David H. Stevens, President of the Mortgage
Bankers Association (MBA) told members attending the organization's annual
convention in New York today that some things hadn't changed much since four
years earlier when he addressed them as the Commission of the Federal Housing
Administration. He said he made
headlines then when he called the government's role
in housing "a sick system". Back then
the conventional wisdom was that strong government intervention was necessary
to get the housing market back on track, protect at-risk borrowers, and prevent
another system failure. For the most
part this was true and the government acted to stabilize the market. But four years later government isn't just still
the backbone of housing, it has become the entire central nervous system of the
real estate finance market. The system is
stuck in the same place it was four years ago.
The MBA, Stevens said, continues to promote policies
that create a vibrant secondary mortgage market, ensure a level playing field
for lenders of all sizes and business models, and maintain access to affordable
mortgage credit and it has not wavered in its calls for reforming the
government sponsored enterprises (GSEs) and for transition to whatever Congress
decides is the future of the system. But
the system will not magically fix itself.
"The secondary market as it exists today greatly influences the primary
market. It's having negative impacts on mortgage affordability and
availability, increasing costs for borrowers and even preventing many from
obtaining homes, and stifling a full-blown market recovery."
He criticized some advocates in Washington who
fear changing the GSEs because they want to protect the underserved and
minorities from being crowded out of the housing market. That, he said is
already happening; 2012 HMDA data shows a 56 percent denial rate on GSE
purchase loan applications for African Americans and only 8 percent of all
African American transactions are now with the GSEs. Further, the current average credit score nationwide
is about 700 and the average credit score of a borrower from Fannie Mae this
year is 741. On top of this strict
scoring criteria there are loan level price adjusters, overlays and
ever-increasing guarantee fees. In this system, only those with the most
pristine credit can afford a home; millions are left on the housing sidelines
simply due to their credit scores.
Stevens said that much of the debate about reform
shows a lack of understanding of the legal structure of conservatorship and the
GSEs' preferred stock agreement with Treasury and why legally Congress is the
only way to move forward. However the
vote last week in the Senate Banking Committee has likely only prolonged the
conservatorship and the current state and the prospect of another significant
downturn in the housing market and any prospect of Congress reacting reasonably
in the midst of it is a real and scary proposition.
The strong showing that Fannie Mae and Freddie Mac
have made on their financial returns in the last two years have been boosted by
one-time events such as settlement agreements, deferred tax asset reevaluations
and lower provisions for loan losses. Last
month the Federal Housing Finance Agency released results of the Dodd-Frank
mandated stress tests and in the severely adverse scenario, which mimicked the
2008 downturn, the GSEs were shown unable to handle events without drawing down
billions from Treasury because they have no capital cushion. This could lead to investors questioning the
limits of the Treasury backstop and requiring more return, pushing up the cost
of a mortgage and tightening credit even further.
Stevens said that, "Under the terms of
conservatorship, it is legally impossible for the GSEs to recapitalize. There
is no way back to their original state. FHFA can only put Fannie and Freddie
into receivership. It requires Congressional action to reform and stabilize the
There are many other things affecting the housing
market such as student loan debt, high fees, and excessive regulation, but
these are fixable and can be changed through regulation or policy. "It's the
GSEs - the central most important variable to creating enough liquidity for the
housing finance system in this country - that can only be resolved through
Congress or the courts. This is the last and most significant unresolved issue
from the housing recession."
With legislative action likely at a political
standstill we can still choose to make progress, Stevens said. The mortgage industry can choose to be
proactive leaders and address some of the choices necessary to set the stage
for long term sustainable change.
In a speech last week new FHFA Director Mel Watt
noted that conservatorship should never be viewed as a permanent or desirable
state and focused on several changes MBA has advocated for; greater clarity
around reps and warrants, enhanced risk sharing to bring in more private capital,
and moving toward a common GSE security.
He also spoke about the ongoing development of the GSEs' Common
Securitization Platform (CSP) and how it could be adaptable for use by market
participants other than the GSEs and how it could move them toward a common
Stevens said that what Watt outlined in his speech
gives FHFA and MBA common ground through which they can work to create a better
functioning secondary market system.
There are three tracks to this process.
The first is GSE reform and the Senate's Johnson-Crapo bill is a good
starting point although it will clearly take longer than was hoped.
track is transition for which a growing economy, declining unemployment, and
mortgage rates that while higher remain historically low are pre-conditions. A common GSE security, greater risk sharing,
greater private sector input into the development of the CSP could all
contribute to improving some of the very issues that divided support for the Johnson-Crapo
legislation. These would variously
contribute to enhanced liquidity, reduced costs to taxpayers and would lay the
groundwork for a more competitive and efficient secondary market.
The third track is the return of private capital
and to achieve this, Stevens said, we must address the obstacles to housing
recovery; the structural, regulatory and economic impediments that are keeping
private investors on the sidelines.
The tasks ahead are these - encourage liquidity,
sustainability and competition in the secondary market; restore trust and
confidence in the marketplace; and attract more private capital in order to
reduce taxpayer support and government control.
Legislatively speaking, we know that GSE reform is
years in the making, he said, but it's time to address the structural,
regulatory and economic impediments that are limiting the return of private
capital and have a stranglehold on housing recovery. It's time to transition to
a stable, competitive and accessible marketplace.
"We know what the prescription is for a broader recovery
and more stable market," Stevens concluded. "We need to stand up and be
advocates for the change we know is necessary. Don't let our collective voice
waver. We have to continue to press Congress to move forward. We have to work
with Fannie, Freddie and FHFA on transition. Because in the end,
it's our future, and the future of the American homebuyer, that is being held
back by the sick market."