In yesterday's update on housing finance reform it was noted that Senator Tim Johnson (D-SD) was hoping to have 16 favorable votes lined up before bringing S 1217, the Johnson-Crapo housing reform bill, to a vote in the Senate Finance Committee.  Twelve committee members - six Republicans and six Democrats, had committed to the bill, two Democrats were opposed, and four others were undecided.  There are 22 committee members.

Bloomberg reported this morning that the four undecided Democrats, Charles Schumer (NY), Jeff Merkley (OR), Robert Menendez (NJ) and Jack Reed (RI) had joined Elizabeth Warren (MA) and Sherrod Brown (OH) in deciding they would not support the legislation.

While Johnson, Chairman of the Committee, still has the votes necessary to recommend the bill to the full Senate, the opposition of so many Democrats lessen the probability that Majority Leader Harry Reid (D-NV) will bring the bill to the floor.

Cheyenne Hopkins says in her Bloomberg piece that the Democrats agreed in a private meeting yesterday that they would not support the bill without significant revisions.  They are said to have agreed that the structure of the proposed Federal Mortgage Insurance Corporation (FMIC) which is supposed to replace the government sponsored enterprises (GSEs) in operating the secondary market and in providing a catastrophic backstop against mortgage default losses seemed unworkable.  The Democrats also want stronger support for affordable housing goals.

In late April Brown introduced multiple amendments to the Johnson-Crapo bill addressing some of the structural weaknesses he saw in the bill.  One amendment would create a fiduciary responsibility for investors in mortgage backed securities.  Brown, on his website, said this would address the concerns over legal liability for the securities among trustees, servicers, and investors while creating protections essential to attracting private capital back into the market.  Provisions of the amendment would apply to trustees of private label securities (PLS) issued both through the new Common Securitization Platform (CSP) and outside of its.  The CSP is currently under joint development and ownership of the GSEs and would be administered and regulated by FMIC if Johnson-Crapo becomes law.   

Nine other amendments were co-sponsored by David Vitter (R-LA).  These would close various loopholes in S 1217 that allowed the participation of depository institutions in the secondary market in such a way as might potentially open the Federal Reserve to another bank bailout. 

Warren and Brown have both been outspoken in their opposition to eliminating the affordable housing goals which were long part of the mandate given to the GSEs.  Johnson-Crapo has opted for providing incentives to private investors for lending to low-income and minority populations.  Civil rights and consumer advocates have also been lobbying for mandates rather than incentives.

Warren has said that "either collectively or individually, issuers of mortgage-backed securities that are government-guaranteed should have a clear and enforceable duty to serve the entire primary market." She has also defended the affordable housing mandates of the GSE's saying that while Freddie Mac and Fannie Mae made major mistakes that cost taxpayers, (their) "affordable housing goals were not to blame for (the) crisis' underlying cause."

Warren has also advocated for protecting the role of smaller financial institutions in housing finance.  On her website she says, "A housing market dominated by a handful of Too Big to Fail institutions would reduce access to mortgages in rural and poorer urban areas. It would also increase systemic risk and reduce innovation and customization in the primary market.  Any future housing finance system must ensure not only that smaller lenders can sell their loans into the secondary market, but also that they can do so at competitive rates and remain viable players in the primary market."

Bloomberg quotes Sean Oblack, a spokesman for Johnson as saying yesterday that the senator expects the bill to be approved by the committee and would continue to seek more support.   "We have made significant progress bridging the divide among those previously undecided, and the committee vote is just a first step," he said.  "Those involved in the negotiations have indicated they are interested in continuing to work together to try and find common ground, so the Banking Committee will keep working after favorably reporting out the bill next week."