(Source: Financial Services) - Mr. Chairman and Members of the Committee thank you for holding this important hearing and thank you for the invitation to participate.My name is John Dalton, and I am the President of the Housing Policy Council of The Financial Services Roundtable. The Housing Policy Council is thirty-two of the leading national mortgage finance companies. HPC members originate, service, and insure mortgages, and do business every day with Fannie Mae and Freddie Mac.
Mr. Chairman, we believe that reform of the secondary mortgage market is a critical priority and it should be based on creating a new structure based on private capital. This new system must have two primary goals: serving homebuyers and protecting taxpayers.
Homeownership is a pillar of the US economy and the American way of life. The new private sector system, built on private capital and clear rules, should help deliver sound financing that will keep homeownership within the reach of most Americans. Without an approach like this, owning a home in America could become a luxury for the few.
One important way to avoid this from happening is to ensure continued availability of the 30-year fixed rate mortgage, which has been the bedrock of our nation’s housing system for more than a half century. Let me explain why.
The 30-year fixed rate mortgage has made homeownership sustainable for millions of American households. A fixed rate mortgage continues to be the overwhelming choice for American consumers. Today, approximately 90 of new loans are fixed rate mortgages. In the fourth quarter of 2010, 95% of refinances were for fixed rate loans. The 30-year fixed rate mortgage delivers affordability, certainty and stability for homebuyers that might not otherwise exist, which is why it is the most popular form of home financing in our country.
Predictability is one of the greatest benefits of the 30 year fixed rate mortgage, and very important for Americans on a budget. A fixed rate mortgage provides incredible peace of mind, because homeowners know that their biggest monthly bill, their mortgage, is not going to change from month to month and year to year. Without this popular finance tool, many homeowners would experience in their mortgages the same wild swings they now feel at the gas pump. That’s a rollercoaster ride most Americans would prefer to avoid.
In addition to serving homebuyers, we strongly agree that a new private sector-based system must protect American taxpayers. Members of the House Financial Services Committee have introduced several bills that identify a number of issues that must be addressed as part of a careful transition to a new, stronger housing finance system. In my testimony, I will discuss the Housing Policy Council’s proposal to reform the secondary market system and also comment on some of the legislation that has just been introduced to begin the reform of the existing GSES.
Guarantee Fees and Portfolio Limits
The legislation just introduced addresses the important issues of guarantee fees and portfolio limits. We support steps to continue the gradual reduction in the size of the portfolios maintained by Fannie Mae and Freddie Mac, and a gradual increase in the amount of the guarantee fees (G-Fees) charged by the GSEs. Guarantee fees and portfolio limits are issues that should continue to be addressed with the current GSEs and as part of the larger reform effort.
The guarantee fees charged by the GSEs should be at a level that reflects the risk they are taking and that also allows private competition to develop. In hindsight, it is clear that guarantee fees charged by Fannie Mae and Freddie Mac were insufficient to cover the risks of the mortgages they acquired. In early 2008, the GSEs began to impose additional fees, but in earlier years, the GSEs’ guarantee fees and their capital levels were inadequate to support the risks they were taking. Given this experience, HPC supports the gradual implementation of guarantee fees that are more properly aligned with the credit risk assumed by the GSEs. Today, the GSEs’ G-Fees have become more accurately priced and additional increases in the G-Fees should be phased-in over a period of time to avoid any undue disruption to the housing recovery.
In the past, the size of the GSEs’ portfolios grew far beyond what was necessary to facilitate the securitization of mortgage loans. The portfolios are now being reduced and that process should continue. Additional reductions in the portfolios should be managed in a manner that the market can absorb. Some limited portfolios are needed to facilitate the securitization of mortgages, to warehouse whole loans from community banks, to make a market in less liquid loans, such as multifamily housing loans. The regulator should have the authority and flexibility to manage the gradual reduction of the portfolios in a manner that does not negatively affect the current fragile housing market.
Under a reformed secondary mortgage market system, new private companies performing the credit guarantee role of the GSEs should not have large portfolios, but only those needed for the purposes explained above to facilitate the smooth functioning of mortgage securitizations.
Elimination of Numerical Affordable Housing Goals
HPC supports the elimination of specific housing goals for the GSEs. While the affordable housing goals were not a major factor in the failure of the GSEs, these goals did detract from their primary mission. The GSEs should have a single purpose
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