Treasury Secretary Tim Geithner testified before the House Financial Services Committee this morning to answer questions about the administration's white paper on housing finance reform. My initial response to the Treasury plan is here, and my Washington Times op-ed response is here.
I wanted to pick out a few things from his testimony this morning to highlight and respond to.
- "We believe the government’s primary role should be limited to several key responsibilities: consumer protection and robust oversight; targeted assistance for low- and moderate-income homeowners and renters; and a targeted capacity to support market stability and crisis response."
This is a clear statement to understand how Treasury is approaching housing finance reform. Unfortunately there are a few problems here. 1) Certainly a role for government should be to support rule of law, prevent fraud and ensure consumers are not swindled. To the extent that this defines "consumer protection" and "oversight" I think we can align with Treasury. 2) Furthermore, given the current make up of the system, it is impractical politically to fight for a system that includes absolutely no assistance for low-income families. While the ideal system would include no government role in housing finance, if the role of government were limited to a very narrow subsection of the market, then I think we avoid the government creating much distortion. But we should be able to limit the government's role to just those who are truly lacking resources to support themselves, as a social goal. Moderate-income families should not need assistance, and homeownership should not be favored over rental. 3) Finally, there should not be a role of government to support market stability. This means a guarantee of the system in some capacity. And any guarantee would ultimately cause instability in the market.
- "We are committed to a system in which the private market – not American taxpayers – bears the burden for losses. And while we believe that all Americans should have access to affordable, quality housing, our goal is not for every American to become a homeowner."
This is a good platform from which all sides can build a new housing finance system.
- "As we decrease Fannie Mae and Freddie Mac’s presence in the market, we will also scale back FHA to its more traditionally targeted role... We will also increase the pricing of FHA mortgage insurance... an additional 25 basis point increase in the annual mortgage insurance premium is included in the President’s 2012 Budget and will be levied on all new loans insured by FHA as of mid-April 2011."
This is good to know in principle. FHA needs to charge more and be involved less. There have certainly been overtones from Sec. Geithner to suggest that he does feel we should still support homeownership for the poor to "avoid" becoming a "renter nation." And that suggests these comments should be taken with a grain of salt.
- "We will work closely with the Federal Housing Finance Agency to determine the best way to responsibly reduce Fannie Mae and Freddie Mac’s role in the market and ultimately wind down both institutions. This objective can be accomplished by gradually increasing guarantee pricing at Fannie Mae and Freddie Mac, as if they were held to the same capital standards as private institutions; reducing conforming loan limits by allowing the temporary increases enacted in 2008 to expire as scheduled on October 1, 2011; and gradually increasing the amount of private capital that risks loss ahead of taxpayers through credit loss protections from private entities and gradually increased down payment requirements. We also support the continued wind down of Fannie Mae and Freddie Mac’s investment portfolios at a rate of no less than ten percent annually.
This is certainly one of the most encouraging parts of the administration's white paper: getting rid of Fannie and Freddie. And the approach is good as well. Lowering conforming loan limits, increasing underwriting standards, increasing g-fees, and letting portfolio's wind down at least 10 percent a year is the same path Ioutlined in my testimony on this topic a month ago. I think we can lower conforming loan limits and the portfolios faster. And we can raise fees and underwriting standards quicker. But if the debate is truly just over the speed of this approach, then we are in a good place. Sadly, on Capitol Hill, this is not yet the case.
Separately, from the written statement, Geithner did say that we do not need to delay the wind down. And that FHFA and FHA have the authority to start the process of making changes now and that they will. This is good in the sense that we need to get things moving, but if the market doesn't know what the ultimate system will look like, then there won't be a flood of private capital back into the housing market. Also, if reform is limited to just these changes, then we don't really have a new system. Here is what Geithner says the government is moving ahead on (in addition to raising g-fees and FHA insurance):
- All regulators are determining the parameters for Qualified Residential Mortgages as ordered by Dodd-Frank;
- CFPA will start this summer taking over the role of consumer protection and will start to "curb abusive practices, promote choice and clarity for consumers, and set stronger underwriting standards';
- Regulators will raise capital standards for banks that will buffer against higher-risk mortgages; and
- Treasury is also pursuing changes on servicing industry regulation.
All together these changes do not create a new system, so Congress will certainly need to act for us to get a good system. Moreover, there are huge problems with some of these regulatory moves. Having a broad QRM or a CFPA limiting products would both be problems. And raising capital standards can only do so much. It is very interesting that Treasury/FHFA/HUD can start the process on their own, and they should when it comes to g-fees and underwriting standards. But Congress should not mistake that for enough reform.
More comments to come as the hearing continues...