NAR President Gary Thomas in testimony before the Senate Banking Committee this week again took aim at a proposal floated by a federal regulator to reduce the size of loans that Fannie Mae and Freddie Mac can handle. Although details are still to be released, the Federal Housing Finance Agency has said it wants to reduce these limits, which in high-cost areas can go as high as $625,500. Reducing this would shut the door to reasonably priced mortgage financing not just for middle-class households living in expensive areas, but for households everywhere, because the regular loan limit would be affected as well. “This isn’t just a high-cost area problem,” Thomas said.
Sen. Robert Menendez (D-N.J.) said he recognized the sweeping nature of the impact. “So, reducing loan limits also hurts existing home owners,” he said.
Thomas also urged lawmakers to back bi-partisan legislation, the “Housing Finance Reform and Taxpayer Protection Act of 2013,” S. 1217, introduced by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) , because it would reform the secondary mortgage market while leaving in place a federal backstop, an NAR priority.
“It’s extremely likely that any secondary mortgage market structure without a government guarantee will foster mortgage products that are more aligned with business goals then with the best interests of consumers,” he said.
It was Thomas’ second appearance before the committee in three weeks. His earlier appearance, at the height of concern over whether Congress would increase the federal borrowing limit before the U.S. Treasury ran out of money to pay the government’s debts, was timely, to say the least. Sen. Heidi Heikamp (D-N.D.) credited Thomas’ earlier testimony for changing minds at a very tense time. “Mr. Thomas, I think your testimony on the debt ceiling and what it would mean for borrowers had a huge impact,” she said. “I think we were able to change public opinion.”
Sen. Sherrod Brown (D-Ohio) also thanked Thomas for his earlier appearance as well as the input REALTORS® provided when he met with them last week in Ohio. “I spoke with a number of your members—the Columbus Board of REALTORS®,” he said. “About 100 of them were there, just to discuss some of these issues.”
For Thomas, the key to his testimony was to keep lawmakers focused on how all the moving parts of mortgage finance reform that Congress is looking at fit together. To that end, he urged Congress, for the short term, to look closely at FHFA’s plan to reduce loan limits without losing sight of the long-term need to reform the secondary market in a way that maintains a federal backstop.
Access Thomas’ written statement.
To get a good picture of why it’s so important for a continued federal role in the mortgage market, view remarks by Ginnie Mae President Ted Tozer, who in a conversation with NAR Vice President Joe Ventrone explains the role the guarantee plays for global mortgage investors.
Congress is looking at what to do about FHA in light of the pressure on its reserves and it’s clear from a hearing that senators held yesterday the agency presents them with a conundrum. Lawmakers acknowledge the indispensable role FHA played in the aftermath of the mortgage crisis and continues to play today, yet it’s equally clear the agency is in a tough spot, although given the pressure it’s been under it’s been managing its reserves remarkably well.
Testimony by market experts that appeared before the Senate Banking Committee yesterday indicated that the housing market, and the broader economy by extension, would have been in much worse shape had FHA not stepped in with affordable mortgage credit when it did. By some estimates, it prevented home values from dropping an additional 25 percent in the darkest days after the downturn.
Testimony also made clear that the cause of FHA’s challenge to its reserves is the very opposite of what caused the mortgage meltdown. The mortgage meltdown was caused by lax underwriting and confusion about the strength of the mortgages that collateralized the private-label mortgage-backed securities that were so popular among investors during the housing boom. FHA’s challenge is very different. It never relaxed it’s underwriting standards and it maintained the safety and soundness of its mutual mortgage insurance fund throughout the boom.
After the crisis, the federal government and private sector looked to it to help shore up the market, and it did, but as a side-effect of that, it took on a lot more borrowers at a time when the broader economy was struggling. As a result of many factors outside its control, including widespread job losses and declining home prices, a portion of the borrowers it took on struggled. The result is a shortage in one of its reserve funds. But even here, the problem is not as acute as it sometimes sounds in the media, because FHA maintains reserves for 30 years, a requirement that far exceeds the private sector.
Against this backdrop, NAR President Gary Thomas made a strong case for careful action by Congress as it decides what, if anything, it should do. He shared with lawmakers the compelling story of how FHA stepped in at a critical juncture and through little fault of its own, took a hit to its reserves. In a sense it saved the economy from a much bigger blow but it did so at the expense of its own reserve fund.
Snippets of Thomas’ remarks to the Senate Banking Committee are in the 3-minute video above.