WASHINGTON DC – The National Housing Conference has released a new white paper on housing finance reform that calls for bipartisan cooperation between Congress and the Trump administration to complete housing finance reform leading to the release of Fannie Mae and Freddie Mac from conservatorship.
“We are hopeful that the approach we have set out will have broad bipartisan support in Congress, the administration and stakeholders in housing finance reform,” the paper says. “Housing finance reform does not require the invention of an entirely new mortgage finance system. Much of the needed reforms have been achieved in HERA and the Dodd Frank Act. Finishing this work with the least disruption to housing markets should be a high priority across the political spectrum.”
The paper, drafted in consultation with a broad and diverse set of housing finance experts, establishes seven conditions to guide administrative and statutory reform to ensure that the United States will have a well-functioning housing finance system that provides consistent, affordable credit to borrowers across the nation and through all parts of the credit cycle, while minimizing the risk of another taxpayer-funded bailout.
“Bipartisanship is alive and well, although it does seem to go on vacation a lot. Housing finance reform is possible with bipartisan support, and that support is realistic, as our broad coalition demonstrates,” said David Dworkin, president and CEO of the National Housing Conference.
The year-long effort to develop a nonpartisan housing reform paper engaged a broad range of experts on housing finance including staff from Chris Tawa Consulting, Enterprise Community Partners, Federal Home Loan Bank of Chicago, Local Initiatives Support Corporation, Mortgage Bankers Association, National Association of Affordable Housing Lenders, National Association of REALTORS, National Community Reinvestment Coalition, National Council of State Housing Agencies, National Low Income Housing Coalition, NeighborWorks America, New York University Furman Center, Opportunity Finance Network, SKA Marin, Stewards of Affordable Housing for the Future, Tennessee Housing Development Authority, ULI Terwilliger Center for Housing, Quicken Loans and Zigas and Associates, LLC. While the paper represents solely the views of the NHC and does not seek to speak on behalf of our individual members, we are grateful for their time and deep expertise. We believe it is a foundation that policy makers and advocates can build on to reach a final agreement on these issues.
For much of the past decade, GSE reform efforts focused on comprehensive reform of the entire housing finance model, the paper notes. “This involved wholesale change to the nature, ownership and operational model of the secondary mortgage market in the United States. These efforts, while well intentioned, posed complex structural concerns and unacceptable transition risk, which made them politically unviable. In the past few years there has been growing consensus in support of a more direct course, working off the existing infrastructure of the current housing finance system.”
“This approach of building on the Housing and Economic Recovery Act of 2008 (HERA) makes the extraordinarily complex task of housing finance reform more manageable and more achievable,” the report states. “HERA’s reforms were a bipartisan product that successfully created the Federal Housing Finance Agency (FHFA) and provided the statutory framework for the new regulator as well as the Treasury Departments of three administrations to place and manage the GSEs in conservatorship and move them out of insolvency. While some have suggested that they could remain in conservatorship indefinitely, we believe that providing reliable and durable countercyclical support for the housing market depends on the outcome of efforts to permanently address the structural problems in the secondary market that existed prior to the financial crisis, as the Dodd-Frank Act in 2010 did for the primary market.”
The paper states that reform or restructuring of the secondary mortgage market system must focus on certain key objectives:
1. Maintain and enhance mortgage funding liquidity through a durable market structure that will support investments in long term, fixed-rate mortgage financing for both single family and multifamily housing through all business cycles, ensuring equitable access to safe, responsible and sustainable mortgage credit to the largest possible number of borrowers.
2. Ensure access to affordable and sustainable mortgage credit to broadly serve homeownership-ready borrowers through a variety of public and private channels, including addressing the minority homeownership gap. The GSEs should not withdraw from serving a portion of the continuum absent a high degree of confidence that those borrowers will be well-served through other market channels.
3. Maintain and enhance a broad commitment to access and affordability through measurable and enforceable standards, a Duty to Serve requirement in the secondary mortgage market and robust funding for the National Housing Trust Fund and the Capital Magnet Fund.
4. Replace implicit guarantees on debt and mortgage backed securities in the current system with a limited, explicit and appropriately compensated government role that retains a healthy “to be announced” (TBA) market and encourages private capital participation to ensure reliable access to long-term fixed-rate single family and multifamily mortgages nationwide.
5. Sustain, strengthen and modernize the Federal Housing Administration’s (FHA) capacity and flexibility to meet the nation’s housing financing needs while protecting the taxpayer’s investment.
6. Protect taxpayers from risk in all but the most exigent circumstances through full engagement of the private sector in providing first loss coverage for conventional single family and multifamily mortgage assets.
7. Mitigate any adverse impacts on the marketplace and consumers, with a particular focus on a smooth transition. Any changes to the GSE footprint (or broader businesses) should be transparent and implemented steadily over a reasonable time horizon.
“We believe that housing finance reform can be done through a dual-track approach of responsible administrative reform, combined with bipartisan statutory reform to address those issues that can only be achieved through congressional action,” Dworkin said. “This process can be successful as long as all parties are at the table. While partisan rhetoric has often been sharp on this issue, there is also an undercurrent of bipartisan communication and consultation that rarely receives public attention. I can’t think of any four members of Congress better suited to resolve these issues than Senate Banking Committee Chairman Mike Crapo and Ranking Member Sherrod Brown, and House Financial Services Committee Chairwoman Maxine Waters and Ranking Member Patrick McHenry. They all have a solid track record of forging bipartisan agreements when they are needed most.”
One area of past controversy addressed in the paper involves the need to protect taxpayers from another bailout, which has led to restrictions on the market that have corrected many of the market failures that led to the mortgage crisis but have also constrained mortgage finance to unhealthy levels. “It is essential to remember that taxpayers and consumers of mortgage credit are one and the same,” the paper states. “Taxpayers pay for the failure of the housing finance system to adequately supply housing that is affordable to all income cohorts, reducing savings and consumer spending, while increasing homelessness and the economic burden of underserved communities. Taxpayers are ultimately protected best by a careful balance of these priorities. Limiting access to mortgage credit and ultimately homeownership to responsible borrowers is no way to ‘protect’ taxpayers from themselves.”
To ensure Fannie Mae and Freddie Mac responsibly meet their affordable housing responsibilities, the paper call for affordable housing performance “be tied to a material portion of executive bonuses.” The paper also calls for reform of the FHA multifamily insurance program to more clearly define its mission to support affordable housing, including the possible adoption of specific affordable housing goals to govern their allocation of FHA insurance commitment authority.
“Competition between the GSEs has resulted in lower borrowing costs, faster loan product innovation and greater transaction efficiency,” the paper says. “The GSEs’ share of the multifamily finance market has grown significantly during conservatorship, with GSE financing now representing more than half the total market despite the very strong interest in this asset class from private investors and lenders. It appears that FHFA’s multifamily scorecard, which attempts to cap the GSEs’ loan volume and market share, has been ineffective. A better means of constraining the GSEs’ growth and leaving room for private capital,” the paper finds, “would be to adjust their pricing models to reflect the public purpose of the property financed, with lower pricing for affordable housing (as is already offered by the GSEs) and a premium added to the price for properties with high market rents. In this way, the price of GSE financing for market rate properties would be equivalent to that of private lending sources, and the GSEs’ and private lenders would compete based on loan product innovation, flexibility and transaction execution rather than price.”
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The National Housing Conference has been defending the American Home since 1931. We believe everyone in America should have equal opportunity to live in a quality, affordable home in a thriving community. Politically diverse and nonpartisan, NHC is a 501(c)3 nonprofit organization. #OurAmericanHome @natlhousingconf