WASHINGTON, D.C. – January 19, 2012 – (RealEstateRama) — David H. Stevens, President and CEO of the Mortgage Bankers Association, today delivered a speech to the Exchequer Club of Washington, DC, on the housing market and housing policy titled, “A Bright Future Requires Certainty.”
Below is the text of Mr. Stevens’ speech, as prepared for delivery.
As the President and CEO of the Mortgage Bankers Association, it is an honor to speak before such a distinguished group, especially one so well versed in the pressing issues of today.
Almost exactly two years ago, I addressed your group in my position as Federal Housing Administration Commissioner. At that time, we were all grateful to be on the long, slow road to recovery.
All of us, myself included, believed that the recovery would become stronger with each passing day. Today, I can report some progress, but not as much as we all would like.
And while our industry was clearly part of the problem, we are now actively working to bring solutions to the table that will stabilize and benefit the entire housing market, borrowers and lenders alike.
Over the past several years, I have been repeatedly asked: What will it take to stabilize our nation’s housing market and finally trigger an upturn? Today I will provide you with some answers.
President Thomas Jefferson once said, “In matters of style, swim with the current. In matters of principle, stand like a rock.”
Currently, our entire economy, and especially the housing market, appears to be swimming with the current, rather than standing like a rock. And what we need right now is rock-like certainty.
One of the main reasons for our economy’s continued struggles is our present state of constant uncertainty. This uncertainty has impacted consumers and industries alike, creating difficulties for both.
In recent years, policymakers and legislators have focused on proposing a plethora of new rules rather than on actions that would create confidence. It is not that rules are a problem or contrary to creating confidence; it is that simply racking up hundreds of rules – rules that are often vague or confusing without clear logic, application, or protection for consumers – is contrary to creating confidence. What individual, let alone what industry, can figure out how to proceed if they are overwhelmed by and do not understand the hundreds of rules?
The solution is simple: we must create straightforward rules that apply equally and nationally. This would provide crystal clear guidance, creating certainty in a time of uncertainty.
The government has a responsibility to create an aura of confidence that will allow us to proceed forward to a brighter future. Well-defined national rules would achieve this.
This is not an Administration or a Congressional issue, not a Democrat or a Republican issue; this is an all-hands-on-deck, bipartisan issue.
As declared on no less than three occasions in the last month by officials from the Federal Reserve System, including Chairman Bernanke, a coordinated and unambiguous national housing policy would be good for our tenuous recovery, our fragile economy and our struggling housing market.
This era of uncertainty has several different aspects. There is overall uncertainty regarding the direction in which our country is heading, where our national economy’s woes are dictating a general disquiet. There is political uncertainty, where the election cycle is leaving many critical questions up in the air and much negative commentary flowing. Finally, there is government uncertainty, where the lack of a coherent approach leaves everyone wondering what the rules will be and how they will be enforced – and so how to proceed.
The overall uncertainty is something that we cannot control or easily influence – the state of the general economy, the level of consumer confidence, and the rate of unemployment are not factors that mere mortals can change.
Yet, I strongly believe that providing certainty in housing will eventually affect these factors as well, boosting everything.
I am not alone in this belief. Earlier this month, Federal Reserve System Governor Elizabeth A. Duke noted: “I do believe that forceful and effective housing policies have the potential to significantly influence the speed and strength of our economic recovery.” President and CEO of the New York Federal Reserve Bank, William C. Dudley, concurs, remarking in a recent speech that he believes “that improving the outlook for housing would materially strengthen the overall economy.”
Clearly, we must focus on what our actions can and will impact. Policymakers and legislators must stop using housing issues to score political points. Presently, housing and particularly the mortgage lenders who make homeownership possible have become political footballs.
With election season heating up, partisan campaign rhetoric is creating potential consequences that could threaten the recovery. As we have experienced through the hundreds of rules proposed recently, many of which have had unintended and negative outcomes, rulemaking takes time, thought and care. Political campaigns offer none of those considerations, and the potential to get locked into unworkable and unrealistic positions is incredibly high. This is not a risk we can take when it comes to the housing market or our economy.
Just consider the recent political maneuvering regarding the extension of the payroll tax holiday. This tax holiday is certainly a boon for hard-working and struggling Americans, but it was done at a cost to homeowners who are also hard working and potentially struggling. The final deal struck in December allowed a two-month extension of this tax cut in return for a new tax on homebuyers to pay for it, a tax that will equal thousands of dollars over the lives of their loans. That’s a lot of money to take out of a family’s budget for just a two-month payroll tax holiday.
Even worse? These additional monies will ignore the express purpose of guarantee fees, and rather than help Fannie and Freddie mitigate their risk, which we endorse, the monies will go to the U.S. Treasury to offset this extension of the payroll tax holiday.
Considering that average Americans are already struggling to make ends meet, this “tax cut” will have the unintended impact of reducing access to housing for those that are most in need. The cost of borrowing for everyone will go up – by at least half a point. Exactly how does that make sense? It does not, and I was one of the only people trying to spread the alarm.
It was yet another sign of policymakers operating in a vacuum – proposing ideas that sound good but do not take into account consequences, consequences that might be clear with a concerted effort and a cohesive strategy. In fact, this focus on short-term gains thanks to election cycles and partisan demands, has created long-term roadblocks that will not only harm those of us in the housing industry, but also homebuyers.
One of the things that make the United States great is our real estate finance system, and we cannot let it be destroyed. It is time for those of us who care about not just housing finance, but our nation overall, to aggressively pursue policies that will fix the situation we are currently in. This means focusing on a coordinated national housing policy that removes uncertainty.
As Stacy Kaper of the National Journal recently wrote: “Instead of mounting a coordinated strategy with clear goals, Washington is awash in discordant, halfhearted, and contradictory solutions to the housing crisis – the main roadblock to an economic recovery.” It is time for Washington to lead. It is time for Washington to create a well-defined, national, coordinated housing strategy with clear, distinct goals. This specifically means determining exactly what the rules will be and exactly how they will be enforced.
Consider the concept of residential servicing standards. Right now all across the country, all different levels of government from the state to the federal are proposing their own standards.
Instead of working together to provide a clear single set of rules, they risk piling on with a variety of strikingly different and sometimes contradictory regulations.
To understand how harmful this is, consider this: we are in the midst of playoffs for the National Football League, what if every state had a different set of rules for the game? How could a single game even be played, let alone a team’s overall record be decided? How could a fan enjoy or understand a game if the rules vary depending on where it is played? The same is true here: a lack of cohesive rules hurts everyone, from the industry to consumers, who have already had their access to credit severely restricted.
It is for this reason that there are potential benefits to the creation of the Consumer Financial Protection Bureau. Its strength is that it can provide a single powerful voice impacting consumer regulations, offering one set of rules across the country just like the NFL. Having one entity in the mortgage space could bring rationality to how we regulate mortgage finance. This is incredible power though, which is why it must be carefully supervised. Just as our government system uniquely provides checks and balances, so must individual agencies like the CFPB have restraints and safeguards. With proper precautions though, the CFPB could provide the clarity needed to dismiss the confusion.
For even just the subject of servicing gets more complicated and confusing when you examine it closely. Look at the potential settlement between mortgage lenders and state attorneys general, HUD and the Department of Justice regarding the origination and servicing of mortgage loans.
These negotiations have continued for more than a year, causing uncertainty as to how this issue will be handled. In addition, despite reports a resolution may be close – which would be good news for the housing market – the Federal Housing Finance Agency has not stopped its separate action to sue 17 lenders for similar charges regarding private label securities.
So with one hand the government is offering a way to avoid a costly legal battle that would continue to hinder housing’s recovery, but with the other hand the government is offering a costly legal battle.
In the midst of all this are individual state attorneys general, many of whom are also pursuing separate actions, whether legal battles or new rules. It is reported, for example, that some attorneys general are considering rejecting the terms of the settlement that HUD and the Department of Justice are negotiating and pursuing their own claims, which have the potential to undermine efforts to achieve truly national standards on servicing.
Further creating uncertainty is that, under the SAFE Act, individual states have created separate and different licensing requirements for loan officers. A state-by-state approach toward licensing is confusing; what is needed is reciprocity between states, or transitional licensing of federally registered originators pending state licensure. In other words, everywhere we look, we are seeing a myriad of rules and legal battles for mortgage lenders to tackle.
Costly legal battles will only extend our housing woes, as lenders will become even more wary of wading back into the market. Consider what lenders currently face: potential lawsuits from 50 different states, as well as from the FHFA.
In fact, the FHFA has not only proposed the lawsuits for servicing misconduct, but is also pursuing action against lenders on the subject of “buybacks” or “loan repurchase deals.” Under normal circumstances in the secondary market, if a borrower defaults on a loan due to a defect in the loan’s underwriting, a lender can be forced to repurchase the loan from the investor.
Today, in an attempt to recoup devastating losses, investors are trying to force lenders to repurchase loans based upon mistakes that may have no material relationship to the loan default.
And now the Securities and Exchange Commission may join the chaos. Presently the SEC is taking comments on a proposal to regulate Mortgage Real Estate Investment Trusts (REITs) under the Investment Company Act. Considering that our real estate finance system is already struggling under the weight of overwhelming new regulations, adding yet another regulatory framework on top would simply add to the confusion and uncertainty.
Add to this that the Department of Housing and Urban Development proceeded to issue a proposed rule on “disparate impact” claims in November. Simply put, even if a lending or housing practice is neutral, non-discriminatory and not motivated by discriminatory intent – the lender will face legal jeopardy if it results in an unequal outcome. This will only increase the skittishness of already skittish lenders; it will only further harm our housing recovery.
Finally, we must further discuss the most influential player in the room: the Consumer Financial Protection Bureau. Virtually all consumer financial protections that exist under current laws will now fall under the purview of the CFPB. This means a lot of regulations that cover a broad range of responsibilities must now be transferred from several other agencies and departments. Its potential influence is vast and so the potential fallout from incorrect implementation is enormous.
For this reason, the MBA has been working closely with Congress to ensure a proper oversight structure for the CFPB, guaranteeing it not only has sufficient oversight, but also performs its functions in a thoughtful manner consistent with its purpose. We also support a different governance model. While we believe new director Richard Cordray to be qualified, we feel that a commission structure, similar to the FDIC, rather than a single director will ensure a diversity of viewpoints is constantly considered. Needless to say, we’re also closely monitoring the progress as new rules are crafted.
As the CFPB’s actions and decisions in the coming months will be vital to whether and how our housing market will recover, as well as our economy overall, there are many critical questions to consider.
Exactly how will the new rules be structured? Perhaps more important, how will these rules be enforced? Has a cost-benefit analysis for the consumer been done? Is there any indication of what the cost of implementation for lenders will be? How will the concept of “abusive practices” be explicitly defined? There is no room for uncertainty on any subject, and especially not with a new agency tasked with so many responsibilities and so much influence.
This is exactly why we have taken a leading role on establishing certainty in all areas that can be controlled or affected. As Washington’s lack of coherent strategy has shown with devastating results, leadership is desperately needed right now.
We can no longer offer advice from the sidelines – we must be actively involved. So here are a few concrete steps that must be taken to eliminate uncertainty and get our housing market, and our broader economy, back on track.
First, we need to establish a true national servicing standard. This provides not just certainty for borrowers and lenders alike; it provides consistency and equal treatment. There should no longer be 50 individual state laws where a borrower cannot be sure that when they move to a new state they will be treated the same as previously. Lenders should have no excuse for confusion, as they will simply need to understand one national rule.
The question is: can the potential settlement help provide greater clarity that can now be adopted into one national standard?
Second, the future of the GSEs has to be addressed to ensure long-term stability of the real estate market and reinvigorate the private mortgage market. The current mortgage market relies far too heavily on government support, edging out private investment. This is neither desirable nor sustainable. The status quo of overwhelming involvement by FHA, Fannie Mae and Freddie Mac has helped to create insufficient private liquidity. What is needed is explicit government involvement in guaranteeing prime mortgage-backed securities – but not the entities of Fannie and Freddie themselves.
Election year politics will likely ensure that a comprehensive approach to this issue will have to wait – but the debate has begun now.
Third, we must restore certainty by establishing clear rules on risk retention and qualified residential mortgage requirements – rules that do not limit the affordable mortgage financing options for moderate-income families, first time borrowers, and minorities. For that matter, we need to consider the borrowers of the future: those who are now considered higher risk due to the consequences of the Great Recession. Those who have returned to solid footing, but might have a history of blemished credit thanks to a lost job, missed payment or more. We need to keep these borrowers – and how we will address their situation – in mind now too.
This will be a huge future challenge, and is another reason why we must be very thoughtful in how we craft the rules on risk retention and qualified residential mortgage requirements. It makes perfect sense to create an exemption from risk retention for mortgage loans that are well underwritten, properly documented and considered sound and sustainable. But present proposals go too far. We cannot allow disparities in homeownership. We must eliminate hardwired down payment and debt-to-income requirements.
We must also guarantee that sustainable and affordable credit is available not just for residential borrowers, but for commercial and multifamily borrowers as well.
They are also a critical part of our overall real estate market and system. This means that we should eliminate the proposed “Premium Cash Capture Reserve Accounts”, which could severely constrain liquidity. This will ensure that mortgage capital will remain available, including for commercial and multifamily real estate borrowers.
Fourth, we can also restore certainty by creating a legal safe harbor in the Ability to Repay / Qualified Mortgage definition. While the QM has its problems it creates considerable liability for lenders by compelling them to determine if a borrower has an ability to repay prior to entering into the loan, more certainty can be achieved with a bright line of safe harbor or the price could be paid by consumers on the margins who might not get access to homeownership at all.
And fifth, we can increase certainty by rationalizing the repurchase regime that investors are using to push back mortgages on lenders. This can be achieved by creating clear guidelines around duration – absolving loans that have performed for several years, except in cases of fraud; materiality – did the defect contribute to the loan defaulting ; and objectivity – is the defect something the originator could have detected at the time the loan was made.
All of these actions will ensure accountability and sound underwriting, but without limiting liquidity and access to affordable financing. Most important, they will provide certainty, which is critical to boosting our fragile housing market – and our economy as a whole. The end result of uncertainty hurts everyone, including those we most want to help. As Federal Reserve Governor Duke has noted, “continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery.”
Key to remember is present protests against the “1 percent” – the financial institutions that are the foundation of our economy – may ignore this point:. The very institutions the protestors blame are the same vehicle for recovery and moving the American people forward.
If we do the right thing, if we take steps to reduce the current uncertainty, if we create clear rules of the road, if we reestablish a vibrant housing finance system, we can provide the very thing the protestors are asking for, the very thing the American people want: We can help restore the American economy.
Our nation desperately needs a “more vigorous economic recovery”, and fixing the weaknesses in the housing market and boosting the financial institutions that support housing will achieve this end.
Just as important though, is the impact of housing on individuals and families. A recent study by the Research Institute for Housing America found that almost 80 percent of American households believe that now is a good time to buy a home. That is 80 percent of Americans that still believe in the American Dream, across all age groups and demographics. But homeownership is not just the American Dream; it is also an investment in the future, and the present. It creates communities; and reduces crime and pollution, while increasing education rates. It is why my Association’s tagline is “Investing in Communities.”
Homeownership pays dividends that are not always calculated in cash. For this reason, as the study shows, homeownership will continue to be a primary objective of future generations of Americans, despite the events of the last four years. It is why all of us have a responsibility to the homeowners and homebuyers around the nation. Considering the impact housing has on the overall economy, we also have a responsibility to all Americans.
We have an obligation to the 80 percent, and also the 99 percent. It is why we must work together to create the conditions where the housing market has a chance to recover – to create the conditions where our economy has a chance to recover.
We must, together, “stand like a rock”. If we end the uncertainty, we can create a bright future – for ourselves and future generations. It is up to us.
The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry, an industry that employs more than 280,000 people in virtually every community in the country. Headquartered in Washington, D.C., the association works to ensure the continued strength of the nation’s residential and commercial real estate markets; to expand homeownership and extend access to affordable housing to all Americans. MBA promotes fair and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 2,200 companies includes all elements of real estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and others in the mortgage lending field. For additional information, visit MBA’s Web site: www.mortgagebankers.org.