The U.S. housing market is showing definite signs of recovery with purchase originations beginning to increase and more liquidity in the market. The recent “good times” can be attributed to two factors – the federal government’s Quantitative Easing (QE) program which created extremely low interest rates, and refinancing ease of negative equity loans due to HARP.
Now that these programs have almost run their course and given a much-needed boost to the marketplace, as anticipated, the federal government is beginning to plan for reducing the QE program and the refinance boom is coming to an end, causing overall market contraction. When the market contracts we can see the true operational impacts of regulations.
As evidenced by housing reform efforts being drafted and discussed, concerns about continued market recovery and a successful housing reform end state are at the forefront of many policymakers’ minds.
Recent Federal Reserve announcements of changing market strategies, pressures on banks to loosen credit restrictions, calls for FHA restructuring, and new legislation such as the Corker-Warner GSE bill and Chairman Hensarling’s housing reform bill, are framing the debate about the proper role of the federal government in the housing finance system and long-term, sustainable real estate finance market reform.
Enactment of any comprehensive real estate finance reform legislation may still be a few years away. This will take time to accomplish and have significant impacts on the market. Therefore, to mitigate the effects of reform on the marketplace, having the core functions of the future system in place during the transition are imperative to any successful outcome.
And so, looking forward, we must be proactive and have a pragmatic approach to maintaining stability and liquidity in the marketplace as the debate over the future of real estate finance in America continues.
Any substantive reform discussion must involve the return of private capital for a safe, competitive and growing marketplace where consumers feel confident and businesses of all sizes can grow. Qualified borrowers need access to affordable credit, not a one-size-fits-all approach. Likewise, lenders of all sizes must have a fair, competitive environment to provide effective and efficient services to consumers.
The current role of the federal government is oversized, outdated and hampering further market recovery. However, while any new structure should rely primarily on private capital, it must also provide liquidity throughout economic cycles with an explicit government backstop.
Ongoing conservatorship, uncertainty and the absence of a strong foundation to build reform are all limiting the return of private capital and obstructing efforts to reduce the government’s role in the market. Few would argue against the perspective that the government’s role is too large and that Congress and the Obama Administration need to address this situation sooner rather than later.
To help pave the road for housing finance reform, MBA has developed a series of transitional steps that can be taken now.Each one of these steps advances healthy reforms to the secondary mortgage market and are compatible with most, if not all proposals for an eventual end state. These transitional steps need to be done now while the debate is in process in order to help pave the way for a smoother transition with the least long-term disruption to the housing finance system:
1.Fannie Mae and Freddie Mac securities should be made fungible for delivery to the TBA market.
2.The GSEs should implement up-front risk sharing options, in addition to their back end pilot, that restore private capital to the market and deliver the benefits of competition and price transparency to consumers.
3.FHFA should take steps to ensure Fannie Mae and Freddie Mac offer viable secondary market options that work for lenders of all sizes and business models.
4.FHFA should continue to develop a transparent outer credit boundary for the GSEs and a common framework for reps and warrants that give lenders the certainty and confidence to lend to the full extent of the allowable credit box.
5.Stakeholders should be given greater input into the development of the Common Securitization Platform (CSP) to ensure the CSP’s maximum utility for the entire market.
MBA’s transition plan will lower costs to consumers, boost liquidity in real estate finance and reduce taxpayer risk inherent in today’s market. It requires no Congressional action and should begin right now. A strong secondary market built on private capital with a limited, explicit government guarantee to ensure liquidity in all market conditions will provide the foundation for successful housing reform.
This is a solid plan toward a vibrant, competitive real estate finance system of the future. A system where taxpayers are protected, consumers and industry can thrive, and real estate market recovery can continue.