Kicking the Can; Housing Reform Given Little Shot at Success

Sources say that the Senate Banking Committee will takernup discussions of S 1217, yet another bill that addresses housing financernreform, sometime this week.  A mark-uprnsession scheduled for last week was cancelled at the last minute  by committee chair Tim Johnson (D-SD) who alongrnwith ranking member Mike Crapo (R-ID) sponsors the legislation.</p

The Johnson-Crapo bill is this season’s variation onrnthe Warner-Corker legislation introduced last year with a few notablernexceptions that may make it more palatable to consumer groups.  Even so, the bill will face tough sledding inrna contentious Senate and during an election year.</p

Srn1217 would wind down the two government sponsored enterprises (GSEs) Fannie Maernand Freddie Mac which have been in government conservatorship since 2008 andrnvirtually eliminate the guarantee the two GSEs have provided to investors whornpurchased mortgages from them or securities backed by those mortgages.  In the place of the GSEs the bill establishesrnthe Federal Mortgage Insurance Corporation (FMIC) as an all-purpose agencyrnpatterned after the Federal Deposit Insurance Corporation.  Funded by fees paid by lenders and investorsrnFMIC will serve as housing regulator and would allow for the creation of arnprivate marketplace for buying and selling mortgages and securities backed byrnmortgages.   While the originators and aggregators whornwould make use of this marketplace or securitization platform are not clearlyrndefined, it is assumed they would be the banks, mortgage companies, andrninvestors who inhabit the current system.</p

FMICrnwould provide a backstop guarantee to those private firms, each of whom wouldrnbe required to put up 10 percent in first-loss capital.  The government guarantee would kick in onlyrnafter that capital was exhausted by catastrophic losses through mortgagerndefaults.  FMIC would establishrnunderwriting guidelines that would incorporate those of the Consumer FinancialrnProtection Agency’s Qualified Mortgage rule and would regulate the contracts,rnrepresentations and warranties and servicing agreements that govern thernsecondary market.  The proposedrnlegislation would ease downpayment requirements from the flat minimum of 5rnpercent mandated by Warner-Corker to allow for a 3.5 percent downpayment forrnfirst-time homebuyers.  The Warner billrnwould have lowered conforming loan limits but the new bill keeps them at theirrncurrent level to avoid disruption to the markets.   </p

Thernproposed legislation also provides accommodations to allow small lenders tornparticipate in the system through a mutual cooperative and it abolishes thernaffordable housing goals mandated for the GSEs, resurrecting instead thernHousing Trust Fund which has gone unfunded since 2008.  The fund would be supported by FMIC userrnfees. It also provides more details for the transition from the existingrnhousing finance system than does the earlier bill.  The Warner bill eliminates the Federal HousingrnFinance Agency (FHFA), current regulator of the GSEs in favor of FMIC while thernJohnson bill retains it as an independent agency of FMIC, giving the financernsystem a total of seven federal regulators (the Office of the Comptroller ofrnthe Currency, the Federal Reserve, the Federal Deposit Insurance Corporation,rnthe Consumer Financial Protection Bureau (CFPB), the Securities and ExchangernCommission, and the Commodity Futures Trading Commission, and FHFA) with whichrnto deal.</p

Inrnaddition to Corker-Warner which is still on the Senate’s table, and S 1217 thernHouse of Representatives has the PATH Act. rnThe bill, formally named the Protecting American Taxpayers andrnHomeowners Act, is sponsored by ScottrnGarrett (R-NJ) although it is clearly the creation of House FinancialrnServices Committee (FSC) Chairman Jeb Hensarling (R-TX).  It has been voted out of the FSC but not yetrntaken up by the House.  PATH phases outrnthe GSEs and creates a housing finance system wherernthe only government involvement would be through the Federal HousingrnAdministration (FHA) which would also have its role limited.  </p

PATH seems to have little support from critical stakeholders.  The legislation has been faulted as havingrnthe potential to end the 30-year fixed-rate mortgage, raise interest rates, andrngenerally raise barriers to home ownership. rn</p

Maxine Waters (D-CA) ranking member of the FSCrnrecently introduced her own bill into the mix. rnThe HOME Forward Act essentially brings most of the features Johnson and Warnerrnfor consideration in the House although it gives different names to the entities it creates.  It treats the National Housing Trust Fundrnmore liberally than the Senate bills and provides more specificity to thernprocess of transitioning from the GSEs to a new system. </p

Virtuallyrnevery sector of the housing industry is unanimous in calling for housing reform.  ThernCenter for American Progress recently summarizedrnand critiqued provisions of 27 separate proposals that have come not onlyrnfrom elected officials but from industry groups, ratings agencies, andrnbi-partisan commissions.  </p

No one seems strongly committed tornany of the proposals that have been made.  As Ben Smith, writing for CNBC said late lastrnmonth, “The effort,” (toward reform) while well-meaning and long overdue, “alsornhas almost no chance of success.”  Therncurrent system, Smith says, with the GSEs guaranteeing payments to investors inrnnearly 60 percent of the mortgages originated in the country, is likely tornstick around until after the 2013 midterm elections and probably well beyondrnthat.  Throwrninto that mix the dozens of special interests that line up with lenders,rninvestors, consumers, and regulators and Smith’s projections begin to lookrnoptimistic. </p

The Plato Group, the American EnterprisernInstitute (AEI), and other conservative groups have testified a number of timesrnbefore the Republican dominated House Financial Services to the need forrnincreased private sector participation in housing finance and far lessrngovernment involvement.  While there havernbeen variations on the theme, most groups on the right have favored arngovernment guarantee on the securities level rather than the loan level.  </p

Twenty-six conservativernorganizations recently wrote to members of Senate Banking this week stronglyrnopposing the Johnson-Crapo bill on that basis that replacing Freddie Mac andrnFannie Mae with a new federal entity does not constitute real reform but anrnexpansion of the kind of government intervention that caused the housing crisisrnin the first place.  </p

There is also opposition to the billsrnaround perceived favoritism toward larger lenders coming from consumer groupsrnand small lenders themselves, and a fear that turning so much control of thernlending process over to private investors will lead to higher loan prices andrnto more restrictive access to credit.  There is also vocal opposition coming fromrngroups representing low income and minority groups such as the National UrbanrnLeague that elimination of the GSEs affordable housing goals would lead to arnsevere downturn in housing opportunities for those groups.  These groups have taken particular exceptionrnto the oft-stated refrain from the right that it was these goals and the GSE’srnadherence to them that led to the housing crisis in the first place.   </p

Industry groups have supported somernaspects of each proposed bill but seem torn between wanting the governmentrnguarantee to continue in some form while fearing any increased regulation thatrngovernment involvement would assure. rnPublic statements from these groups could mostly be summarized asrnfervent pleas to be allowed to write the legislation themselves however severalrnincluding the Mortgage Bankers Association and the Financial ServicesrnRoundtable have recently sponsored newspaper ads urging lawmakers to vote for S.rn1217.  </p

The White House is on record as supporting housing finance reform but has itselfrnbeen criticized for an alleged tepid advocacy. rnTypical of the administration’s rhetoric on the subject were recentrnremarks by Treasury Secretary Jacob Lew and Housing and Urban DevelopmentrnSecretary Shaun Donovan each of whom called on Congress to pass reformrnlegislation.   Lew said that Congress must begin now to passrnhousing finance reform legislation.  “Thernlonger we put it off, the easier it is to forget the damage to the economy,rnloss of housing wealth, and instability can come from a system with misalignedrnincentives and inadequate taxpayer and consumer protections.”  Donovan asked for a system that “shifts creditrnrisk from taxpayers to the private sector and ensures that any governmentrnbackstop is explicit and properly priced.”    One reporter characterized Lew’s remarks asrnthe type of statement introducing the need to do something rather than urgencyrnthat it actually get done.  Barclays, inrnlaying out a dozen reasons why reform would not pass said “The Obamarnadministration has not yet spent significant political capital in support ofrnthe Johnson-Crapo bill despite issuing supportive commentary.”</p

In an exchange on CNBC show host RickrnSantelli and Vincent Fiorillo, DoubleLine Capital portfolio manager agreed thatrnJohnson-Crapo may not even make it out of committee much less pass the Senate. WithrnDemocrats making the mid-term elections about income equality, the two said, itrnis difficult to picture Senate Majority Leader Harry Reid pushing for a billrnthat many on the left will say makes the dream of homeownership and financialrnsecurity even harder for many Americans.  On the House side the PATH bill continues to waitrnin the wings for Senate action on the subject. </p

Before the April 29 mark-up date onrnS 1217 was postponed MarketWatch puts the chances of that bill’s passage of thisrnyear at less than 5 percent, citing the lack of time between the markup and thernmid-summer shift of lawmakers’ attention to the election.  Also mitigating against passage is therninsistence of one top Republican that the government get out of the business ofrninsuring mortgages, the concern of small lenders about disruptions to therncurrent system, Leader Reid’s opposition to terminating Fannie and Freddie, andrnthe opposition of low-income housing advocates to anything that would increasernthe cost of mortgages.</p

MarketWatch also mentions a hurdlernto reform that has gotten little attention elsewhere and that is the actualrnability of the government to kill off the GSEs. rnThe two companies still have thousands of stockholders who aren’t goingrnto be happy with this solution.  Inrnaddition to those who were caught holding the one time blue chip securitiesrnwhen their value tanked there are a number of speculators including many hedgernfunds which bought the stock at post conservatorship bargain rates and who expectrna return.  Several of these largerninvestors have already filed lawsuits seeking to preserve the value of thernstock and whether or not they have a case, they do have an argument.  </p

Why were these two privately owned companiesrnthe only ones among dozens that teetered on the edge of insolvency in 2008 placedrnin conservatorship?  Lehman Brothersrnentered bankruptcy and several were sold to healthier institutions, but most wererngiven billions of dollars in taxpayer money and allowed to right their ships.  Why did the Federal Housing Finance Agencyrnallow a change to the original stock ownership agreement between the GSEs andrnthe Treasury Department that guarantees the GSEs cannot get back on their feetrndespite their record profits and new and apparently sound business plans?  Even though they have returned more than theyrnborrowed from the Treasury, none has been credited to their debt and they arernforbidden from accumulating a capital cushion that would allow them to regainrntheir independence.  The courts mightrnhave a lot to say about the eventual demise of the GSEs.</p

Observers say the Johnson and Crapornwant to lock up at least 16 affirmative votes for their bill from SenaternBanking Committee members before going to Reid and so far they have only 12.  The support is said to be bi-partisan howeverrnwith six vote, including those of the sponsors from each party.  Two Democrats, Elizabeth Warren (D-MA) andrnSherrod Brown (D-OH) have said they will not vote for the bill unless there arernfurther measures to guarantee both affordable loans and rental housing.  Four other Democrats are said to be undecided.  </p

If none of the bills currently underrnconsideration are adopted before November another issue may arise.  Observers are giving Republicans a goodrnchance of taking control of the Senate and they are almost assured of keepingrntheir current House majority.  With that,rnall bets are off.  The HeritagernFoundation, headed by former South Carolina Senator Jim DeMint appears to hold particularrnsway in the House and the Heritage Foundation really doesn’t like S 1217.  </p

It complains that while the billrneliminates the affordable housing goals it replaces them “with a more nebulousrnmandate” allowing FMIC to define borrowers who may have lack access to thernhousing finance system.  It also expandsrnboth the base and the rate of funding for the national Housing Trust Fund andrnthe Capital Magnet Fund, and that the risk sharing envisioned through therngovernment guarantee actually leads to more leveraging by allowing privaternlenders to price their own risk and could leave taxpayers on the hook for 100rnpercent of losses in a catastrophic market failure.</p

Heritagernurges that Congress reject both Senate bills which explicit taxpayer guarantees that are not necessary and adoptrna policy that gets the federal government out of the housing finance market. Heritagernthen goes on to endorse the House’s PATH Act. </p

That ad being run by industryrngroups?  It says part, “It’s time tornstop 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.  

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