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Diving Deeper Into Housing Finance Reform

low income householdsThe Senate Banking, Housing, and Urban Affairs Committee held the second part of its hearing on Committee Chairman Mike Crapo’s Housing Finance Reform outline on Wednesday. Testimonies by mortgage banking and housing experts gave further insights into the best way forward to strengthen and implement this outline.

“Today, the Committee continues the conversation about the state of our housing finance system, and how we can set it on a permanent, sustainable course that protects taxpayers and fosters greater competition,” Sen. Mike Crapo, said in his opening statement.

Giving his insights on the outline, Michael Bright, President and CEO, The Structured Finance Industry Group (SFIG) and the former EVP and COO of Ginnie Mae said that the latest outline touched upon many of the principles that were important to SFIG including: creating a clear role for private capital, establishing a clear and explicitly defined role for the government, the preservation of a liquid TBA market, the preservation of a 30-year fixed-rate mortgage, and making use of already-existing securitization infrastructure

“As the former head of Ginnie Mae, I can attest that global investors will allocate much more capital and at a much lower cost to the US mortgage market if Congress puts a seal of approval on a new end state,” Bright said. “One major lesson I learned at Ginnie is that, when speaking to a non-US investor, the first thing they will ask is, “Is the law clear?” Any lack of clarity on the government’s role versus private capital’s role adds ambiguity, and ambiguity adds to costs. These costs are ultimately borne by the homeowner.”

He said that while SFIG membership supported, and wanted to help provide, broader accessibility to mortgage credit throughout the country, “a role for Congress here is critical.”

Bright said that while considering housing finance reform, there were three issues with the role of private capital that Congress must address. The first was to address how private capital could fill in once the end of the “QM patch” ended in 2021. “Private capital can absolutely help to fill in once this transpires, but some policy changes would be very helpful to ensure the continued availability of mortgage credit. Most importantly, there needs to be a process of determining what qualifies for QM that is independent of whether or not the GSEs’ underwriting systems accept the loan,” he said.

The second issue was the better alignment of regulatory capital requirements between the GSEs and banks. The third issue Bright said was, “As policy-makers look to reduce total reliance on Fannie, Freddie, and FHA while ensuring access to homeownership, a proper mechanism for allowing REITs to access the Home Loan Bank system makes sense.”

Giving mortgage bankers’ views on the outline, Robert D. Broeksmit, President and CEO, Mortgage Bankers Association (MBA) said, “reforms must move forward without delay.” Commending Crapo and his team for releasing the outline that was being discussed, he said that the housing finance system required structural reforms “that will ensure a stable, liquid secondary market to support a vibrant, diverse primary market and comprehensive legislation is essential for such reforms.”

In particular, he said that the MBA supported the outline’s concept of a multi-guarantor market featuring well-regulated, privately-owned institutions aggregating loans in a fair, transparent manner and issuing securities with a full-faith-and-credit federal guaranty that stands behind substantial private capital. “This concept is a strong foundation upon which to develop legislation,” Broeksmit said.

“Based on extensive feedback from our members, MBA believes that a system that is structured around guarantors minimizes transition risk and ensures equal access to the secondary market for diverse set of lenders,” he said. “Market access by lenders of all types and sizes provides tangible benefits for homebuyers through broader competition and availability of credit in all markets at all times.”

Speaking from the mortgage insurer’s point of view, Lindsey Johnson, President, U.S. Mortgage Insurers (USMI) said, that the outline represented “an important marker in the discussion on housing finance reform because it acknowledges the need to limit the GSEs’ market power, better shield taxpayers from mortgage credit risk, and ensure that a reformed system creates incentives for prudent and sustainable mortgage lending.”

“Importantly, the Chairman’s Outline recognizes the importance of maintaining a system where private mortgage insurance (MI) bridges the gap of saving 20 percent of the home price for a down payment; a threshold that is out of reach for many home-ready borrowers,” Johnson said. “We applaud the specific requirement for loan-level coverage MI (insuring individual loans) for high LTV mortgages at standard coverage levels—up to 35 percent of the loan value.”

Additionally, she said that the outline provided for an opportunity for MIs and other market participants to guaranty mortgage-backed securities (MBS). “USMI supports the concept of requiring that mortgages meet standards akin to today’s ATR/QM Rule,” Johnson said.

According to Vince Malta, President-Elect, National Association of Realtors (NAR) any future system should optimize what is working today while minimizing transition risks.  

“By emphasizing on the explicit government guarantee, regulatory flexibility, and reasonable regulatory authority, this outline demonstrates a genuine commitment to ensuring a future housing finance system that is both safe and vibrant,” Malta said. “It is imperative that lawmakers consider the need for liquid national mortgage market that is resilient to stress and supports the homeownership needs of middle-class Americans.”

He said that NAR strongly supported the outline’s language to provide an explicit government guarantee for MBS “buttressed by various credit enhancements.”

“Explicit government backing of these new MBS is required to instill confidence in potential investors. Without investor confidence, the ability to raise capital and provide liquidity to the secondary mortgage market will be severely limited,” Malta said.

“As you consider reform, it is important to note that there are many key elements to the current system,” said Carrie Hunt, EVP of Government Affairs and General Counsel, National Association of Federally-Insured Credit Unions (NAFCU). “Credit union partnerships with the GSEs play an important role in their mortgage lending functions.”

She said that the technology tools such as Fannie Mae’s Desktop Underwriter and Freddie Mac’s Loan Prospector provided critical benefits to small lenders and that “access to such technology must be preserved in any new model.”

Pointing out that NAFCU recognized a number of strengths of the outline, including the requirement of strong capital standards, a guaranteed cash window for small lenders, the prohibition of volume-based discounts, and the preservation of credit risk transfer transactions Hunt said that they were committed to continuing to work with the Committee as it “considers this proposal so that credit unions are afforded the protections necessary to ensure they can continue to provide their communities with access to credit.”

“NAFCU strongly supports the establishment of a capital framework for the GSEs and other potential guarantors in a future housing finance system,” Hunt said.

Speaking on behalf of the Center for Responsible Lending (CRL), Michael D. Calhoun, President, CRL said that the considerable reform over the last 10 years to strengthen the GSEs should be continued, and affordable housing efforts must be expanded. However, he added proposals that would “dramatically alter the housing system would reduce the effectiveness of the system and threaten disruption of the entire housing market.”

After laying out where housing reform stood at present, Calhoun asked, “how do you best harness the necessary government guarantee to further the public mission that the outline intends to accomplish?” He also spoke about the path forward on how the reform could protect the public mission of protecting taxpayers and the private market.  

Click here to view the 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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