Congress can’t wait for next crisis to deal with housing finance reform

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“I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction.” — Treasury Secretary Hank Paulson, announcing the conservatorship of Fannie Mae and Freddie Mac,  Sept. 7, 2008.
 
“I am well aware, and regularly express my belief, that conservatorship should never be viewed as permanent or as a desirable end state and that housing finance reform is necessary. However, Congress and the administration have the important job of deciding on housing finance reform legislation, not FHFA.”  — Federal Housing Finance Agency Director Mel Watt, May 13, 2014.
 
Six years after the financial crisis and the nationalization of America’s housing finance system, it is time for us to restore long-term certainty to the mortgage markets and work together to prevent a financial crisis caused by the next housing “bubble.”  Elected officials on both sides of the aisle and many industry groups, from homebuilders to mortgage bankers, agree: Congress needs to act, and the time to act is now.
 
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The further we move away from the 2008 housing finance crisis, the easier it is to forget what took place.  As conservator, the Federal Housing Finance Agency assumed the role of board of directors and management of Fannie Mae and Freddie Mac. The CEOs were dismissed. Dividends were halted. To allow the companies to keep functioning, The Treasury Department had to backstop their obligations with the promise to inject capital if they became insolvent. Ultimately, the Treasury injected $188 billion in taxpayer funds into Fannie and Freddie to keep them solvent. And since global investors shied away due to the uncertainty, the Federal Reserve began purchasing Fannie and Freddie’s mortgage-backed securities.  
 
Today, Fannie and Freddie don’t have one more ounce of additional capital protection than they did before the 2008 crisis hit. But we still rely on them to guarantee about 75 percent of all U.S. mortgages, perpetuating the unacceptable notion that they are “too big to fail.” Even Fannie Mae CEO Tim Mayopolous acknowledges this, admitting that “U.S. taxpayers are still in the first loss position … and that’s not the best approach long-term.”
 
Without comprehensive reform, the road ahead looks bumpy.
 
During the last few years, earnings for Fannie and Freddie have benefited from one-time sources of revenue, including settlement income and nonrecurring recognition of tax assets. While this has helped produce large, one-time profit margins, we’ve also seen post-crisis housing-price spikes decelerate over the last two years. Going forward, both companies’ ability to operate is contingent upon continuing support from the taxpayers.
 
In addition, Fannie and Freddie’s goals and performance in promoting affordable housing have come into question, and they have been bashed from both the left and the right. Some say these goals allow the enterprises to guarantee loans that are too risky; others say Fannie and Freddie’s track records prove that low-income and minority populations are not being served.
 
For example, even though minority populations have grown in many places across the country, African-American and Hispanic homeownership rates are the lowest they’ve been since 2000. The number of first-time homebuyers is still lower than historic norms, while the number of debt-burdened consumers is rising. No matter what you think of the affordable housing goals, Fannie and Freddie’s business models include an inherent tension between their fiduciary duty to shareholders and their public mission of promoting affordability. 
 
The committee-passed bill, The Housing Finance Reform and Taxpayer Protection Act of 2014, (S. 1217) would provide an estimated $5 billion per year in stable funding for affordable rental housing and homeownership. With the addition of financial incentives that are under discussion, we could further improve options for traditionally underserved communities.  
 
S. 1217, also known as Johnson-Crapo, was based on the framework of bipartisan legislation I introduced last year with Sen. Bob Corker (R-Tenn). The bill passed out of the Senate Banking Committee in May by a vote of 13-9, with the support of six Democrats and seven Republicans. When was the last time we’ve seen such broad bipartisan support for a major piece of reform legislation?
 
This proposal was built from a bipartisan negotiation that most Americans indicate they want to see from Congress.  Over a year and a half of expert briefings, meetings with key industry stakeholders, a dozen public hearings, and with the engagement and support of the administration, we worked to craft a careful balance that allows us to transition to a safer and more sustainable housing finance system.
 
Starting over after a new Congress convenes next year is not the answer for housing finance reform. Industry participants have been waiting for new rules of the road for way too long already. While the FHFA and administration might be able to make incremental changes to help homeowners, only Congress has the power to embrace a bipartisan path to restore long-term stability in the housing market. We should do it now and not simply wait until the next crisis.
 
Warner is Virginia’s senior senator, serving since 2009. He sits on the Banking, Housing and Urban Affairs; the Budget; the Finance; and the Intelligence committees. A former telecommunications executive and venture capitalist, he was Virginia’s governor from 2002 to 2006.