Senate lawmakers continue to hear industry and regulator concerns this week over the future of the mortgage finance market and possible reform to both agency and private-label securitization industries.
The Senate Committee on Banking, Housing and Urban Affairs at a hearing Thursday considered a key issue, the role of government in supporting housing finance through post-conservatorship mortgage giants Fannie Mae (FNM: 1.48 0.00%) and Freddie Mac (FRE: 1.79 0.00%).
The consensus among lawmakers varied during the hearing, from committee chairman Christopher Dodd (D-Conn.) urging an extension of higher loan limits in a forthcoming US Department of Housing and Urban Development (HUD) appropriations bill to Sen. Bob Corker (R-Tenn.) calling to do away with the government-sponsored enterprises (GSEs) entirely and return to private sector support of the securitization market.
Despite the government’s positive impact through supporting the GSEs so far, government intervention should be limited in the future as private capital returns to housing finance, Federal Housing Finance Agency (FHFA) acting director Edward DeMarco told the committee.
FHFA conservatorship of the GSEs helped reduce the risk by limiting mortgage activity to more prudent standards of credit quality among borrowers, he said. The industry can be maintained outside of government intervention, DeMarco added, but it requires structures that foster competition, freedom of exit and entry. The industry must return to traditional underwriting, and investors want to see risk distributed appropriately.
Despite the intervention of the FHFA, he indicated the GSEs still face losses and poor performance of mortgages.
“I am concerned about the continued increase in serious delinquency rates” of US mortgages, including among prime mortgages, DeMarco said.
Despite these rising delinquency rates, the servicing system within private-label securitization creates “thorny barriers” to modification, Patricia McCoy, a law professor at the University of Connecticut School of Law, told a Senate subcommittee on securities and investments Wednesday.
McCoy urged lawmakers to facilitate modification of loans within securitizations by altering tax laws. For example, she suggested taxing securitized trusts unless the trusts provide for “ironclad” incentives for loan workouts.
Any reforms pursued by lawmakers should not, however, stifle sound securitization practices, said George Miller, executive director of the American Securitization Forum (ASF). He indicated accounting standard changes and capital rules may render it “prohibitively expensive” to securitize, and instead reccomended improbing the basic infrastructure of the system.
Loan-level data enhancements would make risk more transparent and encourage accurate ratings, Miller told lawmakers. He added that a mortgage loan that fails to meet underwriting criteria should be removed from securitization to be returned to the banks much like a consumer would return a defective product to a store. This would ensure originators retain a “meaningful and economic” stake in the quality of loans sold for securitization.
Other witnesses at the hearing spoke more forcefully about the proposed 5% credit risk retention by securitizers.
Andrew Davidson, president of risk analytics provider Andrew Davidson Co., said there are “superior alternatives” to the Administration’s recommended 5% retention. He recommended establishing a certificate of obligation coupled with penalties to ensure soundness of securitizations, as well as licensing and bonding mortgage brokers and lenders.
Christopher Hoeffel, executive committee member of the Commercial Mortgage Securities Association (CMSA), said that while keeping “skin in the game” is important to ensuring the quality of securitizations, a 5% risk retention may hamper the securitization market.
He also said he was concerned sweeping regulatory reform of the securitization industry in the wake of the subprime mortgage implosion may apply a “one-size-fits-all” treatment to the commercial mortgage-backed securities (CMBS) market. Hoeffel indicated he does not oppose reforms, but urged lawmakers to tailor reforms to address the needs of various asset classes.