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Now What? - A Post-Election Analysis of Potential Housing Reform
We are all hopeful about the opportunity to begin to move past the politics, and towards having bipartisan support for comprehensive housing reform that will do more than simply add to the regulatory burden on the industry. Instead, we will need to leverage the existing competencies of the government-sponsored enterprises (GSEs) and mortgage industry more broadly to drive a manageable and transparent partnership between private enterprise and federal supervision.
The urgency around housing reform has been mitigated by the strong economic performance of the GSEs in the past two quarters, relatively strong home price appreciation, and a mortgage industry enjoying the best profit margins ever. However, our housing recovery is still young and tenuous and is a reflection of a fragile macroeconomic recovery in the United States.
The looming threats of expiring tax cuts and sequestration, not the housing recovery, are sure to be the biggest priorities for the administration’s second term. Housing reform is not likely going to be a priority for the administration in the short term.
However, once the debate regarding housing reform has its second act, the main characters will be the Federal Housing Finance Agency (FHFA), the Consumer Financial Protection Bureau (CFPB), and, of course, Congress at some point.
It seems highly unlikely that President Obama will replace Ed Demarco, the Acting FHFA Director who has done a remarkable job as interim Director for the past four years, with a recess appointment as he did at the CFPB. The President has spoken with a renewed spirit of urgency and bipartisanship, which will likely drive the administration to put forward a new candidate for Senate confirmation. However, if the Senate doesn’t move earnestly and with haste, it is reasonable to presume that a recess appointment of Demarco is eminent.
The CFPB will most certainly be emboldened by the election results, although I still maintain that the genesis of the CFPB was a somewhat stilted premise – that consumers bore no responsibility for the housing crisis and were largely duped by the lending community. Certainly there is plenty of blame to go around within the mortgage industry but lenders cannot be blamed for the entirety of the crisis.
As such, the regulatory regimen being imposed on mortgage companies risks further constricting credit and driving up costs – which ultimately harms the very persons the CFPB was designed to protect. In the end consumers will have more transparency, but they will be the ones paying for it.
It’s important to note that the CFPB has two key responsibilities: 1) Supervisory regulation (which is how the traditional banking agencies, such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), have operated), and; 2) Enforcement (which is how the Securities and Exchange Commission (SEC), Justice Department and the Federal Trade Commission (FTC) have operated).
The biggest concern is that to date the CFPB seems to be operating nearly exclusively as an enforcement agency as evidenced by it actions against large credit card companies. If this approach, or perceived approach, spills into the mortgage market it will have a chilling effect over credit conditions.
Furthermore, the impact of the CFPB’s actions is that enforcement agencies have generally threatened companies to adopt best/improved practices whereas supervisory agencies generally adopt a more transparent "information-sharing"-based engagement model. Bottom line – the latter model is that the relationships between private enterprise and federal supervision need to move beyond punitive actions and work earnestly towards rebuilding a sustainable and equitable housing finance system.
One additional thing for us to keep our eye on in the upcoming term is the Ability to Repay/Qualified Mortgage (QM) and Risk Retention/Qualified Residential Mortgage (QRM) rulemakings, which were even mentioned in the presidential debates. I predict that the rulemakings will be reasonable and accommodating.
The housing market recovery, which is still fragile at best, will be highly susceptible to not only the actions of the CFPB and FHFA, but also other economic conditions that are largely beyond our control. Unexpected deteriorations in the jobs market, the European debt crisis, or gross domestic production (GDP) could easily move the economy into stall mode if not into a second recession.
With these more impending concerns and modest improvements in the housing market, it is likely that housing reform will remain at the bottom of the Administration’s list. There is little apparent incentive for lawmakers and policymakers to make housing reform a priority. To illustrate, Fannie Mae and Freddie Mac are now reporting strong profits and have declined recent quarterly Treasury draws. Mortgage originations are expected to remain stable, home prices are on the incline, and housing inventories are shrinking.
Still, if we can assume that the primary focus of the Administration and Congress will be the economy, the housing market has to receive some attention. It is too big a contributor to GDP to be ignored. In fact, with home prices and affordability where they are, it should be one of the easier fixes to check off the list early in the game.
Housing finance reform, however, is likely to remain at the bottom of the list. If anything, the GSEs are going to be an important tool in executing any housing plans the Administration wants to employ.
Ben Bernanke’s fate is certainly more assured after his term ends in January 2014 given the election results should he choose to stay on as Chairman of the Federal Reserve. The QE3 initiative, as flawed as it may turn out to be in the long-term for other segments of the economy, is good for housing. Low rates and the multiplier effect of leverage make home buying a huge opportunity. QE3 is also further evidence against major GSE reform in the short term as it reflects a commitment, tripling down, of the Federal government’s commitment to housing.
What we need to support already positive forces in housing is stability in the general economy. Stability will continue to bring the unemployment rate down and boost consumer confidence.
Eventually, you’ll have the private sector ease its way back into the lending space. Mortgage servicing investors especially are experiencing a “gold rush” mentality for the moment. Private capital will likely work its way back into our industry from serving to origination as the new rules are passed and reinforced or clarified in the courts. Again, throughout this process we need to focus on collaboration. Collaboration between private capital and GSEs, will be necessary to support the return of the housing market in the long-run, but in the short-term the Federal Housing Administration (FHA), the GSEs and the market are at least keeping the market stable.
It seems unreasonable to try and force GSE reform to the top of any agenda, at this point. Gradualism will win out as the fundamentals improve and it looks like housing in general, will receive at least some degree of attention.
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