Newsletter: February 2019

February 19, 2019

As the 116th Congress settles in, there has already been a lot of housing finance activity. Yesterday, the Senate Banking Committee (SBC) held a hearing on the nomination of Mark Calabria to head the Federal Housing Finance Agency (FHFA); while on Wednesday the House Financial Services Committee (HFSC) held a hearing on housing challenges, most notably homelessness. Recently, the chairs of both of these committees each outlined their priorities for housing finance reform.  The FHFA also decided to no longer defend the constitutionality of its structure in court, amid an ongoing lawsuit filed by Fannie Mae and Freddie Mac (the “GSEs”) shareholders. Finally, as this is our first Roundup in 2019, we highlight that at the end of 2018, USMI President Lindsey Johnson testified along with other trade association and nonprofit executives before the HFSC on bipartisan housing finance proposals.

  • Senate Banking holds confirmation hearing on FHFA Director nominee, Mark Calabria. On February 14, the SBC held a hearing on Mark Calabria’s nomination to serve as FHFA Director. At the hearing, Dr. Calabria expressed his intent to make the FHFA a “world class regulator” and promote a “well capitalized, strong system that preserves the 30-year mortgage and does provide access to affordable housing.” While he acknowledged that the FHFA can take certain actions to strengthen the GSEs, Dr. Calabria stressed that fundamental changes to the housing finance system must be done by Congress. During exchanges with members of the Committee, Dr. Calabria stated his support for moving away from a system that privatizes gains while socializing losses and explained that the ultimate goal should be a framework with sufficient capital and regulation that allows the GSEs to facilitate affordable housing for creditworthy borrowers. USMI released a statement on Dr. Calabria’s nomination, which can be found here.
  • Senate Banking Chairman Crapo releases GSE reform outline. SBC Chairman Mike Crapo’s (R-ID) housing reform outline serves as a blueprint for comprehensive bipartisan reform efforts. It builds off of other proposals that put into place “multiple private guarantors” to guarantee the timely repayment of principal and interest to investors of eligible mortgages that are securitized through a platform operated by Ginnie Mae. The outline also requires, among other things, that the FHFA establish a capital requirement for all approved guarantors and require that all private guarantors engage in credit risk transfer. In a statement, USMI noted that “the reform plan covers many areas and [USMI] is particularly pleased that Chairman Crapo recognizes the importance and value of private mortgage insurance in enabling access to low down payment conventional mortgages while protecting taxpayers at least to the levels that they are protected today.”
  • House Financial Services holds hearing on housing challenges. On February 13, the HFSC held a hearing that examined housing challenges in rural communities, including homelessness, rental housing, and homeownership, as well as legislative proposals to address aspects of these issues. As Chairwoman Maxine Waters (D-CA) noted, the hearing marked the “very first time that the full committee has convened a hearing focused entirely on homelessness” and discussed a bill that she introduced last congress that would allocate more than $13 billion over five years to programs to prevent homelessness. Chairwoman Waters is expected to reintroduce the bill this Congress. This will be a priority for the HFSC in the 116th Congress and Chairwoman Waters emphasized the need for “proactive solutions to ensure that every American has a safe, affordable place to call home.”
  • House Financial Services Chairwoman Waters releases housing finance reform priorities. Chairwoman Waters similarly outlined her agenda for housing reform, which seeks to address the longtime conservatorship of the GSEs. Notably, she highlighted the importance of private mortgage insurance (MI) in any future reformed system, stating that one of her main priorities is to ensure “sufficient private capital is in place to protect taxpayers.” The list of principles also includes requiring transparency to ensure a level playing field for all financial institutions and maintaining access for all qualified borrowers that can sustain homeownership. HFSC Ranking Member Patrick McHenry (R-NC) sent a letter to Waters requesting she convene hearings in critical areas including on “government-sponsored enterprises and the role of the federal government in mortgage finance to explore paths to ending the government conservatorship of Fannie Maeand Freddie Mac” and the “continued oversight of the Financial Accounting Standards Board (FASB) and its Current Expected Credit Loss (CECL) Accounting Standard.”
  • Government changes course on question of FHFA constitutionality. Recently, the FHFA filed a supplemental brief with the S. Court of Appeals for the Fifth Circuit stating that it will no longer defend the constitutionality of the FHFA’s single-director leadership structure in court. This ruling comes as the result of a lawsuit brought by Fannie Mae and Freddie Mac shareholders who have challenged the structure of the FHFA and the so-called “Third Amendment Sweep” by the Treasury Department. In July 2018, the federal appeals court reversed a previous court’s decision and agreed with shareholders that the FHFA’s structure was unconstitutional.
  • USMI’s President testifies before Congress. At the end of December, Lindsey Johnson testified before the HFSC in a hearing entitled “A Legislative Proposal to Provide for a Sustainable Housing Finance System: The Bipartisan Housing Finance Reform Act of 2018;” a bill introduced by former HFSC Chairman Jeb Hensarling (R-TX), and Reps. John Delaney (D-MD) and Jim Himes (D-CT).  USMI’s testimony addressed several important housing finance topics and discussed the role private MI can play in a reformed housing finance system, specifically in enabling homeownership while protecting taxpayers and the government from mortgage credit risk. She also highlighted key improvements to the industry that make it more resilient going forward.  Specific to the draft legislation, Johnson provided several observations including that private MI is compatible with most proposals for reform because it is done at the loan level, and therefore the credit protection travels with the loan from the first day it is originated whether the loan is placed onto a lenders’ balance sheet, sold to an investor, or sold into a securitization pool. USMI’s testimony also provided several recommendations for the draft legislation, chief among them that any proposal should rely on loan level credit enhancement done by entities that can manage mortgage credit risk through all market cycles. During the hearing, Rep. Andy Barr (R-KY) touted the value of MI stating: “I certainly agree that we need more PMI and we need more credit risk transfers, and the more private capital that we can get in here, the better. Even if we do need a federal guaranty, let’s make sure that private capital has a robust first lost position.” The full list of witnesses and their testimonies can be found here.