David Stevens: Toward a functioning housing finance system

David Stevens is President of the Mortgage Bankers Association.  This post is excerpted from remarks delivered at the Consumer Federation of America‘s annual financial services conference in Washington D.C. on November 30th, 2012.

fragile-housing-market-300x300We are in this unique paradox right now.  The ability to buy a home has never been greater from a pure economic standpoint and yet the rush to buy a home is not there.  Why is that? 

First, there has been incredible damage created in this country. Mistakes were made by bad lenders who promulgated products on unknowing consumers, by government regulators who pushed things like seller-funded down payment assistance programs and homeownership without any controls in place, by investors in their search for yield, and by rating agencies who competed to rate bonds and failed to really measure the true value of those bonds.  Real-estate agents saw ways to continue selling homes and make money. Some consumers speculated and thought homeownership was a piggy bank that could be tapped into endlessly.

The bubble was created and wiped out ultimately the wealth of millions of Americans.  There is no question that there is collective blame in this process.  At the same time, wherever we turn, we see headlines about institutions, particularly banks, which are the core focus of the Occupy Movement, the media, and law suits and litigation.  Banks made significant errors in the process over the past number of years; they also have pockets and deep ones and it’s an opportunity to go after these institutions. But I can tell you as a guy who has worked in financial institutions – bank [parent companies] don’t want to see their mortgage subsidiary ever get in the headlines again.

So the message that bank [parent companies] are giving to their mortgage companies is, ‘Don’t make a bad loan.  We never want to see this ever happen again and we’d just as soon get out of the mortgage business all together than have to deal with these headlines going forward.’  The other side of it is, as a result of this damage that has been created, we have this mass array of regulations coming on the industry.  Regulation that was needed, controls that are going to limit the ability of lenders, rating agencies, investors, realtors, to ever go down the path again of taking advantage of consumers.

They are going to protect consumers, but at the same time what we have is confusion. Lenders don’t know what rules are coming.  We have nine regulators in Washington all regulating the housing and finance system and none of them talk to each other.  Jim Perry, who heads the President’s team on housing at the National Economic Council, spoke at a conference recently and asked, “How do you correct what happened but not do so in a way where we are stuck with not enough liquidity?”  Clearly we have not threaded that needle yet.  

We know policy makers recognize this and I think this is the real challenge we collectively face, as those who want to get markets moving again. Credit is simply too tight, and it is tight for reasons that are primarily driven by fear, uncertainty, and the experience of the past decade. But whether it is mortgages or consumer debt, what we are seeing is access to credit is being restrained from all but the most wealthy, and we are seeing that draw lines that have ethnic and cultural boundaries to them, quite frequently age boundaries to them.

Simply put, what we are seeing is the average weighted FICO scores are going up and the barrier to entry has been raised. Is it a good thing? To some degree it is.  Fully documenting every borrowers ability to repay is the right thing to do. The question is at what point do you limit access to home ownership to all but some select demographic subgroups? Older and whiter get better access to credit in today’s market by pure demographic standards than any other variable.  The pendulum has swung too far the other way, overly tight new standards may be preventing credit worthy borrowers from borrowing to buy homes. 

We are also seeing a retreat from lending.  People say to me, “Dave these banks are just barking, they are going to lend don’t worry there is no desire to walk away from the market.” There is a literal exodus of lending institutions who are running away from the housing finance system because they simply don’t need the risk. I talk to banks everyday who tell me we just don’t want to be in the banking business, and quite frankly the largest number of them are smaller community, credit unions who are saying it is not worth the risk to be in the housing finance system there is just too much exposure associated with it. 

The point that I make constantly to people, this may not sound very politically correct, is you can sue them, you can regulate them, but you can’t force them to lend.  At the end of the day, we need to find the environment that brings balance back so that institutions will lend. Financial institutions should want to lend if it is profitable, that’s what they’re in the business to do. If they don’t succeed it is because they don’t see it that way.

As the economy recovers, household formation recovers. The final piece I want to emphasize is the generation to come.  This echo group generation, Generation Y, 80 million Americans born between roughly 1970 and 2000 is the biggest generation in history.  We have a generation market coming our way that is going to need a place to live.  So in the end this is my final side remark.  How do we get to a point where we can work in partnership?  Where we have clear rules of the road that protect everybody?  Consumers get to borrow safely; lenders to lend safely, and investors to invest safely so that we get a functioning housing finance system in this country.


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