The panel of
four witnesses that appeared before the Senate Banking Committee hearing on the
Essential Elements of Housing Finance Reform were largely in agreement
regarding the essential outline and goals of that reform. There was unanimity on the need for access,
stability, and transparency and all agreed that any system that emerged should
have some mixture of private capital and a catastrophic government guarantee.
Jerome Lienhard II, President and
Chief Executive Officer, SunTrust Mortgage
said that from the prospective of a regional bank, the necessary reform of the
housing finance system must retain the basic "plumbing" of
a system that draws in
enormous sums of investment
capital and provides borrowers
with rate certainty. Reform
must bring more private capital
into the mortgage market in a principal
loss position while maintaining a
global market for mortgage-backed securities (MBS) and providing
competitive access for small
and medium-sized institutions that serve millions of
Lienhard said that while his bank has originated
and service more than $140 billion in mortgages, it holds only one in six or
$30 billion worth on its books. This is
made possible for SunTrust and other regional banks by the existence of the
A bank must be able to give the customer
basic information on its interest rate and monthly costs up front, information
the bank gets from the price of MBS trading in the "To Be Announced" (TBA)
market. The bank can then lock in the rate
for up to 90 days and proceed through the lending process,
properly qualifying, underwriting, documenting, and closing the loan. But this all starts with the certainty of how
the bank is funding the mortgage without which lenders would have the "chicken
or egg" problem of funding risk without knowing its price.
While there is a
need to address taxpayer risk, Lienhard said, the
securitization platform, the
standard-setting on lending
and documentation and the
servicing requirements are absolutely essential
to maintaining a secondary
market and we must emerge from
housing finance reform with these key functions intact.
Richard Johns, Executive Director of the Structured Finance Industry
Group ("SFIG") also stressed the preservation of the TBA market and suggested
three sequential stages that any reform effort should follow.
A conversion into a common TBA, making Fannie and Freddie MBS fungible and therefore
deliverable into a single TBA Market,
eliminating current pricing and liquidity inefficiencies in the Agency Market.
The creation of a single agency
security to facilitate the conversion and continued liquidity
of legacy securities and promote a deep and liquid new-issue MBS market.
of a common securitization platform for the purpose of overseeing and maintaining the standardization of the market for government-guaranteed MBS.
Johns suggested that it should be left to regulators to determine the
specific types of representations, warranties, enforcement provisions and
recourse to be used in the new system. He
also advocated that government separate any goal of affordable housing from the
operation of the secondary market, funding affordable housing through separate
legislative mechanisms. Also, reducing
the upper loan limits for government guaranteed loans would ensure that their
benefits are directed to the populations most in need of them.
speaking on behalf of the Center for American Progress (CAP), said that a consensus
of stakeholders appears to be solidifying around the idea of a catastrophic government
guarantee behind private capital such as is proposed in S 1217, the
Warner-Corker bill rather than the virtual elimination of government
involvement proposed in the House legislation called PATH. Differences center on how to structure putting private capital
in a first-loss position.
CAP, Warner-Corker, and
others have called for
specialized mono-line institutions or bond guarantors. Other plans envision
issuers that lay off the
credit risk through structured
transactions. S. 1217 offers a plan through
which issuers could toggle between bond
guarantors and a purely private capital markets
transaction. The first alternative, Gordon said, is the only structure that meets all
the other requirements
CAP believes are necessary. It is far
more likely to be
regulated and managed effectively for
safety and soundness as there will be
fewer bond guarantors than issuers. The regulator would need extraordinary regulatory capacity or ironclad coordination with banking regulators to evaluate the safety
and stability of the many institutions involved in the structured transactions.
bond guarantors are much
more efficient at pooling and spreading risks. Structured transactions, to the extent that they cover
or limited number of pools, cannot
allocate risks and
reserves across years, regions,
lenders, and so on.
Third, investors in structured transactions have proven unwilling to assume risk on anything but the most pristine mortgages
and if they are assuming first-loss position their high level of
scrutiny will result in
higher prices for non-traditional but credit-worthy borrowers.
deals are much less likely to be
able to support
a robust TBA market
and, although the appeal of
a structured transaction is that the
money is already there
cover losses, it is much harder to
ascertain how the investor institutions
for these assets on their own books and to prevent them exporting risk into the larger financial
sector. Finally, bond guarantors
can provide more protection to the taxpayer at less cost.
Gordon said she
does not believe the S. 1217
approach of offering both executions will work. The current
bill tilts the
playing field toward the
pure capital markets approach,
since that execution has
little by way of regulatory requirements and can more easily meet the capital thresholds through leverage. Moreover, allowing
investors to toggle back and forth between executions will likely
fragment the market sufficiently to undermine
called for establishment of a Market Access Fund to ensure a new system has the
capacity to service borrowers in a "grey zone" between private credit and credit
through VA, FHA, and USDA. This would be
funded through a 10 basis point assessment on all securitized mortgages, whether
an issue receives a federal guarantee.
The fee would be collected by the SEC and used to provide support for
developing innovations geared to expanding sustainable homeownership, for
unsubsidized affordable rentals, to provide limited credit support and provide
grants to encourage development of self-sustaining support services such as
housing counseling. Gordon said estimates suggest
this fee would
result in approximately $5 billion in revenues by the
fifth year of generation.
Mark Zandi, Chief Economist and Co-Founder Moody's Analytics laid out a nearly complete
blueprint for revamping the system including the same goals of access and
transparency outlined by others but in many cases his recommendations were much
To achieve these goals
Zandi said the future housing finance
system should embody a number of essential elements
including a catastrophic government backstop
with private investors providing the first loss capital. He refers to this as a
hybrid housing finance system.
A substantial amount of
first-loss private capital should stand in front of the government's catastrophic backstop. Losses suffered in the Great Recession should
be the benchmark. Freddie Mac and Fannie
Mae (the GSEs) and private mortgage insurers ultimately had a combined loss
rate of between 4 and 5 percent. This, what
Zandi called the 100-year flood mark, would be a conservative capitalization
rate since regulations will require guaranteed mortgages to be of higher
quality than those purchased by the GSEs.
The private capital that will
bear risk ahead of the government should come from varied sources. At the loan
level private capital should
include down payments from borrowers
and the capital of any private mortgage
insurers attached to the loan. At the MBS
level sources should include the capital of the mortgage
guarantors, risk retention by mortgage issuers, and the capital put at risk by global
investors who take on housing risk from mortgage
The system must be overseen by a
strong regulator fashioned along the lines of the FDIC which would manage an insurance fund, funded by mortgage
borrowers, to pay for any future costs that the government bears backstopping the system.
platform which would be used for
all non-Ginnie Mae government-guaranteed securities and, although not required, could be used
for nonguaranteed securities.
There should be a competitive mortgage guarantor market independent from large institutions that originate mortgage
supports a hybrid system as the most desirable option for reform and went into
great detail in his testimony has to how it should be structured, funded, and
protected. His complete testimony and
that of the other witnesses is available here.