House Financial Services Subcommittee Issues Testimony From National Association of Realtors
"Chairman Duffy, Ranking Member Cleaver and members of the Subcommittee; my name is
"I am here to testify on behalf of the nearly 1.3 million members of NAR, who thank you for the opportunity to present our views on "Sustainable Housing Finance: Private Sector Perspectives on Housing Finance Reform, Part II."
REALTORS(R) Perspective
"While the housing industry has generally improved since the financial crisis, REALTORS(R) recognize that the current conservatorship of
"The main risks to the housing industry include, but are not limited to, inadequate housing inventory, low levels of single-family construction, rising interest rates, declining affordability, tight mortgage credit conditions, stagnate job and wage growth, increased student loan debt levels, and low levels of home purchases by the Millennial generation.
"These risks are accompanied by the substantial challenges facing the secondary mortgage market. These include declining capital reserves at the Enterprises, volatile profits at the Enterprises, the need for a steady flow of capital, standardization of mortgage-backed securities (MBS), liquidity over the economic cycle, limited private label securities (PLS) participation, narrow participation in credit risk transfers (CRTs) or equity capital, and the impact of the
"In order to minimize the effects of these threats, NAR urges
Protect & Preserve FHA
"In addition to the important role that the Enterprises play, NAR believes that the
"1 Moody's has estimated that without FHA, housing prices would have dropped an additional 25 percent, and American families would have lost more than
"Proposals that would limit eligible borrowers, increase premiums, or reduce the loan limits will disenfranchise millions of qualified families from purchasing a home, with equally significant ramifications for local communities. Converting to a partial guarantee could make credit less available and more costly, as found by a recent CBO study. That same study illustrated that lowering the loan limits could hurt the taxpayers, because it would "exclude many low risk, high income borrowers" from the
"NAR believes that small reforms can protect taxpayers and retain access to affordable, safe credit for American families. Separating the FHA Home Equity Conversion Mortgage (HECM) program from the MMIF would give
"The only way that FHA can be available to play its counter-cyclical role, is for it to be available to all qualified buyers in all markets at all times. Any policy changes that diminish that ability could have dire consequences for our nation when the next economic crisis hits.
NAR's Comprehensive Housing Finance Reform Recommendation
"There were two primary issues that REALTORS(R) believe must be addressed if the
"In order to ensure a steady flow of capital into the mortgage market in both good times and bad, NAR believes the Enterprises should be converted into government-chartered, non-shareholder owned authorities that are subject to tighter regulations on products, profitability, and minimal retained portfolio practices in a way that ensures the protection of taxpayer monies.
"The new government-chartered non-shareholder owned authorities must ensure that there is liquidity in the marketplace for those standard mortgage products (e.g. long-term fixed-rate mortgages along with traditional adjustable rate mortgages with reasonable annual and lifetime caps) that are the foundation of our housing finance market. Additionally, the establishment of no less than two authorities will create the competition needed to continue to foster innovative mortgage products that can expand consumer choice for safe and reliable mortgages. With the new authorities offering standard and innovative products, private capital will be free to compete and pursue opportunities to offer products in addition to those offered by the new authorities. With the full recovery of the market, the conversion of the Enterprises into these new authorities, and a return of private capital, the nation will see the appropriate balance of government, government-hybrid, and private activity in the secondary mortgage market.
Key Elements of NAR's Recommendation
"REALTORS(R) believe that any entity with private profits that is implicitly backed by public losses, as the Enterprises were structured before conservatorship, is flawed and problematic. NAR proposes a structure that is not driven by shareholders' desire to maximize profits. Instead, the authorities' mission is clarified and their federal backing is made explicit.
"NAR believes a "government-chartered" structure with clearly defined roles and enhanced safeguards is the best model for the new authorities because this structure establishes a separate legal identity from the federal government, while serving a public purpose (e.g. the
"Moreover, a government-chartered authority should remove any ambiguity regarding the government's backing of these secondary market authorities. REALTORS(R) believe that explicit government backing of new authorities is required in order to instill confidence in potential investors of the authorities' mortgage-backed securities (MBS). Without the confidence of these investors, the ability of the authorities to raise capital for the purpose of providing liquidity to the secondary mortgage market will be limited.
"However, REALTORS(R) also believe that the authorities should not be operated as if the government/taxpayers are in the first loss position. The authorities should be self-sufficient (need no appropriations) and price risk effectively to cover potential losses. Most importantly, the new authorities must utilize any profits to establish capital reserves to alleviate losses that occur during market fluctuations and economic downturns.
"Lastly, REALTORS(R) believe that the conversion of the existing government-sponsored enterprises (
"Why not Full Privatization or Nationalization?
Privatization
"NAR considered a number of different models for the future structure of the Enterprises. Our members first considered fully private and fully federal systems. REALTORS(R) believe that neither would effectively solve the two issues deemed necessary to address the challenge of restructuring the secondary mortgage market.
"REALTORS(R) believe that full privatization, even a private utility, is not the most effective option for the secondary market because a private firm's business strategy will inevitably focus on optimizing its revenue/profit generation or dividend distribution. This model would foster mortgage products that are more in line with the business's goals (e.g. higher profits and inconsistent risk-taking) than in the best interest of the nation's housing policy, the economy, or consumers. The situation would likely lead to a decline in access to long-term, fixed-rate mortgage products like the 30-year fixed-rate mortgage, an increase in the costs of these products to consumers, or both. Or worse, the market could experience a surge in risk taking by private players akin to 2001 through 2006.
"Additionally, there is no evidence that a long-term fixed-rate residential mortgage loan would ever arise spontaneously without a strong federal backstop. Some other developed countries have encouraged the use of fully amortized long-term fixed-rate loans. However, in all instances save for
"Second, the size of the
"Finally, REALTORS(R) fear that in times of economic upheaval, a fully private secondary mortgage market will severely contract. This contraction occurred during the financial crisis in the markets for private label securities (PLS), commercial mortgages, and manufactured housing mortgages. When the economy turns down, private capital rightfully flees the marketplace. Should that happen in the residential mortgage market, the results for the entire economy would be catastrophic.
Nationalization
"In contrast to privatization, full nationalization places the government/taxpayer in the first loss position should the housing market turn down and these institutions run into financial trouble. A priority of NAR is to reduce the taxpayer exposure to losses of these authorities. Converting the Enterprises to federal agencies, or merging them with the FHA, conflicts with this goal of REALTORS(R).
"Moreover, nationalization would yield a number of undesirable consequences. First, establishing one public secondary mortgage market entity may remove competition and incentives for innovation in the secondary mortgage market. Though REALTORS(R) favor more vigorous regulation of the products that the new authorities will purchase, they also recognize that innovation is required in order to foster more efficient and less costly products for consumers.
"In addition, a single entity that dominates the secondary mortgage market could lose focus on specific housing missions. For example, an entity that combines the FHA with the Enterprises could lose focus on either low- and moderate-income housing mission or ensuring that the middle market has access to affordable mortgage capital.
Protecting Excess Revenue
"REALTORS(R) believe that it is prudent to have the new authorities invest excess revenue earned in strong markets into a capital reserve fund so that they can pursue countercyclical activities in weaker markets, as well as store capital to prevent the need for taxpayer funds during economic downturns. Again, a primary goal of NAR is to ensure that the government and taxpayers are not immediately on the hook even if a serious downturn occurs.
Utilization of Retained Portfolio
"NAR believes that the authorities should maintain a portfolio for the purpose of funding their daily operations to use in a countercyclical fashion when the market turns down and private capital inevitably leaves the market place. It could also be used to test innovative products and house mortgages on products that are not easily securitized (e.g. multi-family housing loans and rural mortgages). The use of the portfolio will ensure that there is a continual flow of capital into the secondary mortgage market during downturns thus preventing a crisis within the housing market, as well as provide much needed capital to those portions of the housing market that don't traditionally have access to large amounts of private capital.
"REALTORS(R) do not recommend a specific size for the portfolio. They do believe that the portfolio should be large enough to support the authorities' business needs, the products that lack private capital, and when necessary ensure a stable supply of capital consistent with market conditions. REALTORS(R) insist that the portfolio size should not be driven by profit motives.
Increased Sustainable Homeownership & Assumability
"As first-time homebuyers continue to sit on the sideline and the housing market experiences inconsistent growth, NAR believes that the authorities should focus their mission on encouraging increased sustainable homeownership by providing safe and affordable mortgage financing and refinancing, especially if lenders, capital sources and other mortgage product providers benefit from an explicit government guarantee.
"Moreover, NAR believes that any new secondary mortgage market must allow for mortgages that are syndicated through explicitly government-guaranteed MBS to be assumable. REALTORS(R) believe that when interest rates rise, especially in high cost areas, the ability to assume a lower-rate mortgage on a property may become the most affordable source of financing for a qualified buyer.
Addressing the Enterprises' Declining Capital Reserves
"Under the terms of their agreements with the
"While there is less concern that a draw on the Enterprises' line of credit at the
"To address this concern, a prudent intermediate step would be to establish a
"The MMLF would protect taxpayers by reducing the need for the Enterprises to draw additional funding from the
Conclusion
"The stakes have never been higher for the housing market and the broader economy. Yet, there are sizeable challenges and risks associated with the ongoing conservatorships of the Enterprises. Comprehensive housing finance reform enacted by
"REALTORS(R) support a secondary mortgage market model that includes an explicit government guarantee. That guarantee protects the taxpayer while ensuring that all creditworthy consumers have reasonable access to affordable mortgage capital so that they too can attain the American Dream - homeownership. REALTORS(R) recognize that this is an extensive and important conversation regarding how we mend, and improve, a housing finance system that has served us well for many years.
"Furthermore, if
"NAR's recommendations will help
* * *
Footnotes:
1 Zandi, Mark, Obama Policies Ended Housing Free Fall, The
2 Testimony of
Commission,
3
4 Ibid.
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