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March 16, 2014

Serious movement on housing finance reform

March 16, 2014

Senators Tim Johnson (D-SD) and Mike Crapo (R-ID) have released their long-awaited proposal to reform the housing finance system. This is a major legislative feat of a sort we’ve forgotten can happen: a bill carefully crafted after extensive and substantive hearings put forth on a bipartisan basis.

It builds on the foundation laid last summer by Senators Bob Corker (R-TN) and Mark Warner (D-VA) and their 10 bipartisan co-sponsors, but it shows clear signs that its authors were listening carefully and benefited from last fall’s hearings, as well as from endless conversations with interested parties from across the political spectrum.

Like its predecessor, Johnson-Crapo would wind down Fannie Mae and Freddie Mac over five years and establish a system under which the government would—standing behind significant private capital—provide a paid-for-in-advance catastrophic guarantee backing standardized mortgage-backed securities (MBS), thus providing the predicate for continuation of the long-term fixed rate mortgage at reasonable interest rates. But Johnson-Crapo also takes some major steps forward.

For one, the bill explicitly states that one of the purposes of the new system is to “facilitate the broad availability of mortgage credit and secondary mortgage market financing through fluctuations in the business cycle for eligible single family and multifamily lending across all” regions, localities, institutions, property types (including properties serving renters), and eligible borrowers. It is essential that we recognize that the contextual, legal, and financial support provided by the government to the housing system is there to serve American homeowners and renters. Profitability of lenders, issuers, guarantors, and servicers is a means to that end (although it was good to see nonprofits’ role recognized also) and protection of taxpayers essential to its sustainability, but the goal is to serve the public who need shelter.

Second, multifamily housing comes out well in this draft. More than one-third of American households rent today, and there is every indication that number will increase, at least in the near term. And affordable rental housing is in short supply. Building on the work of many over the past several years, the bill includes a faster transition plan for multifamily than for single family, retention of effective risk-sharing mechanisms currently in use, affordability requirements, and special attention to under-50-unit properties.

To accomplish these goals, the bill would establish an Office of Consumer and Market Access within the Federal Mortgage Insurance Corporation (FMIC) and give it significant responsibilities. In addition, albeit after a significant wait, it establishes a 10 basis point (.001) user fee to fund a Market Access Fund to promote innovation and experimentation so a new housing finance system meets the fast-changing demographics of the American population. The fee would also provide funding for the previously-established National Housing Trust Fund and Capital Magnet Fund, which are focused on affordable rental housing. The fee is structured with an incentive system to reward those who serve the market better. And there are reporting requirements so the public also knows who is doing a good job and who is not.

Third, Johnson-Crapo sets up a stronger and more comprehensive regulatory system. While there will clearly be issues of coordination among existing regulators, state and federal, and the FMIC, the bill provides the FMIC with critically important powers over those who will participate in the new system.

There is still much work to be done—on this draft and through the entire legislative process. The capital provisions still are too lenient when securities issuers directly approach the government for a guarantee, and too strict for the well-diversified guarantors envisioned as the primary gateway to the guarantee—raising the real specter of another securities-led race to the bottom, this time with a government guarantee. The equal access provisions, while a definite improvement, still raise serious questions, including the timing of funding and whether the incentive plan can be effective. And there are undoubtedly other concerns buried in the bill’s 442 pages.

But we can thank Senators Johnson and Crapo, and all those who worked with them, for moving the ball in a way that actually enables us to see the goal.

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