David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA) testified recently before the House Financial Services Subcommittee on Capital Markets and the Government Sponsored Enterprises at a hearing on “The Private Mortgage Market Investment Act.”
Below is Stevens’ oral statement before the subcommittee, as prepared for delivery.
“The proposed Private Mortgage Market Investment Act is aimed at achieving our shared goal of opening a pathway to a sustainable real estate finance system. As MBA has consistently stated, the current environment, in which the federal government owns, securitizes, or guarantees nearly every mortgage, is both unsustainable and undesirable.
“I am pleased that we agree on the most important fundamental point: private capital must be at risk, bearing the first loss, and private capital must be the primary source of liquidity for the mortgage market. I would also like to mention other features MBA’s recommendations share with the legislation we are discussing this morning.
“For instance, we agree that the secondary market needs common standards, consistency and transparency for all market participants in order to attract private capital. Your bill, Mr. Chairman, offers a way to accomplish these goals. Take, for example, the language authorizing FHFA to develop standard mortgage securitization agreements. By facilitating predictability and reliability, standardization helps investors measure their risk exposure, particularly in the TBA market.
“MBA also appreciates that the bill provides for the establishment of different classes of standard mortgage products. Safe, well-defined product standards help consumers compare their financing options. For investors, the core market will establish performance standards for pricing purposes.
“I also want to comment on the bill’s repeal of Dodd-Frank’s risk retention requirements, a key issue for our residential and commercial members. Risk retention is a well-intended means for better aligning the interests of mortgage market participants and MBA was the leading advocate for establishing an exemption for safer Qualified Residential Mortgages. Regrettably, the proposed rule, with its QRM definition and creation of a Premium Capture Cash Reserve Account, is so deeply flawed that we seriously question whether it reflects congressional intent or can ever be successfully implemented. Until we see a final rule, it may be premature to call for repealing this provision, though I fear that day may not be far away.
“In my remaining time, Mr. Chairman, I want to turn my attention to the broader issue of GSE reform. Your legislation helps build a bridge to a future housing finance system, but determining what that system will look like is also of paramount importance.
“Ever since Fannie Mae and Freddie Mac were put into conservatorship, MBA has been looking at the benefits and shortcomings of the existing GSE model and refining our proposed framework for providing a more limited and explicit government role.
“We believe the financial crisis proved that some form of government support is required to keep the mortgage market open during times of severe distress. The current dearth of activity outside of government-supported liquidity channels exemplifies the transient nature of private capital. When the market becomes unstable, private investors will exit. And they will be less apt to buy assets even in good times if they doubt their ability to sell them in bad times.
“To be clear, MBA believes the government’s role should be to promote liquidity for mortgage finance, not to provide the capital for it or absorb all the risks itself. MBA has proposed an FDIC-type insurance structure, fully funded by private capital from risk-based fees on market participants and limited to core mortgage products. As with the FDIC, taxpayer funds would only come into play if the capital of the securitizing entity and the insurance fund are exhausted. Again, like the FDIC, taxpayer funds would be returned as the fund is replenished.
“It is important to note that the absence of a guarantee does not mean the government will not be forced to step in during a crisis. In fact, GSE securities have always stated they are not backed by the government. The most recent crisis has shown the government’s willingness to support even institutions that lacked even an implicit guarantee. The taxpayer is better protected, and the market will operate more efficiently, if the rules of the road are clearly stated upfront, and government guarantees are clearly delineated and paid for before the crisis occurs.
“Some have questioned whether the government can correctly price risk. While the FDIC has mispriced its deposit guarantee in the past and taxpayer funds were needed to meet interim cash needs, there does exist within the FDIC structure a mechanism for repaying the taxpayers and correcting for any overpricing or underpricing. We can work together to establish a similar system for mortgage finance.
“I want to conclude by mentioning that even though a new housing finance system may be years away, the steps we take today will influence the system’s ultimate design. With that in mind, it would be inefficient, if not downright wasteful, to dismantle portions of the existing infrastructure before a proven, new structure is in place. The existing systems, market practices, and human capital, are the result of decades of effort, public investment, and billions of dollars of private funds. Retaining these assets through an orderly transition is in all of our best interests and will promote a smoother economic recovery.”
For more information, visit www.mortgagebankers.org.