Thursday, March 21, 2013

Senate Banking Committee hears the need for mortgage finance reform

by Ethan Handelman, National Housing Conference

I had the privilege on Tuesday of watching the Senate Banking, Housing and Urban Affairs Committee’s hearing, “Bipartisan Solutions for Housing Finance Reform?” The question mark in the title shouldn’t distract from the clear message of the hearing, that mortgage finance reform is overdue and that our guiding principles for it must span the partisan divide. Former HUD Secretary and Senator Mel Martinez testified in his role as a co-chair of the Bipartisan Policy Center’s Housing Commission to share their bipartisan blueprint for a mortgage finance system that puts private capital ahead of a limited government role to support both homeownership and rental housing. Janneke Ratcliffe of the UNC Center for Community Capital and the Center for American Progress reinforced the importance of a government role in housing finance to ensure that all in America have access to affordable housing and offered the detailed proposal crafted by CAP’s Mortgage Finance Working Group (in which NHC participates). Peter Wallison of the American Enterprise Institute was a lone voice calling for no governmental role at all in the mortgage finance system.

CAP's Janneke Ratcliffe testifies at the hearing.
Full video of the hearing is available, so I’ll stick to a few highlights:

  • Why do we need a government guarantee? Senator Crapo (R-ID) asked the panelists specifically what market functions require a government guarantee? Martinez noted two: the 30-year fixed rate mortgage, which demands more and longer-term capital than private sources will provide without a guarantee, and the To Be Announced (TBA) market, which reduces borrowing costs and allows buyers to lock-in rates before closing. Ratcliffe agreed and noted also that most other industrial countries have government guarantees in some form, often indirectly through the banking sector. Wallison decried government intervention as a source of instability. 
  • Does the private sector price mortgage risk correctly? After much discussion during the hearing of whether government can price mortgage risk effectively, Senator Warren (D-MA), put Wallison on the spot, asking whether there were any examples from history in which the private sector handling of mortgage risk survived a crisis without government intervention. As contrasting examples, she cited failures in the early 1900s, 1920s, and the recent experience of private-label securities. Wallison did not cite any specific examples but pointed to Fannie Mae and Freddie Mac as examples of government failure. 
  • Should the government use Fannie Mae and Freddie Mac guarantee fee revenue for other purposes? Panelists all agreed that attempts to use the guarantee fee to fund non-housing purposes were counterproductive. Ratcliffe added that funding the National Housing Trust Fund and Capital Magnet Fund, as Congress enacted in 2008, would be a constructive use. Several members of the committee have introduced a bipartisan bill to block just such redirection of the guarantee fees.

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