In a speech at the American Securitization Forum Conference, Representative Scott Garrett, Chairman of the House Financial Services Subcommittee on Capital Markets, began to lay out the goals for reforming housing finance and the Government Sponsored Entities (GSEs), Fannie Mae and Freddie Mac.
Noting that 95% of the U.S. Mortgage market is current being financed by the federal government, Rep. Garrett said that reform needs to be led by four key objectives: 1.) Protect taxpayers; 2.) End the bailouts; 3.) Get private capital back in our mortgage markets; and 4.) Decrease government exposure to housing. Realizing that there many different ways that the legislature could address these goals, he suggested that there are four specific areas that would be a good starting point.
First the the portfolios of the two GSEs. Currently the combined outstanding portfolios stand at approximately $1.5 trillion. The inherent interest rate risk as the interest rate environment becomes more volatile and difficulty hedging a portfolio that size dictates that the GSEs work to decrease portfolios faster than is currently mandated.
Rep. Garrett noted that selling off some of the assets too rapidly could have negative impacts on pricing and that the Treasury and Federal Reserve own a number of these assets. However, when broken down into specific classes of agency, non-agency and other types of mortgages, there are some types that could easily be sold faster than others.
Second, Garrett stated that since the federal government now explicitly stands behind all the securities and debts of the GSEs, than they should be put on to the federal government's budget. This would create transparency for taxpayers and force Congress and the Administration to address them and their debt issuance in accordance with the debt limit.
The third area Garrett would like Congress to focus on is the current Conforming Loan Limit that tops out near $730,000. Purchasing a house at that value, he noted, would require a corresponding income of $250,000, hardly a scenario that would indicate a need for government subsidization of mortgage products.
Lastly, Garrett believes that Affordable Housing Goals, that dictate the percentage of loans within the GSEs portfolios meet affordable housing criteria, should be abolished. Many experts have pointed to these goals as driving forces behind lending standards that helped fuel the housing crisis, as lending standards were eased to meet the goals.
He believes that the securitization process can be strengthen and supported to develop "a purely private U.S. mortgage market over time - free of government guarantees and subsidies." Garrett noted that there are eight central claims and assertions made by those who question the viability of a private mortgage market, what is referred to as the "Housing Industrial Complex."
The assertions included suggestions about the viability of the 30-year fixed mortgage, and appropriate risk-based pricing in the absence of government involvement. However, Garrett believes that lending standards would improve without government involvement as product variations could hedge interest rate risk. Additionally, many people state that since the government is forced to step-in in times of crisis, it makes more sense for the government to be involved initially. He suggested that this is a product more of a system created to allow the government to step in, rather than actual necessity.
There is no doubt that GSE reform debate is heating up and Rep. Garrett is fueling that debate with strong opinions about the directions that the GSEs take in the near future. The actions that will be taken will have significant impacts on the entire U.S. mortgage market and the pricing and availability of all mortgage products. More involvement of private capital could lead to more innovation and new products, including more proprietary reverse mortgage products. It also could lead to a longer period of instability and contraction.
The need to reform the housing market it clear, but a tenuous road, fraught with challenges, lays ahead of Congress and the administration. The results will likely take time and may fuel market volatility in the interim.