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 risk."
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:
- Establishing 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 and undesirable.
"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.