This week, MortgageOrb talked housing-market issues and the government's appropriate role with J.C. Boggs, a true insider on both subjects. Boggs is partner in the multinational law firm of Blank Rome LLP and a principal in Blank Rome Government Relations LLC. He served as Senate Banking Committee counsel to Sen. William V. Roth Jr., R-Del., from 1991-95 and represents financial services and technology clients before Congress and the executive branch.
Q: First, we have the much-discussed $300 billion mortgage insurance fund, partially financed by Fannie and Freddie, being discussed in Congress: What can be expected from this plan? What are the possible specific benefits, and what are the downsides?
Boggs: While it is difficult for Congress to agree on anything these days, particularly with such little time left on the legislative calendar, the Senate Banking and House Financial Services Committees have been working overtime to address these issues before Congress adjourns for the summer.
House Financial Services Committee Chairman Barney Frank, D-Mass., has a sophisticated understanding of housing and mortgage finance issues and was successful in getting an early start on legislation that the House of Representatives passed in the beginning of May. More recently, the Senate Banking Committee, by a 19-2 vote, passed its version of the housing measure.
Last I checked, Majority Leader Harry Reid, D-Nev., promised consideration by the full Senate before the July recess – so we should expect further action in the next week or two.
In the meantime, committee staff are ‘pre-conferencing’ the House and Senate bills in an attempt to limit the number of differences and improve the chances of the legislation reaching the president's desk in a timely fashion. Several of the more contentious issues being discussed revolve around the government-sponsored enterprise (GSE) portfolio and capital requirements, which are more stringent in the Senate version.
Another difficult element in the negotiations concerns a requirement that would prohibit Fannie and Freddie from holding jumbo mortgages within their portfolios, thereby forcing them to be securitized.
One significant feature of the bill is the proposed bailout of mortgages in which the borrower owes more than the property value. Both the House and Senate bills authorize the Federal Housing Administration (FHA) to insure up to $300 billion in at-risk loans if the mortgage lender or servicer agrees to write off 15% on the balance owed to them. In exchange for taking a haircut, the federal government would be liable if the borrower defaults on the loan.
While the House version looks to general taxpayer funds to cover the defaulted loans under the new FHA program, the Senate bill, I think cleverly, redirects money that the GSEs would otherwise be required to contribute to the affordable housing trust fund championed by Chairman Frank and others.
As I understand it, the fund could raise between $500 million and $600 million dollars annually by imposing a 1.2-basis-point fee on GSE portfolios. The Dodd-Shelby proposal would then divert half of the money intended for the housing trust fund to the FHA program in its first year and 25% in the second year, with any funds not needed for the FHA program returned.
In my view, requiring Fannie Mae and Freddie Mac to serve as the backstop for mortgage defaults under the FHA program is the necessary price to pay if Congress wants housing legislation enacted this year. Moreover, given the basic mission and advantages provided to GSEs, it makes good policy sense.
The benefit of the plan to mortgage industry players is the probable passage of a housing bill, including GSE reform, that will provide greater certainty and predictability in the market, with a accompanying decrease in risk to lenders and servicers who chose to participate in the FHA program. The downside, for some, may be greater oversight and increased regulation brought on by the new legislation.
There are also a few outstanding issues that need to be worked out relating to conforming loan limits, capital requirement and appraisal standards that could play either way.
Q: The Office of Thrift Supervision (OTS) has recently called for greater oversight of the mortgage market and suggested itself as the supervisor. Is a federal supervisor a good idea to help with the current turmoil? Which agencies or other entities are the most viable candidates?
Boggs: Yes and no: A federal supervisor is a good idea to help with the current turmoil, and we now have several of them under the existing regulatory structure. But even with multiple regulators, less than half of the mortgage industry is under any type of regulatory oversight, and that has not proven sufficient.
I would be in favor of a single safety and soundness regulator for all financial institutions, even if they retain their diversity in terms of charters and activities. I remain a strong advocate of a separate savings bank or thrift charter. I just don't believe we need a separate regulator to go along with it.
Treasury's recent proposal to overhaul our financial regulatory structure, while by no means perfect, makes a good deal of sense. We would do well to at least consider combining the regulatory resources of the reserve banks, the Office of the Comptroller of the Currency (OCC) and the OTS and create a new safety-and-soundness agency.
The House Financial Services Committee just announced it will hold a series of hearings dedicated to financial market regulatory restructuring beginning in July. No doubt the topic will continue to receive much attention and discussion from trade groups and regulators alike.
Q: Not surprisingly, the latest quarterly delinquency survey from the Mortgage Bankers Association showed an increase in delinquencies and foreclosures. Based on what you've seen and heard, what is the timetable for recovery? When might foreclosures finally peak?
Boggs: That may be the trillion-dollar question. I wish I knew. Some have predicted that we are closer to the end than the beginning. I hope that they are correct.
It will depend upon a number of factors, including which part of the country you are located. In many areas, there is still a lot of inventory on the market. And credit is generally less accessible and more expensive than it has been for years. A lot of folks had little or no equity in their homes to begin with, so it is not a good formula.
Even so, I expect housing markets will begin to recover gradually as demand rebounds and excess inventories are worked off. Recovery in the mortgage markets is naturally tied to recovery in the housing markets. Unfortunately, the difficult conditions we see in the mortgage securitization markets place additional strains on the housing market.
There is just too much uncertainty in the marketplace, both economic and political. I don't see that abating any time soon, though the November election should resolve the political part of the equation, significantly reducing at least one variable.
Q: How much of a role do you think predatory mortgage lending (or alleged predatory mortgage lending) played in creating the current crisis?
Boggs: I never liked that terminology to begin with. It is largely the same people who encouraged lenders to expand access to credit in order to increase homeownership who now target what they describe as overzealous or ‘predatory’ lending.
Sure, there were suitability issues, but Washington policy-makers on both sides of the aisle were effective promoters of higher loan-to-value lending, smaller down payments, riskier lending and the use of government guarantees – all to increase ‘access’ to credit and homeownership. This all played into the mortgage credit overexpansion – what we now refer to as the bubble.
In addition, short-term financing of long and risky positions, which is viewed as normal and safe when there is plenty of liquidity from which to borrow, is unsustainable in the long term and further played into the current crisis.
Q: Do you see cutting the interest rate (as the Fed has done several times recently) as an effective response to the market turmoil? What else might be done to regain investor confidence?
Boggs: I think it has helped to date, but there is only so far the Fed can go with interest rate cuts as we learned from the Japanese experience in the 1990s.
What else might be done? First off, mortgage loan documentation is just too complicated for the average homebuyer. We should require a simple and straightforward disclosure to borrowers of the essential information about prospective mortgage loans – in just one page if possible.
The President's Working Group on Financial Markets has also recommended that credit-rating agencies be more skeptical when presented with complex and opaque instruments to rate. It strikes me that credit rating agencies would better serve investors by providing greater transparency about the models, estimation methods and assumptions used to evaluate credit risk for complex structured securities.
I also like the idea of encouraging greater credit-risk retention by mortgage originators. Securitization has been a terrific tool in addressing the rate risk, but better lending practices could be encouraged if credit risks were retained by the original mortgage lender. While I understand that there may be numerous regulatory and accounting obstacles to this approach, it deserves further attention and consideration.
Finally, and relating back to your first question, I think it would be helpful if Congress could pass the pending housing legislation in the next month or two, including GSE reform and FHA modernization, among other items.