House Subcommittee Examines Garrett Housing Finance Proposal

On November 3, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises (GSEs) held a hearing on Chairman Scott Garrett's (R-NJ) proposal to support the housing finance system and secondary market with mortgage product standards and transparency but without a government guarantee. 

As discussed in NCSHA's October 28 blog post, Garrett's bill would, in his words, "reform the secondary mortgage market to ensure robust private investment in the U.S. mortgage market without a government guarantee." His proposal would:

• Direct the Federal Housing Finance Agency (FHFA) to develop uniform standards for a variety of mortgage categories;
• Abolish the Dodd-Frank risk-retention requirements for mortgage-backed securities;
• Remove conflicts of interest between servicers and investors;
• Prevent regulators from unilaterally forcing investors to reduce the principal of loans they have invested in; and
• Increase the quality of loan level information and disclosures that investors can use to evaluate the value of the mortgages.

Federal Housing Finance Agency Director Ed DeMarco testified on recent FHFA actions regarding Fannie Mae, Freddie Mac, servicing compensation, and refinancing programs. DeMarco also posed a number of questions for the Subcommittee to consider as it goes forward, including:

• Is there a role for the government, perhaps through the Federal Housing Administration, to preserve the availability of credit in times of stress?
• Is there a need for a backstop source of funding when financial markets become temporarily illiquid to preserve liquidity in the market and the financial system?  For example, could the Treasury Department, the Federal Reserve, or the Federal Home Loan Banks play a role in a market that had this type of standardized structure?

On a government guarantee for mortgage-backed securities, DeMarco said "replacing the Enterprises' implicit guarantee with an explicit one does not resolve all the shortcomings and inherent conflicts in that model, and it may produce its own problems." Some of the issues he raised included whether the government can accurately predict and price the credit risk associated with the guaranteed securities, the tendency toward government allocation of credit and adjusting the price to accommodate increased credit availability, and whether a guarantee would direct additional investment toward housing activities.

Other witness included: Tom Deutsch, executive director, American Securitization Forum; Martin Hughes, president and chief executive officer, Redwood Trust, Inc.; Janneke Ratcliffe, senior fellow, Center for American Progress, and executive director, Center for Community Capital, University of North Carolina at Chapel Hill; and Peter Wallison, Arthur Burns Fellow in Financial Policy Studies, American Enterprise Institute. Their testimony is available at the hearing website.