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Home Builders: Effective Housing Finance System Critical to a Sound Economy

WASHINGTON, D.C. – March 31, 2011 – (RealEstateRama) — As Congress and the Administration debate potential reforms of the housing finance companies Fannie Mae and Freddie Mac, the National Association of Home Builders (NAHB) today called on Congress to develop a workable housing finance system before it moves forward with policies that would further destabilize the struggling housing market.”A finance system that provides liquidity for the housing sector in all geographic markets throughout the economic cycle is a prerequisite to achieving housing policy objectives,” NAHB Chairman Bob Nielsen, a home builder from Reno, Nev., told members of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises.

Also of great concern to NAHB are the credit risk retention rules required by Section 941 of the Dodd-Frank Act, which were unveiled this week by the six agencies charged with implementing that section of the law. NAHB believes the proposed rules contain an unduly narrow definition of the important term “Qualified Residential Mortgage” (QRM), featuring a minimum down payment of 20 percent, which would seriously disrupt the housing market by making mortgages unavailable or unnecessarily expensive for many creditworthy borrowers.

By stipulating such a large down payment for a loan to be considered a QRM, the Administration and federal agencies are preempting congressional efforts to reform the housing finance system by imposing a narrow and rigid gateway to the secondary mortgage market.

“This extreme proposal could not have been put forward at a less opportune time,” Nielsen said. “The housing market is still weak, with a significant overhang of unsold homes, and an equally large shadow inventory of distressed loans. A move to a larger down payment standard at this juncture would cause renewed stress and uncertainty for borrowers who are seeking or are on the threshold of seeking affordable, sustainable homeownership. We believe a more balanced QRM exemption is imperative in light of the enormous potential impact it would have on the cost and availability of mortgage credit at this precarious point in the housing cycle.”

Addressing the GSE reform issue, Nielsen noted that the housing finance system is struggling under a cloud of uncertainty. The federal government, through Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), currently accounts for nearly all mortgage credit flowing to home buyers and rental properties.

“Even with the current high level of federal support, fewer mortgage products are available, and these loans are being underwritten on much more stringent terms,” Nielsen said. “This arrangement cannot continue indefinitely, and there is no clear picture of the future shape of the conforming conventional mortgage market. But one thing is clear – the status quo cannot continue.”

Policy discussions are underway on what should become of Fannie Mae and Freddie Mac following the current indefinite conservatorship period, and what should change in the structure and operation of the Federal Home Loan Banks. A key consideration is how to make the transition from the current structure to a future arrangement without undermining ongoing financial rescue efforts and further disrupting the operation of the housing finance system.

“NAHB strongly supports efforts to modernize the nation’s housing finance system, including reforms to the government sponsored enterprises Fannie Mae and Freddie Mac,” Nielsen said. “We cannot go back to the system that existed before the Great Recession, but it is critical that any reforms be well-conceived, orderly and phased in over time. Short-term proposals to reduce the support Fannie Mae and Freddie Mac provide for the housing finance system represent a piecemeal approach to reform that would disrupt the housing market and could push the nation back into a deep recession.

“The National Association of Home Builders urges Congress and the Administration to consider the potential consequences of their proposals,” Nielsen said. “Housing can be the engine of job growth this country needs, but it can’t fill that vital role if Congress and the Administration make damaging, ill-advised changes to the housing finance system at such a critical time.”

NAHB strongly believes that an efficient secondary mortgage market that facilitates the flow of capital to housing is essential to the economy and to the nation’s long-term well-being. NAHB joined a broad coalition of housing and financing groups to develop “Principles for Restoring Stability to the Nation’s Housing Finance System,” released on March 28. The principles, outlined below, should guide efforts to restore and repair the nation’s housing finance system:

A stable housing sector is essential for a robust economic recovery and long-term prosperity. Housing, whether through homeownership or rental, promotes social and economic benefits that warrant it being a national policy priority.

Private capital must be the dominant source of mortgage credit, and it must also bear the primary risk in any future housing finance system.

A continuing and predictable government role is necessary to promote investor confidence and ensure liquidity and stability for homeownership and rental housing.

Changes to the mortgage finance system must be done carefully and over a reasonable transition period to ensure that a reliable mortgage finance system is in place to function effectively in the years ahead.

“NAHB looks forward to working with all stakeholders to develop an effective as well as safe and sound means to provide a reliable flow of housing credit under all economic and financial market conditions,” Nielsen said.