AAF and PPI on Building a Sustainable Housing Finance System
AT TODAY’S PROGRESSIVE POLICY INSTITUTE and AMERICAN ACTION FORUM event entitled “From Recovery to Reform: Building a Sustainable Housing Finance System,” industry experts and officials discussed the current state of the housing finance market and reform legislation.
Data Presentations
In opening presentations, Stan Humphries, Chief Economist, Zillow, and Joseph Tracy, Executive Vice President & Senior Advisor to the President, Federal Reserve Bank of New York, described the current economic state of the housing market.
Humphries noted that national house values are up about 6.6 percent from last year, but are still about 17 percent below their peak level and explained that a recent slowing in monthly levels of value appreciation coincides with rising interest rates. He said he expects to see this moderation in the pace of value gains to continue. Humphries also noted that the level of negative equity nationally is currently at 23.8 percent and that it will take “quite a while” for this percentage to be reduced.
Tracy noted that the areas which were hardest hit in the mortgage crisis are now the areas experiencing the greatest recovery. He also said that although prices are appreciating, there has not been the same level of housing turnover that existed before the crisis.
In answering a question from the audience on the impacts that underwriting guidelines and levels of shadow inventory will have on market trends, Humphries stated that banks will have to “get more creative” with their lending practices and that while there is “plenty of demand” it will take several years to work through the shadow inventory.
Panel Discussion – Reforming the GSEs
The first panel discussion focused on government sponsored enterprise (GSE) reform proposals in Congress. It was moderated by Clea Benson, Bloomberg News, and included: Judd Gregg, former Governor and Senator of New Hampshire, CEO of SIFMA; Jason Gold, Senior Fellow for Financial Markets, Progressive Policy Institute; James Millstein, Chairman and CEO, Millstein & Co.; and Mark Zandi, Chief Economist, Moody’s Analytics.
When asked to outline his reform proposal, Zandi stated that his plan is similar “in spirit and structure” to the plan put forth by Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.). He said his plan uses a “hybrid structure” that contains a “catastrophic government guarantee” and a “significant amount of private capital.”
Zandi noted that a government guarantee is needed in order to ensure a stable credit system and that there is a need for a “FDIC-like” regulator for the securitization market.
Millstein, when asked how his plan was different from Zandi’s when dealing with Fannie Mae and Freddie Mac, said that the main issue is the transition to a new system, citing “the dangers of re-instating a duopoly” and the need to ensure opportunity exists for new entrants to the market.
Millstein added that economies of scale in the securitization market should be recognized and that concentration can lead to greater efficiency. He voiced doubt, however, that a suitable substitute for the GSEs could be found, saying that the private sector would not be able to come up with the $125 billion of capital required to support the market. He added that the idea of the banking sector taking up this role and putting more risk into banks “is crazy.”
When asked for his thoughts on the Congressional reform proposals, Gregg stated that the ideas currently being discussed “are very strong.” He said he views housing finance as a formula where certainty in the markets leads to investor participation which creates liquidity and a strong mortgage market.
Gregg noted that the idea of using eminent domain to seize mortgages is “inexcusable” and would harm the liquidity of the marketplace due to its negative impact on investor certainty.
On the transition to a new market structure, Gregg stated he does not think reform is as complex as it has been made out to be, but there is a need for a new and “repackaged” entity.
Gold followed up on these remarks, saying that reform of the GSEs may end up being “a rebranding exercise” and that “the idea of building a new entity that will work in five years is a leap of faith” since it “took 70 years to get where we are” with the current system.
Next, Benson asked why a government guarantee is needed when other countries do not have this backstop. Millstein replied that other countries do have guarantees but that they are done after the fact by backing up the banking sector rather than upfront backstopping of mortgages.
Gregg followed up by saying that if the country wants to have 30 year fixed rate mortgages available, a government guarantee is needed. He stated that American culture is built around home ownership and that having this long term mortgage product makes this possible. He said the question will be how the private sector stands between the guarantee and the mortgage, and suggested the approach will “probably wind up closer” to the Corker-Warner bill than the PATH Act from the House.
Benson then asked if the 10 percent first loss level for private investors is appropriate. Zandi replied that he thinks five percent would be “sufficient” as the losses from the mortgage crisis ultimately ended up being around four percent. He noted that the five percent level is consistent with capital standards in the banking system and that a 10 percent level may add costs to borrowers.
Gregg added that it would be interesting to see the difference on liquidity impact in the market between the five and 10 percent requirement.
When asked about junior preferred shareholders of Fannie Mae and Freddie Mac, Millstein said that issues stem from “respect for the rule of law” if these shareholders are wiped out. He stated that the signaling from the current bills may send a “buyer beware message” in future situations where there is government involvement if the reform “ignores the norms” and “takes things from people.”
On the question of whether the Federal Housing Administration (FHA) should be included in reform, Gregg replied that there is “no question it will play a major role” and said that if the Senate goes forward with Corker-Warner they will most likely do an FHA plan beside it.
Zandi added that the FHA has served its role admirably and plays an important counter cyclical role in the economy.
When asked by an audience member about the chances housing finance reforms become law, Gregg replied that there is a “high probability” of legislation passing and going to conference because “the House and Senate are looking for something to pass” as it would show “they could govern.” He added that there is “a legitimate shot” of this happening in June.
Keynote Address – Gov. Tim Pawlenty
Tim Pawlenty, former Governor of Minnesota, President & CEO of the Financial Services Roundtable, in his address, stated policy change can occur in three contexts: 1) with consensus; 2) in a crisis; and 3) with strong leadership. He said that housing finance has the “outline of consensus” that reform to the system is needed and that the PATH Act from Rep. Jeb Hensarling (R-Texas) is “a marker” on the importance of getting reform done. He expressed some concern, however, that comments made by Senate Leader Harry Reid (D-Nev.) on the Corker-Warner bill were not positive.
Pawlenty noted that accounting changes at the FHA and profits being realized by the GSEs have caused delays in the reform process, but said he is “optimistic about this issue” and thinks it can “be teed up and solved in less than 3 years.”
When asked by an audience member if the 30 year fixed mortgage is an anachronism, Pawlenty replied that Americans still want this product and that he thinks any potential reform will maintain its availability and viability.
On what could provide the impetus for this legislation to move before mid-term elections, Pawlenty said that the President taking action and “elevating it to Tier One” would help. He also added that there is potential for perceived victory on both sides, as Republicans could get rid of the GSEs and Democrats could maintain the 30 year fixed mortgage.
Keynote Address – Carol Galante
Carol Galante,Commissioner, Federal Housing Administration; Assistant Secretary of Housing, in her address, stated that the FHA plays a critical countercyclical role in the economy by preserving access to capital and market stability.
She said that the FHA’s mortgage insurance fund has improved significantly and is expected to continue doing so in the future; citing a 15 percent drop in mortgage delinquencies and a 26 percent improvement on recoveries. She then explained that the $1.7 billion draw from the Treasury “is an accounting transfer” and is not a reflection of their ability to pay claims.
Galante said that there is a “need to get back to a place where the private market is doing the bulk of the lending” and that the absence of private capital is “holding back the economy.”
She noted that the Department of Housing and Urban Development (HUD) has put out a proposal on the definition of a Qualified Mortgage (QM) to try and help lenders “better identify deserving borrowers” and “clarify enforcement responsibilities.”
Galante said that reform of the FHA should give the agency the “right tools” to increase the quality of the insurance fund, by improving operations and risk management. She also stressed the need for more flexibility to act without getting approval from Congress. On funding, she stated that the agency needs more control over their budget to be able to pay experts competitive rates and invest in technology systems.
In conclusion, Galante said that while “reform is necessary, restricting the FHA is not” and that there should be “a natural overlap” of the FHA and other financing channels.
Panel Discussion – Reforming the FHA
The second panel discussion focused on reform of the FHA. It was moderated by Ben White, Politico, and included: Megan Booth, Senior Policy Representative, National Association of Realtors; Mark Calabria, Director of Financial Regulation Studies, Cato Institute; Chris Mayer, Columbia University; and Anthony Sanders, Professor of Finance, George Mason University.
White began the discussion asking how likely reform of the FHA is. Calabria replied that FHA reform will not happen by the end of the year, but thinks there is a “better than 50/50” chance it will be passed “by end of the next Congress.” He added that there is a good chance the bill will mirror the text being created by Senators Tim Johnson (D-S.D.) and Mike Crapo (R-Idaho) in the Senate Banking Committee.
Sanders said that FHA reform will most likely be a “minor tuning” and said the bill should increase transparency and “beef up” the down payment requirement to between 5 – 7.5 percent.
Booth and Calabria opposed the view that the down payment level is the most important factor, saying that the underwriting of a borrower’s credit risk should be the biggest consideration. Calabria added that if premiums are raised, then good quality borrowers will “go somewhere else” for loans. He stated that increasing prices should not be the objective of housing finance policy.
Calabria suggested that the risk of a loan be “pushed back to the lender” and called FHA “a vehicle for banks to pass bad loans to taxpayers.”
White then asked the panel if government support of 30 fixed mortgages would deter financial innovation. While Mayer said that financial innovation in this area has not always been a good thing, the panel agreed that adjustable rate mortgages (ARMs) have been wrongfully demonized, as they have proven to be a beneficial product in the current, low interest rate environment.
When asked when FHA reform may happen, Calabria replied that if it were to happen, it would occur in June or July.
An audience member asked the panel if the FHA should be converted to a corporate operating structure. Calabria replied that doing so would be a “win-win” as they would be given flexibility to manage their operations and would be made to cover their own costs. Booth disagreed and said that if the FHA had operated under a corporate structure during the crisis, they would have stopped lending and the market would have completely collapsed.
Another member of the audience said that small lenders are concerned that when following the QM rule to avoid legal liability they expose themselves to “disparate impact” liability.
Calabria agreed that this is a problem of “damned if you do, damned if you don’t” and added that it “will be impossible to foreclose in the future because of QM.”
For more information on this event, please click here.
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AT TODAY’S PROGRESSIVE POLICY INSTITUTE and AMERICAN ACTION FORUM event entitled “From Recovery to Reform: Building a Sustainable Housing Finance System,” industry experts and officials discussed the current state of the housing finance market and reform legislation.
Data Presentations
In opening presentations, Stan Humphries, Chief Economist, Zillow, and Joseph Tracy, Executive Vice President & Senior Advisor to the President, Federal Reserve Bank of New York, described the current economic state of the housing market.
Humphries noted that national house values are up about 6.6 percent from last year, but are still about 17 percent below their peak level and explained that a recent slowing in monthly levels of value appreciation coincides with rising interest rates. He said he expects to see this moderation in the pace of value gains to continue. Humphries also noted that the level of negative equity nationally is currently at 23.8 percent and that it will take “quite a while” for this percentage to be reduced.
Tracy noted that the areas which were hardest hit in the mortgage crisis are now the areas experiencing the greatest recovery. He also said that although prices are appreciating, there has not been the same level of housing turnover that existed before the crisis.
In answering a question from the audience on the impacts that underwriting guidelines and levels of shadow inventory will have on market trends, Humphries stated that banks will have to “get more creative” with their lending practices and that while there is “plenty of demand” it will take several years to work through the shadow inventory.
Panel Discussion – Reforming the GSEs
The first panel discussion focused on government sponsored enterprise (GSE) reform proposals in Congress. It was moderated by Clea Benson, Bloomberg News, and included: Judd Gregg, former Governor and Senator of New Hampshire, CEO of SIFMA; Jason Gold, Senior Fellow for Financial Markets, Progressive Policy Institute; James Millstein, Chairman and CEO, Millstein & Co.; and Mark Zandi, Chief Economist, Moody’s Analytics.
When asked to outline his reform proposal, Zandi stated that his plan is similar “in spirit and structure” to the plan put forth by Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.). He said his plan uses a “hybrid structure” that contains a “catastrophic government guarantee” and a “significant amount of private capital.”
Zandi noted that a government guarantee is needed in order to ensure a stable credit system and that there is a need for a “FDIC-like” regulator for the securitization market.
Millstein, when asked how his plan was different from Zandi’s when dealing with Fannie Mae and Freddie Mac, said that the main issue is the transition to a new system, citing “the dangers of re-instating a duopoly” and the need to ensure opportunity exists for new entrants to the market.
Millstein added that economies of scale in the securitization market should be recognized and that concentration can lead to greater efficiency. He voiced doubt, however, that a suitable substitute for the GSEs could be found, saying that the private sector would not be able to come up with the $125 billion of capital required to support the market. He added that the idea of the banking sector taking up this role and putting more risk into banks “is crazy.”
When asked for his thoughts on the Congressional reform proposals, Gregg stated that the ideas currently being discussed “are very strong.” He said he views housing finance as a formula where certainty in the markets leads to investor participation which creates liquidity and a strong mortgage market.
Gregg noted that the idea of using eminent domain to seize mortgages is “inexcusable” and would harm the liquidity of the marketplace due to its negative impact on investor certainty.
On the transition to a new market structure, Gregg stated he does not think reform is as complex as it has been made out to be, but there is a need for a new and “repackaged” entity.
Gold followed up on these remarks, saying that reform of the GSEs may end up being “a rebranding exercise” and that “the idea of building a new entity that will work in five years is a leap of faith” since it “took 70 years to get where we are” with the current system.
Next, Benson asked why a government guarantee is needed when other countries do not have this backstop. Millstein replied that other countries do have guarantees but that they are done after the fact by backing up the banking sector rather than upfront backstopping of mortgages.
Gregg followed up by saying that if the country wants to have 30 year fixed rate mortgages available, a government guarantee is needed. He stated that American culture is built around home ownership and that having this long term mortgage product makes this possible. He said the question will be how the private sector stands between the guarantee and the mortgage, and suggested the approach will “probably wind up closer” to the Corker-Warner bill than the PATH Act from the House.
Benson then asked if the 10 percent first loss level for private investors is appropriate. Zandi replied that he thinks five percent would be “sufficient” as the losses from the mortgage crisis ultimately ended up being around four percent. He noted that the five percent level is consistent with capital standards in the banking system and that a 10 percent level may add costs to borrowers.
Gregg added that it would be interesting to see the difference on liquidity impact in the market between the five and 10 percent requirement.
When asked about junior preferred shareholders of Fannie Mae and Freddie Mac, Millstein said that issues stem from “respect for the rule of law” if these shareholders are wiped out. He stated that the signaling from the current bills may send a “buyer beware message” in future situations where there is government involvement if the reform “ignores the norms” and “takes things from people.”
On the question of whether the Federal Housing Administration (FHA) should be included in reform, Gregg replied that there is “no question it will play a major role” and said that if the Senate goes forward with Corker-Warner they will most likely do an FHA plan beside it.
Zandi added that the FHA has served its role admirably and plays an important counter cyclical role in the economy.
When asked by an audience member about the chances housing finance reforms become law, Gregg replied that there is a “high probability” of legislation passing and going to conference because “the House and Senate are looking for something to pass” as it would show “they could govern.” He added that there is “a legitimate shot” of this happening in June.
Keynote Address – Gov. Tim Pawlenty
Tim Pawlenty, former Governor of Minnesota, President & CEO of the Financial Services Roundtable, in his address, stated policy change can occur in three contexts: 1) with consensus; 2) in a crisis; and 3) with strong leadership. He said that housing finance has the “outline of consensus” that reform to the system is needed and that the PATH Act from Rep. Jeb Hensarling (R-Texas) is “a marker” on the importance of getting reform done. He expressed some concern, however, that comments made by Senate Leader Harry Reid (D-Nev.) on the Corker-Warner bill were not positive.
Pawlenty noted that accounting changes at the FHA and profits being realized by the GSEs have caused delays in the reform process, but said he is “optimistic about this issue” and thinks it can “be teed up and solved in less than 3 years.”
When asked by an audience member if the 30 year fixed mortgage is an anachronism, Pawlenty replied that Americans still want this product and that he thinks any potential reform will maintain its availability and viability.
On what could provide the impetus for this legislation to move before mid-term elections, Pawlenty said that the President taking action and “elevating it to Tier One” would help. He also added that there is potential for perceived victory on both sides, as Republicans could get rid of the GSEs and Democrats could maintain the 30 year fixed mortgage.
Keynote Address – Carol Galante
Carol Galante,Commissioner, Federal Housing Administration; Assistant Secretary of Housing, in her address, stated that the FHA plays a critical countercyclical role in the economy by preserving access to capital and market stability.
She said that the FHA’s mortgage insurance fund has improved significantly and is expected to continue doing so in the future; citing a 15 percent drop in mortgage delinquencies and a 26 percent improvement on recoveries. She then explained that the $1.7 billion draw from the Treasury “is an accounting transfer” and is not a reflection of their ability to pay claims.
Galante said that there is a “need to get back to a place where the private market is doing the bulk of the lending” and that the absence of private capital is “holding back the economy.”
She noted that the Department of Housing and Urban Development (HUD) has put out a proposal on the definition of a Qualified Mortgage (QM) to try and help lenders “better identify deserving borrowers” and “clarify enforcement responsibilities.”
Galante said that reform of the FHA should give the agency the “right tools” to increase the quality of the insurance fund, by improving operations and risk management. She also stressed the need for more flexibility to act without getting approval from Congress. On funding, she stated that the agency needs more control over their budget to be able to pay experts competitive rates and invest in technology systems.
In conclusion, Galante said that while “reform is necessary, restricting the FHA is not” and that there should be “a natural overlap” of the FHA and other financing channels.
Panel Discussion – Reforming the FHA
The second panel discussion focused on reform of the FHA. It was moderated by Ben White, Politico, and included: Megan Booth, Senior Policy Representative, National Association of Realtors; Mark Calabria, Director of Financial Regulation Studies, Cato Institute; Chris Mayer, Columbia University; and Anthony Sanders, Professor of Finance, George Mason University.
White began the discussion asking how likely reform of the FHA is. Calabria replied that FHA reform will not happen by the end of the year, but thinks there is a “better than 50/50” chance it will be passed “by end of the next Congress.” He added that there is a good chance the bill will mirror the text being created by Senators Tim Johnson (D-S.D.) and Mike Crapo (R-Idaho) in the Senate Banking Committee.
Sanders said that FHA reform will most likely be a “minor tuning” and said the bill should increase transparency and “beef up” the down payment requirement to between 5 – 7.5 percent.
Booth and Calabria opposed the view that the down payment level is the most important factor, saying that the underwriting of a borrower’s credit risk should be the biggest consideration. Calabria added that if premiums are raised, then good quality borrowers will “go somewhere else” for loans. He stated that increasing prices should not be the objective of housing finance policy.
Calabria suggested that the risk of a loan be “pushed back to the lender” and called FHA “a vehicle for banks to pass bad loans to taxpayers.”
White then asked the panel if government support of 30 fixed mortgages would deter financial innovation. While Mayer said that financial innovation in this area has not always been a good thing, the panel agreed that adjustable rate mortgages (ARMs) have been wrongfully demonized, as they have proven to be a beneficial product in the current, low interest rate environment.
When asked when FHA reform may happen, Calabria replied that if it were to happen, it would occur in June or July.
An audience member asked the panel if the FHA should be converted to a corporate operating structure. Calabria replied that doing so would be a “win-win” as they would be given flexibility to manage their operations and would be made to cover their own costs. Booth disagreed and said that if the FHA had operated under a corporate structure during the crisis, they would have stopped lending and the market would have completely collapsed.
Another member of the audience said that small lenders are concerned that when following the QM rule to avoid legal liability they expose themselves to “disparate impact” liability.
Calabria agreed that this is a problem of “damned if you do, damned if you don’t” and added that it “will be impossible to foreclose in the future because of QM.”
For more information on this event, please click here.