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Waters: The Real Impediment to Private Capital is Inaction on Secondary Mortgage Market Reform

In her opening statement today at a hearing of the House Committee on Financial Services, Congresswoman Maxine Waters, Ranking Member of the Committee, contested the notion that regulatory oversight is an impediment to recovery in the housing finance market. The title of the hearing called by the Republican majority is “Building a Sustainable Housing Finance System: Examining Regulatory Impediments to Private Investment Capital”.

Waters repeatedly has urged her Republican colleagues to take up the issue of housing finance reform. She recently convened the first in a series of expert panel discussions on the subject in order to jumpstart Congressional action.

The complete text of Ranking Member Waters’ opening statement follows:

Thank you, Mr. Chairman, for holding this hearing.

Today we are “examining regulatory impediments” to private capital coming back to the housing markets, even as we have very fresh memories of a largely unregulated shadow mortgage industry selling billions of dollars of toxic securities to investors, and devastating millions of American families. Interestingly, we are not examining the private-sector impediments to private capital returning.  For example, how many investors have confidence that the institutions selling new mortgage-backed securities won’t try to swindle them again?  Have banks fixed their servicing practices that harmed both borrowers and investors?  And, do we really think investors have forgotten that, according the GAO, the financial crisis reduced the wealth of Americans by $9 trillion?

This is not to say that I think that our current predicament in which the taxpayer is backstopping 90 percent of all mortgages is sustainable.  Nearly everyone on both sides of the aisle agrees that we must reduce the taxpayer’s current exposure.  However, it was FHA, Fannie Mae and Freddie Mac that stepped up to ensure housing finance continued when the private market disappeared.

Congress passed the Dodd-Frank Act to help restore investor confidence in the housing finance markets by providing clear rules of the road.  To name a few, the Act provides legal certainty to banks only when underwriting safe and sound mortgages.  Congress also requires issuers to have “skin in the game” by retaining some of the risk, thus aligning their incentives with investors.  To provide investors better information, Dodd-Frank improved securities disclosures, including requiring better data on the underlying assets, as well as reforming, and imposing liability on, the credit rating agencies when analyzing those securities.

Even as these changes are implemented, we are still a long way to restoring the level of investor confidence necessary to restart the private label security markets.  I continue to support proposals, including aspects of Mr. Garrett’s securitization bill from last year, that recognize the government’s role in encouraging further standardization in these markets.  I also think the government can work with the private sector in other areas, like helping to establish a model purchase and sale agreement, eliminating the conflicts of interest some banks have that service first liens while also owning the second lien on the same property, or transferring servicing generally to institutions that have much higher levels of personal contact with borrowers.

But if we are really looking for impediments to bringing back private capital, we need look no further than this Committee.  While the GSEs are incrementally taking steps to reduce their market presence, it is Congress that must pass comprehensive housing finance legislation to bring about real reform. This legislation will only be successful if it ensures the continuance of stable products like the 30 year fixed-rate mortgage, provides all eligible borrowers with access to credit, and supports affordable rental housing options. Two weeks ago I hosted a roundtable of experts, the first in a series, to discuss housing finance reform and a path forward. I think participants found the forum conducive to digging deeper into the issues to understand policy choices. One conclusion from this roundtable, for example, was that the objectives I just outlined can be met only if the government backstops some level of credit risk.

I am told that there are now over a dozen different comprehensive proposals to reform our housing finance system, many with bipartisan support. I find it disappointing that while we have convened more than 20 hearings on FHA and the GSEs over the last three years, we have not considered any of these ideas.  I hope that our witnesses will explain to my colleagues the need as well as the opportunity we have to build a stable mortgage market for generations to come.

Thank you, Mr. Chairman, I yield back.


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