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» VISIT US ONLINE @ DSNEWS.COM 97 pay rules and the qualified mortgage rules, because the GSE exemption is such that it really mutes the full effect of that standard. So that's an area that is going to continue to require some attention. And finally, I am troubled by the continued emphasis on enforcement actions and monetary penalties at this point, rather than identifying and resolving process and disclosure challenges. e mortgage housing finance market had a lot of bad actors and bad actions leading up to and into the crisis. I think most market participants that have survived this are trying today to do the right thing, but the rules keep evolving and changing. It certainly makes one wonder whether the over-citing enforcement mechanism is becoming more intent on finding flaws and penalizing them monetarily and in the public space, rather than in directing companies to help identify and remediate weaknesses so that things can simply get fixed and improved and market participants can have a better idea of what is expected of them. WHAT DO YOU THINK ARE SOME THINGS THAT NEED TO HAPPEN OUTSIDE OF THE FHFA AND THE CONSERVATORSHIP AS FAR AS FACILITATING A COMPLETE HOUSING RECOVERY? We need to bring competition back to the market. e GSE model is not a competitive one. It's a protected duopoly that lacks freedom of entry and exit. Because of its public charters, it is subject to substantial politicization. So Congress really needs to deal with these things to create a more competitive market that can spur innovation and consumer choice. And of course the government needs to clarify its own role— FHA and VA remain explicitly government guarantee programs and some things can be done to enhance their effectiveness. ere are a number of proposals that the GAO has developed regarding how to strengthen FHA for the future, and these are things that require some attention in the legislative process beyond thinking about how we are going to end the Fannie Mae and Freddie Mac conservatorships. e government can do things to help modernize housing markets so that the markets themselves can work better. And the government can help not just on standards, but to ensure transparency and basic fairness in the lending process. To the extent that it is providing subsidies, whether for rental or ownership, the government can do so in more direct and transparent ways. ese are all things that go into the mix when one is thinking about housing finance reform. SO WHERE DO YOU FIND THAT BALANCE BETWEEN RESPONSIBLE UNDERWRITING AND RISK MITIGATION SO THAT LOAN VOLUME IS HIGH ENOUGH FOR A HEALTHY HOUSING MARKET BUT AT THE SAME TIME NOT TOO RISKY? I would make two observations. e first is, with regard to credit standards or credit access today, we talk about credit standards, but a lot of this is actually driven today by the legal and compliance risks in mortgage lending. Lenders and investors are very wary of the regulatory and legal regime into which they are lending. And that uncertainty contributes to cautious underwriting. It is not so much about the borrower credit position as it is about the contingent risk in making loans that go bad, that then have additional consequences because of the regulatory and compliance regime. e second observation is that to an extent, we find that as a matter of policy, we believe more families should become homeowners. Rather than bending underwriting standards or the pricing of mortgage credit risk, perhaps we should spend more time thinking about what is involved to prepare families at the margin to become sustainable homeowners. And that is not just in terms of financial education, although that's an important part of it. It is also about helping families better understand how to manage credit, how to prepare for dealing with a rainy day, and making sure before we incentivize them into homeownership that there has been appropriate consideration for their larger financial security, in terms of their health, preparing for retirement, and so forth. We really need to think harder about how we develop sustainable homeownership. DO YOU THINK THAT THE CURRENT REGULATORY ENVIRONMENT FURTHERS THAT POLICY GOAL OF ENCOURAGING HOMEOWNERSHIP? THERE ARE SOME WHO ARGUE THAT IT HAS THE OPPOSITE EFFECT. THE NUMBERS SEEM TO BEAR THAT OUT. It's hard to say; maybe it's indicating that there are families that aren't ready for homeownership yet or that the demand for owning one's own home has been changing as a result of the new generation, the demographic changes, lessons learned from the financial crisis where people have reassessed their balance sheets and their priorities. e current condition of the housing market is a complicated story. "I think most market participants that have survived this are trying today to do the right thing, but the rules keep evolving and changing." —Edward DeMarco COVER STORY INDUSTRY INSIGHT INDUSTRY INSIGHT

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