Sources say that the Senate Banking Committee will take
up discussions of S 1217, yet another bill that addresses housing finance
reform, sometime this week. A mark-up
session scheduled for last week was cancelled at the last minute by committee chair Tim Johnson (D-SD) who along
with ranking member Mike Crapo (R-ID) sponsors the legislation.
The Johnson-Crapo bill is this season's variation on
the Warner-Corker legislation introduced last year with a few notable
exceptions that may make it more palatable to consumer groups. Even so, the bill will face tough sledding in
a contentious Senate and during an election year.
1217 would wind down the two government sponsored enterprises (GSEs) Fannie Mae
and Freddie Mac which have been in government conservatorship since 2008 and
virtually eliminate the guarantee the two GSEs have provided to investors who
purchased mortgages from them or securities backed by those mortgages. In the place of the GSEs the bill establishes
the Federal Mortgage Insurance Corporation (FMIC) as an all-purpose agency
patterned after the Federal Deposit Insurance Corporation. Funded by fees paid by lenders and investors
FMIC will serve as housing regulator and would allow for the creation of a
private marketplace for buying and selling mortgages and securities backed by
mortgages. While the originators and aggregators who
would make use of this marketplace or securitization platform are not clearly
defined, it is assumed they would be the banks, mortgage companies, and
investors who inhabit the current system.
would provide a backstop guarantee to those private firms, each of whom would
be required to put up 10 percent in first-loss capital. The government guarantee would kick in only
after that capital was exhausted by catastrophic losses through mortgage
defaults. FMIC would establish
underwriting guidelines that would incorporate those of the Consumer Financial
Protection Agency's Qualified Mortgage rule and would regulate the contracts,
representations and warranties and servicing agreements that govern the
secondary market. The proposed
legislation would ease downpayment requirements from the flat minimum of 5
percent mandated by Warner-Corker to allow for a 3.5 percent downpayment for
first-time homebuyers. The Warner bill
would have lowered conforming loan limits but the new bill keeps them at their
current level to avoid disruption to the markets.
proposed legislation also provides accommodations to allow small lenders to
participate in the system through a mutual cooperative and it abolishes the
affordable housing goals mandated for the GSEs, resurrecting instead the
Housing Trust Fund which has gone unfunded since 2008. The fund would be supported by FMIC user
fees. It also provides more details for the transition from the existing
housing finance system than does the earlier bill. The Warner bill eliminates the Federal Housing
Finance Agency (FHFA), current regulator of the GSEs in favor of FMIC while the
Johnson bill retains it as an independent agency of FMIC, giving the finance
system a total of seven federal regulators (the Office of the Comptroller of
the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation,
the Consumer Financial Protection Bureau (CFPB), the Securities and Exchange
Commission, and the Commodity Futures Trading Commission, and FHFA) with which
addition to Corker-Warner which is still on the Senate's table, and S 1217 the
House of Representatives has the PATH Act.
The bill, formally named the Protecting American Taxpayers and
Homeowners Act, is sponsored by Scott
Garrett (R-NJ) although it is clearly the creation of House Financial
Services Committee (FSC) Chairman Jeb Hensarling (R-TX). It has been voted out of the FSC but not yet
taken up by the House. PATH phases out
the GSEs and creates a housing finance system where
the only government involvement would be through the Federal Housing
Administration (FHA) which would also have its role limited.
PATH seems to have little support from critical stakeholders. The legislation has been faulted as having
the potential to end the 30-year fixed-rate mortgage, raise interest rates, and
generally raise barriers to home ownership.
Maxine Waters (D-CA) ranking member of the FSC
recently introduced her own bill into the mix.
The HOME Forward Act essentially brings most of the features Johnson and Warner
for consideration in the House although it gives different names to the entities it creates. It treats the National Housing Trust Fund
more liberally than the Senate bills and provides more specificity to the
process of transitioning from the GSEs to a new system.
every sector of the housing industry is unanimous in calling for housing reform. The
Center for American Progress recently summarized
and critiqued provisions of 27 separate proposals that have come not only
from elected officials but from industry groups, ratings agencies, and
No one seems strongly committed to
any of the proposals that have been made. As Ben Smith, writing for CNBC said late last
month, "The effort," (toward reform) while well-meaning and long overdue, "also
has almost no chance of success." The
current system, Smith says, with the GSEs guaranteeing payments to investors in
nearly 60 percent of the mortgages originated in the country, is likely to
stick around until after the 2013 midterm elections and probably well beyond
into that mix the dozens of special interests that line up with lenders,
investors, consumers, and regulators and Smith's projections begin to look
The Plato Group, the American Enterprise
Institute (AEI), and other conservative groups have testified a number of times
before the Republican dominated House Financial Services to the need for
increased private sector participation in housing finance and far less
government involvement. While there have
been variations on the theme, most groups on the right have favored a
government guarantee on the securities level rather than the loan level.
organizations recently wrote to members of Senate Banking this week strongly
opposing the Johnson-Crapo bill on that basis that replacing Freddie Mac and
Fannie Mae with a new federal entity does not constitute real reform but an
expansion of the kind of government intervention that caused the housing crisis
in the first place.
There is also opposition to the bills
around perceived favoritism toward larger lenders coming from consumer groups
and small lenders themselves, and a fear that turning so much control of the
lending process over to private investors will lead to higher loan prices and
to more restrictive access to credit. There is also vocal opposition coming from
groups representing low income and minority groups such as the National Urban
League that elimination of the GSEs affordable housing goals would lead to a
severe downturn in housing opportunities for those groups. These groups have taken particular exception
to the oft-stated refrain from the right that it was these goals and the GSE's
adherence to them that led to the housing crisis in the first place.
Industry groups have supported some
aspects of each proposed bill but seem torn between wanting the government
guarantee to continue in some form while fearing any increased regulation that
government involvement would assure.
Public statements from these groups could mostly be summarized as
fervent pleas to be allowed to write the legislation themselves however several
including the Mortgage Bankers Association and the Financial Services
Roundtable have recently sponsored newspaper ads urging lawmakers to vote for S.
The White House is on record as supporting housing finance reform but has itself
been criticized for an alleged tepid advocacy.
Typical of the administration's rhetoric on the subject were recent
remarks by Treasury Secretary Jacob Lew and Housing and Urban Development
Secretary Shaun Donovan each of whom called on Congress to pass reform
legislation. Lew said that Congress must begin now to pass
housing finance reform legislation. "The
longer we put it off, the easier it is to forget the damage to the economy,
loss of housing wealth, and instability can come from a system with misaligned
incentives and inadequate taxpayer and consumer protections." Donovan asked for a system that "shifts credit
risk from taxpayers to the private sector and ensures that any government
backstop is explicit and properly priced." One reporter characterized Lew's remarks as
the type of statement introducing the need to do something rather than urgency
that it actually get done. Barclays, in
laying out a dozen reasons why reform would not pass said "The Obama
administration has not yet spent significant political capital in support of
the Johnson-Crapo bill despite issuing supportive commentary."
In an exchange on CNBC show host Rick
Santelli and Vincent Fiorillo, DoubleLine Capital portfolio manager agreed that
Johnson-Crapo may not even make it out of committee much less pass the Senate. With
Democrats making the mid-term elections about income equality, the two said, it
is difficult to picture Senate Majority Leader Harry Reid pushing for a bill
that many on the left will say makes the dream of homeownership and financial
security even harder for many Americans. On the House side the PATH bill continues to wait
in the wings for Senate action on the subject.
Before the April 29 mark-up date on
S 1217 was postponed MarketWatch puts the chances of that bill's passage of this
year at less than 5 percent, citing the lack of time between the markup and the
mid-summer shift of lawmakers' attention to the election. Also mitigating against passage is the
insistence of one top Republican that the government get out of the business of
insuring mortgages, the concern of small lenders about disruptions to the
current system, Leader Reid's opposition to terminating Fannie and Freddie, and
the opposition of low-income housing advocates to anything that would increase
the cost of mortgages.
MarketWatch also mentions a hurdle
to reform that has gotten little attention elsewhere and that is the actual
ability of the government to kill off the GSEs.
The two companies still have thousands of stockholders who aren't going
to be happy with this solution. In
addition to those who were caught holding the one time blue chip securities
when their value tanked there are a number of speculators including many hedge
funds which bought the stock at post conservatorship bargain rates and who expect
a return. Several of these large
investors have already filed lawsuits seeking to preserve the value of the
stock and whether or not they have a case, they do have an argument.
Why were these two privately owned companies
the only ones among dozens that teetered on the edge of insolvency in 2008 placed
in conservatorship? Lehman Brothers
entered bankruptcy and several were sold to healthier institutions, but most were
given billions of dollars in taxpayer money and allowed to right their ships. Why did the Federal Housing Finance Agency
allow a change to the original stock ownership agreement between the GSEs and
the Treasury Department that guarantees the GSEs cannot get back on their feet
despite their record profits and new and apparently sound business plans? Even though they have returned more than they
borrowed from the Treasury, none has been credited to their debt and they are
forbidden from accumulating a capital cushion that would allow them to regain
their independence. The courts might
have a lot to say about the eventual demise of the GSEs.
Observers say the Johnson and Crapo
want to lock up at least 16 affirmative votes for their bill from Senate
Banking Committee members before going to Reid and so far they have only 12. The support is said to be bi-partisan however
with six vote, including those of the sponsors from each party. Two Democrats, Elizabeth Warren (D-MA) and
Sherrod Brown (D-OH) have said they will not vote for the bill unless there are
further measures to guarantee both affordable loans and rental housing. Four other Democrats are said to be undecided.
If none of the bills currently under
consideration are adopted before November another issue may arise. Observers are giving Republicans a good
chance of taking control of the Senate and they are almost assured of keeping
their current House majority. With that,
all bets are off. The Heritage
Foundation, headed by former South Carolina Senator Jim DeMint appears to hold particular
sway in the House and the Heritage Foundation really doesn't like S 1217.
It complains that while the bill
eliminates the affordable housing goals it replaces them "with a more nebulous
mandate" allowing FMIC to define borrowers who may have lack access to the
housing finance system. It also expands
both the base and the rate of funding for the national Housing Trust Fund and
the Capital Magnet Fund, and that the risk sharing envisioned through the
government guarantee actually leads to more leveraging by allowing private
lenders to price their own risk and could leave taxpayers on the hook for 100
percent of losses in a catastrophic market failure.
urges that Congress reject both Senate bills which explicit taxpayer guarantees that are not necessary and adopt
a policy that gets the federal government out of the housing finance market. Heritage
then goes on to endorse the House's PATH Act.
That ad being run by industry
groups? It says part, "It's time to
stop kicking the can down the road on mortgage finance reform." Probably true. Yet there seem to be a lot of agendas destined to keep that can in motion.