June 29, 2017

U.S. Senate Committee on Banking, Housing, & Urban Affairs: Principles of Finance Reform

Key Topics & Takeaways

  • Government Guarantee: Several committee members, but not all, and most panelists expressed the view that some type of government backstop would be needed in any future U.S. housing system
  • Housing Finance Reform: Sen. Crapo stated that he hopes the Senate Banking Committee can get housing finance reform legislation out of the committee this year.
  • Credit Score Models: Panelists discussed the merits of alternative credit scoring models which account for trends and data points not found in the more traditional credit scoring models.
  • Affordable Housing: Sen. Brown stated that main street must be the point of focus for housing finance reform. Much of the discussion at the hearing was on the topic of how to expand credit access to all credit worthy borrowers.



  • David H. Stevens, President and CEO, Mortgage Bankers Association
  • Edward J. DeMarco, President, Housing Policy Council of the Financial Services Roundtable
  • Michael D. Calhoun, President, Center for Responsible Lending


Opening Statements

In his opening statement Committee Chairman Mike Crapo (R-Idaho) stated that housing finance reform is one of his key priorities this Congress. Crapo expressed a need to preserve not only the TBA market, but also the 30-year fixed rate mortgage. Crapo stated, “We need multiple levels of taxpayer protection standing in front of any government guarantee, including down payments, loan-level private insurance, and substantial, robust, loss-absorbing private capital at guarantors comparable to the amount of capital maintained by global systemically important banks.” Crapo also made mention of the idea to securitize conventional mortgages with a Ginnie Mae wrap.

In his opening statement, ranking member Sherrod Brown (D-Ohio) stated that “main street” must be the point of focus for housing finance reform. Brown stated, “Some proposals to reform the housing finance system focus more on how to allow private capital or financial institutions to take over for or stand in front of the GSEs than on the cost of that additional private capital to borrowers. Underrepresenting those costs will have consequences for access to credit and could reduce home values if new borrowers cannot access mortgages at affordable rates.”



In his opening statement, President and CEO of MBA David H. Stevens stated that the GSE business models were flawed and that there is a need for comprehensive reform. Stevens highlighted three priorities for housing finance reform: 1) taxpayer protection; 2) investor returns; and 3) consumer cost and access to credit.

In his opening statement, President of the Housing Policy Council of the Financial Services Roundtable Edward DeMarco echoed the need for housing finance reform already stated by the others. DeMarco stated that any reform system needs a private guarantee and behind that guarantee there should be a government guarantee. This backstop should include a system to prefund future losses such that a mechanism would be in place to ensure any losses paid by tax power support are fully refunded. DeMarco also listed five principles for reform, where were:


  1. Fix what is broken and preserve what works in support of consumers and the market.
  2. The transition from the old system to the new one should avoid disrupting consumers and markets.
  3. Private capital should bear all but catastrophic mortgage credit risk so that market discipline contains risk. The government should provide an explicit, full faith and credit guarantee on mortgage-backed securities (MBS) but with a pre-set mechanism to ensure any catastrophic losses that call upon taxpayer support will be repaid fully.
  4. Government should provide a regulatory framework that is clear and equitable across all participating companies and ensures that participants in the housing finance system operate in a safe and sound manner.
  5. The government-protected GSE duopoly should be replaced with a structure that serves consumers by promoting competition, affordability, transparency, innovation, market efficiency, and broad consumer access to a range of mortgage products.


In his opening statement, Michael Calhoun, the President of the Center for Responsible Lending, noted that housing finance reform should take into consideration underserved markets, such as rural areas. Calhoun also stated that community banks and other small lenders must be supported in housing finance reform. Calhoun noted that the GSEs are the largest providers of funding in rural areas and that community banks are the primary lenders in those areas as well. Calhoun also stated that the GSE credit risk sharing programs are the types of efforts that should be expanded upon and continued.


Question and Answer

Housing Finance Reform

Sen. Corker (R-Tenn.) began the question and answer by stating that he hopes the committee can work together to produce something on housing finance reform this year. Corker also stated that any reform will need an explicit government guarantee and that an implicit guarantee does not put tax payers in a very good place. Coker expanded on this thought by stating that there should be a prefunded fund to help with failed mortgages and not “failed companies.”

Sen. Reed (D-RI) asked questions regarding servicers and stated that many of the problems from 2008 – 2009 were the direct result of servicer behavior. In response, Calhoun stated that FHFA has implemented various reforms which have improved servicing. DeMarco stated that progress has been made but that the job is not done, and added that more is needed than just a national servicing standard. While on the topic of regulation, Stevens expressed support for the role of FHFA as an independent regulator. Stevens also noted that the direction of housing finance reform is largely dependent on the person serving the role of director of the FHFA which, in his view, only highlights the need for reform legislation.


Sen. Cotton (R-AR) asked for views on the best-case scenario model that would protect taxpayers while also promoting liquidity. DeMarco stated that there needs to be a single security where private capital bears all but the tail end risk.

Sen. Heitkamp (D-ND) asked for views on possible expanding the role of the Federal Home Loan Banks. Stevens expressed concern with potential execution inefficiencies if only aggregating through home loan bank. Calhoun added that FHLBs need a workable cash window for such an endeavor to be successful.


Credit Score Models

Sen. Scott (R-SC) asked for panelist to describe the potential benefits of updating credit score models. Stevens began by stating that the current models are antiquated whereas the newer models can find ways to score outlier demographics that might otherwise be overlooked or unable to be assessed through the more traditional models. Stevens concluded by stating that these credit score models need to be considered further to better access the risks.


Sen. Perdue (R-GA) asked for views on recent fintech developments in the underwriting space. Calhoun, like Stevens, expressed support for alternative credit scoring models. Calhoun stated that traditional models do not account for rent payments and that that data is useful for assessing creditworthiness.


Affordable Housing

Sen. Brown (D-OH) asked panelists to provide views on what can be learned from the current GSE programs which accept 3% down payment loans. Calhoun noted that subprime loans were not the only contributing factor to the financial crisis and that prime loans played a large role as well. Calhoun said that poor documentation played a major role in the crisis and that careful underwriting and documentation could help ensure greater credit access for borrowers. Brown also asked Calhoun how affordable housing goals should be considered during housing finance reform. Calhoun noted the success of the credit risk transfer programs and highlighted the ability of those programs to pool risk such that smaller players can also participate.


Sen. Cortez Masto (D-NV) asked for views on how to ensure that all market participants offer sustainable fair access to all credit worthy borrowers. Calhoun said any housing finance reform package should preserve requirements for loans to be sustainable and to preserve the important tools now at FHFA to advance affordable housing. DeMarco stated that servicing compensation is an issue that should be looked at.


Sen. Warren (D-MA) asked for thoughts on affordable housing. Calhoun stated that the GSEs are transferring risk on a pool basis which means they buy risk and sell to a diverse group of guarantors which helps ensure more than just big firms can participate. Calhoun expressed concern that front-end risk sharing, opposed to backend, would push pricing in favor of larger institutions.


Small Lenders and the Cash Window

Sen. Menendez (D-NJ) asked for panelist to provide further details regarding why access to small lenders is so important. Stevens stated that the Fannie Mae and Freddie Mac cash window is extremely active today, with thousands of customers. Stevens went on to say that this customer diversity prevents concentration risk while also limiting the potential pricing advantage for certain institutions. Calhoun stressed that the cash window can only work well when the pricing for it is competitive with the pricing for securitizing.


Sen. Schatz (D-HI) asked panelists for views on how finance reform should account for various geographic idiosyncrasies, such as the fact that Hawaiian real estate prices can outpace the income for many living there. Calhoun noted that one example of finding a compromise to this dilemma was the willingness of the GSEs to increase the debt-to-income ratios. DeMarco stated that the question gets to the point of community lenders. Specifically, community lenders have insight into borrowers that others do not, which enables them to make better informed lending decisions in these types of communities.