Members of the House Financial Services
Subcommittee on Capital Markets and the Government Sponsored Enterprises (GSE)
heard testimony from six market participants at a hearing Wednesday on The
Private Mortgage Market Investment Act. The bill is one of eight proposed in the
current session by majority members of the committee to restructure various
aspects of the country's housing finance industry.
Subcommittee Chair Scott Garrett (R-NJ)
opened the hearing saying, "Currently, the federal government is guaranteeing
or insuring over 90% of the U.S. mortgage market. Everyone on both sides
of the aisle and all market participants claim that they support efforts to
bring additional private capital back into the secondary mortgage market.
"There are two things that must be done to have private capital begin to
re-enter this space. First, we must begin to roll back the government's
involvement in the housing market. Second, we must take actions to
facilitate increased investor interest in the secondary mortgage market.
By facilitating continued standardization and uniformity within the market, increasing
transparency and disclosure, and providing legal certainty through a clear rule
of law, there will be robust investor participation in the housing market
without exposing the American taxpayers to trillions of additional dollars of
He said the subject of the hearing was
legislation that essentially sets up a new qualified securitization market in
which the Federal Housing Finance Agency (FHFA) is tasked with:
a number of categories of mortgages using traditional underwriting standards
that have different levels of credit risk associated with each category and
- Creating standardized securitization agreements for this market.
David H. Stevens, President and CEO of
the Mortgage Bankers Association (MBA) and, until recently, Commissioner of the
Federal Housing Administration (FHA) told committee members that MBA's
membership agrees with many facets of the act and believes that the current
environment in which the federal government
owns, securitizes, or guarantees nearly every mortgage, is both unsustainable
"I am pleased that we agree on the
most important fundamental point: private capital must be at risk, bearing the
first loss, and private capital must be the primary source of liquidity for the
mortgage market," Stevens said.
MBA members also agree that the
secondary market needs common standards, consistency, and transparency for all
participants in order to attract private capital, and Stevens said the
legislation does offer ways to accomplish that such as language authorizing FHFA
to develop standard mortgage securitization agreements. "MBA also appreciates that the bill provides
for the establishment of different classes of standard mortgage products.
Safe, well-defined product standards help consumers compare their financing
options. For investors, the core market will establish performance
standards for pricing purposes.
Another feature of the bill, the repeal
of Dodd-Frank's risk retention requirements, is a key issue for members. While it is well intentioned, he said, the
proposed rule for a Qualified Residential Mortgage (QRM) exemption is "so
deeply flawed that we seriously question whether it reflects Congressional
intent or can ever be successfully implemented."
Stevens said that, while the
proposed legislation is a step toward building a future housing finance system,
determining what that system will look like is of paramount importance and
reform of the GSEs is key to that. MBA,
he said, has been looking at the existing GSE model and attempting to develop a
framework for a more limited and explicit government role. Some level of government support is required
to keep the mortgage market open during times of severe distress because that
is the time that private investors will exit.
They will also be less apt to buy assets even in good times if they
doubt their ability to sell them in bad times.
MBA has proposed a structure similar
to FDIC insurance where taxpayer funds would only be used if the capital of the
securitizing entity and the insurance fund are exhausted and the taxpayer would
be repaid as the fund is replenished.
Also, like FDIC, there needs to be a mechanism for correcting any
mispricing of the government guarantee.
Mark Fleming, Chief Economist of Corelogic
told the committee that the return of private capital to the residential
mortgage market hinges on the return of liquidity which in turn depends on four
elements; trust in what is being offered, an understanding of what the product
or investment contains, sufficient information to enable agreement of a
risk-adjusted price, and monitoring the investment or purchase.
Prior to collapse of the privately
financed real estate system one of the greatest failures was the mistaken
belief that an upfront outlay for loan diligence was not worth the cost and
that an ever rising house market would offset any deficiencies in the loan
underwriting process. Clearly, he said,
that approach did not work.
The proposed legislation recognizes
that issuer risk retention such as that under Dodd-Frank may make private-label
securitization uneconomic but many market participants want issuers of private
label residential mortgage-backed securities (RMBS) to have some "skin in the
game." Fleming said he hoped that a
consensus solution can be reached that
will incorporate the positive impact that currently available data and
analytics can contribute in assessing the accuracy of user-provided information
and ensuring reps and warrants have more teeth.
This in turn will force issuers to have more skin in the game as the
risk of put-back of deficient loans and securities increases.
Tom Salomone, Director Realtor®
Party Activities, National Association of Realtors (NAR) said that Realtors do
not view the proposed bill as a comprehensive solution to the housing finance
sectors need for reform. He suggested it
be coupled with a second proposed bill which establishes a Secondary Market
Facility for Residential Mortgages. The
inclusion of government participation in the conventional conforming portion of
the market is necessary because of the inevitable retreat of private capital
under extreme economic conditions. A
full shut-down of the conventional conforming portion of the secondary market "means
there would be very limited or no funding for middle class homeowners or
homebuyers which would be devastating to the national economy - possibly causing
a catastrophic collapse."
The existing GSEs were created to
support the viability of this economic sector and the future of the secondary
mortgage market must include an entity with that purpose as well Salomone said.
Other witnesses testifying at the
hearing were Chris J. Katopis, Association of Mortgage Investors; Dr. Mark
Calabria, Cato Institute; and Dr. William Poole, University of Delaware.