Americans have been engaged in a great ideological war over the role of government since the founding of the nation, and the latest skirmish regards the future role of the government
in housing. Since the election of Bill Clinton in 1992, the warring parties have become increasingly entrenched and unwilling to compromise in the name of ideological purity. As a consequence, the future regulatory and economic environments affecting the housing and mortgage industries, related industries, and citizens is uncertain.
The Republican goal is to eliminate any government role in the mortgage market (other than through the direct guarantees provided by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture's (USDA) rural housing programs), while the intention of the Democrats is that federal support of the mortgage market be continued to encourage broad homeownership for all citizens. It is around these conflicting aims that the issues revolve.
Two partisan views
As a result of the mortgage security meltdown in 2008, significant taxpayer costs, and the subsequent recession that many contend continues today, members of both political parties agree that drastic reform of the mortgage finance industry is needed. However, each party has proposed a different approach based upon its political philosophy.
The Democrats, reacting first to the mortgage disaster and controlling both houses of the federal government in President Obama's first two years, passed the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010 with less than 10 total Republican votes. The Dodd-Frank Act is considered the most comprehensive reform of the financial markets generally since the 1930s, and introduced new stringent regulations into the issuance of mortgages with its Ability-to-Repay and Qualified Mortgage (QM) standards, as well as new rules on mortgage securitization.
Since its passage, key Republicans and conservative think-tanks have regularly attacked the bill, introducing numerous bills in the House to weaken its provisions. While reform of the Dodd-Frank Act might occur in the future, it is unlikely to occur until 2015 or later due to other political battles, including a potential budget fight later this year over the Affordable Care Act, immigration reform, and midterm elections.
Earlier this summer, House Republicans, led by House Financial Services Chairman Jeb Hensarling of Texas, floated a plan—the Protecting American Taxpayers and Homeowners Act (PATH Act)
—to eliminate federal guarantees on home loans, effectively privatizing the market and closing Fannie Mae and Freddie Mac. Speaking before the House Financial Services Committee on July 23, Rep. Hensarling said
that the Act "Gets government out of the way, helps increase competition, enhances transparency, and gives consumers more freedom to choose the mortgage that is right for them." The Act reflects the conservative viewpoint favoring free markets, open competition, minimal regulation, and small government.
While many industry representatives have spoken favorably of various provisions in the legislation, only the American Bankers Association (ABA)
has indicated support, primarily for the Act's delay of compliance dates for Dodd-Frank mortgage rules and changes in the points-and-fees definitions. Democrats have charged that the bill would eliminate 30-year fixed-rate mortgages. The bill, if passed in the House, will likely fail in the Democrat-controlled Senate.
A third pragmatists' view
Recently, President Barack Obama signaled a sea-change in the historic Democratic position regarding Fannie Mae and Freddie Mac. "First, private capital should take a bigger role in the mortgage markets," Obama said
. "I believe that our housing system should operate where there's a limited government role, and private lending should be the backbone of the housing market."
His statement seems to signal presidential support for the Housing Finance Reform and Taxpayer Protection Act (Corker-Warner Bill)
, a bipartisan bill sponsored by eight members of the Senate Banking, Housing and Urban Affairs Committee on June 25, 2013. The bill would wind down Fannie Mae, Freddie Mac and the Federal Housing Finance Agency (FHFA), create a new Federal Mortgage Insurance Corporation modeled after the Federal Deposit Insurance Corporation (FDIC), eliminate controversial housing goals of the past, and provide a mechanism where small institutions would have direct access to the secondary markets.
Both liberal and conservative politicians expressed early dissatisfaction with the Corker-Warner bill as it presently exists. Liberals feel the bill weakens the country's commitment to affordable housing programs, while conservatives prefer the complete exit of the federal government from housing finance, thereby eliminating all taxpayer risk.
Supporters of the bill contend that, without such a federal guarantee, the market for mortgage securities would shrink, reducing the availability of mortgage financing, especially the 30-year mortgage. At the same time, the bill includes a number of provisions to minimize taxpayer exposure under the guarantee, specifically a requirement that the private sector assume a 10 percent first-loss risk on the mortgage securities, and that the private sector finance the federal fund that could be tapped to cover losses exceeding the 10 percent first-loss guarantee.
Phillip Swagel, a former assistant secretary for economic policy at the Treasury Department under President George W. Bush contends
that, had the 10 percent equity requirement been in place prior to 2008, the federal GSEs (Fannie Mae and Freddie Mac) would have easily made it through the crisis." Mark Zandi, chief economist of Moody's Analytics, agrees
, stating that the requirement would provide a "Fortress financial foundation" and "All but eliminate taxpayers' exposure to risk."
Industry reaction to the Corker-Warner bill has generally been favorable due to its continued government support for mortgage securities. American Banker unequivocally stated
: "A government guarantee is essential to a well-functioning market." Zandi said the bill would "Ensure that a broad number of American households will have access to safe 30-year fixed rate mortgages."
The following entities have also expressed their support, while recognizing that the bill will be amended as it goes forward:
►Co-chairmen of the Bipartisan Policy Center's Housing Commission
►Mortgage Bankers Association (MBA)
►American Bankers Association (ABA)
►National Association of Realtors (NAR)
►Independent Community Bankers of America (ICBA)
►National Association of Home Builders (NAHB)
►American Securitization Forum (ASF)
While the bipartisan bill does not meet the demands of conservatives or liberal policymakers, it offers a reasonable foundation for amendment and eventual agreement. The possible compromises might include some strengthening of the affordable housing guarantees, slight reductions in the industry's 10 percent equity requirement, and limits on the prices of the homes being financed. Trade-offs could also include some relaxation of the Dodd-Frank Act’s provisions. Unlike many issues on which the parties are unwilling to compromise, housing finance appears to be one area where agreement can be reached to the benefit of the industry, homebuyers and taxpayers collectively.
Mike Lewis is a retired business executive and personal finance columnist.