Stepping in front of a hometown audience in Dallas, House Financial Services Committee Chairman Jeb Hensarling captured the local crowd with a simple joke: "Everything is bigger in Texas… except for me," the congressman jested, as he situated his small frame behind a tall podium.
This showing of humility and earthiness warmed up the audience, creating an atmosphere for Hensarling that is far removed from the constant infighting in Washington, D.C.
And despite the congressman’s willingness to make fun of his own stature, Rep. Hensarling’s profile has never been larger. At a time when the housing finance system is being built midflight, Hensarling is leading the House committee that will ultimately decide which bills have a fighting chance to make it to the floor. While he certainly won’t decide the fate of the mortgage finance market alone, he now has the stature to help lead the fight.
With his soft Texas accent and the professional appearance of a banker, Hensarling serves a part of his state that is far removed from the nation’s major financial centers. Still, he believes the impact of the financial crisis impacted everyone from Washington D.C. to California and every small town and metropolitan area in between. His view of banking is a combination of a small-town banker combined with the savvy of a tenured congressman who has spent his career advocating for and drafting large-scale housing and financial policy.
But the congressman showed up in Dallas for one reason, and one reason only: He believes in housing finance reform and wants to engage in thoughtful, nonpolitical discussions about how to fix both housing and the mortgage finance system. He was in town for a Bipartisan Policy Center forum on housing issues, which took place, at the recently opened George W. Bush Presidential Library and Museum, in honor of the same president who served while the economy began the long road back from recession.
In his first year as the House Financial Services Committee chair, Hensarling is aggressively pursuing mortgage market reforms at a time when both political parties view it as an essential issue.
Hensarling is often seen as the foil to what he considers establishment economic policies in Washington. More often than not, he is a dissenting voice, battling monetary and housing proposals that he deems too risky for the financial markets and taxpayers.
If you catch Hensarling leading a House Financial Services Committee hearing, he has a reputation for being a financial policy wonk and for respectfully questioning everything from the effectiveness of infinite quantitative easing to the logic of Dodd-Frank in an environment where, in his opinion, too-big-to-fail still lingers.
The congressman spent the past few years pushing back against aspects of the Dodd-Frank Act — the Qualified Mortgage rule and the Qualified Residential Mortgage standard — claiming that the regulations force lenders to tighten the lending spigots, even for the safest of borrowers.
Sitting down with HousingWire on the fringes of the Dallas forum for an exclusive interview, Hensarling remained candid about his ongoing fight to make housing reform a top priority for the House, Senate and president.
“Washington has gone from one extreme to the other,” said Hensarling. “We’ve essentially gone from: if you can fog a mirror, you can qualify for a home to if you can’t pay cash for a home, you can’t buy a property. I clearly exaggerate to make a point.”
But, the congressman added, “those are not standards to be made in Washington, so market discipline is ultimately going to be a more important regulator.”
Despite his role being quite large in the grand scheme of Washington, Hensarling remains a mystery to a certain degree. He self-identifies as a free market and free enterprise mind, but his interpretation of those labels may vary from the mainstream media’s perceptions of Hensarling and his House colleagues.
The Wall Street Journal recently cited an old Hensarling quote to convey the uniqueness of his business philosophy. According to the WSJ, Hensarling once said he is “pro-free enterprise, not pro-business.” At the time, the statement was construed as a condemnation of the postbailout society that allowed mega banks to hook taxpayers into excessive bailouts without ever having to face the dire consequences of selfcorrecting markets.
In person, Hensarling expresses this dichotomy well. The congressman essentially wants markets to succeed, regulations to be simmered down and banks to be held responsible, not by the auspices of government, but by the risk of failure.
Not only does he not view Dodd-Frank as an ineffective strategy in achieving these ends, he views the Basel-III regulatory framework that was created to shore up banks’ capital reserves as somewhat lacking.
“Capital and liquidity standards were insufficient,” Hensarling said of the pre-crisis era. “But that does not make the case that they need to be more complex, which I fear Basel has done.”
While Hensarling spent the first part of the year more focused on comprehensive housing legislation, he expects to conduct hearings on too-big-to-fail banks in the second half of 2013, with legislation to follow.
Reign as chairman
The veteran congressman’s genuine interest in housing and financial services secured him the top role on the House Financial Services Committee. He’s viewed from afar as someone who dives into the weeds on financial issues, all the while remaining far removed from the caricatures and media-created personalities that often emerge from Washington power circles.
When HousingWire caught up with Hensarling, he had just come off stage after delivering his speech at the Bush center.
He was in determined mood, at ease with the subject area at hand.
When it comes to bipartisan collaboration, Hensarling welcomes the opportunity to hold discussions that revolve around policy, as opposed to politics. And while he eschews the gridlocked discussions that pop up in D.C., he wishes issues surrounding the Dodd-Frank Act, the big banks and the mortgage finance system had garnered more political attention years ago.
“It’s maybe not getting as much attention as Obamacare and the NSA, but it’s gaining a lot of attention. And this is important because six years after the precipitous housing decline, five years after the economic crisis and three years after Dodd-Frank, no one has acted,” he said.
And if questions linger about how Hensarling will lead the committee, take a look at his own words: “One of the maxims I try to live by is: ‘If in doubt, act.’”
And acting is just what the chairman is doing. In his first several months at the House Financial Services Committee helm, Hensarling co-sponsored and rolled out one of the most significant pieces of proposed housing legislation since the bubble burst back in 2008.
The Protecting American Taxpayers and Homeowners Act, otherwise known as PATH, came into being this year.
The bill, which is supported by fellow congressmen Scott Garrett, R-N.J., Randy Neugebauer, R-Texas, and Shelley Moore Capito, R-W.Va., proposes a five-year phase out of Fannie Mae and Freddie Mac, with the ultimate goal of providing homeowners with more lending options in a mortgage market fueled by private capital.
The legislation aims to achieve these goals by codifying the Federal Housing Finance Agency’s proposed single-securitization platform, which will eventually serve as a model for a new secondary mortgage market that investors can hopefully hang their hats on.
“I think clearly the act is gaining momentum and a lot of attention,” the chairman told HousingWire.
Hensarling’s Dallas speech allowed him to kill two birds with one stone: He was able to reconnect with constituents during his break from Congress, while also delving deeper into the PATH Act, explaining its nuances and addressing concerns raised by critics.
The largest concern is whether the complete elimination of the GSEs, or a wider government backstop, would effectively kill the 30-year mortgage.
Hensarling says the answer to that question is: “No.”
During his speech, the chairman claimed Section 213 of the PATH Act makes room for the continuance of a 30-year, fixed-rate mortgage.
Reviewing a copy of the bill, it shows that the drafters, who codified plans for a single-securitization platform to get the future mortgage market going, outlined the mandatory inclusion of a 30-year, fixed-interest-rate mortgage under the section identifying qualified mortgage securities.
Speaking in Dallas, Hensarling said that based on the terms of the bill, the 30-year, fixed-rate product is not only preserved, but he believes the system created would encourage the private sector to fill in the market with an assortment of products, some of which may be better than the 30-year FRM when considering the needs of individual borrowers.
As for the five-year transition away from the dominance of Fannie and Freddie, Hensarling believes it’s more than possible to get rid of the housing giants within that timeframe.
“It’s not an arbitrary number,” he said. “It was one that was devised by speaking to many people involved in housing finance and in our security markets who have labored over this issue,” Hensarling added. “Some would say you could do it in as few as three; some say you might need seven years. A couple of outliers might say 10.”
Most of the House Financial Services Committee believes the five- to seven-year timeframe is an appropriate estimate for how long it will take to wind down the GSEs.
One person who gained Hensarling’s unbridled praise is acting Federal Housing Finance Agency Director Ed DeMarco. The FHFA’s proposal to create a single-securitization platform that can help wind down the GSEs, while whetting investor appetite for a new secondary market, are incorporated into the PATH Act.
“Kudos goes to Ed DeMarco,” Hensarling said. “He has done an incredibly fantastic job at FHFA, vitally important work.”
“There were deficiencies in how the market worked prior to the financial crisis and we have attempted to address a lot of those in the PATH Act. We have spent a lot of time working with people at FHFA to understand what they were developing, how they were developing it, and assessing the costs and benefits,” the chairman explained.
So is the plan the right one?
“I think we got it right,” responded Hensarling, “but that’s one of the reasons why we have a five- to seven-year transition in this bill.”
Still, the chairman remains a pragmatist at heart, which is not unusual when your congressional career is spent serving on one of the more contentious, yet essential House committees.
One of the reasons for his attendance at the Bipartisan Policy Center’s housing forum was the opportunity it provided for him to address an independent crowd that is more interested in policy than political infighting.
“I am happy to sit down and negotiate in good faith with anybody,” the chairman said.
But he’s unwavering in his belief that whatever the final solution, the mortgage finance system must be reformed.
“Too often the voices that you hear are the voices who believe it is never time for reform,” Hensarling explained. “And those are the only voices that have to be ignored in this debate.”
An area of debate that Hensarling has managed to stay away from is the question of whether today’s housing recovery is market-driven or a potential bubble fueled by the Federal Reserve’s mortgage-bond purchases.
“It’s a hard question to answer,” the chairman replied. “Like many others, I am concerned about quantitative easing, or QE infinity, that the Fed is currently engaged in. I have shared my thoughts with Chairman Bernanke both publicly and privately on the issue.”
Hensarling says the Fed is ultimately the driver of interest rates.
Yet, he’s not laying all of the blame at the Fed’s feet, and readily acknowledges Bernanke as a man he greatly respects.
Outside Fed activities, Hensarling says the market is facing other disruptions, caused mainly by what he considers misguided economic policies.
“I fear that under the policies of this administration, 1.5% to 2% GDP growth is the new norm,” he said pensively. “Historically, it has been twice that; and I think with the right public policy, it could easily be 4% to 5%.”
The solution, he says, would involve a new slate of policies on taxation, regulation and litigation.
His greatest fears stem from all the regulations being promulgated under the Dodd-Frank Act.
“Those regulations come in two categories: those that create uncertainty and those that create certain economic harm,” Hensarling said. “I fear those regulations are keeping lenders on the sidelines for fear of what the rules have already said or what the rules may say.”
As for what he feels about the Qualified Mortgage rule outlined by the Consumer Financial Protection Bureau and the Qualified Residential Mortgage standard for risk-retention under Dodd-Frank, Hensarling is wary of both.
“Washington should not be setting these arbitrary rules,” he said. “It wasn’t that Washington failed to quell the last crisis; Washington to a great degree caused the last crisis.”
As an example, Hensarling addressed the new 43% debt-to-income ratio requirement for qualified mortgages under the lending rules.
“The decision of DTI ought to be made basically by willing buyers and sellers,” Hensarling said. “And what we try to do in the PATH Act is assure there is increased transparency all the way down to the loan level data.”
But new regulations are not Hensarling’s only area of focus. Under his leadership, the House Financial Services Committee honed in on the Federal Housing Administration, questioning the agency’s financial viability and the potential for future government bailouts.
Using the tentacles of the PATH Act, Hensarling wants to see the FHA return to its core mission of providing housing opportunities to first-time homebuyers and low- and moderateincome families.
While in Dallas, he publicly questioned the agency’s willingness to insure mortgages valued as high as $729,750. “I have a number of towns in my district where I would be very surprised if there was a home on the tax rolls at $729,000,” the congressman noted incredulously.
“Everybody claims that the FHA is supposed to serve first-time homebuyers and lowto- moderate income people.”
Within the PATH Act, more conservative measures eliminating these high caps were deployed in an attempt to redirect the FHA’s focus back to first-time homebuyers and affordable housing, Hensarling explained.
Second-quarter data from the National Association of Realtors shows the median existing single-family home price hit $203,500 in the second quarter of 2013.
However, a few select cities feature escalated prices, such as San Francisco, where the median home price for a single-family detached home hit the $1 million mark in 2Q, based on MLS data from the research division of Better Homes and Gardens Mason-McDuffle Real Estate.
Either way, the chairman’s goal for the agency is simple: He wants FHA fiscally sustainable and classified as such using actuarially sound methods.
The path home
Hensarling’s speech in Dallas verified his ongoing belief that the government failed when drafting housing policies in decades past.
He points to Fannie and Freddie, viewing them as two of the major culprits in the financial crisis, while still acknowledging not everyone assigns as much blame to the GSEs.
While others are debating how much lift housing should get from the government, Hensarling sees the artificial lifts built into the system as the cause of housing’s dramatic demise in 2008.
“At its core, the housing market is not fundamentally different from any other asset,” the chairman told the crowd. “It is not immune to the laws of supply and demand.”
Furthermore, the Republican congressman believes housing — like equities — should be subject to market discipline as opposed to government manipulation.
Hensarling sees a future without the GSEs as real progress, a view upsetting to mortgage finance reformers who still see a need for a fairly robust market backstop.
In his speech at the Dallas forum, the chairman told the audience that the U.S. is virtually alone in the world when it comes to having government-sponsored enterprises and direct federal intervention in the housing market. As for all the low-interest-rate policies and other factors that overinflated the pre-2008 market, the congressman says it’s important for market analysts to finally recognize that lower interest rates and the seemingly better deals stemming from the existence of the government housing agencies don’t always equate to cheaper housing options, especially when principal amounts shoot up after the market becomes heavily stimulated.
Hensarling’s PATH Act is designed to accomplish three key objectives: to wind down the GSEs and their influence in the market, increase competition for mortgage products and provide consumers with more choices.
Despite currying some favor for taking on such an aggressive bill, Hensarling is still fielding ongoing criticism from the mortgage industry, with some industry professionals wary when it comes to parts of the bill.
Mark Zandi, chief economist for Moody’s Analytics, at one point said the bill provided a comprehensive, yet ultimately inviable proposal to wind down the GSEs and privatize the mortgage system.
“If fully implemented, the PATH would lead to significantly higher mortgage rates, particularly in tough economic times, and would put 30-year, fixed-rate mortgage loans out of reach for most Americans,” Zandi is quoted as saying.
“If the PATH becomes law, the FHA would account for no more than one-fifth of the mortgage market on average through the business cycle. The rest of the market would receive no government support.”
Hensarling is publicly battling claims about the 30-year, FRM being at risk, saying the product is safe and fits squarely within the PATH statute.
Mortgage Bankers Association CEO David Stevens also gave the PATH Act somewhat mixed reviews, citing fears over too many changes at the FHA.
“MBA has serious concerns with the implications of such a significant policy change for the price availability of mortgage credit through the FHA program,” Stevens warned.
“Even if it were well constructed, such a change could significantly reduce the number of lenders willing to participate in FHA, given the increased risks to the lender.”
On the other hand, Tom Deutsch, executive director of the American Securitization Forum, gave the act rave reviews.
“ASF is strongly supportive in the near term of ratcheting down the federal government’s involvement in the U.S. housing finance system through gradual reductions in loan limits, appropriate increases in guarantee fees and the GSEs’ issuing material amounts of their securities that expose investors to credit risk of the underlying mortgages,” Deutsch explained when discussing his position.
Hensarling has had several weeks to sift through feedback from proponents and critics of the plan.
He understands the various viewpoints, but remains committed to the idea that something must be done.
“I want to see those who are involved in housing finance re-examine the issue of the GSEs and their equivalents,” Hensarling said. “Take a good hard look — have they served us well? I don’t think so.”
Hensarling sees ongoing and excessive reliance on government backstops or guarantees as concerning. And excessiveness in the system is evident whether you’re looking at the setup of the GSEs or the too-big-to-fail banks, the chairman suggested.
“There is something still fundamentally wrong in America when you have some institutions that are seen as too big to fail, and others too small to matter,” Hensarling added. “What I seek to do is create market discipline. There is no greater discipline than the appearance and reality of your own money at risk.”
His overall end-goal is to ensure less taxpayer money is at risk. Yet, Hensarling is well aware that other forces are at play in the market. For starters, the economy is recovering at a tepid pace, while many of the young are underemployed or without a job. Not to mention, student loan debt levels have reached $1 trillion, restricting spending levels within the first-time homebuyer segment.
While Hensarling has not addressed the student loan debt situation directly, he views it as another consequence of excesses built into the system.
“I do think Washington, again, has artificially inflated the price [of education],” Hensarling said. “And speaking to my colleagues who serve on the education committee — too often we are finding more dollars spent on brick and mortar and administration, and less money spent on quality teaching. It’s not an area I claim to have expertise in, but clearly the rapidly rising cost of education has an impact on other markets.”
When Hensarling heads back to Washington for a busy fall term, he’s confident momentum gained from the drafting and committee passage of the PATH Act will pave the way for a constructive discussion in Congress.
To improve the future mortgage finance system — especially the secondary market — Hensarling notes that “transparency” is key.
“What we’re trying to do in the PATH Act is ensure there is increased transparency all the way down to the loan-level data,” the chairman said. “The MBS market relative to other markets is still a fairly new market, so there are still improvements that can be made when it comes to standardization and transparency.”
But getting members of Congress on the same page could prove a challenge in a divided legislature. Hensarling’s bill — though attracting significant attention in the mainstream press — is just one of a few legislative proposals dealing with housing finance reform.
He makes no predictions about whether the PATH Act will pass or eventually be combined with other legislation. But for Hensarling, it’s a place to start. Or at least a path forward.