Bipartisan Policy Center on Private Capital in a Reformed Housing Finance System
AT
DECEMBER 11TH’S BIPARTISAN POLICY CENTER (BPC) event entitled, “the Role of Private
Capital in a Reformed Housing Finance System,” industry experts discussed what
the challenges and options are to encourage the entry of more private capital
into the housing finance system. Senators Tim Johnson (D-S.D.) and Mike
Crapo (R-Idaho), the Chairman and Ranking Member, respectively, of the Senate
Committee on Banking, Housing, and Urban Development also gave remarks.
In
brief opening remarks, Sen. Mel Martinez, Chairman of the Southeast & Latin
America for JPMorgan Chase & Co, stated that there is “agreement across the
spectrum” that the government’s dominance in the housing finance market needs
to be addressed. He said the main questions facing a new system center
around the ability of private capital to “step up” and assume some of the $5
trillion in credit risk currently held by Fannie Mae and Freddie Mac in the
mortgage market. He also said there is question around consumer’s willingness
to pay higher costs in a new system.
Remarks
– Sen. Mike Crapo
In
his remarks, Sen. Crapo thanked Sen. Johnson and his work to find a bipartisan
solution for housing finance reform and noted that the Senate Banking Committee
recently concluded a series of ten hearings on various aspects of this
subject. He said that while he “still want[s] a mark-up” by the end of
the year, it probably won’t happen but hopes a piece of housing finance
legislation can be marked up in the “early part of next year.”
Crapo
said there has been progress in the past few months, noting that legislation
has been produced on the Senate side by Sens. Mark Warner (D-Va.) and Bob
Corker (R-Tenn.) as well as on the House side by Rep. Jeb Hensarling
(R-Texas.), calling them both “very thoughtful proposals.” He also noted
that the White House, regulatory agencies, and “literally all stakeholders”
have been involved in the Committee’s process.
Crapo
noted that the Corker-Warner bill, S. 1217,
contemplates how to structure strong, first loss, private capital, and said it
provides “some flexibility” while looking at how risk sharing is handled,
especially with regard to the “to be announced” (TBA) market. Crapo concluded
that it is “essential that Congress act as soon as possible” and that now is
the time “to capitalize on this momentum.”
Panel
1 – Who provides private capital, how is it provided?
Moderator
Robert M. Couch, Counsel at Bradley Arant Boult Cummings LLP, stated that, for
the purposes of the panel discussion, it will be assumed that there is a role
for a public guarantor of mortgages, but only to take catastrophic credit risk;
as described in S. 1217. He then asked the panel if there is enough private
capital “out there” to take a 10 percent first loss position in the mortgage
market.
Kevin
Chavers, Managing Director at BlackRock, said that the amount of capital needed
to reach the 10 percent level is “unprecedented” and that he is not sure if
even a combination of debt markets, equity, and insurance will be enough to
reach this level. He added that the capital markets model of providing
this money would face challenges in a downturn, as the sector has highly
correlated risks.
Teresa
Bryce Bazemore, President of Radian Guaranty, suggested that a new system could
have a combination of capital markets funding and mortgage insurance, as the
insurance industry has the ability to redistribute risk. She added that
having loan level mortgage insurance and mortgage pool insurance could help in
reaching desired coverage levels. Bazemore also said that the benefits to
borrowers are “not discussed much” and stated that the insurance model would
help borrowers stay in their homes while reducing losses to investors.
Nagendra
Jayanty, Research Analyst at Claren Road/Carlyle, stated that the most
important traits for sources of capital to have are 1) sufficiency; 2)
continuity; and 3) counter-cyclicality. He said that equity capital has
all three of these characteristics, but that debt does not and thus should only
be used as a compliment. He stressed that equity is permanent, upfront,
and can be regulated.
Pat
McEnerney, Managing Director at Deutsche Bank, stated that the 10 percent first
loss capital level may be too high, as the five percent level exceeds what
would have been needed in the past. He added that the transition period
to a new system is critical as markets need time to evolve. Chavers agreed
that the 10 percent level “sounds high” and Jayanty added that there should be
flexibility around this level because “you don’t want capital to flee.”
Jayanty,
when asked about capital weaknesses, said that state regulators “have room to
standardize” capital risk levels and stated that “not all loans should be
treated equally.” He said that “credit based spreads don’t work” but that
“contingent capital bonds” could be feasible.
Next,
Couch noted that S. 1217 discusses the ability of a Federal Mortgage Insurance
Corporation (FMIC) to assume a first loss position in times of stress and asked
the panel when this authority should be triggered.
Bazemore
replied that precaution should be taken with the FMIC stepping into a first
loss position and had concerns that this trigger would be pulled too quickly.
Panel
2 – Rates and monitoring: Assessing the impact of private capital
Moderator
Nicolas P. Retsinas, Senior Lecturer in Real Estate at Harvard Business School,
asked the panel what the world would look like if a new housing finance system
was in place and what mortgage rates would be in comparison to now.
Mark
Zandi, Chief Economist at Moody’s Analytics, stated that mortgage rates would
go up under a new system. He said that the current guarantee fee (G-fee)
of 45 basis points (bps) is capitalized for a 2.5 percent loss rate and that
under S. 1217 the G-fee would be about 95 bps.
Mark
Calabria, Director of Financial Regulation Studies at the Cato Institute,
responded to this saying that the 95 bps level “sounds to be at the upper end”
and that if credit quality is higher than rates would be lower. He added
that debate should focus on the cost to society rather than the cost to a
borrower.
Michael
Stegman, Counselor to Secretary for Housing Finance Policy at the U.S.
Department of Treasury, noted that the fee framework has moved from a “deeply
subsidized G-fee” to a risk-based loan level system and said that the rate
spread should decrease based on these changes.
Stegman
continued saying it will be critical to make sure there is alignment of
interests in the system because the government will be responsible for
catastrophic losses. He stated that the mortgage insurer as guarantor
model aligns interests, whereas in a capital markets model “interest may be
less well aligned.” He added that charging a higher G-fee could be
warranted if a misalignment of interests is inherent in a new system.
Zandi
agreed that the guarantor model does a better job of aligning interests and
stated that “the fact that creditors get wiped out is very important.”
Tim
Rood, Partner at the Collingwood Group, stated that a new system needs a “very
diverse guarantee model” to balance the distribution of guarantees so that a
mortgage insurer can still operate if there are disruptions in the market.
Next,
Retsinas asked the panel how much detail of the new system should be determined
by legislation and how much should be left up to regulators.
Calabria
replied that he does not have confidence in Washington to properly determine
the correct capital standard before a new system is put in place and added that
legislators should seek to “get away from complexity” in creating the statute.
Rood
expressed concern that trying to do too much with the legislation and making it
too complex could create loopholes and raise compliance costs.
Stegman
stated that it will be a balancing act, as overly broad principles will make it
difficult to create an operational plan for a transition to a new system,
saying that “key anchors” are needed. He added that if capital standards
are not put in law, then authorities should ensure there are national loss
mitigation standards.
Zandi
stated that he would “err on the side” of giving regulators more flexibility.
Retsinas
then asked what will be used to measure if a new system is working one year
after implementation.
Zandi
replied that the state of the housing recovery will be a determinant. Stegman
agreed, adding that he would want to see progress in pricing and for risk
transfer to be “scaled up.”
Calabria
stated that “we won’t know” if the new system works until there is another
housing boom and bust.
Remarks
– Sen. Tim Johnson
Senator
Johnson, in his remarks, stated that broad bipartisan support for developing a
new housing finance system gives him hope that a consensus is possible and that
the “importance of getting this right cannot be understated.”
Housing
finance reform “continues to be the top priority” for his Committee, Johnson
said, and identified the areas of private capital and first loss position
thresholds as being places were more work is needed.
Johnson
said that “full attention” is now on “drafting and negotiating a compromise,”
but noted that progress “is not as far along” as he hoped it would be at this
point. However, he said that he continues to “be bullish” on the
Committees chances of creating legislation and that the primary goal is to “get
it right” rather than to get something done hastily.
For
more information on this event, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Housing,Hearing Summaries Agency:Special Event,Publish Year:2013
AT
DECEMBER 11TH’S BIPARTISAN POLICY CENTER (BPC) event entitled, “the Role of Private
Capital in a Reformed Housing Finance System,” industry experts discussed what
the challenges and options are to encourage the entry of more private capital
into the housing finance system. Senators Tim Johnson (D-S.D.) and Mike
Crapo (R-Idaho), the Chairman and Ranking Member, respectively, of the Senate
Committee on Banking, Housing, and Urban Development also gave remarks.
In
brief opening remarks, Sen. Mel Martinez, Chairman of the Southeast & Latin
America for JPMorgan Chase & Co, stated that there is “agreement across the
spectrum” that the government’s dominance in the housing finance market needs
to be addressed. He said the main questions facing a new system center
around the ability of private capital to “step up” and assume some of the $5
trillion in credit risk currently held by Fannie Mae and Freddie Mac in the
mortgage market. He also said there is question around consumer’s willingness
to pay higher costs in a new system.
Remarks
– Sen. Mike Crapo
In
his remarks, Sen. Crapo thanked Sen. Johnson and his work to find a bipartisan
solution for housing finance reform and noted that the Senate Banking Committee
recently concluded a series of ten hearings on various aspects of this
subject. He said that while he “still want[s] a mark-up” by the end of
the year, it probably won’t happen but hopes a piece of housing finance
legislation can be marked up in the “early part of next year.”
Crapo
said there has been progress in the past few months, noting that legislation
has been produced on the Senate side by Sens. Mark Warner (D-Va.) and Bob
Corker (R-Tenn.) as well as on the House side by Rep. Jeb Hensarling
(R-Texas.), calling them both “very thoughtful proposals.” He also noted
that the White House, regulatory agencies, and “literally all stakeholders”
have been involved in the Committee’s process.
Crapo
noted that the Corker-Warner bill, S. 1217,
contemplates how to structure strong, first loss, private capital, and said it
provides “some flexibility” while looking at how risk sharing is handled,
especially with regard to the “to be announced” (TBA) market. Crapo concluded
that it is “essential that Congress act as soon as possible” and that now is
the time “to capitalize on this momentum.”
Panel
1 – Who provides private capital, how is it provided?
Moderator
Robert M. Couch, Counsel at Bradley Arant Boult Cummings LLP, stated that, for
the purposes of the panel discussion, it will be assumed that there is a role
for a public guarantor of mortgages, but only to take catastrophic credit risk;
as described in S. 1217. He then asked the panel if there is enough private
capital “out there” to take a 10 percent first loss position in the mortgage
market.
Kevin
Chavers, Managing Director at BlackRock, said that the amount of capital needed
to reach the 10 percent level is “unprecedented” and that he is not sure if
even a combination of debt markets, equity, and insurance will be enough to
reach this level. He added that the capital markets model of providing
this money would face challenges in a downturn, as the sector has highly
correlated risks.
Teresa
Bryce Bazemore, President of Radian Guaranty, suggested that a new system could
have a combination of capital markets funding and mortgage insurance, as the
insurance industry has the ability to redistribute risk. She added that
having loan level mortgage insurance and mortgage pool insurance could help in
reaching desired coverage levels. Bazemore also said that the benefits to
borrowers are “not discussed much” and stated that the insurance model would
help borrowers stay in their homes while reducing losses to investors.
Nagendra
Jayanty, Research Analyst at Claren Road/Carlyle, stated that the most
important traits for sources of capital to have are 1) sufficiency; 2)
continuity; and 3) counter-cyclicality. He said that equity capital has
all three of these characteristics, but that debt does not and thus should only
be used as a compliment. He stressed that equity is permanent, upfront,
and can be regulated.
Pat
McEnerney, Managing Director at Deutsche Bank, stated that the 10 percent first
loss capital level may be too high, as the five percent level exceeds what
would have been needed in the past. He added that the transition period
to a new system is critical as markets need time to evolve. Chavers agreed
that the 10 percent level “sounds high” and Jayanty added that there should be
flexibility around this level because “you don’t want capital to flee.”
Jayanty,
when asked about capital weaknesses, said that state regulators “have room to
standardize” capital risk levels and stated that “not all loans should be
treated equally.” He said that “credit based spreads don’t work” but that
“contingent capital bonds” could be feasible.
Next,
Couch noted that S. 1217 discusses the ability of a Federal Mortgage Insurance
Corporation (FMIC) to assume a first loss position in times of stress and asked
the panel when this authority should be triggered.
Bazemore
replied that precaution should be taken with the FMIC stepping into a first
loss position and had concerns that this trigger would be pulled too quickly.
Panel
2 – Rates and monitoring: Assessing the impact of private capital
Moderator
Nicolas P. Retsinas, Senior Lecturer in Real Estate at Harvard Business School,
asked the panel what the world would look like if a new housing finance system
was in place and what mortgage rates would be in comparison to now.
Mark
Zandi, Chief Economist at Moody’s Analytics, stated that mortgage rates would
go up under a new system. He said that the current guarantee fee (G-fee)
of 45 basis points (bps) is capitalized for a 2.5 percent loss rate and that
under S. 1217 the G-fee would be about 95 bps.
Mark
Calabria, Director of Financial Regulation Studies at the Cato Institute,
responded to this saying that the 95 bps level “sounds to be at the upper end”
and that if credit quality is higher than rates would be lower. He added
that debate should focus on the cost to society rather than the cost to a
borrower.
Michael
Stegman, Counselor to Secretary for Housing Finance Policy at the U.S.
Department of Treasury, noted that the fee framework has moved from a “deeply
subsidized G-fee” to a risk-based loan level system and said that the rate
spread should decrease based on these changes.
Stegman
continued saying it will be critical to make sure there is alignment of
interests in the system because the government will be responsible for
catastrophic losses. He stated that the mortgage insurer as guarantor
model aligns interests, whereas in a capital markets model “interest may be
less well aligned.” He added that charging a higher G-fee could be
warranted if a misalignment of interests is inherent in a new system.
Zandi
agreed that the guarantor model does a better job of aligning interests and
stated that “the fact that creditors get wiped out is very important.”
Tim
Rood, Partner at the Collingwood Group, stated that a new system needs a “very
diverse guarantee model” to balance the distribution of guarantees so that a
mortgage insurer can still operate if there are disruptions in the market.
Next,
Retsinas asked the panel how much detail of the new system should be determined
by legislation and how much should be left up to regulators.
Calabria
replied that he does not have confidence in Washington to properly determine
the correct capital standard before a new system is put in place and added that
legislators should seek to “get away from complexity” in creating the statute.
Rood
expressed concern that trying to do too much with the legislation and making it
too complex could create loopholes and raise compliance costs.
Stegman
stated that it will be a balancing act, as overly broad principles will make it
difficult to create an operational plan for a transition to a new system,
saying that “key anchors” are needed. He added that if capital standards
are not put in law, then authorities should ensure there are national loss
mitigation standards.
Zandi
stated that he would “err on the side” of giving regulators more flexibility.
Retsinas
then asked what will be used to measure if a new system is working one year
after implementation.
Zandi
replied that the state of the housing recovery will be a determinant. Stegman
agreed, adding that he would want to see progress in pricing and for risk
transfer to be “scaled up.”
Calabria
stated that “we won’t know” if the new system works until there is another
housing boom and bust.
Remarks
– Sen. Tim Johnson
Senator
Johnson, in his remarks, stated that broad bipartisan support for developing a
new housing finance system gives him hope that a consensus is possible and that
the “importance of getting this right cannot be understated.”
Housing
finance reform “continues to be the top priority” for his Committee, Johnson
said, and identified the areas of private capital and first loss position
thresholds as being places were more work is needed.
Johnson
said that “full attention” is now on “drafting and negotiating a compromise,”
but noted that progress “is not as far along” as he hoped it would be at this
point. However, he said that he continues to “be bullish” on the
Committees chances of creating legislation and that the primary goal is to “get
it right” rather than to get something done hastily.
For
more information on this event, please click here.