GSE Reform: "A Responsible Market for Housing Finance"
Another party, this time from the progressive side of the debate, has chimed in with its prescription for reforming the nation's housing finance system. This proposal, "A Responsible Market for Housing Finance", is a product of the Mortgage Finance Working Group sponsored by the Center for American Progress, with the generous support of the Ford Foundation, and the Open Society Institute.
The report details the heavy reliance of the housing finance system on the federal government since the collapse of the non-agency mortgage market. We have the knowledge and tools, it says, to create an American housing finance system that, while relying on private capital, will be stable over the ups and down of the economy, equitably serve its stakeholders and promote residential integration, eliminate housing discrimination, and provide safe, decent and affordable housing in all locations. The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was the first stop towards this end.
According to the report, the next step is to move away from what is now an almost totally nationalized system toward one that again relies on private sector capital. The goals must be to preserve the availability of 30-year fixed-rate mortgage product, rebalance U.S. housing policy so that private markets are the primary source of decent and affordable rental housing, and ensure that a broad array of small and large lenders have access to secondary market financing for both single and multi-family agencies. The resulting system must be governed by five "overarching" principles; liquidity, stability, transparency and standardization, affordability, and consumer protection.
Under the structure proposed by The Center for American Progress, the current function of Ginnie Mae in securitizing VA, FHA, and USDA loans would remain essentially unchanged although there would be a gradual reduction in loan limits and, coupled with a gradual increase in the number of borrowers who will be able to utilize other mortgage sources, this will decrease the FHA share of the middle market. Regulators must be allowed to expand eligibility if private capital becomes unavailable.
The other actors in the system would be:
- Originators - lenders of all types would originate loans as is done currently.
- Issuers - originators and aggregators of individual loans who would issue mortgage-backed securities (MBS.)
- Chartered Mortgage Institutions (CMI) - institutions chartered and regulated by a federal agency which would guarantee timely payment of principal and interest on securities backed by loans eligible for a government guarantee against catastrophic risk. They must hold sufficient capital and be subject to regulation to limit losses and taxpayer exposure. Potential ownership of CMIs could include: Mutual associations managed as corporations but where profit is shared with customers rather than shareholders;, sate and local governments such as through state housing finance agencies, and cooperatives owned by lenders. Individual lenders could not form CMIs.
- Government Catastrophic Risk Insurance - funded by premiums on CMI-issued MBS, it would be managed by the government to protect investors in the event of a CMI failure. The government would price and issue the catastrophic guarantee, collect the premium, and administer the risk fund. The structure and operation of the CMIs and the risk insurance would be modeled on that of the Federal Deposit Insurance Corporation.
A wholly private secondary market without government support would also exist. While it is essential that this market operate according to the rules of consumer protection, capital backing, limited leverage, transparency and realistic pricing, it is assumed that the statutory and regulatory requirements established under Dodd-Frank would regulate this market which would deal primarily with jumbo loans and certain adjustable rate mortgages. The report proposes that government's primary role in this private market be to provide a properly priced, explicit guarantee against catastrophic risk to MBS backed by specific types and sizes of loans that the private market would not otherwise consistently and affordably provide. As private money reenters the market, the percentage of the market covered by the guarantee would be gradually reduced.
The government would set the product structure, underwriting standards, and securitization standards for mortgages and MBS guaranteed by the CMI and would regulate the CMIs for both capital reserves - at higher levels than were required of Freddie Mac and Fannie Mae - and compliance with consumer protection and other responsibilities. The government would also be conservator or receiver for any CMI that fails.
CMIs would be expected to roughly mirror the primary market in terms of the amount and geography of single-family low- and moderate-income loans that are securitized and eligible for the CMI guarantee. Regulations insure that they do not "cream" the market. Where CMIs guarantee multifamily loans they must prove that 50 percent of borrowers offer affordable housing.
It is important that provisions be made for previously underserved groups of borrowers and types of housing, especially in the wake of the housing crisis where many communities have been disproportionally disadvantaged. With CMIs putting private capital at risk ahead of taxpayer exposure, left to their own devices they are unlikely to make loans they view as risky or unprofitable. The result could be a two-tiered system with FHA being the primary source of loans for low- and moderate-income communities and communities of color and taxpayers absorbing all of the risk while private capital services only the middle and upper market.
In addition to continued availability of government programs like Section 8, low income housing tax credits and a fully-funded National Housing Trust Fund, the proposal sees a need for a Market Access Fund (MAF) that would provide research and development funds and/or a full government credit subsidy to enable CMIs and nonprofit/government entities to develop a market for products such as energy efficient loans, shared equity loans, and loans on small multi-family properties. Funds would be available on a shared-risk basis and premiums could be charged. Funds would come from an assessment on all MBS issues and shared with the National Housing Trust Fund and the Capital Magnet Fund.
The Center stresses the important of a "to be announced" (TBA) market which allows lenders to offer borrowers a rate lock and gives investors a unique product through which they can plan or hedge investments because the bonds' yields are known in advance of settlement and says that it has taken the likelihood of the emergence of such a market under consideration in developing its proposal.
The new structure, according to the Center for American Progress, should add little to the cost of a mortgage. Assuming a reasonable rate of return to the CMIs on an increased capital basis as well as operating costs and credit losses, a 10-basis-point fee for the three housing funds; and a government guarantee premium of 10 basis points, the Center estimates an annual guarantee fee of 70 basis points. The Fannie/Freddie fee pre-2008 was 20 basis points resulting in a net interest rate increase of ½ point. This likely could be reduced by an improved price for the securities because of their now explicit government guarantee.
The Center, while congratulating FHA for surviving the current crisis without costing taxpayers a cent, said that the agency "lacks the systems, market expertise, and nimbleness one would hope to see in an institution with over $1 trillion of insurance-in-force." The proposal suggests resurrecting a 1994 recommendation from the Joint Center for Housing Studies at Harvard that Congress should reinvent the agency as a government corporation under the direction of the Department of Housing and Urban Development. The proposal would have resulted in a corporation with far greater flexibility in procurement and personnel policies and in product design. The proposal was adopted by President Clinton a year later and has periodically reemerged in discussions but has never been implemented. Calling FHA "indispensable for economic stability and housing market equity," the proposal suggests revisiting Harvard's recommendations.