House Committee Weighs Options to Avoid Future Mortgage Disaster

Financial Services Committee Chairman Jeb Hensarling (R-TX) outlined steps for a sustainable housing policy Wednesday during a hearing on regulatory obstacles to the re-entry of private capital in the housing finance sector.

Wednesday’s hearing was the seventh full or sub-committee hearing the Committee has held on the topic of forging a new housing policy for America, according to Chairman Hensarling.

In his opening statement, Hensarling proposed three steps to a more sustainable housing policy.

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Step one would be to gradually reduce and eventually eliminate the government guarantee of Fannie Mae and Freddie Mac.

The second step would be to reform the Federal Housing Administration (FHA) so that its mission is “explicit, targeted, and paid for,” says Hensarling.

Lastly, the final measure would call for a removal of the barriers to private capital coming into the housing market—the main subject of the House Committee’s meeting.

“In order to do this, some provisions of Dodd-Frank, particularly QM and QRM, will have to be carefully examined given their potential impact on the mortgage market,” said Hensarling.

Investors are essential in order to rebuild the private mortgage market, according to Chris J. Katopis, executive director of the Association of Mortgage Investors (AMI) and a testifying witness at the hearing.

“Investors and their private capital will only return to a market which is transparent, has non-conflicted stakeholders, and the protection of contract law,” said Katopis.

Accordingly, the U.S. economy at-large is hurt by the decreasing availability of mortgage credit, says Katopis. However, the current legal and regulatory landscape presents several obstacles for private capitals return to the mortgage market, such as the inability to compete with government “g-fees.”

Although these fees are rising, says Katopis, they are still insufficiently low for the private label securitization product to compete in the market.

Raising g-fees to market levels will help attract private capital through crowding in, he says, which is necessary—albeit not sufficient—to get private capital into the market in a size greater than it is currently.

Even if g-fees were to be raised to market levels by regulatory order, says Katopis, the problem would not be solved as Fannie and Freddie are in the same business as private mortgage investors and mortgage insurers.

While eliminating Fannie and Freddie would be good for investors from a competitive standpoint, the effects this would have on mortgage availability would be “disastrous,” he says.

The elimination would also seriously wound the recovering market and cause losses to mortgage lenders, insurers and investors on outstanding loans.

With some advocating for the wind down of Fannie and Freddie, either by stepping down loan limits or restricting their underwriting authority, James Millstein, CEO of Millstein & Co., proposes what would happen if the elimination is not seamless and the demand for mortgage credit goes unmet?

“If policymakers get the size or pace of a forced wind down wrong, we will suffer a credit contraction, house prices will fall and the U.S. economy will once again be at risk for a recession,” said Millstein.

Millstein’s proposal is consistent with suggestions to use structured credit vehicles to stimulate private risk taking, the difference being that his proposal does not rely on those vehicles as the only way to encourage private capital into the market.

Creating well-capitalized “first loss” insurers from the guarantee business of the enterprises is consistent with trying to induce private investors to buy a “first loss” piece of Fannie and Freddie mortgage-backed securities, according to Millstein.

“These paths are also not mutually exclusive,” said Millstein. “Taken together they present a safe, responsible way to return private capital to mortgage markets, to end the conservatorships, to get the taxpayers’ investments in the enterprises repaid in full, and to restore balance to the housing finance system on a more certain timeline.”

Written by Jason Oliva

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