October 26, 2017
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Maintaining a federal role in the housing finance system is vital to ensure access to credit for all borrowers, mortgage industry representatives told the House Subcommittee on Housing and Insurance during a hearing held yesterday to consider private sector perspectives on housing finance reform.

The witnesses were: Brenda Hughes, an executive at an Idaho bank who was speaking on behalf of the American Bankers Association (ABA); Samuel Vallandingham, the president and CEO of a West Virginia bank who spoke on behalf of the Independent Community Bankers of America (ICBA); Nikitra Bailey, the executive vice president of the Center for Responsible Lending (CRL); Kevin Chavers, the managing director of BlackRock, who was representing the Securities Industry and Financial Markets Association (SIFMA); and Richard Stafford, the chief executive of a Maryland credit union, who spoke for the National Association of Federally-Insured Credit Unions (NAFCU).

In their written and oral testimonies, each witness outlined their respective organizations’ principles for housing finance reform. While their specific proposals varied, each witness called on Congress to include in housing finance reform an explicit backing from the federal government. Government backing, they argued, is necessary to preserve the to-be announced (TBA) mortgage-backed securities market that helps support affordable credit for all borrowers and communities.

In response to a question from Maxine Waters (D-CA), the ranking member of the Financial Services Committee, all of the witnesses agreed that removing the federal government entirely from the housing finance system could make homeownership too expensive for many working families. The witnesses also agreed about the importance of ensuring that mortgage lenders of all sizes can access the secondary market.

Subcommittee Chair Sean Duffy (R-WI) acknowledged the witnesses’ consensus regarding the need for government backing for the housing finance market, but indicated that he would like to increase the involvement of private investors. Duffy recently announced that House Financial Services Committee Chair Jen Hensarling had approved Duffy and Subcommittee Ranking Member Emanuel Cleaver’s formation of a working group on housing finance reform.

Duffy asked the witnesses how Congress could ensure that a housing finance system would properly assess risk and operate with a government guarantee that only applies to catastrophic losses. Hughes and Vallandingham both suggested that the current model, where Fannie Mae and Freddie Mac charge guarantee fees, works reasonably well. Vallandingham said both Fannie Mae and Freddie Mac have been able to utilize advanced data to improve their risk pricing.

Duffy also asked the witnesses to comment on recent housing finance reform proposals released by outside organizations, specifically referencing plans from the Mortgage Bankers Association and former Federal Housing Finance Agency Director Ed DeMarco. All of the witnesses said that their organizations had not yet taken positions on specific reform proposals. Stafford noted that it was NAFCU’s position that the current system, including Fannie Mae and Freddie Mac, should largely be maintained.

The witnesses’ principles for housing finance reform differed in other aspects, including support for affordable housing. Hughes said ABA’s view is that any affordable housing initiatives undertaken by Fannie Mae or Freddie Mac or successor government entities should be delivered through affordable housing funds that provide subsidies to private lenders to support affordable housing lending. She cited the Federal Home Loan Banks’ (FHLBs) Affordable Housing Program (AHP) as an example of how such programs could operate.

Bailey argued that access and affordability are fundamental functions of a proper housing finance system. She pointed out that Fannie Mae and Freddie Mac currently have statutory obligations to support affordable housing, including affordable housing goals, the Housing Trust Fund, and Duty-to-Serve obligations. She contended that all of these should be included in housing finance reform legislation.

Bailey said that it is also important that any new housing finance system provide an incentive for participants to price credit risk on a loan pool basis, which helps ensure that many borrowers with less-than-pristine credit are not priced out of the market. Bailey also urged lawmakers to consider historical discrimination in the housing finance system that she said has made it much more difficult for minorities to purchase homes.

While the other witnesses did not offer specific plans for supporting affordable housing in their testimony, they suggested that establishing a government-backed system accessible to all mortgage originators would support homeownership opportunities for low- and moderate-income homebuyers.

Cleaver said in his opening statement that, to be successful, housing finance reform must focus on preserving affordable housing opportunity, protecting taxpayers, and ensuring liquidity. He said that he looks forward to working with Duffy to develop bipartisan legislation.