The Senate Committee on Banking, Housing, and Urban Affairs held another hearing on housing finance reform on Thursday.  In his opening statements, committee chairperson Mike Crapo (R-ID) said "A housing finance system dependent on two government sponsored enterprises in perpetual conservatorship is not the solution," but he added, "Recapitalizing the enterprises and releasing them back into the market without significant reforms is also not a solution."

Crapo set forth several principals for reform that he said share bipartisan support.  These include preserving the to-be-announced (TBA) market and an affordable, accessible 30-year fixed rate mortgage and ensuring that small lenders have equal access to the secondary market.

Testifying at the hearing were:

  • David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA), former Commissioner of the Federal Housing Administration.
  • Mr. Michael D. Calhoun President, Center for Responsible Lending,
  • Edward J. DeMarco, President of the Housing Policy Council (HPC) Financial Services Roundtable, Former acting director, Federal Housing Finance Agency (FHFA)

Stevens included as part of his testimony a proposal for reform of the government sponsored enterprises (GSEs) published by MBA's Task Force for a Future Secondary Mortgage Market last April.  That proposal, he said, recognizes that any comprehensive plan must balance three major priorities: taxpayer protection, investor returns, and consumer cost and access to credit.

To achieve these policy objectives, the MBA plan suggests a multiple-guarantor model.  These would be monoline, regulated utilities owned by private shareholders, operating in the single-family and multifamily markets and would be subject to rigorous capital requirements, satisfied through a combination of their own capital and credit risk transfer.

The implied government guarantee of Fannie Mae and Freddie Mac would be replaced with an explicit guarantee at the mortgage-backed security level only. This guarantee would be supported by a federal insurance fund with appropriately-priced premiums paid by the guarantors, much like banks pay for FDIC insurance.  The plan also explicitly calls for deeper first-loss risk sharing that is transparent, scalable to all lenders, and capable of limiting taxpayer exposure to nothing more than catastrophic risk.

Calhoun said the goal of reform must be to ensure that the full universe of credit worthy borrowers - regardless of where they live, including in rural areas, or who they are - have access to the credit they need to be able to secure a mortgage. Additionally, the system must continue to offer equal access for lenders of every size.

He said it is important to remember that radical changes to housing finance could provoke unanticipated harm. Some changes that have been suggested could create heightened systemic risks, adversely impact community lenders and make housing credit unnecessarily expensive and restricted.

He set forward some features of the current system that must be preserved, including the aforementioned equal treatment for small lenders, requiring issuer-guarantors to serve a national market "rather than creaming the market by serving only lucrative markets and leaving other less lucrative markets, such as rural markets, unserved.  It must also ensure the continued availability of the TBA market and the 30-year mortgage.

Reform must continue those measures ensuring service to rural borrowers, new households, low and medium income borrowers, and borrowers of color and provisions to promote cost-effective loan modifications for when the business cycle returns. The mandate must be to serve the broad market, even at a lower rate of return.  Equally important, credit risk transfers must continue to be done by the issuer-guarantors through mechanisms that do not price these borrowers or small lenders out of the market.

There are other areas, he said, that need continuing reform. One is the regulator; FHFA is a vast improvement as regulator over its predecessor OFHEO which had only limited authority and its funding under appropriations control.  The agency's authority should be maintained and expanded consistent with other recommendations such as:

  • Providing an explicit government guarantee, paid for by insurance premiums which are put into a guaranty fund to be available as needed and with more private capital in front of it.
  • Preventing portfolio arbitrage. The GSEs have dramatically reduced the size of their portfolios but portfolios are necessary for the aggregation of TBA loans, and holding specialized loans, and those that have been modified. Borrowing for these limited purposes should continue to be permitted and should be protected in times of stress.
  • Restructure the insurer-guarantors as either mutual owned organizations or regulated utilities. Either or both of these changes in structure would prevent the present conflict of interest created by the GSEs' structures.
  • Other reforms that would also better align the issuer guarantors with their public goals include making permanent the ban on their political and lobbying activities, and continuing the prohibition on any vertical integration of their activities into the retail mortgage market.

DeMarco's testimony regarding changes to the secondary market largely echoed those of the committee chair and the other two witnesses.  However, he also spoke to what he said were the country's greatest housing challenges, those in the rental market.

While a Qualified Mortgage requires households to have household debt payments generally below 43 percent of a household's monthly income, more than 11 million families spend more than 50 percent of their income on rent. The waiting list for rental vouchers in many communities is years long.  Moreover, local zoning, land use ordinances, and building requirements drive up the cost of new construction and rehabilitation, thereby limiting supply.  While better education, jobs, and wages are the best solution, these supply constraints remain critical obstacles in many communities.

Another challenge facing many lower income renter and owner households, DeMarco said, is increased income volatility.  Many people lack the resources to buffer themselves from life's disruptions, which are more common today than in the past.  Housing policy and our housing finance system needs to become more attuned to this challenge so better solutions may be found.  

He pointed out that few reform proposals deal with FHA, even though it is the government's flagship program for encouraging homeownership and because it is in such need of repair and modernization.  At a fundamental level, Congress could give FHA a clear mission for serving 21st century borrowers and markets and ensure FHA has the resources to fulfill that mission. FHA subsidies should be targeted to complement private sector efforts that promote homeownership opportunities rather than using them and the agencies thin capital base to compete for business that the private market is already servicing.

"There is enough need for access to credit for low- and moderate-income homebuyers that both FHA and private lenders should be actively and fully engaged," DeMarco said, "Yet, trends in the FHA program are troubling." While participation by depository institutions has been declining, its market share grew 17 percent last year.  Neither FHA nor Ginnie Mae has the staff nor the resources to manage the evolving risk profile in the FHA program, which risks its long-term ability to serve its customers.

DeMarco said HPC has submitted a public comment letter to HUD about their concerns regarding the administration of FHA.  These include operational issues like property conveyance rules, weak quality control, legal requirements such as certifications and the use of enforcement tools such as the False Claims Act. He called these features of the FHA program as administered today counter-productive to serving borrowers.  "As the Committee weighs housing finance reform, HPC respectively urges you to also consider the FHA program, its role in our housing finance system, and the potential to address pressing FHA issues as part of reform."