Proposed Housing Bill Would Create a Co-op of Mortgage Lenders
Yet another proposal for winding down Fannie Mae and Freddie Mac and overhauling the nation's housing finance system will be put before Congress on Thursday, this one by Representative Maxine Waters of California, the ranking Democratic member of the Financial Services Committee.
The major distinction of Ms. Waters's proposal is that it would make the mortgage lending system more like a public utility, by creating a co-op of lenders that would be the sole issuer of mortgage-backed securities guaranteed by the government. Such a system would significantly differ from those proposed by the major bills in the Senate, which would allow banks and bond guarantors to participate independently in the market. Both Ms. Waters's proposal and the Senate ones would establish a new federal regulator.
The Waters bill would require private backers to take the first 5 percent loss before the government guarantee kicks in. By contrast, the latest Senate bill, by the Senate Banking Committee's chairman, Tim Johnson, a Democrat from South Dakota, and Mike Crapo of Idaho, the committee's ranking Republican, requires private capital to take the first 10 percent loss.
Some economists say that during the housing crisis, Fannie and Freddie, which were formally taken over by the government in 2008 and now back the overwhelming majority of home mortgages, sustained approximately a 4 percent loss, but that number is in dispute. Setting the right levels of loss is a balancing act: The higher the loss requirement for the system's private backers, the more expensive mortgages would be for home buyers, but the less vulnerable taxpayers would be in another crisis. Ms. Waters's proposal would set the same guidelines for minimum down payments — 3.5 percent for a first-time buyer and 5 percent for everyone else — as the Johnson-Crapo bill, but would allow the regulator to lower those requirements at its discretion.
While almost everyone agrees that the housing finance system is in dreadful need of improvement, the bills stand little chance of passing. In the Senate, the Johnson-Crapo bill probably has enough votes to get out of the banking committee, but even if it manages to get to a floor vote it is unlikely to go very far in the Republican-controlled House. The House Financial Services Committee has approved a bill by its Republican chairman, Jeb Hensarling, but the bill does not have enough support to pass. Given the unlikelihood that a Democrat-sponsored bill would have a better chance of passing, Ms. Waters's bill seems intended mostly as a marker for housing reformers on the left.
"I am hopeful that this legislation will continue to move the conversation on housing finance reform forward," Ms. Waters said in a statement. "While there are differences, this legislation and the two bipartisan proposals in the Senate embrace a number of common themes."
Ms. Waters's bill also clarifies who would get paid first in a wind-down of Fannie and Freddie, starting with the Treasury, which would be paid according to the original terms of its bailout of the mortgage giants. Those terms were later altered, prompting shareholder lawsuits.
The proposal for a co-op is modeled after one described in a paper by the Federal Reserve Bank of New York, which aims to align the incentives for lenders, guarantors, home buyers and investors, and is a response to concerns that the Johnson-Crapo model would lead to a highly concentrated mortgage market with few players.
"Everyone talks about wanting to put private sector capital ahead of the federal government, but the key to any of these proposals working is whether enough entities will provide such capital," said Karen Shaw Petrou, a co-founder and managing partner at Federal Financial Analytics. "A utility, or co-op, may solve for that because it creates a special purpose entity that doesn't need to meet shareholder demand the same way a big bank or bondholder does."
Some liberal advocacy groups, like the Center for Responsible Lending, support a co-op model in part because it would create a single entity that could be held accountable for making sure that mortgages are available in all markets, and would discourage cherry-picking of mortgages in more desirable or profitable areas. "If you're going to have a duty-to-serve requirement, then there is a question about how you enforce it if there's multiple guarantors," said Gary Kalman, the center's executive vice president. "If somebody's not serving South Dakota, who do you hold accountable?"
An article on Thursday about a proposal for winding down Fannie Mae and Freddie Mac and overhauling the nation's housing finance system misstated how taxpayers would be affected in another crisis if there were higher loss requirements for the mortgage lending system's private backers. In that case, mortgages would be more expensive and taxpayers would be less vulnerable to bailouts, not "more vulnerable." The article also misstated the job title of Gary Kalman of the Center for Responsible Lending, who commented on the proposal. He is executive vice president, not executive director.