David H. Stevens, CMB, President and CEO of the Mortgage Bankers Association delivered the following remarks at the opening general session of MBA’s National Secondary Market Conference and Expo in New York City. Here’s what he prepared:
This conference marks the half-way point through our year. The MBA’s Secondary Markets Conference is a unique conference where top leadership in capital markets and those heading their company’s key business channels come together to learn, negotiate, and discover new opportunities. And while many of us are competitors, we also work together as friends and peers. And we meet together this year while seeing continued growth in the U.S. economy, an uncertain political future, and a confusing and fragile geopolitical environment that, like it or not, will affect each and every one of our businesses.
When we look at the business environment today, we see both opportunities and challenges. And now, more than ever, we need great leadership. Leadership in our industry, leadership for our nation, and world leadership that understands the fragility and interconnectedness that binds us together.
Leadership is about more than just seizing the opportunities. True leaders also take on the challenges. Oftentimes it’s about doing what’s right versus what’s easy. True leadership is standing with a unified message that is clear, rational and strategic, and then executing on it. Leadership involves taking risks – the willingness to step forward with progressive ideas and leave behind some of what you know.
Leadership isn’t easy. We must know when to fight, but also when to stay the course. It’s been nearly 10 years since the financial crisis began. Since the crisis we have been confronted with thousands of pages of new laws and regulations that impact every part of our business. Add on to this new (and often unclear) interpretations of old rules and unique uses of existing laws like the civil war -era False Claims Act.
And while the simple fact is that today’s mortgage lending environment is the most conservative, safest we have ever seen, most lenders still feel like we are under attack. Add in a political atmosphere complete with broad brush accusations in political rhetoric that only perpetuate anger towards an industry that’s sole purpose is to provide real estate finance opportunities to qualified borrowers, and it can be tough not to want to fight back.
I’m here to tell you that we cannot let our frustration cloud our judgement, not when we’ve come so far and have led the discussion on so many critical policy issues.
Our leadership on these important issues has made a difference. For the past five years, we’ve been fighting the good fight to responsibly and sustainably provide access to credit and to help offer those opportunities for qualified borrowers.
MBA has been the outsized voice, advancing a litany of important policy changes that are making a difference. Most importantly, this has been a team effort. Working with all our members, we’ve been successful because we have led with one voice on behalf of an entire industry that knows firsthand the challenges borrowers face today. This is much broader than the secondary market – I’m talking about the entire real estate finance system.
Imagine the impact on borrowers had we not led the efforts with Fannie Mae, Freddie Mac, and the FHFA for relief and clarity on rep and warrants and compensatory fees. We persistently negotiated the reforms to rep and warrants to clarify lenders’ obligations and reduce the need for undue overlays. The revisions to compensatory fees are also a positive step forward with properly structured incentives to deter poor servicer performance. The new timelines will reduce the severity of assessments in cases where the existing timelines do not accurately reflect the actual time it takes to foreclose. Finally, raising the de minimis exception should provide substantial compensatory fee relief to small and mid-size mortgage servicers.
Seven times now, we’ve beaten back attempts in Congress to divert guarantee fees, encouraging and reinforcing the belief that if any additional fees be placed on mortgages, then those should be used exclusively for real estate finance purposes.
For quite some time Fannie Mae and Freddie Mac (the GSES), while regulated and government sponsored, could set rules without coordinating with other regulators or obtaining public review and comment. Thanks to MBA’s relationship with FHFA and the GSEs, they now often seek public comment prior to setting new major polices, to the benefit of lenders and investors and most importantly, consumers.
Uncertainty around the future of the GSEs continues to paralyze investment in new or dormant securitization channels, but we have still made progress. Conservatorship was never intended to be permanent. That’s why, three years ago at this very conference, MBA called on FHFA to take non-legislative transition steps designed to modernize and advance the business operations of the GSEs.
Let’s be clear, our calls for GSE reform are to protect the critical role these two companies perform. Conservatorship with no capital and facing a political regime change poses a real threat to our mortgage system. We called for the creation of a single security for the two GSEs. We called for up-front risk share in order to level the playing field of competition and provide access to the market for lenders of all sizes. And we called for the common securitization platform to ensure data standardization, fungibility, and objectiveness.
Our call was answered by Director Watt and today the single security is in sight and the CSP is being built. This will help the housing finance market and we need to push aggressively to get it fully completed. We’re also moving forward on risk sharing that can bring meaningful private capital into the market to assume up-front credit risk.
The success we have had has not been limited just to the GSEs.
It was MBA and its members who fought for a safe harbor in the Ability to Repay/Qualified Mortgage rule. People told us we were crazy, that it would never happen. But we went in, armed with data and convincing arguments about how the safe harbor would benefit consumers and emerged with a rule that is working today to protect borrowers while still allowing lenders to extend reasonable amounts of credit.
Dodd-Frank required six federal regulators to finalize the Risk Retention/QRM rule which has significant implications for mortgage backed securities. Some groups called for a 10 percent downpayment for any mortgage to be considered a QRM, others called for even 30 percent. MBA led a coalition of stakeholders who argued that a downpayment requirement was unnecessary and that QRM should align with the QM. Again, many said it couldn’t be done, but we persevered using facts, backed up by data, and today QRM aligns with QM, and there is no downpayment requirement.
Every single one of these achievements has been accomplished because of your input and your leadership and our unity. Through industry participation, we are moving forward to refine the rules and establish a pathway toward a more vibrant mortgage market.
But we’ve also gone beyond policy, politics and rulemaking. At MBA we’re working with partner groups to achieve benefits for consumers, the industry, the mortgage market and the economy. We established MBA’s Opens Doors Foundation so we could support families in need and give back to the communities we work to build. We’re preparing for future changes in household demographics and through MBA Education we are helping develop a younger and more diverse workforce that more accurately reflects the customers you serve.
Operationally, at MBA we’ve created new outlets for our members’ voices and ideas such as the Independent Mortgage Bankers Executive Council, the Community Bank and Credit Union Network and the State Relations Initiative, all designed to make sure that MBA is getting the best input from its members.
MBA has grown louder, been more successful and more powerful because we’ve listened to our members. MBA simply provided you the platform. That’s how we have achieved so much, and the only way we can continue to be – united as one voice.
But our work isn’t finished yet. Leading amidst a transforming mortgage market is a marathon, not a sprint. We still have much left to do and we still need to stay together on these efforts. Many of our calls for key policy actions are being met, but I’m concerned some are moving at too slow a pace. Now that the major rules required under Dodd Frank are out and the implementation phase is over, the CFPB has moved on to other consumer issues. It’s our job to keep leading and pushing to refine the rules so qualified borrowers can have the opportunities they deserve.
First, we must modify some of the rules so that they work on their own. For example, QM has done a lot of good, but still falls short of being the long term solution. Under the current rule, the GSEs can purchase good, sustainable loans that meet their underwriting standards but failed to meet the QM standard of 43% DTI. This is because the QM “patch” provides a safe harbor exemption for these loans. If we had to underwrite loans solely based on the written QM rule without the patch, and the permanent exemption for the GNMA programs, credit would be much tighter.
Here’s the problem – the patch is only in effect as long as the GSEs remain in conservatorship or for seven years, whichever comes first. When the patch expires, or if GSE underwriting changes substantially, a whole segment of qualified potential borrowers will be frozen out of the market.
The QM rule needs to stand on its own two feet. It should not be a rule that essentially punts all credit decisions to two companies that are not even regulated by the same agency. More importantly, the rule should demand the same credit approval process for a borrower, regardless as to whether the loan is being sold to a GSE or a private investor, as long as all the other terms are the same.
In all fairness, the industry did ask for this temporary stipulation in order to give us time to feel the impacts of QM on the market. But now there are too many “what ifs” that could impact the real estate finance system. We need to lead now and demand modifications to the QM rule before we find ourselves reacting to outside events that might eliminate the patch altogether.
What if there is a new regime at the CFPB once the current director’s term ends that brings a different view about the rule and the use of the patch?
What happens when the Director of the FHFA turns over and a new director comes with different ideas of the role, scope, and size of the GSEs in the market?
What if conservatorship ends and triggers the end of the patch?
I could keep going, but you get the point: the patch is temporary, and the clock is ticking. Let’s proactively re-write the rule now in a thoughtful way rather than in a panic response to events out of our control. As we re-write the rule, we should take into account the lessons learned about access to credit. We must be mindful of the dynamics affecting approval for a new generation that is more diverse and less traditional than we have ever seen in this country.
Next, we must continue working with FHFA on the secondary market transition steps. Here’s why – the conversation on the future of the GSEs is still very much alive and now other voices are being added to ours. Consumer groups, economists, and members from Capitol Hill all recognize the need to solve the conservatorship question. The transition steps being taken now will prepare the market for any future state and help ensure a competitive marketplace for institutions of all sizes. So here’s where we’re at:
Progress is being made on both the CSP and single security.
The CSP is in development, with Freddie Mac scheduled to begin using it for its current single-class securities, or CSS, this year. They have a CEO and an employee base, and are making positive progress toward the release dates set by FHFA. However, we must continue to push for a faster implementation to ensure that these critical advances cannot be reversed. Additionally, the platform should be open to non-agency MBS so that long-term efforts for both private capital and GSE reform can take advantage of the benefits of its efficiency, data, and consistency. And third, the CSP, and CSS itself, must be truly independent. Moving the full function of securitization away from the respective companies to the CSP will bring integrity, scale, and standardization to the securitization market.
Similarly, progress on the single security needs to accelerate. Aligning the TBA markets for both GSEs in order to promote a single fungible instrument should result in a more liquid market for all participants. Investors will retain the option to stipulate the issuer they want, which should keep discipline in the process with respect to key policies that impact prepayment speeds and other performance variables. We have recently made significant progress in getting investor buy-in to the benefits of a common security and key details continue to be negotiated. However, according to the FHFA, the single security won’t be implemented for both GSEs until 2018, most likely after the current Director finishes his term. Now is not the time to slow down and we urge FHFA to maintain focus on a more aggressive timeline.
The institutional commitment of FHFA to complete this work could fade as key personnel move on. We need this completed under the current regime at FHFA.
And risk share is now a growing part of the GSE model. While today’s transactions are certainly helpful to dispersing risk from the GSEs, and ultimately the taxpayers, they risk unleveling the playing field and do not clearly provide a direct benefit to borrowers. Other forms of credit enhancement, including deep-cover MI and recourse need to be implemented with full transparency as to structure and execution. The upfront model of risk sharing is a common theme in almost all GSE reform proposals because of its inherent advantages in transparency and borrower benefits. While some have been able to take advantage of up-front risk sharing in recent quarters, we need to make it an accessible option available to all lenders who serve borrowers in the market. Expanding the up-front risk-sharing program is a priority.
As we continue working with FHFA on transition steps, MBA’s new Task Force for a Future Secondary Market will be developing a proposal that will address end-state models that can fulfill an affordable housing/duty to serve mission while reducing taxpayer risk. This is a member-driven task force led by MBA’s Chairman-Elect Rodrigo Lopez. The task force consists of MBA member companies representing a broad cross-section of the residential and multifamily real estate finance industries, including entities of varying sizes and business models. The task force anticipates a proposal by the end of the year and this will serve as MBA’s secondary market position and strategy going forward.
Finally, we will continue to fight for a federal housing policy coordinator. The industry needs a key housing policy expert at the most senior level in the next Administration to coordinate across federal regulators to ensure they meet, talk to each other, and consider the implications of the confusion and conflict created by uncoordinated overlaps in the rules. We need to work with the leading candidates of both parties to make housing a priority in the next Administration. America is facing a housing affordability crisis that is only getting worse. The next president will need to tackle this issue immediately upon taking office.
So I have laid out a series of issues. I started with what we accomplished, to demonstrate what we can do. I finished with a few that represent work left to be done.
To get that work done, to get those projects over the finish line, I need your help.
Collectively we must work to change the dialogue about mortgage finance in America. We all share the frustration with today’s political rhetoric that’s painting a safe lending environment in a bad light. So let’s work together to change this.
Mortgage lending is safer today than it has ever been, but is not operating at full capacity because the regulatory/enforcement environment is forcing lenders to lend defensively. Home prices are up, unemployment is down and we have reforms in place that make the market safer, as a whole, and more sustainable for consumers, the economy and our businesses. With low rates, safe and well-underwritten loan products and an improving job market and economy, borrowers who can qualify and want to buy a home should feel great making that decision, but they don’t.
When I think about the real estate market today, the one word I keep coming back to is opportunity. And this opportunity is built on a platform of protections, confidence, and skill sets that exist to make sure we build a positive future for America’s next homeowners under the umbrella of the safest system in the world. Because of this opportunity, now is the time for leadership and perseverance.
I understand the desires of many to just deal with the issues we have now, but if we don’t look ahead to see what is needed to meet the demands of those coming into the market now and over the next decade, we will end up sliding backward. We have to keep moving forward.
Leadership is what we do together. We energize together with the biggest loudest voice in the market. We demand clarity and fairness for all participants, and we advocate for thoughtful and common sense solutions that will help support a sustainable market for the long term.
About The Author
Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at firstname.lastname@example.org.