Fireside Chat, Interview
A Conversation With U.S. House Financial Services Committee Chairman Jeb Hensarling
- Current Congress is unlikely to pass housing finance legislation, with reform efforts expected to advance early in the next Congress; however, passing major reforms may be impossible during an election year due to Senate supermajority rules.
- Proposed legislation aims to phase out the current Fannie Mae and Freddie Mac model without liquidating the entities, replacing them with a system featuring multiple issuers and guarantors, though one legacy entity or the Federal Home Loan Banks must maintain a cash window to preserve liquidity for community financial institutions.
- The new framework requires a federal guarantee where taxpayers are placed in the last loss position, contingent on private capital being placed in front of taxpayer capital to reduce long-term fiscal implications, alongside a mortgage insurance fund administered by the FHFA.
- To reinvigorate the private label MBS market and diffuse risk, the proposal mandates securitization of prime mortgages only with strict underwriting standards starting at 5% down payment and 85% loan-to-value ratio, aiming to reverse the erosion of standards seen since the financial crisis.
- Legislation is expected to include an affordable housing component that must be on-budget and demonstrably assist low-to-moderate-income households, preserving the 30-year fixed mortgage despite personal disagreement with the product.
- If negotiations fail, President Trump is expected to control housing finance for at least five years (potentially ten) starting in January 2019, empowering a new FHFA director with plenary powers to increase guarantee fees, lower conforming loan limits, and cut Affordable Housing Trust Fund contributions.
- Fiscal conservatives may oppose the plan due to contingent liabilities, yet the speaker fears the current system leaves taxpayers fully exposed to roughly $8 trillion in securities while 70% of originations and 98-99% of securitizations remain government-backed.
- Regulatory reforms include addressing Basel LCR ratios regarding non-recourse loans and adjusting Reg AB2, while the FHFA is expected to remain the regulator for the reemerging private market and determine Ginnie Mae issuer eligibility.
- Future challenges include the lack of a 3% growth regulatory policy, the rule of law being undermined by regulators entering corporate governance, and the potential for major financial institutions to function as utilities for politically favored credit allocation if reforms do not succeed.
- The proposal is expected to contain approximately a dozen to 15 provisions touching on Dodd-Frank, requiring guarantors to maintain bank-like capital and engage in credit risk transfer, though REITs currently cannot participate in such transfers.
- Risk is expected to be dispersed through a multi-guarantor system with market discipline, while the speaker anticipates pushback from fiscal conservatives and expects Democratic colleagues to demand affordable housing provisions.
- Senator Corker is expected to champion reform in the Senate, while Blaine Luckemeyer and Bill Huizenga are anticipated to lead the effort on the House Financial Services Committee, building on a foundation for future legislation even if the DeMarco-Bright plan variant serves as the basis.
- The speaker expects that the loss of federal fiscal standing will be corrected by solving underwriting issues and that the current 10-year legal infrastructure represents a failure of prudent underwriting that requires comprehensive tax and regulatory reform to achieve 3% economic growth.
- The private label market is expected to be cleaned up regarding no-doc loans and money-back-at-closing practices, but the speaker fears that without negotiation, the political dynamic will remain rigid, especially if Democrats control the House.