Perhaps it was appropriate that a panel of professors testified Tuesday about how to reform the U.S. mortgage system since Capitol Hill's approach to the issue is increasingly beginning to resemble an academic exercise.

The hearing was the Senate Banking Committee's tenth on housing finance reform while various House committees have also held a slew of discussions. Yet Washington appears no closer to a solution than it was three years ago, shortly after the federal government seized Fannie Mae and Freddie Mac.

By now, the lines are well drawn between those who want a fully private mortgage market and those who insist that's simply unrealistic. The debate is well-rehearsed, and members of each camp can anticipate the other side's arguments.

"What we have found, again and again, is every time the government has some kind of guarantee program, or some kind of program to stimulate housing through a guarantee, the taxpayers get it in the neck," said Peter Wallison, a fellow at the American Enterprise Institute, and a longtime foe of Fannie and Freddie.

Adam Levitin, a law professor at Georgetown University, responded: "There's simply no such thing as a non-guaranteed housing finance market, other than in ideological fantasies. Moreover, attempting to privatize the housing finance system puts the entire economy at serious risk."
For their own part, the top Democrat and Republican on the Senate Banking Committee spoke in very broad outlines about their preferences for reform. Lawmakers clearly did not want to commit to a specific idea.

"I firmly believe that we need to reform our housing finance system," said Chairman Tim Johnson, D-S.D., "but I am concerned about the unintended consequences for our housing market and economy that could result if a government role is eliminated completely."
Sen. Richard Shelby, R-Ala., was critical of the system that led to taxpayer-subsidized risk-taking at Fannie and Freddie, but he stopped short of calling for a fully private system. "While some say there is no need for bold reform, I believe that all options should and must be on the table."

Neither Johnson nor Shelby has proposed a comprehensive reform bill. The Obama administration laid out a series of principles in February but has steered clear of any specifics. Democratic and Republican leadership in the House have also largely punted on the issue.
Notably, the two witnesses at Tuesday's hearing who support a continuing government role in the mortgage market did not object to a relatively small change that would roll back the government's involvement.

Unless Congress takes action this month, the maximum size of loans guaranteed by Fannie, Freddie, and the Federal Housing Administration will decrease. The loan limit was raised during the financial crisis. Even if it falls as scheduled, it would still be higher than it was in early 2008.
Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, said that allowing the loan limit to fall would be a worthwhile experiment, even though he sees the need for a government role in the mortgage market.

"I have no disagreement with the idea that if you're going to have a guarantee, that it should be limited to middle-class mortgages," Green said.

Levitin agreed. "I think that's actually a reasonable approach today. Let's see what happens, if we do this as a small scale, and don't take away the guarantee altogether. Let's see what happens if we ratchet it down."

Still, the hearing was dominated by a deep, increasingly familiar disagreement.

"I hear a lot of people talking about gridlock here in Washington, rightfully so," said Sen. Bob Corker, R-Tenn., adding jokingly: "I'm just thinking as I listen to the testimony of three professors, we're certainly creating another generation of gridlock among students in America."

Corker on GSE Loan Limits

Separately, ASR sister publication National Mortgage News' Brian Collins reported that Corker is considering bipartisan legislation that would gradually lower the loan limits on federally backed mortgages, a move that could pave the way to private lending flourishing again.

The $729,750 maximum GSE loan limit is set to decline at the end of September unless Congress passes an extension.

Corker said he expects private lenders will step up and serve the Jumbo market which soon will encompass any new mortgage north of $625,500.

The senator also wants to ratchet the loan limit down further and ensure that private-label MBS issuers have access to a TBA (to be announced) market to achieve best execution.

At a Senate Banking Committee hearing Tuesday, the Tennessee senator asked financial experts if private-label issuers could create a functional TBA market, much like the one used by Fannie and Freddie.

Levitin noted that standardization is the key to creating a TBA market, testifying that it can be done without a government guarantee.

Corker suggested that Congress could set mortgage standards for the industry. Levitin stressed that investors would require certainties that all PLS issuers are complying with such standards.

The law professor pointed out that prior to the 2008 financial crisis, PLS issuers didn't want standards because it meant smaller margins and lower profits.

Richard Green of the University of Southern California (USC) said any standards must "stick" in order for a TBA market to work.

"Investors need to have confidence" that lenders and MBS issuers are complying with those standards, the chairman of the USC Lusk Center for Real Estate testified.

"In light of finding out not only how mortgages were underwritten, and the way documentation had been maintained, I think the market is a very, very long way from having that kind of confidence," Green said.

 

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