Banking Committee Holds First GSE Reform Hearing
The Senate Banking Committee yesterday held the first of two scheduled hearings to examine Committee Chair Mike Crapo’s (R-ID) previously released outline for reforming the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. NCSHA previously summarized Crapo’s proposal in our blog. The second hearing takes place today.
In his opening statement, Crapo expressed disappointment that the GSEs have remained in conservatorship for over 10 years without Congress passing reform legislation. Declaring “the status quo is not a viable option,” he reiterated his previous statements that the Committee would consider reform this Congress, stating “the time is now to resolve this issue.”
Committee Ranking Member Sherrod Brown (D-OH) thanked Crapo for holding the hearings and said the Committee has not focused enough on housing in recent years. The focus of any housing finance reform legislation, Brown argued, should be preserving access to affordable housing options for low- and moderate-income Americans and other underserved markets.
While Brown’s opening statement did not directly address Crapo’s outline, he implied he had substantial concerns. Brown also expressed concerns that the Federal Housing Finance Agency (FHFA) has yet to transfer Fannie Mae and Freddie Mac’s annual contributions to the Housing Trust Fund and Capital Magnet Fund to HUD and Treasury.
Reactions to Crapo Proposal
There was no consensus among the witnesses about Crapo’s plan. Ed DeMarco, president of the Housing Policy Council and former director of FHFA, said the Crapo bill represents an emerging consensus among policymakers that he hoped will prompt Congress to finally enact legislation. Later, in response to a question from Crapo, DeMarco said he strongly supported a provision of the plan that would allow mortgage-backed security (MBS) issuers to insure their securities through Ginnie Mae. Ginnie Mae securities, DeMarco argued, are sought after by investors across the world, and expanding Ginnie Mae insurance to include MBS composed of conventional loans will increase market liquidity.
Mark Zandi of Moody’s Analytics told the Committee that, if they remembered any one thing from his testimony, it should be the housing finance system is in critical need of reform and the Crapo plan is an excellent proposal. Zandi said failing to amend the status quo would be a serious error that would eventually incentivize Fannie Mae and Freddie Mac to make the same mistakes they had made prior to the economic downturn.
Zandi received pushback from Senator Catherine Cortez-Masto (D-NV), who asked him about a Washington Post op-ed he co-wrote last year advocating for reform that establishes a single government-backed mortgage guarantor. He replied that such a system would be his preference, but that it is not politically possible. Because it is critical Congress take action on housing finance reform, he has decided to back the Crapo proposal, which he thinks is strong even if it’s not his preferred proposal.
Sue Ansel, president and CEO of Gables Residential, who was speaking on behalf of the National Multifamily Housing Council and the National Apartment Association, called the Crapo plan a good start but raised questions about how the bill would impact the multifamily housing market. She called on the Committee to take into consideration the unique needs of the multifamily housing finance market and the role Fannie Mae and Freddie Mac will play in the future. She pointed out that both GSEs’ multifamily operations performed strongly throughout the housing crisis and argued that a government role was necessary to secure financing for projects that do not serve high-end markets.
In a similar vein, Greg Ugalde, a home builder from Connecticut who currently serves as chair of the National Association of Home Builders (NAHB), thanked Crapo for his plan and expressed NAHB’s support for its broad principles. Ugalde also urged that Congress maintain Fannie Mae and Freddie Mac’s multifamily housing operations. In his written testimony, Ugalde said NAHB supports an enhanced role for state and local HFAs in the housing finance system; his testimony did not offer a specific proposal or more details.
The other witnesses expressed stronger concerns about Crapo’s plan. Adam Levitin, a law professor at Georgetown University, argued Congress and FHFA have already made a number of reforms to the housing finance system that have pushed Fannie Mae and Freddie Mac to operate more effectively and responsibly. As a result, he contended, the current housing finance system is functioning pretty well overall and supporting liquidity in all housing markets. The Crapo plan, he said, would amount to a radial experiment and replace a working system with one that is completely untested. If Congress were to advance reform, he told the Committee, they should develop a system with a single guarantor acting as a government utility. Committee member Brian Schatz (D-HI) strongly agreed with this approach.
Hilary Shelton, Washington Bureau director and senior vice president for advocacy and policy at the National Association for the Advancement of Colored People (NAACP), did not directly mention Crapo’s proposal but cautioned that any major changes to the housing finance system could end up curtailing the availability of credit for low- and moderate-income consumers and borrowers of color. The Crapo proposal, by eliminating the GSEs’ affordable housing goals and other mission-related requirements, would further widen the homeownership gap between whites and households of color as there would be no incentive for guarantors to support lending in underserved areas.
Senator Mark Warner (D-VA), who drafted bipartisan housing finance reform legislation with then-Senator Bob Corker (R-TN) last Congress, pushed back on Shelton’s and Levitin’s criticisms. He pointed out that current law gives the FHFA director wide latitude to unilaterally suspend a number of the GSEs’ affordable housing requirements and activities, including the affordable housing goals and Duty-to-Serve rule. The only way to preserve the system’s support for affordable housing, he said, is to pass reform that codifies such support into law. DeMarco and Zandi agreed with Warner.
Affordable Housing Concerns
Several Committee Democrats used their questions to highlight their concerns that the Crapo plan, which would eliminate the affordable housing goals and Duty-to-Serve requirements, would diminish financing options for affordable homeownership and rental housing lending. Brown asked Levitin and Shelton whether they felt the Crapo plan would adequately ensure the availability of credit for all markets. Both responded that, by eliminating the affordable housing goals and other requirements, the Crapo proposal would result in less lending for rural, low-income, and minority communities. Brown posed a similar question to Zandi, who argued that such an impact could be avoided if the Crapo proposal were to require that guarantors maintain a national market presence.
Senator Elizabeth Warren (D-MA) asserted that the Crapo plan to replace the affordable housing goals and other GSE affordable housing initiatives with contributions to the Housing Trust Fund, Capital Magnet Fund, and Market Access Fund would be wholly insufficient to meet the nation’s affordable housing needs. She referenced her own recently released legislation that would substantially boost funding for the Housing Trust Fund and Capital Magnet Fund and asked Zandi whether the Crapo plan would truly provide enough assistance. Zandi said that it would not and that he strongly supported her legislation. He agreed with Warren that the federal government needs to make a much larger investment in affordable housing, but he said he is not sure it is wise to expect the housing finance system to provide a large share of that investment.