MBA CEO David H. Stevens Presents Actionable First Steps for Secondary Market Reform
Lowers Costs to Consumers, Reduces Taxpayer Risk, and Boosts Liquidity
WASHINGTON, D.C. – May 7, 2013 – (RealEstateRama) — [Please Note: These are prepared remarks from MBA`s 2013 Secondary Market Conference & Expo. Mr. Stevens may add or subtract from these remarks during the course of his presentation. Portions of the text may be omitted during the speech.]
Good morning and welcome to MBA’s 2013 Secondary Market Conference and Expo. It’s always great to be back in New York City, the mecca of private capital.
This is my third Secondary Conference as president and CEO of MBA. For two years now, I’ve stood upon this stage vigorously expressing the industry’s concerns of uncertainty and access to credit. Beyond our countless comment letters on the wide array of proposed rules, endless meetings between our members with both regulators and legislators on the impacts of excessive, overlapping, rules on consumers access to credit, and an ongoing drum beat advocating on the need for integration of transparency and process coordination, I’ve used this conference to put forth our solutions for a stable, reliable marketplace such as single security, transparency and coordination at all levels of government and throughout the real estate finance system. The MBA has been the leading voice of the real estate finance industry in Washington and throughout the country. Together, we have led the charge and spoken tirelessly about the pathway to achieve a safe, sound, vibrant real estate finance system.
I’m pleased to say that we are making progress. We are being heard, even from the highest levels of government. When President Obama gave his State of the Union address earlier this year, he laid out his key economic policy issues. He recognized housing’s role and importance to economic recovery. He said, and I quote,
“But even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected.
“Right now, overlapping regulations keep responsible young families from buying their first home. What’s holding us back? Let’s streamline the process, and help our economy grow.”
Since then, countless other Washington officials, from the halls of Congress through the numerous regulatory agencies, have agreed that the risks of overlapping regulations have created a burdensome, restrictive and uncertain atmosphere.
But simply being heard is no longer enough. We have talked and they have listened. Now it is time for action.
Unfortunately, the collective players in Washington have created an atmosphere where, guarantee fees have been arbitrarily raised and likewise used as an offset to pay for other budget items; an atmosphere where government is backing the bulk of the mortgage market and directly impeding any opportunity for a return of private capital. In this atmosphere, it’s been okay to change housing policy and regulations without transparency, coordination or consideration for the downstream effects – or to simply ask the industry how this will all impact the average consumer or the economic recovery. This is an atmosphere where the collective actions have produced an outcome that no longer favors vibrant, diverse business models. To the contrary; these actions are actually hurting the goal of a broad and diverse industry. From community banks and credit unions to independent mortgage bankers and banks, the collective weight of change, the lack of any leadership in a future model for housing finance, and lack of coordination are our greatest challenges today.
I stand before you right here, right now saying that this is not okay. This is not acceptable for the prosperity of consumers, our industry or our economy. This must change, and it cannot be done through death by 1,000 cuts.
American Economist Milton Friedman once said, “Nothing is so permanent as a temporary government program.”
And this is the danger we run today as long as there is no clearly defined transition plan for the GSEs out of conservatorship. Under the original plan, Fannie Mae and Freddie Mac were only to remain in conservatorship temporarily. The conservatorships have now been in effect for more than four-and-a-half years. What was intended to be a short “time out” in September 2008, has continued so far that it seems there is no endgame in sight. There is currently no plan for transition.
Don’t get me wrong. We all need, respect and support the role the GSEs have played – and continue to play. They played a vital role in helping rebuild the housing market. Their employees have worked long and hard, under extremely adverse conditions, to keep the mortgage market afloat. At a time when private investors had no appetite for mortgages, Fannie Mae and Freddie Mac have been able to provide desperately needed liquidity to allow the housing market to stabilize and move into recovery. Now, with the market recovering, it is time to transition from conservatorship to a future state. It is time for private capital to re-engage. It is time to restore a vibrant secondary market that can function for the long term; one that is most reliant on private capital, but with a functioning system where a government guarantee ensures liquidity when the market needs it most. It is time for a clear pathway to transition.
Private capital remains on the sidelines while both GSEs have reported large net operating revenues, leading some to wonder whether the business models of Fannie Mae and Freddie Mac have regained perhaps some of the credibility lost during the financial crisis. But these profits don’t tell the whole story of the GSEs in their current form. They are dependent upon three things, largely as a result of government intervention:
• One – the unilateral power to raise guarantee fees, which have more than doubled in recent years despite the safest books of business in history; and
• Two – a wave of refinances brought about by government programs like the Home Affordable Refinance Program, or HARP.
• Three – An extensive period where the Federal Reserve has kept rates near historic lows through its massive, unprecedented purchases of agency MBS and Treasury securities.
Additionally, FHFA and the GSEs have shown that they will act unilaterally to chart the course for the GSEs, and to modify and impose or propose major policy changes on the industry. It is only a matter of time before these policies, taken together, significantly limit Congress’ options for permanent reform. Many of these initiatives are being taken without warning to or soliciting meaningful input from stakeholders.
In the absence of clear direction on the future of the GSEs, actions being taken today by FHFA and the GSEs could adversely impact consumers and competitive conditions in the secondary market. Nobody involved with real estate finance should be satisfied with the current course of inaction. And this complacency comes with great costs.
Consider some of the major announcements of planned policy changes from the FHFA and GSEs–all done without public review and comment. They include changes to the minimum net worth requirements, G-fee changes, volume limits for some existing sellers, new servicing rules, a new framework for reps and warrants, and changes to their securitization platform.
And this does not come just from FHFA or the GSE’s. Almost every major rulemaking from QRM to Basel III provides explicit exemption or preference to a GSE execution over any private capital option. The return of private capital rests in resolving these significant barriers.
The time to act is now! From an interest rate perspective, the opportunity to capitalize on transition will never be more advantageous than now, while rates are at historic lows and refinancing is adding to liquidity. Over the next year, fading refinance volume will reduce overall mortgage activity and impair market liquidity. Taking action during more liquid conditions is preferable.
But we are currently stuck in Washington limbo. We need leadership, coordination and transparency for successful transition.
There are many steps we must take to build a real estate finance system for the future and among these steps, we must move past conservatorship and the government’s oversized role in housing. To get there, ultimately, Congress must do its part and take the appropriate steps. Let’s move a GSE reform package through both chambers and restore a greater balance in housing finance. Let’s work together to ensure G-Fees are no longer used as a way to pay for other government spending. Let’s build upon the hard work of some Senate and House committees that are working toward bipartisan solutions.
Deliberations in the halls of Congress do take time. The good news is there are steps that we can take outside of Congress.
So today we are stepping forward with a solution, a real proposal for transition. We need these three things from Washington and we need them now:
First, it is imperative in this state of overlapping regulatory confusion that the White House name a Housing Policy Coordinator. This is an immediate need with a simple solution.
Second, we must have absolute transparency. FHFA, Fannie Mae and Freddie Mac must stop making market shifting decisions without the input of consumers or the industry.
Finally, we must have a clear path to transition out of conservatorship. To achieve this goal, we must move toward a single security, encourage additional risk sharing by mandating Fannie and Freddie to accept lower guarantee fees for deeper credit enhancements, and redirect the FHFA platform initiative.
MBA has been at the forefront advocating that the GSEs, at the direction of the FHFA acting in its capacity as conservator, modify the Freddie Mac PC to mirror the exact structure of the Fannie Mae MBS and that these securities be considered fungible for TBA delivery.
Any future state requires a common currency. This is fundamental to virtually every GSE proposal – greater standardization in the security is necessary in order to maintain liquidity.
The liquidity of the TBA market for Fannie Mae mortgage backed securities is a public asset that should be maintained and if possible enhanced. On a typical day, ten times as much Fannie Mae MBS trade relative to the much less liquid Freddie PC security. By making the MBS the common currency for both agencies we can enhance liquidity, reduce costs to taxpayers, and begin to lay the groundwork for a more competitive and efficient secondary market.
I realize some investors are apprehensive with this proposal. Transitioning to a common currency is by far the most vocalized concern. The three main issues are:
• Liquidity differentials and defaulting to the cheapest security to deliver;
• Swap costs; and
• How we will we pay for it?
These concerns are valid, but can be mitigated and controlled as long as we act soon. Let me address some of these issues briefly.
The vast majority of the price differential is due solely to liquidity differences. Once liquidity is equalized across the securities, we believe prices will converge to something very close to the current Fannie Mae levels.
For investors who want to swap old for new, some sort of exchange should be offered for those who wanted to swap to the more liquid security.
The fact that the GSE net income is being fully swept to Treasury provides an opportunity to pay for this change before these revenues are swept and should eliminate objections for any reason other than competitive advantage concerns. The ongoing taxpayer subsidy, the timing based on the current liquidity environment, and the GSEs’ record earnings all support the imperative to resolve this issue now.
In addition to a single security and in an effort to further encourage private capital, Fannie Mae and Freddie Mac should be required by FHFA to accept pools with deeper levels of credit enhancement, and provide bona fide off-setting reductions in guarantee fees. The GSEs are now charging G-Fees that are more than twice as high compared to just a few years ago, at a time when their acquisition profile shows they are taking on very little credit risk. Allowing deeper levels of credit enhancement would encourage private investors to invest more in this space, reduce the government’s exposure to mortgage credit risk, and lower guarantee fees to lenders, ultimately to the benefit of borrowers.
A new risk share structure should be created at various LTV thresholds to enable different credit enhancement structures to enter the market. Private capital would be in the first loss position and with multiple credit enhancement structures possible, the government would take on less risk than today.
Recently, FHFA announced a proposal for a common security platform and a new entity to manage that platform that would be owned and funded by the GSEs. MBA has expressed concerns regarding this structure. This is a major undertaking and the private sector has extensive experience in systems development of this size and will likely bear the brunt of any mistakes or delays in getting the platform operational.
This is just one piece of a much larger puzzle that impacts borrowers, lenders and the market as a whole. Proposals of this magnitude need a transparent process to engage with stakeholders, articulate objectives and alternatives, and demonstrate that stakeholder concerns have been evaluated and addressed.
As was recently noted in a blog by a Freddie Mac executive regarding the CSP:
“It takes skilled and attentive guidance to make these decisions wisely. They will influence not only how the GSEs approach the platform today, but how well it attracts private participants tomorrow. These decisions will also influence whether the CSP lowers barriers to entry or unintentionally reinforces them.”
We agree. If constructed well, with industry input and ownership, a central platform could provide a significant benefit in terms of an efficient and standardized process. But if put together too quickly without sufficient stakeholder input, it could indeed be a costly endeavor that cements in today’s marketplace and unintentionally blocks competitors in this space.
In the four-and-a-half years since the GSEs were placed into conservatorship, MBA, the Bipartisan Policy Center, policymakers and countless others have all put forth proposals and ideas on how to restructure the secondary mortgage market. Most of these proposals, including MBA’s, envision a common securitization platform. Getting it right the first time demands considerable industry participation. We should insist on a process that requires industry involvement.
The beauty of this plan is that it can be done outside the halls of Congress. It can be done now and should be done now while the risk to the marketplace is minimal.
Therefore, on behalf of MBA membership I will personally deliver our plan to the FHFA director in the hopes of generating greater momentum toward transition and I hope all of you will join this effort. We believe the time is now to begin moving forward.
From a lender’s perspective, whether large or small, depository or independent, I think the benefits of these steps are large and real, and costs are minimal to non-existent because:
• Moving to a single security will increase liquidity in the market which will benefit everyone, and under current market conditions including the Fed purchases, the transition costs are easily manageable.
• By offering lower G-fees (or LLPAs) in exchange for deeper credit enhancements, lenders are once again able to have more control over managing the credit risk of their deliveries to the GSEs. Lenders would still be able to deliver under the full G-fee structure, this would be providing them an option, and options have value.
• Finally, lenders should have a direct role in influencing the direction of the platform. More input from industry will result in a better product.
As an industry, this is our decisive moment. Change is happening.
We have 3 choices –
We can lead, follow or get out of the way.
Personally – I choose to lead and we will lead together.
It’s time –
Time to stop accepting the status quo.
Time to proactively affect change.
Time to create positive solutions for a recovering housing system.
Time to build a pathway to the housing system of the future.
This is our pathway and we all need to move forward.
Let me leave you with this –
The time for just talking is over. Washington must get to work.
Work with us to achieve a real estate finance system of the future; a system for a competitive, responsible marketplace where all businesses can grow; a system where homeownership is once again the doorway to opportunity.
We need coordination and transparency. It is imperative for the industry and for consumers.
GSE reform must take place now to restore a vibrant secondary market that will be around for the long term and reduce the government footprint in real estate finance.
We must have a clear path to transition out of conservatorship that includes these first few steps that can be started now:
a. Single security;
b. New risk sharing structure; and
c. Redirection of the FHFA platform initiative.
The move to a single security has been debated for years. If we don’t collectively push hard for this now – we will still be talking about it for years to come.
Endless conservatorship is not a sustainable option nor is returning Fannie and Freddie back to their original state. We believe in a strong secondary market built on private capital with a limited government guarantee to ensure liquidity in all market conditions.
Together – industry, consumers, Washington – we can create the pathway forward for a safe, sound, vibrant real estate finance market of the future.
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.