November 2, 2017
House Financial Services Housing and Insurance Subcommittee Hearing “Sustainable Housing Finance: Private Sector Perspectives on Housing Finance Reform, Part II”
Key Topics & Takeaways
- Government Guarantee: All the witnesses endorsed an explicit and appropriately-priced government guarantee on eligible mortgage-backed securities (MBS). They fielded questions from several Congressmen on how best to structure the fee and ensure that taxpayers were protected.
- Status of the GSEs: The witnesses discussed their respective trades visions for reformed government-sponsored enterprises (GSEs) in the housing finance space. Several witnesses endorsed reforming the GSEs to function more like utilities, while others called for a clear delineation of their role and limitations on their ability to act in the primary market. There was also discussion about recapitalizing the GSEs, with some witnesses supportive of recapitalizing and reforming them, with other witnesses ambivalent about recapitalization.
- Tax Reform: There was also discussion about the recently released tax reform bill. Democratic Congressmen, as well as representatives from NAHB and NAR, criticized the proposed cap on the mortgage interest deduction as an attack on homeownership. NAR also criticized the proposed doubling of the standard deduction. Republicans, especially Subcommittee Chairman Sean Duffy (R-Wisc.) vigorously defended the proposals.
- The Honorable David H. Stevens, President and Chief Executive Officer, Mortgage Bankers Association (MBA)
- Jerry Howard, Chief Executive Officer, National Association of Home Builders (NAHB)
- Dan Goodwin, Director of Mortgage Policy, Structured Finance Industry Group (SFIG)
- Sarah Edelman, Director of Housing Policy, Center for American Progress (CAP)
- Kevin Brown, Chair, Conventional Financing & Policy Committee, National Association of Realtors (NAR)
- Robert DeWitt, Chairman, the National Multifamily Housing Council on behalf of the National Multifamily Housing Council and the National Apartment Association
Subcommittee Chairman Sean Duffy (R-Wis.)
In his opening statement, Duffy introduced the hearing and stated his intention to pursue housing finance reform legislation on a bipartisan basis. Duffy said one of his priorities is to get private capital back into the system by making the rules for investors “transparent and enforceable.” He also argued that Fannie Mae and Freddie Mac (collectively, the GSEs) could not be allowed to remain in their current condition because of the risk they pose to taxpayers, and called on Congress to reform the Federal Housing Administration (FHA), which he argued has veered away from its mandate.
Subcommittee Ranking Member Emanuel Cleaver (D-Mo.)
In his opening statement, Cleaver also expressed interest in working on housing finance reform on a bipartisan basis. Cleaver said that reform of housing finance is important because the GSEs’ current conservatorship was never intended to be permanent. He also called on Congress to preserve the 30-year fixed-rate mortgage in any reform package.
The Honorable David H. Stevens, President and Chief Executive Officer, Mortgage Bankers Association (MBA)
In his testimony, Stevens described the conservatorship of the GSEs as “unsustainable” and argued that reform is necessary to create certainty for all participants in the housing finance space. Stevens described MBA’s creation of its housing finance reform proposal (which was attached to his written testimony) and said that MBA’s priorities were to ensure access to the secondary market for all lenders, new affordable housing goals, preservation of the cash window, and a prohibition on vertical integration in the market. Stevens also discussed MBA’s hope that the GSEs will be reformed along a monoline utility model, restricted to a secondary market function, and called on Congress to guarantee qualifying mortgage-backed securities (MBS) with appropriately priced premiums.
Jerry Howard, Chief Executive Officer, National Association of Home Builders (NAHB)
In his testimony, Howard argued that if the GSEs are forced to take a Treasury draw, the result would be “counterproductive” to the goal of reforming the housing finance market, and called on Congress to allow the GSEs to recapitalize with reforms. Howard said that NAHB’s priorities were: 1) ensuring liquidity in all markets in all cycles; 2) creating a reliable flow of affordable housing credits; 3) keep private capital in a first loss position; 4) have an explicit government guarantee on qualifying MBS; 5) ensuring a level playing field for all lenders; 6) have well-capitalized intermediaries; 7) have prudent and safe underwriting standards; and 8) have a well-ordered transition between systems.
Dan Goodwin, Director of Mortgage Policy, Structured Finance Industry Group (SFIG)
In his testimony, Goodwin stressed the importance of involving public and private capital and described the current state of the industry as “unhealthy.” He said there needs to be a stable, liquid market to get borrowers the best rates. Goodwin also discussed the “critical” to-be-announced (TBA) market to minimize the cost of borrowing. He said that the TBA market needs a government guarantee and called on Congress to keep that. He opined that it is unlikely the 30-year-fixed rate mortgage would exist without this certainty. Goodwin stated that “in some ways private capital has been crowded out,” and there is a need for balance between public and private capital. He continued that the GSEs credit risk transfer program has successfully reintroduced private capital into the market, and that he believes the GSEs should expand their credit risk transfer (CRT) program and explore selling some of the existing risk they’ve retained, as CRT is not a replacement for the private-label securities (PLS) market.
Sarah Edelman, Director of Housing Policy, Center for American Progress (CAP)
In her testimony, Edelman offered three recommendations for Congress: 1) build on what has worked in terms of expanding access to prospective homeowners; 2) support the reforms currently underway that aimed to fix problems at the GSEs from the pre-crisis era; and 3) do no harm to taxpayers and homeowners. Edelman also expressed skepticism about a multiple-guarantor model and criticized the GSEs for tailoring insurance pricing based on credit score.
Kevin Brown, Chair, Conventional Financing & Policy Committee, National Association of Realtors (NAR)
In his testimony, Brown outlined NAR’s priorities for housing finance reform, and called on Congress to ensure that creditworthy Americans can access mortgage capital in all markets at all times. Brown said that for this to be possible, Congress must grant an explicit guarantee and restructure the GSEs into government-chartered non-shareholder owned entities with a minimal retained portfolio that is focused on boosting the market instead of on profits. He also called on Congress to create a mortgage market liquidity fund.
Robert DeWitt, Chairman, the National Multifamily Housing Council on behalf of the National Multifamily Housing Council and the National Apartment Association
In his testimony, DeWitt noted that an increasing number of Americans are opting to rent instead of buy residences and that this increase will require a large amount of new construction. DeWitt noted that the apartment industry is incredibly capital intensive and said that private capital today dominates the multifamily housing industry. DeWitt noted that private capital is insufficient for the market’s needs, as private capital is unable to supply long-term financing on favorable terms. DeWitt outlined several principles for multifamily housing, supported by the National Apartment Association, which he believed should be considered in any housing finance reform package.
Question & Answer
Throughout the hearing, all witnesses expressed support for a government guarantee on qualifying MBS, and argued that such a guarantee is critical to preserve the 30-year fixed rate mortgage, as well as liquidity and market confidence.
Duffy asked the panel to describe how much credit risk should be offloaded on to the private sector, and how much risk the federal government should be responsible for. Stevens argued that the government should offload everything except catastrophic risk, but he declined to specify in basis points how much of an MBS this would be.
Rep. Dennis Ross (R-Fla.) asked if a government backstop of some kind is necessary to preserve the 30-year fixed rate mortgage, and all the witnesses on the panel agreed.
Status of the GSEs
Duffy asked Brown discuss NAR’s concept for reformed GSEs. Brown said that NAR supported a government chartered entity as intermediary, with an explicit government guarantee on the MBS it issues, as necessary to support the 30-year fixed rate mortgage. Brown clarified that the guarantee should be on the security.
Ross asked the panel to describe examples of the GSEs crossing the “bright line” between the secondary and primary markets, and asked for their thoughts on the proper role for the GSEs. Stevens called for a clear confinement of the GSEs to the secondary market, and criticized attempts by the GSEs in the past to become involved in the primary market. Stevens reiterated MBA’s support for a regulated utility model for any intermediary entities, with a strong regulator to ensure that that the intermediary not become involved in the primary market. Brown said that NAR supported a bright line, especially to prevent large financial institutions from becoming overly powerful in the primary market.
Rep. Brad Sherman (D-Calif.) asked Brown why NAR supported a two-guarantor model, instead of a one-guarantor or many-guarantor model. Brown said that having only one intermediary could be unstable, especially if something happened to that entity. Brown also argued that having many guarantors could create a “race to the bottom” in terms of pricing, so two guarantors was left as the optimal model.
Sherman asked the panel if it be prudent to have GSEs remit funds to a separate fund in the Treasury which they could draw on, instead of simply remitting funds to the general funds. Brown said that NAR would support this, saying it could create a “rainy day” fund that could help preserve mortgage market liquidity in a downturn.
Cleaver asked Goodwin if the decline in the GSEs capital buffer caused any concern, and Goodwin said that SFIG had no opinion on the GSEs recapitalizing or taking a draw from the Treasury, though he did say that secondary markets would be concerned if they believed recapitalization would lead to a recap and release scenario that would throw the government guarantee for MBS into question.
Credit Risk Transfers (CRT)
Rep. Ed Royce (R-Calif.) noted that he has a bill with Rep. Gwen Moore (D-Wisc.) to require the GSEs to conduct more CRT, and asked the panel how best to accomplish this goal. Stevens said that MBA supports having a wide array of risk transfer mechanisms beyond CRT, including relying on reinsurance markets.
Role of the Federal Housing Administration
Sherman asked the panel if a rollback of the FHA’s policies by a new administrator would pose risks to the housing finance market. Stevens said unequivocally yes, and that Congress should lock in some of the reforms undertaken by FHA administrator Watt so a new administrator cannot undo them. Stevens also called on Congress to legislate a level playing field for small lenders and a government guarantee for qualifying MBS.
Alternative Credit Scores
Rep. Ruben Kihuen (D-Nev.) asked the panel for their thoughts on alternative credit scores. Brown said that NAR supports using alternative scores to prevent thin file borrowers from being shut out of the market. Edelman called on the GSEs to adjust their risk-based pricing practices for mortgage insurance and not tailor fees based on FICO scores.
Rep. Al Green (D-Texas) asked the panel to review his bill HR 123, the FHA Alternative Credit Pilot Program Reauthorization Act of 2017.
Green and Duffy had a back and forth through their second question period over the treatment of the mortgage interest deduction in the House Republicans’ tax reform bill. Duffy defended the reduction in the deduction to the $500,000 loan level from the $1 million level, saying that the current level benefits wealthier Americans and realtors as opposed to the middle class. Green defended the current level, arguing that the reduction was a red herring by Republicans to justify the eventual deletion of the deduction. Howard and Brown (on behalf of NAHB and NAR) both vehemently defended retaining the current $1 million level.
Rep. Michael Capuano (D-Mass.) noted that the House Republican tax reform proposal repeals the current exclusion for sales of a home from taxable income, and asked the panel if they supported this. Brown criticized this proposal, and criticized the proposed doubling of the standard deduction.
Qualified Mortgage (QM) Rule
Hultgren noted that today, all loans purchased by the GSEs are deemed to meet the QM guidelines, and said that this created an unlevel playing field for agency and non-agency MBS. Hultgren asked the panel to describe the significance of the QM patch and how problems with the patch could be rectified. Goodwin argued that because the patch gives the GSEs a major advantage, either QM should be standardized across the market, or the QM patch should be extended to other lenders.
Royce asked the panel about PACE liens, and if Congress should reform how these loans are structured and treated. Stevens said that MBA thinks PACE liens are an enormous problem, especially given that they are not subject to traditional consumer protection rules, and said that loans with PACE liens should be forbidden from the GSEs portfolio.
For more information on this hearing, please click here.