The second in a scheduled three-part hearing on Sustainable Housing Finance was held on Thursday by the Housing and Insurance subcommittee of the House Financial Services Committee (FSC). This hearing focused on "Private Sector Perspectives" on Housing Finance Reform.
All of those testifying before the committee appeared to agree there should be an explicit government guarantee at the mortgage-backed security (MBS) level, and strong standards for the underlying collateral. Fannie Mae and Freddie Mac (the GSEs) would act as guarantors, possibly along with other entities chartered as competition.
Jerry Howard, CEO of the National Association of Home Builders (NAHB), laid out one scenario for how the system could work. What he called private Housing Finance Entities (HFEs) would be authorized to purchase mortgages from loan originators and to package the loans into securities. Both the originators and the HFEs would be required to maintain capital to cover a portion of the credit risk on the pooled mortgages, with private mortgage insurance required on higher loan-to-value mortgages. The HFEs and originators also would pay premiums into the insurance fund that would provide additional protection to MBS investors. The federal government would ensure that the fund is actuarially sound and would stand behind the insurance fund in a catastrophic last tier position. He likened this to the successful Ginnie Mae model.
David H. Stevens, President and Chairman of the Mortgage Bankers Association (MBA) lauded the Federal Housing Finance Agency (FHFA) for the many changes it has put in place as conservator of Fannie Mae and Freddie Mac (the GSEs). These have improved access to the secondary mortgage market and reduce risks to taxpayers he said, but there is still a critical need for legislative reform. Only congress can lock in the improvements made by FHFA.
Stevens said calls to simply recapitalize the GSEs and allow them to operate without structural changes are misguided. Such plans could be reversed by future FHFA directors and "likely embolden those who seek private profit at the expense of sound public policy."
In addition to the legislative changes outlined by Howard, Stevens recommended that FHFA should be empowered with a utility style regulatory mandate to maintain a level playing field and given authority to charter other guarantors to enable secondary market competition.
Robert E. Dewitt, Vice Chairman, President and CEO GID Investment Advisers appeared before the committee on behalf of the National Multifamily Housing Council and the National Apartment Association. He said their critical principals include maintenance of an explicit, appropriately priced, and paid-for federal guarantee for multi-family MBS, recognition that the multifamily business differs from the single-family business, and keeping the concept of the GSEs' multifamily first-loss risk-sharing models;
The National Association of Realtors® (NAR) was represented by Kevin Brown, chair of its Conventional Financing Committee who spoke of his organization's key objectives in the housing finance reform discussion.
First, he said, "Realtors want to ensure that in all markets affordable mortgage capital will always remain available for creditworthy Americans. Second, [they] believe that taxpayer dollars should be protected."
It is time to move the GSEs out of conservatorship which is unsustainable in its current form, he said. NAR advocates for a "government-chartered, non-shareholder owned" system that puts its service to homeowners and taxpayers ahead of profits.
"NAR believes this structure, with clearly defined roles and enhanced safeguards, is the best model for the new authorities, because it establishes a separate legal identity from the federal government while serving a public purpose," Brown said. "Unlike a federal agency, government-chartered organizations are established to be politically independent and often are self-sustaining - not requiring appropriations from Congress. The ability of the authorities to focus on their mission, without the need to chase risky profit-driven opportunities, is an important criteria for Realtors®."
The government-chartered authorities are preferable to nationalized or fully privatized systems, Brown said, because they could respond to market downturns effectively, while also minimizing taxpayer exposure to losses. He also suggested that the new authorities should utilize a regulated, retained portfolio, which could be tapped during a downturn or to test innovative mortgage products.
After speaking to the importance of insuring the continued and uninterrupted operation of the TBA market under any housing finance reform and that the 30-year fixed-rate mortgage be preserved, Daniel Goodwin, Director of Mortgage Policy for the Structured Finance Industry Group (SFIG) turned to discussing the private label securities (PLS) market. That market once represented a far greater share of the mortgage funding system before "market excesses and bad actors... led to the collapse in housing that fed the Great Recession," he said. In response, legislation and regulations were put in place to reduce risk and prevent future crises, but, in some cases, they were overly broad or created uncertainty.
Largely, these reforms did not touch the GSEs, he said, so capital shifted away from the private market. "As this committee is considering housing finance reform and ways to attract that private capital, policymakers should review those policies which may have created an uneven playing field or inadvertent biases."
He urged capital relief to allow depository institutions to participate in Credit Risk Transfer Securitizations (CRT). At present, the capital reserved against the risk in such transactions is often greater than the required capital to be set aside for the loans themselves. It is consistent with common sense, he said, that the amount of capital required to protect against loss in the system should be decreased when risk is transferred.
Another straightforward way to encourage expansion of the PLS market would be to lower the conforming loan limit. The current limits were established when the PLS market was robust and competitive and the GSEs were not in conservatorship. "Today, it is more difficult to support government subsidies that benefit borrowers with mortgages on properties that approach-and in many cases, exceed-half a million dollars or more." SFIG, he says, believes that a slow and measured lowering of limits could transfer risk from the GSEs to investors through the PLS market.
While she agreed with many of the solutions put forward by others at the hearing, Sarah Edelman, Director of Housing Policy, Center for American Progress, also took some contrarian positions. She said some of the proposals could make pricing even more prohibitive for low and moderate-income borrowers by encouraging private credit sources that might price risk on loan-by-loan basis. Going forward, all qualified borrowers should have access to the conventional market, not just the wealthy or the highest earners.
She argued that competition in the secondary market does not always benefit consumers or taxpayers, that it is important to consider how much competition is a desirable goal. However, several of the housing finance reform proposals under consideration make the mistake of setting secondary market competition as a goal of housing finance reform, she said, citing those from the Milken Institute and MBA.
These proposals envision a system in which many entities could issue mortgage backed securities that are guaranteed by the federal government. The theory is that more competition will deliver better priced mortgage credit and greater efficiencies to the consumer while also protecting taxpayers by diversifying risk.
She pointed out that, prior to the housing crisis, "The private label securitization market was robust and private mortgage insurers were very competitive. This competition did not lead to better terms for consumers nor did it protect taxpayers. In fact, competition among secondary market participants drove a race to the bottom, with each jockeying for market share."
"When the housing market collapsed, and the global finance system teetered on the edge of collapse, many firms with connections to the private label securities market needed bailouts. Competition among secondary market participants or among private mortgage insurance companies did not protect taxpayers or consumers during the crisis," she told the committee.
She urged the committee to address market incentives, so shareholders are not put ahead of taxpayers and consumers. Reform should consider appropriate capital requirements, strong regulatory oversight, easy access to the secondary market for small lenders, and a housing finance system that meets the needs of America's renters.
The NAHB's Howard also testified that reform of the appraisal process is essential to reforming the entire financial system. The current process is impaired by inconsistent and conflicting standards and guidance; inadequate and uneven oversight and enforcement; a shortage of qualified and experienced residential appraisers; and the absence of a robust and standardized data system, he said.
Efforts should be made to standardize appraisal requirements throughout the system, so everyone is operating under the same set of rules. The availability of data needed for appraisal analysis should be expanded as should open lines of communication and the sharing of information among all parties in the real estate transaction and educational opportunities for appraisers.
He also advocated for standardization of oversight within and across states and an effective federal system of appraisal oversight.
The NAHB also drew a line in the sand over further consideration of the Protecting American Taxpayers and Homeowners (PATH) Act, which was approved by the whole FSC in 2013. NAHB claimed PATH would begin the process of dismantling the GSEs, leave the private market without guarantees, and restrict FHA lending and has recently emerged in reform discussions.
Howard said, "While NAHB hopes to restart this debate with a clean slate, should the PATH Act serve as the starting point for the subcommittee's reform efforts, we will strongly oppose the legislation unless significant changes are made from the 2013 committee-passed legislation."