AT TODAY’S SENATE BANKING SUBCOMMITTEE HEARING, industry experts discussed ways to remove barriers to refinancing and Menendez’s discussion draft.
In his opening remarks, Chairman Robert Menendez (D-N.J.) said the housing market “needs to be fixed now” and advocated for the removal of barriers to refinancing, arguing that allowing more homeowners to refinance at current interest rates saves borrowers hundreds of dollars a month and greatly reduces defaults and foreclosures. Menendez said that the Home Affordable Refinance Program (HARP) removes many barriers to refinancing, but does not address several of the most burdensome barriers, including high refinancing fees.
Menendez also noted that he was been working with Sen. Barbara Boxer (D-Calif.) on a discussion draft that removes more barriers to refinancing. The working title of the draft is the ‘Responsible Homeowner Refinancing Act of 2012’.
In his opening statement, Christopher Mayer, a Paul Milstein Professor of Real Estate, Finance and Economics at Columbia Business School, advocated for increased access to refinancing programs for borrowers with loans guaranteed by the government sponsored enterprises (GSEs), noting that last year’s changes to HARP (HARP 2.0) were “inadequate.” Further, he said lenders are “strongly discouraged” from refinancing a loan they did not originate because they would have to assume the legal liability of the original mortgage. In closing, Mayer strongly endorsed Menendez’s discussion draft and offered two suggestions for strengthening the legislation: 1) grant all GSE guaranteed mortgages eligibility for refinancing programs, regardless of origination date; and 2) mandate that a public trustee be appointed to wind down the GSEs’ retained portfolio of mortgage-backed securities.
In her opening testimony, Debra Still, Chairman-Elect of the Mortgage Bankers Association (MBA), said the MBA is encouraged by recent increases in housing demand and housing prices, and urged members to foster this progress. She expressed MBA’s strong support of the intent and objectives of Menendez’s discussion draft, specifically praising provisions that remove existing restrictions on HARP, standardize and simplify Fannie Mae’s and Freddie Mac’s borrower eligibility requirements, and lower borrowing costs by prohibiting the GSEs from establishing pricing differences based on loan-to-value (LTV) ratios, income or employment status. However, Still said the discussion draft has room for improvement, including the enhancement of provisions that subordinate second liens and mortgage insurance.
In her opening statement, Laurie Goodman, Senior Managing Director at Amherst Securities, gave a broad overview of HARP 2.0 and offered several suggestions on how to improve the program. Her primary suggestion involved permitting a different servicer to refinance a mortgage on the same terms that apply to the current servicer, allowing for greater competition. “This will result in much better rates to the borrower, and much more refinancing of the targeted HARP population,” she said, noting that 71 percent of completed refinancings since 2009 were not completed under HARP or streamlined refinancing programs. In closing, Goodman endorsed the Menendez discussion draft and urged members to find better ways to make borrowers aware of the refinancing options available to them.
In his opening remarks, Anthony Sanders, a Professor of Finance at the George Mason School of Management, encouraged Menendez to have the Federal Housing Finance Agency (FHFA), the Congressional Budget Office and the Federal Reserve Board perform a cost/benefit analysis of his discussion draft in an effort to identify the consequences of removing safeguards from HARP and determine how his legislation will mesh with existing loan modification programs. Sanders said he supports the discussion draft’s intent to encourage more refinancing, but does not support removing HARP’s safeguards, noting that 25 percent of modified loans go into re-default after one year.
In his opening statement, Michael Calhoun, President of the Center for Responsible Lending (CRL), said the discussion draft’s proposed changes to HARP will “significantly” aid homeowners and the housing market, and advocated for the draft’s immediate adoption. Additionally, he expressed his support for the Administration’s proposal to pay the closing costs of borrowers who refinance into shorter-term mortgages in order to encourage principal reduction through quicker amortization. In closing, Calhoun said there are “no silver bullets” to improve the current state of the housing market, but said the provisions contained in the discussion draft will help all homeowners by stabilizing housing prices and saving borrowers money.
Question and Answer
Menendez asked if documentation of employment, credit history, tax returns and other underwriting requirements are necessary when refinancing a GSE-owned mortgage. The witnesses unanimously agreed that none of that information is necessary. Following up, Menendez said lenders cite rep and warranty liability as an obstacle for refinancing. He said FHFA scaled back liability for same-servicer refinancing in HARP 2.0, but not if the loan was refinanced by a different servicer, which he said reduced competition among lenders. He asked the witnesses to comment on the distinction. Still said the MBA believes that all lenders should operate on a “level playing field” and receive the same servicer-to-servicer treatment.
Sen. Bob Corker (R-Tenn.) asked the witnesses if they support raising guarantee fees (G-Fees) to pay for other programs, noting that he is “working on some legislation that will reframe the GSEs.” The witnesses unanimously expressed their opposition to this practice.
Corker asked Goodman for her opinion on whether the government should put high leverage loans on its balance sheet as part of a broader refinancing program. She said a broader refinancing plan which allows the transfer of risk on higher LTV mortgages, owned by bank portfolios or investors in private label securities, to the government, “would basically be a taxpayer bailout for both bank portfolios and private label investors.”
Corker also asked the witnesses to comment on the Consumer Financial Protection Agency’s (CFPB) efforts to apply rebuttable presumptions to the financing of residential mortgages and whether a safe harbor should be established to protect lenders. Calhoun said the CRL agrees with the CFPB’s efforts and has sent the Bureau a letter of support. Additionally, he said CRL does not support the establishment of a safe harbor because it would require regulators to tighten Qualified Mortgage (QM) standards, restricting worthy borrowers’ access to credit. Still disagreed, stating that the MBA supports a safe harbor because it provides lenders with more certainty.
Sen. Jack Reed (D-R.I.) asked Mayer to comment on concerns regarding a more robust GSE refinancing program. Mayer said refinancing programs do not affect the overall supply of credit into the market, and noted that concerns investors will not buy bonds are “overstated.”
Sen. Jeff Merkley (D-Ore.) asked Calhoun to elaborate on his support for the Administration’s proposal to pay the closing costs of borrowers. Calhoun said the proposal would make it easier for borrowers to afford refinancing, which benefits investors by reducing the risk of borrowers defaulting on their mortgage. He also noted that “we are less than halfway through” the foreclosure crisis and suggestions that regulators and Congress have been “to aggressive” in trying to temper the crisis are not supported by the facts.
Sen. Mark Warner (D-Va.) asked Mayer if there is a point where government intervention in the housing market starts to hinder, not help, its recovery. Mayer said the role of government in a crisis is to restore the normal operation of a given market, and suggested that the government should have done more to help the housing market after the crisis. He added that the Administration and the FHFA have only recently instituted the right programs to assist troubled borrowers. Goodman and Calhoun said the government has overcorrected in its response to pre-crisis credit standards, restricting access to credit too much. Warner followed up by asking if Congress has “missed the window to help out troubled borrowers.” Mayer and Still said the window closes when rates start going up.
For testimony and a webcast of the hearing, please click here.
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