Time to act on housing finance reform

Sens. Tim Johnson (D-S.D.) and Mike Crapo (R-Ida.), the chairman and ranking member of the Senate Banking Committee, must be doing something right.  Their bipartisan proposal to reform our nation’s housing finance system is attracting critics from both ends of the political spectrum.  It appears the two senators have found the legislative “sweet spot” for housing finance reform.

Some conservatives claim the Johnson-Crapo bill would give the federal government too large a role in the mortgage market. Some on the left insist the bill would restrict access to credit for lower-income families.  Both views are wrong.

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Let’s start with the conservative critique:  The Johnson-Crapo bill proposes to wind down Fannie Mae and Freddie Mac, the two government-run mortgage giants, over a five-year transition period.  It would encourage private capital to assume a much larger share of mortgage credit risk, which today is overwhelmingly borne by the federal government.

Yes, the Johnson-Crapo bill envisions the government serving as the insurance backstop of last resort in the secondary market for mortgage-backed securities. But if we want to preserve widespread access to consumer-friendly products like the 30-year fixed rate mortgage, a government guarantee is essential.

In establishing this guarantee, Johnson-Crapo avoids past mistakes.  Unlike the GSE approach, the guarantee would be explicit, fully paid for, and triggered only after private capital in the “first loss” position has been fully exhausted.  With strong capital standards required throughout the new system, Johnson-Crapo makes taxpayer protection a central goal.

Conservatives must understand that, without clear policy direction from Congress, it is entirely conceivable the GSEs could become permanent wards of the state.  Ironically, those who pursue a pre-Depression vision of a purely private mortgage market may end up hastening this outcome and extending the government-dominated status quo.

For those on the left, they too must understand that the uncertainty surrounding our nation’s housing finance system is a major reason for today’s tight mortgage credit conditions that have hit lower-income families the hardest.  Greater certainty about the future of this system will help make affordable mortgage credit more widely available.  

Ensuring access to safe, affordable mortgages for all borrowers in all geographic markets is a key objective of the Johnson-Crapo bill.  The bill establishes a new Market Access Fund to support innovative products and services for communities whose housing needs are not being adequately met.

To its credit, Johnson-Crapo recognizes the increasing importance of rental homes, a critical source of housing for lower-income and working families. It envisions a continued government backstop in the multifamily secondary market and conditions access to this guarantee on meeting an affordability requirement.  It also proposes a pilot program to improve access to secondary-market financing for smaller rental properties with fewer than 50 units.

Over the past year, Sens. Johnson and Crapo have convened an extensive series of hearings examining the key elements of a new housing finance system. The thoughtful, deliberate approach they have taken is a model for how a Congressional committee should legislate on a subject so complex and with the potential for so many unintended consequences.

Building on the solid legislative work of Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.), who helped renew Congressional interest in reform last year, Johnson-Crapo makes a number of positive adjustments.

It provides greater detail on the transition to the new system with a focus on preserving market stability and protecting the taxpayers.  

It makes explicit that the Federal Mortgage Insurance Corporation (the federal agency at the center of the new system) would guarantee a single, common security.  A common security is essential to promote mortgage liquidity.

And Johnson-Crapo provides greater clarity on how financial institutions of all sizes and types would be able to access the new government-guaranteed secondary market, an important goal of any new system.

Sure, a bill of this magnitude will spark lots of questions. But that’s the purpose of the legislative process – to explore all the critical issues and make improvements where necessary. We are encouraged that the Senate Banking Committee will mark-up the Johnson-Crapo bill later this month and urge the full Senate to take action before year’s end.

Members of both political parties can agree that today’s government-dominated housing finance system is unsustainable. It limits the choices available to consumers and imposes excessive risk on the taxpayers. More than five years after the conservatorships of the two GSEs, it’s time to put in place a new housing finance system that can more effectively meet our nation’s diverse housing needs and contribute to a fuller economic recovery.  We commend Sens. Johnson and Crapo for moving us much closer to this goal.

Martinez served as senator from Florida from 2005 to 2009. He was secretary of Housing and Urban Development under President George W. Bush from 2001 to 2003. Mitchell served as senator from Maine from 1980 to 1995, and was Senate Majority Leader from 1989 to 1995. Martinez and Mitchell are co-chairs of the Bipartisan Policy Center's Housing Commission.