Stevens: Four Years Later, Housing Finance System still Sick

David H. Stevens, President of the MortgagernBankers Association (MBA) told members attending the organization’s annualrnconvention in New York today that some things hadn’t changed much since fourrnyears earlier when he addressed them as the Commission of the Federal HousingrnAdministration.  He said he madernheadlines then when he called the government’s rolernin housing “a sick system“.  Back thenrnthe conventional wisdom was that strong government intervention was necessaryrnto get the housing market back on track, protect at-risk borrowers, and preventrnanother system failure.  For the mostrnpart this was true and the government acted to stabilize the market.  But four years later government isn’t just stillrnthe backbone of housing, it has become the entire central nervous system of thernreal estate finance market.  The system isrnstuck in the same place it was four years ago.</p

The MBA, Stevens said, continues to promote policiesrnthat create a vibrant secondary mortgage market, ensure a level playing fieldrnfor lenders of all sizes and business models, and maintain access to affordablernmortgage credit and it has not wavered in its calls for reforming therngovernment sponsored enterprises (GSEs) and for transition to whatever Congressrndecides is the future of the system.  Butrnthe system will not magically fix itself. rn”The secondary market as it exists today greatly influences the primaryrnmarket. It’s having negative impacts on mortgage affordability andrnavailability, increasing costs for borrowers and even preventing many fromrnobtaining homes, and stifling a full-blown market recovery.”</p

He criticized some advocates in Washington whornfear changing the GSEs because they want to protect the underserved andrnminorities from being crowded out of the housing market. That, he said isrnalready happening; 2012 HMDA data shows a 56 percent denial rate on GSErnpurchase loan applications for African Americans and only 8 percent of allrnAfrican American transactions are now with the GSEs.  Further, the current average credit score nationwidernis about 700 and the average credit score of a borrower from Fannie Mae thisrnyear is 741.  On top of this strictrnscoring criteria there are loan level price adjusters, overlays andrnever-increasing guarantee fees. In this system, only those with the mostrnpristine credit can afford a home; millions are left on the housing sidelinesrnsimply due to their credit scores.  </p

Stevens said that much of the debate about reformrnshows a lack of understanding of the legal structure of conservatorship and thernGSEs’ preferred stock agreement with Treasury and why legally Congress is thernonly way to move forward.  However thernvote last week in the Senate Banking Committee has likely only prolonged thernconservatorship and the current state and the prospect of another significantrndownturn in the housing market and any prospect of Congress reacting reasonablyrnin the midst of it is a real and scary proposition.  </p

The strong showing that Fannie Mae and Freddie Macrnhave made on their financial returns in the last two years have been boosted byrnone-time events such as settlement agreements, deferred tax asset reevaluationsrnand lower provisions for loan losses.  Lastrnmonth the Federal Housing Finance Agency released results of the Dodd-Frankrnmandated stress tests and in the severely adverse scenario, which mimicked thern2008 downturn, the GSEs were shown unable to handle events without drawing downrnbillions from Treasury because they have no capital cushion.  This could lead to investors questioning thernlimits of the Treasury backstop and requiring more return, pushing up the costrnof a mortgage and tightening credit even further. </p

Stevens said that, “Under the terms ofrnconservatorship, it is legally impossible for the GSEs to recapitalize. Therernis no way back to their original state. FHFA can only put Fannie and Freddierninto receivership. It requires Congressional action to reform and stabilize thernsystem.”  </p

There are many other things affecting the housingrnmarket such as student loan debt, high fees, and excessive regulation, butrnthese are fixable and can be changed through regulation or policy. “It’s thernGSEs – the central most important variable to creating enough liquidity for thernhousing finance system in this country – that can only be resolved throughrnCongress or the courts. This is the last and most significant unresolved issuernfrom the housing recession.”</p

With legislative action likely at a politicalrnstandstill we can still choose to make progress, Stevens said.  The mortgage industry can choose to bernproactive leaders and address some of the choices necessary to set the stagernfor long term sustainable change.  </p

In a speech last week new FHFA Director Mel Wattrnnoted that conservatorship should never be viewed as a permanent or desirablernstate and focused on several changes MBA has advocated for; greater clarityrnaround reps and warrants, enhanced risk sharing to bring in more private capital,rnand moving toward a common GSE security. rnHe also spoke about the ongoing development of the GSEs’ CommonrnSecuritization Platform (CSP) and how it could be adaptable for use by marketrnparticipants other than the GSEs and how it could move them toward a commonrnsecurity.  </p

Stevens said that what Watt outlined in his speechrngives FHFA and MBA common ground through which they can work to create a betterrnfunctioning secondary market system. rnThere are three tracks to this process. rnThe first is GSE reform and the Senate’s Johnson-Crapo bill is a goodrnstarting point although it will clearly take longer than was hoped. </p

The secondrntrack is transition for which a growing economy, declining unemployment, andrnmortgage rates that while higher remain historically low are pre-conditions.  A common GSE security, greater risk sharing,rngreater private sector input into the development of the CSP could allrncontribute to improving some of the very issues that divided support for the Johnson-Crapornlegislation.  These would variouslyrncontribute to enhanced liquidity, reduced costs to taxpayers and would lay therngroundwork for a more competitive and efficient secondary market.   </p

The third track is the return of private capitalrnand to achieve this, Stevens said, we must address the obstacles to housingrnrecovery; the structural, regulatory and economic impediments that are keepingrnprivate investors on the sidelines. </p

The tasks ahead are these – encourage liquidity,rnsustainability and competition in the secondary market; restore trust andrnconfidence in the marketplace; and attract more private capital in order tornreduce taxpayer support and government control.</p

Legislatively speaking, we know that GSE reform isrnyears in the making, he said, but it’s time to address the structural,rnregulatory and economic impediments that are limiting the return of privaterncapital and have a stranglehold on housing recovery. It’s time to transition torna stable, competitive and accessible marketplace.</p

“We know what the prescription is for a broader recoveryrnand more stable market,” Stevens concluded. “We need to stand up and bernadvocates for the change we know is necessary. Don’t let our collective voicernwaver. We have to continue to press Congress to move forward. We have to workrnwith Fannie, Freddie and FHFA on transition.  Because in the end,rnit’s our future, and the future of the American homebuyer, that is being heldrnback by the sick market.”

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