Stevens: ‘We Have Come Too Far–Let’s Move Forward’

NEW YORK–Mortgage Bankers Association President and CEO David Stevens, CMB, said comprehensive reform of the secondary mortgage market is closer to happening now than any time in the past nine years and that the time for action is now.

“Both Congress and the Administration are pursuing GSE reform legislatively–that is a fact,” Stevens said here at the MBA Secondary Market Conference & Expo. “The teams are on the field and the game is in play; the choice is to either stand on the sidelines and protest or get in the game. MBA plans to get in the game to help craft a solution that works for all lenders, consumers, and the housing finance system. There is no other option but to engage and lead on this subject.”

Stevens called GSE reform “the last piece of unfinished business before we can move forward with true housing recovery” and noted that on Capitol Hill, within the administration and among major stakeholders, activities around housing run high showing a lot of promise for housing finance reform.

“Both the Senate and House leaders have indicated GSE reform is of the highest importance,” Stevens said. “The administration has also committed to making changes. [Treasury] Secretary [Steven] Mnuchin said in an interview a couple months ago with CNBC, ‘I’m committed that under this administration we’re going to have housing reform so that we don’t just leave these entities the way they are. They’ve been sitting there for too long of a period of time and we need a solution.'”

Leaving GSE reform undone has been the “major failure” of the post-crisis era, Stevens said.

“Will it fail again? It shouldn’t. It can’t,” Stevens said. “But there are some that wish to derail positive solutions and constructive discussions in favor of their own personal motives. Simply put, recap and release is more like rewind and repeat. It would return the GSEs to their previous state without safeguards to ensure the positive progress during conservatorship remains and without any guarantee the agencies will operate in a manner that protects the taxpayer going forward. This is dangerous ground that destabilizes the system and does nothing to protect our economy, our homes or taxpayers from another bailout. Rather, recap and release is a ‘solution’ designed to protect the personal pocketbooks of a select few.”

This misguided dialog, Stevens said, threatens to “recreate the very crisis it purports to avoid” and destabilize the level playing field for all eligible lenders to compete in this market equally.

“The financial crisis plainly exposed the structural conflicts, misaligned incentives and other weaknesses associated with the GSE business model and regulatory framework,” Stevens said. “The result was a catastrophic failure of the secondary mortgage market that required more than $187 billion in direct taxpayer support and a continuing federal commitment of more than $240 billion…Simply recapitalizing the firms and releasing them–without structural reforms–would threaten to bring back the same flawed incentive structures that contributed to the GSEs’ failure.”

On April 20, MBA released its white paper, GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market, momentum appears to be building for a legislative fix on Capitol Hill. The paper (https://www.mba.org/issues/gse-reform?_zs=iS2FG1&_zl=KdDk3), the work of the MBA Task Force for the Future of the Secondary Market, establishes the following principles, leading to a new government-guaranteed secondary market “end state.”

“MBA’s most recent proposal preserves what works in the current system, while enhancing the stability of the market, and protecting taxpayers and consumers,” Stevens said. “It ensures that mortgage lenders of all sizes and business models enjoy equal access and execution to the secondary market. And it dramatically reduces the taxpayer and government risk while preserving the products and processes so important to all of you.”

Stevens called the MBA white paper “far and away, the most complete and credible GSE reform proposal offered in the post-crisis era. Our proposal is unique because it was created by practitioners in the industry just like you. A strong representation of MBA members actually working in today’s marketplace created this proposal. Residential and multifamily members, banks, non-banks, big and small contributed their ideas. New ideas were vigorously discussed and debated to compose this comprehensive package that provides for the safety and long-term viability of a sound secondary market.”

Stevens said the MBA proposal is also unique because it is the only one that offers a transition framework–how to get the system from conservatorship, to the new end state.

“Congress never intended conservatorship to be a permanent fix for the secondary market,” Stevens said. “It was a triage lifeline provided so that the economy could rebound from the worst crisis since the Great Depression. Almost every housing stakeholder agrees that Fannie and Freddie should not remain in government control. But MBA and its members are the ones providing true solutions that will prevent future crises.”

Stevens said any GSE reform can only take place with action from Congress. “Only Congress can ensure the security of the system and ensure a level playing field for all lenders,” he said. “By reforming the GSEs, Congress can protect taxpayers and consumers; expand access to sustainable mortgage credit; and create an environment attractive to potential investors.”

To achieve this, Stevens said, Congress should empower the Federal Housing Finance Agency or a successor regulator to re-charter the GSEs through legislation that also opens the door for new entrants to obtain similar charters. “Guarantors would have a defined public purpose of providing sustainable credit availability to the conventional mortgage market to lenders of all sizes and business models,” he said. “This will ensure a level playing field allowing for lenders of all sizes to compete.”

Congress is also the only body that can create the Mortgage Insurance Fund to guarantee eligible mortgage-backed securities. “Congress must establish a new, explicit government guarantee that stands behind the MIF, and this cannot be stressed enough,” he said. “Congress should also change the Common Securitization Platform ownership. Today, the two GSEs jointly own the CSP. Our proposed end state transfers of ownership of the CSP and its conversion to a government corporation. And any legislation must include a transition roadmap, with sufficient time and flexibility for completion without disrupting the markets. These congressional changes can set the foundation for reform to a sustainable, more vibrant secondary market.”

The MBA proposal includes a plan for affordable housing. “We believe that any new system must expand access for affordable mortgage credit; preserve and develop affordable rental housing; and improve liquidity for underserved segments of the mortgage market, Stevens said. “America’s housing needs must be served along the full continuum–from the most subsidized government assistance programs, to the fully private, jumbo mortgage market. Our proposal looks to ensure the new guarantors have incentives that will support, not distort, the market for affordable mortgage credit.”

The MBA proposal, Stevens said, is a “comprehensive plan that secures our system, maintains liquidity in the marketplace, protects taxpayers and homeowners and finally completes housing reform for a stronger future…The time for this action is now. Now…before another economic cycle takes its course. Before we forget the lessons and pain of the recent past. Now…before we lose the momentum for complete housing reform. Now…before anyone makes the mistake of rewind and repeat. Now…we need you.”

Stevens noted the Trump Administration has “wasted no time in tackling some very big issues” right out of the gate.

“MBA has already met with administration officials, participated in many briefings, and testified on Capitol Hill to discuss the road forward on regulatory reform,” Stevens said. “MBA has consistently supported good regulation that protects consumers, supports a vibrant housing market, and prevents repeating mistakes of the past. Let me be very clear–MBA continues advocating for the right regulatory balance of consumer protection, industry supervision, and enforcement.”

Stevens noted with still relatively low mortgage rates, a strong job market and growing housing demand, we should be experiencing a more robust housing market. “But credit still remains too tight for many qualified borrowers,” he said. “MBA is working on many fronts to alleviate this situation, including, but not limited to, regulatory and FHA reform, and pushing for improved credit models that better reflect today’s households. All of this while Washington continues political maneuvering on many other issues, including tax reform.”

Tax reform is another big issue this year, Stevens said, although the Trump Administration recently acknowledged tax reform will not get done by August. “But it is still at the top of the list, even though what form a tax reform proposal will take is still anyone’s guess,” he said. “One thing is clear: housing should not be caught in the political crosshairs. It is too important to too many families, regardless of party, to not finish what we have started. We are pleased the President’s framework recognizes the importance of the mortgage interest deduction and we will continue keeping MBA members informed and your interests protected as more discussions with legislators evolve.”

Housing, Stevens said, is bigger than partisan politics. “MBA has promoted for many years of the need for permanent, sustainable reforms to secure our marketplace,” he said. “After thorough study of what led to the crash, the Financial Crisis Inquiry Commission determined that the financial crisis was avoidable if the warning signs had not been ignored. We cannot let Washington ignore the warning signs again. Do not repeat the past. We have the power right now to protect our system. We must act now to ensure the stability of our homes, our neighborhoods and our economy. We have a duty, a responsibility to take the right preventative measures now to protect the entire system from fault line catastrophe. Stabilizing and securing the secondary market through appropriate reforms and protections, will provide the rock-solid foundation our economy so desperately needs.”