The Senate Banking Committee heard testimony from six witnesses Oct. 29 on the matter of overhauling the country's housing-finance system.
Eric Stein, senior vice president at the Center for Responsible Lending, offered two sets of policy recommendations. The first was for how to structure a revamped housing finance system. The second was a recommendation that underwriting standards not written into the reform legislation; but that the regulator, bond guarantors, and lenders instead use traditional underwriting practices, including compensating factors, for less wealthy borrowers. Stein recommended several features for the new structure. He said that participants in the secondary market should have a mutual ownership structure -- not stock ownership -- with each mutually owned entity able to issue and guarantee securities.
Another feature is that lenders wanting to sell conforming loans into the secondary market be required to invest in one or more mutually owned entities and that their pooled capital stand in first-loss position. Stein also said that smaller lenders should maintain direct access to the secondary markets through a cash window. If Congress opts to bifurcate the system, he noted, it should prohibit lenders from being affiliated with or purchasing stock in either -- except through mutual ownership -- to protect small lenders. Stein also suggested that secondary market entities be required to serve a national market and that any reform preserve the pass-through securities currently used in the TBA market. Additionally, the government-sponsored enterprises should continue to have the ability to modify troubled loans.