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Senate Banking Committee Hearing on Housing Finance Reform

Senate Banking Committee

“Housing Finance Reform: Next Steps”

Tuesday, September 10, 2019

Key Topics & Takeaways

  • Systemic Importance: All three witnesses agreed that Fannie Mae and Freddie Mac are systemically important, too big to fail, and more leveraged now than they were before the financial crisis. Asked if they would recommend they be designated as SIFIs by the FSOC, Mnuchin said he “absolutely” would expect that they would go to FSOC before raising public capital in order to ensure there is enough capital that the GSEs would not need to be designated.
  • Capital: Mnuchin said a top priority is to ensure the GSEs have more capital, adding that Treasury is in “active discussions” with them to renegotiate their agreement to allow for a significant amount of capital to be accumulated. In terms of the absolute amount needed, Mnuchin said it was more like $100BN than $6BN.  Calabria agreed that a primary focus is to build capital and ensure that the FHFA is ready for a post-conservatorship world.

Witnesses

Opening Statements

Chairman Mike Crapo (R-Idaho), Senate Banking Committee

In his opening statement, Crapo noted that the government-sponsored enterprises (GSEs) have been in conservatorship for 11 years, saying that these “systemically important companies” continue to be too big to fail and are more leveraged than they were before the financial crisis. Crapo said that his outline to reform the housing finance system is consistent with the plans released by the Departments of Treasury and of Housing and Urban Development (HUD), including attracting private capital back into the market, promoting competition, a robust transfer of credit risk, and pricing that does not depend on a lender’s size. Crapo expressed his desire to fix the system through comprehensive legislation to achieve a system that protects taxpayers by reducing the risk posed by the current guarantors and promotes broad accessibility of mortgage credit, including in underserved markets.

Ranking Member Sherrod Brown (D-Ohio), Senate Banking Committee

In his opening statement, Brown said the plans released by Treasury and HUD will make mortgages more expensive and harder to get, calling affordable housing a “real crisis facing real families.” Brown said affordability and access are the “whole reason” there is a housing finance system, adding that the system should be built on a mission to serve borrowers and renters with policies that focus on underserved markets and borrowers that have previously been locked out of the market. Brown listed a number of principles for reform, including that reform should protect access to affordable fixed-rate 30-year mortgages and should include a government guarantee. He said the housing finance system should serve a broad national market, maintain affordable housing goals and metrics, expand investment in affordable housing, and maintain the GSEs’ multi-family business model. He said the Administration’s plan “missed the point” and will “gut” existing tools to help families find an apartment or buy their first home.

Testimony

The Honorable Steven T. Mnuchin, Secretary, U.S. Department of the Treasury

In his testimony, Mnuchin said Treasury’s housing finance reform plan will protect taxpayers and foster competition in the market. He noted that since the GSEs were placed into conservatorship in 2008, Treasury has provided them with over $190 billion in taxpayer assistance, and they continue to be supported by Treasury’s commitment to keep them solvent, adding that their continued conservatorship has perpetuated far-reaching government influence on the housing finance system. Mnuchin noted that Treasury’s plan includes 50 recommendations to reduce the role of the federal government, enhance taxpayer protections against future bailouts, and increase private sector competition. He said the plan provides a “roadmap for release” from conservatorship and preserves government support of the 30-year fixed-rate mortgage, but recommends that Congress authorize an explicit, paid-for guarantee backed by the federal government that is limited to the timely payment of principal and interest on qualifying mortgage-backed securities, adding that to foster competition, this guarantee should be available to the GSEs, and also to any other FHFA-approved competitors. Mnuchin said that while the preference is to work with Congress to enact comprehensive reform legislation, reform can and should proceed administratively.

The Honorable Benjamin S. Carson, M.D., Secretary, U.S. Department of Housing and Urban Development

In his testimony, Carson said that in the years since the financial crisis, the federal government has played an “outsized role” in the housing finance system, saying it is “imperative” that Congress and the Administration work to refocus the system, support appropriate and responsible access to credit, and ensure government programs do not overlap with and crowd out private capital. Carson called on Congress to work with the administration on four “key” pillars, including to return the Federal Housing Administration (FHA) to its core mission of serving low-and moderate-income families and first-time homebuyers, to protect taxpayers from the risk of bailouts, to provide FHA and Ginnie Mae with the tools they need to manage the risk associated with oversized portfolios, and to provide liquidity to the housing finance system. He added that HUD and the Federal Housing Finance Agency (FHFA) should coordinate to ensure they serve defined roles within the marketplace.

The Honorable Mark A. Calabria, Ph.D., Director, Federal Housing Finance Agency

In his testimony, Calabria said the housing finance system is in “urgent” need of reform, saying the status quo poses significant risk to taxpayers, homeowners, renters and the entire financial system. He said Treasury’s and HUD’s reform plans are broadly consistent with his top priorities, which are to cement the FHFA as a world-class regulator and to restore Fannie Mae and Freddie Mac to safe and sound condition by building capital to match their risk profiles, which would also begin the process to end their conservatorships. Calabria said the “fundamental problem” of “imprudent” mortgage credit risk backed by insufficient capital remains, and in their current financial condition the GSEs are not equipped to withstand a downturn in the housing market. He said that compared to the duopoly of the enterprises, a fair and competitive secondary mortgage market would better serve borrowers and renters and promote long-term stability by ensuring that inefficient firms do not survive and that no institution is too big to fail. Calabria said he intends to strengthen the FHFA, enable the GSEs to build capital to match their risk profiles, and end the GSE conservatorships.

Question & Answer

Legislative Solutions

The witnesses agreed that the “ideal outcome” is for Congress to reach a comprehensive legislative solution, though Calabria added that this does not mean the Administration and regulatory agencies cannot make significant steps independent of congressional action.

Capital

Multiple senators asked about the capitalization of the GSEs. Mnuchin said a top priority is to ensure the GSEs have more capital, adding that Treasury is in “active discussions” with them to renegotiate their agreements to allow for a significant amount of capital to be accumulated. Calabria agreed that a primary focus is to build capital and ensure that the FHFA is ready for a post-conservatorship world. Sen. Jerry Moran (R-Kan.) asked what level of capitalization would be necessary for the GSEs to operate efficiently and withstand a significant financial downturn. Mnuchin replied that they need “a lot of capital” and that there is currently no way they could operate without the ability to draw on Treasury. He said to accumulate capital, the GSEs would retain earnings and raise third-party capital.

Utility Model vs. Multi-Guarantor Model

Sen. Tina Smith (D-Minn.) asked about the possibility of the GSEs operating like a utility with a regulated rate of return. Calabria responded that under certain circumstances a utility model could work, adding that when a utility model is discussed, what people mean is a regulated rate of return and therefore regulated pricing. He said that under conservatorship they do regulate pricing and would welcome having similar regulatory flexibility outside conservatorship. Calabria suggested that interested parties start “fleshing out ideas” in this regard. Mnuchin replied that he has had conversations about this, and he supports working with the Committee on it. In his closing remarks, Sen. Brown indicated he would be calling on the staffs of the witnesses for assistance in developing an approach for a utility model.

Availability of Mortgages

Sens. Jack Reed (D-R.I.) and Brown expressed concern about changes to the availability and price of mortgages as a result of the Administration’s plan. Mnuchin disagreed that the plan would raise mortgage rates, though he acknowledged there may be people that will not be able to get a loan because they cannot afford one. Calabria noted that the plan calls for increased competition in the market, saying that competitive markets result in lower costs. Mnuchin also expressed his support for the duty to serve and for affordable housing goals.

In response to follow up questions from Reed, Mnuchin said that Treasury had not done an analysis of the impact of their proposals on the cost of credit, but that they would do an analysis in the future. Carson said they don’t have any analysis that their proposals would increase the cost of credit (but he did not indicate that any studies had been done). Calabria said that it is important to keep in mind that the plan calls for increased competition, and competitive markets provide lower costs than monopolies and duopolies.  He said there is no reason to believe anything other than that costs will go down

GSE Technology

Moran asked how it could be ensured that GSE technology and other advances could be shared with the market to promote the entry of new competitors and even the playing field. Mnuchin responded that he agreed this was an area they need to look at. Carson said that the GSEs were able to make significant advancements in their technology infrastructure thanks to the assistance of taxpayers, and these things should be shared.

Systemic Importance

Sen. Mark Warner (D-Va.) and Crapo asked about the systemic importance of the GSEs. All three witnesses agreed that Fannie Mae and Freddie Mac are systemically important, too big to fail, and more leveraged now than they were before the financial crisis. Asked by Warner if they would recommend they be designated as systemically important financial institutions (SIFIs) by the Financial Stability Oversight Council (FSOC), Mnuchin said he “absolutely” would expect that they would go to FSOC before raising public capital in order to ensure there is enough capital that the GSEs would not need to be designated. Calabria agreed and added that it is important not to assume any entity will be designated as a SIFI until they have gone through the FSOC process.

Affordable Housing

Multiple senators asked about affordable housing policies, and the witnesses agreed on the importance of ensuring housing is affordable in the most effective way. Calabria noted there is a “fundamental problem” of supply, which is driven by state and local zoning and land use regulations. He said that while finance plays a role, it alone cannot fix the affordable housing problem. Calabria also agreed that there is a problem with the mechanism of providing subsidies to high credit risk loans, saying that resources could be better targeted to ensure people can achieve sustainable home ownership. Mnuchin said the GSEs and Congress need to work together to identify the best way to support affordable housing.

Disparate Impact

A number of Democratic Senators questioned Carson about HUD’s recent rule proposal regarding disparate impact, and the actions of lack thereof by HUD regarding housing discrimination. Carson defended the rulemaking, and also pointed to recent actions in Los Angeles and San Francisco as examples of HUD being active in this regard.

For more information on this hearing, please click here.