Senate Banking Committee chairman Mike Crapo released a proposal Friday to reform the bailed-out mortgage giants Fannie Mae and Freddie Mac, proposing to eventually release them back into the private sector with diminished roles and subject to competition.
The Idaho Republican’s plan, a three-page paper, does not address several of the trickiest issues that have held up legislation to overhaul the two government-sponsored enterprises since they were taken into government custody in 2008. Nevertheless, it presents a starting point for negotiations between the two parties and the White House to try to resolve Fannie and Freddie’s unusual status as wards of the government.
“We must expeditiously fix our flawed housing finance system,” Crapo said in a press release. “My priorities are to establish stronger levels of taxpayer protection, preserve the 30-year fixed rate mortgage, increase competition among mortgage guarantors, and promote access to affordable housing. I invite my Senate and House colleagues, the Administration and all interested stakeholders to work together to enact this critically needed reform.”
Crapo proposes to retain a government guarantee for mortgage-backed securities, a feature that the housing and banking industries argue is necessary in order to facilitate the existence of 30-year, fixed-rate mortgages, but one that many congressional conservatives oppose.
Ginnie Mae, the government corporation that today guarantees mortgage-backed securities offered by the Federal Housing Administration, would be responsible for guaranteeing securities issued by private guarantors, including reprivatized versions of Fannie and Freddie as well as competitors.
The existing affordable housing goals required of Fannie and Freddie would be replaced with a new “Market Access Fund” that would help extend credit to poorer communities. That provision, as well as a funding stream for affordable housing funds, is a bid to entice Democrats to sign onto the legislation.
The proposal, though, leaves many crucial details unspecified. For instance, it doesn’t say what level of capital the private guarantors would be required to maintain, or how large, relative to the market, they would be allowed to grow. Nor does it spell out the minimum requirements for loans that would be eligible for backing, such as minimum down payments. The plan is also ambiguous regarding the treatment of current shareholders in Fannie and Freddie, many of which are large hedge funds that would be in a position to lobby against legislation.
Crapo has introduced bipartisan housing overhaul legislation before, in 2014, only to see it fail on the Senate floor.
The current situation, although unusual, works well enough for many in the banking and housing industries to prevent Congress from passing legislation to change the system. Nevertheless, some legislators want to pursue reform in order to prevent Fannie and Freddie from ever being released, unreformed, from government oversight.
In recent weeks, the Trump administration has indicated that it is interested in pursuing changes to the housing finance system. This week, it promised a plan for reform “shortly.”
“Protecting American taxpayers by ensuring the safety and stability of the United States housing finance system is a priority for the Treasury Department,” Treasury Secretary Steven Mnuchin said in a statement. “The outline for housing reform legislation released by Chairman Crapo is a productive first step toward that goal, and I applaud him for his efforts.”
