Rep. Royce Discusses Solutions for a Better Housing Finance System

Press Release

This week, Representative Ed Royce (R-CA) participated in a Housing and Insurance Subcommittee Hearing Entitled "Sustainable Housing Finance: Private Sector Perspectives on Housing Finance Reform -- Part II." During the hearing, Rep. Royce advocated for two of his bills aimed at increasing private sector involvement in the secondary housing market and improving the structure and transparency of PACE loans.

Key excerpts, as prepared for delivery:

"Housing finance reform remains the great undone work of the financial crisis. A nationalized mortgage market is an unsustainable status quo. Sadly, the situation we find ourselves in today was a predictable one. In 2003, I introduced legislation, and again in 2005, in the form of an amendment, which would have reigned in the GSEs, allowing them to be regulated for systemic risk.

"Alan Greenspan backed the amendment. But it was not enough to overcome the outsized political pressure brought by the GSEs themselves. While claiming that Fannie and Freddie posed no threat to the financial markets and the systemic risk was "a theoretical term," the opponents of my amendment won that day.

"But they do not have to win today. We have a chance to learn from the past and put to rest the model of private gains and public losses once and for all. Increasing private sector involvement in the secondary housing market -- through increased credit risk transfer and a truly common securitization platform -- is the first step in preventing another bailout paid for by American taxpayers."

***

Rep. Royce went on to question witnesses participating in Thursday's hearing asking, "Mr. Stevens, as you know, along with Rep. Gwen Moore, I have put forward bipartisan legislation that would direct Fannie and Freddie to increase the amount and the types of credit risk transfer transactions to the maximum level that is economically and commercially viable. When FHFA Director Watt appeared before this Committee, in early October, he told me that they are looking to encourage more front-end credit risk transfers at Fannie & Freddie. How do you think they intend to accomplish this goal? Do you think deeper mortgage insurance is part of the equation?"

David H. Stevens, President and Chief Executive Officer, Mortgage Bankers Association replied, "Credit risk transfers are critical to almost every model being presented going forward. To date, the credit risk transfer model has mostly been in the form of structured finance through CRT executions that have taken place. We believe in order to have a truly functioning deep first-loss credit enhancement market you need to utilize both institutional risk transfers via mortgage insurance and reinsurance markets as well as structured. FHFA should be directed to do this sooner rather than later because we believe ultimately proving that point will bring more capital into the markets--both good and bad--regardless of whether credit spreads are wide or narrow. It's something we encourage FHFA to pursue and we appreciate your efforts to try and do the same."

"Mr Goodwin, in your testimony you highlight the work SFIG has done around the revitalization of the PLS market. Outside of lowering conforming loan limits, can you highlight some of the recommendations you have that we, as legislators, can undertake to help?" asked Rep. Royce.

Dan Goodwin, Director of Mortgage Policy, Structured Finance Industry Group responded saying, "There are three broad areas that need focus. One is an industry focused area of providing alignment of interest. Defining clear roles and responsibilities is part of the undertaking that SFIG is doing under its RMBS 3.0 umbrella. That is an industry self-regulating piece. We should continue the work we have been doing over the last several years with prudential regulators and the CFPB to clarify liability around investors, and to tailor regulatory and capital rules to better suit the products we are working with. Finally, we should continue to work to reduce the GSE footprint."

"Mr. Stevens, as you know, Rep. Sherman and I share some of your criticism of the PACE Loan program. On the face of it, helping homeowners improve energy efficiency is a good thing. But the structure of these loans and sales practices have raised some concerns - what role should the GSEs play in addressing these concerns?" asked Rep. Royce.

David H. Stevens replied, "The PACE program we view as a danger to the average home owner. One of the problems is that it's not a loan, it's a tax assessment which means it's not subject to the traditional consumer disclosures and protections that have been established under the CFPB's consumer disclosure requirements. As a result it creates an opportunity for a cottage industry of whoever can invent the next energy enhancement without oversight can go sell it to consumers who may have no idea whether the value is there. It also takes first lien rights after the fact. Our view is that the GSE's should be forbidden from allowing the PACE loan in their portfolio as well as the FHA."

Kevin Brown, Chair, Conventional Financing & Policy Committee, National Association of Realtors added, "I totally agree. There needs to be a consumer educational component. Most consumers that get PACE loans don't understand what they are. It does take a first lien holder position. I very much agree with Mr. Stevens."

Background:

In July of this year, Representatives Royce and Gwen Moore (D-WI), introduced H.R. 3556, the Taxpayer Protections and Market Access for Mortgage Finance Act, legislation requiring the GSEs to increase credit risk transfers (CRT) with the private sector. This legislation directs the Federal Housing Finance Agency (FHFA) Director to establish guidelines requiring Fannie Mae and Freddie Mac (the GSEs) to engage in significant, increasing, and varied credit risk transfer (CRT) with an emphasis on front-end transactions when mortgages are originated. The GSEs would be required to set and publish guarantee fees, including loan level price adjustments (LLPAs), to reflect the reduced credit risk resulting from new CRT transactions. Both authors of the legislation are senior members of the House Financial Services Committee.

In April, Representative Royce cosponsored H.R. 1958, the Protecting Americans from Credit Entanglements Act introduced by Rep. Brad Sherman (D-CA). This legislation amends the Truth in Lending Act, to ensure that PACE lenders are subject to the same basic disclosure requirements that apply to traditional lenders, including providing to consumers the annual percentage rate, a schedule of payments, and the total cost of the loan. Homeowners will also be notified that they will be taking a lien on their home.

Source