New House Mortgage Reform Bill: Federal Guarantee, No Affordable Housing Requirements

September 10, 2018

House Financial Services Committee Chair Jeb Hensarling (R-TX) released a section by section summary of yet another mortgage finance reform bill on September 6, 2018.  He was joined by Reps. John Delaney (D-MD) and Jim Himes (D-NY) as cosponsors.

The drop marks Hensarling’s final surrender to the inevitable endorsement of a full faith and credit guarantee for conventional mortgage backed securities.  That is a welcome headline.  But specific legislative provisions described in the summary would codify a system where wealthy, high credit quality borrowers would be served through the new guarantee system through government approved credit enhancers and those with lower credit and incomes needing lower down payments would be relegated to the government’s credit insurance programs like FHA, VA or priced out of the market altogether.  And while the draft makes a nod to the need for the new “Private Credit Enhancers” at the heart of the proposal to make credit broadly available across diverse borrowers, the proposal’s details suggest this is more a wish than a promise.  There is no stated obligation on the new guarantors to cross subsidize borrowers or expand credit access.  This likely would exacerbate current wide disparities in how communities of color are treated by the mortgage system by codifying into law constraints that would disproportionately affect them.

Loans eligible for the new securities guarantee would have to have at least 5 percent down.  The summary would require further private credit insurance for loans between 85 and 95 percent LTV, an unexplained change from the long-standing requirement for loans with LTVs above 80 percent. It would require “bank like” capital levels for the “Private Credit Enhancers” for the full outstanding balance of insured debt standing in front of the Ginnie securities guarantee, and require them to use credit risk transfer techniques to further de-risk their books.  

Lastly, the summary would require loans backing the securities to meet the “regulatory and statutory” standards of a Qualified Mortgage (QM) – which under present regulations would limit maximum debt to income ratios to 43 percent.

These constraints – maximum 95 percent LTV, bank like capital requirements on credit enhancers, and application of the QM standards without allowing for compensating credit quality factors – make it likely that only the most qualified borrowers would be served by the proposed system.  Many low wealth, moderate income families almost certainly could not meet the qualifying standards, and many of those who could would find the amounts charged by private enhancers using bank like capital excessive and poor competition for FHA, VA or other direct government credit enhancements.  

This would be a significant difference between today’s regime where Fannie and Freddie must meet regulatory housing goals to assure at least a minimal level of service to LMI borrowers and communities and offer to finance loans with down payments as low as 3 percent, and one where there were no such requirements.

In lieu of today’s access regime, which features the housing goals, affirmative obligations to broadly serve credit markets and specific “duty to serve” requirements, the draft would impose a fee on mortgages backing the new securities to finance directly programs like the Housing Trust Fund, Capital Magnet Fund and other appropriated programs.  This is similar to fees proposed as part of most reform proposals, including the ill-fated Corker-Warner reboot released in 2018, whose shortcomings I analyzed here.  It is an important concession.  But it is no substitute for a comprehensive commitment to broad credit access through a new federal guarantee.

Both Mssrs. Hensarling and Delaney are retiring from Congress at the end of 2018.  There is no chance this summary will result in legislation that moves in the Congress any time soon.  The draft represents a welcome end to Mr. Hensarling’s stubborn opposition to a government guarantee in the conventional market.  But it needs much work to meet even a threshold standard for attention to the needs of LMI and minority aspiring homebuyers.