David H. Stevens, CMB, President and CEO of the Mortgage Bankers Association (MBA), testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs at a hearing entitled, “Principles of Housing Finance Reform.” His full written testimony is available here. Below is Stevens’ oral testimony, as prepared for delivery:
Chairman Crapo, Ranking Member Brown, and members of the Committee, thank you for the opportunity to testify today.
It has been nearly nine years since the GSEs entered conservatorship, and yet their long-term status remains unresolved. The financial crisis exposed the structural conflicts and misaligned incentives in the GSE business model, as well as weaknesses in the regulatory framework that was in place at the time.
Extended conservatorship is economically and politically unsustainable and an unacceptable long-term outcome. Without comprehensive reform, borrowers, taxpayers, and lenders will all face increased risk and uncertainty about the future.
Because MBA represents over 2,300 member firms of all sizes, both single-family and commercial/multifamily, including nearly 650 small, community-based mortgage lenders, we firmly believe that housing finance reform must foster a competitive primary market that is served by a diverse cross section of lending institutions.
A year ago, MBA convened a Task Force for a Future Secondary Mortgage Market. The Task Force reflected the composition of MBA’s membership, residential and multifamily, from integrated financial institutions to the smallest community lenders. Our Task Force truly represented the full depth and breadth of the entire real estate finance industry rather than the narrow interest of any one specific market segment.
Our proposal seeks to ensure equitable access for smaller lenders to the secondary market: prohibiting special pricing and underwriting based on loan volume as occurred prior to conservatorship, preserving cash window and small pool execution options, and preventing vertical integration by the largest market participants.
I have submitted our proposal as part of my written testimony.
Our proposal recognizes the need for any comprehensive GSE reform plan to balance three major priorities: taxpayer protection, investor returns, and consumer cost and access to credit.
To achieve these policy objectives, MBA’s plan recommends recasting the GSEs’ current charters and allowing a multiple-Guarantor model that features at least two entities and preferably more.
Guarantors would be monoline, regulated utilities owned by private shareholders, operating in the single-family and multifamily markets. The core justification for utility-style regulation rests with the premise that privately-owned utilities attract patient capital and derive much of their existence and powers from the state.
The Guarantors would be subject to rigorous capital requirements that would provide financial stability without unduly raising the cost of credit for borrowers. These requirements could be satisfied through a combination of their own captial and proven means of credit risk transfer.
The implied government guarantee of Fannie Mae and Freddie Mac would be replaced with an explicit guarantee at the mortage-backed security level only. This guarantee would be supported by a federal insurance fund with appropriately-priced premiums paid by the Guarantors, much like banks pay for FDIC insurance.
Our plan explicitly calls for deeper first-loss risk sharing that is transparent, scalable to all lenders, and capable of limiting taxpayer exposure to nothing more than catastrophic risk.
The Task Force also developed recommendations in two areas that have vexed past reform efforts: the appropriate transition to a new system and the role of the secondary market in advancing a national affordable-housing strategy.
Our proposal specifically notes the importance of leveraging the assets, infrastructure, and regulatory framework of the current system wherever possible. We also believe that any workable transition must utilize a clear road map and be multi-year in nature.
We sought to develop an affordable-housing framework that appropriately focuses the scope of the federally-supported secondary market, covering both renters and homeowners of varying income levels.
Our plan suggests other improvements to better serve the full continuum of households, including updating credit-scoring models, better capturing nontraditional income, and providing enhanced liquidity for small-balance loans.
Our framework has outcomes that are transparent, well-defined, measurable and enforceable.
Only Congress can bring about the changes necessary to achieve the core principles outlined in our plan, which are necessary for a vibrant housing finance system.
FHFA has put in place a number of policies and procedures to improve access to the secondary mortgage market and reduce the risks to taxpayers. Now is the time for Congress to act to “lock in” these improvements.
After all, only Congress can alter the existing GSE charters, establish an explicit federal government guarantee, and create a regulatory mandate to maintain a level playing field.
And most importantly, only Congress can provide the legitimacy and public confidence necessary for long-term stability in both the primary and secondary mortgage markets.
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.
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.
The American people rely on a housing finance system that enables them to rent a quality, affordable apartment, buy their first home, or build a nest egg to pass on to their children. We owe it to them to proceed with the hard work of reform without delay.
Thank you again for the opportunity to testify. And I want to reiterate MBA’s long-standing commitment to working with the Committee on all elements of GSE reform. I look forward to your questions.