Four Predictions About Future Housing Finance Reform
On September 26, National Mortgage News published an article titled Four Predictions About the Future of Housing Finance Reform.
Four Predictions About the Future of Housing Finance Reform
Forecasting the future of Fannie Mae and Freddie Mac is always a tricky business. Just ask the firms’ former executives, who in 2007 still thought the companies were invulnerable.
Yet certain conclusions can already be drawn about the effort to unwind the two government-sponsored enterprises and set up an entirely new housing finance system, including whether it will include a controversial government guarantee.
Following are key predictions on how the debate is likely to play out:
1. A final bill will include a government backstop
Although House Financial Services Committee chairman Jeb Hensarling is still pushing a reform bill to end the government’s significant role in the housing market, he is having difficulty getting it through the Republican-controlled chamber. Housing groups are aggressively lobbying members, and many lawmakers are unwilling to vote in opposition to a government guarantee when the Senate and President Obama are insisting that a guarantee be part of a final bill.
It has become clear therefore that the eventual bill coming out of the House will likely resemble the bipartisan Senate legislation sponsored by Sens. Bob Corker, R-Tenn. and Mark Warner, D-Va. That bill includes a government backstop in the event of catastrophic losses.
The House bill “will be something that moves somewhat in the direction of” the Corker-Warner legislation, Corker told attendees this week at SourceMedia’s Mortgage Regulatory Symposium.
He was seconded by a panel of experts, who said any final bill would keep the government in the housing market.
Assuming “something will pass…it will have a secondary government guarantee,” said Phillip L. Swagel, a former Treasury official in the Bush administration who is now a professor at University of Maryland School of Public Policy. “I think everybody understands that.”
2. Corker-Warner’s proposed 10% equity threshold will come down
One of the most important provisions of the Corker-Warner bill is a requirement that private investors take a 10% first loss position for any loan or security that is backed by the proposed Federal Mortgage Insurance Corp.
The figure is already a lynchpin of debate, with housing and industry groups arguing it should be substantially lower.
Corker signaled on Tuesday that he will fight efforts to weaken it.
“I think it’s very unlikely to come down,” Corker said. “I’ve actually been pretty heartened by the fact that even the more progressive members…of the Senate Banking Committee have seen this 10% as important.”
Speaking to the crowd of bankers and mortgage lenders, he added: “I know that many of you are going to try to dwindle this down. I know there are a lot of people who support this bill but want to see capital reduced. I hope all of you are very unsuccessful and we keep it as it is.”
Yet many observers predict that the number will inevitably come down amid pressure from many of the same groups that are giving Hensarling trouble on the House side.
“The 10% sounds really good to get a lot of the Republicans and some of the fiscal conservative people in line here, but the 10% capital we think is going to be adjusted down,” said Paul Miller, a managing partner with FBR Capital Markets. “The actual equity would be much lower, in the 3%-5% level.”
But others said conservatives will resist a dramatic decline.
“We’ve only really seen Corker just start to reach out to the more conservative members of the Senate Banking Committee,” said Mark Calabria, head of financial regulation studies at the Cato Institute. “And they see 10% as a floor.”
Still, Calabria acknowledged it would likely be reduced by the time it cleared both houses of Congress.
“I believe it will be ultimately less than 10% that comes out,” he said.
3. Affordable housing remains an obstacle
Consumer groups are already angry over both GSE bills’ treatment of affordable housing. While the House bill largely avoids the issue, the Senate bill would create the Market Access Fund, an office within the Department of Housing and Urban Development designed to promote rental housing and assist low-income and underserved areas.
Yet the Senate provision is a far cry from the contentious affordable housing goals that Fannie and Freddie once had to comply with and that many conservatives say caused, or at least contributed to, the financial crisis. It is also distant from the affordable housing trust fund created as part of the 2008 bill that established the Federal Housing Finance Agency. That trust fund would have used profits from Fannie and Freddie to fund affordable housing projects. The GSEs failed before any such funds were deposited.
Many see growing pressure on Senate Democrats to strengthen the affordable housing provisions of the Corker-Warner bill. Yet GOP members are likely to protest any such measures.
“It will be a big difficulty,” said Swagel. “It will be a very hard. On the right, they will want that as low as possible…It’s going to be a big obstacle getting that done.”
Calabria said that while Hensarling may be willing to give some ground on a government guarantee, he might take a hard stance in opposing affordable housing provisions.
“It’s important to keep in mind that it doesn’t get out of conference without Hensarling’s support,” he said. “Ultimately, you have to make some choices. One way Hensarling will be able to declare victory is to push back on housing goals and a housing fund.”
4. The longer GSE reform takes, the harder it gets
Lawmakers are in a very tight spot when it comes to enacting GSE reform. The battles over the budget and debt ceiling are still raging, making it extremely difficult to pass a housing finance reform package this year.
Yet next year, the political environment doesn’t significantly improve, with a small window of opportunity before lawmakers become consumed with their next election. While the 2014 midterm elections could hand Republicans control of the Senate, any final piece of legislation would still have to be bipartisan to have any chance of enactment.
More importantly, the politics of the issue become more challenging as Fannie and Freddie continue to make money–and are handing over those profits to the government.
“It gets more and more difficult,” Corker said. “People look at the GSEs and say, ‘Look how profitable they are.'”
As Fannie and Freddie make more money, the desire to upend the status quo could rapidly fade. That makes it more likely that the government permanently nationalizes the two GSEs.
“If nothing’s done, eventually the profits, whatever they are, will be spent and the firms will become part of the government forever,” said Swagel. “I think that’s the worst outcome of all.”
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About Safeguard
Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders, and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally. Website: www.safeguardproperties.com.
