CEOs, Regulators Testify

Treasury Secretary Henry Paulson said he views the companies’ request for an increase in their investment portfolio caps as legitimate from a business perspective, but not so from a public policy perspective. He echoed prior administration statements that it would be irresponsible to expand the government sponsored enterprises without addressing problems in their regulatory structure and told the House Financial Services Committee that the limits could be lifted when each GSE becomes up-to-date on their filings with the Securities and Exchange Commission. Fannie’s portfolio has been capped since May 2006 under a consent agreement with regulator Office of Federal Housing Enterprise Oversight while it dealt with widely-publicized accounting and internal control failures and caught up on SEC filings. Lifting the cap on GSE portfolio growth would provide a needed back-stop bid for mortgages while a temporary lifting of the conforming loan limit would enable it to provide needed liquidity to the jumbo mortgage market, said Freddie Chairman and Chief Executive Officer Richard F. Syron.

Henry Paulson, Alphonso Jackson & Ben Bernanke

GSEs also face loan limit restrictions. They can only purchase or guarantee loans below the conforming loan limit set by Congress — currently $417,000. The two companies want to invest in loans over the $417,000 limit — so-called jumbo loans.Paulson said there is little question that allowing the GSEs to securitize jumbo mortgages would give a short term lift but explained that the move should only be undertaken if limited to a provision that is temporary and is part of legislation strengthening the regulatory structure.

“If it goes beyond that, it raises difficult public policy issues and could be seen as detracting from the GSEs’ affordable housing mission and displacing private sector participation, which the Administration does not support,” the secretary said.

Federal Reserve Chairman Ben Bernanke warned that if Congress is inclined to move in that direction, it should assess whether the action could be taken in a way that is both temporary and that could be quickly implemented.

Rep. Barney Frank, chairman of the Financial Services Committee, has asked OFHEO to loosen the constraints upon Fannie and Freddie. Frank also sent a letter to the Federal Reserve earlier this month saying that he disagrees with the stance by both the White House and the Federal Reserve that the portfolio limits set by OFHEO be treated as unchangeable.

Daniel Mudd & Richard F. Syron

Fannie President and CEO Daniel Mudd said that if given the go-ahead to expand, the Washington, D.C.-based company would move quickly. “We leave it to Congress to determine our proper loan limit, but I want to be clear — we would support such an increase, and we would be prepared to act,” Mudd told the House committee. National Association of Mortgage Brokers President Harry Dinham testified in support of temporarily lifting the portfolio caps on GSEs, saying that it will help make home financing more easily available in high-cost areas such as California. Mortgage Bankers Association President John M. Robbins agreed that GSE portfolio caps should be temporarily increased. Fannie’s Mudd told lawmakers that OFHEO’s recent decision to change the formula for the portfolio cap provides limited flexibility, but, given the extent of the conditions in the housing finance market, more is needed.

Among a wide swath of regulatory and legislative solutions suggested for current mortgage lending problems was the creation of a uniform national standard for mortgage brokers. Paulson said he would support such a standard as well as the imposition of uniform licensing and education requirements for mortgage brokers to help weed out bad actors.And, the Treasury said it has been working with Congress to change temporarily a provision of the federal tax code that currently considers canceled mortgage debt on a primary residence as taxable income. Bipartisan bills addressing the have been introduced in both the House and the Senate. NAMB supports the measures.

U.S. Housing and Urban Department Secretary Alphonso Jackson said FHA is preparing a new notice for risk-based pricing, a change he hopes to implement in January that is expected to benefit 20,000 borrowers. He also renewed calls for FHA modernization. The House earlier this week passed its version of the legislation, while the Senate Banking Committee also approved its version of the FHA modernization legislation this week on a 20-1 vote.

Jackson said FHA is working with the White House to prepare new mortgage regulations under the Real Estate Settlement Procedures Act that will apply to home purchases and refinances. The focus is on improving the Good Faith Estimate to provide a clear summary of loan terms and total estimated settlement charges. He said HUD is also working on modifications to the HUD-1 form that facilitate comparison of the estimated GFE charges and the final charges on the HUD-1 and provide a clearer disclosure of fees and charges.

NAMB’s Dinham proposed providing a disclosure explaining that originators don’t owe a duty to the consumer or with a disclosure explaining that the originator is willing to enter into an agency relationship with the consumer through a contract that will make the originator the consumer’s agent.

Robbins said MBA supports clear RESPA disclosures including letting the borrower know whether or not the broker is the borrower’s agent because brokers, unlike lenders, hold themselves out as the intermediaries who shop for borrowers.

Robbins told Congress that MBA disagrees with efforts to create a suitability standard for mortgage brokers in all cases, testifying that greater transparency including a declaration of agency is a better approach. He also said such an approach would not work for mortgage bankers because the bankers already owe a fiduciary duty to their investors and stockholders.

NAMB said it supports mandatory escrow accounts for taxes and insurance for all subprime, first lien mortgages – a topic discussed and agreed upon by lenders and consumer advocates in a hearing earlier this summer at the Federal Reserve.

Frank told hearing attendees that the House has passed GSE and FHA bills. He said the differences between the House bills and the stance of the Bush Administration is negotiable. He exhorted the Senate to create a “three-way conference” by quickly taking up the issues of GSE reform and FHA modernization. He asked Senate lawmakers to create a bill to be signed. He indicated he didn’t want to see bill from them that had been “cherry picked” so that it only contained a narrow focus.

Thursday’s hearing examined the legislative and regulatory options for mitigating mortgage foreclosures. It is the latest in a series of hearings on Capitol Hill on the subprime lending crisis.