MBA Outlines Principles for Restoring Balance in Housing System

WASHINGTON–For all the debate about the future of Fannie Mae and Freddie Mac, one aspect appears to be a consensus view: the current system cannot sustain itself.

“The current conservatorship is not a permanent plan,” said Mortgage Bankers Association President and CEO David Stevens, CMB, speaking yesterday at a Congressional Educational Series briefing at the Capitol Building. “We don’t see an immediate pathway out. But they have no capital winding down to zero and they have no clear path toward rebuilding capital.”

Fannie Mae and Freddie Mac have been in federal conservatorship since September 2008. Stevens said on one hand, this conservatorship has provided some security to the housing market; on the other hand, it has hampered the ability of the private securitization market to re-emerge in a substantive manner.

MBA Chief Economist Michael Fratantoni noted that time is of the essence: household formation over the next 10 years projects much higher than the 1970-2014 norm, with more than 1.5 million new households anticipated per year between now and 2024.

“The housing market is doing better by any measure–lots of positive indicators,” Fratantoni said. “We need the housing finance system to not only be fully operational, but operating at full steam.”

Additionally, Fratantoni said single-family housing, which gave way to renters in the years following the financial crisis, are poised to rebound over the next several years. “Renter household expenses have really been growing faster than income,” he said. “It underscores the need for more affordable rental housing in the market. It’s the opposite for ownership, where affordability is not really an issue. Yet, we’re still having trouble getting first-time buyers into the market.”

“We do have the best financing system in the world,” said Fowler Williams, CMB, president and CEO of Crescent Mortgage, Atlanta. “Money flowing through the GSEs and investors getting their money back is a win for the consumer.”

Williams said much about today’s housing market works–the TBA market with a U.S. guarantee provides “unmatched liquidity,” he said, adding that the market allows for a 30-year fixed mortgage, with accessibility on an equal footing for small lenders. But he cautioned that fixes to the GSE system must be made without damaging what already works.

“The conservatorship has gone on for way too long,” said Ethan Handelman, vice president for policy and advocacy with the National Housing Conference. “The conservatorship has hamstrung the GSEs’ ability to innovate.”

Panelists said taxpayers remain at risk from the conservatorship, and that risk is only increasing. This uncertainty has prevented private capital to return to the sector. “You aren’t going to invest your capital as long as the rules keep the market in a state of flux,” Williams said.

“Very few institutions don’t want to develop a business in which they don’t know the boundaries,” Stevens added.

Congress has continued to hamper the process, Fratantoni said, recently passing an appropriations bill that restricts the Treasury Department from selling its equity stakes in the GSEs without congressional approval. “At least through 2018, the GSEs aren’t going to go back to where they were before, he said.

Just as importantly, Fratantoni said, Fannie Mae and Freddie Mac have very little capital because investors are relying on the federal backstop. “It would take decades for the GSEs to build sufficient capital to reassure investors,” he said. “The old system relied on an implicit guarantee, the belief that the government would likely step in in the event of a crisis. Investors no longer would rely on such an implicit backing, which was a source of instability during the crisis.”

MBA called for a number of steps to restore balance in the housing finance system, based on the following key principles:

–Establish a government guarantee of mortgage-backed securities to attract private capital;
–Protect taxpayers with layers of private capital at risk and a carefully structured federal role for catastrophic risk;
–Ensure affordable mortgage credit to serve housing needs of all homeowners and renters;
–Allow equitable access for all lenders, regardless of business model;
–Build on proven success in multifamily mortgage finance;
–Maintain strong regulation and consumer protection; –Supplement the housing finance system with targeted housing assistance mechanisms; and
–Keep what works from the Fannie Mae and Freddie Mac platform.

“It’s clear that we are moving into a higher interest rate environment,” Handelman said. “It gives a greater sense of urgency to making meaningful changes.”

“The lack of focus and urgency on this issue is creating more speculation about the GSEs’ future,” Stevens said.