Republicans on the House Financial Services Committee raised serious questions at yesterday’s housing hearing beyond Chairman Jeb Hensarling, R-Texas’ allegation that HUD is in violation of the law for not meeting GSE reserve capital ratios.
Lawmakers also raised the specter that misguided Washington policies are hurting taxpayers and homebuyers by putting them into homes they can’t afford to keep.
House members discussing these questions with Secretary of Housing & Urban Development Julián Castro argued that the Federal Housing Administration is today using many of the same practices employed by subprime lenders at the height of the mortgage crisis in the run up to the Great Recession, the aftermath of which was that taxpayers footed the bill for a nearly $200 billion bailout of Fannie Mae, Freddie Mac and the FHA. (For one HW perspective, read this take by Ben Lane.)
"What I’m trying to say is this is not just a fiscal issue for me. This is a moral issue. This is about us taking people and bringing them to the lowest common denominator. What happened to the values of homes when people default on homes?,” said Rep. Mia Love, R-Utah. “What do these neighborhoods start to look like? What do you say to the people who have gotten into homes responsibly and all of a sudden -- because of so many different foreclosures around that area -- realize that their neighborhoods are going into decay, that they’ve lost the value in their home? What do you say to those people?”
“The last thing I want to bring up is a map that was sent here by our ranking member, that was introduced, and this shows distressed neighborhoods from 2008 to 2012. And the only thing I want to leave you with is that the people who run these areas have the same political view as you do. In the words of the president during the State of the Union address, ‘if it’s not working, it’s time to do something different,’” Love said. “We need to do everything we can by not just worrying about one family, but worrying about as many people as possible.”
Rep. Steve Pearce, R-N.M., said he is worried about underwriting standards being weakened.
“I participated in my first year in making an award from some department in HUD that allowed a young woman to move into a home in Anthony, New Mexico. Anthony is predominantly a poor community so it was nice to have the help there. Several years later she caught me at a town hall and said, ‘Do you remember coming to my house? You actually helped move boxes out of the trucks.’ I said, ‘I do remember that,’” Pearce said. “She said, ‘I was sort of led into that by this free money from the government.’ She said, ‘What I did was I put my money down, I bought a house that I could not afford because I just wanted to believe that I could do it.’ She said, ‘I ended up losing the whole thing. Everything I owned went with it.’ That’s what we do in the sense of fairness. That’s what we do when we do not have adequate underwriting standards, when we don’t bother to take a look at if people can make the payments or if they can’t.
“People in New Mexico are relatively ambivalent about the whole concept of GSEs and the problems that the GSEs caused until I explain that you the taxpayer is getting to pay for the bad mortgages for your neighbor down the street, whether they made it or they were enticed into it or whether the government helped them -- doesn’t matter. If it goes bad, you the taxpayer are paying for their mortgage and yours. That’s when people get hostile,” Pearce said.
This reflected some of the concerns raised by attendees at ABS Vegas earlier in the week.
On the issue of recent moves by the Federal Housing Finance Agency and whether these changes brought by Director Mel Watt are being undertaken responsibly or repeating the same mistakes, Sanjeev Handa, managing member at Old Orchard Lane said it’s not repeating the same mistakes.
“You have to look at the entirety of what he’s is suggesting and see the nature of the borrower and what is being purchased," Handa said. "I don’t think there’s wholesale bad products – there is bad underwriting. It’s incumbent on people buying these to see if the risk is acceptable to them."
But Vernon Wright, trustee with the Wright Family Foundation, said he worries about the short memory the industry has.
“The industry has a short memory. With turnover in the industry not as many people remember 2008,” Wright said. “My concern is that people focus on not the right key elements. You have to look at safety and look at the soundness of structure."
Miller said his final thought was that it comes down to diligence and discrimination.
“Securitization is not a thing; it’s a process. It can be used for good purposes and it can be misused and abused for bad purposes,” Miller said. “Let’s identify the problems where they exist. Let’s avoid painting all securitization with a broad brush. There are segments that operated fine through the crisis.”