While
it is clear that the recovery of the housing markets is well underway, it is
all too easy to overlook that today's housing finance system has been largely
nationalized. Three members of BlackRock
asset management's Government Relations division write in a Viewpoint
article that despite the discussions among many policymakers
articulating the desire to reduce government support and attract more private
capital, "there continues
to be policy and regulatory initiatives that discourage the return of private
capital to the sector."
"HOUSING FINANCE UPDATE: Â The Conundrum Continues..." by Barbara Novick
Vice Chairman
and Head; Kevin Chavers, Managing Director; and Alexis Rosenblum, Associate, describes the foundations of the recent recovery as fragile and say a
number of impediments remain:
Housing Activity:Â The rebound has been spurred by investors
rather than homeowners and these cash buyers have substantially reduced
inventories. If inventories rebuild it
could put pressure on prices.
Structural impediments:Â These include weak income growth, high
unemployment, and the burgeoning student loan debt which has encouraged some to
abandon or postpone homeownership
Credit Constraints:Â Due to tightened underwriting and the
regulatory concerns of lenders.
The recovery has featured an extraordinary level of
government support; with government behind almost 100 percent of newly
originated mortgage loans, and the government sponsored enterprises (GSEs)
Fannie Mae and Freddie Mac along with Ginnie Mae account for almost all new mortgage-backed
security (MBS) issues and the Federal Reserve's monetary policy and mortgage
buying program have been vital to the recovery.Â
Even
though the consensus is the system must attract more private capital, in the
"absence of legislative reform,
multiple regulatory agencies continue
to forge ahead with piecemeal
efforts that are effectively altering the current
housing finance landscape."Â Many policy initiatives to date have been
fragmented and in some cases "effectively discourage private capital from
the sector," the authors say. The
patchwork of efforts "creates uncertainty and
suggests a lack of political will and
path to achieving a solution-oriented policy objective. There is concern about investors' perception of policy risk
caused by this lack of a clear and
consistent approach to
housing policy."
The article recaps many of the policy and legislative
initiatives either underway or under consideration.
A recent report of the Housing Commission of the
Bipartisan Policy Center (BPC)Â proposed winding down and
eventually eliminating the GSEs over a number of years, replacing them with a government-owned corporation that would provide
a "limited catastrophic government guarantee". Option Three of the Obama Administrations 2011
White paper is largely in agreement with the BPC proposal.
The Federal Housing Finance Agency (FHFA), conservator of the GSEs, is spearheading a host of initiatives under the umbrella of its
"Strategic Plan."Â
-
A call for building a new secondary market infrastructure which the GSEs would jointly develop
and own.
-
A
Uniform Mortgage Data Program
to enhance disclosures and allow the
market to better understand and
ultimately price and absorb additional credit
risk.
-
A
directive to GSEs to steadily increase guarantee fees and actively evaluate other forms of credit risk dispersion;
-
A call for an
accelerated disposition of "illiquid" assets held
in the GSEs' retained portfolios,
In April FHFA directed the GSEs to extend the Home Affordable Refinance
Program (HARP)
by two years. BlackRock
says HARP is an effective program but continued changes to its parameters have
heightened investors' concerns about uncertainty and policy risk and may
discourage private capital.Â
In addition to the GSE reform initiatives being implemented by FHFA, regulatory
agencies are promulgating key rulemakings required by the Dodd-Frank Act
including the "Ability to Repay" rule, the definition of Qualified
Mortgage, Qualified Residential Mortgage, National Servicing Standards and the
Risk Retention Rule.
Finally, the reform of the credit rating
agencies pursuant to Dodd-Frank will also have
a material impact
on the re-emergence and
functioning of the private label MBS market.
Regulators need to develop
a clear understanding of how investors use
credit ratings and to establish agreement on the objectives
of credit rating agency reform,
particularly measures that increase transparency of data while
discouraging measures that attack the fundamental business
of credit
rating agencies.
The legislative focus of current
housing finance policy is
also the reform and/or elimination of the GSEs. A number of GSE-related bills have
been introduced in Congress
over the past five years, however the authors say until recently most appeared to be political statements or "messaging" bills rather
than practical and solutions-oriented. Â Recently more comprehensive legislation has been introduced and
President Obama has spoken
publicly about the
need to reform the agencies.
All of this is complicated by the
recent financial successes of the GSEs. Â Their contributions to Treasury have
materially contributed to deficit
reduction and, coupled with increased
tax receipts, have helped delay the
need to raise the debt ceiling. Another
complication is the series of
recent legal challenges by GSE shareholders and affordable housing groups regarding
amendments to the
Senior Preferred Purchase Agreement
by the US Treasury.
Given the importance of the GSEs, any reform
must include a clear plan
for an orderly transition
to a new system that
does not impair liquidity,
pose a threat to
existing investors or interfere
with the orderly functioning of this multi-trillion dollar market
or impair the its current recovery or long term
stability.
There
is also pending reform legislation. The "Housing
Finance Reform
and Taxpayer Protection Act", (the Corker-Warner bill) would
replace Fannie Mae and Freddie Mac with an entity called the
Federal Mortgage Insurance
Corporation ("FMIC"), a single government guarantor. It would charge guarantee fees
to provide a full-faith-and-credit backstop on mortgaged-backed securities (MBS) provided that a private
guarantor took a 10%
first-loss risk position.
Â
The bill also proposes
that the FMIC establish a mortgage
insurance fund, maintain a database of uniform loan
level information on eligible mortgages, develop
standard uniform securitization
agreements, and oversee the common securitization platform currently being developed by the FHFA.
Fannie Mae and Freddie
Mac would be wound down over a period of time,
their assets available
to the new entity.
This
bill has garnered
attention as the first bipartisan piece
of legislation addressing comprehensive reforms.
However, Senate Majority Leader
Harry Reid recently questioned the
President's recommendation to eliminate Fannie
Mae and Freddie Mac, so the
bill's pathway to final passage remains uncertain.
Jeb Hensarling, Chair of the
House Committee on Financial Services has introduced a bill entitled "Protecting
American Taxpayer and Homeowners Act" (the "PATH Act"
) which seeks to attract more private capital to the sector but calls for no future government support beyond a
reduced role for the Federal
Housing Administration
(FHA). It would eliminate Fannie
Mae and Freddie Mac over a five year period
and accelerate the reduction of
their retained portfolios.
PATH would also re-define
the mission of FHA by limiting
its support to first time and low-to-moderate income homeowners
and reduce FHA mortgage
insurance coverage
from 100 percent to 50 percent. The
bill calls for the
maintenance of a privately
owned securitization platform,
seeks several changes to the
Dodd-Frank housing requirements and
to spur development of the
covered bonds market.
Finally, the bill would prohibit a GSE or FHA from backing any loan in a
jurisdiction that utilized
eminent domain
to seize mortgages. Â
President Obama
recently laid out four core principles for housing
finance reform:
1) private capital should be at the
center of the housing
finance system with a
more limited role for government; 2)
ensure no more taxpayer
bailouts by
winding down the GSEs; 3) maintain
widespread access to 30-year
fixed rate mortgages; and 4) support affordability and
homeownership for first-time buyers as well as access
to home rentals for those who cannot afford to buy a
home. This is again similar to "Option
3" from the Administration's 2011 paper.
The authors say
they are encouraged by the Corker-Warner bill's preservation of a full-faith-and-credit
guarantee of securities and
the bi-partisan support for the
bill but it raises both substantive and political
questions; is there sufficient
private capital available to assume
the 10 percent first loss
credit risk position? Â Is that cushion excessive, given
that Moody's Analytics
views 5 percent as more than adequate
to weather future
financial storms?"Â Â Assuming the 10 percent first loss
capital cushion is available, is this likely to unduly
impair borrowers' access
to mortgage credit and reduce
liquidity, impeding recovery
and putting a substantive burden on future homeowners? The bill
also faces a number of political hurdles.
The PATH Act raises a
host of questions as well. The elimination of any form of government guarantee would likely materially impair the availability and increase the cost of mortgage credit. The Hensarling Bill passed
out of the House Financial Services
Committee on a straight
party line vote in July however most observers place
a low probability on it final passage.
The authors say they continue to believe that the retention
of a government guarantee is essential to any reform
and that it is vital that
any major legislation provide clarity
and certainty regarding the scope of
the guarantee to be
provided. Moreover, an orderly transition
must provide for fungibility of the existing
GSE securities and
any new securities that would result from
reform. These principles are vital to maintaining liquidity, without disrupting the
efficient functioning of the mortgage markets. Every housing finance
reform proposal must be evaluated against these
principles and the resultant impact on the
stability of the housing market.
The Federal Housing Administration is also targeted by reform other
than that of PATH. Â The FHA Solvency Act
of 2013 recently voted out of the Senate Banking Committee would raise
the minimum capital reserve ratio of the
Mortgage Mutual Insurance Fund to 3 percent and give
the Department of Housing and Urban Development (HUD) special tools to address
FHA's failure to meet the goal. It would also increase minimum annual mortgage
insurance premiums and reevaluate them annually
to ensure they cover expected
risk and maintain the capital reserve ratio.
This bill does not
seek to reduce the insurance coverage
of FHA nor redefine
its mission like the PATH bill and the authors say they are somewhat more optimistic about
its future.
The authors
single out two factors that they believe are singularly harmful to recovery and
reform, especially the reentry of private capital. The first is the use of
eminent domain as proposed in some localities to seized mortgages from MBS and
restructure them. The second is the
National Servicer Settlement. The
eminent domain issue, the authors say, would have a profound impact on national
housing policy and global markets. They
support suggestions and the PATH legislation that would prohibit the GSEs
and/or FHA from doing business within any locale that so utilizes eminent
domain. Â Â
The Servicer
Settlement, they say, unwittingly allowed sanctions on servicers to be paid by
private investors and the same construct has been adopted by the Federal
Reserve and the Comptroller of the Currency in their servicing settlement
actions. This will deter investors from
putting money at risk and is at cross-purposes with the public policy goal of
attracting private capital.
In conclusion the article says
that while there are differing
views about the proper degree
of government support there
is an emerging consensus that any serious
approach to
reform of the housing
finance system must
attract more private capital and reduce
the unprecedented level
of government support currently
in place. The authors restate the need for a holistic, coordinated
approach to reform rather than one that works at cross-purposes with the goal
of attracting private capital.
