David H. Stevens, President of the Mortgage Bankers Association (MBA) told members attending the organization's annual convention in New York today that some things hadn't changed much since four years earlier when he addressed them as the Commission of the Federal Housing Administration. He said he made headlines then when he called the government's role in housing "a sick system". Back then the conventional wisdom was that strong government intervention was necessary to get the housing market back on track, protect at-risk borrowers, and prevent another system failure. For the most part this was true and the government acted to stabilize the market. But four years later government isn't just still the backbone of housing, it has become the entire central nervous system of the real estate finance market. The system is stuck in the same place it was four years ago.
The MBA, Stevens said, 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 and it has not wavered in its calls for reforming the government sponsored enterprises (GSEs) and for transition to whatever Congress decides is the future of the system. But the system will not magically fix itself. "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."
He criticized some advocates in Washington who fear changing the GSEs because they want to protect the underserved and minorities from being crowded out of the housing market. That, he said is already happening; 2012 HMDA data shows a 56 percent denial rate on GSE purchase loan applications for African Americans and only 8 percent of all African American transactions are now with the GSEs. Further, the current average credit score nationwide is about 700 and the average credit score of a borrower from Fannie Mae this year is 741. On top of this strict scoring criteria there are loan level price adjusters, overlays and ever-increasing guarantee fees. In this system, only those with the most pristine credit can afford a home; millions are left on the housing sidelines simply due to their credit scores.
Stevens said that much of the debate about reform shows a lack of understanding of the legal structure of conservatorship and the GSEs' preferred stock agreement with Treasury and why legally Congress is the only way to move forward. However the vote last week in the Senate Banking Committee has likely only prolonged the conservatorship and the current state and the prospect of another significant downturn in the housing market and any prospect of Congress reacting reasonably in the midst of it is a real and scary proposition.
The strong showing that Fannie Mae and Freddie Mac have made on their financial returns in the last two years have been boosted by one-time events such as settlement agreements, deferred tax asset reevaluations and lower provisions for loan losses. Last month the Federal Housing Finance Agency released results of the Dodd-Frank mandated stress tests and in the severely adverse scenario, which mimicked the 2008 downturn, the GSEs were shown unable to handle events without drawing down billions from Treasury because they have no capital cushion. This could lead to investors questioning the limits of the Treasury backstop and requiring more return, pushing up the cost of a mortgage and tightening credit even further.
Stevens said that, "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."
There are many other things affecting the housing market such as student loan debt, high fees, and excessive regulation, but these are fixable and 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."
With legislative action likely at a political standstill we can still choose to make progress, Stevens said. The mortgage industry can choose to be proactive leaders and address some of the choices necessary to set the stage for long term sustainable change.
In a speech last week new FHFA Director Mel Watt noted that conservatorship should never be viewed as a permanent or desirable state and focused on several changes MBA has advocated for; greater clarity around reps and warrants, enhanced risk sharing to bring in more private capital, and moving toward a common GSE security. He also spoke about the ongoing development of the GSEs' Common Securitization Platform (CSP) and how it could be adaptable for use by market participants other than the GSEs and how it could move them toward a common security.
Stevens said that what Watt outlined in his speech gives FHFA and MBA common ground through which they can work to create a better functioning secondary market system. There are three tracks to this process. The first is GSE reform and the Senate's Johnson-Crapo bill is a good starting point although it will clearly take longer than was hoped.
The second track is transition for which a growing economy, declining unemployment, and mortgage rates that while higher remain historically low are pre-conditions. A common GSE security, greater risk sharing, greater private sector input into the development of the CSP could all contribute to improving some of the very issues that divided support for the Johnson-Crapo legislation. These would variously contribute to enhanced liquidity, reduced costs to taxpayers and would lay the groundwork for a more competitive and efficient secondary market.
The third track is the return of private capital and to achieve this, Stevens said, we must address the obstacles to housing recovery; the structural, regulatory and economic impediments that are keeping private investors on the sidelines.
The tasks ahead are these - encourage liquidity, sustainability and competition in the secondary market; restore trust and confidence in the marketplace; and attract more private capital in order to reduce taxpayer support and government control.
Legislatively speaking, we know that GSE reform is years in the making, he said, but it's time to address the structural, regulatory and economic impediments that are limiting the return of private capital and have a stranglehold on housing recovery. It's time to transition to a stable, competitive and accessible marketplace.
"We know what the prescription is for a broader recovery and more stable market," Stevens concluded. "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."
