No Surprise: Ambitious Plan to "Fix" Entire Housing Market Met With Mixed Reaction
Does the entire housing market need fixing? Senator Mike Crapo thinks so, and he has a gargantuan reform proposal on the table to prove it (covered here in February). Witnesses called to testify before The Senate Committee on Banking, Housing, and Urban Affairs this week weren't universally convinced, but acknowledged potential in several areas.
Crapo's prepared remarks pointed out that ten years
after the government put the GSEs Fannie Mae and Freddie Mac into conservatorship,
they remain "stuck [there] with taxpayers still on the hook in the event of a
housing market downturn. It appears that
the old, failed status quo is slowly beginning to take hold again, with the
government in some ways expanding its reach even further, entering new markets
where it has never been before."
Today,
Fannie and Freddie, along with government-insured mortgages, dominate the
mortgage market. Approximately 70 percent of all mortgages originated in
this country are in some way touched by the federal government. His
outline, he said "Sets out a blueprint
for a permanent, sustainable new housing finance system that: protects taxpayers
by reducing the systemic, too-big-to-fail risk posed by the current duopoly of
mortgage guarantors; preserves existing infrastructure in the housing finance
system that works well, while significantly increasing the role of private
risk-bearing capital; establishes several new layers of protection between
mortgage credit risk and taxpayers; ensures a level playing field for
originators of all sizes and types, while also locking in uniform, responsible
underwriting standards; and promotes broad accessibility to mortgage credit,
including in under-served markets.
Twelve
witnesses have submitted prepared testimony for the hearing. Tuesday's panel
was made up of:
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Sue Ansel, President and
CEO Gables Residential appearing on behalf of the National Multifamily Housing
Council and the National Apartment Association.
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Edward J. DeMarco, President
Housing Policy Council (HPC), former Acting Director of the Federal Housing
Finance Agency (FHFA).
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Greg Ugalde, Chairman of
the Board, National Association of Home Builders (NAHB)
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Mark M. Zandi, Chief
Economist, Moody's Analytics
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Hilary O. Shelton, Washington
Bureau Director and Senior Vice President for Advocacy and Policy, NAACP
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Adam Levitin. Professor of
Law, Georgetown University Law Center
Ugalde expressed concern
that the lack of congressional action on housing finance reform might allow the
administration, principally FHFA, to step into the gap and introduce more
conservative solutions. NAHB is pleased,
he said, that the initial reform plans that called for winding down the GSEs
have moderated to allow them to remain important participants in the proposed
new system.
He also expressed concern
that Crapo's proposal to designate Ginnie Mae as the operator of the
securitization platform and to provide the explicit government guarantee for
all mortgage backed securities (MBS) could provide difficulties if the agency
is unable to scale up as quickly and effectively as needed to maintain market
liquidity.
Shelton presented some
specific recommendations for reform that would help remedy some of the inequities
persons of color have faced in the housing market. He said a secondary
market structure that is too narrow increases the risks of perpetuating the
current two-tiered lending system in which white, more affluent buyers are
channeled into one system with one set of fees and racial and ethnic
minorities, people of color, and low- to moderate income buyers are funneled
into another. Among his recommendations were:
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Continuation of the "Duty to Serve" provisions for the GSEs and other government
programs
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Preservation and
enhance of fair housing and anti-discrimination laws.
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Preservation of FHA
insured lending, responsible low-down payment mortgage loans, and access to
existing down payment assistance programs and promotion of cost-effective loan
modifications for existing homeowners.
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Recognition and
boosting of the role of housing counseling, both pre- and post-purchase.
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Broad access to capital for all borrowers as
well as institutions of every size.
Zandi said
Crapo's outline leaves much to be resolved, but it does offer a promising
framework from which to begin. He
suggested three critical design issues that need to be addressed and provided
extensive suggestions as to how that might happen. The issues were, how the lender-issuer
channel will work; how the new system will attract a sufficient number of new guarantors
to ensure adequate competition in the secondary market; and how the system will
ensure broad access to affordable credit.
DeMarco
called the role of FHFA and Ginnie Mae as set out in the outline a "hybrid
model" with FHFA setting capital and liquidity requirements for guarantors as
well as the eligibility and underwriting of loans to back the MBS. Ginnie Mae
would pool the loans and guaranty them, regulating the business requirements
and terms. Guarantors would pay a fee into a Ginnie Mae-managed Mortgage
Insurance Fund (MIF) to cover losses in the event of the failure of a
guarantor.
He said HPC believes that this
hybrid model is not only feasible, but also that it reduces the systemic risk
associated with the current Fannie Mae/Freddie Mac duopoly by encouraging participation
for new market players while introducing market discipline and ending too-big-to-fail.
Adding stand-alone guarantors and credit-risk transfers will create more
channels for private capital to improve overall liquidity as well as the
distribution of risk across various private market participants - all in front
of the government guarantee.
Ansel addressed the outline
from the perspective of multifamily lending. She noted that the increase in household formation is expected to create a critical need
for 4.6 million new apartments at all price points by 2030. This means building an average of 328,000 new
apartments every year, a mark that has been hit only twice since 1989. There is also a growing affordability issue;
more than one in four apartment households paid more than half of their income for
housing in 2017.
The availability of consistently
reliable and competitively priced capital is absolutely essential to the health
of the multifamily market. The organizations
she represents believe a reformed housing finance system should:
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Maintain an explicit, appropriately priced and paid-for federal
guarantee for multifamily-backed mortgage securities;
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Recognize the inherent differences of the multifamily and single-
family businesses;
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Promote private market competition;
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Protect taxpayers by keeping the concept of first-loss risk
sharing models;
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Retain
the successful components of the existing multifamily programs; and
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Avoid
market disruptions during the transition to a new finance system.
While other witnesses were more or
less receptive to the Crapo proposal, Levin was not, saying he was deeply
concerned about its basic direction. The
market today is functioning well, he said.
Most qualified Americans are able to obtain a long-term fixed-rate
mortgage, lock in an interest rate prior to closing, and choose among thousands
of institutions to get their loan. "The
multi-guarantor system proposed in the Chairman's outline would place all of this
in jeopardy," he said. It will mean:,
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Rural
consumers being unable to obtain credit on equal terms to urban peers;
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Consumers
being unable to get 30-year fixed-rate mortgages on competitive terms and
unable to readily get pre-closing rate-locks;
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Small
lenders being shut out of access to the secondary market; and
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An
unstable, procyclical market that will put taxpayer funds at risk.
These predictions may appear dire
he said, but they are not speculative. "Much of this is what happened during the 2002-2008
housing bubble period, as well as in the pre-New Deal mortgage market."
Countrywide Financial, Washington
Mutual and other private-label securitization (PLS) sponsors grew their market
share by lowering underwriting standards so that the risk-adjusted price of credit
fell even as the supply expanded. PLS financed primarily nontraditional mortgages
and PLMBS were insufficiently standardized to trade on the to-be-announced
(TBA) market. By the end of the bubble, there were PLMBS with geographically
concentrated pools, such that if the bubble had gone on longer, a national
market would have ceased to exist. The massive underpricing of risk in that
market enabled borrowers to bid up home prices to a level that made a crash all
but inevitable.
Levin says that fortunately there
is an easy fix that would avoid the secondary market competition that resulted
in market segmentation and pro-cyclical pricing. The reform must ensure that guarantors are
taking on market-wide credit risk, rather than the credit risk on a segment of
the market. If guarantors assume market-wide credit risk, the market will not segment,
and guarantors will not price pro-cyclically. This is best achieved through a
single-guarantor structure combined with back-end synthetic credit risk
transfers (CRTs). Such a structure would be a formalization (with some
important adjustments) of the current, well-functioning system, which is a
single-guarantor system in all but name.