Seven years after the start of the Great Recession and six years after the U.S. government brought housing finance giants Fannie Mae and Freddie Mac into conservatorship, the housing finance system is still ‘sick’ and will not get better unless housing finance reform becomes a reality, David Stevens, president and CEO of the Mortgage Bankers Association (MBA), told a crowd of mortgage professionals during the MBA's annual Secondary Conference and Expo on Monday in New York City.
Stevens recalled how he made similar comments four years ago at the same event, when he was commissioner of the Federal Housing Administration (FHA). At that time, the government was "on the hook for over 90 percent of all mortgages" being originated and the entire housing finance system was in essence, "on life support – a sick system," Stevens said, adding that his comments at the time had attracted strong attention from the media.
Four years later the government is ‘still backing nearly 90 percent of the mortgages made in today's market,’ making it ‘apparent that the real estate finance system is stuck in the same place it was when I took this stage four years ago,’ he said.
Stevens said while ‘strong government intervention was necessary to get the housing market back on track,’ to protect at-risk borrowers and prevent another system failure, the problem is that the measures that were taken were intended to only be temporary, short-term fixes, while the government, the industry-at-large and the public worked toward a long term solution.
‘Here's the problem,’ Stevens said. ‘It is four years later and the government isn't still just the backbone, but has become the entire central nervous system of the real estate finance market.’
The main problem, he said, is that government regulation has restricted credit for many lower income Americans. In general, it has resulted in a ‘cycle of increasing mortgage costs, less access to credit and choked-off demand for housing, leading to a weaker and increasingly unstable market,’ Stevens said.
However, Stevens acknowledged that there are other factors beside government intervention that are holding the market back, including a poor job market, slow wage growth, rising home prices, high student loan debt and other challenges. However, he pointed out that all of these problems could be fixed through regulation and policy, whereas the problem of perpetually keeping the GSEs in conservatorship can only be resolved through Congress and the courts.
‘Some advocates in Washington fear changing the GSEs because they want to protect the underserved and minorities from being crowded out of the housing market,’ Stevens said. ‘However, data clearly shows that they are being left out now. The 2012 Home Mortgage Disclosure Act data shows a 56 percent denial rate on GSE purchase loan applications for African Americans. For more perspective, consider only 8 percent of all African American transactions are now with the GSEs.’
The most damaging unintended effect of government regulation is the artificial tightening of credit.
‘The current average credit score in America today is about 700,’ Stevens said. ‘The average credit score of a borrower with a loan backed by Fannie Mae in Q1 2014 is 741. On top of these strict credit criteria, there are loan level price adjusters, overlays and ever-increasing guarantee fees. In this system, only those with the most pristine credit can afford a home. Mark Zandi estimates that over 10 million qualified families are left on the sidelines simply due to credit score.’
And now it would appear that Congress, which has multiple housing finance reform proposals on the table, has once again missed an opportunity to do something about the situation.
‘Unfortunately, last week's vote in the U.S. Senate [on the Johnson-Crapo housing finance reform proposal] has likely only prolonged conservatorship and the current state,’ Stevens said. ‘We applaud the Senate Banking Committee leadership for their efforts in developing bipartisan legislation and passing it out of committee. However, it's unfortunate when faced with the reality of the GSEs being required to reduce their retained capital by $600 million per year that those who did not support the bill significantly hampered any hopes of a reasonable path forward, out of conservatorship.’
One of the main risks of keeping the GSEs in conservatorship is that, should there be another severe economic downturn, they will likely need a Treasury draw yet again, he said, referring to recent stress tests conducted by the Federal Housing Finance Agency (FHFA) reflecting findings to that effect.
‘The risk of Congressional overreaction of doing GSE Reform in the midst of a crisis is a real and scary proposition,’ Stevens said. ‘So the question remains, where do we go from here?’