Fannie Mae-No Politics (FNMA)

[10bambam]

David Steven's address

MBA National Conference

Title: David Stevens Addresses MBA's National Secondary Conference
Source: MBA
Date: 5/19/2014
[Please Note: These are prepared remarks which have been recently updated from MBA's 2014 Secondary Market Conference & Expo. Mr. Stevens may add or subtract from these remarks during the course of his presentation. Portions of the text may be omitted during the speech.]

Good morning and welcome to MBA's 2014 National Secondary Market Conference. We're so pleased all of you could be here. We have incredible attendance this year with over 1,500 attendees. This demonstrates the importance and magnitude of our secondary marketplace today.
I want to take a moment to thank Freedom Mortgage for sponsoring our session this morning and supporting MBA. Without their support, and the support of all our sponsors, this conference and programming would not be possible.

Four years ago, at this very conference, I made headlines. At the time, I was FHA Commissioner and we were in the thick of trying to pull ourselves out of the housing crisis. The reason my comments made the papers was because I spoke about the fact that government's role in housing, which was on the hook for over 90 percent of all mortgages at that time, was representative of a system that was on life support - "a sick system." That simple phrase was plastered everywhere. By the way, I learned when you are an Official of the Administration, you must choose your words a bit more carefully; but analogy aside, I stand by the intention of my statement.

Back then, the conventional wisdom was that strong government intervention was necessary to get the housing market back on track; government involvement was necessary to protect at-risk borrowers; and government oversight must increase to prevent another system failure.

And for the most part, all of these were true. The government acted swiftly as the state of our marketplace necessitated new regulations and better oversight. But we all knew, or at least wanted to believe, that many of the actions were short-term fixes to stabilize the market as policymakers, consumers and industry experts worked toward long-term solutions.

Here's the problem. It is four years later and the government isn't still just the backbone, but has become the entire central nervous system of the real estate finance market. When the federal government is still backing nearly 90 percent of the mortgages made in today's market, it's apparent that the real estate finance system is stuck in the same place it was when I took this stage four years ago.

Again, don't misunderstand me. In the face of the housing collapse, it made sense for government to step in. Since then, the real estate finance community, especially MBA, has consistently supported the hard-working employees and praised the GSEs' vital role in rebuilding the market. In addition, we have called for maintaining the reliable functions of the current system.

And in the past four years, we have not wavered on our approach. MBA believes in a strong secondary market built on private capital with an explicit, limited government guarantee to ensure liquidity in all market conditions.

MBA continues to promote policies that create a vibrant secondary mortgage market, ensure a level playing field for lenders of all sizes and business models, and maintain access to affordable mortgage credit - particularly the 30-year, fixed-rate mortgage. We have not wavered on our calls for GSE reform, transition to whatever future state Congress decides, the return of private capital, and transparency. And somehow, even with the economic and legal reality of the current system, some still believe that this will magically fix itself.

As an industry, we support a competitive marketplace that contributes to a healthy economy, with cost efficiencies and appropriate protections for consumers. But there are those who rush to defend a system that is unsustainable in its current state and offers inadequate, unrealistic options for a stable housing finance system.

The secondary market as it exists today greatly influences the primary market. It's having negative impacts on mortgage affordability and availability, increasing costs for borrowers and even preventing many from obtaining homes, and stifling a full-blown market recovery.

Let me give you an example for those who defend the system based on access to credit. The current average credit score in America today is about 700. The average credit score of a borrower with a loan backed by Fannie Mae in Q1 2014 is 741. On top of these strict credit criteria, there are loan level price adjusters, overlays and ever-increasing guarantee fees. In this system, those with the most pristine credit can afford a home. Mark Zandi estimates that over 10 million qualified families are left on the sidelines simply due to credit score.

The reality is much of the debate reflects a lack of understanding of the legal construct of conservatorship, PSPAs and why legally Congress is the only way to move forward.

Unfortunately, last week's vote in the U.S. Senate has likely only prolonged conservatorship and the current state. We applaud the Senate Banking Committee leadership for their efforts in developing bipartisan legislation and passing it out of committee. However, it's unfortunate when faced with the reality of the GSEs being required to reduce their retained capital by $600 million per year that those who did not support the bill significantly hampered any hopes of a reasonable path forward, out of conservatorship. Should the housing market experience any significant downturn, the GSEs would find themselves in need of another draw from the Treasury. The risk of Congressional overreaction of doing GSE Reform in the midst of a crisis is a real and scary proposition.

So the question remains, where do we go from here?

Last year, the GSEs got a boost to earnings from one-time items such as settlement agreements, deferred tax asset revaluation, and lower provisions for loan losses because of strong home price appreciation. This year, earnings reports highlighted that legal settlements alone contributed to the majority of both GSEs' earnings in the first quarter.

Both companies acknowledge that a sizeable portion of their earnings were one-time gain. As reported by the Washington Post, CEO of Freddie Mac Donald Layton said, "Our recent level of earnings is not sustainable." And, Mr. Layton used the earnings announcement to call for guarantee fee increases as well.

And, consider on April 30, FHFA released the results of the Dodd-Frank mandated stress tests, in which the severely adverse scenario mimicked economic data from the 2008 downturn. The stress test revealed a sobering outcome - the GSEs are not equipped to handle another similar decline without drawing down billions of dollars from Treasury because they have absolutely no capital cushion.

Depending on the severity of those losses, investors would likely begin to question the limits of the Treasury's backstop, because Treasury's support is limited by law and decreases with every draw. Investors might then begin to require more return for their now riskier investments, pushing up the cost of a mortgage and tightening credit even further.

We can choose to avoid a future cycle of increasing mortgage costs, less access to credit and choked-off demand for housing, leading to a weaker and increasingly unstable market.

For the past 4 years, we have advocated for change. Here's why - change is inevitable. It's not a matter of IF; it's a matter of WHEN. The status quo is not an option.

Under the terms of conservatorship, it is legally impossible for the GSEs to recapitalize. There is no way back to their original state. FHFA can only put Fannie and Freddie into receivership. It requires Congressional action to reform and stabilize the system.

Sure there are many other items affecting the housing market. From student loan debt to excessive regulation, to high fees and underwriting standards built and based on being defensive and in self protection from potential litigation or other scrutiny - all of these could impact the future housing. But these are fixable. Many of these can be changed through regulation or policy. It's the GSEs - the central most important variable to creating enough liquidity for the housing finance system in this country - that can only be resolved through Congress or the courts. This is the last and most significant unresolved issue from the housing recession.

Now that legislative action has likely come to a political stand-still, what can be done now? What are our options for avoiding the mistakes of the past?

You've heard the saying before, "Change is inevitable. Progress is optional."

Whatever the outcome from Congress or the courts, we can choose to make progress. The secondary market system does not have to be stuck in a perpetual state of limbo. We can be proactive leaders and address some of the difficult choices to set the stage for future legislative action and help prepare the system for long-term, sustainable change.

And here is where I am pleased to be able to talk about the good news.

Last week, in his first major address since Senate confirmation, FHFA Director Mel Watt stated, "…conservatorship should never be viewed as a permanent or as a desirable state and that housing finance reform is necessary." He too believes that Congress and the Administration have an important job to do in housing finance reform, and was very clear that housing finance reform does not fall into FHFA's statutory authority. Instead, he views his mandate as managing the present status of Fannie Mae and Freddie Mac.

Director Watt appears focused on several items that MBA has been actively advocating for, including greater clarity around reps and warrants, enhanced risk sharing to bring in more private capital and moving toward a common or fungible GSE security. Importantly, he is moving forward quickly with key changes that can be made now and appears committed to working with the industry on further improvements.

Director Watt also understands the necessity for change in the system. In the discussion that followed, he said, "Big recoveries and tax adjustments [for Fannie and Freddie] won't be sustainable in the future" and, "To stand in place simply is not an option."

On representation and warranties, Director Watt acknowledged what we have been saying for more than three years - lenders have been hesitant to ease their credit overlays given the uncertainty that still exists in the current re-purchase regime. Under his direction, the GSEs will be making a number of refinements to address our concerns, including allowing two missed payments the first three years, notifying lenders when mortgages meet the performance benchmark and pass QC reviews and eliminating automatic put-backs when a loans primary MI is rescinded.

He also announced that the GSEs will be providing additional clarity on life of loan exemptions, and will be establishing a new independent dispute resolution program, developing cure mechanisms and providing additional clarity on the GSE underwriting rules. All designed to give lenders more certainty and entice them offer credit to more qualified borrowers.

Director Watt also spoke about steps he was taking to reduce taxpayer risk by increasing credit risk transfers. Exactly a year ago, I stood on this stage, at this conference and offered upfront risk sharing as a means to re-engage private capital in the mortgage market. Last week, FHFA unveiled a new scorecard requiring each GSE to triple their volume of such risk sharing deals in 2014 and to deepen the amount of risk transfer in each deal. Director Watt also voiced his expectation that the GSEs would try new kinds of risk transfer structures, which we took to mean both upfront and back-end structures.

The third highlight of the speech involved ongoing development of the GSEs' Common Securitization Platform. The Director talked about a platform that would be primarily for the use Fannie and Freddie, but would also be adaptable for use by other market participants. The second objective for the CSP would be to move the Enterprises toward a common security. Director Watt believes that a common security would decrease costs for the GSEs and provide for market efficiencies that would benefit borrowers. I couldn't agree more and am encouraged that the Director has thrown his weight behind this concept.

Best of all, on these three initiative and more, the Director has pledged to proceed in a way that enhances transparency and incorporates the feedback of the public and stakeholders - including lenders - whenever possible. This is key because we all have a stake in short-term future of this system. Like it or not, structural change will only come slowly, so we are stuck with current system for the time being. And if we have learned anything coming out of the crisis, it is that the system, and the housing recovery, are fragile, and can be upset at the smallest bobble. Better coordination and consultation with the GSEs will help us avoid the kind of disruptions that could derail the housing recovery.

I am encouraged that through this common ground we can work together to create a better functioning secondary market system, because this is about creating a system that works. Creating a system where private capital plays a key role. This is about a system where lenders and investors of all sizes can compete.

To get housing finance right, we must work together toward a functional system. This is a process that takes time, one with multiple tracks leading us on a pathway to success.

The first track is GSE reform. The Johnson-Crapo bill presents a good starting framework for GSE reform, but it will clearly be a much longer legislative process than we would have hoped. Regardless of the outcome over the next several years, we can still make progress on transitioning to a more stable system of the future.

Which brings us to the second track - transition. Last year at this conference, we introduced specific steps that could be taken outside the halls of Congress. The pre-conditions for transition still exist - a growing economy, declining unemployment, and mortgage rates that while higher remain historically low. These steps can be taken without significant shock to the marketplace. And now, some of the transition steps can be used to improve some of the very issues that divided support for the Johnson-Crapo legislation.

Director Watt advanced these same steps in his speech:

Let's address the trading and liquidity differential between Fannie MBS and Freddie PCs by making the securities fungible for TBA delivery or driving toward a common security. This would enhance liquidity, reduce costs to taxpayers and lay the groundwork for a more competitive and efficient secondary market.

We should implement up-front and back-end risk-sharing options to allow lenders to secure deeper mortgage insurance coverage in exchange for lower guarantee fees and loan-level price Adjusters. This structure brings tangible benefits to consumers by lowering costs and increasing access to credit and encouraging competition among private lenders, credit enhancers, and investors, driving down costs at the point of entry.

Finally, we can provide greater private sector input into the development of the Common Securitization Platform (CSP) to ensure its maximum utility for the entire market. Director Watt indicated a focused effort on creating a CSP that leverages the systems, software and standards used by the private sector as well as utilizing the common security. We agree that this will be a multi-year effort before final implementation and we look forward to working with FHFA and Director Watt as we continue to make progress in this area.

The third track is the return of private capital. To attract private capital, we must address the obstacles to housing recovery. We must address the structural, regulatory and economic impediments that are keeping private investors on the sidelines. Uncertainty will remain until their trust and confidence in the marketplace can be restored.

The tasks ahead are these - encourage liquidity, sustainability and competition in the secondary market; restore trust and confidence in the marketplace; and attract more private capital in order to reduce taxpayer support and government control.

In 2008, Treasury Secretary Hank Paulson stated, "Policymakers must view this next period as a 'time out' where we have stabilized the GSEs while we decide their future role and structure."

Legislatively speaking, we know that GSE reform is years in the making. The economy and the housing market have stabilized…for now, but the current secondary market structure clearly cannot sustain another economic slump. The housing market needs progress.

It's time we address the structural, regulatory and economic impediments that are limiting the return of private capital and have a stranglehold on housing recovery. It's time to transition to a stable, competitive and accessible marketplace.

And so I ask you, are we bold enough to be the leading advocates for change? Are we capable of the leadership it will take to set the market on the right path to transition?

Everyone seems paralyzed by fear of change. What we should fear is inaction because paralysis will only lead to more government dependency, a spiraling cycle of increasing mortgage costs, less access to credit and less demand for housing, and a weaker and increasingly unstable market. And, most importantly, a greater risk of some event, such as the GSEs needing a draw from Treasury or an uncertain outcome in the courts, that could result in a disruptive shock to the entire housing finance system.

The system is still functioning poorly for many prospective homebuyers. But today, unlike four years ago, we are in a much stronger position to accelerate the recovery and nurse the system back to health. The housing market is improving. The demographics are in our favor.

We know what the prescription is for a broader recovery and more stable market. We need to stand up and be advocates for the change we know is necessary. Don't let our collective voice waver. We have to continue to press Congress to move forward. We have to work with Fannie, Freddie and FHFA on transition.

Because in the end, it's our future, and the future of the American homebuyer, that is being held back by the sick market.

Thank you.

###

###

The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry, an industry that employs more than 280,000 people in virtually every community in the country. Headquartered in Washington, D.C., the association works to ensure the continued strength of the nation's residential and commercial real estate markets; to expand homeownership and extend access to affordable housing to all Americans. MBA promotes fair and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 2,200 companies includes all elements of real estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and others in the mortgage lending field.www.mba.org.
- See more at: http://www.noodls.com/view/3737CFCD05A11B2F2F1A8D10C2797A8E9A807557?1728xxx1400527367#sthash.nvVdkTf8.dpuf


http://article.wn.com/view/2014/05/19/5_19_2014_David_Stevens_Addresses_MBAs_National_Secondary_Co/