Mar.Senate Banking Subcommittee Discusses Ways to Strengthen the Housing Market
On March 15, lawmakers on the Senate Banking Subcommittee on Housing, Transportation, and Community Development heard from industry experts on ways to strengthen the struggling housing market.
In his opening remarks, Chairman Robert Menendez (D-N.J.) said he would like to see Congress and the administration employ “more creative ways” to address the housing market’s continued struggles. He said the inclusion of principle reduction and shared appreciation models in the government’s current modification programs could provide value to the market, taxpayers and struggling homeowners, noting that private lenders are increasingly turning to principle reduction modifications because it has proven to be the most profitable modification method.
In his opening statement, John Dilorio, CEO of 1st Alliance Lending, said that while the government has created a number of programs and loan options to help struggling homeowners, refusing to provide principle reduction has hampered those programs ability to provide the long-term solutions that borrowers need. Citing CoreLogic data, he said there are currently 11.1 million homeowners underwater, adding that he does not understand how a housing recovery can be expected to occur if the amount of negative equity homeowners are experiencing is not adequately addressed, which current programs are failing to do. Dilorio said that in his experience, principle reductions done right prevent defaults and are increasingly becoming part of lender’s asset maximization efforts. In closing, Dilorio dismissed the moral hazard issues surrounding principle reductions and noting his belief that “principal reduction should be a component of any comprehensive loss mitigation program.”
In his opening statement, Mark Calabria, Director of Financial Regulation Studies at the Cato Institute, said that while the housing market remains weak, he thinks the market will hit bottom later this year and expects to see “slight upticks” in housing values in some metropolitan markets by the end of the year. He praised Fannie Mae’s recent bulk property sale program, urging the government to ramp up its other bulk sale efforts, but noted that restricted credit availability is becoming a “serious problem” that is sapping demand. He added that increasing credit availability is a “key” to the market’s recovery. Calabria also highlighted recent data showing that 23 percent of homes nationwide are underwater, saying that while 70 percent of underwater borrowers have remained current, negative equity remains the biggest hurdle to a strong housing market recovery. In regard to principle reduction, Calabria acknowledged that while targeted principle reduction programs executed by private lenders has proven to be effective, “sweeping principle reduction program on a national level” will not work. He said principle reduction should be reserved for borrowers who are behind on their payments with limited ability to catch up, noting that loan forbearance is a “more than generous modification” for borrowers that are current.
In her opening statement, Laurie Goodman, Senior Managing Director at Amherst Securities, concurred with Calabria that the housing market remains weak. She said decreasing the number of distressed homes for sale by increasing the success rate of modifications and having a greater reliance on principle reduction, as well as increasing the demand for distressed properties through a ramp up in bulk sale programs and a loosening of credit standards will spur a more robust recovery in the housing market. She said principle reduction is proving to be the most effective modification on the private side and criticized the Federal Housing Finance Agency (FHFA) for refusing to employ it. She said the government-sponsored enterprises (GSEs) “have no regulatory barriers to employing principle reduction” and noted Amherst Securities’ several “very substantial objections” to the FHFA’s study of the effectiveness of principle reduction versus principle forbearance. She said the “serious technical flaws” in the way the study was conducted had the effect of making principle forgiveness seem like a less attractive option, and urged the FHFA to redo the study. However, Goodman said she does share Calabria’s enthusiasm concerning Fannie Mae’s bulk sale program. In closing, Goodman said three actions could be taken to now, with limited cost and effort, to strengthen the housing market, including ramping up bulk sale programs, increasing credit availability, and employing principle reduction on underwater GSE loans.
Question and Answer
The question-and-answer session was short and disjointed, as members repeatedly left and rejoined the hearing to give floor speeches.
Menendez asked if the FHFA analysis of principle reduction factored in the administrations “tripling of incentives” for principle reductions. Goodman said they did not, but noted that if they had, it would have changed the outcome of their study, despite the technical flaws she alluded to out earlier. Following up, Menendez asked why principle reduction is more effective for loans that do not have mortgage insurance. Goodman said the problem with doing principle reductions on Fannie Mae and Freddie Mac loans with mortgage insurance is that they would effectively be subsidizing the insurance and the loan, which is not in their best interest.
Menendez and Sen. Jack Reed (D-R.I.) asked Dilorio to elaborate on his assertion that moral hazard is not an issue with performing principle reductions. Dilorio said he has not experienced any issues with moral hazard during its principle reduction program. He added that warnings of mass defaults on loans that have had their principle reduced are “not supported by the data.”
Reed asked Goodman to elaborate on the reasons the FHFA’s study of principle reduction was flawed. Goodman said she identified five substantial flaws including: 1) no differentiation between loans with mortgage insurance versus loans without it; 2) the use of Treasury’s net present value model instead of results from the Home Affordable Modification Program (HAMP); 3) the use of state price indices instead of MSA-level data; 4) attributes of the loan at origination, not current attributes, were used for the analysis – delinquent borrowers, on average, have suffered a deterioration in FICO scores, so by using origination characteristics, the health of the borrower is overstated, hence the assumed likelihood of success is too high, overstating the cost of forgiveness; 5) the results were done on a portfolio level, not an individual loan level.
Sen. Bob Corker (R-Tenn.) repeated his issues with the Servicer Settlement’s treatment of first and second liens, and asked Goodman and Calabria to comment on the settlement’s principle reduction provisions. Both Calabria and Goodman said the first and second lien priority scheme in the Servicer Settlement is very poor, and Goodman added that the principle reduction program in the settlement “scares [her]” because it allows banks to “get credit” for writing down investor loans, and first and second lien loans receive proportional write-downs, opening up the potential for abuse. In response to another question on the Servicer Settlement, Calabria said he believes the settlement’s treatment of lien priority is pushing private capital out of the market when there must be a concerted effort to bring private capital back into the market.
For testimony and a webcast of the hearing, please click here.
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On March 15, lawmakers on the Senate Banking Subcommittee on Housing, Transportation, and Community Development heard from industry experts on ways to strengthen the struggling housing market.
In his opening remarks, Chairman Robert Menendez (D-N.J.) said he would like to see Congress and the administration employ “more creative ways” to address the housing market’s continued struggles. He said the inclusion of principle reduction and shared appreciation models in the government’s current modification programs could provide value to the market, taxpayers and struggling homeowners, noting that private lenders are increasingly turning to principle reduction modifications because it has proven to be the most profitable modification method.
In his opening statement, John Dilorio, CEO of 1st Alliance Lending, said that while the government has created a number of programs and loan options to help struggling homeowners, refusing to provide principle reduction has hampered those programs ability to provide the long-term solutions that borrowers need. Citing CoreLogic data, he said there are currently 11.1 million homeowners underwater, adding that he does not understand how a housing recovery can be expected to occur if the amount of negative equity homeowners are experiencing is not adequately addressed, which current programs are failing to do. Dilorio said that in his experience, principle reductions done right prevent defaults and are increasingly becoming part of lender’s asset maximization efforts. In closing, Dilorio dismissed the moral hazard issues surrounding principle reductions and noting his belief that “principal reduction should be a component of any comprehensive loss mitigation program.”
In his opening statement, Mark Calabria, Director of Financial Regulation Studies at the Cato Institute, said that while the housing market remains weak, he thinks the market will hit bottom later this year and expects to see “slight upticks” in housing values in some metropolitan markets by the end of the year. He praised Fannie Mae’s recent bulk property sale program, urging the government to ramp up its other bulk sale efforts, but noted that restricted credit availability is becoming a “serious problem” that is sapping demand. He added that increasing credit availability is a “key” to the market’s recovery. Calabria also highlighted recent data showing that 23 percent of homes nationwide are underwater, saying that while 70 percent of underwater borrowers have remained current, negative equity remains the biggest hurdle to a strong housing market recovery. In regard to principle reduction, Calabria acknowledged that while targeted principle reduction programs executed by private lenders has proven to be effective, “sweeping principle reduction program on a national level” will not work. He said principle reduction should be reserved for borrowers who are behind on their payments with limited ability to catch up, noting that loan forbearance is a “more than generous modification” for borrowers that are current.
In her opening statement, Laurie Goodman, Senior Managing Director at Amherst Securities, concurred with Calabria that the housing market remains weak. She said decreasing the number of distressed homes for sale by increasing the success rate of modifications and having a greater reliance on principle reduction, as well as increasing the demand for distressed properties through a ramp up in bulk sale programs and a loosening of credit standards will spur a more robust recovery in the housing market. She said principle reduction is proving to be the most effective modification on the private side and criticized the Federal Housing Finance Agency (FHFA) for refusing to employ it. She said the government-sponsored enterprises (GSEs) “have no regulatory barriers to employing principle reduction” and noted Amherst Securities’ several “very substantial objections” to the FHFA’s study of the effectiveness of principle reduction versus principle forbearance. She said the “serious technical flaws” in the way the study was conducted had the effect of making principle forgiveness seem like a less attractive option, and urged the FHFA to redo the study. However, Goodman said she does share Calabria’s enthusiasm concerning Fannie Mae’s bulk sale program. In closing, Goodman said three actions could be taken to now, with limited cost and effort, to strengthen the housing market, including ramping up bulk sale programs, increasing credit availability, and employing principle reduction on underwater GSE loans.
Question and Answer
The question-and-answer session was short and disjointed, as members repeatedly left and rejoined the hearing to give floor speeches.
Menendez asked if the FHFA analysis of principle reduction factored in the administrations “tripling of incentives” for principle reductions. Goodman said they did not, but noted that if they had, it would have changed the outcome of their study, despite the technical flaws she alluded to out earlier. Following up, Menendez asked why principle reduction is more effective for loans that do not have mortgage insurance. Goodman said the problem with doing principle reductions on Fannie Mae and Freddie Mac loans with mortgage insurance is that they would effectively be subsidizing the insurance and the loan, which is not in their best interest.
Menendez and Sen. Jack Reed (D-R.I.) asked Dilorio to elaborate on his assertion that moral hazard is not an issue with performing principle reductions. Dilorio said he has not experienced any issues with moral hazard during its principle reduction program. He added that warnings of mass defaults on loans that have had their principle reduced are “not supported by the data.”
Reed asked Goodman to elaborate on the reasons the FHFA’s study of principle reduction was flawed. Goodman said she identified five substantial flaws including: 1) no differentiation between loans with mortgage insurance versus loans without it; 2) the use of Treasury’s net present value model instead of results from the Home Affordable Modification Program (HAMP); 3) the use of state price indices instead of MSA-level data; 4) attributes of the loan at origination, not current attributes, were used for the analysis – delinquent borrowers, on average, have suffered a deterioration in FICO scores, so by using origination characteristics, the health of the borrower is overstated, hence the assumed likelihood of success is too high, overstating the cost of forgiveness; 5) the results were done on a portfolio level, not an individual loan level.
Sen. Bob Corker (R-Tenn.) repeated his issues with the Servicer Settlement’s treatment of first and second liens, and asked Goodman and Calabria to comment on the settlement’s principle reduction provisions. Both Calabria and Goodman said the first and second lien priority scheme in the Servicer Settlement is very poor, and Goodman added that the principle reduction program in the settlement “scares [her]” because it allows banks to “get credit” for writing down investor loans, and first and second lien loans receive proportional write-downs, opening up the potential for abuse. In response to another question on the Servicer Settlement, Calabria said he believes the settlement’s treatment of lien priority is pushing private capital out of the market when there must be a concerted effort to bring private capital back into the market.
For testimony and a webcast of the hearing, please click here.