The House Financial Services Committee has planned a full committee hearing today on the future of housing finance.
The hearing will examine proposals concerning the changing market structure of the real estate finance sector, including what to do with the government-sponsored enterprises, Fannie Mae and Freddie Mac.
Among those slated to testify are Tom Deutsch, executive director of the American Securitization Forum (ASF) (please see details of Deutsch's testimony below); Michael Heid, the co-president of Wells Fargo Home Mortgage and the chairman of the housing policy council of the Financial Services Roundtable; Phillip Swagel, a professor at the McDonough School of Business at Georgetown University; Susan Wachter a financial management professor at the Wharton School at the University of Pennsylvania; Christopher Papagianis, the managing director of Economics21; and Michael Bodaken, the president of the National Housing Trust.
Also on the witness list are Ed Pinto, a real estate financial services consultant, as well as Michael A.J. Farrell, the chairman, chief executive officer and president of Annaly Capital Management, on behalf of Annaly Capital Management and the National Association of Real Estate Investment Trusts' Mortgage REIT Council.
In his testimony today before the House Financial Services Committee, Deutsch emphasized the need to reinvigorate the private-label RMBS market to have a real chance at limiting the government’s role in U.S. housing.
Deutsch said that the government now guarantees more than 89% of home mortgages via the GSEs and it would be impossible to lower that level without renewing a strong supply of private investment.
“Reducing dependence on public guarantees for new mortgage origination nec-essarily implies that private capital investment in mortgage originations will have to be reinvigorated,” Deutsch said. “At the same time, however, banks do not and will not have sufficient liquidity to meet consumer demand. Revitalizing securitization is the only way to create sufficient private capital to significantly replace federal guarantees.”
Although Deutsch said that mall and large bank portfolios have helped fund some of the mortgage origination in the past two years, the amount is relatively small and will be further constrained by the higher capital requirements being imposed on banks by policy initiatives, including Basel III and FAS 166/167. The private-label RMBS market has also been dormant since early 2008 and needs revitalization.
“As debate moves forward on the elimination or transformation of the GSE’s,” Deutsch stated.“I would encourage a debate of equivalent strength as to how to reinvigorate the private-label RMBS market without overburdening that market with regulation or regulatory uncertainty.”
In the last year and a half, the securitization markets have been saddled with a wave of legislative and regulatory action, such as provisions in the Dodd-Frank Act, the Federal Deposit Insurance Corp.’s (FDIC) Safe Harbor rule, and disclosure proposals from the Securities and Exchange Commission (SEC) or the new Regulation AB.
The ASF acknowledges policymakers have an obligation to address past problems in securitization, but by creating multiple layers of policy, the securitization markets are now facing regulatory overload. Deutsch also said that successive waves of regulation will ultimately slow down the securitization market's comeback.
“Ultimately, if the aggregate burden on the markets is too great,” said Deutsch, “financial institutions will either significantly reduce the amount of their se-curitization activity or abandon securitization altogether which would almost certainly lead to a contraction of consumer credit.”
The ASF is specifically concerned with overlapping regulations on risk retention and reporting requirements. The Dodd-Frank Act addresses these issues, as does the FDIC in its new Safe Harbor Rule and the SEC in its Reg AB proposals. Aside from being confusing and costly to implement, the various rules can be disadvantageous for financial entities, including insured depository institutions like banks that are subject to more onerous regulation.
“We strongly believe that any regulation of securitization should be implemented on an interagency basis to create not only a level playing field for all financial institutions but also to enable each institution to more effectively determine the aggregate burden associated with such regulation,” Deutsch said.
The ASF also strongly supports the passage of a legislative framework for U.S. covered bonds. Covered bonds have, according to Deutsch, considerable potential to increase the amount of mortgage lending by banks, as they have done in Europe. The ASF supports the legislative framework proposed by Scott Garrett (R-NJ) and Paul Kanjorski (D-PA-11) that would make covered bonds available to almost any large or small bank.
For Deutsch's complete testimony, please click the link below.