Builders Testify on Housing Finance System Reform
The nation’s home builders testified before the Congress last week on several solutions to strengthen the regulation of the housing government-sponsored enterprises (GSEs), Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The proposals would ensure the ongoing financial safety and soundness of the GSEs and allow them to continue to fulfill their vital housing mission. “I cannot overstate the importance of this issue to the building industry,” NAHB President Dave Wilson told members of the Senate Banking Committee. “During NAHB’s 2005 Legislative Conference and Spring Board of Directors meeting last week, I received a clear message: All other issues affecting the building industry mean nothing if American families cannot buy the homes we build or if financing for the affordable rental housing we develop dries up.” Wilson outlined NAHB’s position on five key elements of GSE reform: - Regulatory structure. NAHB agrees with a provision in S. 1508, legislation that emerged from the Senate Banking Committee in 2004, that would establish a stand-alone structure outside of any Cabinet or government unit. NAHB supports an executive board model, similar to that of the Federal Deposit Insurance Corporation, where the board seats are divided between government representatives and private individuals with appropriate regulatory and housing finance experience. Further, NAHB supports establishing three separate regulatory divisions, as called for in last year’s committee bill. One division would conduct mission oversight of Fannie Mae and Freddie Mac, a second would deal with Fannie’s and Freddie’s safety and soundness issues and the third would oversee the regulation of the mission and financial safety and soundness of the Federal Home Loan Bank System.
- Program oversight. NAHB believes that the program approval process should not hinder the ability of the GSEs to address market needs in a timely manner. In this regard, the association supports last year’s committee bill, which sets a reasonable procedure for reviewing and approving programs. However, NAHB opposes creating a “bright line” boundary between primary and secondary market activities, as called for in Senate bill S. 190. The proposed bright line language would impose a rigid and arbitrary limit on Fannie Mae’s and Freddie Mac’s activities. “The true danger of this bright line proposal is that its overly broad approach would instantaneously preclude many of the GSEs' existing secondary market products and activities that were designed solely to increase access to mortgage credit, lower the costs of homeownership and foster innovations in home financing,” said Wilson.
- Affordable housing requirements. NAHB believes the GSEs should do more to accomplish their affordable housing mission and recommends requiring Fannie Mae and Freddie Mac to allocate a percentage of their earnings to enhance their current affordable housing goals. Modeled on the Federal Home Loan Banks’ Affordable Housing Program, this is consistent with the approach embodied in S. 1508. In addition, NAHB supports applying affordable housing goals to the Federal Home Loan Banks’ mortgage purchases, complemented by mortgage securitization authority.
- Capital requirements. NAHB agrees with the Senate Banking Committee’s approach to maintain statutory minimum capital requirements and to establish new risk-based capital standards. NAHB believes that the regulator should have the latitude to adjust minimum capital requirements, but these adjustments should only be taken in response to real changes in risk. Further, the minimum capital level should be returned to the statutory amount once the problem is resolved. “Any increase in minimum capital requirements must be temporary. Let the regulator deal with longer-term risks through the risk-based system,” said Wilson.
- Portfolio limits. NAHB opposes specific limits on GSE portfolio holdings. Fannie Mae’s and Freddie Mac’s portfolios of mortgages and mortgage-backed securities play an important role in stabilizing the supply and reducing the cost of housing credit, Wilson told lawmakers. Review of the GSE portfolios should be a key part of regular examinations for safety and soundness. “Specific portfolio limits are overreaching, unnecessary and could severely disrupt our mortgage markets,” he said.
“No matter what shape reform takes, changing how the GSEs are regulated will have significant impacts,” said Wilson. “We believe this process can be a success without undercutting their housing mission if several core principles are followed. One, balance housing with safety and soundness concerns; two, maintain a smooth and steady flow of mortgage products to the market; three, focus and enhance GSE benefits to expand affordable housing opportunities; four, employ capital as a precise instrument of risk management; and five, preserve GSE portfolios as tools for expanding investment in housing.”
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