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Final Transcript GSE Reform: Something Old, Something New, and Something Borrowed December 15, 2015/9:30 a.m. EST SPEAKERS Josh Rosner Mike Calhoun Ron Haynie Glen Corso Scott Olson Gerron Levi PRESENTATION Moderator Ladies and gentlemen, thank you for standing by, and welcome to the GSE Reform Conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. (Operator instructions.) As a reminder, this conference is being recorded.

12-15 Rosner Teleconference Transcript

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WASHINGTON, Dec. 16, 2015 /PRNewswire/ -- Joshua Rosner, Managing Director of Graham Fisher & Co., was joined by several housing finance policy experts Tuesday in calling for recapitalizing Fannie Mae and Freddie Mac as the first step to reforming the secondary mortgage companies.In a conference call, he announced the release of his paper, "GSE Reform: Something Old, Something New, And Something Borrowed." The paper summarizes the historic role the government sponsored enterprises have played in facilitating homeownership, the policy changes that put the enterprises at the center of the 2007-8 financial crisis and the steps needed to create a better mortgage finance system.Rosner was joined by Center for Responsible Lending (CRL) President Mike Calhoun; Community Mortgage Lenders of America (CMLA) Executive Director Glen Corso; Independent Community Bankers of America (ICBA) Senior Vice President Ron Haynie; National Community Reinvestment Coalition (NCRC) President and CEO John Taylor and Director of Policy & Government Affairs Gerron Levi; and Community Home Lenders Association (CHLA) Executive Director Scott Olson.They echoed the view that Fannie and Freddie have played critical roles in promoting access to homeownership and affordable housing for many decades. They agreed that reforms are needed and that the GSEs should be required to build and retain capital. They also opposed actions that could delay reforms, notably the Jumpstart GSE Reform bill, elements of which have been added to an omnibus spending bill Congress is set to vote on by the end of the week. The Jumpstart language only serves to delay necessary reforms and places the public at risk.

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Page 1: 12-15 Rosner Teleconference Transcript

Final Transcript

GSE Reform: Something Old, Something New, and Something Borrowed December 15, 2015/9:30 a.m. EST

SPEAKERS Josh Rosner Mike Calhoun Ron Haynie Glen Corso Scott Olson Gerron Levi PRESENTATION Moderator Ladies and gentlemen, thank you for standing by, and welcome to the GSE

Reform Conference call. At this time, all participants are in a listen-only

mode. Later, we will conduct a question and answer session. Instructions

will be given at that time. (Operator instructions.) As a reminder, this

conference is being recorded.

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I’d now like to turn the conference over to our host, Mr. Josh Rosner.

Please go ahead, sir.

Josh Thank you very much, and thank you, everyone, for joining us. I’d like to,

before we start, just make a quick comment because it seems timely about

the New York Times editorial this morning by Mark Zandi and Jim Parrott,

which I think continues to miss the point. Nobody is calling for return to

the status quo ante. First of all, HERA would not allow for that. FHFA

has made many significant changes.

Secondly, more importantly, if their view was an intellectual consistent

view, they would be calling for the GSEs to have capital given that part of

the problem with the GSEs before the crisis was significant lack of capital.

In any case, thank you for joining the call. I’d like to introduce the

speakers we have in addition that we’re very happy to have had join us.

First, we have Mike Calhoun from the Center for Responsible Lending;

Ron Haynie from the Independent Community Bankers of America; Glen

Corso from Community Mortgage Lenders of America; Scott Olson from

Community Home Lenders Association, and Gerron Levi from National

Community Reinvestment Coalition.

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So, let’s start with a question for Mike Calhoun. First of all, when each of

the speakers speak, they might want to give a minute about what their

organization does, but Mike, what is it that you see as common to all of

the speakers on the call?

Mike Well, I think as will become apparent from our conversation today and

from the written materials that the various organizations and speakers have

previously issued that there are differences among us regarding the causes

and cures of the housing financial crisis. But, we agree on core values as

to how we should move forward.

Going to the causes, your paper that you released today adds a lot of new

depth and information to the other announces that are out there. For us,

and by way of introduction, the Center for Responsible Lending is the

policy affiliate of Self-Help, which is one of the larger community

development lenders in the country, and we provided a substantial number

of mortgage loans to first-time homebuyers, including through the 2000s

and through the housing boom.

And so, we had over 50,000 mortgages, which we had all the credit and

legal risk on in 48 states across the country. They were made to borrowers

with incomes in the low-$30,000 with small down payments, put some

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cash into the deal, and they performed extremely well even through the

crisis. It was not a great secret.

They were all carefully underwritten mortgages. They were fully

documented. They had 30-year fix rate; so, no payment shock. They had

full escrow, and the vast majority of subprime mortgages had none of

those features when they were written and when they crashed in the 2000s.

To add onto Josh’s comments about the change, we’re in a very different

environment than we were in 2007. First of all, as most of you know,

HERA was passed in 2008 in full recognition of the crisis, including the

housing market’s key role in it, specifically designed with broad bipartisan

support to create a stronger and safer housing market. Then the biggest

change has been the development of standards for mortgages themselves,

the CFPB and their qualified mortgage and ability to repay because many

countries experienced housing booms and crashes in the 2000s.

The US was almost the worst though in the fallout because we had the

most unaffordable mortgages in place at the time that housing values fell.

Not only were people underwater. More importantly, they had not been

paying their mortgages through just their regular income. They were

relying on unsustainable house appreciation to keep refinancing. When

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that option ended, they couldn’t pay their mortgages, and the foreclosures

piled on.

But going forward, the key principles that all of us here agree on are first

that the housing finance market serves a sector that is about a fifth of the

US economy, and is also the leading mechanism for families to build

wealth and move into the middle class. To be effective, it needs to, first of

all, serve all lending institutions, not just large lenders. We have the

independent community bankers here who provide incredibly important

financing along with Glen and Scott’s members, particularly in rural areas.

They have to have access to the secondary market in order to be able to

make loans.

Second, it needs to provide financing for all qualified borrowers. As

Gerron will address further, we are looking at a very different housing

market where the majority of new household growth is among Latino and

African American households. If those households are not served, the

whole housing market contracts because if they’re not new starter homes

being built and purchased, and people can’t sell their existing homes to

move up, the pipeline of our housing system just doesn’t work.

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Third, a system has to serve all geographies. We expect any system will

provide credit, quite frankly, to those who least need it in hot markets,

high wealth borrowers who can readily obtain credit at any time. But,

much of the country will get passed over unless the system specifically

requires that there’s a duty to serve throughout the nation.

Then finally, it has to be a system that performs throughout the credit

cycle. There will be additional housing ups and downs. That’s the nature

of this market and other markets. We have seen too often that a lot of the

capital flees when the market turns down. If there had not been Fannie

Mae and Freddie Mac providing $5 trillion of housing credit following the

beginning of the Great Recession we would still be deep in that recession.

Then finally, we need this to be a system that does not tilt our private

financial institutions, the banking system, to a greater concentration by

squeezing out the smaller lenders and other important players. So, let me

stop there because we have many others who need to add to this

conversation.

Josh Yes, that’s terrific. I appreciate that. I think it makes sense since we are

in the middle of the appropriation season to just take a minute and talk

about what of the GSE Jumpstart language is rumored to, or may be in the

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bill, and why it matters to you. So, why don’t we start with just a quick

round from everyone on the call. Ron, Ron Haynie from ICBA.

Ron Thanks, Josh. Yes, and ICBA represents over 6,000 community banks

nationwide and certainly community banks are an integral part of the

housing system, the housing finance system. Many of our members

depend on access to the GSEs on a daily basis.

What’s key about the GSE is the fact that they’re sort of a friendly

aggregator in that they don’t compete in the primary market with

community banks for other financial services, which obviously larger

national aggregators actually do. And so, it’s very important to our

members to make sure that that access is preserved, and is well capitalized

and safe and sound.

The Jumpstart provisions and, again, as Scott mentioned, obviously no one

is really sure what all is in the bill, if any of it at this point. But, our

concern is that certain provisions of Jumpstart actually would prevent the

regulator, FHFA, from acting in the best interest of the marketplace and

certainly the best interest of taxpayers by basically impairing their ability

to take certain actions.

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While it’s difficult to project what could possibly happen or whatever, the

fact that the regulator does have a considerable amount of authority to be

able to make sure that the system remains liquid, remains viable, remains

accessible for all lenders of all sizes at all times, and so that it does need—

the regulator does need to be able to act to make sure that occurs. And so,

our concern is that those things, certain provisions in that bill could

actually impair that ability. That eventually obviously hurts the housing

market, as well as taxpayers. So, those are our concerns.

Josh Okay. Gerron?

Gerron Yes, good morning. I represent the National Community Reinvestment

Coalition. We are a grassroots member organization. We have about 600

grassroots organizations across the country, and collectively, we are

devoted to helping working families across the country build wealth and to

obtain homeownership.

People in traditionally underserved markets, low and moderate income

borrowers. So, we see ourselves as having a tremendous stake in this

debate for a little over 25 years now. NCRC has been focused on

preserving and protecting the affirmative obligations on lenders in the

market to provide conventional loans to low and moderate income

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borrowers. In the primary market, that’s the Community Reinvestment

Act. In the secondary market, Fannie Mae and Freddie Mac have an

affirmative obligation to facilitate financing of affordable housing for low

and moderate income borrowers. That is manifested through their

affordable housing goal.

We think those affirmative obligations in statute, in their charter, the

charter of the government-sponsored enterprises, Fannie Mae and Freddie

Mac are critical to the flow of credit and conventional loans, conforming

loans getting to low and moderate income borrowers, and traditionally

underserved borrowers; rural areas of the country, minority borrowers, all

of those.

So, we think the stakes are quite high. So, when you look at the Jumpstart

GSE Reform Bill and specifically the provision that would block the

ability of these two entities to exit conservatorship, we’re very concerned

about that. First of all, we’re concerned about how Fannie and Freddie

may be wound down under any future Administration. So, there’s a

certain political uncertainty. We’re facing the prospects of a new

Administration. We don’t know what the policies will be there, and so,

how these entities are managed and potentially wound down could have a

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tremendous effect on the affordable housing goals and the affirmative

obligations that they have.

We’re also concerned about policy uncertainty. Clearly, there has not

been a consensus in Congress on a new or rebuilding the housing finance

system. There is no consensus. There are a number of structural reforms

happening administratively. But anyway, we are concerned about how

any new system may be built and whether that new system will have an

affirmative obligation.

So, we think Fannie and Freddie, as Mel Watt, the Director of FHFA said

recently, we think the conservatorship is not sustainable as he made clear.

How these entities are managed really matters to their profitability, to the

kind of products we see in the market, just many facets. We also think

who the conservator is really matters.

The tenure of Ed DeMarco is striking, is quite different from the tenure of

Mel Watt, whether it be on guarantee fees, whether it be on capitalizing

the Housing Trust Fund and the Capital Magnet Fund, whether it be on

having low down payment products in the market, making homeownership

more accessible for low and moderate income communities.

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So, we don’t want to see the path blocked under this Administration, or

recapitalizing, and these entities exiting the conservatorship.

Josh Thank you. We’ll go now to Glen Corso.

Glen Thanks, Josh. The organization that I manage is composed of a

membership of community-based lenders, both community banks and

independent mortgage companies. The average member in our group

originates—about half of their loan volume is conventional conforming

loans that end up with either Fannie Mae or Freddie Mac. So, Fannie and

Freddie are critical to our members being able to serve the home financing

needs of their borrowers.

We’re extremely concerned with the Jumpstart provisions because we’ve

heard that the Jumpstart provisions could either prevent, or be interpreted

to prevent the recapitalization of Fannie Mae and Freddie Mac. We think

a capital cushion, an adequate capital cushion for both of those

organizations is absolutely critical. Frankly, our members very carefully

manage their capital and make sure that they exceed all of the minimum

standards. To them, how the two biggest entities in the housing market

are running on such little capital is just baffling beyond belief to them.

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The second concern we have with Jumpstart is we understand that the

common securitization platform that Fannie and Freddie are selling may

be transferred away from them, and our members are extremely concerned

about that. They view that common securitization platform as the next

step in the evolution of the secondary mortgage market. Having it

transferred away from Fannie and Freddie and potentially subject to the

influence of Wall Street and the big banks, or the control of Wall Streets

and the too big to fail banks makes our members extremely concerned.

So, that’s our concerns with the Jumpstart provisions.

Josh Okay. Thank you. Scott Olson.

Scott Thanks, Josh and everyone else. I’m Scott Olson. I work for the

Community Home Lenders Association, which is the only national

association that exclusively represents non-bank mortgage bankers,

predominately small and mid-sized lenders.

I don’t think it’s an accident that all these groups here are on this call

together. They represent, I think, sort of common concerns and

viewpoints of a strong coalition of consumer groups, important consumer

groups, and all the groups that represent small lenders. It comes down to

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access and affordability. At the end of the day, we need a wide range of

choices in terms of mortgage originators, and we need a strong access to

the secondary markets, and that drives, I think, our goals and it drives or

policy prescription.

So from our perspective, where are we? GSE reform is extremely

complicated, and no two people see the things the same way. While we’re

waiting for—I think one of the touchstones of where CHLA is coming

from is while we’re waiting for Congress to act, which could be a very

long time, we need to take constructive steps forward. I think the

members here, the groups here have talked about these.

One, we need to build up the capital of the GSEs. I mean all our small

lender groups here are concerned about having a cash window. I’d like to

remind people that in Johnson-Crapo, the promised that they would set

aside profits, current profits of the GSEs to capitalize the cash window.

That’s not happening. We need to make those profits available to build up

capital and to make sure we can maintain a cash window.

We need to move towards figuring out how we can have a recapitalization

plan that makes sense, and most importantly, while no one is looking, all

this risk sharing is going to revamp the way markets are done, and we

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need to pay attention to risk sharing to make sure we get it right and so

that it’s not dominated by these big veritably integrated bank securities

firms, and their risk sharing provides a chokehold to control mortgage

origination.

In closing, I think, Josh, touched on this at the beginning. I just want to

reiterate that this idea that anyone is talking about going back to the way it

was before in 2008 is just a strawman argument. There’s always a

significant number of reforms in place. The GSEs were taken down by a

big extent by no doc loans. Those are now basically not allowed under

QM.

We now have a sound regulator, which we didn’t have before. We now

have FHFA. We’re doing risk sharing to transfer government, taxpayer

risk to other sectors. We’re now charging G fees that go to the

government to cover the government guarantee. I mean these are all

reforms that are already in place, and then we just need to go forward and

do a couple of final ones, which include capitalizing the GSEs and

providing explicit guarantee and making sure we have the right kinds of

qualified loans.

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So, that’s our perspective of how we should go forward and like many

other groups here, we’re very concerned about what we’re seeing about

potential provisions in Jumpstart that we think could undermine that.

Josh Thank you very much. So, we’re going to go just a quick round on what

you’d like to see in mortgage market and housing finance reform, and then

I will go through some of the key points of my paper, which was released

this morning. The views in it are my own, and I think it’s a sensible—of

course, I think it’s a sensible approach to GSE reform. But before I do,

since I know that there may be differing views, let’s go a quick round on

how various parties on the call think GSE reform and housing finance

reform should look. Mike.

Mike I’ll start quickly and just add to the Jumpstart discussion. I think all of us

see the Jumpstart as an attempt to put a heavy thumb on the scale of

pushing housing finance reform in a direction which Congress has not

debated on the open floor. It has not gone through the Senate in regular

order. That is a primary concern for us.

In terms of where Center for Responsible Lending would like to see

housing finance reform, we have for some time had a white paper

available on our website. We believe that the GSEs have played an

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important role, that there are significant further reforms needed. We think

that they should be structured in a mutual type ownership that would

address concerns that have been raised by some about the incentives, and

it also provides a mechanism to ensure that smaller institutions have a full

voice.

We’ve seen models of this, for example, in the federal home loan banks,

which came through the crisis in good shape. But again, it has to be a

system that has a duty to serve the entire market. Otherwise, the entire

market will suffer, and it really undercuts the justification for the

government’s involvement in housing finance. Let me stop there and let

others add on.

Josh Okay, and as I said, we’re not going to all agree on a specific point. So,

Ron, what would you like to see going forward, and what are your

thoughts on the mutual approach?

Ron Well, I think for starters, I mean we have said all along through this whole

process, and we were very much involved in the debate with the Corker-

Warner and Johnson-Crapo bills, that our position has always been we

support a well-capitalized, strongly regulated secondary market that

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allows for equal and competitive access for all lenders on a single loan

basis.

I think Scott and Glen mentioned that earlier, that like their members, our

members do not securitize loans for the most part. It’s they sell one loan

at a time, or a couple of loans at a time, and they retain the servicing on

those loans. And so, that’s a critical part for them. It helps them sustain

their franchises as opposed to turning over their customers to the largest

lenders out there.

But, I think the other too that’s important is that it’s not just the smallest

lenders. I think you get away from the top five large financial institutions,

even regional banks, etc. and especially non-banks. They depend on the

secondary market. They depend on the GSEs for that access and their

ability to be able to provide mortgage financing. And so, it’s a much

broader argument than has been portrayed.

What we’d like to see; we want to see the system—number one, we want

to see the system return to a safe and strong condition. There’s a law in

place that was voted on, that was signed by the President. It was a

bipartisan bill. It’s called HERA and quite honestly, for the most part,

most of it’s been ignored through this crisis.

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So, we certainly would like to see the system capitalize. There needs to be

a plan forward that the regulator prescribes some way forward, a plan to

develop capital for the GSEs to prevent another draw. I don’t know of any

financial regulator out there that would say, “Transfer all your risk, all

your credit risk on your business, and you don’t have to operate with any

capital.” That’s completely absurd.

And so, that more than anything else needs to happen. Then I think from

there, if you have a well-capitalized system, I think we can look at other

types of improvements that would certainly sure up the system, improve

the system, fix what’s wrong. If you talk to lenders that use the system,

they’ll probably from an overwhelmingly perspective say, “Fix the

problems as opposed to reinventing the wheel.” So, I think that’s sort of

where we are.

Josh Okay. Gerron.

Gerron Yes, I think really in terms of housing financing reform; first of all, I

would refer all the audience to a white paper we put out last month on

protecting the duties to serve and responsible next steps in the secondary

mortgage market. Listen, we’re in this discussion really for one reason,

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and it’s about low and moderate income borrowers and communities. The

affordable housing goals that Fannie and Freddie administer have been

critical to ensuring credit flows to those borrowers of traditionally

underserved markets, and we’re really committed to protecting the

affordable housing goals and the affirmative obligations that Fannie and

Freddie have.

In that paper that we put out, we say, look here, it’s really what many folks

on the call have said. The Housing and Economic Recovery Act, HERA,

in 2008, which was about a decade in the making really, really enacted a

number of critical reforms to Fannie and Freddie in terms of their

regulator, in terms of capital standards, in terms of their investment

portfolio, in terms of prudential management. So, many of the reforms

have been put in place. We simply need to build on those reforms.

I think looking at the corporate governance structure, looking at the

guarantee structure, those are common themes and common concerns, and

we believe those can be addressed. But, the real Jumpstart is with

recapitalization and ending the conservatorship. We think our system can

be fixed and reformed, but any system going forward really has to have an

affirmative obligation and the affordable housing goals as a part of it.

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Josh Terrific. Just in the interest of time, if we could keep [indiscernible].

Glen, would you speak about what you think reform should look like?

Glen Sure. So actually, I’m going to echo just what Gerron said. Our members

believe that Fannie and Freddie should be fixed and released from

conservatorship. By “fixed” I mean two things. Number one,

recapitalized to very strong levels and number two, have their business

confined to plain vanilla mortgage product and to carefully designed

products that are designed to meet affordability needs and affordability

goals.

We don’t see any reason for winding them down, tearing up, creating a

new system. There’s just no reason for it. America’s housing mortgage

finance needs have been met for the most part since the crisis, and they’ve

been met in large part by Fannie and Freddie’s work.

There’s still a lot of issues to be addressed on the affordability side, but we

haven’t had a massive breakdown. We haven’t had—we’ve kept

mortgage credit flowing. So, why not take this system, fix what we know

were the flaws in the pre-2008 model, and then move forward. That’s our

position.

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Josh Terrific. Thank you. Scott.

Scott Yes, hello. I’ve already talked about what our plans is. You can see it on

our website. We released it in late-September.

Let me just sort of close by going back to the Jumpstart. We, I think,

question not just the concept, but actually the name. Jumpstart implies

you’re moving forward, but it seems like the provisions, particularly the

preferred stock provision, is more of a handcuff. It’s a restriction. So, I’m

not really clear why it’s called Jumpstart.

But, we just don’t see the point in handcuffing the FHFA and Treasury at

this time. They should go forward and take constructive actions like

changing the sweep agreement to help them build up reserves and capital,

and moving towards doing more risk sharing constructively and so on.

And so, I’m not sure we understand the premise of why we would want to

handcuff the strong authority that already exists to move forward on

reform.

Josh Terrific. Thank you. So, I released a paper this morning, which is

available. If you don’t have the link, feel free to ask for it, and I’ll run

through quickly some of my views.

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Again, these are my views. They don’t necessarily represent anyone else

on the call, though given what has been said so far, I think that any

disagreements are more in slight shape than colors.

So, let’s run through a little bit of my points in the paper. First of all, the

GSEs operated well until 1992 when we created GSE reform legislation as

a result of the savings and loan crisis. The only time that either GSE

ended up in trouble prior to that was specifically because of their

portfolios, and that really was Fannie Mae.

Freddie Mac had a different business model. They really originated to

distribute. They never really built portfolios. Fannie ended up in late-

‘70s/early-‘80s because of their portfolio.

So, when Congress set about to reregulate the GSEs in ’89, amazingly

then Treasury Secretary, Nicholas Brady, put forward his

recommendations for what GSE reform should look like. If you go back

and read them, they are almost identical to what ended up in HERA and

had been ignored in the first time.

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But, if you think about the GSEs and some of their benefits, they created

standards in a market where the largest firms have continued to fight

against standards. The historic reasons for their trouble are all clear: One,

the portfolios; two, a lack of capital; three, the underpricing and

mispricing of credit and G fees, giving large volume discounts to the

largest players, and if you were to think about the fourth, which is mission

creep.

Fannie and Freddie, largely through their portfolios, crept into the primary

market, and the secondary market and the primary market should never

meet. The secondary market is supposed to be counter cyclical. The

primary market definitionally is pro-cyclical.

So, the reform proposals we’ve seen thus far are recreating the system that

failed. When you comingle the primary market with the secondary

market, you lead to pro-cyclicality, to expect that allowing the primary

market players, the largest primary market players to take over the

secondary markets is going to result in a different outcome is the

definition of insanity.

If you were to then look at specifically the proposals that we’ve seen in

legislation, and I’m really talking specifically about Corker-Warner and

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Crapo-Johnson, they remind me of an incident that happened to me about

a year and a half ago where I was driving and I pulled up to a stoplight in

front of Grand Center and a car hit me from the back. It turned out the

driver was texting.

I got out of the car and looked, and it was really just a minor accident,

fender bender, paint, etc. I had three options that were rational economic

options. The first, get his insurance information, file an insurance claim,

and move on with it. That is the most rational economic answer.

The second would have been don’t bother repairing the car because I don’t

want to pay the deductible now, but understand that the car may depreciate

a bit when I got to sell it because it’s unrepaired and may actually fall into

further disrepair. Less of an economically intelligent decision, but

nonetheless, a decision that one could justify.

The third is just take the car to a junkyard and junk the car. That

obviously would an uneconomic and silly option. First of all, it would

take me time to save money to buy a new car. Second, I’d be throwing out

all the residual value in my car.

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The current proposal, or the recent proposals, Corker-Warner, Crapo-

Johnson, seem to have come up with a fourth option, which is to build an

entire new auto assembly plant to build me a new car. That’s really where

we are. It doesn’t make any sense. It’s uneconomic. It risks all sorts of

problems in the creation and manufacturing, and it stands the existing

asset. So, that’s the first.

Second [indiscernible] problems. Both of these options are pro-cyclical.

As I said, they comingle. They contract credit. They undermine Dodd-

Frank Act by reintroducing new avenues for interconnectedness and the

systemic risk of our largest financial institution. That’s especially with

some of the proposals that have been pushed on the Hill and pushed by

those institutions.

Deep MI. We all know that the private mortgage insurance industry, it

remains undercapitalized. They have a total of about $10 billion of capital

today. Certainly, not enough to support the top 20%, let alone top 50% of

the mortgage market.

Second, the common securitization platform, which creates unequal access

for the big firms over the small firms. It will functionally turn the small

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firms into third party aggregators for the big firms just like many of the

independent lenders were before the crisis.

The third is the notion of upfront risk sharing, which if one were to go

through the proposals, they’d realize that the upfront risk sharing

proposals really are pro-cyclical. The first whiff of weakness in the

economy, that private capital would disappear. So, existing transactions

would in fact be fine, but you’d have a shrinking of credit at exactly the

time that you want it.

And so, you’re just creating a system, again, where you have private

profits and public losses. The oversight complexity is something that you

never hear anything about, but if you were to go through with Crapo-

Johnson, Corker-Warner, you would create the most complex regulatory

oversight structure of any market. Again, it would be an avenue for

capture by the largest financial institutions with no ability to hold them to

any responsibilities to support a level playing field, or support affordable

housing given the fact that they would have the ability to play off the

regulators against each other.

The other major problem is it broadens the government guarantee, and this

is something that they’re all pushing for. It broadens the government

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guarantee to all mortgage-backed securities rather than seeking to make

the guarantee as narrow as possible, which is not in the public interest.

So, let’s go through some of the false myths. The first is private capital

can replace the GSEs. As we’ve already mentioned, as I’ve already

mentioned, there’s no enough private capital in either the private mortgage

insurers, or in the public markets to take on the risk that Fannie and

Freddie have been called on to take on. You’ve about $11 trillion in total,

mutual fund and other managed assets in the United States. So, if you

think about the percentage of that that would be required to take the top

20% you realize that it’s both uneconomic; it’s counterproductive to

function in capital markets, and capital formation in other sectors of the

economy. Again, it’s pro-cyclical. That capital will flee precisely when

you need it to be stable.

The second false myth is we need more competition. This is really one of

the ones that we hear everyone sort of commonly accept. It makes no

sense either.

If you were to think about part of the reason that we even are moving to a

common security with Fannie and Freddie is because Fannie, the more

volume it got, the better its execution price. The better its execution price,

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the less volume Freddie got. The less volume Freddie got, the higher their

execution costs. You ended up with this downward spiral where Freddie

was less and less able to compete, and had to go further and further down

the credit curve and underpricing of risk to even be able to function.

You have to recognize that there are industries that are natural

monopolies. The secondary mortgage market as distinct from the primary

lending markets is a natural utility. To add more than two players make

absolutely no sense.

If you think about how many water, gas, sewer or electric utilities you

have in your locale, it’s probably one. When you go home at the end of

the day and you turn on your lights, or you turn on your water, they work

regardless, by the way, of the economic cycle.

The third false myth is any guarantee has to be on the securities and not

the issuer. This makes absolutely no sense. If the issuer is terrifically

capitalized, passes through the exposures, the credit risk exposures either

through securitization, or securitization and back-end risk sharing, you

really have the ability to have it on the issuer. This false beam is really

being put forward by those same largest sell side institutions and frankly,

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some of the larger buy side institutions who are really looking for high

credit, high quality, guaranteed assets to hold.

So, contrary to the proponents of Corker-Warner, no one is—Corker-

Warner and this morning’s New York Times editorial, no one is pushing

for the status quo antic. HERA authorizes FHFA to be independent. It

creates strict rules that would have prevented the GSEs’ troubles,

including by the way winding down the portfolios, giving the regulatory

authority over capital, ensuring that GPs are properly priced.

The GSEs have been doing back-end risk transfers like they do on the

multifamily side. In the multifamily side, they transfer up to about 90% of

that risk. On the single family side, it’s very reasonable to expect that they

can get to 50% back-end risk transfer in the next few years. Real credit

pricing, the regulator has already done a good job of managing.

So, what do we need? We need a government guarantee, but that can be

very, very limited. That can be behind 4% capital in our paper, and real

risk transfer by companies that have essentially not portfolios. It will be

paid for an on an annual basis through the FSOC. They would determine

the assessment of the commitment fee, which would be tied to market

pricing. So, it would have actually funded catastrophic risk insurance

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product, and it would really just be there to be a market signal that there is

some support for the to be announced market.

So, furthermore in our minds, the GSEs should be available for smaller

firms that don’t have the ability to execute in capital markets; in other

words, to do securitizations, throughout the cycle. In good times, those

firms that have capital market execution capability, the largest firms, there

really is no reason that they should get a credit wrap on their issuance. If

they capital market execution and the GSEs are properly pricing credit, the

execution costs between a wrapped and unwrapped should be fairly

negligible. And so, we should create disincentives from the largest firms

being able to use the enterprise’s wrap in good times, and ensure that in

good and bad times there’s credit through the GSEs for everyone. That

would support the counter cyclicality that we need to see and didn’t see

before.

It seems to me that after all of these changes were put in place there’d

really be a very limited need for legislation. In our view, the GSEs are

like gas, water, sewer, electric and other natural monopolies. They should

be regulated as countercyclical utilities.

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So, you can regulate them with the Public Utility Commission, rate of

return caps, and those rate of return caps would ensure that the GSEs do

not creep into the primary market, do not seek to lend into markets that

they shouldn’t be lending into without at least properly pricing the credit,

and clear missions. Regardless of the economy, again, you turn on your

faucet and the water flows, and that’s not just in the homes of the rich.

You create, as utilities, potentially the old notion of a granny stock, which

is a strong capital base with a rate of return cap. It would reduce the risk

of creep into the primary market. It would reduce the lobbying power of

the GSEs and frankly, it’s a fairly simple, straightforward approach that

eludes Washington solely because Washington follows the money, not

common sense.

Anyone want to make a quick comment on that of the group, of the

speakers, or should we turn it over to Q&A?

M I’m fine with Q&A.

M Yes, let’s go with Q&A.

Josh Okay. I would ask, operator, that we really reserve Q&A for members of

the media. Obviously, there are a lot of folks from Washington, from the

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Hill, probably from the investment community, but we’d really like to

open it up to the media. Thank you.

Moderator We’ll go to the line of Lorraine Woellert with Redfin.

Lorraine Hello, guys. Thanks so much and Josh, I’m sorry. I haven’t yet read your

paper this morning, but 60,000-foot question. So, help me explain the

difference between the status quo guarantee on the bonds, and what it

would look like under recap and release under your proposal. Then

second, can you all talk about the access to credit issue? I mean we

currently don’t have many loans going to people of color. How would you

deal with that?

Mike This is Mike with Center for Responsible Lending, and I’ll make a couple

of quick comments and others can join in.

I think all who are on the event today have supported an explicit paid for

government guarantee. If there are any who disagreement, they can make

that known. So, that would be an explicit change from the guarantee

structure today. Then I think your question about access to loans, we have

pointed out that the GSEs, while they did well in the ‘90s, that particularly

in recent years lending has been low. Less than 3% of their loans, for

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example, have gone to African American homeowners for first time

purchase loans out of their first time purchase loan portfolio.

Some of that reflects that after the crisis they understandably and correctly

focused entirely on the coming sustainable/profitably again. They have

announced a number of initiatives to increase lending responsibly to these

borrowers, and we expect and we will continue to monitor and push them

to make sure that those programs do in fact provide fair access to all

families.

Scott This is Scott Olson. I would add that the perverse nature of the current

sweep agreement, which is heads we tie, tails we lose, I think is

contributing to this because they don’t keep any of the profits and they

don’t have any capital. But, if they have any losses, they lose that; they

lose some of their precious reserves/; I think creates incentives for them to

be more conservative and that’s one of the reasons we’re calling for

building up their capital.

Gerron Josh, we have John Taylor here, President and CEO here at NCRC and he

wanted to share a couple of comments on that question.

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John Thank you, guys and gals. I’m sorry for interrupting. I’ve actually been

listening to the conversation from almost the beginning. And so, I just

wanted to add a couple of things.

One is I wish the press would get accurate the phrase “recap and release.”

It’s really—no one’s suggesting that we recapitalize and then just release

them. As Josh and others have said, anybody who puts forward the idea

that we’re going back to the old system really isn’t paying attention. None

of us want that. We really want reform.

And so, this is really recapitalization and reform is a more accurate phrase

to use in this space. You’ve heard many of the reforms, which NRCR

does indeed identify with.

I do want to address the issue of the failure of Freddie in particular. But

also, even though Fannie passed the—the failure for Freddie to do enough

lending to pass the affordable housing goals, and Fannie just did so, really

has less to do with the actual GSEs and more to do with FHFA, which

really controls products fees, G fees, the kind of business that they’re

willing to allow the GSEs to do.

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In fact, if you look at the performance of the GSEs in terms of what they

have done to securitize loans for LMI as well as people of color, clearly

outside of conservatorship they did a much more rigorous and effective

job with higher goals. It is within conservatorship, under government

control that they’ve hit their lowest ebb in recent history in serving

underserved populations.

I agree with the comment about—I think it was Scott Olson talking about

the profits, the incentive of Treasury to continue the current system. I

actually think Treasury is addicted to the profits and that that’s really

hampering the ability of the GSEs to actually build capitalization that

would allow them to come out and compete in the market.

I do want to say on that that I think there are, as Scott Olson and others

have pointed out, there’s a lot of protections in place now that didn’t exist

before. So right there alone, there’s a tremendous amount of reform that

has occurred, whether it’s through Dodd-Frank, QM, a number of other

initiatives that essentially cleaned up the market, and there are other things

that we can do right under FHFA, within their jurisdiction to be able to

create more transparency, require capital reserves, do things that make the

system even stronger.

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The idea that anybody is proposing that we go back to the old system—the

only part we want for the old system is that there was—for most of their

history, Fannie and Freddie, for most of their history created the

opportunity for more than half the population in this country to be able to

get into homeownership. They did it with prime loans. They did it

responsibly. The fight back then a few decades ago was to make sure that

they paid attention to minorities and to working poor people. That was

fixed with HERA and with the affordable housing goals.

So, there’s been a lot of changes. What we would be doing—I love the

analogy from Rosner about what happens when he gets into a car accident.

I think it’s accurate, that we seem to be building a whole new system

when what we had was a system that worked pretty well through most of

its history, that needs to be fixed, that needs to be capitalized, that needs to

do more risk sharing. I think we have that capability.

I shudder to think what will happen if we begin to reinvent the whole

system of securitization in this country, what the reaction is going to be

from all the lenders, from Wall Street, and what a mess it will be trying to

build a new securitization system. So, I’ll stop with those comments.

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Josh I’d like to add—this is Josh. In answer to your question, the difference

between the guarantee that I’m proposing and the guarantee that currently

exists. There is no real guarantee today. And so, that’s actually one of the

false beams that also needs to be dispelled.

If you go back and you look at an e-mail from Hayley Boesky when she

was the New York Fed in the heart of the crisis, September of 2008, she

points out that the one stumbling block is Treasury included an “Explicit

disclaimer of guarantee in their backstop with the GSEs. This states

clearly that the Treasury’s commitment “shall not be deemed to constitute

a guarantee” by the United States of payment to performance of any debt

security of the GSEs.” “It would seem to be difficult to justify treating

GSE debt exactly the same as government debt from a regulatory capital

perspective on this basis.” Those are her words, and I think that those are

accurate words.

So right now, we’ve got an extension of an implied government guarantee

that’s taken as a contingent liability. What I’m talking about is a very

narrow—you can turn the existing size of those guarantees into an explicit

guarantee that the GSEs pay for an annual basis, that stands behind 4%

capital, that stands behind first loss risk transfer, and therefore would

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never be called upon, and the GSEs would be paying for it. That’s a very,

very different system.

Second, again, if you were to structure them as a utility with even a duty

to serve, the rate of return caps and the requirement that they properly

price credit, you would end up with a system that would takeaway most of

the problems that existed before the crisis in terms of taking on credit risk

that reduces their viability in an economic downturn.

And so, the answers here, as I said, are really simple. We’re not talking

rocket science. We’re just watching the simple answers having been

distorted by special interests that really want to capture the market for

their own interests.

Moderator Currently, we have no questions in queue.

Josh Interesting. Okay. Should we open it up, folks? Any thoughts? Outside

of the media?

M Sure.

M Sure. Yes, let’s go ahead.

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Josh Okay.

Moderator Okay, and I do have a follow-up. We can go back to the line of Lorraine

Woellert with Redfin. Please go ahead.

Lorraine Great. Thanks, guys. So, Jumpstart, I mean is it really happening, or can

you help me put this in political context? I mean I know you’re worried,

but how serious is this?

Josh I’m going to defer to others on that.

M You mean if it’s adopted.

Lorraine I’m talking about the likelihood of it being adopted. It seems unlikely,

right?

M I don’t that it seems unlikely.

M It is very much [indiscernible]. I think all information is it’s very much in

play. It’s been in some of the drafts that are currently being debated

among the leaders of the House and Senate. There’s a very strong push by

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some supporters of Jumpstart to have it included. So, it’s very much a

toss-up whether it will end up in the final omnibus.

Gerron Yes, I mean that’s our read of our—this is Gerron Levi with NCRC.

That’s our read as well. I mean there’s a very strong push here to include

it in the omnibus. It may not be—there are various versions of it as well

that are being considered. So, we’ve heard everything from a two year

sunset to some version that would allow the enterprises to rebuild capital,

or mandate it. So, I think the threat is very real, but it may look different

from the original version of the bill.

Moderator We’ll go to the line of Andrew Heckel with Merrill Lynch.

Andrew Yes, hello. Good morning. Thank you for hosting the call. My question

is this; do you anticipate, or do you suspect that the current Administration

is allowing the legal situation to playout, to be the catalyst to move

forward? Thank you.

Josh So, I’m going to start with that because to me, there’s a couple of different

issues here, right? If you were to read HERA, it makes it very, very clear

that only FHFA has the authority to make determinations because it’s got

an affirmative duty to either decide that the companies cannot be

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adequately capitalized, in which case it’s supposed to put them in

receivership, or can, in which case it’s supposed to force them to rebuild

capital.

The Treasury agreement, which created the sweep, which was signed by

FHFA and Treasury and the enterprises, doesn’t seem to have any legal

basis in trumping the statutory requirements of HERA. That’s a clear

priority of the law.

So, the fact that we’re even having a conversation about the administration

leading on the legal outcome is, again, sort of a false beam. It accepts that

the Administration has the authority to make that decision over an

independent agency, which is statutorily required to make those decisions.

Beyond that, on the policy side of things, I do think that to some degree

that plays out. But, I don’t really think that it should be playing out that

way. The legal action is going to go the way the legal action is going to

go. You don’t put the public at risk and public policy at risk just because

of that.

So, I think there is a piece of that that’s driving it. But honestly, I think

the larger piece is that the folks who have been the most aggressive

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lobbying are and have been lobbying for Corker-Warner, Crapo-Johnson,

which looks a lot like, almost identical to the initial position that the

Geithner Treasury put forth. And so, I think to some degree, they’re

wedded to a position that they may not even believe in any more. I’m not

saying they do or they don’t, but it’s unclear.

Scott This is Scott Olson. The other thing I would point out is that the theory

behind Jumpstart seems to be if we can handcuff the FHFA, then that will

impel Congress to act. But, I think if you took a survey of people that

follow this, no one believes there’s going to be GSE legislation next year,

and Congress has found an increasingly difficult to pass any legislation.

So, the question, again, is why would you hamstring the regulatory

process, particularly since under the preferred stock agreement or the

amendments, they’re going to have their capital taken away from them

systematically over the next two years. It’s only a matter of time if we

don’t change the sweep agreement that they’re going to need a Treasury

advance. And so, it just seems like the wrong prescription to basically

handcuff everything.

Josh Operator, I think that we have another reporter in the queue.

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Moderator Okay. Our next question will come from Michelle Celarier with New York

Post.

Michelle Yes, Michelle Celarier. Yes, I have a question about what’s going on in

the omnibus bill as well.

First of all, is whatever comes out of that bill—are we stuck with it? I

mean is that the way this process works, that once the bill comes out,

everybody’s already agreed to it? That’s one question.

The other thing is at least one of the drafts that I saw seemed to say that

whatever this legislation is would not take precedence over any judicial

ruling. So, would that mean that if there is some sort of a settlement on

some of these lawsuits that leads to some sort of recapitalization and

release, or something like that, that this legislation wouldn’t even matter?

Josh Again, I’m going to defer to the people more in the legislative side.

Gerron I mean first of all, as a matter of course, just generally, once it is

committed to language and filed, it is tremendously—it’s far more

difficult to change it at that point. So once it’s in, it’s very, very difficult

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to get various language out, or change. It does happen, but it’s far more

difficult.

I mean we’ve all heard of the possibility of the settlement language.

Without knowing what the language will actually be, I think it’s just hard

to speculate on how it will affect the outcomes of the enterprises.

Moderator Our next question will come from Scott Wilber, The Range. Please go

ahead.

Scott Hello, yes. Good morning. Gee, I didn’t think I’d come up that quickly. I

have a couple of questions. I’m sorry. Go to the next caller.

Moderator Currently, no questions in queue.

Josh Okay. Well, I’d like to thank all of the participants for giving their time so

generously. Hopefully you’ll read my paper. I think it’s fairly clear and

will layout clearly that not only am I not suggesting a return to the status

quo ante, but that many of the fixes are already in place and that many of

the arguments in favor of alternative proposals that we’ve seen are based

on a significantly flawed thesis.

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If you have any questions, obviously feel free to call me. I would suspect

the same would be true of everyone else. With that, unless any of the

speakers have any more comments, I think that’s the call.

John Josh, if you don’t mind; John Taylor. I just wanted to say I think that what

often is missed in the coverage on this debate is that what we and the folks

on this call are discussing are the practical solution to making sure that we

have a robust and effective system of housing finance. But, what’s really

driving things on Capitol Hill is a political discussion.

I think the Conservatives in Congress were very effective at vilifying

Fannie and Freddie to the extent where many people sort of blame them

for the crisis, even though they really followed the market. For many

years, they stayed out of it, but they followed the market into the subprime

predatory abyss and it was really the market that drove this whole

unsavory, unsustainable kind of lending that brought us the Great

Recession.

Certainly Fannie and Freddie when they got into it, got into it in a big way

because of their infrastructure. Even then, they had limits on the kinds of

things they were willing to securitize. But once the market fell, indeed,

because of what was in their portfolio, they fell with it.

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But, Congress and the Conservatives were so effective at vilifying Fannie

and Freddie and protecting those on Wall Street that the Democrats today

do not want to appear to be, and don’t want to be facing elections, whether

it’s a Presidential or the next Senate and House races, with people arguing

that the Democrats let Fannie and Freddie off the hook and let them back

out into the market when of course not only did they not lead the market,

and by the way, those very same people are not arguing for an end to this

Wall Street [indiscernible].

The fact is that Fannie and Freddie did a tremendous job through most of

their history. This is a political discussion going on in Capitol Hill. Why

a lot of it doesn’t make sense, and I really encourage you to read Josh’s

paper, as well as CRL’s and our paper at NRCR because if you really look

at the arguments as to what makes sense. IT doesn’t make sense to create

a whole new system of securitization, which will then be fraught with

uncertainties. When there are uncertainties, you can bet your bottom

dollar that the market will have a lot of problems.

Certainly, the whole reason for having GSEs, the primary reason, and that

is to help people become homeowners, to help the homeownership market;

would really be undermined, particularly for low and moderate income

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and people of color. The problem now is Democrats and Moderate

Republicans have to have the courage to say, “You know what? We can

recap and reform this system in a way that works, and has worked very

well for Americans, but we can have greater protections in there and not

against the kinds of actions that would get these GSEs into trouble.”

That is the most sensible, easiest solution. But, unfortunately, it isn’t the

easiest political solution because politics will, once again, come in and be

used in a way that hurts people in elections. I just wanted to add that

because I really hadn’t heard that in the discussion.

Josh John, you actually begged me to then make a point on my book that I co-

authored called Reckless Endangerment. I disagree slightly because I

think Fannie and Freddie between ’95 and the crisis seasoned the market

with the notion that homeownership is, in and of itself, a good and they

created standards that then the private market took and distorted for their

own use, leading us down. So, I would say they seasoned the market, and

then the private market drove us to the race to zero; Fannie and Freddie

jumping back in at the end of that.

But, if you look at their history, Fannie from 1939 until I would say 1995

and Freddie from ’71 until ’95, the GSEs served their traditional role

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without problem. And so, there is nothing inconsistent with my view of

the GSEs were integral in seasoning the market to crisis, that the private

market then drove us over the cliff in the crisis, and the suggestion that the

GSEs in their fundamental purpose, the purpose in which President

Roosevelt created the notion of the secondary mortgage market. There’s

nothing inconsistent in those perspectives.

Scott This is Scott. I mean a strong regulator, in fact, the current FHFA, had

they been in place in 2003, ’04 and ’05 could have, and probably would

have stepped in to stop them from doing no doc loans and stop them from

buying those MBS that they were buying off the shelf, and they would not

have gone into conservatorship.

Josh Had they had—

Scott Even under the old model if they had just had that kind of regulatory

diligence.

Josh And if they had significant capital, which is the irony here. We’ve starved

them of capital where capital, had they had the level of capital that banks

had, would have prevented them from getting in trouble.

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M Well, and if we had regulation of the independent mortgage companies

that prohibited them from knowingly making unsustainable loans, that

would have helped [indiscernible] as well.

Josh Absolutely.

M Regulation mattered.

Josh If there’s no further questions, operator, thank you, everyone for listening

to the call. I’d like to thank the participants, again, for joining the call.

Feel free to follow-up with any of us.

Moderator That does conclude the conference for today. Thanks for your participate,

and for using AT&T Executive Teleconference. You may now

disconnect.