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From Banking and Finance Law Daily, July 19, 2013

Financial Services Committee begins deliberations on PATH Act; markup scheduled

By John M. Pachkowski, J.D.

In a July 18, 2013, hearing (webcast) that spanned over six and half hours, the House Financial Services Committee heard witness testimony regarding the Discussion Draft of the Protecting American Taxpayers and Homeowners (PATH) Act of 2013. The witnesses were a mix of academicians, public policy experts, and members of the banking, home building, securitization, and mortgage industries. A memorandum issued by the committee’s majority staff noted that the PATH Act was the result of 11 hearings held over the past five months, and was based on testimony and feedback of more than 40 witnesses.

Committee leadership released an executive summary of the PATH Act on July 11, 2013, which claimed that the current housing finance system is unsustainable, unacceptably exposes taxpayers to liabilities in the trillions of dollars, and crowds out private sector capital, investment, and innovation. The committee also released a section-by-section analysis of the 308-page Discussion Draft.

The PATH Act follows the introduction into the U.S. Senate on June 25, 2013, of the “Housing Finance Reform and Taxpayer Protection Act of 2013” by Sens. Bob Corker (R-Tenn) and Mark Warner (D-Va), with Sens. Mike Johanns (R-Neb), Jon Tester (D-Mont), Dean Heller (R-Nev), Heidi Heitkamp (D-ND), Jerry Moran (R-Kan), and Kay Hagan (D-NC) as cosponsors.

Once the legislative proposal was floated, committee Democrats asserted that the PATH Act would do away with the availability of a 30-year, fixed-rate mortgage. The majority subsequently released a blog posting which stated, “The biggest myth we are hearing about the PATH Act is that it will make the 30-year fixed rate mortgage disappear. The 30-year fixed rate mortgage will continue to exist. The PATH Act won’t change that.”

Critical core principles. In advance of the hearing, the committee Democrats released a “set of critical core principles” that they say should be part of legislative efforts to address the future of housing finance reform. The principles call for: (1) maintaining the 30-year fixed rate mortgage; (2) protecting taxpayers; (3) providing stability and liquidity; (4) preventing disruptions to the U.S. housing market during a transition to a new finance system; (5) providing transparency and standardization; (6) maintaining access for all qualified borrowers that can sustain homeownership and serve homeowners of the future; and (7) ensuring access to affordable rental housing.

Endless boom-bust cycles. In his opening statement, committee chairman Jeb Hensarling (R-Texas) noted, “America needs a housing policy that is sustainable over time, not one that causes endless boom-bust cycles in real estate that harms our economy.”

“PATH to nowhere.” The committee’s ranking member, Maxine Waters (D-Calif), said the Discussion Draft is a “non-starter” and added it was an “unrealistic proposal based on the notions of ideological academics, whose ideas have no real audience or weight outside of certain Members on this Committee.” She concluded, “I stand ready to work with you if you want to get serious on housing finance reform or regulatory relief for our nation’s community banks and credit unions. But to be candid, this proposal is a failure on all counts, and for all stakeholders.”

Americans deserve better. Rep. Randy Neugebauer (R-Texas), Chairman of the Subcommittee on Housing and Insurance, called the PATH Act “a transformative piece of legislation that will bring our housing markets into the twenty-first century and allow our housing finance system to function without the unprecedented government intervention we have seen in recent years.” He added, “America can do better and Americans deserve better. They deserve a better housing finance model—one that is built to last and sustainable. Sustainable for homeowners so they can keep their homes; sustainable for taxpayers so they are never again asked to foot the bill for a multi-billion dollar Washington bailout; and sustainable for our nation’s economy so we avoid the boom and bust cycles that have hurt so many in the past. The PATH Act will do just that.”

“The way to go.” In his written statement, Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute, indicated that “the bill now before this committee is the way to go.” He added, the PATH Act “shows the way out of the repetitive cycles of failure that have been the story of the housing finance market under the government’s control since the end of the Second World War. Instead of yet another government program—and another meltdown in the future—the PATH Act would open the way for private securitization to become a major source of housing finance.”

“Path to ruin.” Professor Adam Levitin, Professor of Law, Georgetown University countered Wallison’s enthusiasm by noting that “Unfortunately, the PATH Act is a path to ruin. The PATH Act takes us back to the future in the housing finance, encouraging the revival not only of predatory lending practices but also the structural problems that plagued the pre-New Deal housing finance market.” He added, “The PATH Act is gambling with the American economy based on ideological preferences, not evidence.”

Tweaks will not suffice. Dr. Mark A. Calabria, Director of Financial Regulation Studies, Cato Institute, observed that “Rarely does Congress so directly, clearly and accurately identify a problem and craft a solution actually addressing the problem.” He added that the Discussion Draft was a “terrific start,” but not a perfect piece of legislation. Calabria’s written testimony noted, “It should be beyond dispute that our nation’s system of residential mortgage finance is badly broken. A few tweaks here and there will not suffice.”

Dr. Douglas Holtz-Eakin, President, American Action Forum, discussed three points in his testimony: (1) the need to reform the housing finance system that addresses the “damaging weaknesses” to that system; (2) the winding down and closing Fannie Mae and Freddie Mac; and (3) the reform of the Federal Housing Administration.

“Unviable.” Finally, Dr. Mark M. Zandi, Chief Economist, Moody’s Analytics, claimed in his testimony that the proposal to wind down Fannie Mae and Freddie Mac and privatize the nation’s housing finance system is “unviable.” He added, “If fully implemented, the PATH would lead to significantly higher mortgage rates, particularly in tough economic times, and would put 30-year fixed rate mortgage loans out of reach for most Americans.”

Secondary market access. William A. Loving Jr., President and Chief Executive Officer of Pendleton Community Bank, Franklin, WVa, testified on behalf of the Independent Community Bankers of America. Loving called access to the secondary markets “critical” and added that “[a]ny changes to the housing finance system must preserve equal and direct access to the secondary market to safeguard the role of community banks in providing mortgage credit in the communities we serve. It is critically important to borrowers and the broader economy that the details of any reform are done right.”

Janice K. Sheppard, Senior Vice President of Mortgage Lending and Compliance at Southwest Airlines Federal Credit Union, speaking on behalf of the National Association of Federal Credit Unions (NAFCU), noted that the NAFCU welcomed open discussion on housing finance reform and urged consideration of credit unions’ need for continued access to the secondary market. She added, “[t]he government plays an important role in helping to set standards and bring conformity to the housing market” and that changes in those standards to eliminate conformity or make it more difficult could, in turn, make it harder for credit unions to sell loans on the secondary market since credit unions “do not have the economies of scale larger market participants enjoy.”

Government backstop. Jerry Howard, Chief Executive Officer of the National Association of Home Builders, urged the committee to modify the PATH Act to make sure that the federal government continues to provide a backstop for a reliable and adequate flow of affordable housing credit in all economic and financial conditions. Howard noted, “NAHB believes federal support is particularly important to ensure that 30-year, fixed-rate mortgages, the bedrock of the nation’s housing finance system since the 1930s, remain available at reasonable interest rates and terms,” said Howard. “As currently drafted, the PATH Act does not provide the federal support necessary to ensure a strong and liquid housing finance system, and we urge the committee to make the necessary changes.” He added, “The historical record clearly shows that the private sector is not capable of providing a consistent and adequate supply of housing credit without a federal backstop.”

David H. Stevens, President and Chief Executive Officer of the Mortgage Bankers Association, called the PATH Act “a good starting point for the debate,” but said that “key changes will be necessary prior to this legislation being considered by the full House” so that the bill “provides consumers with affordable, sustainable mortgage credit and creates a vibrant secondary market that works for lenders of all sizes and business models.” He also discussed the role the federal government should play in new finance system. At a minimum, the government role is to “provide quality regulation of guarantors and systems and to provide a clearly defined, but limited, catastrophic credit backstop is an important component of this ideal system.” Stevens added, “Without this government backstop, the mortgage market would be smaller and mortgage credit would be more expensive, meaning that qualified lower and middle class households would have less access to affordable mortgage credit and be less able to qualify to achieve sustainable homeownership and the multifamily rental market, which predominantly serves those of modest incomes, would be adversely impacted.”

Tangible, constructive dialogue. Tom Deutsch, Executive Director of the American Securitization Forum (ASF), testified that “ASF strongly supports the introduction of the PATH Act, as its proposal should continue to fuel what we hope to be a tangible, constructive dialogue to resolve the future of U.S housing finance reform.” He added, “We believe Congress must take steps to substantially reduce the government’s role in mortgage finance. This must be done responsibly so that greater dislocation does not occur within our nation’s fragile housing market through materially reduced access to credit and/or impairment of value of agency and private-label [residential mortgage-backed securities].” Deutsch’s testimony also provided ways to: transition to more private capital; develop an open-access common securitization platform and a set of standards relating to servicing, pooling, and securitizing residential mortgage loans; create new financing channels, especially through the use of covered bonds; and reduce unnecessarily burdensome regulatory requirements that impede the return of private capital to the mortgage market.

Balancing act. Finally, Michael Calhoun, President of the Center for Responsible Lending, argued that the mortgage finance system “should have a balance of consumer protections that prevent abusive lending practices and policies that prioritize access to sustainable credit” and that the PATH Act “meets neither of these goals. Instead, the PATH Act would result in affirmative harm on both accounts.” Calhoun concluded, “reform of the housing finance system is certainly needed. However, the PATH Act would unduly reduce mortgage access, raise costs and limit options for American families. It would also disadvantage community banks and other small lenders and produce lower economic growth for the whole economy.”

Committee markup. On July 19, 2013, committee chairman Hensarling announced a markup of the PATH Act was to occur on July 23, 2013.

Companies: Fannie Mae; Freddie Mac; Moody’s Analytics; Pendleton Community Bank; Southwest Airlines Federal Credit Union

LegislativeActivity: BankingOperations CapitalBaselAccords FinancialStability GovernmentSponsoredEnterprises Loans Mortgages SecuritiesDerivatives VolckerRule

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