Senate Banking Committee Considers Housing Finance Reform
On June 29, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on “Principles of Housing Finance Reform,” marking the Senate’s first formal step this year to discuss the mortgage finance system, including the future of Fannie Mae and Freddie Mac, the mortgage companies that were placed into government conservatorship more than eight years ago. Witnesses included The Honorable David H. Stevens, President and Chief Executive Officer of Mortgage Bankers Association, Edward J. DeMarco, President of the Housing Policy Council of the Financial Services Roundtable and Michael D. Calhoun, President of the Center for Responsible Lending.
In his opening remarks, Chairman Mike Crapo (R-ID) stated that reforming the housing finance system is one of his key priorities in this Congress, expressing his commitment to preserving an affordable, accessible 30-year fixed rate mortgage, maintaining strong private capital to absorb losses from market downturns and incorporating existing market infrastructure into the reform process. Ranking Member Sherrod Brown’s (D-OH) opening remarks focused on the importance of including a wide range of stakeholders in the housing finance reform discussion to ensure that the nation’s housing finance system provides equitable access to both small lenders and all creditworthy borrowers.
Bipartisan Reform Principles
The hearing presented several potential avenues for bipartisan cohesion around housing finance reform. The prevailing sentiment was the need to transfer credit risk away from taxpayers by ending the government’s conservatorship of Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises, or GSEs). With the federal government maintaining control over the GSEs, taxpayers would be liable for approximately $200 billion given another economic downturn, according to witness Michael Calhoun. This risk, he argued, must be transferred away from the taxpayer and onto private institutions through the use of down payments, loan-level private insurance and loss-absorbing private capital that protects taxpayers from downward fluctuations in the market. (It should be noted that the GSEs’ multifamily business lines already include significant risk-sharing to protect against losses on mortgage-backed securities and were not a source of losses during the housing crisis.)
Additional areas of bipartisan agreement included principles such as:
- The 30-year, fixed-rate mortgage is a powerful tool for homebuyers and should be preserved,
- There must be an explicit government guarantee on all mortgage-backed securities (MBS) to create certainty in the market,
- Community banks and credit unions require increased access to mortgage markets, and these groups’ interests should be represented in housing finance reform discussions,
- The existing market infrastructure should be preserved as much as possible to leverage the GSEs’ institutional knowledge, and
- Any transition away from the current system must be orderly and deliberate due to potential market disruptions associated with this change.
This was the first in a series of hearings on housing finance reform that Chairman Crapo has arranged while simultaneously working to draft legislation with input from housing stakeholders. While this recent hearing focused on areas of bipartisan consensus, there remains complicated and risky details that make housing finance reform particularly difficult in a housing market that accounts for nearly one-fifth of the nation’s economy.
Stakeholders continue to disagree on what type of system would replace the GSEs and how a reformed system would serve all market participants. David Stevens cautioned against the concentration of regulatory power within the Federal Housing Finance Agency (FHFA) and called proposals from small lenders and consumer groups to recapitalize Fannie Mae and Freddie Mac “a distraction,” while Edward DeMarco recommended using Ginnie Mae as a building block for a new housing finance system and Michael Calhoun emphasized the importance of accessibility for small lenders. Nonetheless, all witnesses were supportive of common principles across reform proposals.
There was also discussion of ensuring access to affordable housing for low- and moderate-income borrowers, underserved communities and rural communities, all of which have been historically excluded by the private market. Both Senators Thom Tillis (R-NC) and Elizabeth Warren (D-MA) made statements regarding the importance of considering affordable rental housing in housing finance reform. Sen. Tillis focused on the issue of regulatory costs, such as land use and zoning restrictions, which can inflate the price of affordable housing projects that push many low-income renters out of the market, while Sen. Warren’s comments focused on the effect that low homeownership rates have on the rental market and the current affordable housing crisis, citing the National Low Income Housing Coalition’s (NLIHC) recent Out of Reach 2017 report. “Any effort to reform our housing finance system must address this [affordable housing] crisis. If it doesn’t address this crisis, then it doesn’t address the problem in front of us,” said Sen. Warren. When asked whether they agreed, the hearing’s witnesses replied “yes,” “yes” and “absolutely.”
Enterprise’s Position on Housing Finance Reform
This recent hearing on the Principles of Housing Finance Reform builds on earlier bipartisan efforts to address the fate of Fannie Mae and Freddie Mac. In 2014, a bipartisan group of Senators, led by Sens. Tim Johnson (D-SD) and Mike Crapo (R-ID), passed the Johnson-Crapo Housing Finance Reform bill out of the Senate Banking Committee, the most substantial step that Congress has taken towards housing finance reform. The Johnson-Crapo bill included several of Enterprise’s recommendations for multifamily reform and was a positive bipartisan effort towards creating an affordable and sustainable mortgage market. Despite the optimistic tone of yesterday’s hearing, housing finance reform remains complicated and many substantive issues will need further clarification as the Banking Committee works with stakeholders to draft new legislation.
Enterprise will continue to advocate for America’s low- and moderate-income families, many of whom are renters, in any effort to reform the nation’s housing finance system. We support establishing an explicit, limited and paid-for government guarantee on qualifying single-family and multifamily mortgage-backed securities, as well as preserving the GSEs’ current multifamily businesses and ensuring that they continue to focus on affordable rental housing. Enterprise also supports increased resources to the National Housing Trust Fund and the Capital Magnet Fund, both of which face threats in President Trump’s proposed fiscal year (FY) 2018 budget request. We urge broad access to the mortgage market and sustainable pathways to homeownership for all eligible borrowers, particularly those in low-income urban and rural areas.
We look forward to continuing to work with members of the Banking Committee, our partners and other stakeholders as reform legislation takes shape.
This post was co-authored by Olivia Barrow and Shaun-Dae Clark.