KBRA’s Whalen extinguishes any hope of housing reform

"What happens if nothing happens?"

The constant talk in Washington over housing reform might be just that—talk. At least that's what the recent report on housing reform by Christopher Whalen, senior managing director with Kroll Bond Rating Agency, argues  

“KBRA does not believe that there is any likelihood of housing reform legislation passing Congress before the 2016 general election at the earliest,” Whalen said in the report titled “KBRA Housing Finance: What Happens if Nothing Happens on GSE Reform?”

“Accordingly, we believe that investors and financial institutions need to operate under the assumption that current law and regulation will remain in place for years to come," he continued. 

Five years past the financial crisis, and Congress has continuously gone back and forth on what to do about the housing market, with a strong emphasis on reworking Fannie Mae and Freddie Mac.

The two main proposals that came out of this:

  • The House proposal sponsored by Financial Services Committee Chairman Jeb Hensarling, R-TX, and other committee leaders, H.R. 2767, ends the taxpayer-funded bailout of the GSEs by phasing out the enterprises within five years, increases competition by ending federal control of the mortgage finance system and grants more options to consumers when selecting mortgage products.
  • S.1217, sponsored by Senators Mark Warner, D-VA, and Bob Corker, R-TN, seeks to unwind the GSEs involvement in the secondary mortgage market, expand the role of private mortgage insurance, and create a single government backstop through the new Federal Mortgage Insurance Corporation (FMIC) to provide for common securitization platform and catastrophic mortgage insurance for qualified mortgage backed securities.

In the current market, mortgage lending in 2014 is expected to be about $1 trillion, significantly down from $3.9 trillion in 2003. And although rates fell to historical lows, the lack of home equity and tightening underwriting standards helped to mute refinancing volumes, Whalen explained.

“But the continued drop in origination volume in 2014, during a flat-to-falling interest rate environment, demonstrates that other forces are at work,” he said. “For example, given the substantial compliance standards associated with Qualified Mortgage and other regulatory changes, many mortgage lenders have curtailed originations, especially since the effective date of the QM standard.”

KBRA also believes the net effect of large settlements, new banking regulations and changes in fees and other criteria by Federal Housing Administration and Federal Housing Finance Agency has been to limit mortgage lending.

“The efforts to craft housing reform legislation in Congress do not seem likely to produce a result in the near term, but the various changes made in the regulatory regime, coupled with aggressive pursuit of settlements of alleged errors in lending and/or servicing mortgage loans by federal prosecutors, are having a decidedly negative effect on the housing market,” Whalen said.

“Simply stated, lenders, Realtors, homebuilders and investors alike need to ask 'what happens if nothing happens?' with respect to GSE reform, and the current regulatory and enforcement environment regarding housing remains in place,” he concluded. 

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