"Everyone working in the mortgage business feels like there is a giant target on their backs," David H. Stevens said in remarks prepared for delivery today at the Mortgage Bankers Association's (MBA's) National Secondary Market Conference and Expo.  Stevens, MBA's President said the Department of Justice and other enforcement agencies appear to be in charge of the nation's housing policy and both consumers and the housing market would be better served if the tone in DC changed.  Housing policy, he said, is failing today.

The mortgage industry has acknowledged and taken accountability for its role in the meltdown and lenders have paid hundreds of billions of dollars in settlements and made major changes in controls and compliance.  But now it is time for policymakers at both state and federal levels to account for their role in the recovery and in credit access and consumer confidence.  "It's time to acknowledge the flaws in policy, corrections needed to the rules, and the impacts of going too far," he said.

The former FHA commissioner said the current environment is not encouraging credit expansion but rather forcing lenders to be overly conservative and failing entry-level homeowners on every front.  He pointed to the homeownership rate, at its lowest point in over two decades and said there is a set of "ironclad chokepoints" preventing or discouraging qualified young families and non-traditional borrowers from ever buying homes."

But the situation can be fixed. Quoting President Obama about the Dodd Frank impact; "We can go back at it and further refine it, learn lessons from things that aren't working as well, make it simpler, make it better," he said he couldn't agree more but this means that the regulators and legislators must listen to a broader audience.  "[They] seem unwilling to acknowledge what President Obama knows - the rules are not perfect."

Five years into Dodd-Frank, rules are being written and adjusted for nearly every real estate finance business model, restricting competition in the marketplace and causing confusion for consumers.  This is having a negative effect on access to credit which remains right and is a key factor in preventing many qualified borrowers from buying a home.  Investors too are asking questions; where are the mortgage originations and new home starts?  If Dodd Frank regulations create a safer lending environment, why aren't consumers borrowing?

One problem he said are the different rules for different business models.  And if the industry cannot understand this complex lending environment, how can a consumer be expected to understand it?  Borrowers are encouraged to shop around for a mortgage but "thanks to policymakers dicing and slicing lending rules based on business models, we are headed to a world where a consumer may go to a bank and get one set of options, then go to a non-bank, and likely get another set of options."

Next he said, it is a world of inter-regulatory confusion; confusion among and across federal agencies, but also with state regulations on top of federal regulations.  There is a need for consistent and common national standards across the entire industry and the Housing Policy Coordinator MBA asked for several years ago is still needed but with its job description broadened to include impact assessment.

Finally, today is an era of enforcement rather than of innovation. "Some regulators appear to have an enforcement-first strategy, instead of providing clear rules and guidance which expose lenders to an outcome that we call "regulation by enforcement action".  This he said, is not rulemaking at all.  "Enforcement on a case-by-case basis becomes a guessing game for businesses to know if and when they may be penalized. It produces the most defensive lending posture that severely impairs access to credit."

"This atmosphere of the unknown; this environment of fear and trepidation rather than an environment of constructive engagement and compliance, has a steep cost. It makes lenders much more conservative than they might otherwise be, keeping qualified borrowers from being able to obtain a home," he said.

The industry has actively engaged in historic change. Now, it's time for Washington to do its part, starting with three things at a very high level.

1)       Change the dialogue.  The lending environment is the safest and soundest in decades and consumers should feel confident applying for loans and purchasing homes. The dialogue of distrust must end. Regulators should understand the power that their message has over the mortgage market and just how their messages influence behavior and negative messages from regulators about the lending community fosters fear in consumers. "The impact of all this negative dialogue to the economy is real. Consumers won't buy; builders won't build; lenders won't lend."

2)       The most problematic rules must be changed.  Policymakers should utilize the industry as a partner and advisor.  Lenders' ability to use judgment to determine the soundness of a loan is all but gone from the decision making process. Households as we know them are changing and much of the Ability to Repay/Qualified Mortgage rule doesn't take these changing dynamics into account.  The only reason QM is working is because of the GSE patch.  The hardwired 43 percent DTI is too high for some borrowers and too low for others. The lenders actually do the lending but their hands are tied and the perception of the lack of trust remains.

3)       Secondary market questions must be resolved.  The private securitization model must return but private capital will not return until the secondary market question is answered and we will not have a true functioning market until then.  Stevens said he proposed steps two years ago to move Fannie Mae and Freddie Mac (the GSEs) forward to prepare for their transition out of conservatorship.  These included deeper up-front risk sharing, a new single security, and the common securitization platform (CSP).  Progress is being made on all three but the industry needs to keep the pressure on.

Stevens said that in order to protect the core capabilities the GSEs provide to the housing market these actions must be taken or the industry risks emergency Congressional action. Risk needs to be moved away from the taxpayer and resolve core components of GSE reform that don't require Congress to act. "Let's leave Congress with a small list of issues such as re-affirming an explicit guarantee, defining capital standards, dealing with affordable housing concerns, confirming the regulators and any fees to offset the government commitment, and establishing rules should new entrants be permitted in the market."

He concluded that we must bring confidence back, the confidence to provide access to credit to more qualified borrowers at the lower and middle income levels.  Private capital must be returned to the secondary mortgage market and the economic engine of the real estate market reignited.  It is time for regulators to take credit for the protections that are in place today, but also to fix what needs to be fixed, change the tone from a dialogue of distrust to a dialogue of confidence and fix the rules to allow for innovative, sustainable, safe lending and end relentless enforcement regimes.