Mortgage

Housing finance reform remains a hurdle for Capitol Hill

Zandi: Since GSE takeover nothing meaningful has changed

The U.S. Senate Committee on Banking, Housing and Urban Affairs held an open hearing Thursday to push forward with housing finance reform.

The only problem is while most lawmakers know it's needed, a comprehensive, linear and widely accepted solution has yet to gain major traction in Congress.

Although the group did discuss existing legislation, Senate Bill 1217—a proposal to reform the mortgage finance market—a major concern for reconstructionists is ensuring the new system doesn't eliminate what's still good about the old housing finance system.

“We must ensure that reform of the housing finance system improves our current system and does not create market disruptions that threaten our housing recovery or unnecessarily increase costs for borrowers,” said Housing and Urban Affairs Committee Chairman Tim Johnson, D-SD, in his opening statement.

Johnson went on to thank Senators Bob Corker, R-Tenn., and Mark Warner, D.-Va., for their contributions in creating a comprehensive housing refinance reform bill, which proved bipartisan initiatives are possible.

The U.S. housing finance market is the second largest in the world, so the consequence of getting any major reform wrong cannot be overstated, Johnson pointed out during the hearing.

In a prepared testimony, Julia Gordon, director of housing finance and policy at the Center for American Progress, reminded those in attendance that Congress has important decisions to make and that a new system could provide credit to a broad and diverse population, offer sale investment opportunities to a wide range of investors and result in a more stable housing market.

“These choices will determine not only the sustainability of a robust housing market, but also future economic opportunities for millions of families. Homeownership and the housing finance system play a unique role in ensuring strong families, strengthening neighborhoods, and boosting the overall economy,” Gordon noted.

Gordon said the current system satisfies no one. In fact, those seeking smaller government are not getting it through the current system, and neither are those who believe GSEs should fulfill their public missions by enabling broad based and affordable access to credit adopting best practices in loss mitigation, and by capitalizing on the Housing Trust Fund and Capital Magnet Fund, Gordon explained.

Jerome Lienhard, president and CEO of SunTrust Mortgage (STI), offered the perspective of a regional bank. Lienhard said reform must bring more private capital into the mortgage market in a principal loss position, but not reduce the global demand for mortgage-backed securities.

“While there is a need to address taxpayer risk by making structural changes to the housing finance system, the securitization platform, the standard-setting on lending and documentation and the servicing requirements are absolutely essential to maintaining a secondary market,” said Lienhard.

"This infrastructure is so foundational that we must emerge from housing finance reform with these key functions intact,” he added.

Richard Johns, executive director of the Structured Finance Industry Group, noted, “An integral part of any reform will be to ensure the continued liquidity of the TBA Market, which is the most efficient and cheapest mechanism to enable a mortgage consumer to 'lock in' the interest rate at the time when a mortgage loan is approved and thereby minimize the cost of borrowing.”

Johns added that the TBA Market also creates efficiencies and cost savings for lenders that are passed on to borrowers in the form of lower rates. As of now, the TBA Market is reliant in part on the existence of government-guaranteed MBS, making it imperative that any reform legislation includes provisions that preserve some form of government guarantee.

Mark Zandi, chief economist and co-founder of Moody’s Analytics (MCO), was very vocal in his opinion of the government-sponsored enterprises.

"The nation’s housing finance system is dysfunctional and should be reformed. Since the government took over Fannie Mae and Freddie Mac during the financial collapse five years ago, effectively nationalizing the nation’s housing finance system, nothing meaningful has changed," said Zandi. “The government still makes nearly nine of every 10 U.S. mortgage loans. This is bad for both taxpayers and homebuyers," he added.

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