Momentum for scrapping mortgage giants

Greg Nash

The dissolution of federal mortgage giants Fannie Mae and Freddie Mac is becoming a stronger possibility thanks to a burst of activity in the Senate.

Lawmakers are rallying around a core set of principles crafted by Senate Banking Committee Chairman Tim Johnson (D-S.D.) and ranking member Mike Crapo (R-Idaho), providing real hope that legislation might finally move forward after years of delays.

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“In a Congress that has been this divided, to have a bipartisan bill by a well-respected committee chairman and a well-respected conservative Republican member. That’s big,” said Paul Leonard with the Financial Services Roundtable’s Housing Policy Council. “We think the people that are on the bill give it a lot of credibility.”

The Johnson-Crapo proposal would eventually dismantle government-controlled mortgage giants Fannie and Freddie, and replace them with a Federal Mortgage Insurance Corporation (FMIC) over a period of at least five years.

In order to reduce the government’s role in the market, the new agency would charge fees to provide a federal backstop on mortgage-backed securities and would only step in to cover losses once private investors have exhausted their 10 percent in capital reserves. 

The new agency’s underwriting standards are expected to set down payment requirements at 3.5 percent for first-time homebuyers and at 5 percent for most other borrowers.

While the plan is not a finished product — the committee is holding a markup April 29 — lawmakers and housing industry leaders are putting their weight behind the Johnson-Crapo plan.

“There clearly is a lot more momentum, and there seems to be a coalescing around some core common principles,” David Stevens, head of the Mortgage Bankers Association, told The Hill.

Jerry Howard, head of the National Association of Home Builders, said he’s heard a majority of senators could back the proposal. If that bears out, it could apply considerable pressure on House Republican leaders to take up the issue.

A number of different bills have been offered to revamp the housing finance system since the crush of the 2008 crisis.

Since Fannie and Freddie were taken over by the government in 2008 and given $188 billion in taxpayer funds to stay afloat, they have become the central backstop in the mortgage market, owning or backing about 60 percent of all mortgages. 

All told, the federal government guarantees about 90 percent of all new loans.

Stevens and others are pointing to the Senate measure as the best chance at rolling back federal involvement, since it has backing from members of both parties.

“I don’t see any purely partisan effort truly making the difference,” he said.

Howard said he doesn’t see any way that a “piece of legislation of that magnitude can get done in anything but a bipartisan manner.”

The desire to have buy-in from both parties could sideline proposals from House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and panel ranking member Maxine Waters (D-Calif.).

Industry advocates like aspects of both of those bills, but they are looking to the Senate’s bipartisan effort as the best chance for action.

Stevens called Johnson-Crapo the “second iteration” of the bipartisan plan crafted by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) last year, which quickly picked up Democratic and Republican supporters, and was considered a breakthrough at the time.

Hensarling actually took the first step on housing finance reform, proposing a major bill and steering it through his committee in July. But the effort has stalled since then, and many note that his plan differs significantly from other ideas, regarding the role of the government in the housing market.

Republicans are uneasy about allowing the government to maintain too much involvement in the mortgage market, preferring to shift the balance back to the private sector. 

But Democrats and industry advocates insist the housing market cannot function properly without some form of a government backstop in case of a catastrophe.

“Certainly our view, and I think the view virtually across the board, is that there has to be some level of a federal guarantee,” said Joseph Pigg, vice president and senior counsel for the American Bankers Association. “I think Johnson-Crapo is likely the framework.”

Supporters hope that, if a Senate bill can have a strong showing, it could provide a slim window to get a major piece of legislation done this year.

Stakeholders say Johnson and Crapo have done the legwork to give the plan legitimacy, and they are continuing to reach out to a range of interested parties as they put it together.

While the bill isn’t perfect, “it’s as close as they could come,” Howard said.

Still, while the plan enjoys support from the political center, there have been arrows from the right and the left, making an already uphill climb a bit steeper.

Community groups and liberal lawmakers concerned about affordable credit have been slow to warm to it, and conservatives are balking at the size of the government’s footprint in the plan.

And everyone involved acknowledges that the upcoming markup is just the latest in a process that has already run several years, and one that many expect to run at least a few more.

“You’re dealing with a $5 trillion market that you’re reforming. It’s something that you can’t get wrong,” said Paul Merski, vice president for congressional relations at the Independent Community Bankers of America.