The Next Barrage in Housing Finance Reform Battle

House Republicans are finally moving forward with legislative action on reducing the government’s role as primary supplier of mortgage finance. The first step will be to start moving a series of largely bi-partisan bills through the House, and pass them along to the Senate. The eight bills are rolling out on Tuesday, focusing on short-term efforts to impact the housing market.

If the legislative initiatives to eliminate Fannie Mae and Freddie Mac are to be effective, they need to be targeted at four things:

First, ending the GSE bailout, which as cost about $150 billion and could get to as much as $400 billion; Second, protecting taxpayers from future losses by further irresponsible behavior by the GSEs, which includes investing in risky mortgages and shirking strict oversight of resource utilization; Third, beginning to create space for the private sector to supplant the GSEs and FHA as 90% providers of housing finance; and Fourth, work with Treasury’s stated goals and intentions in their white paper on GSE reform so that this issue can transcend partisanship and move the housing recovery forward.

I outlined the first three of these goals in testimony in early February that preceded the Treasury paper, and I encouraged the fourth goal in a Washington Times op-ed following the white paper release.

How do the eight bills stack up?

1. “GSE Subsidy Elimination Act” (Increase GSE Guarantee Fees)

To decrease the government’s exposure to housing market risk this bill directs FHFA to begin raising the fee charged by Fannie and Freddie for guaranteeing payment on mortgage investments (g-fee) to a rate FHFA believes the GSEs would have to charge if they were a private company without the backstop of taxpayer cash. The bill is bi-partisan in that it mirrors language in the Treasury white paper in support of raising the g-fee and has further value in that the hirer the g-fee, the more the private sector will be able to compete for business in the mortgage secondary market. For this to be truly effective, Congress must also pass similar language increasing FHA’s g-fee.
(For more, see my testimony suggestion #3.)

2. “GSE Portfolio Risk Reduction Act” (Cap GSE Portfolios and Speed up Reduction)

All research has shown the GSE portfolio does nothing to advance their social mission, so this bill to stop Fannie and Freddie from adding to their portfolio should not be a partisan problem (though that doesn’t mean it won’t anyway). The bill would still allow the GSEs to securitize loans, offer guarantees, and modify mortgages it already owns, but it would also require the GSEs to increase the speed at which they sell off their portfolio so that in the next few years there is little remaining. This would reduce the GSE profit margin and make it harder for them to re-emerge as a private company if full reform failed.
(For more, see my testimony suggestion #7.)

3. “GSE Mission Improvement Act” (End Affordable Housing Goals)

There is no reason to keep the affordable housing goals. Conservatives argue they were partly the cause of the GSE demise. Progressives claim they were ineffective. Either way, they should go, and this bill does just that in eliminating the goals, protecting taxpayers and working in a bi-partisan manner since Treasury suggested getting rid of the goals as well.
(For more, see my testimony suggestion #4.)
(Also see this blog post addressing affordable housing goals.)

4. “Equity in Government Compensation Act” (Put all GSE Employees on the Federal Pay Scale)

There is no reason Fannie and Freddie employees should make more than other government officials, and this bill would progressively transfer the GSEs to the General Schedule pay scale for federal workers. The Congressional Budget Office considers the GSE federal agencies, and Ginnie Mae does similar work but on federal salaries. The bill also would suggest FHFA consider clawing back some of the millions in compensation that went to GSE executives in 2010. Ideally this money would go towards paying back part of the Fannie and Freddie bailout money. This could be the most partisan of the bills since it is a direct attack on the GSEs, but it will be uncomfortable for anyone to defend million dollar salaries for an organization that is in conservatorship.
(For more, see my testimony suggestion #8.)

5. “GSE Credit Risk Equitable Treatment Act” (Forbid GSEs from a QRM Exemption)

The Dodd-Frank Act requires all banking regulators to establish a definition for a very safe, “qualified residential mortgage” (QRM), and then require that banks hold 5 percent of the value of all mortgages originated outside the QRM standard as a means of protecting against systemic risk. This bill would ensure that the GSEs are not exempted from the QRM standards, as some regulators have suggested in the past months. Ideally, this law would require that the GSEs be limited to guaranteeing or securitizing only QRMs while they remain alive, but this bill does a good job anyway of protecting taxpayers, limiting future losses, and helping create room for the private sector.
(For more, see my testimony suggestion #2.)
(Also see this blog post on getting QRM right.)

6. “GSE Debt Issuance Approval Act” (Require Treasury to Approve GSE Debt)

This bill would require Treasury to approve all GSE debt issuance, as is required in the charters of Fannie and Freddie. For years, Treasury executed this authority, but in the 1990s it just decided to slowly stop, and around that time is when things began to get really out of control at the GSEs. This would protect taxpayers by providing additional accountability of GSE activities while they are still around. This is already law so it should not get much of a fight.
(For more, see my testimony suggestion #9.)
(Also see last week’s commentary on Treasury’s regulatory failure.)

7. “GSE Risk and Activities Limitation Act” (Restrict New GSE Activities)

This bill would limit the GSEs to business activities they perform now, and require FHFA to restrict any new program or product offering at Fannie and Freddie. This won’t keep the GSEs from supporting the housing market with their current activities, so there should be little concern about the bill, but it does keep Fannie and Freddie from competing with private sector innovation in the new housing finance sector.
(For more, see my testimony suggestion #7.)

8. “Fannie Mae and Freddie Mac Accountability and Transparency Act” (Require Additional Oversight from FHFA IG)

This bill, which was introduced back in early January as HR 31, but will be considered along side the other legislative initiatives here, requires the Inspector General at FHFA to submit quarterly reports to Congress while the GSEs are in conservatorship. This enhanced accountability will protect taxpayers from excessively risky business practices at the GSEs and limit future losses from today’s activities.
(For more, see Library of Congress bill text.)

Separately from these bills there has already been bi-partisan bill to create a legal framework for covered bonds that was introduced a few weeks ago with a Republican and Democrat co-sponsor. Sen. Schumer has shown interest in moving similar legislation in the Senate, indicating this idea should be on a path to becoming law this year. This will help the private sector as well.

Plus, Rep. Hensarling reintroduced is more comprehensive bill to wind down the GSEs earlier in March. As it stands the bill would need to be amended to effectively remove government involvement in the housing market and is certainly unlikely to pass the Senate if it got through the House. While this bill may not become law it is positive in pushing forward the discussion on long-term reform for housing finance, which is the next step after pushing the initial wave of ideas into the legislative circus ring.