Senate Hears Testimony on Housing Finance Reform

The Senate Banking Committee heard from six witnesses on Tuesday on therntopic of “Housing Finance Reform: Essentials of a Functioning Housing FinancernSystem for Consumers.”  Testimony fromrnwitnesses tended to focus on specific areas of interest such as the role ofrnprivate mortgage insurance.  Additional regulationrnof servicers, especially as it relates to foreclosure prevention, was arnparticular area of focus as S. 1217’s (the Housing Reform and Taxpayer ProtectionrnActrnof 2013).  This is among finance reform bills pending inrnthe Senate and the one given the best chance of being enacted in somernform.   </p

EricrnStein, Senior Vice President, Center for Responsible Lending provided thernSenators with two sets of policy suggestions. rnThe first was for ways to structure a reformed housing finance systemrnand how those structures might affect consumers.  The second was a recommendation thatrnunderwriting criteria not be hardwired into reform legislation.  Instead, Stein said, a reformed system shouldrnallow the regulator, bond guarantors, and lenders to use traditionalrnunderwriting practices, including compensating factors, for lower-wealthrnborrowers.</p

Thernnew structure, Stein said, should have the following features:</p<ul class="unIndentedList"<liSecondaryrnMarket entities should have a mutual ownership structure rather than stockrnownership. Each mutually owned entity shouldrneach be able to issue securities and guarantee them.

Eliminatingrnprivate shareholders would curb incentives for short term and volatile equityrnreturns over long-term sustainability. rnLenders wishing to sell conforming loans into the secondary market wouldrnbe required to invest in one or more of the mutually owned entities and theirrnpooled capital would stand in first-loss position.

This type of ownershiprnwould reduce the chasing-the-market problem exhibited by the GSEs prior to conservatorshiprnand would benefit consumers not only with stability but by limiting thernsecondary market entities from driving up prices to lenders and borrowers.rn</li</ul<ul class="unIndentedList"<liSmallerrnlenders should continue to have direct access to the secondary markets throughrna cash window. The current systemrnprovides smaller lenders with direct access to the GSEs but reform proposalsrnsuch as S 1217 that split the system into separate issuer and guarantorrncompanies threaten this access.

Should Congressrndecide to bifurcate the system, Stein said, then it should prohibit lenders from beingrnaffiliated with or purchasing stock in either, except throughrnmutual ownership, in order to protect smallrnlenders. </li</ul<ul class="unIndentedList"<liSecondaryrnmarket entities should be required to serve a national market.</li</ul<ul class="unIndentedList"<liReformrnshould preserve the pass-through securities currently used in the TBA market butrnstructured securities should not be able to obtain a government guarantee. </li</ul<ul class="unIndentedList"<liReformrnshould preserve the ability of the GSEs to modify distressed loans. This means a having portfolio capacity tornhold modified loans and a government liquidity backstop to support thernportfolio in times of economic stress.</li</ul

Rohit Gupta, President of Genworth Financial’s U.S. Mortgage Insurancerntold the senators that the amount of down payment does matter when it comes tornloan performance.  Loans with higherrncombined loan to value ratios (CLTV) experience higher default rates than thosernwith lower CLTV.  But, he said, there isrna responsible way to offer high CLTV loans by making sure they are properlyrnunderwritten and have the benefit of credit enhancement in the event ofrndefault.  </p

Mortgage insurers are in first loss position in thernevent of default so their business model relies on insuring mortgages that arernwell underwritten.  Detailed underwritingrnstandards have historically been established through regulation, investorrnguidelines, and market practice rather than by statute but regulators have arnmuch clearer legislative mandate today that will help them guard against thernbehavior that led to the crisis.  Thus certainrnbroad underwriting criteriarndefining the “outer edges” of loansrnwith a government backstop could be writtenrninto statute.   He cautioned however,rnthat an overly prescriptive approach could limit creditrnforrnresponsible borrowers and thatrnlocking underwriting requirements into statute could make it difficult to makernsmall adjustments over time. </p

Many proposals for housingrnfinance reform contemplaternrequiring a “QM” or “QRM”rnstandard for loans subject to governmentrnsupport.  Gupta said his company generally agrees with this approach, with the caveatrnthat it will be important to have creditrnenhancement such as private mortgage insurance assuming first loss on lowerrndown payment loans to make the need for any government support truly remote.  This credit enhancement should be mandated asrn”standard”rnMI coverage rather than “charter coverage” as S1217 does, lowering anrninvestor’s loss exposure for a 90 percent LTV loan to 67 percent.</p

Larry Platt an attorney with K&L Gates,rnLLP said S1217 addresses mortgage servicing in two ways, first creating thernFederal Mortgage Insurance Company (FMIC) which would establish servicingrnstandards for residential mortgage loans and second by creating a securitizationrnagreement with uniform servicing standards. rnNeither provision imposes detailed loss mitigation requirements for thernbenefit of borrowers and Platt said he believes they are not required.  The newly enacted loan servicing requirementsrnof the Consumer Financial Protection Bureau (CFPB) along with the myriad newrnstate and federal regulations that impose increased obligations on servicers tornavoid home foreclosures are sufficient.</p

CFPB went to great pains to focus on the procedures thatrnneed to be followed, he said, rather than mandating specific servicerrnrequirements, formulas, and targets for loss mitigation as many consumer groupsrnhad requested.   CFPB declined to be sornprescriptive, focusing instead on the nature of a mortgage loan, the legitimaternneeds of investors, the difficulty in developing a “one size fits all” approachrnand the potential impact on credit availability. Other federalrnagencies have shared in this public policy reluctance to obligaternspecific loss mitigation outcomes,rnand other than requiring specific forms of loss mitigation on specific terms Platt said it is not clear what more S1217 would or could do in thisrnarea. </p

Alys Cohen, Staff Attorney,rnNational Consumer Law Center presented a counterpoint to Platt’s testimony,rninsisting that housing finance reform should include several improvements tornexisting mortgage servicing rules.   CFPB,rnshe said, has issued a series of procedural requirements for servicers but hasrndeclined to mandate affordable loan modifications consistent with investorrninterests.  </p

The data show, she said, thatrnalmost all delinquent homeowners still get no modifications and those that dornseldom get the best terms available.  Thernsystem should promote proven methods for modifying loans for optimumrnperformance and should also include a government-backed portfolio capacity tornhold the modified loans.</p

Current requirements also do notrnfully protect borrowers who are actually in foreclosure from dual tracking.  Those homeowners should be able to obtain arntemporary pause in the process while modification is underway.</p

Turning to force-placedrninsurance, Cohen said the current system in which the Freddie Mac and FanniernMae (the GSEs) reimburse servicers for insurance has resulted in vastlyrninflated prices for borrowers and when borrowers default, for the GSEs andrntaxpayers.  She urged that the new housingrnfinance corporation be authorized to purchase insurance including hazard,rnflood, title and private mortgage insurance, directly from insurers which “would decrease costs forrnborrowers and the corporation by circumventing the kickbacks to servicers thatrndrive up insurance prices.”</p

Lautaro Diaz, Vice President, Housing and Community Development, NationalrnCouncil of La Raza, said thatrncommunities of color were not served well in the run-up to the financialrncrisis.  Latino and immigrant borrowersrnin particular do not fit traditional credit profiles.  While prime lenders, and FHA and VA offeredrnloans designed to accommodate their unique profiles the majority of privaternsector lenders shuffled them off to subprime affiliates or simply did not courtrnthese borrowers at all.</p

Today thernmarket is not serving communities of color significantly better.rnEven as housing prices are rising inrnmany urban markets with heavyrnminority populations, oftenrnfaster than income, the credit box continuesrnto tighten. </p

Housingrncounseling arose in part as a response to many of these problems. “Morernthan simply increasing financial literacy,rncounseling is a tool to combatrnsome of the unethical and atrntimes illegal practices employedrnbyrna number of subprime lenders targeting of communities of color,” Diaz said.  Hernrecommended that reforms to the housing finance system include the following:</p<ul class="unIndentedList"<liInclusion of housing counseling into the programs of thernFMIC or other entity that replaces the GSEs.</li</ul<ul class="unIndentedList"<liIncreased access and affordability in the mortgagernmarket should be an explicit purpose and duty of FMIC. Other steps could include a distinct MarketrnAccess Fund to address both homeownership and rental housing for low andrnmoderate income persons and elimination of mandated downpayment requirements.</li</ul<ul class="unIndentedList"<liIncorporate measures to help distressed homeownersrnrecover from delinquency or exit homeownership gracefully. To achieve this end, services should bernrequired to work with HUD-approved housing counseling agencies, provide accessrnto all loss mitigation options, and end improper servicing practices such asrndual tracking.</li</ul

National Association of Realtorsrn(NAR) President Gary Thomas expressed concern about what he called emergingrnbarriers to homeownership facing middle class and first-time buyers.  Bankers are leery about issuing new loansrnbecause of proposed risk retention rules and ability-to-repay requirements thatrnare set to go into effect next year at the same time that rising interest ratesrnand growing student loan debt is limiting consumers’ access to credit, he toldrnthe committee.</p

He urged policymakers tornprioritize strong underwriting standards over high down payment requirements andrnsaid regulators should follow the standards set by CFPB for qualified mortgagesrnrather than adopting a complex qualified residential mortgage rule.

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