[Editor's note: The original version of this story contained additional remarks from Mr. Stevens in regard to mortgage loan denial rates to African American borrowers. The MBA contacted HousingWire and asked us to revise these remarks. We removed a single paragraph, which contained a specific data point now in contention. Per our corrections policy, the edits below reflect his revised remarks. Mr. Stevens' remarks have come under some scrutiny by others, as covered elsewhere by HW editorial.]
The CEO of the Mortgage Bankers Association David Stevens started the trade group's annual National Secondary Market Conference, now underway in New York City, recalling how four years ago he made headlines for labeling housing finance "broken."
Stevens returned to a controversial term he used four years ago to describe the state of housing finance.
Frustration over action – and inaction – in Washington last week was visible just beneath the surface of the remarks.
“The reason my comments made the papers was because I spoke about the fact that government’s role in housing, which was on the hook for over 90% of all mortgages at that time, was representative of a system that was on life support – a sick system,” Stevens said. “That simple phrase was plastered everywhere. By the way, I learned when you are an Official of the Administration, you must choose your words a bit more carefully; but analogy aside, I stand by the intention of my statement.”
Stevens said that in 2010, the conventional wisdom was that strong government intervention was necessary to get the housing market back on track; government involvement was necessary to protect at-risk borrowers; and government oversight must increase to prevent another system failure.
“And for the most part, all of these were true. The government acted swiftly as the state of our marketplace necessitated new regulations and better oversight. But we all knew, or at least wanted to believe, that many of the actions were short-term fixes to stabilize the market as policymakers, consumers and industry experts worked toward long-term solutions,” Stevens said.
“Here’s the problem. It is four years later and the government isn’t still just the backbone, but has become the entire central nervous system of the real estate finance market. When the federal government is still backing nearly 90% of the mortgages made in today’s market, it’s apparent that the real estate finance system is stuck in the same place it was when I took this stage four years ago.”
He quickly added that in the face of the housing collapse, it made sense for government to step in.
“MBA continues to promote policies that create a vibrant secondary mortgage market, ensure a level playing field for lenders of all sizes and business models, and maintain access to affordable mortgage credit – particularly the 30-year, fixed-rate mortgage. We have not wavered on our calls for GSE reform, transition to whatever future state Congress decides, the return of private capital, and transparency. And somehow, even with the economic and legal reality of the current system, some still believe that this will magically fix itself,” he said.
He said the system as it stands is unsustainable, and that the MBA supports a competitive marketplace that contributes to a healthy economy, with cost efficiencies and appropriate protections for consumers.
“But there are those who rush to defend a system that is unsustainable in its current state and offers inadequate, unrealistic options for a stable housing finance system.
"The secondary market as it exists today greatly influences the primary market. It’s having negative impacts on mortgage affordability and availability, increasing costs for borrowers and even preventing many from obtaining homes, and stifling a full-blown market recovery,” Stevens said.
He also pointed out how tight credit is.
“Let me give you another example for those who defend the system based on access to credit. The current average credit score in America today is about 700. The average credit score of a borrower with a loan backed by Fannie Mae in Q1 2014 is 741. On top of these strict credit criteria, there are loan level price adjusters, overlays and ever-increasing guarantee fees. In this system, those with the most pristine credit can afford a home. Mark Zandi estimates that over 10 million qualified families are left on the sidelines simply due to credit score,” Stevens said.
“The reality is much of the debate reflects a lack of understanding of the legal construct of conservatorship, PSPAs and why legally Congress is the only way to move forward.”
Stevens noted last week’s vote for Johnson-Crapo, which passed out of Senate committee favorably, but without enough votes (13-9) to force a vote on the Senate floor. As a result, most say they expect Johnson-Crapo to linger in limbo until after the mid-term elections.
“Unfortunately, last week’s vote in the U.S. Senate has likely only prolonged conservatorship and the current state. We applaud the Senate Banking Committee leadership for their efforts in developing bipartisan legislation and passing it out of committee. However, it’s unfortunate when faced with the reality of the GSEs being required to reduce their retained capital by $600 million per year that those who did not support the bill significantly hampered any hopes of a reasonable path forward, out of conservatorship. Should the housing market experience any significant downturn, the GSEs would find themselves in need of another draw from the Treasury. The risk of Congressional overreaction of doing GSE reform in the midst of a crisis is a real and scary proposition,” Stevens said.
So the question remains, where do we go from here?
“We can choose to avoid a future cycle of increasing mortgage costs, less access to credit and choked-off demand for housing, leading to a weaker and increasingly unstable market,” Stevens said. “For the past 4 years, we have advocated for change. Here’s why - change is inevitable. It’s not a matter of IF; it’s a matter of WHEN. The status quo is not an option.”
Recapitalization can’t happen as things stand.
“Under the terms of conservatorship, it is legally impossible for the GSEs to recapitalize. There is no way back to their original state. FHFA can only put Fannie and Freddie into receivership. It requires Congressional action to reform and stabilize the system,” Stevens said. “Sure there are many other items affecting the housing market. From student loan debt to excessive regulation, to high fees and underwriting standards built and based on being defensive and in self protection from potential litigation or other scrutiny – all of these could impact the future housing. But these are fixable. Many of these can be changed through regulation or policy. It's the GSEs - the central most important variable to creating enough liquidity for the housing finance system in this country – that can only be resolved through Congress or the courts. This is the last and most significant unresolved issue from the housing recession.”
He said the problem is not insurmountable, even if the political process is a challenge.
“The system is still functioning poorly for many prospective homebuyers. But today, unlike four years ago, we are in a much stronger position to accelerate the recovery and nurse the system back to health. The housing market is improving. The demographics are in our favor,” he said. “We know what the prescription is for a broader recovery and more stable market. We need to stand up and be advocates for the change we know is necessary. Don’t let our collective voice waver. We have to continue to press Congress to move forward. We have to work with Fannie, Freddie and FHFA on transition.
“Because in the end, it’s our future, and the future of the American homebuyer, that is being held back by the sick market,” Stevens said.