"Enough is enough"; Stevens Calls for End to Conflicting, Unbalanced Policymaking
Access to the credit needed to drive this economy is being stifled by government decisions that are an overreaction to events of five years ago, David H. Stevens said today. In an effort to be diligent in correcting for the loose standards of yesterday, "Policymakers all over town have been making hundreds of policy decisions to clamp down on risk, decisions that may make sense in isolation but in the aggregate are choking off credit."
In prepared remarks for a speech at the 100th anniversary convention and expo of the Mortgage Bankers Association (MBA), Stevens, the association's president and CEO, excoriated the government saying that "More than five years after the crisis, countless, innocent, would-be borrowers are still being caught in the aftermath, all because Washington won't trust lenders to make fact-based credit decisions without countless strings attached and second-guessing."
Stevens looked back over the 100 year history of the organization noting that there has always been a need to balance access to credit with minimizing risk. It's a tough balancing act-no doubt about it. And over the years, sometimes the market has gotten out of balance--- tilted too far in one direction or the other. Well today we are in such a moment.
At this same event last year, he said, MBA called for policymakers to reassess that risk-credit balance and coordinate with others so that choices would be coherent. MBA asked to be part of the solution and warned that once again American families would be the victims of the confusion. "One year ago, we called for leadership. But our calls have gone unheeded, so I stand here today to say, in the politest way possible--enough is enough. The overcorrection and conflicting policies that continue to come out of Washington are threatening not just this market, but they are threatening the recovery."
He called the current mortgage finance system landscape one of "confusion, excess, piling on, and dysfunction," and said that with the housing market accounting for 20 percent of last year's GDP growth, stunting the housing recovery puts the economic recovery in peril.
The federal government reacted swiftly when the housing market melted down, but the response was not perfect. While the efforts by all involved at the time were noble, some of the specific programs and policies had their limitations and it is critical to recognize their shortcomings as well as their successes.
"Yet policymakers have not turned the page. They continue to clamp down on risk, run up pricing on government lending, and pursue enforcement actions that may have made sense in 2009 and 2010, but today are impeding our economic health rather than supporting it."
Referring to his former position as Federal Housing Administration Commissioner Stevens said that to deal with the housing crisis fallout they raised premiums, changed minimum credit score requirements and tightened risk controls, all of which made sense at the time. Today however there are proposals in congress "That have extraordinary indemnification provisions that will curtail credit access to even more families on the margin simply because the risk of a mistake - should those bills go through as is - is simply too great."
FHA mortgage insurance premiums were raised to shore up the fund but given the loans being originated today the large forecasted profits will be disproportionate to the risk. And these profits, in context with new indemnification terms, come at the expense of the very families FHA was created to help. The country needs a financially sound FHA where fees reflect risk and lenders follow origination standards but today the rigid oversight and overly aggressive policing is out of control. It is going too far.
"The GSEs have all but eliminated the ability for any borrower with a low down payment and average credit score from having access to a home loan at a reasonable price, Stevens said. Add-ons for less attractive loans, adverse market fees, and mortgage insurance fees have produced a portfolio that, quoting the recent Home Mortgage Data Act (HMDA) report, "implies no risk taking."
When the GSEs were put in conservatorship no one would have argued against a rise in g-fees and implementation of sustainable lending. "But, today, the GSEs are virtually printing money and the excess profits are going to the Treasury - all at a cost to home ownership and the broad recovery of the housing market.
Today we face our toughest challenge yet as an industry, Stevens continued. There's a patchwork of stifling regulation and legal actions for as far as the eye can see. If lenders make one wrong move-or in some cases, even one right move-they could be caught up in a web of confusion based enforcement actions.
"Put backs and indemnifications on any error, even completely non-material errors, class actions, settlements, Justice Department suits, state attorney's suits, treble damage penalties from False Claims Act suits - need I go on?" he asked. These all create serious disincentives for those considering the borrower on the margin and the impact is hitting the very underserved populations these programs were set up to serve.
Almost 80 percent of FHA's purchase business is made up of first-time homebuyers. Thirty percent are minorities and more than half of African American and Hispanic homebuyers used FHA financing to buy their home in 2012. These borrowers tend to have less wealth available for down payments; more than 51 percent of African Americans and 44 percent of Hispanic homebuyers in 2009 had LTVs above 95 percent.
"We have to ask if our country's real estate finance policy is doing the job it was set up to do. Or have a series of post-crisis over corrections turned into actions to the detriment of responsible, qualified borrowers?"
Taxpayers certainly need to be protected but the goal can't be zero risk as that means zero lending. The goal has to be striking the right balance between risk and access to credit, and we are a long way from the right balance.
Stevens said policymakers don't seem to understand what they're doing and there are conflicts everywhere. A new take on disparate impact rules conflicts directly with a new QM standard. Speeches are made that call for efforts to reduce red tape and take the extra step to lend to the marginal borrower, yet all of this is offset by ability-to-repay requirements that come with extraordinary penalties should a lender make even a minor error or dare consider a compensating factor. "It's like the left hand isn't talking to the right."
He said we are already seeing the result. Lending volumes have started to decline, and purchase markets need all the help they can get from a viable lending environment.
Stevens said the MBA has long called for a housing policy coordinator who would make sure the regulators met and talked with each other at the most senior levels to consider implications of obvious and uncoordinated overlaps but this hasn't been done and the confusion continues.
We are nearing a tipping point and if we don't get policies right, he said, we won't be able to return to a time when average Americans have solid prospects for homeownership. "While we may end up creating a perfectly risk-free, safe and sound housing finance system-it might be one built for those who least need the help."
The conflicting rule makers are also hurting the return of private capital. "Policymakers can give lip service to their desire to bring more private capital into the mortgage markets, but so many of their own actions are working against that goal."
Stevens said he is asking again for policymakers and the Administration to pay attention; to act on the industry's call for greater transparency from FHFA, Freddie Mac and Fannie Mae in their policymaking process, and to name a national policy coordinator. He said the industry should also advocate for the five transition steps MBA had laid out for a smooth transition to a new mortgage market.