Mapping the Course Toward Housing Finance Reform
By Michael Tucker
November 2, 2017
DENVER--The odds of comprehensive housing finance reform this year have never been better, said officials here at the recent Mortgage Bankers Association Annual Convention & Expo. But some analysts, while hopeful, are not so sure.
MBA has led the call among industry trade groups for GSE reform. Earlier this year, MBA issued a white paper (https://www.mba.org/issues/gse-reform) that outlines a comprehensive path toward GSE reform. Both MBA Chairman Dave Motley, CMB, and MBA President and CEO David Stevens, CMB, said momentum is not only growing, but necessary.
"We've been talking about this for nine years. But, we're not talking anymore...we're doing," Motley said. "Congress and the White House are moving forward and MBA is right in the middle of it, briefing staff in the White House, on Capitol Hill and in the agencies themselves. Why? Because the status quo is not sustainable with the GSEs in their current form."
Stevens told more than 4,600 convention attendees that GSE reform no longer seems like something that "might or might not happen" someday, but cautioned that political instability could hamstring momentum.
"It's clear that the industry has benefited by the stability provided throughout conservatorship," Stevens said. "But still, conservatorship was supposed to be temporary. A stop-gap. And I think we're all guilty of sometimes forgetting that. Right now, we live with a false sense of security. We are facing the fact that Director [Melvin] Watt's term ends at the end of next year and who is selected after him could risk the sense of security that far too many live in today. What happens if the President nominates a new director who thinks differently about the government role in mortgage finance and wants to scale it back?"
The answer, Stevens said, is that such a scenario could affect everything from g-fees to loan limits. "Credit policy could change which would impact the QM patch and confidence in the rule as it works today," he said. "Even the view of protecting the level playing field in pricing may change as there is no permanent protection here. We are risking our business models under a change unless we can lock in the market protections that we depend on today. And that can only be done with legislation."
The MBA plan, Stevens said, "improves the strength of the government guarantee, legislates a level playing field and protects the taxpayer going forward. But most importantly it protects against the individual bias of any specific director going forward. This is why we need to do this now. Before we change to a new regime. Congress must act. We need a legislative fix. It's the only option. Only legislative reform will lock in the gains we have made. But let's not stop there. We must use our strong, steady voice beyond just GSE reform."
In a breakout session at the Convention, several analysts expressed cautious optimism on GSE reform but said time is of the essence.
"The chances are dropping by the day," said Jaret Seiberg, Managing Director of Financial Services and Housing Policy Analyst with the Cowen Washington Research Group, Washington, D.C. "Look at the [recent] ‘Twitter war' between Sen. Bob Corker [R-Tenn.] and President Trump. Corker is critical to housing finance reform, but he is now an enemy of Trump."
Seiberg said these real-world dynamics get in the way of the "huge amount of progress" lawmakers have made on this issue. "This is something that should be able to get done," he said. "Should have been able to get done. But between the personal feuds that weaken [President Trump] politically on Capitol Hill as well as the upcoming mid-term election, it's getting harder. We're less optimistic than we were even six weeks ago."
Isaac Boltansky, Director of Policy Research with Compass Point Research & Trading LLC, Washington, D.C., predicted a 10 percent chance of meaningful housing finance reform this Congress.
"We're pessimistic for two reasons," Boltansky said. "While we've made considerable progress, there are meaningful questions not yet answered about affordable housing and transition risk. The second reason: Congress only acts when there is a fire and there is no fire here. The market is functioning well enough for Congress."
Seiberg agreed policymakers have "insufficient urgency" to reform the housing finance system at the moment. "The problem is people are happy for now," he said. "But while Fannie Mae and Freddie Mac are in conservatorship and have a regulator, the White House or a future White House can decide to expand or shrink what Fannie and Freddie can do. That's not the way we want the market to work. It puts a lot of power in an agency for an extended period."
Milken Institute Housing Finance Program Senior Fellow Michael Stegman noted Fannie Mae and Freddie Mac could soon enter their 10th year under conservatorship--the federal government placed the enterprises into conservatorship in September 2008.
"Ten years takes the sense of urgency away from getting housing reform done," Stegman said. "If we made a loan to a low-income family who succeeded in staying in that home for 10 years, I'd suggest that's a sustainable mortgage."
But Stegman expressed a bit more optimism than other analysts about the chances for comprehensive housing finance reform. "The differences [between Democrats and Republicans] have narrowed, so conditions are more favorable," he said. "I think we will see a discussion draft before the end of the year in the Senate and a bill in the House."
If not, the potential for administrative actions grow as the window for a legislative solution closes, Stegman added.
Boltansky said some GSE reform has been occurring--in a way. "It's not the systemic reform we all want, but it's happening," he said. He suggested systemic reform might be possible in 2019 "at the earliest" because House Financial Services Committee Chairman Jeb Hensarling, R-Texas, will no longer chair that crucial congressional committee. There will be a new committee chair in January 2019 who may be more open to comprehensive reform even if Republicans keep their majority in the House of Representatives, he said.
But the best time for comprehensive housing finance reform is now, "while the economy is healthy," Stegman said. "I look at the Puerto Rico relief bill that got the House, the Senate and the administration together and I wonder whether it will take a crisis to get us over the line with housing finance reform."