The mortgage industry has been forced to endure all sorts of "Cart Before the Horse" type regulatory reforms over the past two years. I would describe these onesy-twosy procedural reforms as poorly planned band-aids which do little to slow the bleeding of a hemorrhaging patient.
The biggest problem with this patchwork reform approach is it has led to conflicting interpretations of regulatory policy and an over-tightening of loan underwriting guidelines. These protective measure have put banks on the defensive and all but cut off funding lines to "less than perfect" borrowers, deepening the hole that has become the housing market over the past two years.
Not too many folks disagree with calls for much needed GSE Reform, but there is a disparity among the urgency of these outcries. Some say the piecemeal approach is the right move to protect the long-run solvency of the banking system. Others say we're grossly overlooking the core issue facing U.S. growth outlooks, a housing market on the verge of being totally sucked into a negative feedback loop. And until the housing finance mechanism is given the attention it deserves, this country will be bogged down by debt with no method of deleveraging besides default.
That said, even though the Administration committed to offering a GSE Reform Plan by January 2011, there's been a noticeable silence from the sources we would've expected to be chiming in by now. And now this from Nick Timiroas at the Wall Street Journal..DELAYS AND DIFFERENCES OF OPINION
The Obama administration is likely to miss a deadline for issuing a long-awaited report about the future of mortgage giants Fannie Mae and Freddie Mac, and what might replace them.
The Dodd-Frank law enacted last year to overhaul financial-industry regulations didn't address how to reshape the troubled mortgage concerns, which have cost taxpayers a combined $134 billion since they were taken over by the government in 2008. But the law did require the Treasury Department to report recommendations for Fannie and Freddie by Jan. 31.
The administration now plans to release the report by mid-February. Officials say the delay is needed to accommodate other major policy initiatives, including next month's release of the annual budget and the president's State of the Union address next Tuesday.
People familiar with the matter say a final proposal has also been stymied by turnover of senior staff that had been heavily involved in drafting the report. There have also been policy disagreements between Treasury and White House officials, which has complicated efforts to reach consensus, these people said.
Due to the lack of agreement, once a final report is released it is likely to contain two or three proposals for what should replace Fannie and Freddie, and discussions of the merits and drawbacks of the different approaches, according to people familiar with the plans.
One of the proposals will outline a way for the government to continue backing certain mortgage-backed securities, while another will discuss how to structure a market with no government guarantees. The report also is likely to include a detailed road map for the short-term steps that can be taken to prepare for a transition to either model.
Offering multiple proposals could help the administration build support from different stakeholders and frame the coming debate with Congress. Republicans may face their own divisions over whether to embrace a fully private market, a goal of many conservative lawmakers.
Republicans were sharply critical of the absence of Fannie and Freddie in the Dodd-Frank bill and missing the deadline is almost certain to spark further criticism from GOP lawmakers.
Officials have spent months researching proposed structures, with a particular focus on whether there is enough capacity in capital markets to finance mortgages without some type of government backstop. The administration still hasn't reached accord on that key point.
Fannie Mae and Freddie Mac own or guarantee around half of the $10.6 trillion in U.S. home loans outstanding. The firms buy mortgages from lenders and sell them as securities to investors, guaranteeing to make investors whole if borrowers default. Without any government guarantee, some investors are likely to demand higher rates. Others won't invest at all.
Top administration officials have spoken favorably in public about the merits of a limited but explicit government guarantee of securities backed by certain types of mortgages. Supporters of this approach worry that without a guarantee, mortgage markets won't function well in times of stress, potentially exacerbating financial shocks.
Under such a model, bank-owned cooperatives or companies run like heavily regulated utilities would take over some of the market-backstop functions of Fannie and Freddie, and the mortgage securities they issue would be explicitly guaranteed by the U.S. government.
That explicit guarantee would differ from the existing model, where investors merely assumed the government would bail out Fannie and Freddie if they became insolvent. That implied guarantee lowered borrowing costs for the companies.
But others in the administration worry the government won't charge sufficient fees from mortgage originators to cover the true cost of any guarantee, setting up the same hazard that led to Fannie and Freddie's collapse.
A separate concern is that allowing bank-owned cooperatives to issue government-backed mortgage bonds could concentrate more power among the largest U.S. banks, according to a December report from analysts at Barclays Capital. Further consolidation "would seem to be at cross-purposes with the legislative reform efforts to end the 'too big to fail' paradigm," the report said.
Most analysts don't expect legislation this year, and any transition period could take between 15 and 20 years, according to Barclays.
At a minimum, the Treasury is likely to take steps to begin encouraging private capital to return to the market, both by allowing Fannie and Freddie to raise fees they charge lenders and by reducing the maximum loan limits for mortgages the companies can purchase. The administration will have to do so carefully, however, because steps that limit the cost or availability of mortgages could hurt still-fragile housing markets.
Any proposal that includes a government guarantee of mortgages would need to spell out other key issues, including which mortgage products would be eligible for government backing and how the government would price those guarantees.
A report to be issued next week by the Center for American Progress, a liberal think tank with close ties to the Obama administration, provides one of the most detailed road maps yet for how to create that structure.
Under the proposal, the firms that issue government-guaranteed securities wouldn't be controlled by banks and would be chartered by regulators. Multiple firms would issue the same security, allowing for mortgage bonds to continue trading even if one issuer became insolvent. The loan limits would restrict the companies to serving middle-class homeowners.
We are officially kicking the can down the road now. This is the same exact spot we were in last year!Since then we've heard from Treasury officials. We've heard from members of the President's Economic Council. We've heard from the Fed. We've heard from analysts. Blah blah blah...this issue has been debated and discussed over and over and over and over again!
September 2009... MBA Recommends New Secondary Market Framework
December 2009... Exploring the Future of Mortgage Securitization: Covered Bonds
February 2010...Housing Policy: The Message is as Important as the Mechanism
February 2010... FY 2011 BUDGET REVIEW: GSE Reform Guidance Missing
March 2010... Treasury Secretary Outlines Housing Reform Objectives
July 2010...Fannie Mae Preps Investors for Reform
September 2010...New GSE Housing Goals: Is FHFA Putting the Cart Before the Horse?
November 2010: Fed Dissenter Hoenig Offers Input on Housing Finance Reform
December 2010...GSE Reform and Securitized Mortgage Finance
December 2010...GSE Reform: The Future is Ours to Shape
BOTTOM LINE: The housing market is swimming in a sea of uncertainty and won't be on its way to recovery until some sort of concrete forward looking directional guidance is offered by an official source, good or bad! We don't expect this mess to be cleaned up overnight, nor do we think it's fair to expect a broad-based reform package to be implemented with one swipe of President Obama's pen. What we do expect is better management of expectations and a clear voice of leadership. And if the regulators are really having this much difficulty making a decision on the next move...then maybe they shouldn't be implementing onesy-twosy patchwork regulations just to appease outcries for reform. All that does is create more confusion ...which only breeds more uncertainties and adds further barriers to the home loan qualification process.