TOP OF DOCBRUCE F. VENTO, Minnesota
CHARLES E. SCHUMER, New York
BARNEY FRANK, Massachusetts
PAUL E. KANJORSKI, Pennsylvania
JOSEPH P. KENNEDY II, Massachusetts
FLOYD H. FLAKE, New York
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
LUCILLE ROYBAL-ALLARD, California
THOMAS M. BARRETT, Wisconsin
NYDIA M. VELAZQUEZ, New York
MELVIN L. WATT, North Carolina
MAURICE D. HINCHEY, New York
GARY L. ACKERMAN, New York
KEN BENTSEN, Texas
JESSE L. JACKSON Jr., Illinois
CYNTHIA A. McKINNEY, Georgia
CAROLYN C. KILPATRICK, Michigan
JAMES H. MALONEY, Connecticut
DARLENE HOOLEY, Oregon
JULIA M. CARSON, Indiana
BERNARD SANDERS, Vermont
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Hearing held on:
March 18, 1997
March 18, 1997
Tuesday, March 18, 1997
Hansen, Hon. James V., a Representative in Congress from the State of Utah
Kennedy, Hon. Joseph P. II, a Representative in Congress from the State of New York
Waters, Hon Maxine, a Representative in Congress from the State of California
Lacy, William, Chairman and CEO, Mortgage Guaranty Insurance Corporation, on behalf of the Mortgage Insurance Companies of America
Logan, Ann, Executive Vice President and Chief Credit Officer, Federal National Mortgage Association
McCord, Ron, President, American Mortgage and Investment Company, President, the Mortgage Bankers Association
Meier, Michelle, Counsel for Government Affairs, Consumers Union
Saunders, Margot, National Consumer Law Center
Stamper, Michael, Executive Vice President, Federal Home Loan Mortgage Corporation
Page 5 PREV PAGE TOP OF DOCPrepared statements:
Leach, Hon. James A.
Gonzalez, Hon. Henry B.
Hansen, Hon. James V.
Kennedy, Hon. Joseph P. II
Lazio, Hon. Rick
Vento, Hon. Bruce F.
Waters, Hon. Maxine
Lacy, William H.
Stamper, Michael K.
Additional Material Submitted for the Record
Hopper, Robert R., written statement
Kulick, Bob, President, California Association of Realtors, written statement
McDonnell, Brian L., President and CEO, Navy Federal Credit Union, written statement
America's Community Bankers, two written statements
Consumer Bankers Association, written statement
Page 6 PREV PAGE TOP OF DOC Consumer Mortgage Coalition, written statement
National Association of Realtors, written statement
H.R. 607, THE HOMEOWNERS INSURANCE PROTECTION ACT
TUESDAY, MARCH 18, 1997
House of Representatives,
Committee on Banking and Financial Services,
The committee met, pursuant to notice, at 1:07 p.m., at 2128 Rayburn House Office Building, Hon. James A. Leach [chairman of the committee] presiding.
Present: Chairman Leach, Representatives Roukema, Lazio, Bachus, Castle, Fox, Kelly, Paul, Weldon, Ryun, Cook, Snowbarger, Riley, Hill, Gonzalez, LaFalce, Vento, Frank, Kennedy, Waters, Maloney, Roybal-Allard, Barrett, Watt, Bentsen, Kilpatrick, and Hooley.
Chairman LEACH. The hearing will come to order.
Today, the Committee on Banking and Financial Services will hold a hearing on H.R. 607, the Homeowners Insurance Protection Act, introduced by our distinguished colleague, the gentleman from Utah, Congressman Jim Hansen.
The committee may also consider its views on the Administration's budget proposal for fiscal year 1998.
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I want to welcome our first panel of witnesses, which include Representatives Hansen, Joe Kennedy, and Maxine Waters of this committee, and to thank them for their interest in this important legislation.
In particular, I would like to commend Congressman Hansen for introducing H.R. 607. This legislation provides new consumer disclosure concerning a homeowner's right to cancel private mortgage insurance, or PMI.
House Resolution 607 has its genesis in Mr. Hansen's own experience as a homeowner, whereupon he was unable to terminate PMI once his mortgage had been substantially paid down.
His experience is one that many other homeowners have shared, and the committee is grateful for his leadership on this issue.
Over the last 30 years, the mortgage financial markets have evolved with innovative products that leverage private sector resources in a manner that facilitates and expands affordable home ownership opportunities.
As we review H.R. 607, we must be mindful that mortgage insurance is a key component of America's home ownership strategy.
Without mortgage insurance, potential homeowners would be required to pay substantial and significant down payments for the purchase of a new home.
Page 8 PREV PAGE TOP OF DOC The ability to save the money needed to meet a 5-, or 10-percent down payment has often stood as a roadblock preventing many families from purchasing a home.
Today, through innovative mortgage insurance products, potential homeowners are now able to acquire new homes with down payments as low as 3-, to 5-percent, thus significantly expanding home ownership opportunities to many families.
While we in Congress appreciate the private sector's innovation and ability to leverage the resources of the capital markets, we must be mindful to balance on one hand the financial market's need for reasonable protection against losses from default and non-payments with the need to protect consumers from unnecessary insurance cost.
Many mortgage investors presently allow a borrower to cancel insurance after certain guidelines are met. Those guidelines may include, among other things, that the homeowner's equity is equal to or greater than 20 percent of the value of the house and that the homeowner has a responsible payment history.
Given that there are hundreds of investors, it is safe to assume that there exist hundreds of insurance cancellation guidelines, some of which may provide confusion and uncertainty to homeowners.
In addition, most homeowners are either, one: unaware that their investor may allow them to cancel mortgage insurance or, two: unsure or confused about the criteria that is applied for cancellation.
Page 9 PREV PAGE TOP OF DOC House Resolution 607 does not intend to replicate or mandate investor guidelines for cancellation. Instead, the intent of the legislation is to ensure reasonable disclosure and certainty that homeowners may terminate their obligation to pay private mortgage insurance when specific criteria established by the mortgage investor are met.
The savings to the borrower in terminating their obligation to pay mortgage insurance can range from $300 to more than $900 a year.
America has the most efficient and competitive capital markets in the world, unmatched in the home purchase arena. The extent of competition to provide credit is the principal consumer protection, but a compelling case can be made that the home buyer can be subject to unnecessarily burdensome insurance payments in certain circumstances, hence the appropriateness of this homeowner protection legislation.
It is possible, as this bill moves to committee markup, that we may consider amendments requiring mandatory cancellation of PMI at a particular point in the mortgage, provided that payments are current and the loan is in good standing.
Today's hearing will allow Members an opportunity to discuss the issues that are involved in H.R. 607 with industry and consumer groups and to prepare for the markup that is scheduled for Thursday, March 20th, at 1:30 p.m.
At this time, I would like to recognize the distinguished Ranking Member present, Mr. LaFalce.
Page 10 PREV PAGE TOP OF DOC [The prepared statement of Hon. James A. Leach can be found on page xx in the appendix.]
Mr. LAFALCE. Mr. Chairman, I thank you very much for convening today's hearing on the issue of termination of borrower-paid private mortgage insurance.
I, too, would like to extend a special welcome to our House colleagues who are testifying before us today.
The issue of whether private mortgage insurance should be canceled and at what point cancellation should be permitted is an important policy question.
It is possible that hundreds of thousands of mortgage borrowers are paying unnecessary monthly premiums for mortgage insurance, long after they have exceeded the loan-to-value requirements that necessitated the insurance and long after they have posed any real or actuarial risk of loan default.
These payments cannot really be justified and should no longer be permitted.
I commend Mr. Hansen for bringing this issue to Congress' attention and also Mr. Kennedy and Baker for cosponsoring the legislation.
I also commend representatives of consumer groups and the mortgage lending, servicing, and insurance industries for their efforts to achieve a compromise solution.
Page 11 PREV PAGE TOP OF DOC Mr. Chairman, the need to disclose to borrowers the terms under which mortgage insurance can be canceled reflects in many respects the problems of mortgage servicing transfers that our committee addressed in 1990.
It was in response to my own experience as a consumer, much like Mr. Hansen's, that I introduced the first mortgage servicing transfer bill in 1988.
At that time, I had the able assistance of my housing counsel, Mr. Jonathan Miller, who now serves as Mr. Kennedy's housing counsel, and I hope you have at least equal success.
At that time, it was difficult or impossible to get adequate information about the company acquiring servicing rights for a mortgage, the details of any changes in servicing requirements, or the status of escrow funds.
Congress provided consumers with full disclosure and protections against unnecessary fees, protections against adverse credit ratings, and misuse of escrow funds.
I think we might need comparable protections in this legislation. H.R. 607 is a step in the right direction, to be sure. I am concerned it may mislead consumers by disclosing a right to cancel PMI if that right, in fact, does not exist.
I understand that several alternative proposals are under discussion that might provide those protections, better define consumer rights, and I look forward to working with all the gentlemen at the table to try to best resolve this issue.
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Chairman LEACH. I thank the distinguished gentleman.
Does anyone else wish to make an opening statement?
Mr. GONZALEZ. Thank you, Mr. Chairman.
Well, of course, mortgage insurance is very good and an excellent thing that allows people to buy homes. It enables them to, with a low down payment, make home ownership affordable, as we all know.
I am old enough to remember the era in which the Great Depression flagellated our country and the repossessions, the families that I saw thrown out, are an indelible memory. Mortgage insurance, to me, is a very sacred thing, and as I said before, it allows people to buy a home that otherwise could not.
However, when homeowners pay for insurance that they do not need, I believe they are being victimized.
The rule of thumb has been that, when you have achieved 20 percent equity in a home, the mortgage owner is fully protected against default, and mortgage insurance can safely be canceled.
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Unfortunately, many borrowers today are being charged for mortgage insurance that they do not need, but as Congressman Hansen discovered, canceling a policy that is not needed can be a long and a very frustrating process. So, obviously, reform is needed.
We have the opportunity in this legislation to establish some important principles.
First, the principle of the right to cancel unnecessary mortgage insurance must be properly and clearly established.
Second, clear disclosure of a borrower's right to cancel ought to be made at the outset.
Third, mortgage insurance ought to be automatically canceled at the half-life of a loan, and fourth, we should lay out clear procedures for cancellation when the borrower has at least 20 percent equity and a good payment record.
What we want to do here is to maintain mortgage insurance so that it will remain the indispensable tool that it is and has been in making low down payment loans possible.
We also want to clean up the situation that today causes too many borrowers to pay for insurance they do not need and that frustrates too many when they seek to cancel policies that they do not need.
I certainly look forward to working with my colleagues to develop this bill.
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Thank you, Mr. Chairman.
[The prepared statement of Hon. Henry Gonzalez can be found on page XX in the appendix.]
Chairman LEACH. Thank you very much, Mr. Gonzalez.
Is there anyone else?
Mr. VENTO. Mr. Chairman, just briefly.
Chairman LEACH. Yes, Mr. Vento.
Mr. VENTO. I thank you, Mr. Chairman, for holding the hearing.
I appreciate the process and the fact that our witnesses are responding to short notice to come before us and discuss the disclosure of private mortgage insurance and termination rights of borrowers with regard to private mortgage insurance.
As is typical of the mortgage process, there is nothing simple about proposals before us nor the laws that they would amend.
Perhaps the best thing about today's hearing and the legislative options we have before us as Members of Congress is that it appears that everyone is for the consumer getting better information and the ability to utilize that information to stop paying premiums for a product they no longer need to qualify for credit.
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Congress needs to not only disclose an opportunity to consumers but also assure that that opportunity can be exercised. Disclosure of cancellation of policies without a right to cancel is a hollow disclosure, indeed, and one that would surely come back to haunt us.
At issue are concerns regarding possible automatic and/or retroactive application of changes and probable market responses to such changes in law, both positive and negative.
Among other issues such as annual notices of statutory and/or actual damages and what factors can be used to determine an 80 percent loan-to-value or, for that matter, any loan-to-value after origination, any percentage of loan-to-value.
What we, of course, must be mindful of throughout this ''fast-track'' process in law is the law of unintended consequences.
We must be certain, as certain as we can be certain, that any changes we propose, or that others will propose will not, by the virtue of these requirements or the rigid placement in the statute, cause increases in everyone's mortgage costs that far and away exceed savings from another narrow class of borrowers who reach these LTVs that would allow them to terminate their PMI benefits.
There still would be changes that would virtually eliminate the opportunity for people with the lower down payments to buy homes.
After all, the private mortgage insurance is a bona fide means to buffer risk that has a proven track record, a successful track record, of achieving home ownership.
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Mr. Chairman, I have a number of questions. I look forward to listening to our witnesses. I want to credit especially Congressman Jim Hansen for his work and his cosponsors on this important measure.
[The prepared statement of Hon. Bruce Vento can be found on page xx in the appendix.]
Chairman LEACH. Thank you, Mr. Vento.
Are there other Members that wish to be heard?
Mr. LAZIO. Mr. Chairman, I have a statement that I would ask to be included in the record.
Chairman LEACH. Without objection.
[The prepared statement of Hon. Rick Lazio can be found on page XX in the appendix.]
Mr. LAZIO. It is exceptionally important for us to protect this area of the marketplace. Before we had private insurance, the transactional barrier of having large down payments kept hundreds of thousands, if not millions, of Americans away from the dream of home ownership.
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At the same time, there is a simple issue of fairness here, and disclosure goes a long way in ensuring that we have the ability of consumers to understand their option of cancellation once the debt-to-equity point is resolved.
I want to commend my good friend, the gentleman from Utah, Mr. Hansen, for having introduced this bill, having written it, and having the vision to move forward to deal with it, and of course, my colleague and friend, Mr. Kennedy, from Massachusetts.
I yield back the balance of my time.
Chairman LEACH. Before proceeding, let me just say, at some point in the afternoon, there is a possibility that we might interrupt proceedings for the purpose of establishing a quorum to consider the budget views, and I will consult with the Minority if we want to move in that direction, or if there are insufficient Members present, we might put off the budget view considerations until Thursday.
Mr. FRANK. With conflicting schedules, could we have maybe like a 5-or 6-minute notice if you are going to get to the budget views? Some of us may have to go elsewhere. I mean, I would like to be here for that.
Chairman LEACH. I will let you know.
Mr. FRANK. Yes, a 5-minute notice? Thank you.
Page 18 PREV PAGE TOP OF DOC Chairman LEACH. The gentleman's staff has notified the chair that he may have an amendment.
Mr. KENNEDY. Mr. Chairman.
Chairman LEACH. Mr. Kennedy.
Mr. KENNEDY. Just on that procedure, I just had a question, because this came up in the veterans hearing the other day.
Is this the proposed budget from the entire Banking Committee that would go then to determine our 602(b) number for the purposes of Budget Committee allocating, then to the Appropriations Committee?
Chairman LEACH. Let me respond briefly.
This is not that procedure.
What is at issue here is that, in all prior congresses or in recent prior congresses, the committee has sent to the Budget Committee its views on the President's budget.
Heretofore, it has been one that has been done without formal committee action in all committees of the Congress. The Parliamentarian and the leadership have decided it should now come before the committee for approval.
Page 19 PREV PAGE TOP OF DOC We have circulated Majority views to the Minority in the last week. The Minority has come up with an alternative statement, and it would be the intent of the chair to submit both views and any individual supplementary or differing views that Members might want to present.
It is also--it had been somewhat the hope of the chair that there would not be an amendment process. On the other hand, it is the right of any Member to attempt to amend the views, and the chair has been noticed that Mr. Frank may have an amendment to the budget views that he may wish to proceed with.
Mr. KENNEDY. This is to comment on the budget that----
Chairman LEACH. The President's budget, and it is commentary rather than a specific binding perspective, that is correct.
Mr. KENNEDY. Thank you, Mr. Chairman.
Chairman LEACH. If there are no other Members seeking to make opening statements, the chair would ask unanimous consent that the written testimony of the witnesses be included in the hearing record. Hearing no objection, it is so ordered.
I would like, first, then, to turn to Congressman Hansen, who is not only the sponsor of the bill before us today but, I think, universally, or at least in this body, considered one of the most decent and thoughtful Members of Congress, and we welcome you, Jim.
Please proceed in any manner you wish.
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STATEMENT OF HON. JAMES HANSEN, A REPRESENTATIVE IN CONGRESS FROM THE FIRST DISTRICT OF UTAH
Mr. HANSEN. Well, thank you, Mr. Chairman. I do appreciate all the help you have given us on this piece of legislation--Mr. Kennedy and Mr. Cook, Mr. Baker, others who have worked on this legislation.
Mr. Chairman, I would like to point out what, really, PMI is.
I do not think a lot of people realize what a blessing PMI has been to a lot of folks in this country, that with PMI they are able to get a mortgage loan. Who is it that gets this loan?
It is interesting. It is the boy out of school or the blue-collar worker, who upon closing the loan, is presented a stack of papers knee high, and who is so grateful to get it, would kiss the shoes of the loan officer if that would help.
He signs every paper. Similar to millions of others. I doubt if one percent of the people in America understand what they are signing. All of these pieces of paper, of small print. But the young man is content in knowing that he has a loan, thus he signs all the papers and leaves.
He is interested in taking the keys, walking to the house, and saying ''I finally have got a place to call my own for my wife and my baby,'' and other such things. However, as time goes on, he starts realizing, ''What is this I am paying for on my annual statement?'' The annual statement states what his principal is, what he has paid in interest, what his property tax is, and then there is another thing on the statement that says what he has paid in PMI. After reviewing the statement he starts wondering ''What is PMI?'', and so, he calls up his mortgage services and asks ''What is PMI?'' and they say, ''Well, this is private mortgage insurance which is needed because you did not have a 20 percent down payment,'' and he says, ''Well, when I get down to the 80 percent loan-to-value, is it OK if I take it off?'' However this is hardly ever done. Many people are never able to take it off.
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Well, I had a similar experience to that. When I came back to Congress 17 years ago, I bought a little condo over in Crystal City. I did not care where it was. All I wanted was a place to turn the key and call home for the days I was in Washington. But being the tightwad that I am, I started looking at my annual tax statement to see what I was paying for. After reviewing my annual statement I called my mortgage servicer and asked him what PMI is and what does it take to get rid of it? I was told that all I had to do was pay $4,200 to cancel it.
So, I paid them that. Well, they say ''We are not sure we came up with the right figure,'' and so, they hassled me some more. And they told me that I needed to pay more. All I wanted to know was how I could take it off.
Next thing it turns out, they wanted an appraisal on my condo. So I called an attorney who said he would do the appraisal. He got the appraisal that they wanted. However, later they told me it was not valued because it was on the wrong form, and that I would have to get another appraisal. So, I had another one done.
So, then, the next thing they told me was that I had rented it out, and thus was not eligible to cancel. I have never rented it out, but I still had to prove that to them.
So, I started telling this story around America, and about every time I would do that, people would come up from the audience, whether they were well-to-do or not, and say, ''Gee, I had the same experience. How do you get rid of this?''
So, what we find, Mr. Chairman, is that a lot of mortgage servicers are hassling the American public, and those who can really least afford it are those who are on it.
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Now, when we introduced this legislation, all of a sudden attorneys started calling me from all over America wanting to do class action suits, and some did and were very successful at it. We have got hundreds of letters that would bore you to death from people that have paid all the way down to the last 10 percentile and are still paying PMI.
We have situations where very cavalier letters have gone from lenders to the homeowners telling them that they would not let them off PMI. So, all over America we have hundreds of thousands of people overinsured.
Now, Mr. Chairman, I find it interesting that it is always another person's fault. The originator points to the mortgage servicer, or the secondary market, and the secondary market points to the appraiser, and on down the line. Who is really to blame for this?
I had some mortgage bankers in to see me the other day and who said they could not afford to do this. Well, what are we really asking them to do?
At the time the loan is originated, we are asking them to tell the person what PMI is in an understandable manner. We are asking mortgage servicers to state to the homeowners on their annual statements that private mortgage insurance may be cancelled.
A lot of servicers say to me, ''Oh, there is no way we can do that,'' and I say, ''Why? You can put on your annual statement 'Happy Birthday, Jim Hansen.' You can put on there 'Have a Merry Christmas, Jim Hansen.' You can put on there 'Vote on the Second Tuesday in November'.''
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Why can't you put in there something regarding that they can get off of PMI?
Now, Mr. Chairman, I know a lot of people have said, ''Well, you do not go far enough,'' and I know, by the time it goes through this committee and the Senate committee where we have testified, it may not look like the same piece of legislation, and I surely understand that.
On the other hand, we want to raise the awareness of what people can see, that they know that there is a possibility that they can get off of PMI.
A lot of folks have talked about an automatic trigger. The distinguished Senator from New York, Al D'Amato, who I have great respect and admiration for, has an automatic trigger on his bill.
His trigger is at 80 percent.
Well, in my past life, I have done everything there is in insurance, from claims, actuary, underwriting, agent, the whole nine yards. If I was a mortgage insurer I would just up the premium, and I think that is what you are going to get with an automatic trigger.
So, if we put an automatic trigger at 80 percent, I can tell you know what is going to happen, you are just going to have mortgage insurers raising the rates on everybody else. However, in some cases I believe that it should be automatically cancelled. For example, people who have been good on their payments and have at least an 80 percent LTV. Another issue that always comes up is how do you value a home to deternine the LTV? The answer is an appraisal.
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Why is an appraisal necessary? Can anybody in here tell me a place in America where houses have really depreciated much over the last 20 years?
I mean, it is an anomaly and rarely, rarely would it occur. However, if market values decrease, or an area is hit hard economically, then I could understand a full appraisal being done.
I almost think, and I say respectfully to the committee, in my mind the appraisal issue is not an issue.
As you know, when you get your tax notice every year from the county, it has on it a market value, and having been a past legislator for a long time and having done a lot with that, most of those are about 80 percent of the market value.
I would think a 3 year average of those should be sufficient, but I guess it is not my place to get into that, but I would really caution the committee as you look into automatic triggers, that you assure that premiums don't rise.
Some people have mentioned a half-life trigger. This makes a lot of sense to me.
We don't have a problem with many of these things. I fully know that it would be in your hands and the hands of this committee.
We can draw a chart connecting the originator and the servicer to the secondary market, to the appraisers, to the insurance company, and we can all
Page 25 PREV PAGE TOP OF DOCsee that they are involved in the process. However it comes down to it, they will blame somebody else.
Frankly, as I have looked at this in some detail I have found out that many bankers are servicing literally thousands of mortgages paying PMI, and I have heard the average PMI payment is $37. If you times that $37 by 300,000 you have a great deal of money.
When you can get a little bit of money from a lot of people, that is the way to make big money in this life.
A lot of servicers say, ''Well, gee, I just put it in escrow and then I turn it over to the bank.'' How would you like to have a few million dollars in escrow when you have to make only an annual payment?
So, Mr. Chairman, I just wanted to bring it to your attention.
I know, from the opening statements, that you folks are way ahead of me on a lot of these particular issues, but I really feel this is a good piece of consumer legislation that we should have done a long time ago, and I would honestly hope that the industry would stand up, square their shoulders, and take care of this themselves. I think they should have corrected this problem a long time ago.
I used to be chairman of the insurance committee in the State of Utah. I even did that when I was Speaker of the House.
Page 26 PREV PAGE TOP OF DOC I still remember going to a lot of these hearings where the presidents of large insurance companies would stand up. I always appreciated the comments of Mr. Ed Rust, who is the president of the biggest casualty insurance company in the world; he used to state that ''If we do not do it, the government will,'' and it has now come to the point that I think the Federal Government will have to address this issue. However, if we go too far, I think we are going to create more problems than we had originally intended to do.
Now we see the Navy Credit Union has taken it upon themselves to address this issue. They automatically cancel PMI at 80 percent LTV. Some of the rules enforced by the secondary market are now coming up with some very good ideas to do this.
I think the industry is getting the message. I just hope we do not hit them so hard that we take over their work, and that is the way we tried to craft this legislation.
Thank you, Mr. Chairman.
[The prepared statement of Hon. James Hansen can be found on page XX in the appendix.]
Chairman LEACH. Thank you very much.
Before turning to Mr. Kennedy, I just have to tell you I am reminded of a famous quote of Henry David Thoreau that went to the effect of, ''How do I sign off of all these things I signed on to?''
We welcome Mr. Kennedy, who is one of the most thoughtful Members of this committee and committed Members of Congress.
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STATEMENT OF HON. JOSEPH KENNEDY II,
A REPRESENTATIVE IN CONGRESS FROM THE
EIGHTH DISTRICT OF MASSACHUSETTS
Mr. KENNEDY. Did the recorder get that introduction?
Mr. Chairman, I very much want to thank you for organizing this hearing today. Most particularly, I want to thank Jim Hansen for his leadership.
We say these words around here all the time about particular Members of Congress whenever we are trying to get something done, but in this case, it really is true.
Jim Hansen has been pushing this issue for years. It went nowhere. He kept at it. He kept writing letters to all the Members of our committee, telling us of this ridiculous thing called private mortgage insurance that was overcharging the consumer. It really is singlehandedly his perseverance that I think has enabled this issue to come to the fore and for us to begin to struggle with it. I think all of us and consumers across this country really owe Jim Hansen a deep debt of gratitude for the efforts that he has made, and it really is just a single-handed effort.
So, Jim, I just want to thank you for bringing this to our attention, and I thank the Chairman for scheduling this hearing. I think we will take rather quick action, I would hope, on the issue.
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It is interesting that, once this thing sort of came under the light of day, all of a sudden everybody's got a different bill and got a different opinion about how we ought to change it, so that they hope that their name can possibly be associated with yours when the day is done, Jim.
So, I hope that you are successful, and I want to thank both Michelle Meier as well as Margot Saunders. Michelle, from the Consumers Union, has been working with this committee for many years, as has Margot, from the National Consumers Law Center. I commend them for the efforts that they have made.
I would just make a couple of very brief observations.
This morning, I was driving from my home in Boston with a couple of folks from my staff. I said, ''Listen, I am going to be doing something on private mortgage insurance, what do you think?'' I got these blank stares from people like, ''What the heck is private mortgage insurance?''
Well, it turned out, by the start of this committee, Jonathan Miller, who John LaFalce had mentioned, had checked with both of them. It turned out both of them were paying private mortgage insurance and had no idea what it was.
So, I think this is an indication, in these complex kinds of transactions that involve home ownership these days, that some of these charges can be just lost in the mix. This is a significant charge.
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The young fellow who works for me in my Boston office is paying $66 a month. You add up all those $66 a month worth of charges, according to an estimate by the Consumers Union and others, we are paying over $200 million in excess fees on this issue alone.
That is not total fees. That is just the excesses over and above the 20 percent.
I think there are a couple of issues that need to be thought through, and I think Mr. Hansen has shown a great deal of flexibility.
We started off with a pure disclosure bill. When we look into it a little bit deeper, it sounds like disclosure in and of itself is probably not enough. We have to make sure that there is a right by the consumer to cancel this insurance once they have hit the 20 percent level.
There are other discussions as to whether or not that right to cancel should be only into the future or whether or not it should be a look-back.
It does not seem to me to make a lot of sense that we are not going to take care of people that are above 20 percent today and yet say that they do not have a right to cancel.
Now, Freddie and Fannie have taken care and provide this as a matter of right in terms of the loans that they buy, but it is very difficult, as Congressman Hansen has mentioned, for people to actually get through the process of being able to take care of this issue.
Even though Fannie and Freddie provide this as a right, it does not ensure that the homeowner actually is able to achieve it.
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So, I think, Mr. Chairman, if we are able to work together the way that Mr. Hansen has, that we can fashion a bill that, in fact, gets us to the point where we go a long way toward eliminating $200 million a year worth of over-fees. I think even the banking industry, including the community bankers, they support the kind of legislation that we are talking about.
So, I thank you again, Mr. Chairman, and thank Mr. Hansen again for his leadership and Maxine Waters for hers, as well.
[The prepared statement of Hon. Joseph Kennedy II can be found on page XX in the appendix.]
Chairman LEACH. Well, thank you, Mr. Kennedy.
Let me notify the committee that Ms. Waters has explained that she might be a bit late, she is at another committee at the moment, and she may be coming shortly, but at this point, we will entertain questions of the two witnesses.
Mrs. ROUKEMA. No questions.
Chairman LEACH. Does anyone wish to ask any questions on the Minority side?
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Chairman LEACH. Majority?
Dr. PAUL. Thank you, Mr. Chairman.
Obviously, I think everybody is sympathetic with the goals of this legislation. Nobody likes to see the consumer being ripped off and charged fees that seem to be unnecessary.
I do have a few concerns, and I would like to express those, and maybe you can help me out, and they really are in the area of ethics, because as I returned to Congress again, I made some promises in my campaign, and I promised not to ever vote to raise taxes, and that is not too difficult to uphold, but I have also promised that I would never increase regulations, you know, and create more Federal forms to be filled out, and it looks like we will have some settlement forms and annual forms and automatic forms, and it looks like this is going to fall into the area of more Federal regulation. So, this does concern me.
Also, I made an absolute commitment to doing my very best to interpret our Constitution, that if I do not see the precise authority to do something, I do not want to vote for it. So far I cannot find in our Constitution the precise clause that says that we have the authority to interfere in a voluntary contract, and this is a concern to me, and I have not totally given up on the marketplace either.
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Consumers have been put into some difficult positions with their mortgage rates, and we did not require the Congress to come to their rescue when interest rates when from 11-, down to 7- or 6-percent, and they protected their interests by going out and renegotiating a contract.
So, again, I am very sympathetic with what we want to do here, but I have trouble with this requirement to rewrite, in essence, a contract which should be a voluntary contract and may be very intrastate, within a State, and how I can justify this.
Mr. HANSEN. May I respond?
Chairman LEACH. Mr. Hansen, yes.
Mr. HANSEN. I really do not take issue with most of the things you have said here. Frankly, I agree with you on regulation. I think I find over-regulation one of the biggest problems the Federal Government is involved with.
What I think I have done, Representative, is create a fair bill for both the homeowner and industry that really adds nothing that is very burdensome.
You, probably, like many of us who have gone through a few property closings, have had to read dozens and dozens of forms, as well as fill them out.
All we are asking is maybe one form be increased to provide the person a full understanding of PMI.
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I hardly look at that as regulation. It is the right thing to do to provide an opportunity to get a good handle on what he is doing, and how much he is going to pay out. My legislation informs people what PMI is and what it pays for. All that is needed is a little form that says, ''By the way, Mr. Homeowner--or potential homeowner--here is something that you need to pay in order to get this loan, it is really a blessing to you at this point, however when you get down to a point, you have a good possibility of taking this off.'' I think that probably would not be over-regulation.
The only other thing we are asking for is, on a homeowners' annual statement, the servicer provide information about PMI and where the homeowner stands on his loan, what his LTV is, and at what point the homeowner won't need PMI anymore.
I do not think I am in a position to refer to whether it is Constitutional or not, but I guess it would be caught up in the whole idea of the common good. When does a legislative body get involved?
When we see there is an inequity, or a discrepancy, or some type of problem that is unfair or discriminatory, and as I see it, PMI is kind of discriminatory against the person who can least afford it, who finds himself in this position where he happens to be in that bracket and he cannot get it off.
If he has made a good loan payment for all those years and has paid down to 80 percent LTV, I really think he is a better risk than the guy that walked in and paid 20 percent down. The first homeowner has shown he is a good risk.
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Yet, he is stuck paying PMI and has to jump through all these hurdles to cancel it and I think this is the point where the government can come in.
I agree with you, though. I do not want to put burdensome regulations on the banking industry. It is already a heavily-regulated industry. I personally feel that they may have overlooked this point, and I will give them the benefit of the doubt of saying that.
Millions of dollars have been made, and it has been at the expense of people who cannot afford it, and I really do not think we are taking those things on, but I have to say I agree with you on the over-regulation point.
Chairman LEACH. Thank you, Dr. Paul.
Mr. LAFALCE. I have a few general questions that I will pose to either Jim or Joe.
Help fill me in on this phenomena of private mortgage insurance.
What percent of people who obtain mortgages get private mortgage insurance? Is it a requirement for approval of a mortgage, or are there anti-tying provisions that say the lending institution that takes the mortgage also provide the insurance?
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Can they insist upon the insurance as a condition of the mortgage?
In New York State, I think that private mortgage insurance is prohibited after a certain percentage. I think it is 75 percent. Is there any other State in the country that does this?
It is my understanding that your bill takes a federally preemptive approach, except for New York. Are we moving a little too fast?
I know, in mortgage servicing and the transfer of mortgage servicing, I started out without Federal preemption, and after a period of around 4 years, we wound up at Federal preemption. But we were, you know, convinced that at that point in time it would be good and would make a lot of sense, but to start off at Federal preemption, it concerns me a bit.
We might not know exactly what we are doing. Hopefully, we would before we passed it.
Who would care to comment on that raft of questions?
Mr. HANSEN. I would respond and say this. For one thing, unfortunately, the majority of potential homeowners are confused with the three kinds of insurance that they may be paying when they take out a mortgage.
One thing, of course the bank is going to insist upon--or the lender is going to insist upon--is homeowner's insurance. He is not going to take that risk if he does not have homeowner's insurance. A lot of people think that PMI is homeowner's insurance. It is not.
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Another type of insurance is title insurance. It is necessary and important. However, title insurance is the third type of insurance that is very confusing to millions of homeowners, as is PMI insurance. My staff tells me that 54 percent of the insured loans in 1996 were privately insured. That is quite a huge amount of people who pay PMI.
Mr. LAFALCE. I wonder what is actuarially justified? That seems phenomenally high, too.
Mr. KENNEDY. If I might just interject John, you have been one of the persons who has helped the banking industry find a whole series of ways of allowing people to purchase homes in this country that do not meet the 20 percent requirement.
It is, as I am told, about a third of those mortgages do not reach the 20 percent requirement. They are required to put up private mortgage insurance.
What happens, then, is over a period of 1-, 2-, or 3-years, as in the case that Congressman Hansen outlined, the value of the home rises, and yet, the homeowner continues to pay the private mortgage insurance.
At this time, there is not any right by that mortgage holder to object to, in a reasonable fashion, the continuation of the private mortgage insurance.
Mr. LAFALCE. What I was trying to get a handle on, Joe, is to what extent are lenders insisting on private mortgage insurance, because it is an easy profit as opposed to necessary, given the creditworthiness of the borrower, and I just do not know.
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Mr. KENNEDY. Well, Fannie and Freddie require it, and that is probably 60 percent of the market, John.
I am told there are about four States where consumers have the right to cancel. I think this is a significant enough problem for us to be able to go ahead--provide a right to----
Mr. LAFALCE. Now, who provides this insurance? Is it some entity independent of the lender, or can it be an arm of the lender, also? Can it be a subsidiary of the lender, an affiliate of the lender?
Mr. HANSEN. Yes.
Mr. LAFALCE. It can be.
Mr. KENNEDY. I don't know if it can be----
Mr. HANSEN. It is independent of the lender.
Mr. LAFALCE. Must it be independent?
Mr. HANSEN. An insurance company will provide that, not the kind of insurance company you think of a State Farm or a Metro Life or something, but they will provide that, and the servicer of the loan----
Page 38 PREV PAGE TOP OF DOC Mr. LAFALCE. I am just wondering, though----
Mr. HANSEN.----Gets the money, pays the bills in escrow, and the secondary market, and then, of course, pays the private mortgage insurance company.
Mr. KENNEDY. There is a whole industry of private mortgage insurers that are not necessarily affiliated with a particular bank.
Mr. LAFALCE. I was surprised at the amount that your staff assistants--maybe I should not have been--you know, 60-some dollars a month. I am wondering what the usual percentage is of the mortgage payment that is attributable to private mortgage insurance?
I mean is he paying $500 a month and $60 for PMI? Is it $1,000? Sixty dollars just struck me as----
Mr. HANSEN. It is predicated on the balance of the loan.
Mr. LAFALCE. Yes.
Mr. HANSEN. The higher the loan, the higher the PMI.
Mr. LAFALCE. Yes.
Mr. HANSEN. The higher the risk. But the second part of your question----
Page 39 PREV PAGE TOP OF DOC Mr. LAFALCE. The higher the loan is not necessarily the higher the risk. That is one of the problems.
Mr. HANSEN. That seems to be the case, but as you look at it, they are corresponding, the amount of the premium up to the----
Mr. KENNEDY. It is going to be in aggregate dollars, John.
If you go out and buy a house in Chevy Chase for a million dollars and you are still below the 20 percent requirement, the amount of dollars, the aggregate dollars that you potentially are able to lose, is going to be significantly higher.
So, if we had to make up the differential in terms of private mortgage insurance, the risk is going to be----
Mr. LAFALCE. Do we----
Mr. KENNEDY. I mean, the amount of dollars is going to be much greater.
Mr. LAFALCE. Do either our Majority or Minority staff have some memos that give us a lay of the land in this area?
I just wondered, Chairman Leach, do we have anything?
I think it would probably be helpful for us to better understand the industry dynamics.
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Mr. KENNEDY. I think the next panel of witnesses, John----
Mr. LAFALCE. They could answer those questions.
Mr. HANSEN. May I respond to the second part of the question, though, are we going too fast? Well, we have let this go on for years without addressing the problems with PMI. I think this should have been done 20 years ago.
I think we are now to the point that it should be done. I honestly feel we are behind the power curve on that.
Chairman LEACH. If there are no more questions, let me just restrain for a second.
Ms. Waters, would you rather submit your testimony?
Ms. WATERS. Mr. Chairman, I am sorry I am late, I was over on the Senate side, and so that you can move on with the committee, I will submit my testimony for the record. If there are any questions, I would be happy to answer them.
Chairman LEACH. Fair enough. Thank you.
Without objection, your full statement will be printed in today's hearing record.
If there are any comments you want to make related to your statement in answer to questions, please feel free to proceed.
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Ms. WATERS. Well, let me either help or harm. I am in support of the legislation that is being presented that would give notice to our consumers when they have paid into this mortgage insurance for a period of time.
As a matter of fact, if there is one thing that I could add, I think that it should be automatically canceled. I would not put another burden on the consumer.
I would make sure that the insurance is automatically canceled, so that the consumers would be relieved of having to pay additional insurance.
Chairman LEACH. Thank you.
[The prepared statement of Hon. Maxine Waters can be found on page XX in the appendix.]
Dr. WELDON. I thank the Chairman, and I supported this legislation last year, I believe you introduced it. The only question I have, and really, any of you can feel free to comment on it.
I think the language calls for notifying the homeowner every year about their status regarding this issue, and as I understand, the average is about 11 years before a homeowner has paid off 20 percent.
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I am just thinking about millions of loans and millions of letters going out every year to tell somebody that they are going to be able to pay off--they are going to be able to cancel in 5 years, 7 years, 9 years, and I am thinking about thousands of acres of trees being cut down.
Now, maybe in a State dependent on the logging industry, this is music to your ears, but could there be some sort of reasonable notification time period, like when they are within 2 years or 3 years?
Why notify every year when the average is 11 years? I mean, that just seems like a lot of letters that the industry is going to have to send out.
Mr. HANSEN. Congressman, this is how I would respond to that, and this is how we envision it. As you know, every person who is paying on a loan receives an annual statement that states the balance of the loan, how much has gone on principal, how much has gone on interest and how much was paid in property taxes. My legislation will make sure that the homeowner knows that he may cancel PMI at some time.
In fact, I am sure that many do this now. My bill would only add one little thing that would say, ''You have so many years until you are paid down.''
So, it is just an entry on a form that I am sure every American who has a loan is getting anyway, and I would think that would be relatively simple, because gee, they can put on there, ''Happy Birthday, Dr. Weldon'', and they can put on there--if you want to----
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Dr. WELDON. ''Congratulations on Your Reelection.''
Mr. HANSEN. Yes. I have got that on some of mine. I did not even know they knew I was a Member of Congress, and I have got that.
So, I really do not see this as a problem, but I do agree with you, if we had to send out a separate piece of paper on each loan with PMI, it would be a cumbersome thing.
All we are doing is trying to think of a way to expedite it, make it easy, just put it on your annual statement, and I think that would be very simple to do.
Dr. WELDON. Joe, did you have a comment?
Mr. KENNEDY. Doc, just very briefly, the 11 year stat that you are citing I think has more to do with the fact of how we pay interest in this country than it does with the actual valuation of the house.
In other words, somebody who is giving you that statistic is not taking into account that, over that 11 years, any of the money that had been paid toward the mortgage would have actually gone to its mortgage, that all of it would have gone toward the interest payments alone.
So, I think that that is really a misnomer. I think that, underneath it, the valuation of the house is going to go up so quickly, in most cases anyway, that this is only going to be a 1-, 2-, or 3-year process in the vast majority of cases across the country.
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Dr. WELDON. Thank you. I appreciate that.
I yield back the balance of my time.
Chairman LEACH. Yes, Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman.
I just wanted to ask one question that was motivated by Congresswoman Waters' comment.
I understand that the Senate bill actually has this automatic termination provision in it after payment of 20 percent of the value, or 20 percent of the principal of the outstanding loan.
It seems to me that, if you had that provision in the law, Mr. Paul's concern would be addressed in that it would eliminate the necessity of even putting a disclosure requirement at the closing, because it would be automatic, the termination would be automatic. I am wondering whether either Congressman Hansen or Congressman Kennedy have any negative or downside comments to make about Ms. Waters' suggestion that we have an automatic trigger?
Mr. KENNEDY. The automatic trigger is something that I actually favor.
I think the trouble with the Senate bill is that HUD has responsibility for coming up with any exemptions that they may deem necessary.
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My feeling is that there ought to be an automatic trigger mechanism.
Mr. Hansen suggested to me while we were sitting at the table that, if you simply took the appraised values that all of us get that own homes in this country, and recognized that they are generally well below the actual market value in most cases, and took a 3 year running average of that valuation, that might get you to a reasonable point where you could pull the trigger, but I think it is----
Mr. WATT. You mean the tax value? You are talking about tax value, not appraised value?
Mr. KENNEDY. Well, the appraised value by the tax guy, right?
Mr. WATT. The tax value. You are not talking about doing a separate appraisal.
Mr. KENNEDY. No. I am saying that is how you could beat the appraisal cost.
Mr. WATT. OK. I have got it.
Ms. WATERS. Let me just say if I can, Mr. Chairman, that the only thing that I would add to favoring automatic--and I am not trying to rewrite Mr. Hansen's bill--is this:
In States where you have automatic triggers, I would not want this legislation to preempt it if, in fact, this does not have it in the final analysis. That is the only caution I would have.
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Mr. HANSEN. I am really neutral on an automatic trigger. However, I do have a concern.
Number one, what if we got somebody who is very delinquent on their payments and they have not been making their payments on a regular basis?
Mr. WATT. Well, by definition, if they paid 20 percent of the principal on the loan, if they have not been foreclosed on by the time--by 11 years into the loan and they have paid 20 percent of the principal, they must be pretty--they must be doing something right.
Mr. HANSEN. I would agree with that, but there are some people who feel they have got a risky loan when the person is not prompt on their payments and they have to send them these dunning letters on occasion.
Well, to the insurance company, that looks like a big risk, just like a driver who drinks or has speeding tickets. He is a big risk. So, they want to be careful with that person.
I would be a little careful on legislating an automatic trigger. However, I am not really against one. I just hope it is well thought-out.
I would think with an automatic trigger you would find yourself in a position where a mortgage insuror would raise the premium on everybody else to take care of the deadbeats, similar to what happens throughout other parts of the insurance industry.
Mr. Kennedy talked about how do you come up with a no-risk LTV?? That is the biggest hassle that mortgage servicers use when they state that they don't have a value, or know what one would be.
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Mr. WATT. Let me just ask one other question.
I understand the point you are getting ready to make, but if the PMI insurance is actually terminated at that point, doesn't that eliminate the risk to the insurance company, because there is no PMI after that? It is the lender that has the risk.
So, the insurance company is not going to have any concern about canceling it after 20 percent of the mortgage is paid.
Mr. HANSEN. I would seriously doubt if the mortgage servicer would cancel PMI if they had someone who was delinquent on their payments.
Mr. WATT. Nobody is paying a premium after that 20 percent pay-down, as I understand it. What would be the basis for continuing insurance if nobody is paying the premium?
Mr. HANSEN. Well, I doubt if the person could get it canceled if he was not completely prompt on his payments, so he may have to continue paying PMI beyond the 80 percent LTV.
Servicers want people to pay PMI until the person shows a good record of making prompt payments and reaches at least an 80 percent LTV.
Mr. WATT. Thank you, Mr. Chairman.
Chairman LEACH. Mr. Hill.
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Mr. HILL. I would like to continue on that same line of questioning, because herein is where I see the problem with this whole area, and that is we are doing nothing here to change the risk.
In other words, the same number of foreclosures are going to occur and the same amount of costs are going to incur in those foreclosures whether people carry PMI insurance or they do not, or whether we require notification or we do not, or whether we require it be 80 percent or 50 percent.
So, the question is, who is going to bear the risk, and how is it going to get financed? That is the question.
I guess what I would like to do is take you through my logic here and have you respond to whether you agree or disagree with that, but if the risks are the same and the costs are going to be the same, all this is doing is adding two things.
One, it is shifting the risk from one to another and it is adding cost because it is adding an administrative burden.
So, it seems to me the consequence of that is going to be this, that if you do have an automatic trigger, it is going to raise the premiums for those people who are paying premiums for the first, let us say, 20 percent, the administrative costs are going to result in higher premiums. If we eliminate PMI insurance at, say, 80 percent, then that is going to raise interest rates from lenders, because they are going to be bearing that risk rather than the private mortgage insurance companies.
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So, how have we benefited consumers if the consequence of this will be higher premiums and higher interest rates?
Mr. KENNEDY. Mr. Hill, I think that the logic of your question is reasonable. The question about the conclusion is what this is all about.
It would be one thing if we were creating a massive insurance pool like Fannie or Freddie that would then provide a lower risk pool and a lower cost of private mortgage insurance for everyone who participated in that. That is not what goes on.
These are private companies that are continuing to charge the individual consumer a fee for a service that is no longer required by the mortgage condition, which really gets to Dr. Paul's question.
This is not adding new regulation. This is enforcing existing contracts that are already in place.
This is just saying, listen, the bank required a 20 percent down payment, the private mortgage insurer is fulfilling the requirement to attain that 20 percent down payment, and yet, once that 20 percent down payment has been achieved, the company is continuing to charge the consumer. So, I think it would be a mistake for us to charge consumers unwittingly for a service that they themselves, as individuals, have already met.
Mr. HILL. What you are in essence saying is that there is no risk once the 80 percent is achieved?
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Mr. KENNEDY. I am just saying that the risk those individuals may default should not be borne by those individuals that have attained the 20 percent ceiling on what was required for them to pay the mortgage insurance to begin with.
Mr. HILL. There are going to be fewer dollars of premium under this proposal. Is that correct?
Mr. KENNEDY. The dollars of premium that are required on an actuarial basis for the service that they are rendering should not be changed due to the fact that some consumers have achieved the level that was designated in order for them to no longer require the service.
What you are suggesting is a system of socialism for those that have essentially paid off their fair share, that we are going to hit up all the consumers, regardless of whether or not they have paid their fees, in order to subsidize those that have not. I just think that is wrong.
Mr. HILL. I guess my time is up. Thank you.
Chairman LEACH. Ms. Roybal-Allard.
Ms. ROYBAL-ALLARD. I would just like to raise one more concern with regard to the automatic termination.
There are some who are suggesting that you have an automatic termination but that the lender determine that threshold, and so, there is some concern that they may make it higher than the current industry standard of 80 percent.
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So, would you recommend, then, with the automatic termination, that the industry standard be maintained at 80 percent? Also, I think you already did mention that you would not support any preemption?
Ms. WATERS. That is right.
Ms. ROYBAL-ALLARD. So, like for California, it is at 75, for example.
Ms. WATERS. That is right. Yes, I would be very comfortable with that.
Let me just say that I think that, if the author of the legislation and others really were interested in looking at automatic cancellation or termination, whatever it would like to be called, there is some work to be done and some considerations to be made that fall in the category of the question that you are asking.
I am comfortable with the 80 percent, but I think that it would bear a bit more discussion and work to make sure that, number one, Mr. Hill's concerns are satisfied, because I believe that the amount, the risks, are so low to the private insurers. Based on the fact that, still, I think the predominant number of mortgages in this country are like 30 years, still, I mean, many people are paying for the length of that mortgage for this insurance, and I think that reduces the risks substantially to the insurers, and I think there is just tremendous profits made in this industry, and so, I would not be very much concerned about the question of risk and whether or not it would dictate that there be increases in interest and increases in the cost of insurance, and I would be comfortable with the 80 percent.
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Ms. ROYBAL-ALLARD. Thank you.
Chairman LEACH. Mr. Cook.
Mr. COOK. Yes. I want to add my voice to those that have commended Congressman Hansen for this very important piece of consumer legislation. I know you expressed some concern about the automatic cancellation, those that would add that to your legislation.
How significant is the idea that, or the problem that the premiums may really be increased if automatic cancellation becomes part of this legislation?
Mr. HANSEN. I think you would find yourself in the situation where some very bright person in the insurance industry will figure out what kind of profit they want, and to achieve it. There is no question PMI premiums will increase if you don't address the problems that may arise with automatic cancellation.
You look at your potential exposure and you go from there.
The gentlelady from California brought up the question of automatic. I know it has been floating around this committee and around Congress. Maybe we should have an automatic trigger that will cancel PMI regardless of any conditions at the half-life of the loan. I cannot see where there would be any risk to anybody at the half-life of a loan.
I think that the half-life would be a good start. However, an automatic trigger at 80 percent LTV is another question.
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The automatic trigger worries me, though, because I am afraid we are going to be carrying some deadbeats, and the mortgage industry will just increase the ante for everybody, and I don't think that is right, because the person who religiously makes his payment every month, who is very current, who is a very concerned and solvent individual, should not have to carry others. As I look at it, right now, if I was a banker or an underwriter in the secondary mortgage market, I probably would fight tooth and toenail not to let somebody that a mortgage servicer was always sending five late payment letters a week to, to cancel PMI.
Ms. WATERS. Will the gentleman yield?
Mr. HANSEN. If the purpose behind this is to pay, why are we doing this? PMI pays the mortgage holder, and it does not do a thing for the person other than to get him into a home with a low down payment.
Ms. WATERS. Will the gentleman yield?
If, theoretically, everybody who received their notices acted on them, would the same risks be incurred that you are concerned about?
Mr. HANSEN. No, I do not think so.
Mr. COOK. This is actually one of the follow-up questions I wanted to ask you, Congresswoman Waters. Assuming automatic cancellation does not become part of this legislation, what percentage of the people that have this insurance would not cancel it anyway with the notices?
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I mean aren't these mortgage-holders pretty sophisticated people?
Ms. WATERS. Yes.
Mr. COOK. They have purchased a house.
Ms. WATERS. Yes.
Mr. COOK. They have engaged in a major financial transaction.
Ms. WATERS. Yes. I think----
Mr. COOK. Are we really going to have that many different folks, you know, depending on whether it is automatic or not----
Ms. WATERS. Well, I think this is a good start, and I think this is the right thing to do.
Public policymakers should be concerned about consumers and their ability to stretch their dollar and to make their money work and not somehow--not to have access to their money because they simply do not know.
If we can clear that up for them, we should try and do that, and I think this is a beginning and a good way to at least start to get at this problem.
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Again, I would like to see automatic termination, because I think that is the real way to help consumers, but I think this is a good start.
Mr. HANSEN. Could I just add one thing, if I may? A lot of the questions--the question of Mr. Hill, Mr. Watt, Mr. Cook--a lot of these questions are for the second panel.
The industry is going to stand here in a minute, and they have got these statistics. They have got this information.
Ms. WATERS. Yes.
Mr. HANSEN. It is not that we are trying to get out of answering any questions, don't take it that way, but a lot of these questions should be addressed to the people who actually work in this business, who have this information, have the statistics, can tell you these things.
Mr. COOK. Instead of making them up.
Chairman LEACH. Thank you.
Let me just first say, Ms. Holley has been wanting recognition for quite a while, and I will be able to go to her next.
Page 56 PREV PAGE TOP OF DOC Mr. LaFalce has a question he wants to ask, but we have a distinguished panel to follow, and let me say to the committee, I will recognize first in the next panel those that have not asked questions of this panel, but Ms. Hooley, do you want to be recognized?
Ms. HOOLEY. I will wait for the next panel.
Chairman LEACH. You would prefer to do that?
Ms. HOOLEY. Yes.
Chairman LEACH. All right.
Mr. LAFALCE. Mr. Hansen, your bill requires disclosure of the ability to cancel if, in fact, the ability exists, correct?
Mr. HANSEN. Yes.
Mr. LAFALCE. All right.
Now, one of the problems I have with just doing that is, if I get a mortgage and I am required to get mortgage insurance, I am not insuring through that private mortgage insurance myself, I am insuring the bank.
Page 57 PREV PAGE TOP OF DOC Mr. HANSEN. That is right. You are paying the premium for it.
Mr. LAFALCE. That is right. I am paying the premium for the entity that gave me the loan, and so, I would have to be out of my mind not to exercise the option to discontinue that insurance, it seems to me.
Mr. HANSEN. I would agree.
Mr. LAFALCE. Right. So, it is not really disclosure that we need to give, because there is no choice for the consumer once disclosure is given.
You know, you are not really saying, ''OK, now make a wise choice.'' There is only one choice, and that is not to pay for insurance for the lender, and so, that is why we need something that is operative, rather than disclosure. At least that is the logic I am now using. Do you have problems with my logic?
Mr. HANSEN. I agree with your logic, but I am just saying that, right now, the majority of consumers are not even aware that they are doing this.
Mr. LAFALCE. All right.
Mr. HANSEN. So, this brings it to their attention, and possibly this will be a catalyst for the industry to see that they have not really done this correctly and maybe will help them to reform their practices.
Page 58 PREV PAGE TOP OF DOC Actually, Fannie and Freddie, if we followed their guidelines, we would be doing it. As I pointed out earlier, the Navy Credit Union is doing it.
I am getting calls from banks in Utah. I got a number of calls from banks that said, ''We are doing it now, we have seen the light, we have been converted, we see this is the right thing to do.'' I mean, it took a little nudging on the part of Congress.
I always worry, if I may say so, that we don't go too far and create new burdensome regulations. We do not want a gentleman hired to be the the head of PMI down at HUD. This is not my intention.
I just think that would be encroachment into the banking industry we do not want to make, but you may be right. It is a debatable point which you brought out.
Mr. LAFALCE. I have been apprised by staff that, actually, we may have caused at least a portion of the problem, because it is by law that we create the necessity for these secondary market institutions that are governmentally sponsored enterprises to require PMI for certain categories of borrowers, that we have legislated that. Maybe we should not have legislated that.
Mr. HANSEN. Maybe we should have, at the time, required that they take it off at a certain point.
Mr. LAFALCE. That is what we are talking about.
Mr. HANSEN. I agree.
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Chairman LEACH. Thank you.
If there are no more questions of this panel, we thank you very much.
Our second panel includes representatives from Fannie Mae, Freddie Mac, the Mortgage Insurance Companies of America, the Mortgage Bankers Association, Consumers Union, and the National Consumer Law Center.
I would like to ask unanimous consent that the written statements of each witness be included in today's record. Hearing no objection, it is so ordered.
Certain groups have also asked that they be permitted to insert written statements in the record. These include the Consumer Bankers Association, the National Association of Federal Credit Unions, America's Community Bankers, the National Association of Realtors, the California Association of Realtors, and the Consumer Mortgage Association.
I would also like to ask unanimous consent that these statements be included in the record, and hearing no objection, it is so ordered.
The current panel includes Ann Logan, who is the Executive Vice President and Chief Credit Officer of Fannie Mae; Michael Stamper, Executive Vice President for Risk Management of the Federal Home Loan Mortgage Corporation; Michelle Meier, who is Counsel for Government Affairs of the Consumers Union; Margot Saunders, who is Counsel of the National Consumer Law Center; William Lacy, Chairman and CEO, Mortgage Guaranty Insurance Corporation, on behalf of the Mortgage Insurance Companies of America; Mr. Ron McCord, President of American Mortgage and Investment Company, on behalf of the Mortgage Bankers Association.
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Before proceeding, I would like to recognize briefly Mr. Barrett, who would like to acknowledge a constituent.
Mr. BARRETT. Thank you, Mr. Chairman.
I just wanted to welcome Mr. Bill Lacy here today and introduce him to the committee Members. He is, as was indicated, the Chairman and CEO of the Mortgage Guaranty Insurance Corporation, which is located in Milwaukee. He is very active in civic affairs, and it is a pleasure to have you here.
Mr. LACY. Thank you, Congressman.
Chairman LEACH. Thank you, Mr. Barrett.
We will begin with Ms. Logan. Please proceed.
STATEMENT OF ANN LOGAN, EXECUTIVE VICE PRESIDENT
AND CHIEF CREDIT OFFICER, FEDERAL NATIONAL
Ms. LOGAN. Thank you, Mr. Chairman, and thank you for inviting me today to testify on H.R. 607, the Homeowners Insurance Protection Act of 1997, and for the opportunity to tell the committee about some of the steps that Fannie Mae is taking regarding private mortgage insurance coverage.
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Today I will only briefly summarize the testimony that I submitted for the record.
Mortgage insurance is an important part of the mortgage and housing industry, allowing many people to purchase homes who would not otherwise be able to get a mortgage. It is an important tool and one that should be used to protect the consumer.
Congressman Hansen and the committee are making a very valuable contribution in ensuring that the consumer has the information they need to cancel the insurance when it is no longer needed.
I would like today to provide just briefly the reasons why mortgage insurance is important to Fannie Mae's mission to expand affordable housing opportunities for American families, particularly families of low- and moderate-income.
Many of the families we serve are very well-qualified to own a home but they have not been able to save a down payment of 20 percent. To help these families achieve their dream of home ownership, we offer low down payment mortgages.
In fact, borrowers can get mortgages with down payments as low as 3 percent.
Low down payment mortgages help families buy homes sooner than they might otherwise to be able to do so, and while most of these loans perform very well, unfortunately some borrowers are unable to make their mortgage payments.
Page 62 PREV PAGE TOP OF DOC When this happens and a foreclosure occurs, the loss to the lender and/or the investor is greater due to the smaller amount of equity in the property.
As a result, low down payment borrowers maintain mortgage insurance to protect the lender and the mortgage insurer in the case of default.
About one in three of the loans that Fannie Mae purchases or guarantees does have mortgage insurance. It enables Fannie Mae to maintain our very strong support for affordable housing.
When a mortgage does default, the insurance covers a part of our total loss. These losses include the unpaid mortgage balance, unpaid interest, foreclosure costs, the payment of taxes and insurance on the property, the cost to repair, maintain, and to sell the property.
In 1996, for example, Fannie Mae had $550 million in losses on defaulted loans. $190 million of these losses involved low down payment loans that also had mortgage insurance.
Without mortgage insurance, our total losses would have been about 50 percent higher, or about $778 million. So, you can see how important it is to both Fannie Mae and to the strength of the country's housing markets to maintain the value of mortgage insurance.
Mortgage insurance serves a purpose, to protect the lender and the investor when the homeowner has very little equity. The homeowner, however, should be able to drop it, and we are committed to making sure we end these unnecessary payments of mortgage insurance premiums.
Page 63 PREV PAGE TOP OF DOC Working with lenders, mortgage insurers, and others, we have developed a new approach to our own policies regarding mortgage insurance coverage, and our work has been guided by four principles.
The first is information. We will soon issue guidelines that will require Fannie Mae lenders and servicers to notify borrowers at closing and annually that their mortgage insurance can be canceled under certain circumstances.
The second principle is fairness. We currently allow and will continue to allow servicers to cancel mortgage insurance for any borrower with a good payment history whose loan balance reaches 80 percent or less of the value, whether through pre-payment or amortization.
Our third principle is shared responsibility. We will have servicers automatically cancel mortgage insurance on any Fannie Mae loan that reaches the halfway point in its term and where the borrower is current on his payments.
The fourth principle is recognition of market value. We believe that a homeowner should be able to have their mortgage insurance canceled when the market value of their home increases to the point where the insurance is no longer necessary.
The four principles that I have outlined guide Fannie Mae's commitment to ensuring that homeowners only pay for mortgage insurance as long as it is necessary.
We will soon communicate with our servicers our new policies requiring that consumers be fully informed about their mortgage insurance and the circumstances under which they can cancel it.
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Further, we will also require that mortgage insurance be canceled automatically halfway through the term of the loan.
We believe our principles and policies are very consistent with H.R. 607, and we look forward very much to working with the committee on this and other issues that can help us all achieve the American dream of home ownership.
Thank you for the opportunity to be here.
[The prepared statement of Ann Logan can be found on page XX in the appendix.]
Chairman LEACH. Thank you, Ms. Logan.
STATEMENT OF MICHAEL STAMPER, EXECUTIVE VICE
PRESIDENT FOR RISK MANAGEMENT, FEDERAL HOME
LOAN MORTGAGE CORPORATION
Mr. STAMPER. Good afternoon, Chairman Leach, Congressman Gonzalez, and Members of the committee.
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I, likewise, will just summarize my comments.
First of all, Freddie Mac supports the Congressional efforts to ensure that mortgage borrowers are adequately informed of their ability to cancel private mortgage insurance.
Second is we believe that risk-sharing arrangements such as private mortgage insurance and other credit enhancements provide essential tools to expand home ownership opportunities, and indeed, during 1996, our estimate would be that about 43 percent of all mortgages made to borrowers purchasing a home, as opposed to refinancings, would have had down payments less than 20 percent and, therefore, mortgage insurance in place. So, we see it as a very important tool to help us get to lower income home buyers.
Next, we believe that borrowers should be able to cancel their private mortgage insurance under appropriate circumstances, and indeed, our current guidelines to servicers, our requirements to servicers, provide for that.
That is, if a borrower requests that private mortgage insurance be canceled when their loan gets down to 80 percent in a specific set of circumstances, we allow that, and let me just touch on the two circumstances that we address in that.
First of all, we want to make sure that the borrower has a good payment history. That is, the mortgage is current, not delinquent, and second, that house prices have not declined, and I will come back to that in a minute to explain why it is we have that provision.
Page 66 PREV PAGE TOP OF DOC We believe that the enhanced disclosure should enable the consumer and consumers to effectively cancel their mortgage insurance, but we also support automatic termination of the borrower's responsibility to pay for private mortgage insurance at the half-life of the loan.
That is, in all likelihood, borrowers would be able to cancel their mortgage insurance before that, but it is just an additional safeguard. We are more than comfortable having a requirement that, when the loan gets to its half-life, it automatically cancels itself.
Now, we do have a couple of concerns about legislative proposals that would create fixed ratios that would require the elimination of mortgage insurance, in particular automatic cancellation provisions when the loan amortizes down to 80 percent, and the data point I guess I can point you to is, if we take a look at Southern California, in the early 1990's, house prices, in fact, did go down. They went down about 20 percent.
So, a borrower in 1990 who started with a loan that was at 80 percent, in fact, 5- or 6-years later, that loan was up to almost 100 if you marked the loan-to-market.
So, there really is the possibility of house prices declining. It has happened in several areas of the country, and we are less than enthusiastic about canceling mortgage insurance in situations where house prices, in fact, have gone down and the borrower does not have equity in the property.
Again, having said that, we support the legislation, and we believe that disclosure on cancellation is absolutely the right thing to do.
Page 67 PREV PAGE TOP OF DOC Thank you.
[The prepared statement of Michael Stamper can be found on page XX in the appendix.]
Chairman LEACH. Thank you, Mr. Stamper.
STATEMENT OF WILLIAM LACY, CHAIRMAN AND CEO,
MORTGAGE GUARANTY INSURANCE CORPORATION
ON BEHALF OF THE MORTGAGE INSURANCE COMPANIES
Mr. LACY. Thank you, Mr. Chairman. Good afternoon. My name is Bill Lacy, and I am here representing the Mortgage Insurance Companies of America, and I thank you for the opportunity to talk about our product and how it helps people buy a home.
I would like to show you an exhibit which--the picture sometimes helps more than the words--but this is a very typical transaction where we have a $100,000 purchase price, and these are the kind of homes that we insure, with a 5 percent down payment.
We then have a 95 percent mortgage loan made by a lender. That lender may keep that mortgage. Most often, today, it is put into the secondary mortgage market, not always to Fannie Mae or Freddie Mac.
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Sometimes it will go to other investors, and these loans can find themselves in securities, they can go to pension funds, all sorts of secondary market sources.
So, we have a 95 percent mortgage. My industry, my company, would insure the top 30 percent of that mortgage, and I think it is real important to note that, because after we insure the top portion of the loan, the investor still has some exposure.
We are able to keep the cost down by doing the most risky portion, the top portion, but then again, we look at the fact that the investor--Fannie Mae, Freddie Mac, could be a State teachers fund--has the exposure after our insurance.
The borrower here is probably someone who would qualify with an income of $35,000. Could be a single head of a household.
With our product, after 3 years of savings, if they could save 5 percent each year of that $35,000, they could get into this home.
Without that insurance, without us standing behind their credit, they would have to wait 10- to 12-years, and then again, the price of housing could move away from them.
The beauty of the product, the beauty of the delivery mechanism, the shared risk concept of the goal is to keep the cost down to the American home buyer, and as a result of that, we have had tremendous increases in home ownership in America, and we expect it to increase going forward.
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I might just add, on that particular product, someone asked the question, ''What might be the premium?'' The premium most often selected, and there are a lot of premium plans, but the one most often selected would be a monthly plan to keep the cost down for the consumer, so they do not have to come up with it at closing or front-end, would be $60 a month for the first 10 years.
In the 11th, we reduce our premiums, to reflect the reduction in risk, to $16 on this loan per month, and I just want to make that point.
The amortization of a loan like this, depending upon interest rates, at a 95 percent loan-to-value ratio, can take 13-, 14-years to amortize down to 80 percent.
So, that is just an overview of how it works. We are very proud to be part of this system, and our industry fully supports full disclosure. The last thing we want to have happen is a home buyer to pay for insurance that they do not need.
That is not good for our business, and it is not good for what we are trying to get accomplished.
So, we are here today to help work on this legislation, this law. We want to make a good law. We do not want to disrupt the markets. We want to do the right thing.
So, I thank you for that.
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I might just add a few other numbers for you.
Our industry got started as a private alternative to the FHA program 40 years ago. Since then, we have insured 17 million households, allowing people to get homes. Today, our insurance in force represents 5 million policies. So, 12 million have canceled.
Either they have refinanced or we have taken the insurance off, and we can talk more about that, because some of the numbers are a little bit distorted, and I can speak to what is in force out there, what might be eligible for cancellation, and what that all means, if you would like, but in any event, I am running out of time, and I know you will come back to me with questions.
I just want you to know clearly that we are here to help address this issue but to do it in a way that does not disrupt our markets and the beauty of our home mortgage finance system, and we think we can do that.
The consumer must know what they are buying, what they are getting, and they must have rights to cancel. So, we will work to do that.
I thank you.
[The prepared statement of William Lacy can be found on page XX in the appendix.]
Chairman LEACH. Thank you, Mr. Lacy.
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STATEMENT OF RON McCORD, PRESIDENT,
AMERICAN MORTGAGE AND INVESTMENT COMPANY
ON BEHALF OF THE MORTGAGE BANKERS ASSOCIATION
Mr. MCCORD. Thank you, Mr. Chairman.
I am Ron McCord, President of American Mortgage and Investment Company in Oklahoma City, Oklahoma. I am also current President of the Mortgage Bankers Association of America.
We appreciate the opportunity to testify before you today, to comment on H.R. 607, the Homeowners Insurance Protection Act, and I, too, want to assure you that we are committed to continuing to work with you and the committee to seek ways to keep the cost of home ownership at reasonable and affordable levels for the country's home buyers.
Let me just say at the outset that I wish to make clear MBA's position in regard to the question of where the mortgage servicing industry stands with respect to the borrower's rights to know whether or not his or her mortgage insurance can be canceled, as well as the borrower's ability to actually cancel that insurance.
I want to make the following points.
Page 72 PREV PAGE TOP OF DOC MBA supports a borrower's right to know at the time of settlement whether his or her insurance may be canceled.
MBA supports no less than annual notification to a borrower that he or she may be able to cancel the insurance, and MBA supports cancellation of private mortgage insurance where it is permitted.
Our position is quite simple and straightforward. Borrowers should regularly be made aware of their options regarding private mortgage insurance.
Private mortgage insurance protects lenders and investors from loss should a borrower default on a home loan.
It has, as has been mentioned several times today, enabled millions of Americans to obtain low down payment mortgages. But under appropriate circumstances there does come a time when borrowers should be able to cancel their mortgage insurance coverage.
My industry is, in essence, a middle-man. We originate the loan. We place the mortgage insurance. We sell that loan into the secondary market, primarily to agencies such as Fannie Mae and Freddie Mac, but also to a number of private investors throughout this country. We then service those loans for those investors for the life of the loan.
We do not make the rules. We must abide by the guidelines of those that we sell the loans to, and for the most part, we do not and are not--do not receive any direct fee income for servicing an insured loan versus an uninsured loan.
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The bottom line is that mortgage bankers, as originators and servicers of loans sold to investors, have absolutely no direct financial stake in keeping private mortgage insurance in place longer than it is necessary.
Our interest is in ensuring that private mortgage insurance is available rests on the accessibility of mortgage credit and the creation of home ownership opportunities.
As as been mentioned by several today, without the existence of private mortgage insurance, many low down payment loans would probably not have been made, and without these loans being made, many individuals and families would be denied access to the American dream of home ownership.
We all need to be conscious of this fact. We do not want to undermine the ability of low down payment borrowers to purchase homes. We truly want to create opportunities as we go forward.
In conclusion, let me just say that MBA, again, supports the abilities of borrowers to be apprised of their options regarding private mortgage insurance.
However, the effects of the legislation on all parties needs to be considered and clear guidance provided to ensure that implementation of the legislation is accomplished smoothly and with the least cost or expense involved to all parties involved.
So, Mr. Chairman, again, I want to thank you for this opportunity to appear before you today, and we look forward to working with you and Congressman Hansen on this very important legislation.
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[The prepared statement of Ron McCord can be found on page XX in the appendix.]
Chairman LEACH. Thank you, sir. Let me just say on behalf of the committee, we want to thank you and Mr. Lacy coming from Oklahoma City and Milwaukee.
Mr. MCCORD. Thank you.
Chairman LEACH. We appreciate your coming.
Now we will turn to the consumer conscience of the committee, Ms. Meier.
STATEMENT OF MICHELLE MEIER, COUNSEL FOR GOVERNMENT AFFAIRS, CONSUMERS UNION
Ms. MEIER. Thank you very much, Mr. Chairman, and a special hello to you and Mr. Gonzalez and other Members of the committee with whom I have worked closely over the years.
Generally, I want to thank the sponsors of H.R. 607 and the supporters of doing something about the PMI problem, for their willingness to look into this issue.
We at Consumers Union view the PMI problem to be one of the most serious abuses in the mortgage market today.
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We estimate that it costs some American families hundreds of dollars in unnecessary housing costs each year when they are forced to pay, under a contract with the mortgage lender, private mortgage insurance premiums after their mortgage balance has reached 80 percent of the original value of the home.
I want to particularly second and voice appreciation for a number of the observations made by Mr. Hansen, the sponsor of the House legislation.
There are many observations he made with which we wholeheartedly agree, although his solution, at least his original solution, the disclosure approach, is not strong enough.
He observed that many home buyers, when they get to the closing room, are just about ready to lick the loan officer's feet to get the loan approved.
We agree with that, and we think it speaks to the reality that many consumers, particularly those who are only able to pay a small down payment, are not in a very good bargaining position vis a vis the mortgage lender to bargain over some of these ancillary terms that are associated with buying a home.
At the very best, many homeowners are happy to get approved at all and to get a good interest rate.
Many of the other products that go with getting the loan closed are unfamiliar to the consumer and simply beyond the reach of the consumer's ability to bargain effectively on his or her own behalf.
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So, we agree that the consumer is in a poor position here to help himself and ask Congress to address what has developed in the marketplace due to these imperfections to help the consumer by making an automatic cancellation right a matter of Federal law.
We have been working with the senator from New York on his automatic termination approach, and we look forward to working with Members of this committee on a proposal along the same lines.
I want to clarify what has not been talked about so far at this hearing.
Although we think that an automatic cancellation right at 80 percent is reasonable, we are very willing to consider some exceptions to that kind of approach.
It is very clear to us that if, between the time of closing and the point at which the loan amortizes down to 80 percent of the original value, if that original value has actually declined, then we think that that would be a good circumstance in which to waive the automatic cancellation right.
In that circumstance, the consumer, because the loan continues to pose some risk, should be required to continue to pay PMI.
So, in a situation where there are declining home values, we would definitely be willing to have the bill include an exception from the automatic cancellation right.
Page 77 PREV PAGE TOP OF DOC I am running out of time here.
I think the most important point here is one that I think Congressman LaFalce raised before.
If disclosure were enough for the consumer, then we would not be here to begin with.
The problem that brought us here today is the problem that Congressman Hansen had, which is, when he went to try to get his PMI canceled, when his loan-to-value ratio was at 80 percent, he was not able to do it.
So, clearly, the market is not working for a number of consumers, and some protection that is a right, not just a disclosure, is needed.
[The prepared statement of Michelle Meier can be found on page XX in the appendix.]
Chairman LEACH. Thank you, Ms. Meier.
STATEMENT OF MARGOT SAUNDERS,
NATIONAL CONSUMER LAW CENTER
Ms. SAUNDERS. Thank you, Mr. Chairman and Members of the committee.
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I am here today from the National Consumer Law Center, representing low-income consumers. We also commend Mr. Hansen and Members of the committee for considering this important legislation.
We have been active for a number of years to facilitate home ownership for low-income borrowers. We also have been trying to help low-income consumers maintain home ownership after they have run into default and foreclosure possibilities. In fact, we have contracts with Fannie Mae and Freddie Mac and the FDIC to work out foreclosure alternatives. PMI becomes, in some cases, an issue in these work-outs, because we often look to see if the value of the home has increased such that we can drop PMI.
Any amount that we can save the borrower at any time will significantly aid the avoidance of foreclosure and the lender's ability to work out a new agreement. In fact, we work out hundreds of loans a year. We have rarely had, even with borrowers in default, a situation where the PMI has been refused to be dropped once the loan-to-ratio value has dropped below 80 percent.
So, there has been a lot of discussion over what is the appropriate ratio to write into Federal law, and 80 percent seems to be the magic number.
In our research on this issue, we have found that, according to the Federal Reserve Board, there were no loans insured by Fannie Mae or Freddie Mac in 1995 that had a loan-to-value ratio of less than 80 percent on which PMI insurance was required.
Page 79 PREV PAGE TOP OF DOC Well, if that is the case, then why should any lender refuse to drop PMI insurance once the borrower has reached that point? Because in addition to the additional equity that this lender now has in the house, the lender has the knowledge that this particular borrower is committed to this house and going to make the payments. In fact, I think if you ask Fannie Mae and Freddie Mac what their comparative losses are for borrowers who start out with a better than 80 percent loan-to-value ratio as compared to those borrowers who start out with higher loan-to-value ratio and have PMI insurance but reach the 80 percent ratio--in other words, borrowers whose loans have been held for some time--I believe you will find that lenders lose money more on those newer borrowers who start out with the higher loan-to-value ratio.
If that is the case, then what is the problem with automatic cancellation? We agree with Michelle Meier that 80 percent does not have to be written into the law automatically, but I want to bring to the committee some experience that we have had with energy conservation programs and explain why, if you have a disclosure and the requirement that the borrower make an investment and an appraisal, which may or may not result in saving the borrower money, because the appraisal may or may not be sufficient, you are going to have, in total, very few borrowers that will take advantage of that option.
We know from energy conservation programs that, even if a middle-income customer is told that if $500 is spent on an energy-efficient refrigerator and $400 to $600 will be saved over the next 3 years in energy bills, most people will still not make that investment. This is especially low-income people.
This is called a ''hurdle'' rate. It is an initial investment that most people cannot make because they cannot come up with that amount of money.
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The analysis is very close in this situation. To have to make an investment of $200 or $500 for an appraisal which may or may not be sufficient to cancel PMI premiums of $50 or $200 dollars a month may be possible for some borrowers, but is unlikely to be an affordable tool for the majority of borrowers.
It therefore becomes much more important to consider when is the PMI premium going to be automatically cancelled? I think the industry would prefer an automatic cancellation that will avoid the potential for lawsuits over the validity of the appraisals and whether the disclosures were properly made.
An automatic across-the-board cancellation, even at a lower percentage than 80 percent, as long as it is not too much lower, I think, will benefit consumers and industry alike considerably.
Now I would like to talk briefly about what that number should be.
The number of 50 percent, or halfway through the loan term, has been discussed.
Well, that number has been based on original loan-to-value ratios of 90- or 95-percent, but in fact, almost half of PMI insurance loans are at less than 90 percent, or an 82-, or 85-percent.
I cannot give you the exact numbers, but the ranges are provided by the Federal Reserve Board, and if you run the numbers on an amortization schedule, as I have shown you in our testimony, an 85 percent loan-to-value ratio, not counting appreciation, at 8 percent, which is today's loan rates, the borrower will reach 80 percent in the 5th year. Not the 15th year, but in the 5th year.
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At 12 percent, which is a very high interest rate, the borrower will reach 80 percent loan-to-value ratio in the 8th year.
So, if you are talking about an automatic cancellation at 50 percent of the loan term, or 15 years, that might be appropriate for a 95 percent loan-to-value loan.
However, it is giving a major gift to the PMI companies unnecessarily. It makes this bill not a consumer-friendly bill for loans which are at an 85 percent loan-to-value ratio.
I will explain myself, Mr. Vento. I am not making myself clear.
In other words, for a loan that starts out at 85 percent loan-to-value ratio, only requiring a termination of PMI after 15 years of the loan, is ridiculous. At that point, an 8 percent borrower would have paid the loan down to 65 percent of the principal.
So, where you make that automatic termination becomes the key.
If you do put any requirement----
Chairman LEACH. Ms. Saunders, your statement is in the record.
Ms. SAUNDERS. I am sorry.
Chairman LEACH. Do you want to summarize quickly?
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Ms. SAUNDERS. I will just say that, if you do put any requirement for the borrower to have an appraisal, I would ask that you consider that the tax appraisal, as Mr. Kennedy and others noted, that the tax appraisal be sufficient, at least if the borrower chooses to use it. That will avoid the borrower having to come up with the initial money for the appraisal.
Chairman LEACH. Thank you.
Ms. SAUNDERS. Thank you.
Chairman LEACH. Thank you very much.
[The prepared statement of Margot Saunders can be found on page XX in the appendix.]
Chairman LEACH. Mrs. Roukema.
Mrs. ROUKEMA. Thank you, Mr. Chairman.
I am not sure where I am going to go with this. I thought I was paying close attention, but maybe I was not.
I have a question for Ms. Logan of Fannie Mae, but I will use it to then go on to whoever of the mortgage people would like to address it.
Ms. Logan, did you, are you saying in your report--your statement, that you have new guidelines, and the guidelines pretty much cover what Mr. Hansen has been recommending? Is that not correct?
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Therefore, is that almost a tacit approval of yours that this would be the best way to run the business, to have some precise standards, whether it is the 20 percent cutoff or whatever, and full disclosure on a regular basis, and that would meet your financial and your economic needs and the cost factors of your loans? Is that correct?
Am I drawing too much of a conclusion from what you said? I did not hear you say it, but that was the conclusion I drew.
Ms. LOGAN. If I understand you correctly, I think it is an accurate statement to say that, whether or not legislation proceeds, Fannie Mae will issue guidelines that would require servicers to notify borrowers at closing and annually of their ability to cancel their mortgage insurance.
Mrs. ROUKEMA. At a fixed ratio?
Ms. LOGAN. Yes, at 80 percent under certain circumstances and then automatically halfway through the term of the loan.
Mrs. ROUKEMA. Automatically halfway through the term of the loan? I did not hear the automatic reference.
Ms. LOGAN. Yes.
Mrs. ROUKEMA. All right.
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Now, for the mortgage insurance company and Mr. Lacy, I did not hear you address the cost factors in the questions.
I would like to know, from your experience and your data, because I am not dealing with the consumer approach now, I think I am off the automatic cancellation.
I want an economic rationale for how you would address the issue beyond the--well, for the full disclosure but also how you would address the data and what percentage you would use, or would you have a sliding ratio, in order to reach a cancellation point. In answering that, I want to know, by your estimation, how much of the cost shift would the automatic cancellation require shifting to the other patrons? OK?
I did not hear that in your testimony, and I would like you to address it.
Mr. LACY. Congresswoman, those are two tough questions in the sense of the complexity. They are excellent questions.
Mrs. ROUKEMA. Address the generality, and if you want to provide the data in writing, we will submit it for the record.
Mr. LACY. Yes.
Let me, first of all, explain that 80 percent LTV is a standard where mortgage insurance normally is not required. However, this past year, my industry insured 17,000 loans at 80 percent, at 80 percent LTV.
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Now, these were credit borrowers that were very weak. These were people who have had previous problems.
There were also property types that were two- to four-family. In some communities, people get that first home by having a duplex and renting the other part out, and they have a higher risk profile, and I could go on with numerous other examples.
The marketplace needs the flexibility to address those issues, because we want to serve the total market.
So, to come up with a level of cover, to give the investors the flexibility to put the insurance on that they need to give them the comfort so that they can continue to provide the money for low cost affordable housing, is the critical issue.
The half-life concept, I think, is real definitive. People can understand that. There are other approaches that could be looked at.
Recently one has been put on the table where, with full disclosure, full disclosure to the borrower at the time of origination, whatever that coverage is--now, the coverage may be a little bit deeper or need to be a little bit longer because of the risk, but then it is automatic. Then it is automatic once it reaches that point.
So, I think there are techniques here that can be employed, and I hope that is responsive to your question.
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Mrs. ROUKEMA. Yes, it is, and if you want to provide any financial data, statistical data to back up your statement, I would be happy to receive it.
Mr. LACY. Congresswoman, one of the other points I would like to add is that the average life of a policy in my industry today is 5 years.
Mrs. ROUKEMA. OK.
Mr. LACY. Last year at my company--well, the last 5 years at my company--we insured 1,500,000 new mortgage loans, 1.5 million. We canceled 800,000.
People refinance. The American home buyer takes advantage of the many options available out there to get away from mortgage insurance through refinancing, and I could give you a lot of numbers about what is out there in the policies in-force on the 5 million loans, and we could talk about that if you would like, the 5 million loans.
Mrs. ROUKEMA. My time has run out. However, I think maybe Mr. McCord wants to add something?
Mr. MCCORD. Well, I would just like to add to the question regarding the guidelines. We applaud both Fannie and Freddie for coming out with their guidelines.
It is a tremendous help for the industry, but as I mentioned in my testimony, we also have other masters, unfortunately, because it does help drive the cost of home ownership down. We do sell to other investors.
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So, simplistic guidelines, certainty in our guidelines in terms of whether or not we cancel or do not cancel, that is important as a servicer of mortgage loans in this country. We have, unfortunately, been subjected, as an industry, to a number of class action lawsuits, which this committee, I know, has addressed some of those issues in the past. So, I would just like to add that to my comments.
Mrs. ROUKEMA. Mr. Chairman, is it all right if the consumer person----
Chairman LEACH. Yes, of course.
Mrs. ROUKEMA.--Ms. Meier?
Chairman LEACH. Absolutely.
Ms. MEIER. Thank you very much.
I wanted to clarify that I am a little concerned we might be getting caught up in some semantics, because you said that you think you are off of the automatic cancellation.
If I do not use the word ''automatic'' but at 80 percent, I think that you would see that what Fannie guidelines would require at 80 percent is very similar to what we are talking about.
Ms. Logan said that they require cancellation at 80 percent under certain conditions, and those conditions include an appraisal that shows that the home value has retained its value, and then there is also a condition going to repayment history.
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Those are two areas of conditions that would come in as exceptions to what we would call an 80 percent automatic cancellation requirement.
So, I would only urge you to keep open to the 80 percent idea, because it is really the industry standard.
That is why we think it is so attractive and where a borrower with really good repayment history and a home that has maintained its value is really unfairly treated when the home has reached 80 percent and they cannot get their PMI canceled.
Mrs. ROUKEMA. All right. Thank you very much.
Chairman LEACH. Thank you.
I mentioned earlier I would go first to the people that have not asked questions.
Ms. KIRKPATRICK. Thank you, Mr. Chairman.
I was going to ask another question, but I would like to go back to Mr. Lacy.
Page 89 PREV PAGE TOP OF DOC I think Congresswoman Waters mentioned the 30 year--most mortgages, but I just heard you say, because people tend to refinance with the varying interest rates, that 5 percent--a 5 year life is what is more common in the mortgage industry today. Is that right?
Mr. LACY. On my insurance policies?
Ms. KIRKPATRICK. Sure.
Mr. LACY. On the loans that we have insured, the average life currently is 5 years.
Ms. KIRKPATRICK. Would that be the same, Fannie Mae, Freddie Mac, and others?
Mr. STAMPER. It would be very close to it. There are conceivably some people that cancel their insurance policy but keep their mortgage, but most of this is driven by people refinancing their loans.
Ms. KIRKPATRICK. I see. So, it is about a 5 year life, unlike when we used to buy homes, 25-, 30-year mortgages, you do not see those as often today?
Mr. LACY. The mortgage term is still 30 years, but the consumer will move, for example, or refinance the mortgage debt. We have had a significant drop in interest rates.
We have also had new mortgage instruments being introduced continually in the marketplace which are better for the consumer, and hopefully they move to those.
Page 90 PREV PAGE TOP OF DOC Frankly, at my company, anytime a consumer gets a better deal, it is better for me, because the better deal they get, the more likely they are to pay and I do not have to pay.
Ms. KIRKPATRICK. Sure, and that is what you are looking for always, is it not?
Mr. LACY. Yes.
Ms. KIRKPATRICK. That is how you like to see the industry move. After the 80 percent, they pay that amount of money, and they are not automatically terminated and they continue to pay. What happens to the additional resources that are paid into the mortgage financing? One, two, three, four--the first four gentlemen. They continue to pay, they have reached their 80 percent. What happens to that money?
Mr. LACY. Let me quantify what I know about my industry.
There are five million policies in force today. We took a cut at how old those contracts were, and we took a 10 year timeline and said how many of those policies were before 10 years?
We also looked at the loan-to-value ratio at origination, and we determined that there was less than 5 percent of the current loans in-force in our industry that would be a candidate for cancellation at 80 percent amortization.
Now, we do not know if they prepaid more money.
Page 91 PREV PAGE TOP OF DOC Now, in the case of Congressman Hansen, he had paid down more and, therefore, was entitled to cancellation.
I am just talking about normal amortization, about 230,000 loans.
Now, if those people are paying for insurance that they do not need, we need to cancel that insurance. I am the first one to say we do not want that to happen.
Ms. KIRKPATRICK. That is 5 percent that you speak of who may be in that category?
Mr. LACY. Yes, ma'am, but when you look at it, you also go back to 1986 and before, and the interest rate environment we were in. Those loans had average coupon rates at 11-, 11 1/2-, 12-percent.
So, the question--it is a real good question. I can't answer it. Why haven't they refinanced out? Why haven't they moved to better terms? I do not know.
Ms. KIRKPATRICK. Could be employment, could be not knowing, could be uneducated. I mean, we can list a lot of reasons.
Mr. LACY. Yes.
Ms. KIRKPATRICK. But the mortgagor, or the companies, do not seek them out to see why either. At the same time, you continue making the same money, at the high rate that they were paying initially?
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Mr. LACY. Yes.
I must also tell you that, on claims development, we will pay 20 percent of the total claims in the 10th year and beyond. There are losses beyond 10 years.
As you just described, people, unfortunately, lose their jobs, an illness hits them, divorce, a number of factors, and then a home goes on the market, you cannot sell it, you have got transaction costs, or people just give up, and there are losses, in some instances, beyond 10 years.
Ms. KIRKPATRICK. So, my original question on what happens after the 80 percent threshold and they continue to pay, the dollars that go into the lenders' pockets--what happens to the dollars?
Mr. LACY. No, ma'am. The lender/servicer will collect the premium, remit it to one of the mortgage insurance companies, who then collects the premiums just as it normally does, and then deals with the losses and claims.
Ms. KIRKPATRICK. So, they put it against their losses is what you are saying?
Mr. LACY. Yes. It goes into our insurance pool and is premium that we receive as an insurance company.
Ms. KIRKPATRICK. You parallel it against what losses might be had?
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Mr. LACY. Yes. There are losses on contracts that are 10 years and older. Twenty percent, in fact, of the claims we pay will be at that after 10 years.
Ms. KIRKPATRICK. I want to commend Fannie Mae and Freddie Mac for the work that you are doing throughout America, really.
We have a big announcement coming in Michigan the first of next week, Friday I think it is, and I commend you for what you are already doing, and also the consumer advocates and your testimony today.
I think there is a lot to be done. I would like to see the lenders available and ready and always willing to get first home buyers into the market and I commend you for the work that you do.
Ms. LOGAN. Thank you.
Mr. STAMPER. Thank you.
Chairman LEACH. I think it is only fair that the Chair also commend this unisex duopoly.
Mr. LAZIO. I would like to address a few questions to Ms. Meier, if I can.
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I want to thank you, first of all, for being here and follow up on the last statement of Mr. Lacy concerning what is, in effect, a subsidy by those people who have paid premiums in excess of a 20 percent loan-to-value ratio that pay to subsidize the pool that is used to deal with those mortgages that end up in default and where there are losses.
If you remove, through an automatic cancellation that event from happening--in effect, this cross-subsidy--will that, in your opinion, translate into higher premiums being paid on MIP up front?
Ms. MEIER. I do not think so.
I think that some of the earlier dialogue has indicated that, when you get out this far in a loan, that you are talking about a shrinking population of persons affected, but by the same token, you are talking about people who, at least under the proposal we support, would be having good repayment histories and having 20 percent equity built up in their home.
So, we think that they have the right to this benefit, but their numbers, given the statistics on how long, on average, loans existed before being prepaid, indicate that the aggregate cost to the industry here is not mind-boggling, because we are talking about a small population affected here, and so, then the question becomes--and this came up earlier; I think Mr. Hill raised it--is where is the pressure going to move? All I can say at this point on that is looking at some of the industry literature tells me that the mortgage insurance industry has been enjoying pretty hefty profits.
Page 95 PREV PAGE TOP OF DOC So, I would hope that, at least for starters, you would see some of that pressure going in that direction and being eaten by the companies rather than passed through to consumers.
There is also, in terms of market analysis here, a lot of pressure to keep those up-front premiums down, because those kinds of up-front costs are barriers to home ownership, and nobody at this table likes that.
Mr. LAZIO. Where they are transparent?
Ms. MEIER. Where they are transparent. That is exactly the point here. The cost here to the consumer is not obvious. To the homeowner that we want to help here, at closing, the cost that they are being forced to bear is down the road, if it is even known at all.
Mr. LAZIO. Ms. Meier, is there a danger inherent in having a mandated cancellation that people will be moved into non-cancellable instruments, spread accounts, and areas in which the mortgage insurance, in effect, can be recouped through a higher yield on the account, as opposed to the ascertainable mortgage insurance?
Ms. MEIER. You mean will it----
Mr. LAZIO. If you have a mandated cancellation instrument in terms of mortgage insurance, will there be an inherent incentive to move toward non-cancellable instruments, where you could recoup the potential loss through a spread account, through a higher yield rate?
Ms. MEIER. Well, I think that there could be an effort to recoup the loss if the loss is significant, and it is hard to speculate where that might be and where the market might allow it to occur, but I think my earlier answer is really my preferred answer, which is I do not see major cost implications here when you look at it in aggregate. But for the individual homeowner who is affected unfairly, it is a big thorn in the side and a costly family expense.
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Mr. LAZIO. Mr. Chairman, I wonder if you could indulge me so Ms. Saunders may answer the question?
Chairman LEACH. Of course.
Ms. SAUNDERS. Thank you, Mr. Lazio.
I would think that, to the extent--this is in answer to our first question--to the extent that the mortgage insurers see increased costs or reduced income as a result of having to cancel insurance and that, thus, causes them to look to raise insurance rates, that they would look to raise the insurance rates from the group that causes the most losses.
So, rather than having those of us who are unable to cancel our premiums just because we do not have the wherewithal to do it, or because our servicer, who has nothing to do with the investor or the actual risk, will not allow us to cancel it, and us subsidizing those homeowners who are actually causing the loss, the actual group of borrowers who are more likely to cause the losses will be subsidizing themselves.
So, I think that the fear of cross-subsidy that you have is correct and it may be appropriate that we push the market away from that.
Mr. LAZIO. In doing that, I hope we do not box out people in under-served areas where you have higher risk of loss.
Page 97 PREV PAGE TOP OF DOC Ms. SAUNDERS. I hope not, too, and I would agree.
I would point out that from what I understand, 75 percent of the market of loans made to the lowest income minority, Hispanic individuals and to people in low-income minority Hispanic communities, are not made by the lenders that are represented here today.
Those are mostly, according to the Federal Reserve Board, FHA and VA loans.
So, I do not want to diminish the importance of PMI insurance to enabling low-income people to get into their homes, but it is not the primary tool that we use in this country to help the lowest income. I am very well aware that we do not want to push the market away from helping people get into their homes, and I think that we are all wrestling with the appropriate method of achieving the best resolution to the problem, but I would strongly urge simplicity as the resolution.
I have been working with lenders for a long time, and everybody wants to avoid lawsuits, and the more complications we have, the more absolute automatic but-if's, the more complexity we have, and that is why we would prefer a later but absolute firm automatic--I am sorry, Mrs. Roukema--cancellation that satisfies the industry, as has been proposed, I understand it, by one segment of the industry.
Chairman LEACH. Ms. Hooley.
Ms. HOOLEY. Thank you, Mr. Chairman, and thank you for coming today.
Page 98 PREV PAGE TOP OF DOC I have a question. First of all, I am grateful that we have this method for people to get into a home. My question is, as a consumer, do they have a choice which mortgage insurance they have, and are those rates competitive at all?
Ms. MEIER. Mr. Hansen, I think, said it all when he said that most consumers are not even aware that they have got PMI when they have PMI. I actually, when this issue came up, looked at my 1990 closing file----
Ms. HOOLEY. I am going to go home and look at mine.
Ms. MEIER. I knew I had PMI, but I did not know--because I paid a lot for it--but I did not know that the clause that has become apparent as a widespread part of the problem here was in my contract, my mortgage documents, which basically says that I have to keep paying it until the lender says I do not have to pay it anymore.
So, I think that the knowledge among consumers, most consumers going into a closing to buy a home, is one where PMI is not even on the radar screen, and they look to the loan officer that they are working with to get advice if not to just be told from whom to purchase it.
Ms. HOOLEY. Do you know if the prices are competitive at all?
Mr. MCCORD. Yes, they are very competitive, and I will let Mr. Lacy deal with the insurance process, but the market is very competitive.
I am a small lender, and yet, I do business with almost all of the private mortgage insurance companies in this country. It is a very competitive market, and it is driven by service, and they are also regulated.
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Ms. MEIER. I think the way my co-panelist stated that is accurate. He does business with those PMI companies. That is exactly the market here that we are talking about. The business is done between the mortgage insurance companies and the lenders, primarily.
Ms. HOOLEY. So, the consumer does not really have a choice?
Ms. MEIER. The consumer rarely does his or her own shopping. The loan office does the shopping for the PMI, usually. So, there might be competition to get lenders to take your product and do, of course, business with you, but not competition at the consumer level.
Mr. LACY. If I might comment, there are eight companies in my industry, and very competitive. There are some very large companies that are well-known.
We compete vigorously for the business, and the way we do that is to provide services, efficiencies that make the market work and help it work. We deal with the lender. Our customer is the lender who makes the loan, and that is very appropriate.
The borrower goes to one source to get their home loan, and there are all sorts of services that are provided by originators, whether it be flood insurance, packaging the loan, putting it all together.
For the consumer to shop for all of that individually--I mean it is a tough enough process as it is. Let us simplify it. Let us go to one source.
Page 100 PREV PAGE TOP OF DOC Also, I just want to comment that Fannie and Freddie are significant leaders in affordable housing.
In this country today, we have been able to increase the home ownership rate in America largely because of their initiatives, 97 percent conventional lending today, outreach programs in the communities.
The comment was made earlier that sitting at this table are people that maybe do not get involved in those programs. In fact, Fannie and Freddie are the leaders.
Ms. LOGAN. In fact, just to correct the perception that Ms. Saunders left, 17 percent of the loans Fannie Mae purchased or securitized in 1996 went to minorities and 45 percent of the loans we did went to low- and moderate-income families, those below 100 percent of the area median.
So, to the contrary, I think that is a market we serve and are very interested in.
Ms. HOOLEY. Thank you.
Mr. STAMPER. Our numbers would be similar. I think it is 13 percent minorities, and 42-, 43-percent low-income. So, people at the table are doing this kind of business.
Chairman LEACH. Are you through?
Ms. HOOLEY. Yes. Thank you.
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Chairman LEACH. Does anyone else wish to be recognized?
Mr. HILL. I just want to go back to the question I asked earlier, and that is, I see this as kind of a zero sum gain.
That is, there is so much in claims paid, so much in premiums collected, so much in interest that is collected by the lender that covers the cost of money, the cost of servicing, and the cost of risk.
It seems to me that this has--I guess I am concerned about what I call the law of unintended consequences, and that is, if we adopted an automatic trigger date at, let us say, 80 percent, that is shifting the risk to somebody, and who is going to pay that risk, and is that going to result in higher monthly premiums for borrowers?
That is my concern here, and I guess I would ask any one of you or all of you to address that.
Mr. STAMPER. To some extent, I believe it is a zero sum gain. That is, to the extent mortgage insurance is canceled, the defaults are still going to occur. What is going to happen is, instead of the mortgage insurance company paying the default, it will be the investor.
However, the legislation as it is currently proposed is very similar to what our policies already are, or will be as we adjust them, so we do not think it is materially going to change the losses that we will experience.
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Mr. HILL. At 80 percent, if it was automatic required termination at 80 percent----
Mr. STAMPER. Right now, we would allow termination at 80 percent if the borrower asked for it.
I mean the fundamental difference here is really the disclosure issue, and the other possible difference, at least in variations of how the bill is being proposed, would be the extent to which there are conditions that the borrower would have to meet, significant conditions like has the property value actually deteriorated since the loan was made?
Mr. HILL. It is your judgment that that will not result in higher premiums for insurance, nor will it increase interest rates over a period of time?
Mr. STAMPER. To the extent that we are allowed to continue to have those conditions, I do not think this legislation will materially change the losses or costs that we will incur.
Mr. HILL. I would ask others to comment.
Mr. LACY. Well, I believe that is a fair comment. In my industry, it is so competitive that the marketplace will determine that.
Now, if we are canceled out of a class of business, we will lose the premium. We will lose, also, the losses, but I do not think it is something that--and somebody else will have to bear those.
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Mr. HILL. Who will that be?
Mr. STAMPER. Us.
Mr. LACY. Yes.
Mr. HILL. Mr. McCord?
Mr. MCCORD. Well, in our industry, as I said earlier, that originates and then primarily packages loans and sells them into the secondary market, you know, we would be concerned that, ultimately, at some point, you know, that if it is not absorbed, it could be passed on to the consumer in terms of higher rates. But as a servicer, we would not be involved in the risk assessment as the insurance industry, or the ultimate investor community would.
Mr. HILL. If we are going to apply this set of rules to PMI, why wouldn't we apply this same set of rules to FHA insurance?
Mr. MCCORD. I think I can answer that. I think there are two different programs.
One, FHA, is a mutual program, a mutual insurance program, and has, since its inception, had the provision to return premiums to the borrower once the loan was paid off and did so all the way up until 1991, when there were some concerns about the financial wherewithal of the insurance fund.
Page 104 PREV PAGE TOP OF DOC It has now returned to stability, a very sound fund, and certainly could entertain returning those premiums today.
Second, the mortgage insurance underwrites a risk, if you will, that I believe the public sector does not, and probably should not, as has been mentioned by some on the panel today. For that very reason, I think the cross-subsidization and the mutual benefit of the insurance program does and has, for some 60-plus years, benefited home ownership in this country.
Mr. LACY. I think they have stopped the refund, though.
Mr. MCCORD. It was stopped in 1991, but it can be at the discretion--it could be reinstated.
Ms. MEIER. If I could only add to that, this came up over on the Senate hearing, too, and I know some Members here--I know Mr. Gonzalez, because I have worked with his staff on this.
A few years ago, due to some years of neglect of the FHA program or mismanagement, there were forecasts that it could become insolvent, and this was only a few years ago, in the early 1990's, and the rules at that time changed to what they are now, which do not necessarily parallel what we are talking about here in the commercial marketplace, and I think the response that was raised over on the other side of the Hill is appropriate here.
Maybe it is time, given the renewed health of the FHA fund, to revisit that question, but it has been put under special rules, Congressionally mandated, only recently due to problems that we hope will not be repeated in terms of its management.
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Mr. HILL. Thank you.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Hill.
Mr. GONZALEZ. Thank you, Mr. Chairman.
Once a borrower has achieved 20 percent equity in a home based on original value, what is the risk of default even if the value of the property decreases?
Ms. MEIER. Well, if the value of the property decreases, then they would not necessarily have 20 percent in the home if you are basing value on current value. But the numbers are very clear if you look at correlation statistics between loan-to-value ratio and default, that the lower the loan-to-value ratio, the much less experience of default there is, and I think that explains why the industry standard for a long time now has been a 20 percent down payment gets you off the hook for PMI.
Mr. GONZALEZ. Thank you.
Mr. LACY. Congressman, if I could respond.
Page 106 PREV PAGE TOP OF DOC Mr. GONZALEZ. Certainly.
Mr. LACY. The way it happens in real life is someone gets to 80 percent LTV, and let us just say they get there through amortization, appreciation, whatever, but things can go wrong. I mean, things can go wrong in that economy. We have seen it happen.
Frankly, some of the most overheated markets that will appreciate at 20 percent a year become the problem 4 years out. Most specifically, in our industry, my industry incurred losses of $1.2 billion last year in claims, in the best of economic times.
I mean we have low interest rates today, we have a great economy. Where did it happen?
It happened in some sectors in the Northeast, specifically Boston.
It happened in Southern California. The market got so extremely overheated that people were bidding up housing, they overpaid, and then something happened to them, they got displaced.
I mean they lost their job, or maybe they had to move, and then they went to put it on the market and they found out it just would not sell, and it would not sell for what they had in it. All of a sudden, you can wipe out 20 percent equity in a sales situation in a soft market very, very quickly.
I mean a home can stay on the market for years in a soft market.
Mr. MCCORD. I would just like to add from personal experience that I, unfortunately, bought my home in 1981 that I am living in today. The price of oil was $30 a barrel, and we thought every day would be Sunday on the farm in our part of the country forever.
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It was not until 1995 that my home, from a market value standpoint, returned to the price I paid in 1981.
Now, that is not what the tax assessor said. That is what the real market was. So, there are those situations that have occurred in this country and will probably, unfortunately, occur in the future that I think we need to be very aware of as we go forward with this legislation.
Mr. STAMPER. I can give you a specific statistic on it.
When we purchase a new loan that has a 95 percent LTV, we expect, ballpark, 9- to 10-percent of those to go bad. When we buy a new loan that has an 80 percent LTV, we would expect, ballpark, 2- to 3-percent of those to go bad.
When you have a loan that started off with a higher loan-to-value ratio, amortized down to 80 percent, most of the good loans will have already refinanced, the end result being, for the business of loans that has already amortized down to 80 percent, looking out into the future, it is only about 15 to 20 percent of the original book that is left and about 2 percent of those are still going to go bad, so it is starting to look like the 95, when it was brand new.
Ms. MEIER. I just want to point out that it is the good loans, the good payment history loans in that batch that is left once it is amortized down to 80 percent, that we are talking about here that deserve the right to a cancellation, and that subset is at least to the lender in the same position regarding risk as the original borrower is who puts 20 percent down at the closing table. Possibly better because that borrower has paid for many years on time.
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Mr. GONZALEZ. To your knowledge, even when there are economic down-swings, are the risks at this point great, or does experience show that people tend to stay in their home once they have equity?
Mr. STAMPER. Our data would suggest that, if house prices have declined, even though the loan has been on the books for year and years, the risk associated with that loan is going to be very much like it was a brand new loan and you looked at the loan-to-value ratio at that point in time.
So, if it started off as a 50 percent loan-to-value ratio----
Mr. GONZALEZ. I see.
Mr. STAMPER.----If house prices have gone down and you mark that to market and it is now 95, it is going to perform more like a 95 percent loan-to-value ratio loan.
Ms. LOGAN. That is our experience, as well.
Mr. LACY. I might add we also have to talk about behavior, and it is not so much just the numbers, it is what happens to people if they have to move.
If they are living in the community, they are a fire-fighter, school teacher, they will hang in there, you know, they do not mark their house to market when they pull in the driveway every day. But if they have to leave town, if they are working for a plant, a defense contractor, and there is a cut-back, and now they have to sell their home to go find another place to live and work, then they take a look at that situation, they see the deficiency, and it is not that they always will just walk because it is underwater, they just simply do not have the money to cover the deficiency.
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Had they had the money, they would have made a bigger down payment.
Mr. GONZALEZ. That is right.
Ms. MEIER. Again, to point out that it is that circumstance that we would not want to have an automatic cancellation applied to.
Mr. GONZALEZ. I see.
Ms. MEIER. If the home value has declined from its original value so that loan-to-current-value ratio is not 80 percent, there should be no automatic cancellation. That is a key exception that we think is very reasonable.
Mr. GONZALEZ. Thank you very much.
Chairman LEACH. Thank you very much.
Mr. Barrett asked to be recognized.
Mr. BARRETT. Thank you, Mr. Chairman.
What I would like to do real quickly is go through the points that Ms. Logan made that Fannie Mae is covering, so I have an understanding where there is disagreement. Real quickly, the first one is the information that Fannie Mae will issue specific server guidelines requiring that mortgagors whose loans are sold to be informed that they loan had mortgage insurance that can be canceled.
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Is there disagreement over this? This provision, it seems to me, everybody agrees on this one.
Mr. LACY. A hundred percent support. We want people to know what they have all the time. We are for disclosure, absolutely.
Mr. BARRETT. OK.
Ms. MEIER. Yes. I just was not sure what you were saying.
Mr. BARRETT. OK.
Ms. MEIER. It is the disclosure.
Mr. BARRETT. I am just going through point by point to find out where the sticking points are here. So, that one is copasetic.
The second one deals with the issue of amassing equity equal to 20 percent of the home's original value where you would allow servicers to cancel.
Obviously, these are things that you put forth, Ms. Logan, so I am assuming you agree with things you put forth.
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Ms. LOGAN. I would hope.
Mr. BARRETT. OK.
Ms. LOGAN. That is provided that the borrower has a good payment history----
Mr. BARRETT. I understand.
Ms. LOGAN.----As we have been discussing and also provided the market value has not declined, again along the lines which we have been discussing.
Mr. BARRETT. Mr. Lacy and Mr. McCord, this is one you disagree with. Is that correct?
Mr. LACY. No.
Mr. MCCORD. No. As I said, as a mortgage servicer, we are for simplicity and certainty, and we applaud both Fannie and Freddie for their guidelines.
Unfortunately, we have a huge number of other investors out there, and so, we would be in favor of certainty, if you will, across the board, with all investors.
Mr. BARRETT. Ms. Meier, Ms. Saunders?
Ms. SAUNDERS. I think the problem is who the burden is on.
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Mr. BARRETT. OK.
Ms. SAUNDERS. If the burden is on the borrower to go forward and prove that the home has an appropriate value, at least 20 percent value as compared to the loan, that is a problem to us.
If the burden is on the lender to show that, despite the normal amortization of the loan, that the home has depreciated in value, I think that is--I do not want to put words in your mouth, but I think that is a problem to the industry.
Mr. BARRETT. I was not here when Mr. Hansen was talking, but when he talked about how, when he hit the 20 percent, his lender would not permit him to do so, is there disagreement on that?
Mr. LACY. What I heard was that he inquired about the insurance, they said we can take it off if you will put more down, and he put more down, and then, the servicer came back and said we need an appraisal to be sure that values have not dropped, and then he went about a process to do that, and then he was told it was unacceptable, he did not get the right appraisal.
It sounded like pretty crummy customer service, to be honest with you. I mean, he was not handled properly in terms of the lender dealing with him, and I think the service was the problem as much as the process itself.
Mr. BARRETT. Is the appraisal a big deal here?
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Mr. STAMPER. An appraisal would be expensive, and in that sense, it is a big deal, but I do not believe an appraisal is always what is needed.
Mr. BARRETT. Is that one of those stumbling blocks in this bill, in reaching an agreement, the appraisal and who pays for it?
Mr. LACY. I do not believe that is the issue. I think that there are so many different situations--we are looking for a quick fix. We are looking for one rule that applies to all, and in doing that, we then disrupt portions of the market, and that is the dilemma.
I do not think people are disagreeing. People have said we do not want people to pay for insurance that they do not need. I think we all agree to that. That is bad business, it is bad policy, but how do we do this?
How do we do it in a way that does not ruin the marketplace, affect the flow of money for the kind of programs we want to do, so we do not affect new initiatives. That becomes the issue, and this is where we need to continue the dialogue, do the work, and come up with a remedy that is simple and yet will not put too many burdens on people, and it is real difficult, and I think we need a lot more time to talk about it and work through it, but a couple of suggestions have been made.
I think Fannie and Freddie's policies today are real good. I mean, I really do think they are good. I think we can always get better, and we are trying to do that, and we will.
Page 114 PREV PAGE TOP OF DOC Mr. BARRETT. Very quickly, if I could, Mr. Chairman, could I indulge?
Chairman LEACH. Yes.
Mr. BARRETT. Do we know what percentage of losses occur once we have crossed that 20 percent threshold?
Ms. LOGAN. Fannie Mae, last year, for example, of the $550 million I gave you, $360 million of our losses last year were on loans with loan-to-value ratios of 80 percent or less at the time of origination.
Mr. BARRETT. What percentage is that?
Ms. LOGAN. It is more than half.
Ms. MEIER. My understanding from how you just described that number, that is losses on loans with 80 percent LTVs or less?
Ms. LOGAN. That is correct.
Mr. BARRETT. OK.
Ms. Saunders raised some concerns about using the term of the loan and she indicated that, if you were putting down 15 percent rather than 5 percent, you would hit a magic percentage of equity much earlier.
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Is that something, Ms. Logan, that you looked into? Do you think that she has a valid point there?
Ms. LOGAN. She has a valid point, and that was one of the reasons we had for automatic cancellation at the halfway point in the term.
The consumer needs to do nothing. They can just sit in their home, do nothing, and the insurance would be canceled, and the reason for the notice and the reason for the option to cancel the mortgage insurance at 80 percent is to handle those circumstances where the consumer should be able to and can drop their insurance before the halfway point in the term.
So, we are in favor of doing all three.
Mr. BARRETT. OK. Thank you.
Mr. LACY. I would like to add to that. I think the numbers were wrong. At my company, 45 percent of the loans we insure are at that 90 percent category and above, at 95 and above we are in the low 40's, 41-, 42-percent.
I mean there are 14 percent of the loans that my company insured, our industry insured, that were at--under--90 percent, the 80- to 90-percent category.
So, that 85 percent loan--and we do see those about 15 percent of the time--stay on the books much shorter. They stay on the books 3 years versus the others that stay on 5 years.
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Ms. SAUNDERS. If I might, I know better than to make up numbers before I come to a House committee hearing. I am reading from a Federal Reserve Board bulletin, December 1996.
According to this bulletin, of all Fannie Mae and Freddie Mac mortgages in 1995, 43 percent were between 81-, and 90-percent.
Mr. STAMPER. That actually might be right, and I would say that about 99 percent of those between those ratios are right at 90. We see very, very few loans with loan-to-value ratios that are over 80 but are not all the way up to 90.
Ms. LOGAN. I think both figures of the panel are correct.
Ms. MEIER. Can I just point out, though, that I think that line of analysis goes to possibly pegging a termination policy to a particular time period, and I think simplicity is, in looking to the industry for standards, generally a good idea, and for that reason, I would urge a standard that looks to the 80 percent loan-to-value ratio.
I think the relevance of the time period is when you start talking about half-lives and you realize how long into a loan the consumer is going to be waiting and making payments faithfully before the half-life policy, if that is the way one wants to go, helps them.
In half-life, I got some numbers that I did not bring with me, but I asked someone to run numbers under a half-life policy, and that was going to force the consumer to amortize down to about between 30- or 40-percent, so they would have a loan-to-value ratio of between 60- and 70-percent by the time they got any benefit from that rule.
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Ms. LOGAN. I think that depends on what the interest rate was of their mortgage and, obviously, a number of other factors.
Ms. MEIER. I agree with that, it depends, but again, I am urging the industry's own standard.
Ms. LOGAN. I do not think we are disagreeing.
We are in favor of both the ability of the borrower to cancel at 80 percent under certain circumstances and, in addition, for those borrowers who do not want to go through the trouble or for whatever reason, they need take no action to have it canceled at the half-life, halfway point.
Chairman LEACH. Mr. Vento.
Mr. VENTO. There is so much agreement we have to really talk about something we disagree on.
Ms. MEIER. Yes, please.
Mr. VENTO. Of course, one of the issues is that the possibility that lender-paid mortgage insurance could, in fact, if we put certain prerequisites and provisions in place for the borrower-paid mortgage insurance, isn't it like that we might end up having the lender incorporate this in and reflected in a higher interest rate or some other factors?
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I do not look to it to be an up-front payment, because obviously, if they had money, they would not be putting money into it or it might be incorporated into the value of the house, I guess, or property, but, you know, what are the remedies there, then, if, in fact, things shift in that direction, Mr. Lacy, Mr. McCord?
Mr. LACY. Yes. Thank you.
Congressman, number one, I think your observation is correct. If we make this so difficult, the traditional mortgage guarantee insurance product, the private mortgage insurance, which is cancellable, versus FHA which is not, we----
Mr. VENTO. That is not exactly my question. I was referring to the lender-paid mortgage insurance which is, under the rules and discussion we are having here, Mr. Lazio basically asked this question, but I think it was misunderstood, and maybe I stated it wrong, but I am not asking about FHA, I know about FHA.
I am asking about lender-paid mortgage insurance to which none of the rules we are talking about here would apply. Shouldn't there be some threshold issue here where that would apply to lender-paid mortgage insurance as well?
Mr. LACY. I believe that it should be fully disclosed. I mean, the consumer should always know what they are paying for, and if the lender is paying for it and then canceling it later and not passing----
Page 119 PREV PAGE TOP OF DOC Mr. VENTO. Well, tell me this, Mr. Lacy. Do you have any mutuality in terms of payment back to lender-paid mortgage insurance? Is there any mutuality in terms of paying back to lenders with regard to this?
Mr. LACY. No.
Mr. VENTO. I mean, the real problem that we have here, as Ms. Meier, Ms. Saunders, is that there could be a tendency to move, you know, from what is overtly out here, the lenders--and obviously not as clear as you want it in your contract, I do not know about mine, I have got to go home and look at it, and you know, contrary to the statement about nobody wants to sell you insurance you do not need, they keep selling--they keep sending me brochures through the mail to buy mortgage insurance.
So, somebody is trying to sell it out there for that little cabin on Lake Phelan that they want me to buy it for.
Mr. MCCORD. If I could just make a couple of comments on the lender-paid. Number one, the industry is very much in favor of disclosure, and I think the industry does a very good job of disclosing, those that offer lender-paid, the options between borrower-paid versus lender-paid.
Typically, the situation in lender-paid is where the borrower knows they are only going to be in a property for a limited period of time and they do not want to pay excessive premiums, and so, the lender-paid allows them to get a cheaper or a less expensive premium for a specific period of time that they know they are going to be in their home, and at the same time, it is built into their contract rate, so it is also interest-deductible.
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Mr. VENTO. I understand that, they get a little tax break on it, but my concern is that no one is answering my question, you know, in terms of whether this is going to lead from the lender-paid--or, pardon me--from the buyer-paid to the borrower-paid to the lender, and I just think we need to address that in this particular context. That is all my concern is.
Ms. LOGAN. I think your concern is quite legitimate and one of the reasons why we mandate disclosure to the borrower today of lender-paid. It is because you are not able to cancel it. So, I think your concern is legitimate.
Mr. VENTO. Yes. Well, I think we need to address that in terms of--obviously, the disclosure problems are good, but they do not, you know, at that particular time, you are there, you are at the closing table, and you feel compelled to--you will do anything to buy that American dream.
The other thing I think that the refinance cost barrier and the issue is, yes, you could refinance if you are dissatisfied with the fact that you have private mortgage insurance, but that is a real threshold question in terms of cost.
Then you are into everything. I mean, that is thousands of dollars. You really have to have a differential that is really quite substantial in order to make that work.
So, again, that is not an answer in terms of where we are at with these costs.
I agree that there is a problem with the valuation of property at the core here, and of course, it is through the setting of the reps and warrants that much of this has been required.
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What percentage of the portfolio of Fannie and Freddie are, in fact, requiring private mortgage insurance at this time?
Ms. LOGAN. Twenty-five percent of our book of business has private mortgage insurance or had private mortgage insurance required at origination.
Mr. VENTO. You are requiring it. I mean, you are making this business, in essence, by virtue of that rep and warrant. I mean, if it were not there, lenders could take a paper and cycle it and would not have the issue.
So, it is something that bears very close scrutiny on the part of what is being required.
Mr. Stamper, is your book of business similar?
Mr. STAMPER. It is about 20 percent.
Mr. VENTO. Mr. Lacy, you said that this is very competitive.
Mr. McCord, you said it is competitive.
Well, how many private mortgage insurance companies are there?
Mr. LACY. Eight.
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Mr. VENTO. There are eight?
Mr. LACY. Yes.
Mr. VENTO. They do how many billions of dollars of business?
Mr. LACY. Last year, we insured about 16- to 17-percent of the total mortgage debt created.
Mr. VENTO. All the private mortgage insurance? That includes both the borrower- and lender-paid?
Mr. LACY. No, just the companies, and to have a mortgage guarantee insurance company takes a lot of capital and a large credit rating. It is also what we call a mono-line business. You cannot write other insurance through it.
So, the company that is committed to it has to have substantial capital, typically has to get a credit rating of at least a double-A from the rating agencies.
So, we are talking about initial capitalization of at least a couple of hundred million dollars.
So, the barriers to entry are fairly significant, so you have meaningful companies that can take catastrophic losses when they occur. There are eight companies in the industry, and we compete vigorously for the business.
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Mr. VENTO. I was going to ask questions that were a little more disagreeable. I think I have accomplished that.
Mr. LACY. You are right about the lender-paid product.
Mr. VENTO. Thank you.
Mr. LACY. You are absolutely correct.
Mr. VENTO. Thank you, Mr. Chairman.
Chairman LEACH. Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman.
I just wanted to go at the difference between Ms. Logan and Ms. Meier to make sure I understand at what point they differ.
It sounds like, if you listen to them superficially, they are saying the same thing, but I sense that there are some serious disagreements once you get down to the detail of how this actually plays out.
You have got a voluntary policy, Ms. Logan, that when you get to 80 percent, if you want a borrower to stop paying PMI, you can allow them to stop paying it, I take it.
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Ms. LOGAN. We would support even an automatic cancellation of the mortgage insurance when the loan amortizes or prepays down to 80 percent, as long as the property is of the same or greater value than it was at origination.
Mr. WATT. All right. I am with you now. Who would determine that? Who would pay for the appraisal to make that determination? Who would have that burden?
Ms. LOGAN. Under our policy today, we look to the servicer to determine whether or not the property value might have declined, and if they believe it has, then an appraisal is requested, and the borrower pays for the appraisal.
Mr. WATT. OK, and if the borrower's appraisal confirms what they thought was the case, the borrower still pays for it? I mean, there is no risk to you in that equation. So, what is the----
Ms. LOGAN. You are saying if the borrower's appraisal proves that the current loan-to-value ratio is now 90 percent, then the borrower pays for an appraisal and cannot cancel the insurance?
Mr. WATT. No, I'm talking about the reverse of that. I pay for the appraisal. I was right.
I told you in the first place that I should not be required to have an appraisal, and you were wrong, and you said no, you are going to have an appraisal, and my appraisal proves that you were wrong in requiring me to have the appraisal. Who pays for it?
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Ms. LOGAN. Well, under our standards today, the borrower does pay for it, and may I just clarify, Fannie Mae is not in direct contact with the borrower, the servicers are the entity in direct contact with the borrower.
Mr. WATT. Servicers being who?
Ms. LOGAN. The mortgage lender.
Mr. WATT. All right.
So, I guess, under your automatic trigger, with exceptions, who would pay for the appraisal?
I mean, you all kept saying appraisal is not the issue, but I fought most of the Democratic Members of this committee a couple of years ago about requiring a bunch of appraisals that did not make any sense, and I am not anymore inclined to have people pay for appraisals that do not make sense now in this context.
So, who is going to pay for the appraisal? That is really, it seems to me, the major difference that we are arguing about here.
Ms. MEIER. Well, I agree with you.
Mr. WATT. Under your theory, who pays for it?
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Ms. MEIER. Under our theory, the assumption would be that the loan will cancel unless the servicer or the lender or its delegate, the servicer, can develop evidence to show that the original value has declined.
Mr. WATT. All right. So, then you would pass the burden of proof to the lender or to the servicers----
Ms. MEIER. Right.
Mr. WATT.----Or whoever is making that determination, and if they are wrong, as I postulated under my facts, then they would pay for it? If they are right, would they also pay for it?
Ms. MEIER. Well, if they are right, they would refuse to cancel, and then the onus would fall back on the consumer to incur the cost and then pursue it further through some kind of dispute forum, but from the get-go, we would like the assumption to be that the cancellation occurs and the onus be on the lender to show that--through some evidence--and I am not sure a full-blown appraisal would be necessary at that time--that there is reason to believe that the original value has declined.
Mr. WATT. You all have got problems with that, I take it?
Mr. STAMPER. I think what you have identified is really a pretty thorny issue in this, and I believe it is something that we can solve.
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Mr. WATT. I just do not want to leave this hearing with everybody sounding like they are singing off the same page, because I know you all are not, and I know that relying on the tax appraisal is not going to solve it.
Mr. McCord has already demonstrated that to us, the tax appraisers in most places do not appraise but once every 10 years, or once every 8 years, so relying on a tax appraisal is not going to solve it.
So, in the final analysis, who pays for this appraisal is really the heart of the issue here, it seems to me, and it seems to me that you all ought to get together and try to reach some meeting of the minds.
I like the presumption approach where, if you are wrong, then you go and prove you are wrong.
If you prove you are right, then maybe you can pass the cost on to the person who was wrong, but I mean, this is the heart of the issue, it seems to me, and to keep pretending that there is no difference between what you all are saying does not advance the discussion, in my opinion.
Ms. LOGAN. That is a very good point.
Ms. SAUNDERS. I agree, and I guess I am more pessimistic. I am not sure we are going to be able to come to an agreement on this issue.
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I think especially my clients are never going to be able to afford the cost of that appraisal, at least the lower-income clients. That is why we are advocating people be able to cancel that. It is clearer and cleaner for there to be an automatic cancellation with only one criteria--which is, are the payments current?--at a slightly lower loan-to-value ratio across the board.
Mr. WATT. The problem with that is it burdens a lot of people who do not fall into that category.
You are basically saying write it down to 75 and you do not have the problem, but you have got that 5 percent window in there that you have spread that risk to those people in that 5 percent window, and there is no ideal answer to this, I grant you, but it does seem to me that you all are close enough together that, if you all sat down and really went at this for a while, you could work out something that made sense and provide for an automatic trigger at some level.
It might not be 75 percent, it might be 78 percent, you know, but I do agree with Ms. Saunders that it is crazy to leave this up to litigation, because then you will be litigating about it every single time, and appraisals, as much as appraisers would like us to believe that they are scientific, are not.
I will have my appraiser, the lender will have his appraiser, and you will be in court, and the judge or a jury will have to decide it at everybody's expense. So, we need some kind of meeting of the minds here that makes a lot more sense than getting into court.
Page 129 PREV PAGE TOP OF DOC Mr. McCord, I am sorry. I did not mean to take up extra time.
Mr. MCCORD. Just briefly, Congressman, thank you for those comments, and I agree that you bring up litigation, as I did in my testimony and in response earlier to a question, and that is a concern of ours, and keeping it simple, keeping it with certainty, you know, then this industry can do what is best for the consumer and for the investment community, as well, and I just again want to add that, from a servicer's perspective, our industry is consolidating tremendously, more and more national servicers, so it is very difficult to determine value in a specific location if you are servicing loans out of one location or two locations in this country.
So, it is an issue----
Mr. WATT. That is kind of a risk of doing business. I cannot let you off with that one.
Mr. MCCORD. I understand.
Mr. WATT. You do not have an appraiser in Charlotte, so we are not going to let you off the hook down there.
Mr. MCCORD. It is just that there is a cost involved and it does need to be addressed, as you say.
Mr. STAMPER. I just want to point out I think it is in our interest to solve this one. It is not because of the legislation but for investors in mortgages.
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If we have borrowers out there that should be able to cancel their MIP and for some reason we have a process that prevents them from doing it, what happens to us is they refinance their loan and we lose the loan, and that is why we have the policies. We do not want to lose good loans.
So, we will come up with a solution.
Mr. WATT. Thank you, Mr. Chairman.
Chairman LEACH. Thank you.
Mr. Bentsen, I apologize to you.
Mr. BENTSEN. Thank you, Mr. Chairman.
You do not lose that many loans over--people do not refinance, necessarily, at $30 on a monthly basis. I would imagine they refinance for a little more than that, but let me ask you this.
If there was a set standard of 80 percent LTV in which you drop the primary mortgage insurance and the burden of proof was on the investor to determine whether the LTV was higher than 80 percent or not, would that affect Fannie or Freddie's underwriting standards for loans with higher than 95 LTV?
Page 131 PREV PAGE TOP OF DOC Would you shift your underwriting standards? Would you end up--would that cause you a concern, that you might buy more loans in the 90 to 95 category?
Mr. STAMPER. I guess when you first raised the issue, the thing that ran through my mind was how could we manage the expense on the borrower who was asking for an appraisal, say, every month, like am I at 80 yet, will you come do an appraisal?
It is like how often would we have to do that? I mean, given that each appraisal is going to be about 300 bucks--that is kind of the going rate for an appraisal--that would get to be a very expensive proposition.
So, I am not sure it would change your underwriting standards as much as it would cause us to rethink what interest rate we have to charge, or what guarantee fee we would charge for an insured loan because of this potential expense.
Ms. MEIER. I am really glad that this issue has come up, because I have felt a need for a while to clarify that we are not talking about a cancellation right that would raise because of value appreciation.
We have talked about it, some sort of discussion about that might be valuable at some point in time, but the nub of the proposal we are talking about solely looks to an 80 percent loan-to-value ratio based on amortization.
Mr. BENTSEN. Under the original documents, and once you receive 80 percent off the original--from the original LTV----
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Ms. MEIER. Downward.
Mr. BENTSEN.----To 80 percent?
Ms. MEIER. Right. Right. So----
Mr. BENTSEN. Unless there is proof that shows that----
Ms. MEIER. Well, if you want to----
Mr. BENTSEN.----The market has----
Ms. MEIER.----Run with that idea, that would be great, but we have been very supportive of a much simpler notion.
Mr. BENTSEN. You said earlier that, if the investor showed, or the lender or the servicer showed that, in fact, the property value had declined, which would then raise the LTV, then they would not get the automatic cancellation?
Ms. MEIER. That is right, but what I think the comment just a moment ago went to was the prospect of having some kind of cancellation right apply if 80 percent is reached through appreciation of the home value, and we are not talking about that, although it is maybe worth talking about.
Page 133 PREV PAGE TOP OF DOC We are looking at even a more conservative notion, which is that the loan balance would be at 80 percent of the original home value, so that there could not be numerous points in time at which the homeowner could go to the investor or servicer and say I think my home has appreciated and I am at 80 percent, would you please look into this and do an appraisal?
There would only be one small window period unless there have been a lot of prepayments, early prepayments, that would be the point at which 80 percent loan-to-value would be reached through regular amortization of the original balance.
Mr. STAMPER. I think we still have the same issue Mr. Watt raised. That is, there is still the concern that house prices have gone down, some way we are going to have to establish whether they have or have not, and the burden is on us now to find a low-cost way to do that.
Ms. MEIER. OK. Well, then----
Mr. STAMPER. Doing a full-blown appraisal just is much too expensive.
Ms. MEIER. Well, let me just say that we are--OK. Never mind. I wanted to make that point, that we are only looking toward the original value and the declining loan-to-value ratio based on amortization of the loan, rather than appreciation----
Mr. BENTSEN. Not taking into consideration any appreciation or depreciation?
Ms. MEIER. Only depreciation would play a role here.
Page 134 PREV PAGE TOP OF DOC Mr. BENTSEN. Then Fannie and Freddie say their concern is they think--if they think there is depreciation, then they have to go and conduct an appraisal to prove to the borrower that, in fact, that the house is not worth what it once was?
Ms. MEIER. Right, and we are very open to accepting a depreciation rule that would say, if there is depreciation shown through some kind of analysis, appraisal-like analysis, that the cancellation would not occur.
Mr. BENTSEN. Then who would be responsible for the cost of that?
Ms. MEIER. We would appreciate and hope that the investor would have the burden of coming forth with some evidence that there has been a decline in value, because we think, in some market areas, doing a full-blown appraisal on every single home is not worth the cost.
We think that is going to be very inefficient and uneconomical to require every homeowner to cough up 400 bucks.
Mr. BENTSEN. So, you would allow the investor to come forward, then, with a broad gauge of the Beaumont housing price index for the last 10 years and to say, based on this index, we think housing prices across the board have devalued, and therefore, your client probably has not achieved 80 percent?
Ms. MEIER. We have not really engaged in a discussion with people about exactly what kind of appraisal documentation would be necessary, but, I think you raise a really good point, but the dialogue that I have been participating in has not gotten that specific, because we have been even just arguing over having an assumed cancellation at a certain point, with exceptions.
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Ms. SAUNDERS. If I might, I think we have a proposal which does not seem too popular here, but I will clarify it one more time, that responds to these problems.
One is, at 80 percent loan-to-value, the borrower has the right to request cancellation and prove to the lender's satisfaction that the house is worth what--the necessary amount.
At some point reasonably close to that, but sufficient to cover the lender's additional risk, such as 75 percent, there is an automatic cancellation where the only issue is is the borrower current. That way, you deal with the transfer of the burden to the borrower, who very often cannot afford it, but you also afford the opportunity to the borrower who can afford it to obtain cancellation.
Mr. BENTSEN. That makes some sense, because both sides have burden of proof at one point or another, except that you do have situations where you have markets that go through dramatic changes, and you end up with negative equity.
Ms. SAUNDERS. That is why it is less than----
Mr. BENTSEN. Oklahoma and Texas experienced a lot of that.
My time is up, but I want to ask a quick question.
In your experience with your portfolios, have you--where you have had negative equity, and then, of course, it has turned back around, have you then allowed the cancellation of PMI insurance once they have gotten to that point?
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Mr. STAMPER. Yes.
Mr. BENTSEN. So, that is not--you are not scarred once and scarred forever because of an economic condition?
Ms. LOGAN. No.
Ms. MEIER. Could I just add one short point?
The thing that we want to avoid is creating obstacles such as forcing borrowers to come up with a multi-hundred-dollar appraisal when it is really not necessary.
So, I am thinking of market areas where there has been significant home appreciation for which requiring individual homeowners to do full-blown appraisals that cost hundreds of dollars is probably--well, it is definitely an obstacle to exercise of the right just because of the cost involved, and it is probably not necessary, and just like mortgage underwriting in the first place is a risk analysis kind of business, and deciding not to require PMI when 20 percent is put down, we would expect that some of that risk analysis and being willing--that results in a business being willing to accept some amount of risk because it is reasonable would play a role here, so we can avoid each homeowner having to pay hundreds of dollars unnecessarily.
Mr. BENTSEN. Thank you.
Mr. BARRETT. Mr. Chairman?
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Chairman LEACH. Just one second.
I will recognize Mr. Vento.
Mr. VENTO. Yes, Mr. Chairman.
I think the issue here is the magnitude of these payments is, in essence, very significant at $60 a month that we are talking about in some instances, and it, obviously, automatically drops, but one of the things I just want to point out is that, when you start adding--and if we are talking about higher mortgages, and many times, most mortgages in many markets are higher than this--you are talking about a tremendous credit risk, aren't we, with regard to Fannie and Freddie?
I mean, if you are exacting an extra $60, or an extra $100 for some of the conventional markets, that would be the case in this market in the Washington, DC., or the Maryland/Virginia area, you are talking about $1,200-, $900-a-year, $720 in the market a year, in terms of insurance.
So, I mean, we are talking about real credit risk here in terms of what the cost is in terms of the performance on paper. These factors themselves, you know, are really adding in a sense to the default.
I mean at some point you just would not make the loan, obviously, but the other factor I think that is important is who actually pays the loss here.
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In other words, if you pay an extra--down to 75 percent of the loan-to-value ratio, the insurance company receives the premium for that extra period of time, but the fact is, if there is going to be a loss, that still goes to who?
Does it go to the servicer? Does the servicer--does the mortgage banker pay it, or does the investor pay it? Who pays the loss?
Mr. STAMPER. If the insurance policy is in place, the loss will be borne by the insurance company and/or the investor, someone like Freddie Mac or Fannie Mae. When the insurance policy is not in place, then the investor bears the entire amount.
Mr. VENTO. So, it is not the servicer, it is not the insurance company. It is simply out of the investor portfolio?
Mr. STAMPER. The servicer is going to incur some expenses associated with the foreclosure, but they are not bearing the credit risk loss.
Mr. VENTO. The real concern is that we talked about appraisals. I agree that we should make this as simple as possible.
I think that is in everyone's interest, to make it as simple as possible in terms of loan-to-value ratio unless there is some outstanding circumstance that would trip that up.
One would be not making the payments. Another would be some abnormality or some function of the marketplace, like in Oklahoma or Minnesota or someplace, that causes that.
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Thank you, Mr. Chairman.
Chairman LEACH. Mr. Barrett.
Mr. BARRETT. Just a quick question.
If you have a 20 percent threshold with the borrower bearing the burden and you have a 25 percent threshold with the lender bearing the burden, what is the timeframe between your equity at 20 percent and 25 percent? Two years? Three years? I do not know.
Mr. STAMPER. It is going to be that order of magnitude, 3- or 4-years. I will look it up on an amortization schedule for you.
Mr. BARRETT. Thank you.
Ms. LOGAN. Not long.
Mr. BARRETT. Mr. Chairman, one further comment. I think, as we go through this, we ought to obviously put in place certain requirements----
Ms. MEIER. Six years. I would call that long. Sorry.
Mr. VENTO. I think we ought to--Mr. Chairman, I think that the concern is, in terms of legislation, that we ought to--if somebody wants to take the burden on themselves--obviously, you have some features that might be more acceptable in terms of the--in terms of the secondary market and others that are involved, the servicer.
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I think you need predictability, but I think we ought to leave the option open where somebody who would want to go in--as in the case of Mr. Hansen, that he wants to go and get--you know, even when you go out and pay for an appraisal, it does not always satisfy the servicer or others who are trying to be cautious about their responsibilities, but we ought to leave the option open somehow for individuals that want to go through the process to, in fact, try to keep that option so that they can, in fact, satisfy with appraisals or other factors, because once the value is there, then for the purposes of Fannie and Freddie, it is basically paper that is over 80 percent or below 80 percent loan-to-value ratio, and that is like a new loan at that particular point.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you.
I would like to summarize a couple of thoughts.
One, I am struck that there does not seem to be dissension against the precept of legislation, is that correct? There seems to be some common desire for common standards and I have heard the word ''simplicity'' raised several times. Is that valid?
Mr. LACY. Yes.
Mr. MCCORD. Yes.
Page 141 PREV PAGE TOP OF DOC Chairman LEACH. As long as the legislation is not too onerous. I would take that as a presumption.
Second, it strikes me, the changes that are under consideration are not immensely radical in the sense that, first, it has been placed on the table by Mr. Lacy that caught me surprisingly off-guard that the fee structure is not a straight fee.
That is, it is heavily weighted at the beginning, to begin with. I mean, so you gave a model of $60 for a period of years, and then 16----
Mr. LACY. Sixteen.
Chairman LEACH.----And then, coupled with the fact that many mortgages only last 5- to 7-years, that many are over before that period of time elapses, and so, it ends up that the large universe of people affected, or the universe of people affected is not as large as I would have thought it was coming into this meeting.
It does raise, though, one very interesting fact, and that relates to this--I mean a true constitutional issue.
I think Ms. Saunders is a lawyer, I am not sure any of the rest of you are attorneys, but it is one thing to legislate for the future and another to legislate in a place that actually breaks a contract, and I do not know if we would face a legal challenge or if there is philosophically a case for that. I raise this because one of the interesting aspects of this is that I hear from the industry a desire for legislation which might imply a lack of desire to raise a legal challenge, and so, I do not know where a legal challenge would come from or if a legal challenge would exist. But in theory, if I am an insurance company and I hold a contract with someone to pay me a fee for a service and Congress comes in and breaks it, are we breaking a contract in such a way that we raise a Constitutional question. I do not know if any of you have legal opinions or have any opinions that you would like to express.
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Ms. MEIER. I have a legal and a non-legal opinion----
Chairman LEACH. Sure. Go ahead.
Ms. MEIER.----And I am a lawyer, although I try not to tell people.
Chairman LEACH. Fair enough.
Ms. MEIER. We are--the Constitutional issue arises if you are impairing an existing contract----
Chairman LEACH. Uh-huh.
Ms. MEIER.----And the proposal that we are pushing would be looking prospectively----
Chairman LEACH. It would be.
Ms. MEIER.----At new loans. I mean, I think it would be good to have a notice requirement for existing loans that would hopefully let the existing, for example, Fannie Mae policy help the homeowner who gets the notice, but the heart of the proposal, which is the presumptive cancellation would apply prospectively.
Chairman LEACH. Would anyone else wish to comment on that?
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Chairman LEACH. No comment.
Mr. LACY. I agree, but I would also make the comment that my insurance contract is cancellable. In other words, they are generally always cancellable.
Ms. LOGAN. I would just say I am not an attorney and obviously do not pretend to be, but I cannot imagine Fannie Mae guidelines ever being in conflict in any way with----
Chairman LEACH. Federal law?
Ms. LOGAN. Right.
Chairman LEACH. I would suspect that of Fannie Mae.
Ms. LOGAN. We would change----
Chairman LEACH. I mean, I do not know what other parties out there would say on this. Do you think there would be objection from your universe?
Mr. LACY. No, we cannot. We do not have a right in terms of the insurance company, and frankly, it is kind of an interesting contract. I am on it----
Chairman LEACH. Uh-huh.
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Mr. LACY.----In the worst of times. I mean, non-cancellable, non-negotiable for the life of the mortgage. I mean, some insurance people have looked at my business and said, ''Very, very difficult business from an insurance standpoint.''
I cannot re-price the risk, I cannot re-underwrite it, and I can get adversely selected against.
The place it would have an impact is in some of the securities that are outstanding, and I think we have to be very, very careful here. There have been mortgage securities put together with different types of coverages which have been rated and sold into the capital markets, and some of these are held by major pension funds.
It would be very disruptive if there were some sort of law trying to go back in time--and I do think there are some Constitutional issues, and I am not a lawyer, but my lawyers have told me there would be.
If it were to disrupt markets, take down credit ratings, it would be a big problem.
Chairman LEACH. Well, I just want to return to one final point.
I have noticed that there is a class action lawsuit that has been filed against a company, a major bank, on this issue, and so, there does seem to be litigation that may be brewing, and it strikes me legislation might be one way to bring that uncertainty out of the market, but is that the view of the private sector parties or not?
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Mr. LACY. I think, going forward, it is very helpful to define it and get the misunderstanding out and avoid litigation. Clearly, it is. The suits that have been brought have been dismissed on the basis of dealing with trying to change contract terms.
Mr. MCCORD. If I may add, as I said earlier, I mean, that is the need for the certainty and the simplicity as we go forward, not to have vagueness or gray, so that we, particularly as servicers who are in the middle, administrating this for both the consumer and the investors, that we not put the industry in a position where it is open for frivolous class action-type lawsuits.
Chairman LEACH. Let me just have one final question, then, from Mr. Lacy.
From your perspective, then, to have certitude in this, does that increase the competition within the eight, I mean, so that everybody knows the ground rules they are operating under within the mortgage insurance industry?
I mean, is that helpful for the industry in a competitive sense? One has the feeling that, if you have different sets of rules, Fannie and Freddie have one set of rules, a pension fund might have another, you tell me, is it helpful or not to have this kind of commonality?
Mr. LACY. From a competitive standpoint? Is that the question? No, not from a competitive standpoint. Right now, the market is competitive. I mean, it does not enhance it, it does not improve it.
Page 146 PREV PAGE TOP OF DOC I think the point I would react to is that it takes away some of the uncertainty, some of the legal exposure that could lead to high costs. I think that is where the legislation would be helpful to put the issue to bed, to make it clear as to what the rights are.
We believe that consumers should know, we believe consumers should have the right to cancel at a certain point in the process. They are entitled to that as long as they meet certain conditions--the property is OK and other types of things.
To take away this rhetoric that is going on, it does spawn class action suits, which are wasteful, very wasteful for the whole system.
Chairman LEACH. Well, if no one else has any more comments, let me just say that it is our intent to move to markup this Thursday.
After this hearing, we are going to recommence serious talks with the Minority side on whether we can come close to consensus before we come forward with an approach, and I think we will take into consideration all the views that have been laid before us, and hopefully, we can resolve these matters on Thursday.
It would also be the intent of the Chair to bring forth on Thursday the issue of the committee's views on the Administration's budget.
Mr. WATT. Mr. Chairman, I just wanted to ask a question. You were asking about retroactive application of the law. I would not--is there somebody on the committee who is advocating for that? I did not even know that was an issue.
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Chairman LEACH. No, it could be an issue, and I am just raising it as a possible issue.
Mr. WATT. I would not think that even the most activist consumer advocates among us would make that an issue.
Ms. MEIER. Much less the moderate ones sitting before you.
Chairman LEACH. OK.
Well, just so you know, the Majority has received certain input from parties relating to the retroactivity issue.
Mr. VENTO. On that issue, not to--but, I mean, isn't--aren't the guidelines that are being put out now--wouldn't they affect paper that is, in effect, that you have rep'd and warranted already?
Ms. MEIER. Right.
Mr. VENTO. So, aren't they----
Mr. WATT. That is a different issue than what is required by law.
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Mr. VENTO. That is right, but I mean, I think the concern here is not to lose any existing, you know, benefits so that the Jim Hansens of the world can go forth and do their work, and I hope we can write the legislation so that is possible in the future, even though it may not fall within the rather conservative guidelines of the reps and warrants that are put out.
Chairman LEACH. Well, fair enough.
If there are no further questions, let me thank all our panelists. You have been very helpful, and we are very appreciative, and the committee is in recess until Thursday at 1:30.
[Whereupon, at 5:20 p.m., the hearing was adjourned.]
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