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Senate Banking Committee Hearing on the Chairman’s Housing Reform Outline Part 2

Senate Banking Committee

“Chairman’s Housing Reform Outline: Part 2”

Wednesday, March 27, 2019

 

Key Topics & Takeaways

  • Multiple Lenders and Guarantors: Panelists had different opinions regarding multiple lenders and guarantors. Hunt said the current system of two entities works and that it is more important to provide a robust system that provides certainty, fair pricing and access to the government guarantees. Malta said the multi-guarantor approach should be treated as a utility model that is highly regulated and provides a need for more private capital and regulatory structures. Bright said using this model makes sense and would even help with global investors being provided more clarity.
  • Recapitalization and Release, Trump Administration, and FHFA reform: Calhoun said there are risks in recapture and release and that the Trump administration’s policies are yet to be determined. He said the new Federal Housing Finance Administration (FHFA) director has a long-standing approach in housing reform and he does not believe he will disrupt the market. Calhoun said that the FHFA needs newer technology and secure resources, as well as certainty from the False Claims Act, which has driven major banks out from participating in Federal Housing Administration (FHA) lending.

Witnesses

  • Michael Bright, President CEO, The Structured Finance Industry Group
  • Robert Broeksmit, President and CEO, Mortgage Bankers Association
  • Lindsey Johnson, President, U.S. Mortgage Insurers
  • Vince Malta, President Elect, National Association of Realtors
  • Carrie Hunt, Executive VP of Gov Affairs and General Counsel, National Association of Federally-Insured Credit Unions
  • Michael Calhoun, President, Center for Responsible Lending

Opening Statements

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

Crapo said he will continue the discussion of the housing finance system and how to set a permanent sustainable course that protects tax payers. He referenced yesterday’s hearing and supportive remarks from the panelists regarding his outline for housing reform. Crapo said his goal is to flush out comprehensive details, as this is a top priority for him as the status quo is no longer a viable option.

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

Brown said a reform proposal for accessible and affordable mortgages needs to be offered as housing costs increase for many Americans. Brown said the FHFA should be provided with policies for equitable treatment of all markets, and allowing single institution performing primary and secondary market functions would increase standards and competition. He stated the housing reform outlines should consider changes to current standards for borrowers and lenders and strengthen housing policies.

Testimony

Michael Bright, President CEO, The Structured Finance Industry Group (SFIG)

In his testimony, Bright voiced support for the Chairman’s outline and mentioned the standards for global investors need to be set from a Congressional seal of approval, one that provides clarity to Ginnie Mae and global investors. Bright stated that with assets prices increasing faster than wages, there is a need for broader accessibility and support across the country. He said private capital can be channeled to augment the role for government-sponsored enterprises (GSEs) and FHFA to build safe and dynamic systems. Bright said three areas are in need of improvement: 1) increasing access to private capital to fill in the availability of mortgage credit; 2) reducing reliance on Fannie and Freddie, and FHFA can ensure a mechanism for homeownership to allow rates to home loan systems to makes sense; and 3) ensuring the secondary mortgage market better serves the public.

Robert Broeksmit, President and CEO, Mortgage Bankers Association

In his testimony, Robert said the housing finance system requires structural reform for stable liquid secondary markets for diverse primary markets and a well-structured framework is essential for these reforms. He said after the 2008 crisis there is an increasing need for a stable, sustainable, and inclusive mortgage market. Broeksmit said the Chairman’s outline is robust, competitive, accessible for affordable credit, provides fair pricing for lenders, aims to provide liquidity through varying credit cycles, is reliable for private capital to protect taxpayers, and continues to address ongoing concerns for secondary markets. He suggested to address privately-owned well-regulated entities’ credibility before credit guarantees to provide security to families. Broeksmit said reforms should be considered to securitization infrastructure and processes when issuing securities, which minimize risks and equalize the market.

Lindsey Johnson, President, U.S. Mortgage Insurers

In her testimony, Johnson said the Chairman’s outline should emphasize the importance of private mortgages, bridging the gap for individuals to meet down payments and other requirements. She said the goals should include underwriting, insuring, and dispersing credit risk, while providing permanent private capital dedicated to housing finance reform, which would reduce risk. Johnson said the outline can continue to provide consistent access for credit worthy borrowers and all lenders, promote stability, and foster transparency for the GSEs. She recommended a future system to rely on loan level credit enhancement done at origination by entities who actively manage mortgage risks in all cycles. Johnson commended the Ginnie Mae guarantees, as explicit government guarantees on private capital help cover liability in catastrophes. Johnson said there needs to be a level playing field for issuers and credit enhancers in GSE reform, and that mortgage insurers could further serve as guarantors in the Chairman’s outline. She said the simple approach would be to highly regulate the system as utility-like entities, with transparent capital pricing functions in the secondary market, open access and transparent underwriting engines in place.

 

Vince Malta, President Elect, National Association of Realtors

In his testimony, Malta said a responsible and bipartisan plan for competitive GSE reform is important. He recommended the need for explicit government guarantees and applauded the Chairman’s outline. He suggested regulatory flexibility and strong reasonable regulatory authority to create a housing finance system that is safe and reliant to support government guarantors. Malta said it is imperative for a liquid national mortgage market that is resilient to stress and support homeworker needs, and that mortgages should be accessible to all. Malta expressed his support for competitive secondary markets, minimized cost to consumers, maximized access to credit worthy borrowers, protecting taxpayers and borrowers, and preserving the 30-year fixed rate mortgage.

Carrie Hunt, Executive VP of Gov Affairs and General Counsel, NAFCU

In her testimony, Hunt said the Chairman’s outline does and should continue to support maintaining the cash window for guarantors, explicit government guarantees, and prohibiting volume-based discounts. She voiced her support for oversight over secondary markets, but said to allow flexibility in places such as minimum down payment percentage requirements for the regulators. Hunt said that there is a need for a single independent regulator to provide stability and confidence in markets, such as Fannie and Freddie, and enhancing the FHFA as a strong regulator for authority over leverage ratios and concentration risk and capital requirements is needed. Hunt said under a multi-guarantor model other guarantors could enter the market and the FHFA could better approve pricing models. She explained that NAFCU is concerned about the cost and workability of any housing reform system and would like to maintain servicing rights of loans, are optimistic about potential benefits about common securitization platforms and uniform mortgage backed securities (UMBS), and recommends these should be maintained.

Michael Calhoun, President, Center for Responsible Lending

In his testimony, Calhoun had three areas of focus: 1) to set out a landscape for housing finance reform; 2) answer how to best harness necessary government guarantees for future public missions; and 3) set a path forward while protecting taxpayers and private markets. He said there are measures in place to make the housing system safe through providing mandatory mortgage standards, strict limits on loan portfolio, and robust capital standards to raise sufficient funds. Calhoun added there is a need for government guarantees to preserve the 30-year fixed mortgage rate, and promoting systems that could be used by entities to maximize revenue by focusing on lucrative markets to avoid unfair barriers to entry. He said the multi-guarantor system could be a reformed with tradeoffs of transitional risks, heavy pressure to fight for lucrative parts of the market, and that the approach double downs on conflict of government guarantee being used for private gain. He also said community banks do not have enough to prohibit volume discounts and need to continue to be granted the cash window. Calhoun said guarantors should function as utilities with oversight, prevent misuse of guarantees, and should lower prices for borrowers and all lenders.

Question & Answer

Small Lenders

Sens. Jerry Moran (R- Kan.), Jon Tester (D-Mont.), and Doug Jones (D-Ala.) asked about providing equal and fair access to small lenders, reforms to down payment systems, and providing clarity for community banks. Malta said there is need for proper regulations for an equal playing field and there should always be competitive advantages across all markets. He expressed concern over arbitrary limits for down payments and recommended following already established structures and vehicles. Hunt reiterated to maintain cash windows and duty for entities to serve all markets, adding that secondary markets for underserved and small lenders need to be channeled through managing risk at the loan level. Johnson said there is a need to address competitive advantages for GSEs in the marketplace to better serve all markets, and there is an “enormous” challenge to bridge the gap between access to mortgages and families ability to meet the 20 percent down payment requirements, which takes much longer than expected for many families.

Multiple Lenders and Guarantors

Sens. Crapo, Brown, Mike Rounds (R-S.D.) and John Kennedy (R-La.) asked about the transitioning to multi-lender systems and the role of government guarantors, as well as the national markets. Calhoun said multiple guarantors are not bad entities, but the competitive pressure and costs could create disparity to rural borrowers, as the larger providers would win out the conflict for place in the market. He recommended providing safeguards for smaller lenders in this approach. Hunt said the current system of two entities works and that it is more important to provide a robust system that provides certainty, fair pricing and access to the government guarantees. Malta said the multi-guarantor approach should be treated as a utility model that is highly regulated and provides a need for more private capital and regulatory structures. Johnson said her concern would be to strip enough power from the GSEs to allow more guarantors, but this could certainly be a long-term step in a utility model or transition step. Broeksmit said this would provide an area for more private capital and to better serve rural communities, but also recommended a scorecard for monitoring progress.  Bright said using this model makes sense and would even help with global investors being provided more clarity. He further recommended leaving flexibility for guarantors to have choice to focus on underserved communities rather than just having a nationwide approach.

Recapitalization and Release, Trump Administration, and FHFA reform

Sens. Mark Warner (D-Va.), Tester and Jones asked about the role of FHFA, the Trump’s administration’s approach, recapture and release, and conservatorship. Calhoun responded saying there are risks in recapture and release and that the Trump administration’s policies are yet to be determined. He said the new FHFA director has a long-standing approach in housing reform and he does not believe he will disrupt the market. Calhoun said conservatorship is a critical role for first time homebuyers, but should not be the only option. He added that the FHFA needs newer technology and secure resources, as well as certainty from the False Claims Act which has driven major banks out from participating in FHA lending. Bright agreed with Calhoun, especially on the False Claims Act and that FHFA needs more technology and the ability to pay salaries comparable across town to attract the best talent.

Duty to Serve

Kennedy asked if duty to serve works, to which Bright responded the scope of the system is small and only defines three simple areas but could be scaled up to work. Broeksmit said it could be improved with a comprehensive scorecard. Hunt said the system is incredibly important to credit unions.

For more information on this hearing, please click here.