A Treasury Department official warned attendees at an asset-backed securities conference about allowing Fannie Mae and Freddie Mac to remain in their current form. He also expressed his opinion about expanding the Home Affordable Refinance Program.
The taxpayer-backed duopoly in place with Fannie and Freddie and their 61 percent market share is unsustainable. And despite their remaining structural flaws, some are calling for their preservation.
Some stakeholders mistakenly argue that housing finance reform is no longer needed. They say the government-sponsored enterprises are financially flush and that the recent confirmation of a director for the Federal Housing Finance Agency will empower the Obama administration to achieve virtually all of its housing policy priorities without legislation.
“We could not disagree more,” the Counselor To The Secretary For Housing Finance Policy Dr. Michael Stegman told attendees the ABS Vegas 2014 conference Wednesday, according to a copy of his prepared remarks. “The administration is still firmly committed to comprehensive housing finance reform.”
Stegman said the recent record earnings at the pair of secondary lenders is due to positive trends in the housing market — which are moderating. But the recent financial results overstate their true financial condition.
If the $75 billion in one-time tax reversals, $11 billion from the release of loss reserves and $10 billion in one-time mortgage-backed securities settlements are excluded — then more than 60 percent of their income during the first nine months came from their retained investment portfolios that are shrinking by 15 percent a year.
“We believe that keeping the GSEs in a conservatorship whose contours and restrictions were defined by emergency legislation is not the best framework for broadening the availability of mortgage credit over the longer term,” he said. “The GSEs in conservatorship have done an exceptional job of maintaining a deep and liquid secondary market in and following the recent crisis. However, we believe that continued uncertainty about their political future will continue to be a headwind impeding access to credit especially for average families with less than pristine credit.
“For all these reasons, comprehensive housing finance reform remains a top administration priority.”
Stegman said that cutting the price gap between what Fannie and Freddie securities trade for would reduce taxpayer costs and improve liquidity in the to-be-announced market.
He also called for a reformed system that separates the holding of credit risk from the issuance of government-backed securities so that companies with credit risk are not considered too important to fail since they also control the securities infrastructure. Such a move would also lower the barriers for new players.
The Treasury official said that while increasing guarantee fees is needed to “crowd in” private capital, it’s not enough to create a much needed healthy and robust non-agency private label securitization market.
The Treasury plans to coordinate a series of discussions with regulators, market participants and other stakeholders to help accelerate necessary reforms in the non-agency space.
“Transition must be done in a way that does not disrupt liquidity and access to credit,” he said. “Any transition from our current market facilitated by the government-sponsored enterprises to one centered on private capital in front of a government guarantee on MBS will take time — at least five years. There needs to be annual, public reports on the transition. Clear benchmarks must be set, progress must be documented, deficiencies reported, and addressed — all in a transparent process.”
HARP should be expanded to loans held in private-label mortgage-backed securities. Such a move would prevent local communities from turning to eminent domain schemes to rescue underwater borrowers.
“While we understand their frustration, we think refinancing legislation is a better way to go,” Stegman said. “So as we work to reform the housing finance system, we will seek to ensure that neither the source of one’s mortgage nor who owns the credit risk should determine a borrower’s eligibility for refinancing or mortgage assistance.”
But he disagreed with some who have suggested that the HARP eligibility date should be changed to allow loans that were originated after May 1, 2009, to qualify. He explained that few of the potential additional borrowers are in a negative-equity position, and expanding eligibility would only do more harm than good by prolonging market and investor uncertainties.
Counseling prior to a home purchase is essential, according to Stegman. It’s an effective investment for all parties. He cited a study by Freddie Mac that found pre-purchase housing counseling could reduce the likelihood of serious delinquency by an average of 29 percent. Another report he cited found that counseled borrowers were 67 percent more likely to remain current nine months after receiving a loan modification than non-counseled borrowers.
Stegman said it was important for Congress to renew the Mortgage Forgiveness Debt Relief Act. The law, which expired at the end of last year, forgave taxes for borrowers whose loan balances were reduced as part of a mortgage modification, short sale, or deed-in-lieu of foreclosure.
He warned that without the legislation, distressed borrowers would be forced to settle for a less effective loan modification or choose foreclosure over better alternatives. While Congress often passes “tax extenders” later in the year, making them retroactive, it needs to move quickly since borrower might choose worse options.
