Housing Finance Reform Hearings Held

The Senate Committee on Banking, Housing, and Urban Affairs held its fourth and fifth hearings on housing finance reform during the week of October 28. The first, “Essentials of a Functioning Housing Finance System for Consumers,” was on October 29. The hearing focused on the potential impact of housing finance reform on borrowers and other consumers. While affordable rental housing was not a focus of the October 29 hearing, Alys Cohen of the National Consumer Law Center said in her testimony that “the nation’s housing finance system must include mechanisms to ensure that equal housing opportunities are provided in places where sustainable lending has been harder to find. This should be done through several complimentary mechanisms. In addition to properly funding the National Housing Trust Fund and the Capital Magnet Fund, the new system should promote broad access to lending by inhibiting credit rationing and ‘creaming’ of the market. Lenders should be required to serve all population segments, housing types and geographical locations.” Committee Chair Tim Johnson (D-SD) asked how housing counselors can assist individuals who turn to their mortgage servicers for help. Lot Diaz of the National Council of La Raza, an NLIHC board member, said the relationship between counselors and servicers has changed over time. At first, servicers often thought counselors to be unnecessary, but as the foreclosure crisis mounted, counselors became increasingly important in helping servicers reach families. Ranking Member Mike Crapo (R-ID) asked Laurence Platt of K&L Gates whether stronger servicing rules are needed, as has been suggested by some observers. Mr. Platt disagreed, saying that servicers are already willing to modify loans if they can and if it makes sense to do so. Continuing the line of questioning about whether stronger servicing rules are needed and should be specified in legislation, Senator Sherrod Brown (D-OH) asked Ms. Cohen if the Consumer Financial Protection Bureau’s powers should be expanded in a housing finance reform bill advanced by the Committee. Ms. Cohen hopes that additional servicing measures will be part of the forthcoming legislation. The needs of rural communities was a topic of discussion in the hearing, as it has been in previous hearings related to housing finance reform. Senator Jon Tester (D-MT) asked about the role of community-based institutions play in ensuring competition in the mortgage market, and in particular, in rural communities. Senator Elizabeth Warren (D-MA) asked about the role of small lenders in the mortgage market. Eric Stein of the Center for Responsible Lending said small lenders and diversification in the market are very important, and it would be a serious problem if smaller lenders were crowded out, particularly for low income families and rural areas. Ms. Cohen said that large servicers generally having the hardest time meeting the needs of consumers in a timely manner. Senator Warren said the Committee needs to focus on the question of access, and noted that currently Fannie Mae and Freddie Mac have a duty to serve the entire market. Ms. Cohen said that if there is not a duty to serve, the country will not have a system that will promote wealth. Mr. Diaz said that access to credit has always been a problem for low income individuals and minorities; the incentive to serve these populations is now gone. Senator Heidi Heitkamp (D-ND) said one of the biggest housing problems in her state is that of Native Americans and asked the witnesses if any of them had thought about the unique challenges faced by Native American borrowers. The Senator’s question was met with silence. Ms. Cohen said that Native Americans are part of the group of low wealth borrowers served by legal services. Senator Heitkamp agreed but specified that she was specifically referring to the unique situation of borrowers living on reservations. The Committee’s second hearing of the week on housing finance reform, “Essential Elements of a Government Guarantee for Mortgage-Backed Securities,” was held on October 31. In this hearing, Senators and witnesses all acknowledged there must be some government guarantee for a housing finance system to work, and Senators focused on fine-tuning details of a future system. Discussion largely centered around whether or not the government guarantee should apply to the entire market, and how a guarantee should be structured to minimize taxpayer risk. Witnesses agreed that there should be some government guarantee, but largely suggested that private capital be in front of the guarantee in a first-loss position. Senator Crapo raised the question of adverse selection if the government guarantee only applied to certain loans, such as the riskiest loans. Phillip Swagel of the University of Maryland said adverse selection is always a concern, and underscores the need for a strong regulator and strong underwriting criteria. Mr. Swagel said it is important for these standards and capital requirements to be hardcoded in the legislation. The issue of whether underwriting standards should be specified in legislation was also a topic of discussion at the October 29 hearing. In response to a question from Senator Kay Hagan (D-NC), Mr. Stein said that there needs to be an explicit, full-paid for government guarantee in future legislation, but that underwriting criteria should not be explicitly hardwired into the legislation. Ms. Cohen said in her written testimony, “Any statute should not dictate specifics of underwriting that would result in less flexibility to meet these broad access goals. Housing finance legislation should leave open the specifics of down-payment requirements, credit scores and debt-to-income ratios. Down payment requirements are keyed directly to wealth, which itself varies widely by demographics and is not always tied to creditworthiness or ability to repay.” Watch an archived webcast and read all witness testimony from the hearings at: http://1.usa.gov/HlCl7S