Mr. Brian Brooks Testimony - U.S. House Financial Services Committee

Well, Mr. Chairman, Ranking Member Waters, and members of the committee, thanks for having me today. It's great to see many of you again. Most Americans know, as you said, Mr. Chairman, that everything got more expensive over the past 5 years as the country experienced the highest inflation since the 1970s and house price inflation was dramatically worse than inflation as a whole. Between 1991 and 2025, US home prices increased at literally twice the rate of background inflation and prices of houses are compounded by high prices for credit. Interest rates remain persistently high and regulatory pressures have reduced credit supply to a point that is almost as significant as the problem of housing supply itself. So today I'll focus on several specific dimensions of this problem. First, let me start by addressing the housing supply deficit. We are about 5 million units short of what would be required to support total housing demand in this country. And one reason is the magical thinking of rent control. I live in Los Angeles where I recently saw a billboard on the side of a decrepit building that literally says rent control, an LA tradition since 1919. And LA's housing cost has been one of the highest in the nation almost that entire time. Is this in spite of rent control or is it because of it? In some cities with rent control laws, such as New York, where my company is headquartered, regardless of a building's operating expenses and maintenance or repair needs, not only are annual rent increases capped for existing tenants, but the rent can't even be increased when an old tenant moves out and a new tenant moves in. As a result, building owners, including many of my firm's clients, can predict with incredible accuracy the day on which the expenses of the building will exceed the building's income. And on that day, there is no further capital available to perform necessary maintenance, meaning that small deferred repairs turn into major structural problems. And as we learned in 1970s New York, the building then fails. It's taken over by either the bank or the city, and the disaster becomes a taxpayer problem without any tenants being any better off. Rent control deters investors from building new housing units because they can't recoup their investment. So rents rise in those cities due to shortages while rents are stable or even falling in places without rent control laws. Places like Austin, Dallas, Denver, Phoenix, which have experienced building booms. Then there are the local environmental permitting, climate mandate, zoning rules. I mentioned again, I live in Los Angeles about 5 miles from the Eden fire burn zone that destroyed almost 7,000 structures. More than a full year after that devastation, construction has begun on only about 7% of those burned-out properties and even fewer in the Palisades fire area. LA's complicated overlapping rules on an array of environmental, fair housing, energy efficiency, and similar issues may not explain all of that slow rolling tragedy, but it's undeniable it's a significant part of it. The federal government can actually address all of this. Some of what this committee passed in the Housing for the 21st Century Act is a great start, but there's more. The Housing and Urban Development Department distributes tens of billions of dollars in state and local grants. Those funds require a finding that local policies promote the construction and availability of housing. HUD could declare that some of these rent control and permitting ordinances in fact reduce the construction and availability of housing and refuse to subsidize states that pursue these policies. HUD also has the power under section 8 and various other statutory provisions to revoke approval or withhold funding to localities that pursue policies that reduce the supply of housing. HUD could further consider preempting state and local rent control, environmental review, climate change, and other anti-housing laws to the extent that they would apply to HUD-insured mortgages. The affordability situation, especially in our blue coastal cities, is dire enough that all of these options have to be considered at this point. Now, let's talk for a moment about federal banking policy. Something that all of us know well. Since President Obama signed the Dodd-Frank Act in 2010 and accelerating during the last administration, federal banking policy has sharply reduced banks' role in housing finance. Non-banks currently originate the large majority of all mortgages. And those loans that are made by banks usually wind up on the government balance sheets of Fannie Mae, Freddie Mac, Ginnie Mae, or the VA. At this point, only about 10% of mortgage credit risk is actually borne by the private sector. Dodd-Frank is partly to blame since it imposed a series of rules that disincentivized mortgage lending as a banking line of business. But separately, bank supervision, including by my old agency, the OCC, led banks to be very wary of lending to apartment owners and developers. Time and again, those of you who speak to community banks will hear the story of how over the last five years, the OCC, the FDIC, and the Federal Reserve have gone into banks and have declared that performing loans that have never had a payment default should nonetheless be charged off in an effort to make sure that they're not embarrassed by another Silicon Valley Bank failure again. And that overcorrection has drawn community banks out of the sector, forcing the federal government to deal with the situation. In my written testimony, I talk about a couple of other topics which I encourage you to talk about today, including Fannie Mae and Freddie Mac and their future. I appreciate the committee's time. Thanks so much, Mr. Chairman.

Well, Mr. Barr, thank you for the question. It's great to see you again and thanks for your leadership on that bill in particular. It's a great idea. I would argue the most important idea of the package that the committee is looking at. And I say that because community banks are so much better credit managers of these kinds of loans than our Fannie Mae and Freddie Mac. And why? Because they live in the local community where they know the asset, they know the borrower, they know the history of the asset. I think about Mr. Huizenga's story about his small apartment building in Michigan, right? Where the local bank that knew him well was not allowed to invest in that loan and instead it got shipped off to some bank someplace else that wouldn't know it as well. So first of all, an enormous amount of deployable capital sits in banks below $10 billion which is what you're focusing on in this street act. And nothing wrong with non-bank.

Well, as several witnesses have already said, Congressman, the foundation of most households' wealth is their equity in their house. And so, the ability of a household to spend, the ability of a household to sell the house and move for a better labor opportunity, it's all really tied up in the robustness of the housing market. And as I said, the robustness of the housing market has two aspects to it. There is the price of the house and your ability to sell it. So we saw in the financial crisis that labor mobility went to zero because no one had equity and they couldn't sell their houses. And the second piece is the price of credit which is how much does it cost me every month to pay my mortgage and stay in that house. Both of those things are inflated right now which contravenes what you learned in economics class in high school. Usually if the cost of money is high then the cost of the underlying asset is low. Right now we have a strange stagflation in the housing market. Something's got to be done about it. This is the Committee on Financial Services. And so you have jurisdiction to oversee the credit allocation in this country. And I would argue that the regulation of our banking sector, the reduction in competition in lending to Main Street, right, where people can use home equity to fund businesses or sell houses to move for better jobs. That system's broken. It used to work well. It stopped working after the crisis.

Well, Congressman, one of the things that happens is foregone consumption because most people don't have access to Goldman Sachs. So, if First National Bank of my hometown in Colorado isn't going to make the loan, the loan's not going to get made is the bottom line. Most capital formation happens locally and if community banks are not unleashed to supply that demand, you're mostly out of luck.