BPC Event on Risk Sharing and GSE Reform
Bipartisan Policy Center
“Housing Finance Reform: Opportunities and Obstacles of Risk Sharing”
Tuesday, October 6, 2015
Key Topics & Takeaways
- Risk Sharing Goals: FHFA’s Ryan stated that risk sharing is meant to reduce risk to the taxpayers as well as transfer risk to the private market. He stated that the risk sharing programs by Fannie Mae and Freddie Mac are meant to create a broad and liquid market, and that risk sharing needs to be scalable and repeatable so the market can continue to grow.
- Risk Sharing Sustainability: Panelists generally shared the view that risk sharing is working now but that how the program would respond during an economic downturn is a complete unknown. All panelists agreed that in five years the U.S. housing finance market will look very much the same as it does today and that the risk sharing market will continue to grow and develop during that time.
- GSE Reform: Sen. Corker (R-Tenn.) stated that change could happen if the next president makes GSE reform a priority. Sen. Warner (D-Va.) agreed with Corker that there will not be any major legislation but hopes there will be some incremental pieces of legislation that help move housing reform forward.
Speakers
- Sen. Bob Corker(R-Tenn.)
- Sen. Mark Warner(D-Va.)
- Kevin Chavers, Managing Director, Blackrock
- Bob Ryan, Acting Deputy Director of the Division of Conservatorship, Federal Housing Finance Agency
- Michael Fratantoni, Chief Economist and Senior Vice President, Research and Industry Technology, Mortgage Bankers Association
- Laurie Goodman, Director, Urban Institute’s Housing Finance Policy Center
- Pat Sinks, CEO, Mortgage Guaranty Insurance Corporation
General Panel Discussion
General Assessment of GSE Risk Sharing
The panel began with a question to the panelists regarding their thoughts on government-sponsored enterprise (GSE) credit risk sharing.
Bob Ryan, Acting Deputy Director of the Division of Conservatorship, Federal Housing Finance Agency (FHFA), began the panel by outlining several goals for GSE risk sharing. Ryan stated that risk sharing is meant to reduce risk to the taxpayers as well as transfer risk to the private market. He stated that the risk sharing programs by Fannie Mae and Freddie Mac are meant to create a broad and liquid market. Ryan stated that risk sharing needs to be scalable and repeatable so the market can continue to grow, and also noted a need to broaden and deepen the investor base.
Regarding the current credit risk sharing programs, Michael Fratantoni of the Mortgage Bankers Association stated that while risk is being transferred he does not believe the current risk sharing model is what the market originally envisioned. Fratantoni drew a clear distinction between front-end risk sharing and back-end risk sharing. He expressed the view that a front-end risk sharing model would encourage greater participation from more market lenders while at the same time reducing risk.
Laurie Goodman, Director of the Urban Institute’s Housing Finance Policy Center, said risk sharing has accomplished the goal of reducing taxpayer risk but that she believes more could be done to inform guarantee fee pricing in a more transparent manner. Regarding front-end risk sharing deals, she stated that there has been a lack of price transparency in the few deals that have been executed.
Panelists were asked if the risk sharing market is a permanent one. Pat Sinks, CEO of the Mortgage Guaranty Insurance Corporation, stated that since there is no pending legislation, there is the expectation that several more risk sharing deals will be issued.
Ryan expressed the view that there will be investor appetite for risk sharing deals going forward and that he expects the market to grow through the diversification of asset classes. He explained that legislative reform needs to be a priority for the GSEs but expects the risk sharing market to expand in the near term.
Kevin Chavers, Managing Director at Blackrock, stated that policy risk for credit investors is real and that standardization of offered products would help to increase the liquidity of the risk sharing market. Regarding the challenge of liquidity, He said the capital requirements for broker-dealers impede market making in the risk sharing market. Chavers said the question he has is how the market will respond during a market downturn.
Panelists generally shared the view that risk sharing is working now but that how the program would respond during an economic downturn is a complete unknown. All panelists agreed that in five years the U.S. housing finance market will look very much the same as it does today and that the risk sharing market will continue to grow and develop during that time.
Panelists were asked about the potential impact of one of the GSEs having to draw more money from Treasury. Goodman expressed the view that the need for one of the GSEs to draw capital from Treasury in the future would not be enough to force legislation.
In closing, panelists were asked if borrowers should be able to buy a house with a down payment that is less than twenty percent. Moore noted that home ownership has been the most common way to build wealth in the country and a down payment under twenty percent has always been the standard. Ryan agreed with Moore on the need for borrowers to have access to credit even if the down payment is less than twenty percent.
Corker and Warner Panel
Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) were asked about S. 1217, the Housing Finance Reform and Taxpayer Protection Act, original proposed on June 25, 2013. Corker stated that even though the legislation did not ultimately pass, the industry is, slowly, moving in the direction laid out by the bill. Warner noted that during the creation of the legislation, he did not have a good enough appreciation for the fact that so few would be ready and or willing to disrupt the status quo.
Asked when he thought the conservatorships of the GSEs would end, Corker answered that he does not believe conservatorship will end until the next presidential term at the earliest. He added that because ending conservatorship is such a heavy lift, no one is going to be completely happy so neither Republicans nor Democrats want to discuss such a tough issue. Corker stated that change could happen if the next president makes GSE reform a priority. Warner agreed with Corker that there will not be any major legislation but hopes there will be some incremental pieces of legislation that help move housing reform forward.
Common Securitization Platform
Warner stated that he wants to see more front-end risk sharing deals as well as more movement on the Common Securitization Platform (CSP). Warner expressed hope that the CSP will be utilized to help bring more participants into the mortgage risk sharing market.
For more information on this hearing, please click here.
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Bipartisan Policy Center
“Housing Finance Reform: Opportunities and Obstacles of Risk Sharing”
Tuesday, October 6, 2015
Key Topics & Takeaways
- Risk Sharing Goals: FHFA’s Ryan stated that risk sharing is meant to reduce risk to the taxpayers as well as transfer risk to the private market. He stated that the risk sharing programs by Fannie Mae and Freddie Mac are meant to create a broad and liquid market, and that risk sharing needs to be scalable and repeatable so the market can continue to grow.
- Risk Sharing Sustainability: Panelists generally shared the view that risk sharing is working now but that how the program would respond during an economic downturn is a complete unknown. All panelists agreed that in five years the U.S. housing finance market will look very much the same as it does today and that the risk sharing market will continue to grow and develop during that time.
- GSE Reform: Sen. Corker (R-Tenn.) stated that change could happen if the next president makes GSE reform a priority. Sen. Warner (D-Va.) agreed with Corker that there will not be any major legislation but hopes there will be some incremental pieces of legislation that help move housing reform forward.
Speakers
- Sen. Bob Corker(R-Tenn.)
- Sen. Mark Warner(D-Va.)
- Kevin Chavers, Managing Director, Blackrock
- Bob Ryan, Acting Deputy Director of the Division of Conservatorship, Federal Housing Finance Agency
- Michael Fratantoni, Chief Economist and Senior Vice President, Research and Industry Technology, Mortgage Bankers Association
- Laurie Goodman, Director, Urban Institute’s Housing Finance Policy Center
- Pat Sinks, CEO, Mortgage Guaranty Insurance Corporation
General Panel Discussion
General Assessment of GSE Risk Sharing
The panel began with a question to the panelists regarding their thoughts on government-sponsored enterprise (GSE) credit risk sharing.
Bob Ryan, Acting Deputy Director of the Division of Conservatorship, Federal Housing Finance Agency (FHFA), began the panel by outlining several goals for GSE risk sharing. Ryan stated that risk sharing is meant to reduce risk to the taxpayers as well as transfer risk to the private market. He stated that the risk sharing programs by Fannie Mae and Freddie Mac are meant to create a broad and liquid market. Ryan stated that risk sharing needs to be scalable and repeatable so the market can continue to grow, and also noted a need to broaden and deepen the investor base.
Regarding the current credit risk sharing programs, Michael Fratantoni of the Mortgage Bankers Association stated that while risk is being transferred he does not believe the current risk sharing model is what the market originally envisioned. Fratantoni drew a clear distinction between front-end risk sharing and back-end risk sharing. He expressed the view that a front-end risk sharing model would encourage greater participation from more market lenders while at the same time reducing risk.
Laurie Goodman, Director of the Urban Institute’s Housing Finance Policy Center, said risk sharing has accomplished the goal of reducing taxpayer risk but that she believes more could be done to inform guarantee fee pricing in a more transparent manner. Regarding front-end risk sharing deals, she stated that there has been a lack of price transparency in the few deals that have been executed.
Panelists were asked if the risk sharing market is a permanent one. Pat Sinks, CEO of the Mortgage Guaranty Insurance Corporation, stated that since there is no pending legislation, there is the expectation that several more risk sharing deals will be issued.
Ryan expressed the view that there will be investor appetite for risk sharing deals going forward and that he expects the market to grow through the diversification of asset classes. He explained that legislative reform needs to be a priority for the GSEs but expects the risk sharing market to expand in the near term.
Kevin Chavers, Managing Director at Blackrock, stated that policy risk for credit investors is real and that standardization of offered products would help to increase the liquidity of the risk sharing market. Regarding the challenge of liquidity, He said the capital requirements for broker-dealers impede market making in the risk sharing market. Chavers said the question he has is how the market will respond during a market downturn.
Panelists generally shared the view that risk sharing is working now but that how the program would respond during an economic downturn is a complete unknown. All panelists agreed that in five years the U.S. housing finance market will look very much the same as it does today and that the risk sharing market will continue to grow and develop during that time.
Panelists were asked about the potential impact of one of the GSEs having to draw more money from Treasury. Goodman expressed the view that the need for one of the GSEs to draw capital from Treasury in the future would not be enough to force legislation.
In closing, panelists were asked if borrowers should be able to buy a house with a down payment that is less than twenty percent. Moore noted that home ownership has been the most common way to build wealth in the country and a down payment under twenty percent has always been the standard. Ryan agreed with Moore on the need for borrowers to have access to credit even if the down payment is less than twenty percent.
Corker and Warner Panel
Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) were asked about S. 1217, the Housing Finance Reform and Taxpayer Protection Act, original proposed on June 25, 2013. Corker stated that even though the legislation did not ultimately pass, the industry is, slowly, moving in the direction laid out by the bill. Warner noted that during the creation of the legislation, he did not have a good enough appreciation for the fact that so few would be ready and or willing to disrupt the status quo.
Asked when he thought the conservatorships of the GSEs would end, Corker answered that he does not believe conservatorship will end until the next presidential term at the earliest. He added that because ending conservatorship is such a heavy lift, no one is going to be completely happy so neither Republicans nor Democrats want to discuss such a tough issue. Corker stated that change could happen if the next president makes GSE reform a priority. Warner agreed with Corker that there will not be any major legislation but hopes there will be some incremental pieces of legislation that help move housing reform forward.
Common Securitization Platform
Warner stated that he wants to see more front-end risk sharing deals as well as more movement on the Common Securitization Platform (CSP). Warner expressed hope that the CSP will be utilized to help bring more participants into the mortgage risk sharing market.
For more information on this hearing, please click here.