Hensarling bill moves further away from housing finance reform

Lack of an explicit federal role in supporting financing the more than $1 trillion of mortgage credit extended annually is justified as protecting the taxpayers from another costly bailout of the financial system.

But ironically, the lack of an explicit federal role leaves taxpayers even more exposed to a another costly bailout. Federal policy makers would certainly step in to protect the financial system from a future potential collapse if losses by private firms were large enough to threaten its solvency. As a result, the Hensarling proposal does not protect taxpayers, it simply leaves the governmentimplicitly insuring the housing finance system with taxpayers on the hook for the full tab of another potentially costly bailout.

Moreover, a purely private mortgage market would directly result in a significantly more rigid and costly mortgage market. As Center for American Progress housing expert Julia Gordon sums it up, the Hensarling proposal would “eliminate the 30-year fixed-rate mortgage; put homeownership out of reach for millions of young borrowers, communities of colors, and low-wealth families; further constrict the already-inadequate supply of affordable rental housing; and leave the housing market fully exposed to the private market’s cyclical fluctuations.”

The Senate also has proposed legislation on this topic. On June 25, 2013, Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) introduced "The GSE Reform Act of 2013." The bill proposes to replace Fannie Mae and Freddie Mac with an independent government agency called the Federal Mortgage Insurance Corporation that will insure mortgage backed securities issued by private financial institutions.

Under the legislation, the federal government would provide catastrophic insurance for the mortgage market that would pay only after private investors absorbed the first 10 percent of losses. In addition to government backing of the mortgage market, this bipartisan legislative proposal envisions access to the agency’s insurance fund to small, as well as large, lenders, and a subsidized housing fund to provide credit enhancement to make homeownership possible for more families, as well as to support subsidized affordable housing production.

The Corker-Warner plan does a better job of protecting the taxpayer, yet still fails to articulate a key public policy goal that any proposals to rebuild the home finance market must embody: Broad access to affordable mortgage credit for all credit-worthy borrowers. In fact, the bill as currently drafted would lead to an even more restrictive lending market than currently exists today.

Most important, Corker-Warner eliminates the existing affordable housing goals for Fannie Mae and Freddie Mac, establishes a minimum 5 percent down-payment requirement rather than allowing lenders to make down payment decisions based on the credit worthiness of borrowers, and fails to include an explicit duty to serve credit-worthy borrowers protected by civil rights laws. The proposed law also does not establish rules to guide the actions of mortgage servicers that could help prevent future foreclosure crises.

Corker-Warner’s recognition of the continuing and essential role of government in the mortgage market is a major reason this bill is considered a more legitimate proposal, as opposed to the Hensarling legislation, for revamping the secondary housing market.  Yet revamping the housing finance system in a manner without requiring that the system meets the needs of all creditworthy borrowers is a recipe for failure.

The Harvard Joint Center for Housing Studies finds, for example, that roughly 70 percent of net new household formation over the next decade will be people of color. That reality alone demonstrates how critical it is to ensure wide access to affordable and sustainable mortgage credit.

For the restructuring of the mortgage market to be successful, it must be based on fact, not fiction, and history, not nostalgia, of the role of private capital in mortgage finance and the increasing diversity of America’s creditworthy future homeowners.
 
Carr is a distinguished scholar with the Opportunity Agenda and senior fellow with the Center for American Progress. Rice is vice president for the National Fair Housing Alliance.