The House Financial Services Committee held a hearing Thursday on what is called "discussion legislation" titled A Legislative Proposal to Protect American Taxpayers and Homeowners by Creating a Sustainable Housing Finance System. The legislation, already given the acronym PATH, is sponsored by Committee Chairman Jeb Hensarling. It proposes to wind down the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae and create a housing finance system where the only government involvement would be through the Federal Housing Administration (FHA) which would also have its role limited. Committee members heard testimony from 11 representatives of various industry trade groups, investors, policy institutes, academia, and consumers.
David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA) said his organization's members had identified several key principles necessary for a successful secondary market. In particular, he said, any new structure should rely primarily on private capital, but must also provide liquidity throughout economic cycles, with an explicit government backstop. The new structure should support the availability of traditional long-term, fixed-rate mortgage products with the ability to lock interest rates efficiently and at a low cost and there must be robust competition - supporting multiple business models - in both the primary and secondary mortgage markets. These principles, Stevens said, will ultimately benefit borrowers and taxpayers through increased competition and lower costs.
Stevens said that MBA has strong concerns with the overall scope of the changes PATH proposes to a more traditional role, and urged the committee to re-examine changes to the mortgage insurance coverage, repurchase requirements, and loan limit floor, and multifamily income limits. "The final bill should strike a balance between strengthening FHA's fiscal solvency and maintaining flexibility to support both homeownership opportunities for first-time and working-class borrowers, as well as a vibrant rental housing market," he said.
Douglas Holtz-Eakin, President of American Action Forum said the most significant component of PATH is its commitment to winding down and closing the GSEs, calling them "fundamentally flawed in their design and politically toxic" The two, he said, were central elements of the 2008 crisis, first as part of the securitization process that lowered mortgage credit quality standards and second as large financial institutions" whose failures risked contagion. "They were massive and multidimensional cases of the too big to fail problem."
Mark Zandi, Chief Economist, Moody's Analytics, called PATH's proposal to wind down the GSEs and privatize the nation's housing finance system "comprehensive but ultimately unviable." If fully implemented, he said, PATH would lead to significantly higher mortgage rates, especially during tough economic times and would put 30-year fixed-rate mortgages out of reach for most Americans.
The principal advantage of a privatized system, Zandi said, is its strong incentive for prudent mortgage lending which depends in part on how strongly investors believe the government will not intervene when things go bad, but the recent collapse of the private-label securities market show that imprudent risk taking can occur in a private market even where enormous losses are possible. A privatized system would protect taxpayers by lowering the risk that government capital would be mis-allocated toward housing and away from more productive activities and reduce the systemic risks borne by taxpayers, at least in theory.
In a truly competitive private market, Zandi said, the GSEs' roles would presumably be filled by smaller institutions that would not threaten the system if they fail. "However, given scale economies in mortgage lending and servicing and historical precedent, it is very possible that the market would become more concentrated with greater too big to fail risks."
Complete privatization, Zandi said, is much more plausible in theory than it would be in practice. Private capital is not limitless, and there are catastrophic scenarios that would completely wipe it out, giving government little choice but to intervene. The potential advantages of privatization would also be overwhelmed by the disadvantages of much higher mortgage rates and a much less stable source of mortgage funding across the economic cycle.
Association of Home Builders (NAHB) CEO Jerry Howard urged the
committee to modify the PATH Act to make sure that the federal
government continues to provide a backstop for a reliable and
adequate flow of affordable housing credit in all economic and
"The historical record clearly shows that the private sector is not capable of providing a consistent and adequate supply of housing credit without a federal backstop," he said, and NAHB has recommended that the GSEs be gradually phased into a private sector oriented system, where the federal government's role is explicit but its exposure is limited to catastrophic situations where specified levels of private capital and insurance reserves would be depleted before any public funds were employed.
He urged the lawmakers to modify the sections of the bill outlining changes to FHA. "The PATH Act would drastically diminish FHA's vital liquidity mission," said Howard. "By simultaneously leaving all federal support for housing to FHA, and then by greatly reducing the overall scope and reach of FHA's programs, PATH would greatly limit homeownership and rental housing opportunities for many financially responsible and qualified Americans."
Janice K. Sheppard, Senior Vice President, Mortgage Lending and Compliance, Southwest Airlines Federal Credit Union, representing the National Association of Federal Credit Unions, told the committee her organization has concerns with calls for an immediate wind down of the GSEs. "We believe that any reforms should focus on the consumer and not disrupt the recovery underway in the housing market," she said. Guaranteed access to the secondary market was critical to credit unions being able to lend during the financial crisis and that without a government role in that market the 30-year fixed rate mortgage might still exist but only at a higher cost to the consumer and at scarcer levels.
The mortgage finance system should have a balance of consumer protections that prevent abusive lending practices and policies that prioritize access to sustainable credit, Michael D. Calhoun, President of the Center for Responsible Lending told the committee. PATH meets neither of these goals,m he said, instead it would result in affirmative harm on both accounts.
Calhoun said the elimination of government guarantees for eligible mortgages would make the 30-year fixed-rate mortgage a thing of the past and fewer Americans could become homeowners. Those able to obtain a mortgage would end up with "less affordable, less stable, and shorter term mortgage financing."
PATH's creation of a securitization platform a constructive contribution to the discussion but he said it falls significantly short of sufficient housing finance reform and small lenders would be squeezed out of the mortgage market.
Calhoun called the Act's approach to FHA reform "death by a thousand programmatic changes" with the result being a much more restricted and expensive program that would have difficulty fulfilling its mission.
PATH also strikes critical mortgage reforms from the Dodd-Frank Act and invites a return to the predatory and abusive lending that proliferated before the housing crisis and "allows the private-label securities market to return to its old, harmful and reckless ways."
Referring to the accounting scandals of the mid 2000s, Dr. Mark A. Calabria, Director of Financial Regulation Studies, Cato Institute, said we should remember Fannie Mae and Freddie Mac as two deeply corrupt companies, "A depth of corruption that can only result from their protected, entrenched status." He said Bear Stearns, Lehman Brothers, and Countrywide are all gone, "Fannie Mae and Freddie Mac merit the same fate."
There is no need for a (government) guarantee and objections to the elimination of the GSEs often assert that such would be dangerous because our mortgage market needs a guarantee to function, Calabria said. "Such an assertion is false on a variety of fronts." First our mortgage market is characterized by several government backstops other than the GSEs. The Federal Reserve has purchased trillions of dollars in mortgage-backed securities and the Fed's 13-3 powers were used to support non-mortgage debt during the crisis. In addition there are the FHA, Ginnie Mae, and the Federal Home Loan Banks. One could also argue that deposit insurance for banks and thrifts also backstop the market. "While I would eliminate or roll back most of these interventions, that does not change the fact they are indeed there. Even in the absence of Fannie Mae and Freddie Mac our mortgage market maintains considerable government support," he said.
He cited the existence of the jumbo mortgage market as further proof of the market's ability to function without the GSEs and said 30-year fixed rate financing is readily available at affordable rates without the backing of a GSE. If a government guarantee was essential we would expect the jumbo market to be relatively small relative to its "competition." Instead it has a 5 percent market share while homes exceeding the FHA high-cost limit are only 4 percent of the market.
The notion that without Fannie Mae and Freddie Mac we would be a nation of renters is simply not true Calabria said.
Also giving testimony to the committee were Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute; Adam J. Levitin, Professor of Law, Georgetown University Law Center; William A. Loving, Jr., President and Chief Executive Officer, Pendleton Community Bank, on behalf of the Independent Community Bankers of America; and Tom Deutsch, Executive Director, American Securitization Forum