On August 6, 2013, President Obama outlined key principles of comprehensive housing finance reform. These principles closely mirror the outline presented by NAR to the administration in early 2011. The President’s plan is centered on four core principles for reform:
- ensure a limited government role, which encourages a return of private capital;
- a privatized system with a federal catastrophic reinsurance if private capital proved to be insufficient;
- preserve widespread access to safe and responsible mortgages like the 30-year fixed rate mortgage;
- and protect the American dream of affordable homeownership for all qualifying borrowers in every community.
NAR believes these principles will contribute to the long-term stability of our nation’s housing market and provide consumers with access to affordable mortgage credit, even during economic downturns. However, NAR has serious concerns with other aspects of the Administration’s proposal. Specifically, the Administration favors lower FHA loan limits, , which the Obama Administration believes are appropriate changes to give sufficient incentive for the private sector to resume making mortgages without FHA or GSE involvement.
Congress also has begun serious discussions regarding the future of the GSEs, as well as the need for overall reform of the U.S. housing finance system. As of August 19, 2013, the Senate Banking Committee and the House Financial Services Committee have held several hearings on housing finance reform, and 2 significant pieces of legislation have been introduced in the House and Senate. NAR strongly opposes the legislation that was introduced in the House, known as The Path Act, which eliminates a federal guarantee for a secondary mortgage market and dramatically restructures the FHA. Unlike in the House, the Senate bill (Secondary Mortgage Market Reform and Taxpayers Protection Act) would maintain the federal government as an insurer of last resort.
NAR believes that the recent bipartisan Senate bill along with the President’s principles for GSE restructuring, incorporate a promising groundwork for housing reform.
Current Legislation/Regulation (bill number or regulation)
Since the release of the Obama Administration's housing finance reform report, Congress has begun serious discussions regarding the future of the GSEs, as well as the need for overall reform of the U.S. housing finance system. The Senate Banking Committee and the House Financial Services Committee have held several hearings on housing finance reform, and each chamber has introduced legislation.
U.S. House Legislation: The Path Act
On July 24, 2013, the House Financial Services Committee passed H.R 2767, the Protecting American Taxpayers and Homeowners (PATH) Act, introduced by Rep Garrett (R-NJ). NAR opposes this legislation which includes reforms to FHA, the GSEs, and the financial regulatory law known as the Dodd-Frank Act. NAR opposes the bill based on two major concerns: 1) We strongly oppose the end of federal guarantee for a secondary mortgage market; and 2) we strongly oppose the dramatic restructuring and targeting of FHA.
The bill winds down Freddie Mac and Fannie Mae over a five-year period. It would create a new Utility to promote the securitization of mortgages. However, the bill does not provide for a federal guarantee for the Utility.
NAR sent a letter to the Full Committee opposing the bill and asking for a no vote. The bill is not expected to come to the House floor until the fall. NAR will continue to work with Congress and explain our opposition to the legislation.
U.S. Senate Legislation: Secondary Mortgage Market Reform and Taxpayers Protection Act
On June 25, 2013, Senators Bob Corker (R-TN) and Mark Warner (D-VA) introduced the Housing Finance Reform and American Protection Act that would also phase out Fannie and Freddie but, unlike in the House, the federal government would remain as an insurer of last resort, much like the FDIC is the insurer of last resort for troubled banks. NAR has long called for replacing Fannie and Freddie while ensuring continued mortgage market liquidity through the maintenance of an explicit federal presence in the market. On that basis, the Senate approach is the better starting point of the two.
It’s unclear how far Congress will get this year in taking the next step to pass either of these bills or to consider other bills that need to be factored in.
Federal Housing Finance Agency: Secondary Market Infrastructure
On October 4th, 2012, the Federal Housing Finance Agency (FHFA, Fannie Mae and Freddie Mac’s regulator) released a white paper on a proposed framework on the creation of a common secondary mortgage market securitization platform being developed by FHFA and the GSEs. The infrastructure is being developed as part of FHFA’s strategic plan and includes the creation of a model pooling and servicing agreement that will dictate the responsibility of mortgage loan originators.
NAR is supportive of a self-sufficient infrastructure whereby safe, sound, transparent, and insured MBS may be packaged and sold. Bringing standardization, stability and confidence to the mortgage market space will facilitate the return of private sources of capital to the housing finance system.
On April 30th, 2013, FHFA issued a progress report on the creation of the infrastructure that will include Fannie Mae and Freddie Mac building a new joint company for securitizing home loans. FHFA indicated they were encouraged by the public feedback and will continue to set goals and advance the creation of the structure.
NAR Principles for Restructuring the Secondary Mortgage Market and Encouraging the Return of Private Capital
NAR supports restructuring the secondary mortgage market to ensure a reliable and affordable source of mortgage capital for consumers, in all types of markets, to avoid a major disruption to the nation’s economy that would result from the total collapse of the housing finance sector. Restructuring is required in response to the failure of Fannie Mae and Freddie Mac, which has been under government control since entering conservatorship in September 2008.
- An efficient and adequately regulated secondary market is essential to providing affordable mortgages to consumers. The secondary market, where mortgages are securitized, is an important and reliable source of capital for lenders and therefore for consumers. Without a secondary market, mortgage interest rates would be unnecessarily higher and unaffordable for many Americans. In addition, a poorly functioning secondary market will impede both recovery in housing sector and the overall economy.
- The old GSE system with private profits and taxpayer loss must be replaced. The current GSEs (Fannie Mae and Freddie Mac) should be replaced with government-chartered, non-shareholder owned entity(s) that are subject to sufficient regulations on product, revenue generation and usage, and retained portfolio practices in a way that ensures they can accomplish their mission to support long-term mortgage financing and protect the taxpayer.
- Reforms should ensure a strong, efficient financing environment for homeownership and rental housing. The mission of the new entity must include providing access to mortgage financing for consumers who have the demonstrated ability to sustain homeownership. Creditworthy consumers require a steady flow of mortgage funding that, during economic downturns, only government participation in the secondary mortgage market can provide.
- The government must clearly, and explicitly, offer a guarantee of mortgage instruments facilitated by the entity(s) that meet the Qualified Mortgage (QM) standards. This is essential to ensure qualified, creditworthy borrowers have access to affordable mortgage credit. Without government backing, consumers will pay much higher mortgage interest rates and mortgages may at times not be readily available at all—as happened in jumbo and commercial real estate loans. Taxpayer risk would be mitigated through the use of mortgage insurance on loan products with a loan-to-value ratio higher than 80 percent, or through other fees paid to the government.
- The new entity(s) should guarantee or insure a wide range of safe, reliable mortgage products. These mortgage products include 15-year and 30-year fixed rate loans, traditional adjustable-rate mortgages (ARMs), and other products that have stood the test of time and for which American homeowners have demonstrated a strong “ability to repay.”
- Provide a self-sufficient mechanism whereby safe, sound, transparent, and insured Mortgage Backed Securities (MBS) may be packaged and sold. There must be an option for an explicit government guarantee or insurance for all offered MBS within the secondary mortgage market. The creation of a not-for-profit “utility” facility is needed to receive, package, sell and guarantee MBS. The entity should operate with similar insurance and enforcement components as the FDIC. This option must minimize taxpayer exposure.
- Sound and sensible underwriting standards must be established. Establish standardized, sound underwriting principles and products that provide the foundation for responsible, credit worthy borrowers to be able to achieve homeownership goals. For additional safety, these standards must also be applied to securities (MBSs), purchased for portfolio (to a limited extent).
- The entity(s) should price loan products or guarantees based on risk. In addition, the new entities must set standards for the MBS they guarantee that establish transparency and verifiability for loans within the MBSs.
- Ensure solid, verifiable, current loan level data is available to investors that empowers and enables them to conduct their own risk analysis. There is a strong consensus among multiple market participants that solid loan level data is the essential foundation from which to rebuild the private mortgage security industry. Investors want to be empowered and enabled to conduct their own analysis. With properly structured loan level data the mortgage collateral supporting a regulated, securitized instrument will lead to a verifiable, current predictable instrument of cash flow and thus will attracting private capital.
- The reformed entities must have a separate legal identity from the federal government but serve a public purpose. Unlike a federal agency, the entities will have considerable political independence and be self-sustaining given the appropriate structure.
- The GSEs should remain politically independent. Political independence of the entities is mandatory for successful operation. CEOs should have fixed terms so they cannot be fired without cause, and they should not be allowed to lobby. Additionally, the entities should be self-funded instead of receiving ongoing appropriations.
- To increase the use of covered bonds, particularly in the commercial real estate arena, the entities should pilot their use in multifamily housing lending. The entities should explore the use of covered bonds as an additional method to provide more mortgage capital for residential housing. The entities should be allowed to pave the way for innovative or alternative finance mechanisms that meet safety criteria.
- There must be strong oversight of the entities. The new entities should be overseen by the Federal Housing Finance Agency (FHFA) or a successor agency that would make timely reports to allow for continual evaluation of the entities’ performance.
- Restore investor confidence and trust in the Representations and Warranties via the standardization of pooling and servicing contracts. Standardization of Representations and Warranties is imperative. Pooling and Servicing Agreements (PSAs) must be simple with clear terms and definitions so they are easily understood by investors. They must have clear disclosures of any deviations from “Federal Best Practice Standards”, clearly define “buy back” rules, and servicer operational policies must be consistent with their fiduciary duties to the investor.