Dems See Little Hope for Housing Finance Reform

PHILADELPHIA — Democrats appear to have given up on housing finance reform.

Despite efforts by President Obama to wind down Fannie Mae and Freddie Mac since their government seizure nearly eight years ago, policymakers attending the Democratic National Convention here believe their current arrangement as wards of the state is tenable for now.

"Fannie and Freddie will remain government agencies," said Rep. Brad Sherman, D-Calif. "They will continue to have underwriting standards that assure that they are actuarially sound and actuarially providing a profit to federal government."

Fannie and Freddie were seized in 2008 during the housing crisis and put into conservatorship. Since then, they have been fully supported by the government, and given a line of credit from the U.S. Treasury. But an arrangement started a few years after that means the government-sponsored enterprises cannot build capital and must pass on all profits to Treasury. That move was designed to force Congress to act as the GSEs' capital buffers dried up.

"Fannie and Freddie are actually on a timeline to going nowhere to actually closing down by 2018. Congress must step up and the president must step up," Susan Wachter, a professor of real estate and finance at the University of Pennsylvania Wharton School, said while speaking at an event here sponsored by Politico.

But the strategy of forcing Congress' hand doesn't appear to be working, in part because Fannie and Freddie are making the government a sizable profit. The two firms are returning more than $10 billion annually to the federal government.

"Right now Fannie and Freddie are basically being used as a piggy bank by the United States," Rep. Michael Capuano, D-Mass., said at the Politico event.

David Stevens, chief executive and president of the Mortgage Bankers Association, agreed that housing finance reform is less pressing because of the line of credit with the Treasury, which "provides them ample capital" and said that he worries about "overreacting" to the capital issue.

Democrats said they are open to discussing housing finance reform and devising a permanent solution to what was supposed to be a temporary fix, but the issue is clearly on the back burner.

"Fannie and Freddie have provided affordable housing to multitudes of Americans and it has worked well in the past we just have to make sure that it comes back to its core mission of providing affordable housing for Americans and not getting into all these side areas that are risky and not their core mission," Rep. Carolyn Maloney, D-N.Y., said in an interview here.

At the Politico event, Sherman predicted Congress will at most "tweak around the edges" as long as Republicans hold either the House or the Senate. House Republican leaders have sought to eliminate Fannie and Freddie, but had trouble winning support from enough GOP lawmakers for a bill to clear the chamber.

Speaking at another event in town sponsored by The Hill newspaper, Rep. John Delaney, D-Md., said that although the current housing market is properly functioning, reform is still needed.

"I think what we need to do is to come up with a more permanent framework for housing finance and what has happened is we have been in an ideological debate about the role government," Delaney of the divide between Democrats and Republicans. "The government has historically done two things in housing, it is providing liquidity and it is pricing risk. What we should be thinking about is how do we get the private market more involved in pricing risk, but keep the government in providing liquidity that will lead to a more stable housing market in the future. That is where I think reform efforts are starting to go."

Stevens said he was more concerned about meeting the housing needs of the future, noting that two-thirds off future housing formations will be from groups other than white non-Hispanics.

"The future homebuyer isn't going to look like the borrowers of the past," Stevens said in a separate interview Wednesday.

He added that the Consumer Financial Protection Bureau's Qualified Mortgage rule, which sets underwriting standards, could impede the flow of housing credit.

"My own sense of this is we need to be diligently focused on trying to get the bureau to relook at the rule itself to make sure it can provide at least as much credit as it is providing right now in the assumption that Fannie and Freddie weren't in their same state," Stevens said.

The rule establishes certain underwriting standards for a mortgage to be considered a qualified mortgage, but also provides an exemption for all loans bought by the GSEs. The exemption is scheduled to last seven years, but it's unclear if the so-called "patch" will get extended after that.

"What the CFPB did," Stevens said, "is they literally delegated underwriting authority over to Fannie Mae and Freddie Mac via the patch … our own view is that the rule should stand on its own two feet."

For reprint and licensing requests for this article, click here.
Law and regulation GSEs Housing Mortgages Consumer banking
MORE FROM AMERICAN BANKER