A hearing held by the U.S. House of Representatives Financial Services Subcommittee on Housing and Insurance on Wednesday took a critical look at the Federal Housing Finance Agency (FHFA) policies that initially spurred the controversial loan-level pricing adjustment (LLPA) for conventional borrowers with debt-to-income (DTI) levels at or above 40%.
The hearing, titled “The Current Mortgage Market: Undermining Housing Affordability with Politics,” followed efforts by Republican legislators, who in April introduced a bill into the House to block the LLPA changes from taking effect. Subcommittee chairman Rep. Warren Davidson (R-Ohio) described the FHFA’s LLPA decision in his opening statement as one motivated by politics instead of policy.
“The FHFA […] must be immune to political agendas, regardless of how much any administration pressures the agency,” Davidson said. “The FHFA therefore retains an exceptional degree of authority to impose rules that shape the entire mortgage market. It is this authority that brings us here today — in light of recent proposals to change the [LLPAs] set by the FHFA and to be implemented by the Enterprises.”
The hearing was scheduled prior to the FHFA announcing earlier this month its decision to rescind the LLPA changes. Davidson acknowledged that decision in his remarks, but contended that the purpose of the hearing extends beyond that policy.
“Now, to be fair, we’ve already seen the FHFA reverse course on some components of the LLPA changes, while also issuing a request for input on its method for determining LLPAs,” he said. “These are positive but small steps in the right direction. While we welcome these changes, they are insufficient.”
Davidson said the committee will ensure that “appropriate risk-based pricing and an efficient mortgage market” is achieved.
Ranking subcommittee member Rep. Emanuel Cleaver (D-Miss.) characterized the changes as misunderstood due to the complexity of housing finance policy. Cleaver said in his opening statement the complexity can lead to the spread of disinformation and alluded to comments made by FHFA Director Sandra Thompson in an effort to correct inaccuracies related to the proposed changes.
“I appreciate the request for input released by Director Thompson earlier this week,” Rep. Cleaver said. “But I fervently disagree with the way individuals have taken the liberty with the motivations of [FHFA] or have mischaracterized [its] actions.”
Witnesses providing statements and testimonies during the hearing included Housing Policy Council President Edward DeMarco, National Association of Realtors (NAR) President Kenny Parcell, University of Maryland Professor Clifford Rossi and Urban Institute Housing Finance Policy Center (HFPC) VP Janneke Ratcliffe.
In summarizing the perspective of the HPC, DeMarco said the “DTI pricing element was unworkable and had negative consequences for borrowers,” according to his statement. Parcell said the NAR also expected the changes to the pricing would have negative impacts on borrowers while echoing gratitude for the FHFA’s decision to rescind the changes.
Rossi said it was unsurprising that a heated debate emerged from the controversial policy proposal, considering how pricing models are structured.
“Today we have a sort of Frankenstein approach to credit pricing, cobbling together average pricing for ongoing fees with quasi-risk-based pricing for upfront fees,” he said in his written statement. “It is no surprise then that we have arrived at a place where so much heated debate has occurred on these fees. Fundamentally, the FHFA should immediately eliminate the FICO and LTV LLPA grids and request the Enterprises to update their guarantee fees to reflect that change while conforming to actuarial-based pricing.”
Ratcliffe said that “the recent adjustments to the LLPAs do not compromise the safety and soundness of the GSEs” since they are all underwritten according to strict risk criteria.
“Ultimately, it is important to recognize that the GSEs bring a valuable economic subsidy to all their borrowers, provide macroeconomic stability to the economy, and help foster affordable and sustainable homeownership while needing to maintain safety and soundness, all against changing market conditions,” she concluded in her written statement. “Setting pricing is a complex balance of all these considerations.”
The House has scheduled an additional hearing on the topic of the FHFA for May 23, titled “FHFA Oversight: Protecting Homeowners and Taxpayers.”
