Senate Banking Hearing: Principles of Housing Finance Reform

US Capitol SunriseTomorrow, I am testifying before the Senate Banking Committee at a hearing entitled Principles of Housing Finance Reform. This will be an excellent opportunity for to discuss the merits of MBA’s recently released housing finance reform proposal, which addresses the future of the secondary mortgage market.

Conservatorship of the GSEs has already persisted far longer than was ever intended.  And while the Federal Housing Finance Agency (FHFA) has taken important administrative steps during this period, an extended conservatorship is economically and politically unsustainable.

MBA has long advocated for comprehensive GSE reform that protects small lenders, provides a stable foundation for the secondary mortgage market, and preserves access to 30 year fixed rate mortgages. What I will emphasize tomorrow, and what is highlighted in our proposal, is that any comprehensive GSE reform effort must balance three major priorities: 1) taxpayer protection; 2) investor returns; and 3) consumer cost and access to credit.

To remedy that, MBA’s proposal is guided by core principles which will lead to a stable secondary mortgage market:

  • Preserve the 30-year, fixed-rate, prepayable single-family mortgage, as well as long-term financing for multifamily mortgages;
  • Maintain a deep, liquid to-be-announced (TBA) market for securities backed by conventional single-family loans;
  • Attract global capital and preserve liquidity during times of economic stress through an explicit government guarantee for eligible MBS backed by single-family or multifamily mortgages;
  • Limit the explicit government guarantee to the eligible MBS, while prohibiting the extension of the guarantee to the equity or debt of the Guarantors;
  • Require the Guarantors to support an effective national affordable-housing strategy that helps meet the needs of low-income and underserved households and communities;
  • Support a competitive market and a level playing field for lenders of all sizes and business models;
  • Enable a robust, innovative, and purely private mortgage market to coexist alongside the government-backed market;
  • Preserve existing multifamily financing executions and permit new options;
  • Establish a strong, transparent regulatory framework that promotes liquidity while protecting the taxpayers;
  • Ensure that private capital assumes most of the credit risk ahead of the taxpayer;
  • Ensure continuous liquidity in the event of a systemic crisis; and
  • Minimize any disruption of the mortgage markets during the transition to the end state.

Calls to simply recapitalize the GSEs and allow them to operate without further structural changes are misguided.  Under such plans, the post-crisis reforms already achieved could be reversed at the discretion of future FHFA directors.  And recapitalization absent comprehensive legislation would likely embolden those who seek private profit at the expense of sound public policy, while mortgage market participants may lose confidence in the prospects of serious reform, creating further uncertainty around business planning.

We cannot go back to a housing finance system that provides private gains when markets are strong yet relies on support from taxpayers when losses occur.  Only by enacting comprehensive legislative reform can borrowers, lenders, and investors realize the full benefits of a diverse, competitive primary market and a vibrant, liquid secondary market.  The hard work of reform should proceed without delay. MBA is committed to working with Congress and the Administration to build a solid and durable foundation for the secondary mortgage market.