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Sep 15-16 Bipartisan Policy Center Housing Summit

Bipartisan Policy Center

“2014 Housing Summit: New Directions for National Policy”

Monday, September 15 – Tuesday, September 16, 2014

Key Topics & Takeaways

  • Housing Finance Reform
  • Rep. Randy Neugebauer (R-Texas) and Maxine Waters (D-Calif.) both said housing finance reform legislation will not be accomplished this Congress.
  • Neugebauer expects that next Congress, the PATH Act will pass in the House and he is hopeful that Johnson-Crapo passes in the Senate to allow for a conference on housing reform legislation.
  • Former FHFA Acting Director Ed DeMarco said the FHFA should work towards incremental changes to transition the housing market towards a post-GSE structure.
  • HUD Secretary Julian Castro urged legislators to finish housing finance reform legislation, and pledged that the Administration would continue to work toward housing reform.
  • Reigniting the PLS Market
  • SIFMA President and CEO Kenneth Bentsen said structural issues in the private label securities market can be resolved with the finalization of regulations like the SEC’sRegulation AB II and outstanding regulations on risk retention and capital.
  • Fred Matera of Redwood Trust offered several recommendations to revive the PLS market, including the creation of third-party transaction managers with a fiduciary duty to monitor a servicer’s compliance and performance.
  • Michael Stegman of the Treasury Department said measures must be taken on enforcement and standards to restore investor confidence before the full restoration of the market can take place.

Speakers

Day 1

Opening Remarks

In his opening remarks, former Sen. George Mitchell (D-Maine) called today’s housing policies “outdated” and made for yesterday’s problems, saying that substantial changes are needed to face the issues of coming years. He called on leaders to set a new direction for housing policy, stating that “neglect is not a plan for action.” Mitchell called housing finance reform the last major piece of unfinished business from the financial crisis.

Julia Stasch, of the John D. and Catherin T. MacArthur Foundation, commended the Bipartisan Policy Center’s Housing Commission for modeling a process that will be needed for real federal reforms to the housing finance system. She said one of the best results of the report the Commission compiled is that the recommendations reignited the conversation on Capitol Hill and contributed to the Corker-Warner and Johnson-Crapo housing finance reform bills.

Mitchell said the Commission recognized early on that it needed “organizing principles” because of the diversity of their group and the scope of housing problems. He then listed the five principles that guided their formation of recommendations: 1) a healthy and stable housing market is essential to a strong economy; 2) the housing finance system should promote the uninterrupted availability of credit and capital; 3) the U.S. should reaffirm its commitment to providing decent homes for all families; 4) the primary focus of policy should be to help those in need; and 5) policy should find an appropriate balance between homeownership and housing subsidies.

Stasch again credited the Commission for showing that a bipartisan solution can be found, and stressed that housing finance reform needs to be accomplished in some way. She stated that reforms must also acknowledge that money for housing Americans will have to come from outside the government, and that federal funds should be dedicated to the best-working programs.

FHA – 80 Years and Counting: What Does the Future Hold?

Deloitte’s Monte Zaben moderated a panel featuring Federal Housing Administration (FHA) Director Carol Galante, and former commissioners Brian Montgomery, Nicolas Retsinas, David Stevens, and John Weicher. Zaben opened by asking them about the greatest operational challenges they faced.

Galante said running a trillion-dollar insurance company within the government is a huge challenge because of the stresses of dealing with appropriated funds, government shutdowns, and sequestration. Montgomery said FHA commissioners need the ability to make decisions quickly, but Congress “is not always on our schedule.”

Asked about what the private mortgage insurance industry can learn from FHA, Stevens notedthat people fail to realize that FHA supports itself with its own funds despite lending to people with low credit scores and without down payments, helping borrowers that most lenders would not touch today. Despite this, he said FHA has been able to survive, and this proves that the private market should not shy away from this segment of society, as long as they insure this portion of the market in a responsible way.

Montgomery said FHA is the “unwilling competitor” in that it exists not to take business away from the private sector but rather to provide services to the low-credit market, and that this is a difficult balance to find.

Zaben asked how the FHA balances the challenges of being ready for its countercyclical role and radical changes in its market share. Galante called this the agency’s core challenge because it must always have the resources to be ready and a certain infrastructure must be in place, so a steady amount of business is important.

Stevens added that it is a major challenge to work on an annual appropriations cycle when systems-development needs are multiyear. He continued that the FHA holds the biggest insurance portfolio in the world, yet it must plead for the money to remain sound each year.

Zaben asked the panelists for their thoughts on the possibility of reestablishing FHA as an independent agency outside of the Department of Housing and Urban Development (HUD).Retsinas said he proposed this in 1995, but that the initiative died immediately. Montgomery supported the notion because he believes that HUD directors should be focused on low-income housing. He also said independence would allow FHA to pay employees more and attract more talent. Galante said the best time for such an initiative would be now, coming out of the crisis, because people have seen that FHA can step up and fulfill its mission.

Weicher was the lone speaker to disagree. He said that because FHA is able to commit the full faith and credit of the government, it should not become semi-independent. He warned that making it into a semi-private corporation could take FHA down the same path as Fannie Mae and Freddie Mac.

Reigniting the Private-Label Mortgage Backed Security Market

James Lockhart of WL Ross & Co. LLC, moderated a panel with SIFMA President and CEO Kenneth Bentsen, Laurie Goodman of the Urban Institute’s Housing Finance Policy Center, Fred Matera of the Redwood Trust, former PIMCO Managing Director Scott Simon, and Michael Stegman of the Department of the Treasury.

Stegman said a diverse housing finance system promotes competition, efficiency and consumer choice. He then outlined why the return of the private-label security (PLS) market is important, stating that a robust, non-agency market is in the best interests of families, credit markets, and the economy as a whole. He explained that securitization has played a significant role in expanding access to credit for all Americans.

While market discipline and underwriting standards broke down in the lead-up to the financial crisis, Stegman said fixes have been made with the implementation of the Dodd-Frank Act, and ongoing development of regulations will continue to contribute to the soundness of the PLS market. He specifically mentioned the qualified mortgage rule, proposed risk retention rules, and regulations meant to improve transparency. The last piece of the puzzle, he said, would be improving standards and enforcement measures to restore the confidence of private investors.

Stegman said Treasury efforts have met two main stumbling blocks: 1) current market conditions and the economics of securitization favor retention in bank portfolios rather than pooling and securitizing; and 2) structural problems and a lack of investor trust.

Lockhart asked what the impediments to the return of the PLS market are. Matera said reformsto this point are fine for pristine levels of credit, but more must be done to allow the government to step back. He listed Redwood Trust’s published requirements for a market revival: 1) increased transparency to fight conflicts of interest; 2) creation of a third-party transaction manager with a fiduciary duty to monitor a servicer’s compliance and performance; 3) structural changes in which a 120-days delinquent loan is transferred immediately to a special servicer to start a pre-defined loss-mitigation strategy; 4) establishing clear responsibilities and performance metrics for servicers; and 5) addressing second liens and requiring the consent of first lien-holders to tack on additional debt.

Lockhart asked how to get AAA-rated investors back in the market. Simon said that when investors lose a trillion dollars, they will not return to a market without serious changes, and he questioned whether the system has changed enough. He agreed with Matera’s suggestions, and added that investors must be able to sue servicers and securitizers for violations or actions against investor interests, so that they know they have a way to get their money back.

Goodman pointed out that investors are “extremely upset” that their money is being spent on settlements. She said the settlement process should be more transparent and allow for investor objections to be heard and include greater disclosures.

Asked how he would respond to the suggested ideas, Bentsen said SIFMA represents members of all sides of this equation, and commented that there are structural issues that should be resolved with the finalization of regulations like the Securities and Exchange Commission’s (SEC) Regulation AB II and outstanding regulations on risk retention and capital.

Bentsen said SIFMA’s member would acknowledge that there is a residual factor – that it will take time to restore investor confidence. He added that government action is needed, but that the revival of the market will be an “evolutionary process” of reforms and cost analysis.

Given government dominance of the mortgage market, Lockhart asked how to get the private sector back without congressional action. Stegman said the Federal Housing Finance Agency’s (FHFA) decisions private mortgage insurance guarantee fees will be significant in giving a sense of where the market is and where pricing is. He then said the only way to reduce the government footprint in the market would be to move forward with housing finance reform, which would require working on the issues that continue to divide members of Congress.

Simon said the PLS market would return once banks no longer have an incentive to portfolio loans and when loan limits come down to increase the supply of loans.

Lockhart asked Bentsen to comment on earlier suggestions of creating third-party transaction managers or self-regulatory organizations (SROs). Bentsen said the transaction manager idea is one that SIFMA is going after, and that AB II is a step in the direction. On SROs, he questioned how they would work in the context of the mortgage market. He said that SROs have provided value in extending the reach of primary regulators, in this case the SEC), so it is an interesting proposal but more thought is needed as to how it would work.

Goodman said the idea of a transaction manager is a good one, and that a collateral manager would be an excellent idea to deal with enforcement and ensuring transparency for investors with regard to servicers’ loan modifications and risk mitigation strategies.

Goodman also commented that PLS market issuers can be their own worst enemies because of a lack of standardization. Matera agreed, saying that people should not have to read 800 pages to find three pages of difference from previous deals.

An audience member asked about FHFA’s work on a common securitization platform for Fannie Mae and Freddie Mac. Stegman said Treasury has been very supportive of the initiative and that it could also be a vehicle to stabilize non-agency and private label work.

Reflections from Five Former HUD Secretaries

Former Rep. Rick Lazio (R-N.Y.) moderated a panel discussion with five former HUD secretaries:Carla Hills (1975-77), Henry Cisneros (1993-1997), Mel Martinez (2001-2003), Alphonso Jackson (2004-2008) and Steven Preston (2008-2009).

Jackson was very critical of the regulatory atmosphere, saying that nothing will change on access and affordability of credit without substantial change. He argued that banks want to make more loans, but that it is impossible because of regulations.

Preston agreed, and said it is important to remember that the financial services community acts as HUD’s distributor and that HUD must therefore understand whether and how the banks will adopt different programs.

Cisneros stated that it is important to be careful about taking the wrong lessons from the crisis, and that there is no need to pull back from homeownership because it remains essential to the country as a way for people to build up equity.

Asked about what he would have changed about their tenures as HUD secretary, Martinez answered that he wishes he had acted and pushed for government-sponsored enterprise (GSE) reform earlier, because the problems with Fannie Mae and Freddie Mac were already apparent.

Housing Finance Reform: Where Do We Go From Here?

The Wall Street Journal’s Nick Timiraos moderated a discussion with former FHFA Acting Director Ed DeMarco, Matthew Feldman of the Federal Home Loan Bank of Chicago, Nagendra Jayanty of Claren Road/Carlyle, Adolfo Marzol of Essent U.S. Holdings, Inc., and Bruce Morrison of the Morrison Public Affairs Group.  Timiraos opened by asking about the risks of an open-ended conservatorship of Fannie Mae and Freddie Mac, and to what extent the FHFA should taken action on its own absent congressional or executive action.

DeMarco answered that ultimately, the resolution of the conservatorships will require Congress. He offered four main risks to the open-ended conservatorship: 1) the GSEs are making decisions every day with a 30-year tail-line, despite uncertainty about how long they will remain in business; 2) they operate with a limited amount of capital; 3) the longer the government waits, the more private capital will lose interest and look to other areas to invest; and 4) the government continues to make decisions as a conservator, making politically-based decisions rather than market-based. DeMarco urged looking for incremental steps to start transitioning to a post-GSE structure.

Timiraos noted that H.R.2767, the Protecting American Taxpayers and Homeowners (PATH) Act and S.1217, the Housing Finance Reform and Taxpayer Protection Act (Johnson-Crapo) seem to have lost momentum, and asked if we are “doomed to the status quo” if Congress cannot act.Morrison countered that there is no such thing as standing still, and then even indecision has consequences. He said there is “lots of room” for moving forward on a transitional basis and find ways to gradually bring in private capital. He continued that even those who want to take catastrophic risk away from the government entirely must agree that you have to start by removing a small portion. Overall, he said Congress should manage the transition with a transitional legislation, because there is no stomach for a “big bang solution.”

Marzol said the inherent nationalization of credit risk is the biggest problem, but that no one wants to hurt access and affordability of credit. He pushed for a “build-in” of private capital ahead of taxpayer risk. He said real competition is needed to drive price, service and innovation, and that a new system cannot allow for another monopoly or duopoly that would mean another era of too-big-to-fail and government guarantees. Marzol stressed that the transition much be gradually implemented because the GSE system is too big to “turn out the lights” all at once.

Asked if the Treasury should allow the GSEs to recapitalize, Jayanty answered that there is a clear need to build capital in some way, and lamented that Johnson-Crapo does not discuss how to fund the transition. He suggest using GSE profits to start funding the proposed Federal Mortgage Insurance Corporation (FMIC).

Timiraos asked DeMarco how he would decide the direction in which to take Fannie Mae and Freddie Mac given that reform does not seem to be moving quickly. DeMarco stated that no one ever expected the conservatorship to last this long, but there is no other infrastructure in place that can replace the GSEs. He said that gradually shrinking the GSEs’ footprint requires the reentry of private capital into the market, and must start with risk-sharing, but this will require higher guarantee fees that are commensurate with the price of the guarantee. Another guiding principle, he said, was the need to ensure ongoing activities towards risk-mitigation.  DeMarco said the FHFA has been rebuilding some parts of the GSEs and winding down others with the understanding that Congress has a long-term plan to wind them down.

Jayanty again pushed for building up capital, arguing that it puts taxpayers further away from risk. He also acknowledged that the GSEs will be very different in four to five years with the reforms of the FHFA, specifically mentioned the common securitization platform.

Timiraos noted that current FHFA Director Mel Watt is trying to de-risk the GSEs rather than wind them down. Marzol said this is Watt reacting to the “facts on the ground.” On accelerating the role of private capital, he stated that guarantee fees must reflect the value of any private credit enhancements.

Day 2

Congressional Perspectives on the Future of Housing Finance Reform

Sen. Johnny Isakson (R-Ga.) declared that the most certain thing about federal housing policy is uncertainty itself, and that the government has done what it does best – overreacting and over-regulating ever since the crisis.

On GSE reform, Isakson said passing legislation is absolutely critical, but members of Congress who do not want government guarantees need to “get over it.” He said GSE reform should be adopted as quickly as possible, and called both Corker-Warner and Johnson-Crapo good bills. He stated that he wants to “get on this train and ride it out of the station.” He said the mortgage market would not return to normal until there is GSE reform and clearer mortgage regulation.

Asked by a member of the audience about the extreme partisanship in Congress, Isakson agreed that the parties have competed with each other rather than doing what is best for the American people. He said he expects Republicans to win a slight majority in the Senate, but that having a Republican Congress and Democratic White House does not mean progress cannot be made. He warned that Americans are sick of conflict, and that Republicans will have about six months to deliver on key issues such as the budget and highway trust fund, or they risk being in just as bad a shape as Democrats are today.

Keynote Remarks – Newt Gingrich

Former Speaker of the House Newt Gingrich (R-Ga.) advocated for property ownership, saying landowners have more of a commitment to long-term thinking and greater independence. He denied the perception that homeownership is becoming culturally less important.

A significant challenge today, Gingrich said new solutions should be designed that eliminate modern bureaucracy. Rather than rebuilding the old system, he encourage constructing a new one using modern technology. He supported a rules-based system rather than a regulatory system in which bureaucracy is expected to punish bad actors, calling bureaucracy ineffective and prone to making unnecessary “exceptions.”

Congressional Perspectives on the Future of Housing Finance Reform

Rep. Randy Neugebauer (R-Texas) said the path forward for housing reform is difficult to predict because of disagreement as to the meaning of reform with respect to what the role of government should be. He added that the outcome of the midterm elections, and even the next presidential election, will have an impact because alignment is needed between both the legislative and executive branches.

Neugebauer said housing finance reform “doesn’t seem to have any legs” for the rest of this Congress, and that no action would take place during the lame duck session. However, he predicted that the next Congress would see reintroductions of both the PATH Act in the House and Johnson-Crapo, perhaps in an amended form, in the Senate. He said he hopes that both chambers will pass their respective bills and get to a conference where real progress can be made.

Legislation needs to lead to a sustainable and market-driven housing market, Neugebauer stated. However, he insisted that there will always be downturns, and that they cannot be eliminated. He cautioned that casting a wide regulatory net will never work to make the housing market failsafe, and that overregulation can in fact be crippling to the housing market and economy.

Rep. Maxine Waters (D-Calif.) noted that the GSEs posted significant profits in 2013 and continue to be profitable today, but that gains are slowing and current profit levels are not sustainable. She said the fact remains that another housing downturn will result in taxpayers once again being on the hook for GSE losses, which underscores the need for GSE reform.

Waters said her bill, the HOME Forward Act, would create a new market securities cooperative, establish a strong regulator with consolidated oversight of underwriting standards, counterparties and vendors, promote sharing of credit risk, and create a new fund to stand ahead of taxpayer losses. In addition, she touted that her bill would include greater support for affordable housing and multifamily housing.

In a sharp criticism of House Financial Services Committee Chairman Jeb Hensarling (R-Texas), Waters lamented that her bill has not received a hearing and that GSE reform has seen no attention in the House since July of 2013 because of Hensarling’s inability to gather support within his own party for the PATH Act. She said Hensarling’s bill would be a disaster for the housing market and virtually end the 30-year fixed-rate mortgage. Waters applauded the Senate Banking Committee for its conscientious effort at bipartisan reform, and called Johnson-Crapo an important step down a long road to GSE reform.

Waters heaped praise on FHFA Director Mel Watt for setting in motion efforts to lay the groundwork for whenever Congress finally takes action on GSE reform, such as the creation of a consolidated securitization platform and placing access to credit at the top of the agenda. She also stressed that the return of private capital to the mortgage market will require addressing widespread investor distrust. She credited the SEC for acting on new rules for credit rating agencies and broader asset-backed securities disclosures.

Closing Keynote – HUD Secretary Julian Castro

Department of Housing and Urban Development Secretary Julian Castro said that HUD works to expand opportunity for all Americans, and the best place to start is through homeownership, but that the dream of homeownership is out of reach for many Americans. He stated the government must work to attract private capital back to the market, establish certainty for lenders, and protect taxpayers.

Castro said housing finance reform is important because a government-dominated market is unsustainable. He called the passage of Johnson-Crapo in the Senate Banking Committee a huge step, and urged pushing final legislation “over the finish line once and for all.”

While Congress works to pass meaningful legislation, Castro said the FHA will do its part through its “Blueprint for Access.” He said this plan has two components: 1) the Homeowners Armed With Knowledge (HAWK) program will allow consumers who undergo housing counseling to qualify for reduced mortgage premiums; and 2) clearing up quality assurance policies to give lenders certainty.

Castro highlighted the need to produce affordable housing, specifically through the National Housing Trust Fund. He pointed out that Johnson-Crapo directs billions of dollars to produce affordable housing, and called this an “unprecedented opportunity” and another reason why the Administration will continue to fight for housing finance reform.

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