Senate Foreign Relations Subcommittee on Banking, Housing and Urban Affairs Hearing
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Good morning Chairman Johnson, Ranking Member Crapo, and members of the committee. I am
Housing finance mechanisms have evolved over time and in response to crises, from the creation of the
In seeking reform of the housing finance system,
These choices will determine not only the sustainability of a robust housing market, but also future economic opportunities for millions of families. Homeownership and the housing finance system play a unique role in ensuring strong families, strengthening neighborhoods, and boosting the overall economy. For this reason, it is critical to redesign the system to account for shifting demographics and changing consumer profiles, including the rapid growth of communities of color, ever-increasing student debt burdens, rising demand among rural Americans, and increased economic insecurity among all but the wealthiest families.
Why Congress Should Act Now
America's housing finance system needs reform now.
While housing prices have begun to recover in many (although not all) parts of the country, our national mortgage market today is significantly smaller than it was in the early 2000s. n2 The homeownership rate has dropped from close to 70 percent to 65 percent, n3 and while the housing market has improved from the crisis, the fundamentals are not yet there for a robust, accessible and sustainable market to develop.
To start, approximately two-thirds of mortgage originations in the second quarter of 2013 were for refinancing, not home purchases. n4 Many purchasers are now investors rather than owner occupants, and a large percentage of these investors purchase with cash rather than a mortgage (estimates suggest that nearly 40 percent of homes purchased in
In the meantime, first-time homebuyers, young homebuyers and homebuyers of color - the future of homeownership in
Meanwhile, production of multifamily apartment buildings is falling behind demand. n10 As supply and demand shift, rents have risen significantly - five percent in 2012 alone. n11 This is only putting more pressure on the nation's renters, more than half of whom are "rent impoverished," or spending more than thirty percent of their income on housing. n12 These figures do not suggest well-functioning single and multi-family housing finance markets.
So where do we go from here?
We cannot go back to the status quo ante. It's true that for many decades, the government-sponsored enterprises, or GSEs (
Nor can we continue with the system we have right now. Last week marked five years since
It is hard to see how the current system satisfies anyone, either those seeking smaller government (since the system is now effectively nationalized) or those who believe the GSEs should fulfill their public missions by enabling broad based and affordable access to credit, adopting best practices in loss mitigation, and capitalizing the
Our vision of a well-functioning and responsible housing finance system that protects taxpayers is grounded in five core principles: liquidity, stability, transparency, access and affordability, and consumer protection.
. Liquidity: The system needs to provide a reliable supply of capital to ensure access to mortgage credit for both rental and homeownership options, every day and in every community, during all kinds of different economic conditions, and for large and small lenders alike.
. Stability: Private mortgage lending is inherently procyclical. Stability for the market requires sources of countercyclical liquidity during economic downturns or in the wake of other exogenous shocks causing private capital withdrawal. Stability also requires sustainable products and capital requirements that are applied equally across all mortgage financing channels for the long cycle of mortgage risk.
. Transparency: Underwriting and documentation standards must be clear and consistent across the board so consumers, investors, and regulators can accurately assess and price risk and regulators can hold institutions accountable for maintaining an appropriate level of capital. Secondary market transparency and standardization lower costs and increase availability of credit.
. Access and Affordability: It is critical for any housing finance system to ensure a level playing field for all creditworthy borrowers, rather than to allow lenders to "cream" the market, leaving perfectly creditworthy lower wealth, lower income or minority segments underserved. Additionally, the system should enhance access and affordability for underserved market segments. With appropriate incentives and tools, attaining these goals can benefit the market as a whole.
. Consumer Protection: As the current crisis has demonstrated, consumer protection is inextricably linked with financial institution safety and soundness. Along with regulators such as the
Today, we see a broad consensus emerging on the general outlines of housing finance reform in a way that has a potential to embody these principles. While the details differ, S. 1217, the work of the Bipartisan Policy Center, and numerous other proposals support our view that homeownership is a desirable option when viable, and that those who do not buy a home ought to have access to affordable, quality rental housing. n13
Additionally, these proposals agree that a government role is critical to maintain access to long-term, sustainable mortgage products; that there is a critical need for a reformed multi-family finance system to meet the demand for affordable rental; and that the system must provide access to safe and affordable mortgages for all creditworthy borrowers, including those of low and moderate income.
Some policymakers still question the need for any government role in the housing market. This position is embodied in the PATH Act legislation proposed by Chairman Hensarling of the
Thus, now is the ideal time to consider in some detail the essential elements of a reformed housing finance system in the context of broader, long-term considerations and priorities.
Ten Essential Elements of a Strong Housing Finance System
1. First and foremost, a new housing finance system must place the nation's housing needs at the center of the system.
The structures and processes of the secondary market are not ends in and of themselves. Rather, they are a means to provide housing to our nation's families. Placing the goal of access to affordable, sustainable credit at the center of the new system's mission will provide the greatest benefit in the long run not only to families but also to lenders and investors while protecting taxpayers from future bailouts.
While most people think of mortgage lenders as the point of intersection with the public, the less transparent but very large secondary mortgage plays a critical role in ensuring access and affordability within the housing finance system. Lenders prefer to make the types of mortgage loans that the secondary market will buy. For this reason, one of the most effective ways to ensure a broad, accessible and affordable primary mortgage market is by creating a secondary market that promotes those principles.
Using a range of possible tools, the secondary market can encourage lenders to provide all Americans access to safe, affordable mortgages, including traditionally underserved populations such as Hispanics, African-Americans, rural residents, low- and moderate-income families, Asians, and Echo Boomers; collectively, these are the future of the mortgage market. It can also help to increase access and affordability by supporting standardization and lowered costs and by adopting responsible, targeted product innovations that can be made widely available throughout the mortgage market.
Any legislation overhauling the nation's housing finance system should include a purpose statement that makes clear the goal of the system is to provide liquidity, stability, transparency, and access to affordable credit for qualified borrowers across all geographies, housing types, populations, and mortgage balances within specified limits, including providing credit to traditionally hard-to-serve or underserved markets and supporting mortgages that further the purposes of the Community Reinvestment Act and other regulatory or statutory requirements for which primary market originating lenders are responsible.
Moreover, the entity that administers the government guarantee -- in S.1217, this entity is called the
In the remaining items in this list, we discuss additional ways to advance and support this core public purpose.
2. The system should enable a deep, liquid market that will attract capital and keep credit affordable through providing a government guaranty and preserving the TBA market and the long-term, fixed rate mortgage.
If we want to provide broad access to affordable, sustainable credit as well as provide attractive investment opportunities for a range of investors, any new housing finance system must incorporate three components of today's system: a guaranty for investors in mortgage-backed securities, a robust TBA market, and the widespread availability of long-term, fixed-rate mortgages. These three items are very interdependent, but we will look at each separately:
The government guaranty: The guaranty on government-backed securities provides a broad class of so-called "rate investors" the confidence to invest in the U.S. housing finance system at efficient, fixed rates.
Some have asserted that the significant development of the financial sector since the 1930s means that a purely private mortgage system could effectively serve the mortgage needs of Americans today. They point to the nascent recovery in the so-called jumbo mortgage markets, an area that lacks any government support because these mortgages are for the high end of the housing market, as evidence supporting the idea that the purely private markets can capably serve the mortgage markets. n14
However, the fact that the purely private markets may be able to meet the mortgage needs of a small, wealthy slice of homebuyers does not mean that they will be able to meet the mortgage needs of all Americans. This argument ignores the limited investor appetite for long-term debt investments--the type of investments that fund home mortgages--in the absence of a government backstop. While investor demand for long-term sovereign debt is enormous, totaling many trillions of dollars for U.S. Treasuries alone, the demand for privately issued long-term mortgage obligations that don't carry a government backstop is small in comparison. n15 What's more, the jumbo market is enabled by the existence of the conventional market, as lenders need to compete with a product that wealthier borrowers could access with a larger down payment or if they bought a less expensive house. The conventional market also provides transparent pricing information and benchmark prices and rates upon which the jumbo market relies for its own pricing and rate-setting.
We agree with the drafters of S. 1217 and the
The TBA Market: The TBA ("to-be-announced") market -- which really can be used to describe an overall market or a type of trade or delivery -- today provides for the forward sale of mortgage-backed securities (MBS) guaranteed by
The TBA market is important to consumers for several reasons. First and foremost, in combination with the government guarantee, the existence of a deep and liquid market where MBS are easily traded is another essential precondition of the long-term, fixed-rate mortgage. Second, forward commitments facilitate rate locks, thereby providing consumers with certainty going into their home purchase, protecting them from a possible increase in rates during the time required to finalize the purchase of the house and to close on the loan. Third, because the TBA market is so liquid, it attracts a great deal of both domestic and foreign investment, which results in mortgages that are more affordable to everyone.
The TBA market is also critically important to investors. It provides a safe investment for rate investors, who can enter and exit the market at will, and it provides a high degree of price transparency. These characteristics are critical for a variety of different types of investors, including foreign central banks, fixed-income investors, and regulated financial institutions who are subject to restrictions based in charter, statute or regulation. In addition, the TBA market enables the pricing and hedging of many non-TBA eligible mortgage products, including jumbo mortgages. n16
Unfortunately, the structured transaction solutions envisioned by S. 1217 and some other proposals would not be compatible with a deep and liquid TBA market. In a senior/subordinate deal, the subordinate piece would certainly not be eligible, and it is not clear that investors would consider senior tranches to be sufficiently homogeneous. What's more, even for a credit-linked-note transaction or other structured deal without a separate subordinate piece, any variations in the underlying documents from one deal to the next would lessen the level of homogeneity that's required for a market where new MBS are traded alongside more seasoned securities.
It is also worth noting that significant cutbacks in loan limits will result in a smaller overall market, which will reduce liquidity and raise prices. However, generally speaking, we believe that reducing loan limits is a better way to bring in private capital than over-charging for the guaranty fee.
The long-term, fixed rate mortgage: The explicit government guaranty together with the TBA market enable the widespread availability of the long-term, self-amortizing, fixed-rate mortgage, which maximizes affordability and economic security for the majority of American homeowners. While adjustable rate mortgages may be right for some borrowers under specific circumstances, they expose borrowers to interest rate risk, and shorter-duration products with balloon payments that are designed to be refinanced every two to seven years expose borrowers not only to ordinary interest-rate risk, but also to the risks that they may not be able to refinance when they need to due to other adverse changes in market conditions. While mortgage rates have been low for a long time, they are turning upward, and that can do a lot of damage quickly to borrowers who are not prepared.
Research conducted at the
Providing borrowers with that kind of stability also has benefits for the economy as a whole. Prior to the introduction of the major housing and finance reforms of the 1930s,
3. The system should protect taxpayers from having to bail out any part of the mortgage or financial system, which is best accomplished through a bond guarantor structure.
Our proposal, along with S. 1217 and the
Where the plans differ is how to structure putting private capital in a credit-risk-taking, first-loss position. Some, like ours, call for specialized mono-line institutions or bond guarantors, as they are called in S. 1217. Other plans envision issuers that lay off the credit risk through structured transactions. S. 1217 offers a plan through which issuers could toggle between bond guarantors and a purely private capital markets transaction.
In our view, the institutional solution of well capitalized, bond guarantors chartered or licensed by the
Second, bond guarantors are much more efficient at pooling and spreading risks, which is the core function of insurance. Structured transactions, to the extent that they cover a single or limited number of pools, cannot allocate risks and reserves across years, regions, lenders, and so on.
Third, as we have seen in recent private label securitizations, investors in structured transactions have proven unwilling to assume risk on anything but the most pristine mortgages. If investors are assuming the first-loss risk, their high level of scrutiny will result in higher prices for non-traditional but still creditworthy borrowers, as the investors will demand a premium for taking risk that is not well-understood or serving borrowers who are perceived as more risky.
Fourth, as we noted earlier, individual deals are much less likely to be able to support a robust TBA market.
Fifth, although the appeal of a structured transaction is that the money is already there to cover losses, it is much harder to ascertain how the investor institutions are accounting for these assets on their own books. As a result, these structures could export risk from within the four corners of the security out into the larger financial sector, which puts the taxpayer at risk once again.
Finally, bond guarantors can provide more protection to the taxpayer at less cost. For example, if losses occur in a senior/sub arrangement or in a credit-linked-note transaction, there is a stop-loss on that deal at the ten percent mark, at which point the government guaranty will attach. With bond guarantors, however, the guarantor can spread risk among pools, so if one pool loses 11 percent and another loses only 1 percent, there is no need to access the guaranty. Furthermore, the bond guarantor would have to exhaust not only its reserves but also its corporate resources before tapping the reinsurance fund. These institutions will have established business lines and a strong incentive to stay in business through the ups and downs of the business cycle. (To be clear, we do not intend to prohibit using structured transactions anywhere in the system. Bond guarantors can choose to lay off risk however they choose, including in capital markets.)
We do not believe the S. 1217 approach of offering both executions will work. First, as currently drafted, the bill tilts the playing field toward the pure capital markets approach, since that execution has little by way of regulatory requirements and can more easily meet the capital thresholds through leverage. Moreover, allowing investors to toggle back and forth between executions will likely fragment the market sufficiently to undermine TBA.
4. The system should operate effectively throughout all economic and business cycles.
The more central a role is played by private capital, the more instability is introduced. Private capital is inherently pro-cyclical, meaning that it tends to be plentiful and cheap during good times and scarce and expensive during downturns, thus inflating bubbles and deepening downturns, a lesson that we learned very painfully during the recent financial crisis. If Fannie, Freddie, and FHA had not been readily available to provide countercyclical capacity, the housing market decline would have been far more severe and the resulting economic damage would likely have been a full-blown depression rather than a recession. n21
While this is a challenging problem, we suggest that there are two keys to solving it. The first is to build in countercyclical capability in an intentional and effective way. The mechanism envisioned in S. 1217 to change the attachment point of the government guaranty in an economic downturn requires the written agreement of two agencies together (
The second key to countercyclical capacity is to recognize that what is done in good times is just as important as what is done in times of stress. Adequate reserving and building up of capital is critical and can best be achieved using institutional risk taking solutions (rather than structured transactions). Regulatory discipline around pricing and risk management also needs to be imposed on the private market, and should be the charge of a strong regulator.
5. The system should ensure that all creditworthy borrowers have access to the mainstream housing finance system regardless of demographic characteristics, geographic location, or housing type.
For a variety of reasons, the mortgage market often serves those borrowers perceived to be the "easiest," most lucrative, or least risky borrowers at the expense of borrowers who are equally able to sustain homeownership but require more customization and consideration due to factors such as self-employment, nontraditional credit histories, the purchase of smaller homes, or living in certain rural or urban neighborhoods.
We see this phenomenon quite vividly today. Lenders are now requiring higher credit scores, larger down-payments, lower debt-to-income ratios, and essentially refusing to lend in certain geographies, regardless of a potential homeowner's creditworthiness. Symptomatic of this trend, between 2007 and 2012 originations of prime home purchase mortgages fell 30 percent for borrowers with credit scores above 780 but fell 90 percent for borrowers with credit scores between 620 and 680. n22 As a result, the market is largely serving the most pristine borrowers, those seeking higher balance loans, and those in well-served locations. In other words, they are "creaming" the market.
Because the secondary market can play a crucial role in determining the behavior of the primary lending market, we believe any new system should build in a requirement that lenders provide a level playing field for all primary market loans meeting the standards for the guarantee, rather than serving only a limited segment of the business, such as higher-income portions of that market.
This obligation would have four parts:
. Bond guarantors as a whole would be expected to mirror the primary market (roughly) in terms of the amount and the geography of single-family low- and moderate-income loans (other than those with direct government insurance) that are securitized and are eligible for the guaranty.
. Bond guarantors (or issuers) for multifamily loans would be expected to demonstrate that at least 60 percent of the units supported by securitized multifamily loans during the preceding year were offered at rents affordable to families at 80 percent of the relevant area median income, measured at the time of the securitization.
. Bond guarantors (or issuers) would be required to provide loan-level data on securitizations to the government (which will be required to make these data public) that are more robust than those of the Public Use Database currently produced by the
. All entities would participate in a yearly planning, reporting, and evaluation process covering their plans for and performance against both the single-family and multifamily performance standards and government-identified areas of special concern, such as rural housing, small rental properties, and shortages created by special market conditions such as natural disasters. Substantial underperformance could lead to fines and possible loss of the ability to access the guaranty.
This mechanism can proactively support the flow of fair and affordable credit by identifying market gaps, elevating promising products, and halting predatory or discriminatory activity. As is the case in our current housing-finance structure, there must be a market regulator responsible for monitoring the use of the taxpayer guarantee, ensuring that the public benefit is not abused or unfairly rationed. Because it will have a comprehensive view of the national housing landscape, the secondary market regulator will be in the best position to ensure that the benefits of a taxpayer-funded guarantee are available to all qualified borrowers, regardless of the ultimate structure of the system.
6. The system should include provisions to help enable more borrowers to access the mainstream housing finance system.
For generations, affordable homeownership has provided a primary means for families to climb the economic ladder and achieve financial stability. Homeownership results in a host of positive externalities both for families and for their neighborhoods, ranging from better health and education outcomes to safer streets and more small-business development. n23
While mechanisms to level the playing field for creditworthy borrowers can help, they will not fill all the gaps left by a national history of discrimination and wealth disparities. These gaps are especially important to fill in the aftermath of the housing crisis, where many communities saw equity stripped by subprime lending or were hit very heavily by the recession and unemployment. These neighborhoods, who are most in need of capital to rebuild, will likely be the last to get it from a private market left to its own devices. The Community Reinvestment Act is too limited in scope to be expected to generate the level of support required solely through banks' balance sheet lending.
However, many prospective homeowners and owners of rental homes who are not easily served by private markets demanding competitive rates of return can be well served with limited amounts of credit enhancement. These borrowers inhabit a "grey zone" between private credit and fully insured credit through agencies like the FHA, VA and
To ensure that the new system has the capacity to serve these categories of borrowers, we propose establishment of a
. Provide support for research, development and pilot testing of innovations in products, underwriting and servicing geared to expanding the market for sustainable homeownership and for unsubsidized affordable rental.
. Provide limited credit support for products that expand sustainable homeownership and affordable rental but that cannot be piloted at sufficient scale to determine whether they can be sustained by the private market, or, alternatively, are best served by FHA, VA and/or
. Provide incentive grants to encourage development of self-sustaining support services, such as housing counseling, that have proven effective in expanding safe and affordable homeownership, but that so far have not developed a sustainable business model that combines lender support, client fees and limited government and philanthropic subsidy.
We propose that the
This fee would be split among the
By creating and using the
Other proposals call for all low- and moderate-income lending to be served through the FHA. This approach ignores the fact that much of this segment can be well and safely served by the core conforming conventional market, and that the primary market's conventional lending to such segments, through CRA and otherwise, depends on a reliable secondary market outlet. Instead, it would institutionalize a dual mortgage market, with less choice and higher costs for borrowers who would most benefit from access to the prime conventional market, and it would unnecessarily and inefficiently drive credit risk onto the government's balance sheet.
We argue that access and affordability objectives can be achieved whether the GSEs are replaced by numerous private credit-risk takers, a public utility, or a nationalized secondary market. That said, the more centralized the credit-risk-taking entity (s), and the more authority it has, the easier it is to align the delivery of the guaranty with broader housing policy objectives.
7. The system should provide financing to preserve the existing privately-owned affordable housing stock and support the construction of new affordable units. n26
Approximately one-third of Americans live in rental housing. n27 Rental homes provide a starting place for new households, mobility for people who move with their work, convenience to transit, a transition for older adults who no longer need a large home, and affordable shelter for many Americans of low and moderate income. Rental housing is in urban, suburban, and rural communities. As we restructure the mortgage finance system, we must ensure that it directs capital to rental housing, particularly housing that is affordable to low- and moderate-income households.
The cost of rental housing is an increasing burden, particularly for people with the least income. HUD recently reported that the number of low-income renter households with worst case needs increased to 8.48 million in 2011, up from a previous high of 7.10 million in 2009. n28 Looking specifically at working households, the
Rental housing needs access to capital to serve the many people who rely on it. Construction of new rental properties only occurs if there is permanent mortgage capital available to finance it once construction is complete. In addition, properties large and small need periodic renovations, typically every five to seven years. To preserve older affordable rental housing, developers often need financing to acquire as well as renovate the properties. The secondary mortgage market provides a critical source of capital to finance all of this construction, acquisition, renovation, and refinancing.
The primary means that the federal government uses to ensure that capital flows to rental housing are FHA and the GSEs, each of which has a division devoted to multifamily housing. n31 During the 2008 financial crisis, when private capital retreated nationwide, FHA and the GSEs were virtually the only sources of capital for financing rental housing. n32 Even as private capital has gradually returned to multifamily, it has mostly focused on A-class properties in the strongest urban and suburban markets, leaving government channels to finance older, less-expensive properties and those in secondary and tertiary markets. As private capital gradually broadens its risk exposure, the recent crisis is a reminder that only a government-supported channel provides the countercyclical capacity to ensure steady access to capital for rental housing.
But even under normal conditions, private sources of multifamily rental financing often cannot provide enough credit in rural areas and smaller cities or produce the long-term, fixed-rate mortgages that attract diverse investors and to produce affordable properties. n33 The GSEs have long played a role in making sure these gaps in the multifamily market are filled.
Performance of the GSE multifamily divisions, in particular, has been strong throughout the financial crisis. Default rates for
Ensuring adequate financing for affordable housing preservation and construction requires a carefully deployed and targeted government guarantee to encourage private capital to bear risk ahead of the government for affordable multifamily finance. It is essential that multifamily rental finance needs get explicit attention in housing finance reform so that the eventual new system preserves the strengths that have lasted through the financial crisis to finance affordable rental housing.
As we recommend in the single-family area, we believe the way forward should be for bond guarantors (most likely specializing in multi-family) to take predominant risk ahead of the government guaranty for permanent financing. These entities would be required, on an annual basis, to demonstrate that 60 percent of the units financed by securities it guarantees are affordable to a family making 80 percent of median income. Moreover, as in single family, the entities would pay the fee that will help support the
8. The system should support effective and fair mortgage servicing practices as well as appropriate systems to support clarity of property title.
One of the most "broken" parts of the housing finance system is mortgage servicing. In the aftermath of the housing and financial crisis, the perverse financial incentives embedded in the current system of servicer compensation as well as confusing pooling and servicing agreements resulted in servicers severely compounding the damage rather than ameliorating it.
The single largest driver of the foreclosure crisis was servicers that routinely foreclosed on homes when foreclosure was not only unnecessary, but neither in the best interest of the investor or the homeowner. This occurred in large part because the way servicers are compensated gives them an incentive to pursue foreclosures over modifications. Once a loan is in default, servicers must choose to foreclose or modify. A foreclosure guarantees the loss of future income, but a modification will also likely reduce future income, cost more in the present in staffing, and delay recovery of expenses. Moreover, the foreclosure process itself generates significant income for servicers. n36
for servicers, the true sweet spot lies in stretching out a delinquency without either a modification or a foreclosure. Income from increased default fees and payments to affiliated entities can outweigh the expense of financing advances for a long time. This nether-world status also boosts the monthly servicing fee and slows down servicers' largest non-cash expense, the amortization of mortgage servicing rights, since homeowners who are in default are unlikely to prepay via refinancing. n37 Finally, foreclosure or modification, not delinquency by itself, usually triggers loss recognition in the pool. Waiting to foreclose or modify postpones the day of reckoning for a servicer. But delay can cost a homeowner the opportunity to obtain a modification.
Servicers also have routinely overcharged homeowners and investors for routine activities such as insurance and default servicing fees. For example, overcharging for lender-placed insurance (also called force-placed insurance), as well as placing that insurance when not necessary, often pushed borrowers who were otherwise making their monthly payments into default and foreclosure. There is ample evidence that servicers have received kickbacks from insurers, made force-placed insurance a profit center through "commissions" to servicer affiliates, and entered into captive reinsurance schemes with servicer affiliates. n38
Going forward, congressional legislation concerning the securitization system should build in standardization, accountability, and transparency concerning servicer compensation and contractual obligations. For example, servicers should be prohibited from having any financial interest in force-placing insurance other than the coverage provided by the insurance, and
Additionally, once an initial request for loss mitigation has been made by the homeowner, the servicing agreements should require servicers to refrain from initiating a foreclosure or, where a foreclosure has been initiated, from taking any additional steps to pursue that foreclosure, until completion of the review of any loss mitigation application, including written notice to the homeowner documenting any denial and the completion of any appeal process. The practice of pursuing loss mitigation and foreclosure simultaneously (also known as "dual tracking") has been one of biggest drivers of unnecessary foreclosures.
One structural suggestion for improving servicing practices is to provide bond guarantors with the ability to buy defaulted loans out of pools and hold them in portfolio to have more flexibility in modifying those loans. Ginnie Mae does not have a portfolio now, which requires servicers themselves to purchase loans having payment difficulties out of the pass-through securities and them attempt to re-securitize them. As a result, servicers can only modify the loans to current interest rates and 30-year terms (in other words, very shallow modifications) to fit into new Ginnie Mae pools. Fannie and Freddie, on the other hand, have been able to offer modifications that are both more affordable and sustainable because they can buy loans out of pools and hold them in portfolio, where it is easier to reduce interest rates and/or extend loan terms.
Another set of abusive servicer practices related to their failure to use the traditional systems of tracking property title, resulting in massive confusion and lack of ability to prove ownership or the right to foreclose. Various legislative proposals suggest creating one privately operated national system rather than multiple, publicly operated state systems. There are several problems, however, with such proposals.
First, clarity of real property title is a public good and should be provided by the government, rather than by private parties, as is already done by the federal government for patents, trademarks, copyrights, broadcast spectrum, airplanes, and nautical vessels, among other types of property.
Second, the existing proposals would separate land and mortgage records, which are currently maintained in unified local databases. While the aim in doing so is to improve on
Third, none of the proposals has considered the interaction between voluntary mortgage liens recorded in a national database and various types of involuntary liens (such as tax liens, construction liens, and judgment liens) recorded in local land records. Similarly, the national system would not be mandatory for all consensual mortgage liens, but only for those using a new federal securitization platform or insured by a new government-sponsored entity. This means that the national database would be incomplete even as to voluntary mortgages.
A fourth problem is that in about half of all states, a mortgage is considered actual ownership of the land with the borrower having a repurchase option, rather than as a lien, so mortgage recordation and transfer law in these states is subject to various legal requirements relating to the transfer of real property. The interaction of a national system with these local real property laws has not been considered and could potentially create more confusion than a national database resolves.
Finally, it is not clear whether there is constitutional authority for the federal government to interfere with real estate recordation, which is traditionally a local right.
A simpler solution to lack of consistency of mortgage title procedures among the states would be to recreate a federally-owned and operated
9. The system should provide access and a level playing field for both large and small lenders.
A diverse lending market is crucial for ensuring broad access to credit for all borrowers and communities, including rural communities, communities of color, and communities that have been hard-hit by the recession. A secondary market that enables lenders of all sizes in all communities to offer mortgages on equal and well understood terms is one of the major beneficial functions of
In revamping the current housing finance system, we risk building a system that favors large, well-capitalized banks (and their affiliates) and leaves small originators at the mercy of their larger competitors as to whether and under what terms they can access the government-guaranteed market. Some proposals, including S. 1217 and the
In our view, originating lenders should not also be able to own the bond guarantors or other entities that perform the predominant credit risk-taking function, except as part of a broad-based mutually owned entity designed to ensure access at equitable prices to smaller lenders such as community banks, credit unions and community development finance institutions. It might also be appropriate for a government entity, such as a housing finance agency or agencies, to become a guarantor. While S. 1217's proposal of a cooperatively-owned entity is a useful idea, in the context of the rest of the bill, it is not clear that it would provide comparable access on equal terms.
10. The system should include strong regulatory tools to supervise, monitor and ensure the appropriate operation of entities that provide access to the government guarantee.
Regulatory supervision for system safety and soundness will be a crucial part of a well-functioning housing finance system. Lax regulation and captured regulators in many ways led to the crisis we recently experienced, both in the housing finance system and the financial system as a whole. As former FHFA director
For any new system, it is critical that the government have access to the full range of regulatory tools to supervise bond guarantors, issuers, and other counterparties. There needs to be a regulator with authority to examine and even take injunctive type action, similar to the
We believe that effective oversight may be difficult to achieve in a system where issuers engage in diverse structured transactions. Initial "approval" of an issuer does not equal oversight, and in fact, may be counterproductive in that it may give a green light to subsequent actions that are unmonitored by the regulator. It will be much more effective to provide the
Conclusion
From the 1930s through the end of the last century,
Thank you again for inviting me to testify today. I look forward to continuing discussion on these important matters as the
ENDNOTES
n1
n2
n3 Ibid.
n4
n5
n6
n7
n8
n9 HUD, "US Housing Market Conditions Historical Data"
n10
n11 Trulia, "
n12 Harvard Joint Center on Housing Studies, "State of the Nation's Housing 2013: Appendix Tables" (2013), available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/son2013_chap7_appendix_tables.pdf
n13
n14
n15
n16
n17
n18
n19
n20
n21
n22 Gov.
n23
n24 For comparison, the servicing strip in the conventional market is 25 bps.
n25
This section owes a debt to
n27
n28
n29
n30 Ibid.
n31 Multifamily is distinct from rental housing, since multifamily buildings can be owned (e.g., condominiums) and single-family homes can be rented. Financing of new rental housing tends to focus on multifamily channels, which leaves a capital gap for small building and single-family rental.
n32
n33
n34 Handelman, Smith, and Trehubenko, "
n35
n36 A fuller treatment of servicer incentives may be found in
n37 See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K) 30 (
n38 Letter from
n39
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