U.S. Representative Ed Royce (R-California) questioned HUD Secretary Julián Castro regarding the need for housing finance reform during a full House Financial Services Committee hearing this week titled The Future of Housing in America: Oversight of the Department of Housing and Urban Development, with Castro agreeing there were ways to introduce more private capital into the market.
Royce, a member of the House Finances Services Committee since 1995 and a member of the Capital Markets and Government-Sponsored Entities Subcommittee and the Housing and Insurance Subcommittee, has long been an advocate for taxpayers and transferring mortgage risk to the private market. In late February, he introduced the Pay Back the Taxpayers Act of 2015, aimed at preventing the GSEs from funding housing groups while Fannie Mae and Freddie Mac are under the FHFA's conservatorship.
Castro was making his second appearance testifying before the full House Committee on Financial Services since being sworn in as HUD Secretary in July 2014.
Royce asked the Secretary about the GSEs sharing more credit risk with the private sector and about the creating of a common securitization platform allowing for mortgage-backed securities to be issued by other entities besides Fannie Mae and Freddie Mac, and also about the development of a common residential MBS by the two GSEs.
"I thought I would just give you the floor to discuss how this might bring private sector capital back into the market and how we might work together to achieve these goals as kind of a building block," Royce said during the hearing.
Castro responded by stating there was some "agreement" between the two parties on the issue of housing reform.
"The President has made very clear that he does have an interest, as I think all Americans do, in taking taxpayers off the hook in the event that God forbid we did experience the same kind of housing crisis we did go through," Castro said. "Agreed that we can find ways to introduce more private capital into the market. With respect to proposed legislation, I think there's some common principles that are the foundation to build on and we look forward to working with you."
Royce then asked Castro about a reduction in FHA market share for large banks, which he said has been recently cut from 61 percent to 33 percent, and that non-bank financial institutions how have 51 percent of the market share compared to 24 percent several years ago.
"Is this troubling, and do you think legal uncertainty maybe is part of the problem in terms of getting the traditional lenders more involved here and what about the need for a greater certainty around the rep and warranty framework here and looking at that as a way of bringing capital back in?" Royce said. ". . . Given the percentage of erosion here in market share and especially the fact that it's thinly capitalized non-banks that are coming in, I think that it needs to be addressed."
Castro said in his response that "we are looking at that" and that it "makes sense to take reasonable steps to create more business certainty for lenders." He cited HUD's Blueprint for Access to Credit as a means of easing risk while expanding the credit box.
"We hear from lenders about the uncertainty that does exist regarding potential liability," Castro said. "We look forward to being able to create greater certainty that will help open up the credit box reasonably for responsible Americans to get access to credit."
Click here to see the exchange between Royce and Castro.