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Working Toward Crapo’s “More Sustainable” Housing Finance System

The Senate Banking, Housing, and Urban Affairs Committee met on Tuesday to discuss the committee’s Chairman Sen. Mike Crapo’s housing finance reform outline. The first of this two-part hearing saw testimonies by experts giving their comments on the housing finance reform outline.

During his opening statement, Crapo said that his outline set out a “blueprint for a permanent, sustainable new housing finance system.”

Under the outline, he said that the new housing finance reforms would protect taxpayers by reducing the systemic, too-big-to-fail risk posed by the current duopoly of mortgage guarantors; preserve existing infrastructure in the housing finance system that works well, while significantly increasing the role of private risk-bearing capital; establish several new layers of protection between mortgage credit risk and taxpayers; ensure a level playing field for originators of all sizes and types, while also locking in uniform, responsible underwriting standards; and promote broad accessibility to mortgage credit, including in under-served markets.

“As we begin these discussions we must ask what housing options do families have today and what housing opportunities will we make available for families,” said ranking member Sen. Sherrod Brown. “Failure to put working families first in the process will make it harder to for families to afford rent, but above all put the viability of the 30-year fixed-rate mortgage at risk and hit communities with lower income, communities of color and rural America.”

During his testimony, Edward DeMarco, President of the Housing Policy Council (HPC) said that the need for housing finance reform remained as critical as ever. “Only Congress can replace the GSE duopoly with a more competitive market that reduces risk to taxpayers while ensuring a steady flow of mortgage finance for homebuyers,” DeMarco said. “We seek a more competitive market that puts private capital in front of a government guarantee.”

Additionally, DeMarco said that HPC members recognized that government reform would not happen absent meaningful progress on questions of affordability and availability of credit. “Here too there has been progress, though some work remains.”

Speaking specifically about the outline, DeMarco said that it reflected the “progression in our collective thinking” and that it was a practical, workable proposal that built on all previous proposals.

DeMarco addressed the components of the outline, the elements that HPC supports, the open-ended questions that the outline identifies, and some areas where additional specificity is needed. Additionally, he highlighted actions that the Federal Housing Finance Agency (FHFA) and the administration could take to ensure a smooth transition for new guarantors to enter the housing finance system with no competitive disadvantage relative to Fannie Mae and Freddie Mac.

During his testimony, Greg Ugalde, Chairman of the Board, National Association of Home Builders (NAHB) called on Congress to make housing affordability a national priority through housing finance reform.

“Advancing comprehensive housing finance reform will ensure the capital and liquidity necessary for consumers and home builders to access stable financing,” Ugalde said. “We believe that an accessible housing finance system must address liquidity as well as affordability regardless of domestic and economic financial conditions.”

Giving NAHB’s views on Crapo’s housing finance reform outline, Ugalde said that the NAHB appreciated and supported the Committee Chair’s effort to put forth a “thoughtful outline for housing finance reform,” that included what NAHB believed were key elements for a comprehensive reform bill along with a bipartisan agreement.

Ugalde particularly expressed appreciation of Crapo’s support of the explicit government backstop for a key portion of the conventional mortgage market that was critical to the ongoing availability of the 30-year fixed-rate mortgage and financing of affordable multifamily properties. Additionally, he said that the outline allowed the mortgage market to benefit from Fannie Mae and Freddie Mac’s well-tested infrastructure.

“The outline will designate Ginnie Mae as an operator of the securitization platform and provide the explicit government guarantee for mortgage-backed securities,” Ugalde said. “Employing a known and successful government entity provides an advantage but substantial operates will be needed for Ginnie Mae to perform this expanded role.”

Mark Zandi, Chief Economist at Moody’s Analytics said that while the outline left much to be resolved, it offered a promising framework to begin this work. “I would implore policymakers to use your outline to finish this job of housing finance reform,” Zandi said.

However, he told Crapo that the framework still had critical design issues that needed to be resolved for the reform to be a success. According to Zandi, the first structural issue was to ensure how enough guarantors enter the system that there are “none that are too big to be allowed to fail.”

“Fannie and Freddie’s complete domination of the current market will frankly make it impossible for new entrants absent significant steps to reduce barriers to entry,” Zandi said. “A more fulsome securitization platform, increased transparency, and multi-issuer single security will at very least be required to support sufficient entry.”

The second key issue, Zandi said was to ensure that lender-issuers were not on the hook for the failure of the guarantors from which they purchase insurance. “If they are, then they won’t get true sail accounting for the loans that they make which will make this channel entirely unworkable,” he said.

The final issue was to ensure broad, consistent access to affordable mortgage credit particularly in areas where the market could be less inclined to serve as well when left on its own. “Your outline states that the current affordability goals and duty to serve will be replaced by 10-basis point market access to lower housing costs for low- and moderate-income borrowers,” Zandi told the committee. “While this fee will generate much more funds than the current system to promote access, more needs to be done. Critically it’s important that all guarantors have a national footprint so that they don’t only serve the markets that happen to be most profitable.”

According to Hilary O. Shelton, Director, NAACP Washington Bureau and SVP for Policy and Advocacy at the National Association for the Advancement of Colored People (NAACP), today the homeownership rates between African-Americans was where it was “when discrimination was legal, prior to the enactment of the Fair Housing Act of 1968.”

“Any changes to the current system must continue to protect and incorporate the important market segments, namely people of color and low- to moderate-income families on which a well functioning future system depends and a just society demands,” Shelton said.

Moreover, he said that any housing finance reform must remedy “the discriminatory practices within the mortgage market, the societal constraints, and too many cases to federal policies.”

Specifically, Shelton called on Congress to retain and strengthen “any or all duty to serve provisions by GSEs or any governmental program. “Without an enforceable, robust history to serve any program the market has proven that communities of color will find it extremely difficult to access the mortgage market.”

“Congress must preserve FHA-insured lending to ensure low down payment mortgage loans and access to low down payment assistance programs as well as promote low and cost-effective loan modifications for existing homeowners,” Shelton said. He reiterated that any housing finance reform must provide broad access to capital for all borrowers as well as institutions of every size.

Giving a directly opposite view, Adam Levitin, Professor of Law at the Georgetown University said that today’s housing market was functioning well and did not need a complete overhaul as outlined in Crapo’s housing finance reform proposal. “Most creditworthy Americans are today able to obtain mortgage financing, no matter where they live—metropolitan areas or rural communities. They can readily obtain a long-term fixed rate mortgage, the product that has built the American middle class,” Levitin said. “The multi-guarantor system proposed in the Chairman’s outline would place all of this in jeopardy.”

He said that the system should make one essential change to make lending more secure and accessible, which was to ensure that guarantors took on market-wide credit risk, rather than the credit risk on a segment of the market. “If guarantors assume market-wide credit risk, the market will not segment and guarantors will not price pro-cyclically,” he said.  

The second part of this discussion will be held on Wednesday, March 27 at 10 a.m. EST.

Click here to view the testimonies and discussion of the first part of this hearing.

About Author: Radhika Ojha

Radhika Ojha is an independent writer and copy-editor, and a reporter for DS News. She is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her masters degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha, also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Houston, Texas.
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