Realtors are fervent believers in free markets, and acknowledge the need for private capital to reduce the federal government's role in this sector. However, our members are practical and understand that in extreme economic conditions private capital will retreat from the market, requiring the participation of an entity that will remain active in the marketplace regardless of economic conditions. The government-sponsored enterprises were created to support this specific mission within the secondary mortgage market. Future secondary mortgage market facilities must be created with this mission as their basis in order to ensure that creditworthy American families will always have access to affordable mortgage capital.
Realtors agree with lawmakers and the administration that taxpayers should be protected, private capital must return to the housing finance market, and that the size of government participation in the housing sector should decrease if the market is to function properly. Where we continue to disagree with some is how these aspirations should be accomplished. Those who advocate for legislation that effectively constrains, shuts down the secondary mortgage market functions traditionally served by Fannie Mae and Freddie Mac, removes government participation from the conventional mortgage market, and/or relies only on private capital to operate the secondary mortgage market need only examine the current miniscule activity in the jumbo and manufactured housing mortgage markets in order to understand the implications of private capital as the sole participant in the secondary mortgage market. In both of these markets, mortgage capital became nearly nonexistent, which prohibited creditworthy borrowers from access to the funds required to purchase a home.
Congress chartered Fannie Mae and Freddie Mac to expand homeownership opportunities and provide a stable foundation for our nation's housing financial system. Unlike private secondary market investors, Fannie Mae and Freddie Mac remained in housing markets during past market downturns, and have used their federal ties to facilitate ongoing access to mortgage finance when other players have left the market.
Realtors believe that the GSEs' housing mission, and the benefits that are derived from it (e.g., long-term fixed-rate mortgages), played a vital role in the success of our nation's housing system, and continue to play a key role today. Without these secondary mortgage market facilities providing affordable mortgage capital during the current market disruption, there would have been a much more serious disruption to the market.
As the market turmoil reached its peak in late 2008, it became apparent that the role of the GSEs, even in conservatorship, was of utmost importance to the viability of the housing market as private mortgage capital effectively fled the marketplace. If no government-backed conventional mortgage market facility entity (i.e., Fannie Mae and Freddie Mac) existed as private mortgage capital fled to the sidelines, the housing market would have fallen even further and thrown our nation into a deeper recession, or even a depression.
Unique to the U.S. housing finance sector is the availability of affordable, long-term fixed-rate mortgages. The 30-year fixed rate mortgage is the bedrock of the U.S housing finance system.
And now, more than ever, consumers are seeking fixed rate 30-year loans because they are easily understood and offer a predictable payment schedule.
Realtors believe that full privatization is not an effective option for our secondary mortgage market because private firms' business strategies will focus on optimizing their revenue/profit generation. This model would foster mortgage products that are more aligned with these business' goals (e.g., based upon significant financial risk-taking) than in the best interest of the nation's housing policy, or the consumer. We believe that this would lead to the elimination of long-term, fixed rate mortgage products (e.g., 30-year fixed-rate mortgage) and an increase in the costs of mortgages to consumers.
In fact, based on early data from a survey that NAR is conducting on the impact of the new, lower FHA and GSE loan limits, we are beginning to see signs of how the private market impacts consumers. Preliminary data indicates that consumers who are now above the new lower conventional conforming loan limit are experiencing significantly higher interest rates and the need for substantially larger downpayments. According to data, this is leading to a loss of interest in real estate sales. (NAR will provide the committee with details from the full report once the data has been fully analyzed.) At a time when our economic recovery teeters on the edge of collapse, activities and reforms that force further constriction of economic activity should be resisted.
According to research by economist Susan Woodward, there is no evidence that a long-term fixed-rate residential mortgage loan would ever arise spontaneously without government urging.
Woodward points out that a few developed countries have encouraged the use of amortizing long-term loans, but in all instances (save for Denmark) where they do exist, the loans have adjustable rates and recast every five years. She goes on to indicate that the United States is unique in having a residential mortgage that is long-term, amortizing, fixed-rate and prepayable, and that Americans have come to view this product as one of their civil rights. Woodward points out that in early 2000, when Former Federal Reserve chairman, Alan Greenspan, hinted at its abandonment, the public outcry was such that he eagerly abandoned that position.
The affordability and availability of the fixed-rate mortgage has yielded a U.S. residential mortgage market that stands at approximately $11 trillion. Today, the GSEs own or guarantee $5 trillion to $6 trillion of mortgage debt outstanding and providing capital that supports roughly 70% of new mortgage originations. Realtors believe that it is extremely unlikely that any secondary mortgage market structure that does not include securitization and have some government backing could support the existing mortgage funding needs of the United States housing sector, while making mortgages available in all markets under all economic conditions.
Lastly, Realtors fear that in times of economic upheaval, a fully private secondary mortgage market will largely cease to exist as has occurred in the jumbo mortgage, the commercial mortgage, and the manufactured housing mortgage markets. When the economy turns down, private capital understandably flees the marketplace. Should that happen under a fully private secondary mortgage market model, the results for the entire economy would be fatal because affordable long-term fixed-rate mortgage funding would no longer be available, thus the plethora of peripheral industries that support and benefit from the residential housing market would suffer from the catastrophic effects of this occurrence.
Realtors insist that the long-term viability of America's housing finance system requires comprehensive reform of the secondary mortgage market. Toward that end, the National Association of Realtors supports H.R. 2413, the Secondary Market Facility for Residential Mortgage Act of 2011. As the leading advocate for home ownership and housing issues, Realtors want a secondary mortgage market that will serve homeowners today and in the future, as well as support a strong housing market and economic recovery.
H.R. 2413, introduced by Chairman Gary Miller, R-Calif., and ranking member Carolyn McCarthy, D-N.Y., does exactly that. It offers a comprehensive strategy for reforming the secondary mortgage market and gives the federal government a continued role to ensure a consistent flow of mortgage credit in all markets and all economic conditions. Moreover, it supports and emphasizes the use of long-term fixed-rate mortgage products in a manner that is consistent with the qualified residential mortgage exemption to the Dodd-Frank Act. Continuing government participation and establishing a facility that will provide liquidity during all market conditions will help ensure that creditworthy homebuyers can obtain safe and sound mortgage financing products even during market downturns, when private entities have historically pulled back.
Lastly, this legislation includes provisions to protect taxpayers and ensure safety and soundness through appropriate regulation and underwriting standards. Just as importantly, the bill's structure will keep the door open to lenders of all sizes without favoring large lenders over small and midsized institutions.
The National Association of Realtors supports a secondary mortgage market model that includes some level of government participation, but protects the taxpayer while ensuring that all creditworthy consumers have reasonable access to mortgage capital so that they, too, may attain the American dream—homeownership. We believe that the U.S. housing finance system is unique and serves a unique group of people who strongly desire a real piece of America. All potential solutions should focus on this key point.
Moe Veissi is president-elect of the National Association of Realtors.
