Penn panel focuses on current housing finance regulatory issues.
Since the first major effects of the housing crisis hit the U.S. financial system more than five years ago, policymakers, politicians, and finance experts have called for reform of the U.S. housing finance system. However, the actual restructuring of this allegedly broken system has not yet occurred, and some politicians and members of the financial industry question the reform measures Congress has taken thus far.
At a recent panel discussion hosted by the Penn Institute for Urban Research at the University of Pennsylvania, experts discussed potential housing finance reforms and whether a consensus yet exists about the future of the housing finance system.
Panelist Johnny Isakson, U.S. Senator from Georgia, set forth one model for reform in a speech that outlined his proposed Mortgage Finance Act of 2011. Senator Isakson called for the creation of a new government-sponsored enterprise (GSE) which would seek to facilitate mortgage financing by guaranteeing securitizations of mortgages that meet certain underwriting requirements. The new agency would replace Fannie Mae and Freddie Mac, the two mortgage finance entities linked to the housing crisis. The new agency’s powers would phase out over time as the private sector eventually steps in to guarantee such transactions.
Senator Isakson stressed that the creation of a new agency – and its eventual phasing out through the privatization of its role – is necessary to attract private capital back into mortgage markets and get the housing market moving again. Other panelists, including Philip Swagel, a former Assistant Secretary of Treasury for Economic Policy in the George W. Bush administration, agreed that the government has played too large of a role in housing finance and any significant reforms need to focus on encouraging private capital investment and the phasing out of the widespread reliance on government financing and guarantees.
Although panelists agreed that the government needs to play a continued role in encouraging private investment in the short run, several noted that House Republicans tend to favor immediate privatization is the appropriate approach to reform.
In the wake of the increased mortgage finance and securitization requirements under the Dodd-Frank Act, several panel members highlighted the delicate balancing act involved in encouraging the investment of private capital while ensuring that investors were not creating too much risk in the system. They largely agreed that while strict underwriting standards are key, but also agreed that burdensome regulations should not overly constrain the mortgage finance for consumers and bankers alike.
The panel also discussed the proposed Credit Risk Retention Rule which requires mortgages to have a minimum 20% down payment to qualify as a “Qualified Residential Mortgage” (QRM). Under the Dodd-Frank Act, originators and securitizers of financial assets are required to retain at least 5% of the credit risk for any asset that is sold or transferred through the issuance of an asset-backed security; however, the law exempts issuers from compliance when the assets are QRMs.
Senator Isakson argued that the proposed QRM rule is too narrow to encourage investment of private capital and argued that the agencies had misinterpreted the intentions of Congress under the Dodd-Frank Act. With a 20% down payment requirement, securities issuers are not adequately encouraged to play their role in housing finance and the risk retention requirement will prove to be too burdensome without appropriate exceptions when risk retention is unnecessary.
Consumer advocates, including panelist Barry Zigas, the Director of Housing Policy for Consumer Federation of America, also have worried that the proposed QRM rule will restrict loan access to the large number of credit-worthy consumers unable to afford 20% down payments. The argument for requiring 20% down payments is that loans with loan-to-value (LTV) ratios of 80% or less (at least a 20% down payment) have traditionally performed better than those without the payment.
The public is still waiting for the final word on what mortgages will qualify as QRMs under the exception and some believe that a final rule will not be issued until 2013. Panelist Michael Berman, Chairman of Mortgage Bankers Association, suggested that such uncertainty about this regulatory requirement is only further constraining the market and a full housing market recovery is not possible in the face of continued regulatory uncertainty.
Although some share Berman’s view, others have suggested that bankers are placing false blame on regulatory uncertainty and over-regulation, when in reality their reluctance to lend is based on the current low returns and high risks that define today’s housing finance market.
In addition to Isakson, Berman, and Zigas, the panelists at the event, held on October 25, included Phillip L. Swagel, former Assistant Secretary for economic policy at the Treasury Department.