WORD ON THE STREET: The purpose of the proposed Private Mortgage Market Investment Act (PMMIA), as set forth in the draft bill, is ‘to increase standardization and transparency and ensure the rule of law in the mortgage-backed security (MBS) system.’ Without reservation, the Mortgage Bankers Association (MBA) supports these important objectives. The current real estate finance environment – with the federal government owning, securitizing or guaranteeing nearly 90% of single-family mortgages underwritten today – is untenable.
Without question, a new housing finance system must attract private capital. Key elements of the PMMIA – facilitating standardization, legal certainty, greater transparency and disclosure – are fundamental to mortgage markets that rely on robust private investment.
At the same time, we believe the necessary tools, materials and expertise currently exist to begin building a bridge toward a more sustainable real estate finance system. As the discussion on the future of housing finance continues, the MBA recommends that policymakers carefully consider the path by which private capital is brought back into the system.
A core disadvantage of the government-sponsored enterprise (GSE) model is that it fundamentally relied upon ambiguity regarding the extent of the government backstop in the conventional mortgage market – an ambiguity that, in the end, wound up harming the interests of borrowers, investors and taxpayers. Because the government guarantee was implicit rather than explicit, it was provided at no charge to market participants.
Another shortcoming of the GSE model is that Fannie Mae and Freddie Mac were permitted to amass sizable risk through their retained portfolios that presented substantial systemic risk with limited benefit to anyone but their shareholders. Additionally, the fact that the GSEs were chartered by Congress meant their competition was limited.
Our evaluation of the current system led to the development of three principles that serve as the foundation of the MBA's recommendations for the future of the secondary mortgage market.
The first principle, which is in agreement with the goals of the PMMIA, is that secondary mortgage market transactions should be funded with private capital. The second principle is that the importance of housing, whether owner-occupied or rental, to the nation's economic and social fabric warrants a federal government role in promoting liquidity and stability in the core mortgage market. This role should be in the form of an explicit credit guarantee on a class of MBS, and the guarantee should be paid for through risk-based fees.
Third, taxpayers and the system itself should be protected through limits on the mortgage products covered, limitations on the types of activities undertaken, strong risk-based capital requirements, and actuarially fair payments into a federal insurance fund. The MBA's recommendations were developed in a way that retains the benefits and avoids the shortcomings of the existing GSE framework.
I am pleased to say that there is considerable concurrence between the MBA's recommendations and the draft PMMIA.
Private capital. The most important common ground we share is that private capital should be the primary source of liquidity for the real estate finance system. Like the MBA's proposal, the PMMIA also provides greater clarity on the government's role by establishing that private capital is in the first loss position.
Standardization. We agree that one way to foster a secondary market that attracts private capital is to provide standards, consistency and transparency for market participants. The PMMIA could help accomplish these goals.
For example, the bill authorizes the Federal Housing Finance Agency (FHFA) to develop, adopt and publish standard form securitization agreements for certain classes of mortgages. This provision is important for a variety of reasons (i.e., standard forms and terms facilitate predictability and the rapid flow of information). Standard securitization forms streamline the transportation of data and capital in the same way that standard gauge railroad tracks facilitate interstate commerce.
Core products. The MBA appreciates that the PMMIA provides for the establishment of different classes of standard mortgage products. This provision is similar to the MBA's recommendation for the establishment of a core residential mortgage market to set a benchmark for consumers, underwriters, investors and others.
For consumers, the presence of well-defined core mortgage products will provide a standard against which other products can be assessed. The core market will also provide considerable stability, ensuring that mortgage products of a known type will be available in all market conditions.
For underwriters, the characteristics of the ‘well-documented, well-understood’ mortgages of the core market will provide a known base for modeling and pricing risk. For investors, the core market will establish performance and pricing benchmarks for use in MBS investing, and against which other investment options can be judged.
30-Year fixed rate mortgage. The MBA appreciates that the bill gives consideration to preserving the 30-year fixed-rate mortgage. Homeowners have come to view this mortgage product as the industry standard. Payments are predictable, and borrowers are protected from fluctuations in interest rates.
The MBA also appreciates that the bill does not attempt to standardize all real estate finance transactions. Instead, it provides room for market participants to negotiate alternative agreements according to their own risk appetites. This leaves open opportunities for innovation and further advancements.
Competition. The MBA is grateful that the PMMIA attempts to address a fundamental flaw in the current statutory and regulatory framework regarding the statutory charters of the GSEs. Fannie Mae's and Freddie Mac's congressional charters give them a competitive advantage that no other private MBS issuer has – a government guarantee that at one point was implied, but was made explicit when they entered conservatorship. The MBA believes that transferring to a federal regulator the authority to charter additional competitors, and approve and disapprove certain MBS, solves the problem of insufficient competition in the secondary market.
Disclosure and securities registration. The disclosure provisions of the PMMIA are generally consistent with MBA's support for efforts to increase the transparency and reliability of investment product information. The MBA is aware that the financial services system has witnessed a tremendous increase in the level of complexity and sophistication in financing options, investment products and liquidity channels. We believe it is vital for investors to have sufficient information so they can adequately assess whether a particular investment matches their level of risk appetite.
At the same time, the secondary market is remarkably fluid. As a result, additional securities registration requirements could cause unnecessary delays in MBS execution. Accordingly, we support the PMMIA's exemption for certain securities from securities registration requirements.
Clarification of qualified mortgage exemption. The MBA strongly supports efforts to clarify the ‘ability to repay’ provisions of the Dodd-Frank Act, which also authorizes the Consumer Financial Protection Bureau (CFPB) to establish a ‘Qualified Mortgage’ (QM) category of mortgages that will have been deemed to satisfy the law's ‘ability to repay’ provisions. Some have expressed uncertainty regarding whether the QM category is a safe harbor or rebuttable presumption of compliance.
Having considered this issue carefully, the MBA urges that adoption of a safe harbor with objective bright-line standards serve as the best construct for the QM. Such an approach:
- Is clearly within the powers of the CFPB under the Truth in Lending Act as amended by Dodd-Frank;
- Will provide the strongest incentives for lenders to operate within its requirements, given the severe penalties resulting from non-compliance, and, at the same time, offer sustainable mortgage credit to the widest array of qualified consumers;
- Will allow efficient and less costly litigation to determine whether the safe-harbor requirements have been met;
- Will prevent lenders who conscientiously meet the requirements from being dogged by endless and costly litigation, including meritless claims that would be encouraged by anything less than a safe harbor;
- Will avoid saddling qualified borrowers with the costs of legal uncertainty in the form of a lack of access to credit or, if credit is made available, higher interest rates and fees (which is the only way the industry will be able to support the costs of litigation); and
- Will help maintain competition in the marketplace by reducing the burden on smaller lenders.
The rebuttable presumption of compliance, in contrast, would:
- Cause lenders to act more conservatively and potentially use the more restrictive ‘Qualified Residential Mortgage’ (QRM) standards (under Dodd-Frank's risk retention section) as a ‘safe harbor’;
- Result in the denial of credit at a higher rate and/or increase costs to many borrowers;
- Have the most serious effects on the availability and costs of credit for minority, low- to moderate-income, and first-time borrowers who, though qualified, may present greater credit risks;
- Invite more extensive litigation than necessary, resulting in greater costs being borne by all borrowers;
- Eliminate competition from the marketplace by creating a level of risk that makes compliance too costly for smaller lenders; and
- Diminish the recovery of the housing market and the nation's economy.
For these reasons, the MBA believes it is imperative to unequivocally clarify that Dodd-Frank provides a bright-line safe harbor for QM purposes.
David H. Stevens is president and CEO of the Mortgage Bankers Association. This article is adapted and edited from testimony recently delivered before the
U.S. House of Representatives' Committee on Financial Services
Subcommittee on Capital Markets and Government-Sponsored Enterprises. The full testimony is available online.
