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.
S 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.
FMIC 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.
The 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 to deal.
In 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.
Virtually 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 bi-partisan commissions.
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 that. Throw into that mix the dozens of special interests that line up with lenders, investors, consumers, and regulators and Smith's projections begin to look optimistic.
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.
Twenty-six conservative 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. 1217.
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.
Heritage 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.
