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2014 Housing on the Hill: Policies in Passing or a Way of Life?

Reflecting on the Past Year in Housing Policy

Stuart Quinn    |    Housing Policy

Housing market participants were in a consumption phase throughout 2014 when it came to regulatory and policy guidance; digesting, interpreting, re-interpreting and implementing lengthy regulations to remain compliant and operationally sound. The Ability to Repay/Qualified Mortgage Rule (ATR/QM) and National Mortgage Servicing Rules became effective in early January, legislative amendments were made to Biggert – Waters, modifying features of the National Flood Insurance Program (NFIP), and the Credit Risk Retention (QRM) rule was finalized – to name a few major developments. But even given those milestones, how much progress was really made in the last 12 months? After all, though the 113th Congress provided a little more certainty throughout the 2014 fiscal year, economic growth still didn’t quite reach the levels needed to support further housing recovery. The 2014 composite of multi-billion dollar settlements, interest rates remaining above 2012 lows, stricter underwriting policies and residual softness in employment markets led to a less robust than desired year for the housing market. Forecasts for 2014 origination volume are expected to come in just north of the $1 trillion mark, down nearly 50 percent from 2012. And even as lawmakers tried their hand at tackling comprehensive housing finance reform, their efforts fell just shy of the compromise required for passage. Will the policies that regulators began to shake out in 2014 become long-term, sustainable changes as they continue to unfold in 2015? To answer that question, we must first look at where legislation stalled and how it was successfully put into motion over the last 12 months.

GSE Reform: An Exercise in Consensus Building

Throughout 2014, the Senate Banking Committee dedicated the majority of their political agenda to reconciling legislation that would restructure the housing finance system. A myriad of bills have been penned on GSE reform, but a bipartisan bill sponsored by Bob Corker (R-TN) and Mark Warner (D-VA) served as the underlying framework for the Johnson-Crapo bill (Housing Finance Reform Act of 2013, S.1217) that garnered industry attention over the 2014 Congressional calendar year. Johnson-Crapo passed the committee, but never made it to the Senate floor due to external pressure posed by midterm elections that have a tendency to exacerbate political inaction.

Three draft bills remain under consideration on the House side. Components of each of the bills have the potential to contribute to an agreeable final piece of legislation (Waters, Delaney-Himes, Hensarling), however, prioritization of the GSE Reform to the forefront of the agenda is unlikely in 2015. The expected inaction in 2015 would postpone the debate into 2017, unless a catalytic event was to occur, such as a draw by one of the GSEs from the U.S. Treasury.

Expansionary Policies

Looking at clear forward progress, however, the Consumer Financial Protection Bureau (CFPB) qualified mortgage rule that became effective on January 10 introduced very minimal disruption to the mortgage markets, beyond compliance costs associated with implementation. The temporary exemption in the QM rule allows for ongoing GSE eligibility for loans, which provides broader underwriting criteria than the ‘general QM’ requirements. The exemption allowed loans eligible for sale to Fannie and Freddie to continue to be financed and a number of money center banks expanded their balance sheet lending operations. The CFPB also issued a cure mechanism to mitigate industry concerns about the complexities of calculating points and fees under the ATR/QM rule. The modification of the cure policy provided more clarity in the underwriting process and the agency indicated that it is still considering a cure provision for the income calculation.

Also a major milestone, the Federal Housing and Finance Agency came under new leadership in 2014 and made a strong effort to introduce thoughtful policies that would expand the credit box while maintaining safety and soundness. Under guidance from FHFA, the GSEs modified language in their representation and warranty framework twice. Both changes provide more clarity and certainty for when the credit risk transfers from originators and sellers. The GSEs also released a high loan-to-value product, froze forthcoming guarantee-fee increases and maintained higher loan limits, all in hopes of expanding access to credit. The new director has indicated that he will continue to deliver policies that ensure a robust and liquid housing market as conservator of the GSEs until Congress legislates reform.

Congressional Job Approval

Congressional Job Approval

The Congress made it through 2014 without any major catastrophes seen in previous years such as the debt ceiling debates or a government shutdown. Both Congressional chambers will be controlled by G.O.P. majority in the new year after picking up a number of seats in the mid-term elections. Despite the shift in party make-up to more broadly represent one party, the Congress continues to be confronted by extremely low approval ratings and the American public is reticent that 2015 will bring forth substantive legislative action. As the end of the year approaches, there are whispers that the incoming 114th Congress intends to take on comprehensive tax reform. A number of impediments exist that have the potential to encumber passage of such a bill. A few mandatory items already on the agenda that could detract from the tax reform effort include: the “CROmnibus,” which only included temporary Department of Homeland Security (DHS) funding through February that will require renegotiation, expiration of the interim funding measure for the Highway Trust Fund in May of 2015, the perennial Congressional disputes over Presidential Budget recommendations and ongoing combatting of Executive Orders. Brinkmanship and comradery will be on full display for each of these issues, not to mention the volume of lobbyists promoting special interests associated with comprehensive tax reform. That is not to say the task is insurmountable, however, years move quickly on Congressional calendars and 2016 may be too close for such a contentious vote.

So what does this mean for policy in the year to come? A number of high impact carryovers issues will drive the first half of 2015 housing market. This chore list includes: the finalization of the Home Mortgage Disclosure Act by the CFPB, implementation of integrated disclosures under the Truth in Lending Act and Real Estate Settlement Procedures becoming effective in August, PMI eligibility requirements under FHFA, and the continued promulgation and interpretation of state foreclosure laws. We can expect to hear a number of key housing policy terms through the first half of the year as well, including accessibility, affordability, actuarially appropriate insurance premiums, adequate capital, single security architecture, adverse selection, regulatory implementation and compliance. With economic fundamentals back in the driver seat, the question now becomes, how quickly and capably can economic drivers navigate the new rules of the road?