Yesterday, the House Financial Services Committee held a hearing entitled "The Future of Housing Finance-A  Review of Proposals to Address Market Structure and Transition". The panel consisted of economists and housing market experts who generally counseled that the government should reduce its role in the housing finance market. Committee Chairman Barney Frank (D-MA) opened the hearing by noting that he had planned to have legislation available to discuss when the hearing was scheduled; however, because Wednesday was the last day before the House recessed, legislation regarding housing finance would not be available until November when Congress returns.

Testifying before the committee were the following witnesses:

  • Michael J. Heid, Co-President, Wells Fargo Home Mortgage and Chairman, Housing Policy Council of The Financial Services Roundtable 
  • Kenneth E. Bentsen, Jr., Executive Vice President, Public Policy and Advocacy, Securities Industry and Financial Markets Association (SIFMA)
  •  Phillip L. Swagel, McDonough School of Business, Georgetown University
  • Michael Bodaken, President, National Housing Trust
  • Christopher Papagianis, Managing Director, Economics21
  • Michael A.J. Farrell, Chairman, Chief Executive Officer and President, Annaly Capital Management, Inc. on behalf of Annaly Capital Management and the National Association of Real Estate Investment Trusts' Mortgage REIT Council
  • Susan Wachter, Richard B. Worley Professor of Financial Management, The Wharton School, University of Pennsylvania
  • Ed Pinto, Real Estate Financial Services Consultant  
  • Tom Deutsch, Executive Director, American Securitization Forum (ASF)

The panelists generally agreed that government should have a more restricted role in housing financing, while recognizing the need for a limited governmental role in guaranteeing mortgages. Mr. Heid began the panel discussion by advocating "dividing the existing functions of Fannie Mae and Freddie Mac among a combination of public and private sector entities." However, he said that a government backstop is necessary to ensure consistent functioning of mortgage-backed securities markets under all economic conditions, while also maintaining a layer of private capital ahead of the federal guarantee in order to protect taxpayers. Mr. Papagianis pointed out that the GSEs did not operate with enough capital and "policy makers should recognize that bailouts in the housing sector are inevitable if the key institutions in the space do not hold sufficient capital.”

Mr. Pinto was the most aggressive in his criticism of the GSEs and Congressional management of housing policy. He cited former Federal Reserve Chairman Paul Volcker for the proposition that "any explicit government guaranty of private mortgages will once again privatize profits and socialize the inevitable losses." He suggested that the government withdraw from any role in financing mortgages and instead allow the free market to determine prices. With respect to Fannie and Freddie, he suggested Congress set a definite sunset date at which they will disappear. Mr. Farrell echoed the need to wind down Fannie Mae and Freddie Mac, stating "Fannie and Freddie should continue to operate in conservatorship with a goal of winding down their retained portfolios over a set period of time and honoring the guarantees of the Agencies." In his written testimony, he suggested that Congress should provide "explicit government guarantees on MBS in a manner similar to Ginnie Mae. This would enable it to continue to serve as the portal between the borrower and the secondary market through securitization and the [To Be Announced (TBA)] mechanism, but most importantly enforce underwriting standards for mortgages carrying the government guarantee."

Mr. Swegel also offered a plan centered on competition and limited role for the government. Under Mr. Swegel's proposal, "Fannie Mae and Freddie Mac would be privatized and focus on securitization, and would compete with other private firms such as banks that could buy the federal MBS backstop on the same terms. The government would not guarantee any particular firm—shareholders would be wiped out before the government insurance pays off in the event of a failure." Competition would help drive the government subsidy to the mortgage consumer as opposed to the shareholders of Fannie and Freddie and because there would be more firms offering MBS, one firm's failure would not be a catastrophic event.

Ms. Wachter blamed the housing market's collapse on the market's appetite for mortgage backed securities: "The housing bubble was exacerbated by but did not result from greater demand for homes in the face of inelastic supply.... Instead, it was securitizers’ appetite for mortgage‐backed securities (MBS) that drove a “race to the bottom” in lending standards, risk creation, and competition for market share." She argued that securitized products should be limited to those that can be analyzed, pointing out that many investors did not understand the financial products they purchased. She continued, "Investors and regulators must be in a position to monitor standards in the book of MBS business as they are being generated both to price these risks effectively and to require increased capital if that becomes necessary."

Mr. Bodaken argued that housing financing should be balanced between home ownership and rentals: "It is self evident that the future financing of government backed multifamily, Section 8 housing should be supported by the institution or institutions on which our nation’s housing finance rests. The changes in the future housing finance system must take into account the interdependence of these privately owned properties, backed by FHA insurance and the properties dependence on HUD subsidies to operate."

Mr. Bentsen mentioned the need for the SEC to either extend a temporary exemption from the "expert liability" imposed on credit rating agencies by the Dodd-Frank Act or change its regulation AB, because otherwise it will be nearly impossible to execute securitization transactions. Ever since the Dodd-Frank Act removed the "expert liability" exemption, "rating agencies refused to allow the use of their ratings in securitization transaction documents, which conflicted with requirements of Reg AB mandating their disclosure." Because ratings agencies will not consent to their ratings use in securitization documents, the SEC must either extend relief or permanently revise Regulation AB.