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HFSC Hearing on Housing Finance Reform

House Financial Services Committee

“A Legislative Proposal to Provide for a Sustainable Housing Finance System: The Bipartisan Housing Finance Reform Act of 2018”

Friday, December 21, 2018

Key Topics & Takeaways

  • Bipartisan Discussion Draft: Chairman Jeb Hensarling (R-Texas) explained that a discussion draft of bipartisan housing finance reform was released in September, stressing that reform is “necessary and urgent” and disagreed with anyone who says the status quo is “good enough.”
  • Transition Risk: Ranking Member Maxine Waters (D-Calif.) and Reps. John Delaney (D-Md.) and Denny Heck (D-Wash.) asked about transition risk, to which Calcaterra noted his concern given the changes at Ginnie Mae, noting that he was originally supportive of this idea. He explained that he can see “significant” transition risk transferring from “something known” to “something unknown,” adding that the Ginnie Mae initiative will not be complete until 2021. DeMarco explained the need to “be mindful in how we go about this,” adding that it is “doable” and that one suggestion for the draft is to alter the timing to accelerate work on obtaining data and infrastructure envisions so the private market side can make additional developments before the rest of the transition starts, which would help reduce any transition risk.
  • Lobbying Efforts: Rep. Ed Royce (R-Calif.) noted that he introduced H.R. 7382, which would regulate lobbying by Fannie Mae and Freddie Mac, prohibiting them from any lobbying while in conservatorship or receivership, and his hope that the new Congress will take this up.

Witnesses

    • Edward J. DeMarco, President, Housing Policy Council
    • Diane Yentel, President and Chief Executive Officer, National Low Income Housing Coalition
    • Vince Malta, President-Elect, National Association of Realtors
    • Robert D. Broeksmit, President and Chief Executive Officer, Mortgage Bankers Association
    • Jerry Howard, Chief Executive Officer, National Association of Home Builders
    • Don Calcaterra, Jr., President, Local Lending Group Loans; Vice-President, Community Home Lender Association
    • Rick Stafford, President and Chief Executive Officer, Tower Federal Credit Union, on behalf of National Association of Federally-Insured Credit Unions
    • Lindsey Johnson, President, U.S. Mortgage Insurers
    • Alex J. Pollock, Distinguished Senior Fellow, Financial Markets, R Street Institute
    • Dr. Norbert J. Michel, Director, Center for Data Analysis, The Heritage Foundation

Opening Statements

Chairman Jeb Hensarling (R-Texas), House Financial Services Committee

In his opening statement, Hensarling noted that it has been 10 years since Fannie Mae and Freddie Mac were placed in conservatorship and that it is time to “open the next chapter” in the housing finance system. He explained that a discussion draft of bipartisan housing finance reform was released in September, stressing that reform is “necessary and urgent” and disagreed with anyone who says the status quo is “good enough.” Hensarling noted that the next Congress has the opportunity for generational housing finance system reform, and that the discussion draft he introduced is one path to achieving a legislative solution.

Rep. Dan Kildee (D-Mich.)

Kildee noted that there have been discussions on government-sponsored entity (GSE) reform for the past six years he has been on the Committee and that he is grateful there is “finally” a discussion draft with bipartisan support. He then noted areas that still need to be dressed in the draft, to include homeownership opportunities for low- and middle-income families.

Testimony

Edward J. DeMarco, President, Housing Policy Council

In his testimony, DeMarco noted that the discussion draft is “an important advancement” in modernizing the housing finance system. He stated that the bill sponsors take the right approach in the legislative text by creating an equal playing field and distributing risk on those who can best manage it, as well as avoiding larger institutions from dominating the market. DeMarco continued that the draft sets up placeholders for future work and welcomes new ideas, noting that the incomplete work cannot be accomplished without Congress “and shouldn’t be,” adding that the Federal Housing Administration (FHA) and other government lending should be considered with future work as they are “critical elements of the system” and “need to be part of the solution.”

Diane Yentel, President and Chief Executive Officer, National Low Income Housing Coalition

In her testimony, Yentel criticized the shortage of homes available for low-income Americans and how the private market cannot solve these needs on their own without government intervention, adding that federal subsidies are needed. She discussed the National Housing Trust Fund (Trust Fund) and how it was created to meet this need, adding that any housing finance reform efforts have to significantly expand investments in the Trust Fund. Yentel stated her appreciation for the commitment to support programs like the Trust Fund and Capital Magnet Fund, and stated that any housing finance reform has to remain off budget and separate from the appropriations process.

Vince Malta, President-Elect, National Association of Realtors

In his testimony, Malta noted that the discussion draft contains provisions that should be the “backbone” for comprehensive housing finance reform, to include an explicit government guarantee, regulatory flexibility, and strong and reasonable regulatory authority. He supported the explicit government guarantee for mortgage-backed securities (MBSs), noting that without this backing, consumers will pay higher mortgage interest rates and mortgages will not be readily available. Malta also voiced his support for the flexibility that was given to Ginnie Mae and the Federal Housing Finance Administration (FHFA) in setting rules and standards for market participants, adding that sound regulatory guidance and oversight are “needed guardrails” for taxpayers.

Robert D. Broeksmit, President and Chief Executive Officer, Mortgage Bankers Association

In his testimony, Broeksmit noted that the draft is a “strong step forward” in accomplishing housing finance structural reforms and that it focuses on having liquidity across the mortgage markets, accessible credit for borrowers, and lender access to secondary credit. He continued that the “robust” competition in the secondary market promotes a highly competitive primary market, giving borrowers “more choices and affordable prices.” He also noted that there are several provisions prohibiting discrimination based on the size of lenders and their business model, which is of “paramount importance.” Broeksmit explained that developing an insurance fund is appropriate because it will ensure the government is compensated for the credit risk it takes, as well as creating a buffer to absorb losses. He commented that the restriction on vertical integration preventing Ginnie Mae issuers from also operating as private capital enhancers would protect market distortions favoring larger institutions.

Jerry Howard, Chief Executive Officer, National Association of Home Builders

In his testimony, Howard noted that any housing finance reform has to come from Congress, noting that the Administration has laid out their intent to fix the structural flaws that led to the financial crisis, but that Congressional action is the only way to achieve an effective and sustainable solution. He noted that the draft extends the use of the existing Ginnie Mae securitization platform to issue mortgages backed by qualifying conventional loans and also issuing Ginne Mae securities backed by government-insured mortgages, noting the need for “upgrades” for Ginne Mae to perform in this expanded role. Howard noted his support for the proposal of the regulator being governed by a board, as it will avoid any “extreme” and “abrupt” changes that could happen under a single director regime.

Don Calcaterra, Jr., President, Local Lending Group Loans; Vice-President, Community Home Lender Association

In his testimony, Calcaterra noted that while there are many good provisions, such as language that creates a bright line distinction between primary and secondary markets, he has concerns about the proliferation of additional guarantors and credit enhancers. Regarding GSE reform, he explained that using Ginnie Mae’s model could be “problematic,” and that the Community Home Lender Association is gaining input from small issuers on Ginnie Mae’s recent supervisory actions, with a comprehensive report to be released next year on how to balance the goals of financial supervision and maximizing consumer choice and access to credit. Calcaterra stressed the need for Congress to enact housing reform into law, but if they cannot, his written testimony lays out a path for the FHFA and Treasury Department to build upon current progress to reform the GSEs.

Rick Stafford, President and Chief Executive Officer, Tower Federal Credit Union, on behalf of National Association of Federally-Insured Credit Unions

In his testimony, Stafford discussed some of the positive provisions in the draft, to include strong capital standards, a guaranteed cash window for small lenders, permitting small lenders to retain serving rights on their loans, preserving and enhancing the use of credit risk transfer transactions and common security platform, and the government’s limited role in the housing finance system. He explained the need for a single, independent regulator to provide confidence and stability in the market, adding his concern that the Ginnie Mae-FHFA dual regulator system could cause confusion. Stafford stressed how critical it is for large lenders not to dominate the system, explaining that borrowing costs for consumers should not be increased or be a barrier to entry for small lenders. He concluded by encouraging the FHFA to work with Treasury in allowing the GSEs to rebuild capital.

Lindsey Johnson, President, U.S. Mortgage Insurers

In her testimony, Johnson focused on mortgage insurance, explaining that it reduces the risk exposure for taxpayers, transferring a portion of the mortgage credit risk at an individual loan level. She continued that mortgage insurance is the only credit that is compatible with housing finance reform proposals, as it is accessible to all lenders. Johnson commended the draft’s approach to use Ginne Mae, including separating the roles of issuer and credit enhancer, explaining that it reduces risk without reducing borrower or lender access. She recommended expanding loan level insurance to the conventional mortgage market to cover all expected credit loss, reducing losses at the individual borrower level and affording lenders flexibility for secondary market execution and ensuring quality loan manufacturing. Johnson also noted that the government guarantee should be conditional on private capital covering expected loss so it is only used during “catastrophic” scenarios.

Dr. Norbert J. Michel, Director, Center for Data Analysis, The Heritage Foundation

In his testimony, Michel criticized the draft for being “built upon a naked giveaway to special interests from the housing industry.” He explained that the explicit government guarantee for MBSs is being marketed as necessary for creating a sustainable housing finance system but that it actually creates excessive leverage. Michel stated that such a guarantee shifts financial risks to taxpayers, resulting in systemic risk and financial crises, adding that it is “inconceivable” that Congress is “thinking of repeating this mistake.” He did note that revoking the charters of Fannie Mae and Freddie Mac and running them through receivership is a “great policy idea” but that “if this is the best we can do, Congress should do nothing.”

Alex J. Pollock, Distinguished Senior Fellow, Financial Markets, R Street Institute

In his testimony, Pollock echoed Michel’s comments about not liking the government backing the mortgage market. He discussed additional principles for the Committee to consider with housing finance reform: 1) the best place for mortgage credit risk to reside is with the lender who makes the loan, even if funded in securitization; 2) easy credit standards and cheap mortgage credit get capitalized into increased house prices; 3) underpriced government guarantees are sources of economic distortions and mortgage credit inflation; 4) the draft replaces Fannie Mae and Freddie Mac’s current functions with a complex set of new institutional structures and relationships; and 5) the draft envisions a larger role for Federal Home Loan Banks with the purchase and securitization of conventional mortgage loans from smaller financial institutions.

Q&A

Current Expected Credit Loss (CECL)

Rep. Blaine Luetkemeyer (R-Mo.) asked about the impact of CECL on the FHFA, Fannie Mae, Freddie Mac, and Ginnie Mae. DeMarco replied that CECL will require Fannie Mae and Freddie Mac to increase reserves, but that there will be a bigger impact among lending institutions who will also face “quite a change” in reserves.

Transition Risk

Ranking Member Maxine Waters (D-Calif.) and Reps. John Delaney (D-Md.) and Denny Heck (D-Wash.) asked about transition risk, to which Calcaterra noted his concern given the changes at Ginnie Mae, noting that he was originally supportive of this idea. He explained that he can see “significant” transition risk transferring from “something known” to “something unknown,” adding that the Ginnie Mae initiative will not be complete until 2021. DeMarco explained the need to “be mindful in how we go about this,” adding that it is “doable” and that one suggestion for the draft is to alter the timing to accelerate work on obtaining data and infrastructure envisions so the private market side can make additional developments before the rest of the transition starts, which would help reduce any transition risk.

National Housing Trust Fund

Waters asked about the Trust Fund, to which Yentel replied that it is “essential” and should be expanded in comprehensive GSE reform.

GSE Lobbying Efforts

Rep. Ed Royce (R-Calif.) noted that he introduced H.R. 7382, which would regulate lobbying by Fannie Mae and Freddie Mac, prohibiting them from any lobbying while in conservatorship or receivership, and his hope that the new Congress will take this up.

Mortgage Insurance

Luetkemeyer noted that Rep. Ed Royce (R-Calif.) introduced a bill asking agencies to look at where the government is guaranteeing things, questioning why private reinsurance cannot be used instead. Pollock replied that it is an “interesting idea” that should be experimented with to see the price of such reinsurance, noting that underpricing government guarantees is a “great source of mortgage lending disasters.”

Rep. Andy Barr (R-Ky.) asked about ways to improve increasing the role of private mortgage insurance in the housing finance system to better manage credit risk. Johnson explained that it is “essential” to have permanent sources of private capital that can take risk in all market cycles. Barr agreed that private mortgage insurance and credit risk transfers are needed, adding that “the more capital, the better.”

For more information on this hearing, please click here.