October 25, 2017
House Financial Services Housing and Insurance Subcommittee “Sustainable Housing Finance: Private Sector Perspectives on Housing Finance Reform”
Key Topics & Takeaways
- Government Guarantee: Kevin Chavers, testifying on behalf of SIFMA, called on Congress to place an explicit and appropriately priced government guarantee on qualifying mortgage-backed securities (MBS) to boost investor confidence in these products, while increasing their liquidity, and the other panelists agreed.
- Transition Between Systems: When asked by Rep. Randy Hultgren (R-Ill.) how Congress could ensure a smooth transition between systems, Chavers said that – assuming the future system has an explicit guarantee – regulators should communicate with capital market participants, ensure that new MBS will be freely fungible with outstanding MBS, and have the entire process be undertaken in a transparent way, and the other panelists agreed.
- Brenda K. Hughes, Senior Vice President, First Federal Savings, on behalf of the American Bankers Association (ABA)
- Samuel A. Vallandingham, President and CEO, First State Bank, on behalf of the Independent Community Bankers of America (ICBA)
- Nikitra Bailey, Executive Vice President, Center for Responsible Lending
- Kevin Chavers, Managing Director, BlackRock, on behalf of the Securities Industry and Financial Markets Association (SIFMA)
- Richard Stafford, President and CEO, Tower Federal Credit Union, on behalf of the National Association of Federally-Insured Credit Unions (NAFCU)
Subcommittee Chairman Sean Duffy (R-Wis.)
In his opening statement, Duffy stressed the importance of reforming the housing finance system in a way that creates certainty for lenders and investors. Duffy noted that there have been numerous proposals in recent years on the topic, and said he would like to hear from the panel of witnesses about what Congress should preserve from the current system, for what is not working in the current system, and how to return private capital to a front-end risk position.
Subcommittee Ranking Member Emmanuel Cleaver (D-Mo.)
In his opening statement, Cleaver discussed what he viewed as an “affordable housing crisis” in the United States. Cleaver said that minimum wage workers are effectively priced out of reasonable housing and noted that many Americans are still struggling from the 2008 financial crisis. Cleaver closed by saying he believes it is important for Congress to expand access to affordable housing and preserve the 30-year fixed-rate mortgage in any reform legislation.
Brenda K. Hughes, Senior Vice President, First Federal Savings, on behalf of the American Bankers Association (ABA)
In her testimony, Brenda Hughes stressed that absent aggregation and securitization, access to long-term, lower-rate mortgages would diminish. Hughes also argued that the government guarantee on existing mortgage backed securities (MBS) issued by Fannie Mae and Freddie Mac (collectively, the GSEs) provides liquidity which also helps expand access to credit. Hughes called on Congress to maintain these features in any reform package. Hughes outlined several other principles that ABA believes should be considered in housing finance reform legislation.
Samuel A. Vallandingham, President and CEO, First State Bank, on behalf of the Independent Community Bankers of America (ICBA)
In his testimony, Samuel Vallandingham discussed the importance of community banks to serving rural and low-density areas, many of which would struggle to attract capital for mortgage lending from larger institutions. Vallandingham said that community banks need access to the secondary market on favorable terms in order to boost their own lending capabilities (and this was also one of ICBA’s principles for reform). Vallandingham used his testimony to state ICBA’s positions on GSE reform, and called on Congress to retain the features in today’s system that are working well and to focus reform on the parts of today’s system that either do not work or put taxpayers at risk.
Nikitra Bailey, Executive Vice President, Center for Responsible Lending
In her testimony, Nikitra Bailey said that the secondary market helps homeowners access credit, and noted that homeownership is the primary way that American families build wealth. Bailey also discussed the historical discrepancies in lending practices and credit availability for white and minority households, noting that minority homeownership levels remain low despite the creation of federal programs to boost homeownership.
Kevin Chavers, Managing Director, BlackRock, on behalf of the Securities Industry and Financial Markets Association (SIFMA)
In his testimony, Kevin Chavers offered up several principles that SIFMA and its members believe should guide any new housing finance reform legislation, which included: 1) the need for a clearly defined and limited government role to facilitate liquidity while protecting taxpayers; 2) transparency at all levels; and 3) a framework to attract private capital. Chavers said that SIFMA’s main focus in the housing finance space is the preservation of the To-Be-Announced (TBA) market, which helps homebuyers lock in interest rates in advance of closing. Chavers also called on Congress to place an explicit and appropriately priced government guarantee on qualifying MBS to boost investor confidence in these products, while increasing their liquidity. Chavers discussed the importance of private capital for housing finance, and said that any legislative reforms to the housing finance system should be implemented in an orderly and thoughtful way.
Richard Stafford, President and CEO, Tower Federal Credit Union, on behalf of the National Association of Federally-Insured Credit Unions (NAFCU)
In his testimony, Richard Stafford called on Congress to narrowly tailor changes to the housing finance system, noting that many credit unions find it easier today to sell a loan into the secondary market than several years ago, saying “the current system is working for credit unions.” Stafford was critical of previous housing finance proposals, saying they did not address the needs of community-based lenders, and stressed that “large institutions” not be given control of the market for aggregating mortgages in order to preserve credit union access to the secondary markets. Stafford also called for a pricing structure for loans based on quality instead of quantity.
Question & Answer
Duffy asked the witnesses how the government would accurately price a guarantee on MBS. When witnesses endorsed the use of guarantee fees (G-Fees), Duffy questioned how there was any way of knowing that the G-Fees are set at the appropriate level without market input.
Rep. Dennis Ross (R-Fla.) asked witnesses to compare government guarantees proposed by both the Mortgage Bankers Association (MBA) and the Milken Institute. Chavers pointed out that the two proposals have much in common, but that SIFMA does not have a formal position on either (NAFCU did not take a position on the plans, either). Chavers also discussed the layers of risk sharing on an MBS, which include equity in individual borrowers’ homes, mortgage insurance, G-Fee for the particular MBS, and then front-end and back-end credit risk transfer by the GSEs. In response to a question from Rep. Blaine Luetkemeyer (R-Mo.), Chavers said the guarantee should be at the security level, not on individual mortgages.
Rep. Brad Sherman (D-Calif.) argued that the pre-2008 system failed because a government guarantee was provided to the activity of private corporations taking care of their shareholders. Sherman then asked the witnesses if it would be possible to have widespread 30-year fixed rate pre-payable mortgages without a government guarantee, and Chavers and Stafford both said no.
Rep. Maxine Waters (D-Calif.) noted that the entire panel agreed on the need for an explicit government guarantee, and asked for their views on the impact of eliminating that guarantee. Vallandingham said that rates for borrowers would increase, while Hughes said that her bank would have to reduce the number of loans it made. Chavers also agreed that the cost of credit would increase, and that the TBA market would encounter problems that would shrink the amount of capital available for 30-year fixed rate mortgages.
Transition Between Systems
Luetkemeyer asked Chavers to provide some specifics on how a new system should function, and how best to transition to that. Chavers said that to serve a housing market with today’s features and size, it is important that there be an explicit government guarantee on MBS. Chavers also said that an important part of any transition is assuring investors that existing MBS will be fungible with any new MBS.
Rep. Randy Hultgren (R-Ill.) also asked Chavers how Congress could ensure a smooth transition between systems. Chavers said that – assuming the future system has an explicit guarantee – regulators should communicate with capital market participants, ensure that new MBS will be freely fungible with outstanding MBS, and have the entire process be undertaken in a transparent way.
Credit Risk Transfer (CRT)
Duffy asked the panel to opine on how credit risk could best be offloaded to the private market. Chavers said that the key consideration is the downstream implications of transferring credit risk – essentially, what is the cost to the borrowers of the credit protection acquired on a MBS. Chavers also pointed out that the rates market “dwarfs” the size of the private market for credit risk.
Common Securitization Platform (CSP)
Rep. Ted Budd (R-N.C.) noted that the CSP is being developed as a platform for the GSEs, and asked Chavers how important the CSP is for returning private capital to the mortgage market. Chavers said that CSP could be expanded for private market participants, which could help investors who have lost confidence in the intermediaries in the private label market. Chavers conceded that he did not have insight in to how feasible this could be, and said that his understanding is that the platform is being brought to market with the idea that it would create a single security for Agency MBS.
Ross asked the witnesses for their views on the recapitalization of the GSEs. Hughes said that recapitalization should happen after reforms are made. Vallandingham said that ICBA supports recapitalization, as well. Bailey agreed that recapitalization should happen after reforms. Chavers said that recapitalization could indicate to markets that policymakers are adopting a “recap and release” strategy for the GSEs, which he said would be “problematic,” as it would raise questions about the government guarantee. Stafford said that NAFCU supports recapitalization and that this step would be prudent. Chavers noted that whether or not the sweep continues, or the GSEs draw on their line of credit from the Treasury, they are still relying on short-term taxpayer provided funds. In response to a similar question from Sherman, Chavers said the main issue is transparency, and that if there is limited recapitalization to prevent a draw, this should be clearly communicated to markets.
Qualified Mortgage (QM) Rule
Hultgren noted that the Treasury Department’s recent report on bank regulation found that the QM rule has distorted the market for mortgages and asked the panel if the rule has contributed to private capital leaving the market. Chavers said that he believes that private capital’s return will depend on broader issues, such as confidence in the market. He conceded that the QM rule may contribute to the small amount of private capital in the system, but it is not the entirety of the issues.
Rep. Keith Rothfus (R-Pa.) asked the panel if they have concerns about relying on the QM standards as a requirement for wrapping MBS in a government guarantee. Vallandingham said that community loans get loans “right,” but have been burdened by QM, which provides additional layers of regulatory costs for making and servicing loans. Stafford also discussed the regulatory burden QM imposes on credit unions.
Rep. Steve Pearce (R-N.M.) asked about the Ability to Repay (ATR) rule, and asked the panel if they support it, even though the 43 percent debt-to-income level may be “punitive” and hurt lower income homebuyers’ ability to get credit. Bailey supported the rule, while Hughes said that many small banks follow the GSE underwriting standards and that ATR is not difficult to comply with.
Small Lender Access
Hultgren asked the panel for their thoughts on the importance of preserving small lenders’ access to secondary markets. Vallandingham said hurting this access would ultimately be felt by rural and low-income borrowers. Vallandingham continued that community banks understand their markets better than regulators, and that large banks and can make loans that those institutions might not approve.
Rep. Dave Trott (R-Mich.) noted that a large amount of the GSEs business involves refinanced and second homes. He asked the panel for their thoughts on curtailing the GSEs activities in this space. Chavers noted that SIFMA has no position on the issue, but is a policy determination best left to Congress. He did qualify this by urging Congress to consider the impact of such a move on secondary markets.
For more information on this hearing, please click here.