Housing Finance System Reform Needed to End Mortgage Crisis
NAHB on March 6 called on Congress to move quickly to enact comprehensive regulatory reform for housing government sponsored enterprises (GSEs) Fannie Mae, Freddie Mac and the Federal Home Loan Banks to ensure their financial safety and soundness and allow them to vigorously pursue their housing mission.
“At a time when the housing market needs them more than ever, Fannie Mae and Freddie Mac have failed to adequately respond to the mortgage crisis,” Jerry Howard, executive vice president and CEO of NAHB, told members of the Senate Banking Committee. “Rather than aggressively pursue market solutions, they are hunkering down to shore up financial results and shareholder returns — and are even taking steps that will further burden struggling mortgage borrowers.”
Because their regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), continues to impose a 30% capital surcharge on both companies, Fannie and Freddie are attempting to build their capital reserves by imposing higher fees that will raise mortgage borrowing costs at the worst possible time, Howard said.
“OFHEO is constraining the ability of Fannie and Freddie to do all they can to promote affordable housing and to help strapped borrowers. At the same time, HUD’s mission oversight over the two GSEs is lacking. HUD should be requiring them to do more, not less, in the present dire mortgage market circumstances,” said Howard. “This just underscores why major reform of this flawed, bifurcated regulatory framework is long overdue and urgently needed.”
During the hearing, senators noted that GSE reform alone would be insufficient to resolve the current housing crisis and sought input from panelists on other solutions to move housing and the economy forward.
Several senators expressed interest in the tax policy recommendations put forth by NAHB and Chairman Chris Dodd (D-Conn.) specifically thanked Howard for offering the home builders' perspective on how to get housing moving again.
H.R. 1427, the Federal Housing Finance Reform Act of 2007, which passed the House last May, would allow the GSEs to operate in a safe and sound manner while preserving the vitality of their government-sponsored status for the fulfillment of their vital housing mission.
Howard outlined NAHB’s position on six key elements of GSE reform:
- Conforming loan limits. NAHB supports the action of Congress to include a temporary increase in Fannie Mae’s and Freddie Mac’s conforming loan limits in the recently enacted economic stimulus legislation. The new limit — which is capped at $729,750 and available for loans originated between July 1, 2007 and Dec. 31, 2008 — will help expand the supply of mortgages in high-cost markets. However, NAHB believes that a comprehensive GSE reform bill should extend the conforming loan limit increase to two years to allow sufficient time for regulators and Fannie and Freddie to implement this new program to help borrowers in high-cost areas.
- Capital requirements. The GSE regulator should have full authority to establish and adjust risk-based capital standards. The regulator should also have the latitude to adjust minimum capital requirements, but these adjustments should only be taken in response to issues related to the safety and soundness of the GSEs. Further, the minimum capital level should be returned to the statutory amount once the problem is resolved.
- Portfolio limits. Any GSE legislation must not hinder the important portfolio functions of Fannie Mae and Freddie Mac, which have been critical to sustaining liquidity in the mortgage markets during periods of financial market stress and in developing innovative programs to address affordable housing needs. The GSE regulator should have authority to ensure that portfolio activities do not adversely affect the safety and soundness of Fannie Mae or Freddie Mac, but should not place arbitrary limits on such holdings.
- Affordable housing requirements. NAHB supports the creation of an affordable housing fund established through annual contributions by Fannie Mae and Freddie Mac and modeled on the statutorily prescribed Affordable Housing Program of the Federal Home Loan Bank System. The focus of this fund should be on increasing affordable homeownership and rental opportunities for low-income households, preserving the supply of affordable housing and supporting infrastructure development in connection with housing. The allocation mechanism for the new fund should be based on how well a project meets a community’s housing needs rather than on the tax status of the sponsor.
- Program approval. NAHB supports a program approval process for the GSEs that ensures they are operating within their charters and undertaking activities in a safe and sound manner. The program approval process should also accommodate innovation and allow for prompt responses to market needs. Program oversight should focus on broad categories of programs and not involve micromanagement of individual activities within an approved program area. The regulator should be given a reasonable, but limited period of time to review new programs submitted for prior approval.
- Regulatory structure. The new regulator should be governed by a board modeled on the Federal Deposit Insurance Corporation, where the board seats are divided between government representatives and private individuals with appropriate regulatory expertise. In the case of the GSE regulator, the board would include the secretaries of the Department of Housing and Urban Development and the Department of the Treasury and three private individuals, one of whom would serve as the board chair. The goal is to infuse additional expertise in housing and housing finance through the appointment of individuals with such credentials.
“With the U.S. housing market now in the contraction phase of the most pronounced housing cycle since the Great Depression, passage of a GSE regulatory reform bill has the ability to greatly relieve liquidity and inventory pressures in the nation’s mortgage markets, help stabilize housing prices and bolster consumer confidence. This would bring immediate benefit to the overall economy,” said Howard.
Photo by Herman Farrer