The Senate Banking Committee heard from six witnesses on Tuesday on the
topic of "Housing Finance Reform: Essentials of a Functioning Housing Finance
System for Consumers." Testimony from
witnesses tended to focus on specific areas of interest such as the role of
private mortgage insurance. Additional regulation
of servicers, especially as it relates to foreclosure prevention, was a
particular area of focus as S. 1217's (the Housing Reform and Taxpayer Protection
of 2013). This is among finance reform bills pending in
the Senate and the one given the best chance of being enacted in some
Stein, Senior Vice President, Center for Responsible Lending provided the
Senators with two sets of policy suggestions.
The first was for ways to structure a reformed housing finance system
and how those structures might affect consumers. The second was a recommendation that
underwriting criteria not be hardwired into reform legislation. Instead, Stein said, a reformed system should
allow the regulator, bond guarantors, and lenders to use traditional
underwriting practices, including compensating factors, for lower-wealth
new structure, Stein said, should have the following features:
Market entities should have a mutual ownership structure rather than stock
ownership. Each mutually owned entity should
each be able to issue securities and guarantee them.
private shareholders would curb incentives for short term and volatile equity
returns over long-term sustainability.
Lenders wishing to sell conforming loans into the secondary market would
be required to invest in one or more of the mutually owned entities and their
pooled capital would stand in first-loss position.
This type of ownership
would reduce the chasing-the-market problem exhibited by the GSEs prior to conservatorship
and would benefit consumers not only with stability but by limiting the
secondary market entities from driving up prices to lenders and borrowers.
lenders should continue to have direct access to the secondary markets through
a cash window. The current system
provides smaller lenders with direct access to the GSEs but reform proposals
such as S 1217 that split the system into separate issuer and guarantor
companies threaten this access.
decide to bifurcate the system, Stein said, then it should prohibit lenders from being
affiliated with or purchasing stock in either, except through
mutual ownership, in order to protect small
market entities should be required to serve a national market.
should preserve the pass-through securities currently used in the TBA market but
structured securities should not be able to obtain a government guarantee.
should preserve the ability of the GSEs to modify distressed loans. This means a having portfolio capacity to
hold modified loans and a government liquidity backstop to support the
portfolio in times of economic stress.
Rohit Gupta, President of Genworth Financial's U.S. Mortgage Insurance
told the senators that the amount of down payment does matter when it comes to
loan performance. Loans with higher
combined loan to value ratios (CLTV) experience higher default rates than those
with lower CLTV. But, he said, there is
a responsible way to offer high CLTV loans by making sure they are properly
underwritten and have the benefit of credit enhancement in the event of
Mortgage insurers are in first loss position in the
event of default so their business model relies on insuring mortgages that are
well underwritten. Detailed underwriting
standards have historically been established through regulation, investor
guidelines, and market practice rather than by statute but regulators have a
much clearer legislative mandate today that will help them guard against the
behavior that led to the crisis. Thus certain
broad underwriting criteria
defining the "outer edges" of loans
with a government backstop could be written
into statute. He cautioned however,
that an overly prescriptive approach could limit credit
responsible borrowers and that
locking underwriting requirements into statute could make it difficult to make
small adjustments over time.
Many proposals for housing
finance reform contemplate
requiring a "QM" or "QRM"
standard for loans subject to government
support. Gupta said his company generally agrees with this approach, with the caveat
that it will be important to have credit
enhancement such as private mortgage insurance assuming first loss on lower
down payment loans to make the need for any government support truly remote. This credit enhancement should be mandated as
MI coverage rather than "charter coverage" as S1217 does, lowering an
investor's loss exposure for a 90 percent LTV loan to 67 percent.
Larry Platt an attorney with K&L Gates,
LLP said S1217 addresses mortgage servicing in two ways, first creating the
Federal Mortgage Insurance Company (FMIC) which would establish servicing
standards for residential mortgage loans and second by creating a securitization
agreement with uniform servicing standards.
Neither provision imposes detailed loss mitigation requirements for the
benefit of borrowers and Platt said he believes they are not required. The newly enacted loan servicing requirements
of the Consumer Financial Protection Bureau (CFPB) along with the myriad new
state and federal regulations that impose increased obligations on servicers to
avoid home foreclosures are sufficient.
CFPB went to great pains to focus on the procedures that
need to be followed, he said, rather than mandating specific servicer
requirements, formulas, and targets for loss mitigation as many consumer groups
had requested. CFPB declined to be so
prescriptive, focusing instead on the nature of a mortgage loan, the legitimate
needs of investors, the difficulty in developing a "one size fits all" approach
and the potential impact on credit availability. Other federal
agencies have shared in this public policy reluctance to obligate
specific loss mitigation outcomes,
and other than requiring specific forms of loss mitigation on specific terms Platt said it is not clear what more S1217 would or could do in this
Alys Cohen, Staff Attorney,
National Consumer Law Center presented a counterpoint to Platt's testimony,
insisting that housing finance reform should include several improvements to
existing mortgage servicing rules. CFPB,
she said, has issued a series of procedural requirements for servicers but has
declined to mandate affordable loan modifications consistent with investor
The data show, she said, that
almost all delinquent homeowners still get no modifications and those that do
seldom get the best terms available. The
system should promote proven methods for modifying loans for optimum
performance and should also include a government-backed portfolio capacity to
hold the modified loans.
Current requirements also do not
fully protect borrowers who are actually in foreclosure from dual tracking. Those homeowners should be able to obtain a
temporary pause in the process while modification is underway.
Turning to force-placed
insurance, Cohen said the current system in which the Freddie Mac and Fannie
Mae (the GSEs) reimburse servicers for insurance has resulted in vastly
inflated prices for borrowers and when borrowers default, for the GSEs and
taxpayers. She urged that the new housing
finance corporation be authorized to purchase insurance including hazard,
flood, title and private mortgage insurance, directly from insurers which "would decrease costs for
borrowers and the corporation by circumventing the kickbacks to servicers that
drive up insurance prices."
Lautaro Diaz, Vice President, Housing and Community Development, National
Council of La Raza, said that
communities of color were not served well in the run-up to the financial
crisis. Latino and immigrant borrowers
in particular do not fit traditional credit profiles. While prime lenders, and FHA and VA offered
loans designed to accommodate their unique profiles the majority of private
sector lenders shuffled them off to subprime affiliates or simply did not court
these borrowers at all.
market is not serving communities of color significantly better.
Even as housing prices are rising in
many urban markets with heavy
minority populations, often
faster than income, the credit box continues
counseling arose in part as a response to many of these problems. "More
than simply increasing financial literacy,
counseling is a tool to combat
some of the unethical and at
times illegal practices employed
a number of subprime lenders targeting of communities of color," Diaz said. He
recommended that reforms to the housing finance system include the following:
Inclusion of housing counseling into the programs of the
FMIC or other entity that replaces the GSEs.
Increased access and affordability in the mortgage
market should be an explicit purpose and duty of FMIC. Other steps could include a distinct Market
Access Fund to address both homeownership and rental housing for low and
moderate income persons and elimination of mandated downpayment requirements.
Incorporate measures to help distressed homeowners
recover from delinquency or exit homeownership gracefully. To achieve this end, services should be
required to work with HUD-approved housing counseling agencies, provide access
to all loss mitigation options, and end improper servicing practices such as
National Association of Realtors
(NAR) President Gary Thomas expressed concern about what he called emerging
barriers to homeownership facing middle class and first-time buyers. Bankers are leery about issuing new loans
because of proposed risk retention rules and ability-to-repay requirements that
are set to go into effect next year at the same time that rising interest rates
and growing student loan debt is limiting consumers' access to credit, he told
He urged policymakers to
prioritize strong underwriting standards over high down payment requirements and
said regulators should follow the standards set by CFPB for qualified mortgages
rather than adopting a complex qualified residential mortgage rule.