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MBA president: GSE reform is within reach

At the end of the Mortgage Bankers Association (MBA) national convention held in Denver this week, President David Stevens made a surprise announcement that he would retire effective Sept. 30, 2018.  Prior to this, however, he fielded questions from VantageScore President Barrett Burns and MBA members during a Q&A breakout session. Stevens answered several questions covering a range of issues, but much of the discussion focused on reform of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, a pressing issue in the mortgage industry at this time. The questions below were among those asked at the Q&A session, although they have been edited to keep them concise.

What are MBA’s main priorities in Washington?

davestevens(1)It is actually a pretty interesting time in the form of priorities, with a new director of the CFPB [Consumer Financial Protection Bureau], a new director of the FHFA [Federal Housing Finance Agency]. Both are going to be nominated by this president over the next year or so. The order of it is really important. [CFPB Director] Richard Cordray will leave first, and then we actually have some opportunity to modify some of the rules with a new director. He could begin to work on some revisions to the QM [qualified mortgage] rule.

With [FHFA Director] Mel Watt’s replacement, hopefully we can be better prepared with a more fulsome QM rule, so that if the new director of FHFA has a different view about the role of the size and scope of the GSEs, we don’t have to worry about the patches [which currently exempt Fannie Mae and Freddie Mac loans from the QM rules]. That is one of the big priorities. GSE reform is actually moving. I’ve testified in the first hearing that took place in the Senate on the subject. Just about an hour ago, I got a call to testify in the first week in November in front of the House Financial Services subcommittee.  I know text is being worked on, on both sides of the aisle. It is going to be a big-deal issue moving forward.

What do you think is going to make GSE reform happen?

My view in Washington is that there is nothing like a good crisis to create motivation. The unfortunate thing about the GSEs is if you see a member of Congress going out of a town hall, you don’t have the average citizen saying, "Hey, what is going to happen to Fannie Mae and Freddie Mac?" It is technical. It is esoteric. It is actually not a partisan issue in any given way. You have to ask yourself, what is the motivation? Why would anybody stick their neck out and do GSE reform?

But, let us just suppose that the new FHFA director represents the side of the conservative elements in Washington who believe the government’s role is overstated in housing finance. Remember the PATH Act in the House of Representatives sponsored by [House Financial Services Committee Chairman Jeb Hensarling, R-Texas] that went through the committee on a purely partisan vote. [That] is the Republican bill that would actually wind down the GSEs altogether. My point is that [if] a new FHFA director takes steps that look like it could be shrinking the scope of the GSEs, that might motivate Democrats to take action.

In many cases, there has been a stall-and-delay approach, which is, let’s just wait until we get the administration that is most favorable to our efforts. In some cases, it was a hope that the Hillary Clinton administration might be more favorable to some of the more liberal interests in the party. She is not in the presidency, and we have a party  today that represents concerns about the oversized role in government. So, my view is that we as an industry need to demand GSE reform, push hard on it and not think that things are going to get better. I am actually somewhat hopeful that actions may take shape that will motivate members of Congress, particularly on the Senate Banking Committee, which I think is the most important voice on the subject to begin moving forward.

What are your thoughts on the FHFA taking steps so the GSEs avoid a Treasury draw?

I know there has been a lot of different opinions on whether we should advocate for the GSEs to retain some capital and not pay the dividend. My own view is that we have spoken to global investors and they don’t care about a draw. They know there is [$258.1] billion line of credit. It is backing these two entities. It will cover catastrophic loss. Under that context, there isn’t a concern about some wavering question as to whether there will be a crisis in confidence about the mortgage-backed securities that the GSEs produce; and, therefore, no impact to rates.

I do worry that if [FHFA Director] Mel Watt were to unilaterally act in his role and under his authorities under [the Housing and Economic Recovery Act, or HERA], that he would draw extraordinary reaction from those that oppose, one, him having the job in the first place. More importantly, oppose him acting against the interests of the administration, or taxpayers that would not be paid the dividend. The risk of an over correction — should the director move based on his HERA authority --- is our greatest risk overall.  

What we really need to do is get GSE reform started to protect against what is going to happen, which is, a change in regime [that] can have a very different view of the role of the GSEs. People should put their energy there, rather than this capital issue when there is a [$258.1] billion line of credit.

Is the White House letting Congress take the lead on this?

What you should come to expect out of the administration — and I believe it will happen fairly soon, perhaps weeks —you will see a principles document released by the Department of Treasury. Those principles are going to be intended to communicate to policymakers on the Hill about the framework that they would like to see GSE reform constructed under. It will be a way of signaling to say, "OK Congress, if you draft a bill, and it meets the contours of these principles, you are going to get White House support." I think it will avoid specificity because they don’t want to box in a congressional process. It will intend to signal that the administration is behind reform — something that the Obama administration didn’t put their full weight behind, and why legislative efforts like Johnson-Crapo never made it past committee. I think it will give great authority to Congress to draft the legislation that they need to do with the kind of compromises that are going to have to take place to get the majority of votes.

Given that there are other GSE reform plans, such as one backed by major GSE shareholders, what chance does the MBA plan have of rising to the top?

The Senate [banking committee] went through the drill already, originally with Corker-Warner, then Johnson-Crapo. That committee, which hasn’t changed a lot since that period, they learned a lot about GSE reform. They learned all about the sensitivities, the nuance, and they also learned about special interests. One group of special interests are the shareholders. They have been very aggressive. They ran ads against the members of the committee in their home states. They ran ads against [Senate Banking Committee Chairman Mike Crapo, R-Idaho]. These members of the Senate have long memories about the personal attacks against them, and their brethren do, [those] who are new to the committee, but know they could be under attack as well. I think the group that is working on it now has core principles that they believe in. Much of that will reflect similar principles that our plan has.

We are not foolish enough to think that they will adopt the MBA plan whole parcel. We think they are going to take elements of our plan. They will look at the other plans. They have held hearings already as you know. As they deliberate this, I think they will take the best elements of all of them. I think it is going to stick more closely to the kinds of things that we have been talking about at MBA.

But, there is a lot of good in other plans that should also be considered in the dialogue. Our goal is just to create permanence, create a long-term solution that keeps an explicit guarantee by the government behind the [mortgage-backed securities] because that is what we need for the capital markets to buy that security and keep rates stable. And we think we need to legislate a level playing field, so legally it would impossible for any future guarantor to cut a market-share deal with some big bank just to drive volume. That would be eliminated. We need to deal with affordable housing, or you won’t get Democrats on board; and you need to deal with risk to taxpayers, or you won’t get Republicans on board. Those are really the foundations of our approach. 


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