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FSOC: Congress must take on housing finance reform

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The Financial Stability Oversight Council, which includes the leaders of the government’s top financial regulatory agencies (listed below, in part), believes that it is time for Congress to take on housing finance reform, stating that regulators are “approaching the limits” of their ability to enact housing reforms.

The FSOC made the statement in its 2016 annual report, which it released earlier this week.  In its annual report, the FSOC revealed a series of 12 issues identified as items that “warrant continued attention” and/or require “further action” from the Council’s members or member agencies.

One of the items the FSOC members identified as a main concern is housing finance reform, with the FSOC stating that it believes that Congress needs to take the lead on housing finance reform to fully stabilize the country’s housing finance system.

“While regulators and supervisors have taken great strides to work within the constraints of conservatorship to promote greater investment of private capital and improve operational efficiencies with lower costs, federal and state regulators are approaching the limits of their ability to enact wholesale reforms that are likely to foster a vibrant, resilient housing finance system,” the FSOC said in its report. “Housing finance reform legislation is needed to create a more sustainable system that enhances financial stability.”

The report, which carries the names of the FSOC’s members including Jacob Lew, Secretary of the Department of the Treasury; Thomas Curry, Comptroller of the Currency; Richard Cordray, Director of the Consumer Financial Protection Bureau; Mary Jo White, Chair of the Securities and Exchange Commission; Martin Gruenberg, Chairman of the Federal Deposit Insurance Corporation; Timothy Massad, Chairman of the Commodity Futures Trading Commission; Melvin Watt, Director of the Federal Housing Finance Agency; Rick Metsger, Chairman of the National Credit Union Administration; S. Roy Woodall, Jr., an independent member with “insurance expertise;” as well as non-voting members Richard Berner, Director of the Office of Financial Research; Michael McRaith, Director of the Federal Insurance Office;  Adam Hamm, Commissioner, North Dakota Insurance Department;  John Ducrest, Commissioner, Louisiana Office of Financial Institutions; and Melanie Lubin, Securities Commissioner, Maryland Office of the Attorney General, also touches on the current state of the housing economy and the current and future roles of Fannie Mae and Freddie Mac.

“The domestic housing market continued to improve over the past year as sales of new and existing homes increased, prices rose, and the share of properties with negative equity fell,” the FSOC notes. “Meanwhile, post-crisis regulatory reforms to the housing finance system within the framework of existing legislation have largely been implemented,” the report continues.

According to the FSOC report, Fannie Mae and Freddie Mac have reduced their retained portfolios more than 50% below their levels at the end of 2008 and are now engaging in credit risk transfers on 90% of their typical 30-year fixed-rate mortgage acquisitions.

The FSOC notes the changes to the mortgage market put in place by federal regulators including, clearly defining risk retention requirements for mortgage securitizations, and the finalizing the representations and warranties framework that governs lender repurchases of defective loans.

“The Council recommends that regulators and market participants continue to take steps to encourage private capital to play a larger role in the housing finance system,” the FSOC report continues. “FHFA and the GSEs have also made progress on the development of a new housing finance infrastructure, including the Common Securitization Platform and a single agency mortgage-backed security. The Council recommends that efforts to advance both the CSP and single security continue.”

But the FSOC notes that regulators can only go so far.

“Notwithstanding the (stated) progress, the GSEs are now into their eighth year of conservatorship,” the FSOC notes.

“The Council acknowledges that, under existing regulatory authorities, federal and state regulators are approaching the limits of their ability to enact reforms that foster a vibrant, resilient housing finance system,” the FSOC concludes. “The Council therefore reaffirms its view that housing finance reform legislation is needed to create a more sustainable system.”

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