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Hot Time, Summer in the City

June 23, 2013

The midsummer solstice has brought Washington, DC not only the predictable onslaught of heat and humidity and the “super-est” of 3 “super moons” this year, but also a freshening of interest in tackling long-term reform of the U.S. mortgage finance system.  Trade groups, interest groups, Wall Street investors and many others have promoted various designs to replace Fannie Mae and Freddie Mac.  But only recently have these efforts begun to coalesce around specific features with evident support among influential Members of Congress.

In February, 2013, the Bipartisan Policy Center’s housing commission on which I served issued its report on critical housing policy issues.  It proposed a system in which a new government owned corporation would provide catastrophic credit insurance for qualified mortgage insurance bonds.  This guarantee would stand behind a deep layer of private risk-bearing capital, and come into play only if those private guarantors failed to honor their obligations to investors.  The proposal resembled in many ways how Ginnie Mae (Government National Mortgage Association) works today. But instead of relying on the Federal Housing Administration (FHA) to provide the underlying credit guarantee on the mortgages in the securities, the BPC proposal would rely on private capital to take on this risk. As the transition to this new system is completed, Fannie Mae and Freddie Mac would be wound down.  The proposed insurance would be available both for homeownership and for rental housing finance, with some slight differences in details.

The BPC proposal itself drew on a series of earlier proposals from a wide range of groups, including the Mortgage Finance Working Group convened by the Center for American Progress, the Mortgage Bankers Association, the Financial Services Roundtable’s Housing Policy Council, NYU’s Furman Center, and quite a few others.  The BPC report was distinguished, however, by its  focusing not on the creation of specified and approved entities to issue securities and take a first loss credit position with a government guarantee to a system that would focus on private risk-bearing credit enhancers and many issuers who would purchase the private risk insurance as well as the government’s. 

The BPC housing commission’s report was highlighted in a Senate Banking Committee hearing in March featuring commission co-chair and former Senator/HUD Secretary Mel Martinez.  It drew significant interest and positive comments from a number of Senators, most notably Sen. Bob Corker (R-TN) and Sen. Mark Warner (D-VA). Rumors began to swirl that these two were collaborating on a draft proposal to implement the basic housing commission recommendations.

Then just last week, a new paper released by the Milken Institute, Moody’s Analytics, and the Urban Institute called for a proposal like the BPC’s – disaggregating the issuance and credit insurance functions, with a catastrophic government guarantee paid for through mortgage fees—with a few important and valuable additional details, especially around the use of a common, government owned mortgage securities issuance platform, and in the creation and funding of a so-called “Market Access Fund” to help provide mortgage credit to underserved and hard-to-serve communities and families.  Authored by a bipartisan quartet of policy experts, the report is another infusion of energy into the discussion.  On the other hand, unlike the BPC report, it lacks any specific recommendations for rental housing finance.

Now it seems as though an actual proposal sponsored by Corker, Warner and perhaps four or more bipartisan colleagues will be put forward the week of June 24, 2013.  Senate Banking Committee Chair Tim Johnson (D-SD) and Ranking Minority Member Mike Crapo (R-ID) have indicated that their first priority is to put the FHA on a firmer footing and that this work will precede any committee consideration of broader mortgage finance reform.  But the release of a Corker-Warner will be hard to ignore, especially if its additional co-sponsors include other Banking Committee members.

The majority leadership in the House Financial Services Committee seems likely to continue to promote the “full privatization” of the mortgage market, with no ongoing federal support like that promoted by the BPC, Corker Warner, and others.  But there also are rumblings that a bipartisan proposal introduced in the last Congress by Reps. John Campbell (R-CA) and Gary C. Peters (D-MI) could quickly become the offer around which the committee’s majority coalesces.  I noted at the time it was introduced that this bill and another introduced around the same time by Reps. Gary G. Miller and Carolyn McCarthy (D-NY) provided an intriguing counterweight to the relatively extreme position espoused by HFSC Chairman Jeb Hensarling (R-TX) and Rep. Scott Garrett (R-NJ), chairman of the subcommittee on Capital Markets and GSEs.  If and when the Corker-Warner proposal surfaces and seems to draw support, it’s possible that one of these bipartisan alternatives could add further momentum in the House.

Still silent since releasing its own White Paper in February, 2011 is the Obama Administration.  There has been no further elucidation of the Administration’s position since its succinct summary of the post-crash mortgage finance landscape.  There are rumors, of course, that the staff drafting Corker-Warner has been consulting regularly with Treasury officials, and that while it doesn’t represent Administration views, the possible proposal may reflect at least some perspectives that the parties would share.  There is also speculation that no firm proposal will emerge from the Administration until the Senate has disposed of – one way or another – the pending nomination of Rep. Mel Watt (D-NC) to be the Federal Housing Finance Agency’s Director.  An actual proposal could force the nominee to navigate a minefield of  detailed questions about any Administration proposal and provide putative reasons to reject his candidacy. Hence the reluctance to issue anything further till the nomination process is concluded.

While there is more consensus on the substance of a future structure than sometimes is obvious, it is by no means unamimous, as evidenced by this Heritage Foundation pre-emptive strike against Corker-Warner. 

So the summer starts with a fresh burst of energy.  And almost certainly, controversy. It’s still unclear if it will it provide more questions or more answers to the vexing question of,  “what will replace Fannie and Freddie?”


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