Regulatory Uncertainty Prevents Meaningful Housing Recovery

Washington just keeps kicking the can down the road.

Last week's announcement by the Consumer Financial Protection Bureau that it would to delay issuing final Qualified Mortgage rules for the mortgage industry and the Treasury Department's comments that housing reform requires further study are just the latest in a string of policy deferrals that prolong meaningful recovery in housing. 

The premise for this statement is simple: too much regulatory uncertainty persists in the market for credit to flow more freely.  

The Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices for April 2012, for example, suggests no real movement in banks' willingness to "open" the credit box much wider than it has been over the last couple of years, although lenders reported a pick-up in demand for residential mortgages overall. 

While no single factor explains the industry's reticence to expand credit availability, regulatory uncertainty over mortgage origination, servicing and financing holds back the return of private capital to mortgage markets.

To their credit, the various agencies tasked with creating rules that will redefine the mortgage industry of the future have taken a deliberative approach, recognizing the complexity and significance of what such changes may usher in.  However, these delays point toward a systemic policy malaise threatening to make the housing recovery since the crisis a decade-long process.  

Since it defines what type of mortgage products will generally be available going forward, the QM rule has a lot riding on it. For example, the Qualified Residential Mortgage rule, a separate part of the reform introducing risk-retention provisions into the securitization process, is effectively on hold until the CFPB introduces the final QM regulations. 

Beyond QM and QRM lie other major policy issues that have yet to be addressed which contribute to market uncertainty. Nearly four years after both enterprises went into conservatorship, a firm transition plan for Fannie Mae and Freddie Mac has yet to be announced or the details on what ultimately replaces these companies. The enterprises' regulator, the Federal Housing Finance Agency, has been proactive in positioning a strategic plan for handling legacy mortgage issues with the two firms, maintaining stability in securitization activities and working to develop the systems needed to support the future secondary market.  However, politics on both sides have stymied efforts to provide any concrete action plan for moving beyond the caretaking activity that has effectively cast mortgage finance adrift in a sea of regulatory uncertainty.

One way to reduce this uncertainty, while strengthening the focus and resources on key strategic issues for FHFA, would be to merge the two enterprises and reorganize the businesses around three functional areas coinciding with the FHFA's strategic plan: legacy asset management; ongoing securitization; and future data and system infrastructure development. But this plan can only be put in place if a viable replacement to Fannie and Freddie can be put forth. 

Clearly the issue is one of great complexity. However, too much time has elapsed now for there not to be a definitive game plan for reforming the secondary mortgage market.

Other areas of mortgage policy also remain unsettled.  One of these is the role of the Federal Housing Administration in mortgage markets and the health of its Mutual Mortgage Insurance fund.  Just last week, Lender Processing Services reported a sharp increase in foreclosures resulting from the surge in the FHA's market share during the 2008-2010 period.  While this served a vital countercyclical role at the time, the large share of volume taken by FHA and general weakness in the MMI fund pose fundamental risks to taxpayers and further private capital's reentry into mortgage markets.  Changes in FHA loan limits, insurance premiums and fees play a significant role in determining the extent of the federal government's direct participation in mortgage financing. Yet little movement in this policy area has been made, again reflecting a broader need for policy coordination on multiple fronts.