MBA's Stevens and Others Raise Concerns over PATH Proposal

ThernHouse Financial Services Committee held a hearing Thursday on what isrncalled “discussion legislation” titled <iArnLegislative Proposal to Protect American Taxpayers and Homeowners byrnCreating a Sustainable Housing Finance System.<b Thernlegislation, already given the acronym PATH, is sponsored byrnCommittee Chairman Jeb Hensarling. It proposes to wind down the tworngovernment sponsored enterprises (GSEs) Freddie Mac and Fannie Maernand create a housing finance system where the only governmentrninvolvement would be through the Federal Housing Administration (FHA)rnwhich would also have its role limited. Committee members heardrntestimony from 11 representatives of various industry trade groups,rninvestors, policy institutes, academia, and consumers.</p

DavidrnH. Stevens, President and CEO of the Mortgage Bankers Associationrn(MBA) said his organization’s members had identified several keyrnprinciples necessary for a successful secondary market. Inrnparticular, he said, anyrnnew structure should rely primarily on private capital, but must alsornprovide liquidity throughout economic cycles, with an explicitrngovernment backstop. The new structure should support thernavailability of traditional long-term, fixed-rate mortgage productsrnwith the ability to lock interest rates efficiently and at a low costrnand there must be robust competition – supporting multiple businessrnmodels – in both the primary and secondary mortgage markets. Thesernprinciples, Stevens said, will ultimately benefit borrowers andrntaxpayers through increased competition and lower costs.</p

Stevensrnsaid that MBA has strong concerns with the overall scope of thernchanges PATH proposes to a more traditional role, and urged therncommittee to re-examine changes to the mortgage insurance coverage,rnrepurchase requirements, and loan limit floor, and multifamily incomernlimits. “The final bill should strike a balance betweenrnstrengthening FHA’s fiscal solvency and maintaining flexibility tornsupport both homeownership opportunities for first-time andrnworking-class borrowers, as well as a vibrant rental housing market,”rnhe said.</p

DouglasrnHoltz-Eakin, President of American Action Forum said the mostrnsignificant component of PATH is its commitment to winding down andrnclosing the GSEs, calling them “fundamentally flawed in theirrndesign and politically toxic” The two, he said, were centralrnelements of the 2008 crisis, first as part of the securitizationrnprocess that lowered mortgage credit quality standards and second asrnlarge financial institutions” whose failures risked contagion. “They were massive and multidimensional cases of the too big tornfail problem.”</p

MarkrnZandi, Chief Economist, Moody’s Analytics, called PATH’s proposal tornwind down the GSEs and privatize the nation’s housing finance systemrn”comprehensive but ultimately unviable.” If fully implemented,rnhe said, PATH would lead to significantly higher mortgage rates,rnespecially during tough economic times and would put 30-yearrnfixed-rate mortgages out of reach for most Americans.</p

Thernprincipal advantage of a privatized system, Zandi said, is its strongrnincentive for prudent mortgage lending which depends in part on howrnstrongly investors believe the government will not intervene whenrnthings go bad, but the recent collapse of the private-labelrnsecurities market show that imprudent risk taking can occur in arnprivate market even where enormous losses are possible. Arnprivatized system would protect taxpayers by lowering the risk thatrngovernment capital would be mis-allocated toward housing and awayrnfrom more productive activities and reduce the systemic risks bornernby taxpayers, at least in theory. </p

Inrna truly competitive private market, Zandi said, the GSEs’ roles wouldrnpresumably be filled by smaller institutions that would not threatenrnthe system if they fail. “However, given scale economies inrnmortgage lending and servicing and historical precedent, it is veryrnpossible that the market would become more concentrated with greaterrntoo big to fail risks.”</p

Completernprivatization, Zandi said, is much more plausible in theory than itrnwould be in practice. Private capital is not limitless, and therernare catastrophic scenarios that would completely wipe it out, givingrngovernment little choice but to intervene. The potential advantagesrnof privatization would also be overwhelmed by the disadvantages ofrnmuch higher mortgage rates and a much less stable source of mortgagernfunding across the economic cycle.</p

NationalrnAssociation of Home Builders (NAHB) CEO Jerry Howard urged therncommittee to modify the PATH Act to make sure that the federalrngovernment continues to provide a backstop for a reliable andrnadequate flow of affordable housing credit in all economic andrnfinancial conditions.

“The historical record clearlyrnshows that the private sector is not capable of providing arnconsistent and adequate supply of housing credit without a federalrnbackstop,” he said, and NAHB has recommended that the GSEs berngradually phased into a private sector oriented system, where thernfederal government’s role is explicit but its exposure is limited torncatastrophic situations where specified levels of private capital andrninsurance reserves would be depleted before any public funds werernemployed. </p

Hernurged the lawmakers to modify the sections of the bill outlining<bchanges to FHA. “The PATH Act would drastically diminish FHA’srnvital liquidity mission,” said Howard. “By simultaneouslyrnleaving all federal support for housing to FHA, and then by greatlyrnreducing the overall scope and reach of FHA’s programs, PATH wouldrngreatly limit homeownership and rental housing opportunities for manyrnfinancially responsible and qualified Americans.”</p

JanicernK. Sheppard, Senior Vice President, Mortgage Lending and Compliance,rnSouthwest Airlines Federal Credit Union, representing the NationalrnAssociation of Federal Credit Unions, told the committee herrnorganization has concerns with calls for an immediate wind down ofrnthe GSEs. “We believe that any reforms should focus on thernconsumer and not disrupt the recovery underway in the housingrnmarket,” she said. Guaranteed access to the secondary market wasrncritical to credit unions being able to lend during the financialrncrisis and that without a government role in that market the 30-yearrnfixed rate mortgage might still exist but only at a higher cost tornthe consumer and at scarcer levels.</p

Thernmortgage finance system should have a balance of consumer protectionsrnthat prevent abusive lending practices and policies that prioritizernaccess to sustainable credit, Michael D. Calhoun, President of thernCenter for Responsible Lending told the committee. PATH meetsrnneither of these goals,m he said, instead it would result inrnaffirmative harm on both accounts.</p

Calhounrnsaid the elimination of government guarantees for eligible mortgagesrnwould make the 30-year fixed-rate mortgage a thing of the past andrnfewer Americans could become homeowners. Those able to obtain arnmortgage would end up with “less affordable, less stable, andrnshorter term mortgage financing.” </p

PATH’srncreation of a securitization platform a constructive contribution tornthe discussion but he said it falls significantly short of sufficientrnhousing finance reform and small lenders would be squeezed out of thernmortgage market. </p

Calhounrncalled the Act’s approach to FHA reform “death by a thousandrnprogrammatic changes” with the result being a much more restrictedrnand expensive program that would have difficulty fulfilling itsrnmission. </p

PATHrnalso strikes critical mortgage reforms from the Dodd-Frank Act andrninvites a return to the predatory and abusive lending thatrnproliferated before the housing crisis and “allows thernprivate-label securities market to return to its old, harmful andrnreckless ways.” </p

Referringrnto the accounting scandals of the mid 2000s, Dr. Mark A. Calabria,rnDirector of Financial Regulation Studies, Cato Institute, said wernshould remember Fannie Mae and Freddie Mac as two deeply corruptrncompanies, “A depth of corruption that can only result from theirrnprotected, entrenched status.” He said Bear Stearns, LehmanrnBrothers, and Countrywide are all gone, “Fannie Mae and Freddie Macrnmerit the same fate.”</p

Therernis no need for a (government) guarantee and objections to thernelimination of the GSEs often assert that such would be dangerousrnbecause our mortgage market needs a guarantee to function, Calabriarnsaid. “Such an assertion is false on a variety of fronts.” First our mortgage market is characterized by several governmentrnbackstops other than the GSEs. The Federal Reserve has purchasedrntrillions of dollars in mortgage-backed securities and the Fed’s 13-3rnpowers were used to support non-mortgage debt during the crisis. Inrnaddition there are the FHA, Ginnie Mae, and the Federal Home LoanrnBanks. One could also argue that deposit insurance for banks andrnthrifts also backstop the market. “While I would eliminate or rollrnback most of these interventions, that does not change the fact theyrnare indeed there. Even in the absence of Fannie Mae and Freddie Macrnour mortgage market maintains considerable government support,” hernsaid. </p

Herncited the existence of the jumbo mortgage market as further proof ofrnthe market’s ability to function without the GSEs and said 30-yearrnfixed rate financing is readily available at affordable rates withoutrnthe backing of a GSE. If a government guarantee was essential wernwould expect the jumbo market to be relatively small relative to itsrn”competition.” Instead it has a 5 percent market share whilernhomes exceeding the FHA high-cost limit are only 4 percent of thernmarket. </p

Thernnotion that without Fannie Mae and Freddie Mac we would be a nationrnof renters is simply not true Calabria said.</p

Alsorngiving testimony to the committee were Peter J. Wallison, Arthur F.rnBurns Fellow in Financial Policy Studies, American EnterprisernInstitute; Adam J. Levitin, Professor of Law, Georgetown UniversityrnLaw Center; William A. Loving, Jr., President and Chief ExecutivernOfficer, Pendleton Community Bank, on behalf of the IndependentrnCommunity Bankers of America; and Tom Deutsch, Executive Director,rnAmerican Securitization Forum

All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of MortgageNewsDaily.com is prohibited.