Housing Finance Reform Heats Up as House Financial Services Committee Schedules Hearings

As the release of the Administration’s paper on housing finance reform nears, House Financial Services Committee Chairman Spencer Bachus (R-AL) unveiled on January 25 a tentative Committee hearing schedule announcing housing finance reform hearings on February 9, February 16, and March 1.  The Administration announced recently that it is likely to release its paper sometime in mid-February.  The paper will include proposals for the future of Government-Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac.

Earlier this month, House Financial Services Committee Vice Chairman Jeb Hensarling (R-TX) said that he plans to re-introduce legislation soon that would wind down Fannie Mae and Freddie Mac over a period of five years.  Last week, Financial Services Committee Capital Markets and Government-Sponsored Enterprises Subcommittee Chairman Scott Garrett (R-NJ) called on the Administration to release its plan soon and stated that one of his basic principles for housing finance reform is to avoid an explicit federal guarantee on the securities of any future GSEs.

In anticipation of the Administration's proposals, several D.C.-based policy groups have issued their recommendations for the future of housing finance.

On January 20, the American Enterprise Institute (AEI) released their white paper on GSE reform, entitled  Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market.  The white paper stresses four principles for potential reform, including: moving the housing finance market away from direct government financial support, focusing federal regulation on ensuring mortgage credit quality, putting and keeping federal affordable homeownership programs in the federal budget while avoiding risks to taxpayers and borrowers, and moving to the eventual elimination of Fannie Mae and Freddie Mac as GSEs.

On January 27, the Center for American Progress (CAP) released a proposal entitled A Responsible Market for Housing Finance: A Progressive Plan to Reform the U.S. Secondary Market for Residential Mortgages.  Under the proposal, privately owned firms chartered by a federal regulator would issue mortgage-backed securities backed by explicit government guarantees.  Fees charged on mortgage bonds issued by the firms would finance a catastrophic risk insurance fund that would guarantee payments to investors on the mortgage securities if a mortgage firm became insolvent.  While the federal government would guarantee the cash flows owed to investors in the mortgage securities, the firms themselves would not be guaranteed.  Under CAP’s proposal, multiple firms would jointly issue mortgage securities, a technique meant to increase the liquidity of the bonds by allowing them to continue trading if one issuer were to fail.

The CAP plan would require each “chartered mortgage institution” (CMI) to provide financing for eligible mortgages in all markets, rather than serving only a limited segment of the business such as higher-income portions of that market.  The report states, “With respect to multifamily lending, CMIs that securitize multifamily loans would be required to demonstrate that they are providing housing for working households.  In addition, CMIs would be required to provide service to areas of specific concern identified annually, such as shortages created by natural disasters, rural housing, and small multifamily housing.”

The CAP plan also proposes the creation of a Market Access Fund, financed by a small fee on all mortgage-backed securities.  The Market Access Fund would, on a competitive and shared-risk basis, provide credit enhancement and research and development funds to promising but untested mortgage finance products that could better serve underserved markets.  Market Access Fund credit enhancements, unlike Federal Housing Administration guarantees, would back only a portion of the risk of loss and would be available only for a limited period of time.  HFAs would be eligible to participate in Market Access Fund activities.

The fee on all mortgage-backed securities would also fund the Housing Trust Fund, which provides grants to states for affordable rental and homeownership housing for very low-income families, and the Capital Magnet Fund, which provides funds to community development financial institutions and other lenders to support economic development and affordable housing activities. 

The CAP proposals regarding affordable housing are similar to elements of NCSHA’s white paper on housing finance reform, entitled Future Housing Secondary Market Entities, Their Affordable Housing Responsibility, and the State HFA Opportunity.  NCSHA’s plan calls on the Administration and the Congress to establish a powerful commitment to affordable housing within any future housing GSEs or other secondary market entities and to assess them a fee to support the Housing Trust Fund.  NCSHA’s paper also recommends using the existing, high-performing HFA delivery system to administer the required affordable housing activities.