SBC Examines the Potential Impact of Housing Reform on Consumers
AT OCTOBER 29TH’S SENATE
BANKING COMMITTEE HEARING, affordable housing advocates and industry
representatives discussed principles for a more affordable and accessible
housing finance system and critiqued S.1217, the Housing Finance Reform and Taxpayer
Protection Act of 2013, sponsored by Sens. Bob Corker (R-Tenn.) and Mark Warner
(D-Va.).
In his opening
remarks, Chairman Tim Johnson (D-S.D.) said consumers currently face “a complex housing finance system that may stack the
odds against them,” highlighting the flaws in the housing system exposed by the
crisis, and remain unresolved. He said the Dodd-Frank Act included “key”
reforms to protect consumers from abusive mortgage practices and praised the
work of the Consumer Financial Protection Bureau (CFPB) this year to address
mortgage servicing standards and define a borrower’s ability to repay a
mortgage. In closing, Johnson noted the tight credit environment for first-time
and low and middle-income borrowers and urged Members to be mindful of the impact
of strict underwriting standards.
Ranking Member Mike
Crapo (R-Idaho) expressed the need for strong underwriting standards in order
to foster a sustainable housing system, noting that “one of the major causes”
of the financial crisis was a deterioration in underwriting standards. Crapo
also acknowledged the tight credit conditions in the housing market, and warned
that if “very proscriptive servicing laws and regulations” are adopted,
homeowners could pay considerably higher monthly rates.
In
his opening
statement, Eric Stein, Senior Vice President, Center for Responsible
Lending (CRL), presented Members with CRL’s recommendations on how to structure
a reformed housing finance system that would have the greatest benefit for
consumers. His recommendations include: 1) requiring mutual ownership of
entities that both issue and guarantee conforming securities; 2) retaining cash
window access for smaller lenders; 3) maintaining a national market by
requiring secondary market entities to serve all eligible lenders; 4)
prohibiting structured securities from accessing a government guarantee; and 5)
allowing secondary market entities to have a portfolio for
distressed-then-modified loans, and to provide a government backstop for this
portfolio so these modifications can continue in times of economic stress. In
closing, Stein recommended against hardwiring underwriting criteria, such as a
down payment mandate, into reform legislation as it would “needlessly” restrict
access to credit.
In
his testimony,
Gary Thomas, 2013 President of the National Association of Realtors (NAR), said
that despite a housing recovery in the last two years, the housing market
“clearly remains far from healthy.” He noted that access to credit continues to
be tight due to regulatory uncertainty, and the uncertainty surrounding the use
of representation and warranty clauses by both private market investors, as
well as the Government Sponsored Entities (GSEs), to indemnify against loan
defaults. Thomas said the result of this uncertainty has been a pull back by
lenders to a position where the probability of default is “far lower than
historic norms.”
He
called S.1217 a “significant step forward” in the reform discussion and
highlighted its inclusion of several NAR housing reform priorities – such as an
explicit government guarantee and the preservation of long-term mortgage
products. He also expressed support for the QM and QRM standard. However, Thomas
said the proposed legislation is “still a work in progress” and expressed
concern with several provisions, including the five percent down payment
requirement, the reduction of loan limits, access for smaller lenders and
credit unions, and which entity will ensure that lending continues when an
economic downturn occurs.
In
her opening
statement, Alys Cohen, Attorney, National Consumer Law Center (NCLC),
provided a brief overview of the state of the housing market and offered
recommendations to Sens. Corker and Warner, sponsors of S.1217. As they work to
finalize their draft legislation, Cohen urged Corker and Warner to focus the
reformed housing finance system on access and affordability by including
provisions to ensure equal housing opportunities to underserved communities,
flexible underwriting standards, sustainable and affordable loan modifications,
enhanced servicing standards, forced-placed insurance and increased
transparency and accountability.
In
his testimony,
Rohit Gupta, President of Genworth Financial’s U.S. Mortgage Insurance
Business, discussed the impact that housing finance proposals will have on
affordability and the cost of mortgage finance for consumers. He said mortgage
credit is “overly tight,” and expressed concern that mandated underwriting
criteria or “even a ten percent” down payment requirement would make
homeownership “impossible” for many creditworthy borrowers. However, Gupta said
Genworth supports requiring a Qualified Mortgage (QM) or Qualified Residential
Mortgage (QRM) standard for loans subject to government support and they are
very supportive of the S. 1217’s inclusion of standard coverage mortgage
insurance (MI).
“Private
mortgage insurance at standard coverage levels can and should be an important part
of a reformed housing finance system because it will ensure that there is
meaningful private capital ahead of any government exposure,” he said.
In
closing, Gupta said S. 1217’s provisions regarding private MI “thoughtfully
incorporate a prevailing market standard” that is well known and easy to
execute for consumers, lenders and investors. Importantly, this approach does
not introduce any new costs for consumers, while at the same time it helps
distance future losses from the federal government backstop, he added.
In
his opening
statement, Larry Platt, Consumer Finance Lawyer at K&L Gates, addressed
whether S. 1217 should impose loss mitigation standards on servicers and owners
of securitized residential mortgage loans for the benefit of consumers. He said
that the proposed legislation addresses loan servicing in two ways: 1) the
newly created Federal Mortgage Insurance Company (FMIC) would establish
servicing standards for the residential mortgage loans; and 2) a uniform
securitization agreement with uniform servicing standards would be created for
use by the FMIC and potentially by investors in private securitizations.
However, Platt noted that neither provision imposes detailed loss mitigation
requirements for borrowers in default. Despite this conclusion, he concluded
that loss mitigation requirements do no need to be included in the legislation
because the newly enacted loan servicing regulations from the Consumer
Financial Protection Bureau (CFPB) are “sufficient.”
In
his testimony,
Lautaro Diaz, Vice President for Housing and Community Development for the
National Council of La Raza (NCLR), discussed the impact of the housing crisis
on Latino families, the importance of pre- and post-purchase housing
counseling, and the necessity of preserving access to affordable housing
finance options. In his concluding remarks, he urged Members to address the
following three principles in their housing finance reform legislation: 1)
Improving the effectiveness of HUD-approved housing counseling agencies by
integrating housing counseling into the programs of the FMIC, or other entity
that replaces Fannie Mae and Freddie Mac; 2) Increase access and affordability
in the mortgage market; and 3) Incorporate measures to help homeowners at risk
of and to improve mortgage-servicing standards.
Question and Answer
Referencing
some of the opening testimony, several Members asked the witnesses about the
impact of recently promulgated servicing standards and the misalignment of
servicer incentives. Platt noted that the Federal Housing Administration (FHA)
Servicing Alignment Initiative and the CFPB’s Mortgage Servicing Rules do not
go into effect until next year, but said the 2011 Interagency Consent Orders
and the global foreclosure settlement have established a “template” for the way
servicing will be done prospectively and formed the basis of the CFPB’s
regulations. Moreover, Platt said he does not believe that servicers have
an incentive to foreclose on borrowers, as it is in their economic interest to
modify a loan if they are able to.
Sen.
Sherrod Brown (D-Ohio) asked Cohen if the extension of the Fair Debt Collection
Act, requiring loan modifications if they are beneficial to borrowers and
prohibiting the dual-track system should be part of servicer regulations. Cohen
said NCLC hopes these provisions are a part of the Committee’s housing reform
legislation, noting that it is important to include servicing standards in an
origination reform effort because once a borrower gets a mortgage “he does not
go away.”
In
response to a question from Crapo on a recent proposal that would restrict the
ability of servicers to collect collateral in the event of a borrower default,
Platt said if it becomes “practically infeasible to realize on the collateral
of the home” it would “invalidate secured loans,” materially increase interest
rates and further restrict access to credit.
Johnson
asked Thomas to detail the impact of stricter underwriting criteria, including
high down payment requirements on first-time homebuyers. Thomas said strict
underwriting criteria would significantly impede the ability of first-time
homebuyers and the underserved to get a mortgage. He said the impact on
first-time homebuyers is especially troubling because it would stall the “move-up”
market. Thomas added that the combination of down payment minimums and closing
costs could make homeownership unaffordable if the minimum is set too high.
Sen.
Elizabeth Warren (D-Mass.) expressed concern that if the secondary mortgage
market is opened up to private capital without protections for smaller lenders,
then “the primary market dominance of the four largest banks will extend to the
secondary market, allowing them to crowd out the smaller lenders.” In response
to questions from Warren and Sen. Jon Tester (D-Mont.), Thomas and Stein said
the consolidation in the mortgage lending space “is a problem,” expressing
concern that these large lenders will keep credit tight, have no incentive to
lower costs, and raise significant barriers to homeownership for first-time
borrowers.
Crapo
asked Gupta how important borrower equity is to attracting more private capital
to the housing market. Gupta said borrower equity is very important, but noted
that low down payment loans were not the reason for the crisis and should not
be regulated out of existence. He praised S.1217’s MI requirement and explained
that under the legislation, a modest down payment plus mortgage insurance
would remove the burden from taxpayers and reduce the amount of bond guarantees
that are needed.
Brown
referenced several issues surrounding short sales, and asked Thomas if some of
the provisions in Prompt Notification of
Short Sale Act should be included in the Committee’s housing finance
reform legislation. Thomas agreed that short sales are “problematic” and urged
the Committee to include short sale provisions in its reform bill.
Sen.
Robert Menendez (D-N.J.) asked Thomas about the effects of reducing the
conforming loan limits of Fannie and Freddie. Thomas said if the limits are
reduced to the currently proposed level – to between $600,000 and $400,000 at
the highest end – then the anticipated excess demand for homes next year will
be eliminated, reducing housing prices and lowering housing demand.
For
testimony and a webcast of the hearing, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Housing,Hearing Summaries Agency:Senate Banking Committee,Publish Year:2013
AT OCTOBER 29TH’S SENATE
BANKING COMMITTEE HEARING, affordable housing advocates and industry
representatives discussed principles for a more affordable and accessible
housing finance system and critiqued S.1217, the Housing Finance Reform and Taxpayer
Protection Act of 2013, sponsored by Sens. Bob Corker (R-Tenn.) and Mark Warner
(D-Va.).
In his opening
remarks, Chairman Tim Johnson (D-S.D.) said consumers currently face “a complex housing finance system that may stack the
odds against them,” highlighting the flaws in the housing system exposed by the
crisis, and remain unresolved. He said the Dodd-Frank Act included “key”
reforms to protect consumers from abusive mortgage practices and praised the
work of the Consumer Financial Protection Bureau (CFPB) this year to address
mortgage servicing standards and define a borrower’s ability to repay a
mortgage. In closing, Johnson noted the tight credit environment for first-time
and low and middle-income borrowers and urged Members to be mindful of the impact
of strict underwriting standards.
Ranking Member Mike
Crapo (R-Idaho) expressed the need for strong underwriting standards in order
to foster a sustainable housing system, noting that “one of the major causes”
of the financial crisis was a deterioration in underwriting standards. Crapo
also acknowledged the tight credit conditions in the housing market, and warned
that if “very proscriptive servicing laws and regulations” are adopted,
homeowners could pay considerably higher monthly rates.
In
his opening
statement, Eric Stein, Senior Vice President, Center for Responsible
Lending (CRL), presented Members with CRL’s recommendations on how to structure
a reformed housing finance system that would have the greatest benefit for
consumers. His recommendations include: 1) requiring mutual ownership of
entities that both issue and guarantee conforming securities; 2) retaining cash
window access for smaller lenders; 3) maintaining a national market by
requiring secondary market entities to serve all eligible lenders; 4)
prohibiting structured securities from accessing a government guarantee; and 5)
allowing secondary market entities to have a portfolio for
distressed-then-modified loans, and to provide a government backstop for this
portfolio so these modifications can continue in times of economic stress. In
closing, Stein recommended against hardwiring underwriting criteria, such as a
down payment mandate, into reform legislation as it would “needlessly” restrict
access to credit.
In
his testimony,
Gary Thomas, 2013 President of the National Association of Realtors (NAR), said
that despite a housing recovery in the last two years, the housing market
“clearly remains far from healthy.” He noted that access to credit continues to
be tight due to regulatory uncertainty, and the uncertainty surrounding the use
of representation and warranty clauses by both private market investors, as
well as the Government Sponsored Entities (GSEs), to indemnify against loan
defaults. Thomas said the result of this uncertainty has been a pull back by
lenders to a position where the probability of default is “far lower than
historic norms.”
He
called S.1217 a “significant step forward” in the reform discussion and
highlighted its inclusion of several NAR housing reform priorities – such as an
explicit government guarantee and the preservation of long-term mortgage
products. He also expressed support for the QM and QRM standard. However, Thomas
said the proposed legislation is “still a work in progress” and expressed
concern with several provisions, including the five percent down payment
requirement, the reduction of loan limits, access for smaller lenders and
credit unions, and which entity will ensure that lending continues when an
economic downturn occurs.
In
her opening
statement, Alys Cohen, Attorney, National Consumer Law Center (NCLC),
provided a brief overview of the state of the housing market and offered
recommendations to Sens. Corker and Warner, sponsors of S.1217. As they work to
finalize their draft legislation, Cohen urged Corker and Warner to focus the
reformed housing finance system on access and affordability by including
provisions to ensure equal housing opportunities to underserved communities,
flexible underwriting standards, sustainable and affordable loan modifications,
enhanced servicing standards, forced-placed insurance and increased
transparency and accountability.
In
his testimony,
Rohit Gupta, President of Genworth Financial’s U.S. Mortgage Insurance
Business, discussed the impact that housing finance proposals will have on
affordability and the cost of mortgage finance for consumers. He said mortgage
credit is “overly tight,” and expressed concern that mandated underwriting
criteria or “even a ten percent” down payment requirement would make
homeownership “impossible” for many creditworthy borrowers. However, Gupta said
Genworth supports requiring a Qualified Mortgage (QM) or Qualified Residential
Mortgage (QRM) standard for loans subject to government support and they are
very supportive of the S. 1217’s inclusion of standard coverage mortgage
insurance (MI).
“Private
mortgage insurance at standard coverage levels can and should be an important part
of a reformed housing finance system because it will ensure that there is
meaningful private capital ahead of any government exposure,” he said.
In
closing, Gupta said S. 1217’s provisions regarding private MI “thoughtfully
incorporate a prevailing market standard” that is well known and easy to
execute for consumers, lenders and investors. Importantly, this approach does
not introduce any new costs for consumers, while at the same time it helps
distance future losses from the federal government backstop, he added.
In
his opening
statement, Larry Platt, Consumer Finance Lawyer at K&L Gates, addressed
whether S. 1217 should impose loss mitigation standards on servicers and owners
of securitized residential mortgage loans for the benefit of consumers. He said
that the proposed legislation addresses loan servicing in two ways: 1) the
newly created Federal Mortgage Insurance Company (FMIC) would establish
servicing standards for the residential mortgage loans; and 2) a uniform
securitization agreement with uniform servicing standards would be created for
use by the FMIC and potentially by investors in private securitizations.
However, Platt noted that neither provision imposes detailed loss mitigation
requirements for borrowers in default. Despite this conclusion, he concluded
that loss mitigation requirements do no need to be included in the legislation
because the newly enacted loan servicing regulations from the Consumer
Financial Protection Bureau (CFPB) are “sufficient.”
In
his testimony,
Lautaro Diaz, Vice President for Housing and Community Development for the
National Council of La Raza (NCLR), discussed the impact of the housing crisis
on Latino families, the importance of pre- and post-purchase housing
counseling, and the necessity of preserving access to affordable housing
finance options. In his concluding remarks, he urged Members to address the
following three principles in their housing finance reform legislation: 1)
Improving the effectiveness of HUD-approved housing counseling agencies by
integrating housing counseling into the programs of the FMIC, or other entity
that replaces Fannie Mae and Freddie Mac; 2) Increase access and affordability
in the mortgage market; and 3) Incorporate measures to help homeowners at risk
of and to improve mortgage-servicing standards.
Question and Answer
Referencing
some of the opening testimony, several Members asked the witnesses about the
impact of recently promulgated servicing standards and the misalignment of
servicer incentives. Platt noted that the Federal Housing Administration (FHA)
Servicing Alignment Initiative and the CFPB’s Mortgage Servicing Rules do not
go into effect until next year, but said the 2011 Interagency Consent Orders
and the global foreclosure settlement have established a “template” for the way
servicing will be done prospectively and formed the basis of the CFPB’s
regulations. Moreover, Platt said he does not believe that servicers have
an incentive to foreclose on borrowers, as it is in their economic interest to
modify a loan if they are able to.
Sen.
Sherrod Brown (D-Ohio) asked Cohen if the extension of the Fair Debt Collection
Act, requiring loan modifications if they are beneficial to borrowers and
prohibiting the dual-track system should be part of servicer regulations. Cohen
said NCLC hopes these provisions are a part of the Committee’s housing reform
legislation, noting that it is important to include servicing standards in an
origination reform effort because once a borrower gets a mortgage “he does not
go away.”
In
response to a question from Crapo on a recent proposal that would restrict the
ability of servicers to collect collateral in the event of a borrower default,
Platt said if it becomes “practically infeasible to realize on the collateral
of the home” it would “invalidate secured loans,” materially increase interest
rates and further restrict access to credit.
Johnson
asked Thomas to detail the impact of stricter underwriting criteria, including
high down payment requirements on first-time homebuyers. Thomas said strict
underwriting criteria would significantly impede the ability of first-time
homebuyers and the underserved to get a mortgage. He said the impact on
first-time homebuyers is especially troubling because it would stall the “move-up”
market. Thomas added that the combination of down payment minimums and closing
costs could make homeownership unaffordable if the minimum is set too high.
Sen.
Elizabeth Warren (D-Mass.) expressed concern that if the secondary mortgage
market is opened up to private capital without protections for smaller lenders,
then “the primary market dominance of the four largest banks will extend to the
secondary market, allowing them to crowd out the smaller lenders.” In response
to questions from Warren and Sen. Jon Tester (D-Mont.), Thomas and Stein said
the consolidation in the mortgage lending space “is a problem,” expressing
concern that these large lenders will keep credit tight, have no incentive to
lower costs, and raise significant barriers to homeownership for first-time
borrowers.
Crapo
asked Gupta how important borrower equity is to attracting more private capital
to the housing market. Gupta said borrower equity is very important, but noted
that low down payment loans were not the reason for the crisis and should not
be regulated out of existence. He praised S.1217’s MI requirement and explained
that under the legislation, a modest down payment plus mortgage insurance
would remove the burden from taxpayers and reduce the amount of bond guarantees
that are needed.
Brown
referenced several issues surrounding short sales, and asked Thomas if some of
the provisions in Prompt Notification of
Short Sale Act should be included in the Committee’s housing finance
reform legislation. Thomas agreed that short sales are “problematic” and urged
the Committee to include short sale provisions in its reform bill.
Sen.
Robert Menendez (D-N.J.) asked Thomas about the effects of reducing the
conforming loan limits of Fannie and Freddie. Thomas said if the limits are
reduced to the currently proposed level – to between $600,000 and $400,000 at
the highest end – then the anticipated excess demand for homes next year will
be eliminated, reducing housing prices and lowering housing demand.
For
testimony and a webcast of the hearing, please click here.