Housing Finance Reform Assumptions Refuted by Congressman Garrett

The newrnChairman of the House Financial Services Subcommittee on Capital Markets andrnGovernment-Sponsored Enterprises has invoked what he called “The CantorrnRule” as a framework for reforming the U.S. housing finance mechanism.  </p

Representative Scott Garrett (R-NJ) shared with attendees at the American Securitization Forum (ASF) Conference on Monday what Majority LeaderrnEric Cantor tells House members to always ask themselves, ‘Are my efforts addressingrnjob creation and the economy; are they reducing spending; and are theyrnshrinking the size of the federal government while increasing and protectingrnliberty? If not, why am I doing it? Why are we doing it?’ </p

“Applying the Cantor Rule to the GSEs,” Garrett said, “thernquestion I believe needs to be answered first is – What are the things we canrnbe doing right now, this very instant to: 1.) Protect taxpayers; 2.) End thernbailouts; 3.) Get private capital back in our mortgage markets; and 4.) Decreaserngovernment exposure to housing?  Irnbelieve these four objectives should be the driving forces in our initialrndecisions regarding GSE reform legislation.”<br /<br /Garrett said, while there are countless ways to address these goalsrnlegislatively there are four specific areas that would be good places to start.</p

First, the combined retained portfolios of Fannie Mae and Freddie Macrn(the GSEs) are roughly 1.5 trillion. rnWhile under the conservatorship agreement these portfolios are required tornshrink by a small percentage each year to a set level, it should happen faster.  There is a significant amount of interestrnrate risk in the portfolio and, as the rate environment becomes more volatilernit will become increasingly difficult to hedge such a large portfolio againstrnthose movements.  There are also significantrnunrealized gains in the portfolios that should be recognized.</p

Halfrnof the portfolios are agency MBS, one-quarter is non-agency MBS and the balancernincludes all types of mortgage loans. rnSome of these assets can be sold off more quickly; there is a specificrnmarket for each of these assets and each portfolio component should be lookedrnat for the best way to wind it down quickly. Selling assets quickly, Garrettrnsaid, may have effect their price but if it happens faster it will reducerntaxpayer risk.  He said there were probablyrna number of people in his audience who would provide a market for some of thernassets.<br /<br /Next, both of the GSEs should be put on the federal government’s budget. Thisrntransparency will increase budgetary pressure and will force Congress and thernAdministration to deal with the GSEs “and not let them continue onrnexisting in perpetuity.”</p

“Another area that should be addressed Garrett said, is the Conforming LoanrnLimit.  To afford a house of almost $730,000, the current limit, a familyrnwould need to earn roughly a quarter of a million dollars. “These arernthe same people that the president wants to raise taxes on.  It doesn’t make much sense to raise taxes onrnthose families because they are too ‘rich’ and then turn around and have therngovernment subsidize them when they want to buy a house!<br /<br /The fourth area Garrett pointed to as a starting place for change is the AffordablernHousing Goals, which he called one of the main causes of the GSE’srncollapse.  These, he said, should bernabolished.</p

“It is absurd that these two entities, under federal government conservatorshiprnand hemorrhaging billions of taxpayer dollars, have their conservatorrnpublishing new affordable housing goals for them to hit. The only goal theserntwo entities should currently have is to reduce their burden on the Americanrntaxpayer.”<br /<br /Turning to the future of the housing finance market, Garrett stressed that,rnwhatever shape it takes, securitization will play an integral and vital role. Thererncannot be a market of over $11 trillion such as in the U.S. without securitization.  There is not enough capital in the bankingrnsystem without it and currently 75 percent of the market is funded by thernsecondary market and MBS investors.   "But, while there are a wide variety ofrnpositions on the future of housing finance, two things everyone can agree on isrnthat having the federal government continue to underwrite 95% of our nation'srnmortgage market and having the FHA specifically insure 50% of new originationsrnis completely unsustainable.<br /<br /Garrett said that he wanted to be very clear that he is firmly committed to arnpurely private U.S. mortgage market over time – free of government guaranteesrnand subsidies. "I realize that this will not be an easy or immediate goal butrnit is one I feel strongly about – especially given the role that governmentrninvolvement in the mortgage market played as a central cause of the financialrncrisis."<br /<br /People who support a continued government role raise concerns about a purelyrnprivate market, Garrett said. But there are just as many concerns with any modelrnthat includes government support.  <br /<br /He refuted “eight of the central claims and assertions made by what somernrefer to as the ‘Housing Industrial Complex.” rn</p<ul class="unIndentedList"</ul<ol