Senators strike deal on housing reform

Getty Images

The drive to reform the nation’s mortgage market accelerated Tuesday as the leaders of the Senate Banking Committee announced a bipartisan accord on legislation to wind down Fannie Mae and Freddie Mac.

ADVERTISEMENT
The agreement culminated months of work by Committee Chairman Tim Johnson (D-S.D.) and ranking member Mike Crapo (R-Idaho), who plan to release a draft of legislation within the next few days in hopes of holding a markup in the spring.

"There is near unanimous agreement that our current housing finance system is not sustainable in the long term, and reform is necessary to help strengthen and stabilize the economy," Johnson said.

"This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country."

The bill from Johnson and Crapo calls for the slow demolition of Fannie and Freddie, which were seized by the government during the financial crisis of 2008.

While the two mortgage giants are now turning a profit for the government, lawmakers fear federal control of the entities will put taxpayers on the hook for a massive bailout if the housing market collapses again.         

Complicating the work for legislators, Fannie and Freddie have become the central backstop in the mortgage market, owning or backing about 60 percent of all mortgages. The federal government guarantees about 90 percent of all new loans.

The bill from Johnson and Crapo would eventually eliminate Fannie and Freddie, and create a new agency called the Federal Mortgage Insurance Corp. 

It would also require private investors to take the first 10 percent of mortgage losses, before the government would step in to help. 

“This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie, while protecting taxpayers with strong private capital, building the components for a stable secondary market and avoiding repeating the mistakes of the past,” Crapo said.

“Government control of Fannie and Freddie with no private capital to protect taxpayers against losses is unacceptable," he added.  

Housing and mortgage industry officials said they were pleased that the Senate framework appeared to include many of their priorities, including preservation of government backing for the popular 30-year mortgage. 

The measure would also require underwriting standards mirroring those set out under the new qualified mortgage rules, which took effect this year. 

It would set down payment requirement at 5 percent for all homebuyers, except people taking out a mortgage for the first time, who would be required to put down 3.5 percent. 

Jerry Howard, head of the National Association of Home Builders (NAHB) said the framework should produce a “very good bill.”

The White House, which contributed to the draft, released a statement saying the Johnson-Crapo measure required both sides to make difficult concessions to move the debate forward. 

“We support this effort and believe it is a workable, bipartisan approach to complete the biggest remaining piece of post-Recession financial reform,” said White House spokesman Bobby Whithorne. 

Still, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) said he feared that the “window of opportunity to pass sustainable housing finance reform during this Congress is rapidly closing.”

Hensarling noted that many of the components in the Senate bill are part of a measure his committee approved in July. 

Democrats have blasted Hensarling’s plan for not continuing government backing of the 30-year mortgage.

But whether the Johnson-Crapo bill would reduce the government’s role in the mortgage market enough for House Republicans remains to be seen. 

Howard said if the Senate Banking Committee could mark up their housing reform measure before Easter and quickly move it to the floor, it would put “all kinds of pressure” on the House to act.

He said that, despite what are bound to be some remaining differences, lawmakers wouldn’t want to go home and campaign about why they would decline moving forward on legislation to stabilize the housing market and help the broader economy. 

David Stevens, head of the Mortgage Bankers Association, said the Senate could pass a bill before the November elections. 

“I’m hopeful it can gain traction,” Stevens said. 

But to do that it needs a “broad majority in committee to gain momentum for Senate floor.”

He called the overhaul of Fannie and Freddie “the last major outstanding item from the Great Recession that has yet to be resolved.”

But passage of legislation remains a stiff challenge, as it would require the Senate and Republican-led House to reach an agreement in the heat of midterm election politics.

Howard said his biggest concern is that groups on the far right and left would try to derail the legislation.

But Stevens suggested that the structure of outline should appeal to many lawmakers because it works off the premise of protecting taxpayers’ interests first in the mortgage finance system. 

The bill from Johnson and Crapo builds on the framework on legislation from Sens. Mark Warner (D-Va.) and Bob Corker (R-Tenn.), which was co-sponsored by a bipartisan group of 10 members on the Banking Committee.  

"This shows that a bipartisan approach is the best way to get something this important and this complicated across the finish line,” Warner said. 

Corker said Tuesday he loved the product that Johnson and Crapo had produced.

"It's one of the substantive pieces of legislation that we might actually pass," he said. "A month ago, to be candid, because things were moving so slow in committee, I was worried about that.

"I'm pretty optimistic.”

— Peter Schroeder contributed. 

— This story was first posted at 10:21 a.m. and has been updated.