House Subcommittee Passes Garrett Private Mortgage Market Support Bill

On December 14, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises (GSEs) marked up Chairman Scott Garrett's (R-NJ) Private Mortgage Market Investment Act.  Garrett's bill authorizes the Federal Housing Finance Agency to develop standards for mortgage products, repeals the Dodd-Frank Act’s risk retention rule, increases the quality of loan level information and disclosures for investors, removes conflicts of interest between servicers and investors, and prevents regulators from unilaterally forcing investors to reduce the principal of loans in which they have invested.  For more information on the details of Garrett's proposal, see Garrett's December 15 press release and NCSHA's October 28 blog post.
 
During the markup, Financial Institutions and Consumer Credit Subcommittee Ranking Member Carolyn Maloney (D-NY) and GSEs Subcommittee member Stephen Lynch (D-MA) proposed an unsuccessful amendment that would have maintained the Dodd-Frank Act’s risk retention requirements.  Lynch said that clear regulations would prevent lenders from making bad loans because selling them to securitizers would be more difficult.  The Maloney-Lynch amendment failed on a 11-19 vote.  Garrett says that under his bill the FHFA will develop clear, transparent representations and warranties that, coupled with an adequate repurchase program, will ensure that lenders have "skin in the game" and foster market-driven risk retention.
 
Lynch also introduced another unsuccessful amendment that would have delayed many of the bill’s provisions from taking effect until Congress enacted legislation reforming Fannie Mae and Freddie Mac.  Lynch’s amendment failed on a 15-18 vote.
 
The Subcommittee also considered an amendment from Congressman Brad Miller (D-CA) that would require the Federal Housing Finance Agency develop servicing standards jointly with other mortgage regulators, such as the Consumer Financial Protection Bureau.  The Miller amendment failed on a 12-19 vote.
 
The Subcommittee passed the bill on a 18-15 vote.  The legislation now moves to the House Financial Services Committee for consideration, although no Committee hearing or markup has been scheduled.
 
Earlier this month, on December 7, the Subcommittee held a hearing on the bill, during which members and witnesses discussed how the legislation would impact the housing finance system.  The Subcommittee also held a hearing on the bill in early November.
 
In his opening statement, Garrett cited a broad consensus that the current level of government involvement in the mortgage market is unsustainable and that the goal of housing finance reform should be to increase the level of private capital in the market.  One obstacle to this goal, Garrett said, is regulatory uncertainty, particularly new Dodd-Frank regulations, such as the risk retention and Qualified Residential Mortgage (QRM) rules.  Garrett said his proposal would repeal the risk retention rule and increase the FHFA's regulatory role to cover mortgage-backed securities. 
 
House Financial Services Committee Ranking Member Barney Frank (D-MA) agreed with a few portions of Garrett's bill but voiced opposition to the repeal of the risk retention requirement.  Frank said that the housing crisis was caused by loan originators who were unconcerned with long-term loan performance; when the bad loans were passed along to securitizers, the lenders often retained no liability.  Frank pointed out that Garrett's bill repeals the risk retention requirements for all asset-backed securities but only allows new regulations for mortgage-backed securities.  Frank emphasized that allowing risk-free lending once again would be a grave error that could lead to future financial catastrophes.
 
Subcommittee Ranking Member Maxine Waters (D-CA) said in her opening statement that while regulatory certainty and uniform underwriting standards are important goals, she remains concerned that the bill constitutes a piece-meal approach toGSE reform.  Waters said she believes Congress should address housing finance reform in a comprehensive manner and ensure both that consumers are treated fairly and that markets remain liquid. 
 
House Financial Services Vice Chairman Jeb Hensarling (R-TX) said the current housing finance system poses an unacceptable level of risk to taxpayers.  Hensarling said that, with 90 percent of all originations and 99 percent of all securitizations being backed by a government guarantee, in addition to regulations introduced by the Dodd-Frank Act, private investors cannot compete in the open market.  Hensarling specifically denounced the risk retention requirement, which he said is at odds with Congress's goals.
 
The Subcommittee heard testimony from six witnesses:  Chris Katopis, Executive Director of the Association of Mortgage Investors; Dr. Mark Calabria, Director of Financial Regulation Studies at the Cato Institute; Mark Fleming, Chief Economist for CoreLogic; David H. Stevens, President and CEO of the Mortgage Bankers Association and former FHA Commissioner; Tom Salomone of Real Estate II, Inc., testifying on behalf of the National Association of Realtors; and Dr. William Poole, Distinguished Scholar in Residence at the University of Delaware.
 
Calabria said the proposed legislation was an important first step in reforming the GSEs.  He warned the Subcommittee that there could be too much standardization in the mortgage market, brought about by too much federal regulation.  Calabria said there should be many different mortgage products available for consumers.  He supported the proposed repeal of the risk retention rule, calling the notion that market participants do not retain any kind of risk a "false premise."  Calabria pointed out that Fannie Mae and Freddie Mac were financially devastated because they retained too much credit risk when investing in risky securitized mortgages.
 
Stevens agreed that repealing the risk retention rule is a key issue, and he questioned whether the rule's proposed qualified residential mortgage (QRM) definition is even workable.  Regarding the GSEs, Stevens said that there should be a government role in the mortgage market, although that role must be limited to core mortgage products.  Stevens urged Congress to take steps to create a new housing finance structure before disabling the GSEs as they currently exist.
 
Poole disagreed with the proposed bill and the other witnesses, saying that the government should remove itself from the mortgage market entirely.  He argued that the federal guarantee in the secondary mortgage market encouraged overly risky investments and caused the housing crisis.  He said the future of housing finance should be left to the private market to determine.  Poole recommended that the GSEs' conforming loan limit be phased down and the securitization fees increased until the GSEs can leave the market completely.
 
Waters asked Fleming about a provision of the proposed bill that would prohibit government agencies from requiring lenders to write down the principal of underwater mortgages.  Waters disagreed with the restriction, pointing out that reducing the owed principal can prevent a foreclosure, and Real Estate Owned (REO) properties often sell for only 55 percent of the unpaid balance.  Fleming replied that principal reduction can be a very useful tool in mitigating losses, but the government must allow private contracts to be honored or risk scaring away private investors.
 
Subcommittee member Stephen Lynch (D-MA) said that while a 20 percent down payment requirement under the QRM definition may be too high, a required 80 percent loan-to-value ratio may be a better solution.  Stevens said that he worried that a down payment requirement may negatively impact low-income borrowers and noted that the size of the down payment doesn't necessarily reflect potential loan performance.  Stevens warned against erecting barriers that would keep credit-worthy borrowers out of the private mortgage market.