David H. Stevens, President and CEO ofrnthe Mortgage Bankers Association (MBA) and, until recently, Commissioner of thernFederal Housing Administration (FHA) told committee members that MBA’srnmembership agrees with many facets of the act and believes that the currentrnenvironment in which the federal governmentrnowns, securitizes, or guarantees nearly every mortgage, is both unsustainablernand undesirable. </p

“I am pleased that we agree on thernmost important fundamental point: private capital must be at risk, bearing thernfirst loss, and private capital must be the primary source of liquidity for thernmortgage market,” Stevens said. </p

MBA members also agree that thernsecondary market needs common standards, consistency, and transparency for allrnparticipants in order to attract private capital, and Stevens said thernlegislation does offer ways to accomplish that such as language authorizing FHFArnto develop standard mortgage securitization agreements.  “MBA also appreciates that the bill providesrnfor the establishment of different classes of standard mortgage products. rnSafe, well-defined product standards help consumers compare their financingrnoptions.  For investors, the core market will establish performancernstandards for pricing purposes. </p

Another feature of the bill, the repealrnof Dodd-Frank’s risk retention requirements, is a key issue for members.  While it is well intentioned, he said, thernproposed rule for a Qualified Residential Mortgage (QRM) exemption is “sorndeeply flawed that we seriously question whether it reflects Congressionalrnintent or can ever be successfully implemented.”  </p

Stevens said that, while thernproposed legislation is a step toward building a future housing finance system,rndetermining what that system will look like is of paramount importance andrnreform of the GSEs is key to that.  MBA,rnhe said, has been looking at the existing GSE model and attempting to develop arnframework for a more limited and explicit government role.  Some level of government support is requiredrnto keep the mortgage market open during times of severe distress because thatrnis the time that private investors will exit. rnThey will also be less apt to buy assets even in good times if theyrndoubt their ability to sell them in bad times. rn</p

MBA has proposed a structure similarrnto FDIC insurance where taxpayer funds would only be used if the capital of thernsecuritizing entity and the insurance fund are exhausted and the taxpayer wouldrnbe repaid as the fund is replenished. rnAlso, like FDIC, there needs to be a mechanism for correcting anyrnmispricing of the government guarantee.</p

Mark Fleming, Chief Economist of Corelogicrntold the committee that the return of private capital to the residentialrnmortgage market hinges on the return of liquidity which in turn depends on fourrnelements; trust in what is being offered, an understanding of what the productrnor investment contains, sufficient information to enable agreement of arnrisk-adjusted price, and monitoring the investment or purchase.</p

Prior to collapse of the privatelyrnfinanced real estate system one of the greatest failures was the mistakenrnbelief that an upfront outlay for loan diligence was not worth the cost andrnthat an ever rising house market would offset any deficiencies in the loanrnunderwriting process.  Clearly, he said,rnthat approach did not work.</p

The proposed legislation recognizesrnthat issuer risk retention such as that under Dodd-Frank may make private-labelrnsecuritization uneconomic but many market participants want issuers of privaternlabel residential mortgage-backed securities (RMBS) to have some “skin in therngame.”  Fleming said he hoped that arnconsensus solution can be reached  thatrnwill incorporate the positive impact that currently available data andrnanalytics can contribute in assessing the accuracy of user-provided informationrnand ensuring reps and warrants have more teeth. rnThis in turn will force issuers to have more skin in the game as thernrisk of put-back of deficient loans and securities increases. </p

Tom Salomone, Director Realtor®rnParty Activities, National Association of Realtors (NAR) said that Realtors dornnot view the proposed bill as a comprehensive solution to the housing financernsectors need for reform.  He suggested itrnbe coupled with a second proposed bill which establishes a Secondary MarketrnFacility for Residential Mortgages.  Therninclusion of government participation in the conventional conforming portion ofrnthe market is necessary because of the inevitable retreat of private capitalrnunder extreme economic conditions.  Arnfull shut-down of the conventional conforming portion of the secondary market “meansrnthere would be very limited or no funding for middle class homeowners orrnhomebuyers which would be devastating to the national economy – possibly causingrna catastrophic collapse.”</p

The existing GSEs were created tornsupport the viability of this economic sector and the future of the secondaryrnmortgage market must include an entity with that purpose as well Salomone said.rn</p

Other witnesses testifying at thernhearing were Chris J. Katopis, Association of Mortgage Investors; Dr. MarkrnCalabria, Cato Institute; and Dr. William Poole, University of Delaware.

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