[StBernard] Rep. Baker challenges Senator Dodd to move GSE Reform in October

[Westley Annis]

Rep. Baker challenges Senator Dodd to move GSE Reform in October 

WASHINGTON – U.S. Rep. Richard Baker, R-Baton Rouge, issued the following statement today in connection to the House Financial Services Committee’s hearing on Legislative and Regulatory Options for Minimizing and Mitigating Mortgage Foreclosures. 

“The American housing finance system is once again proving the old saying that there’s no such thing as a free lunch. The last time we were taught this lesson was the S&L crisis when the American economy endured the hard consequences of “free money” and loose underwriting. American families faced the hard reality of double-digit interest rates and the collapse of an entire sector of our financial services system. 

“What we suddenly seem to be “discovering” is that underwriting standards actually matter. A borrower’s debt-to-income ratio matters. A borrower’s economic interest in a mortgage matters. Documenting a borrower’s income matters. And finally, business cycles (even in real estate) occur. 

“Over the past 45 days we have seen the Federal Reserve, the European Central Bank and other central banks pump hundreds of billions of dollars into financial markets. Some countries have even had to resort to direct loans to individual financial institutions to keep them solvent. And, just this week the Federal Reserve lowered the federal funds rate and the discount rate (for a second time in less than 30 days). 

“We are discussing today what else the government can do about this crisis. Given what Congress has done this week in passing legislation to allow FHA to insure zero down loans (including closing costs) for borrowers with abysmal credit ratings suggests we aren’t paying attention. The federal government doesn’t need to be in the predatory lending business and FHA shouldn’t put families in home s they won’t be able to keep. 

“I have a modest alternative to suggest. Let’s use FHA to help creditworthy families refinance out of problem loans so they can stay in their home s. Let’s examine the loose or non-existent underwriting standards that have caused the problem. Let’s look at mortgage brokers and originators that failed to live up to their professional obligations. Let’s keep our focus on the problem, which was the rush to cash in on an overheated housing market. 

“The federal financial regulators have admitted to being slow to react to the subprime crisis. Earlier this year the agencies jointly required underwriting standards to be improved. This was a good first step and one that has had a profound impact on both the availability of credit and credit quality. There is likely additional action that can be taken to encourage professional conduct by mortgage brokers and lenders. The Congress should take action in this area, but also be mindful that a credit crunch caused by legislative or regulatory overreach is just as devastating as any other. 

“Some have suggested that Congress should go beyond the mortgage origination level and impose legal liabilities in the secondary market. If we have observed anything these past few months I would hope that it is the harsh reality of an illiquid secondary mortgage market. Injecting additional regulation into this market would be unwise, unwarranted and unnecessary. Investors have plenty of other opportunities to deploy their capital. Attaching onerous civil and criminal liability to the secondary market will drive this capital elsewhere and only compound the problems that our mortgage markets now face. 

“The one action Congress can take to significantly improve the secondary mortgage market would be to finally, after years of debate and stalling, enact GSE reform. I have worked closely with former Chairman Leach, former Chairman Oxley and Chairman Frank to craft and pass out of the House legislation to significantly improve the regulation of the GSEs. The Senate needs to take its responsibilities seriously and adopt GSE reform. If this legislation, which has been under consideration for almost a decade, was now law, the pressure that many American families face would not be so daunting. 

“Now, some in the Senate want to put the cart before the horse and expose the GSEs to additional interest rate and credit risk by increasing the conforming loan limit and setting aside regulatory penalties levied against the GSEs for serious safety and soundness violations. If these Senators genuinely wish to be a part of the solution, they should insist that Senate Banking Committee Chairman Chris Dodd convene his committee and pass GSE reform legislation in October. If we are to consider an expanded role for the GSEs in responding to the current crisis, a sufficiently empowered regulator is required to ensure the enterprises are not exposed to the credit contagion that has disrupted global markets.   

“Ultimately, the solution to this problem lies in improving underwriting standards and credit quality of mortgages. If it hasn’t been clear up to this point, the American economy and housing finance system has a global reach and relies on international capital. By improving credit quality we can restore global confidence in our housing finance system and continue to grow our economy.”   

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For more news about Congressman Baker, please visit 

www.baker.house.gov <http://www.baker.house.gov/>