In March, Senator Elizabeth Warren joined lawmakers on both sides of the aisle to assemble bipartisan legislation that begins to tackle housing finance reform. By introducing the “JumpStart GSE Reform Act,” Warren has taken an important first step in reforming housing finance giants Fannie Mae, Freddie MAC, and Ginnie Mae (Government-Sponsored Enterprises or GSEs.)
Warren’s legislation would require a new era of openness by Freddie and Fannie. Technically government entities, GSEs continue to propose policy changes affecting lenders and real estate markets that are likely to create even more uncertainty in the home lending marketplace. Senator Warren, elected as an outspoken advocate for reform, understands the dominance of GSEs across all sectors of the housing market and the need for greater transparency into how the agencies operate.
GSEs play an outsized role in the housing finance industry. Five years after the height of the financial crisis, nearly 90 percent of newly originated housing loans are backed by one of the GSE agencies or by the Federal Housing Administration. This government-based model is unhealthy for the economy, poses an enormous risk to taxpayers and is ultimately unsustainable.
Most experts agree that private capital is necessary to propel the long-term viability of the housing market, but recent federal policy changes have created additional barriers for these types of investment. Rules governing mortgage lenders are ultimately unclear and, at times, contradictory, while carrying the risk of costly litigation, indemnification, and repurchase.
Warren’s legislation has created an environment for honest debate over the future of Fannie Mae and Freddie Mac. It will also cast a spotlight on complicated law that hampers the ability of many hometown banks to originate loans by creating significant compliance and legal costs.
Members of the Mortgage Bankers Association from Massachusetts, as well as hundreds of colleagues across the country who built America by providing loans to families and main street businesses one generation at a time, recently traveled to Washington to meet with lawmakers charged with reforming the real estate finance industry.
Passage of the Dodd-Frank Act in 2009 was designed to protect consumers and provide more transparency in the industry. The law effectively ended abuses such as no documentation, no down payment, and negative amortization, while eliminating troublesome unsustainable subprime lending from the system. The onslaught of new regulations went far beyond commonsense consumer protection, however, and left many creditworthy borrowers unable to secure home financing. At the same time, regulations created new obstacles for lending institutions, particularly community banks, to make competitive loans to qualified individuals and couples.
After enduring many years of hardship, however, hardworking families who have diligently saved to pay for a down payment on a home should not have troubles obtaining a loan because of overregulation. This is the unfortunate reality many American families face as they look to improve their lives.
There are many steps that lawmakers and regulators can take to help make home ownership a reality for American families. These include restoring financial solvency to the FHA, which would preserve its critical housing mission and maintain its ability to insure private mortgages during challenging economic times, and the creation of a Housing Policy Coordinator position within the White House. The latter would ensure coordination of rulemakings among regulators while keeping the president, cabinet secretaries, and other senior policy leaders fully informed of the challenges and paths to strengthening the US housing market.
Members of the Mortgage Bankers Association from across the country and Massachusetts are proud to advocate for the shared goal of a healthy, functioning marketplace that meets the home lending needs of the American people through private capital resources, while creating a limited, appropriate role for federal programs. Today’s rebounding economy provides an opportunity to ensure that families, home builders, and communities all realize the benefits associated with the American dream of home ownership.
David H. Stevens is president and CEO of the Mortgage Bankers Association. He previously served as assistant secretary of Housing/Federal Housing Commissioner at the Department of Housing and Urban Development.