4 takeaways from Senate GSE reform hearing

WASHINGTON — Lawmakers still have a long way to go before enacting reform of Fannie Mae and Freddie Mac, but the first of two Senate Banking Committee hearings examining Mike Crapo's reform proposal could signal how legislative talks will play out in the future.

The Idaho Republican’s proposal, which was released in February, would turn Fannie and Freddie into private mortgage guarantors — competing with other private guarantors — while allowing for Ginnie Mae to provide a government backstop.

“This outline is the byproduct of over a dozen hearings conducted by this committee over the past decade,” Crapo said in his opening statement. “It also incorporates key elements of several housing finance reform plans that have been advanced by thought leaders.”

Crapo’s plan is one of many being discussed to reform the government-sponsored enterprises, including a White House framework reportedly in the works. His bill like others faces an uphill battle in a divided Congress. Still, senators took the opportunity Tuesday at a hearing to examine the plan and question experts about possible areas of agreement.

Above all, both sides of the aisle coalesced around the fact that the current decadelong conservatorships of the GSEs are unsustainable. But with the housing and financial markets both stable, enacting a housing finance bill is low on the legislative priority list.

“It’s always easier to fix the roof of a house when it’s sunny out … and yet because our housing market and our economy are healthy, there appears to be no crisis immediately in front of us,” said Sen. Mike Rounds, R-S.D.

The hearing comes as President Trump’s nominee to lead the Federal Housing Finance Agency, Mark Calabria, awaits Senate confirmation. A number of lawmakers have expressed concern that Calabria might usurp their role in the reform process, which some suspect could serve as a catalyst for long-awaited legislative action.

Here are four things we learned about the appetite for GSE reform from Tuesday’s hearing:

Crapo’s outline praised but lawmakers still can't agree on path forward
Sen. Mike Crapo, R-Idaho
Senator Mike Crapo, a Republican from Idaho and chairman of the Senate Banking Committee, speaks to members of the media on Capitol Hill in Washington, D.C., U.S., on Monday, March 25, 2019. House Democrats formally requested on Monday that Attorney General William Barr hand over Special Counsel Robert Mueller’s report to Congress by April 2. Photographer: Yuri Gripas/Bloomberg
Senators and witnesses from both sides of the aisle applauded Crapo’s efforts, saying his reform outline marked an important step forward.

“Housing, affordable housing and the lack of affordable housing in Nevada is the number one issue, and I know it’s an issue across the country, so I just appreciate the outline that you put out there and the ability to have a starting foundation to have this discussion,” Sen. Catherine Cortez Masto, D-Nev., told Crapo.

However, beyond praising Crapo’s plan, senators found few areas of bipartisan agreement.

“The outline does not address the costs that families all across this country — black, white and Latino, urban, rural, Republican, Democrat — face, and unless we set some real goals and put some real resources into doing this, we’re not going to make the change,” said Sen. Elizabeth Warren, D-Mass.

Others expressed concern that the multiple guarantor system Crapo proposed would harm the market and would return to the same system that was in place before the financial crisis.

“While competitive markets are generally a good thing, competition can have deleterious effects in some circumstances. One needs look no further than Wells Fargo’s false account scandal,” said Adam Levitin, a law professor at Georgetown University, who testified at the hearing. “The intense competitive pressures on Wells encouraged corner cutting and worse.”
Hearing participants backed preserving parts of the current system
A Freddie Mac sign hangs behind employee John Estrada as he works in the borrower contact unit area at Freddie headquarters in McLean, Virginia, U.S., on Tuesday, April 8, 2014. Senator Sherrod Brown, an Ohio Democrat and a member of the Senate Banking Committee, said a bipartisan bill to replace Fannie Mae and Freddie Mac is too complicated and doesn't do enough to address too-big-to-fail concerns or provide assistance for affordable housing. The panel will consider the measure on April 29. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** John Estrada
Unlike other GSE reform plans that propose winding down Fannie and Freddie and repealing their charters, Crapo’s outline would preserve the two GSEs, which was praised by witnesses at the hearing.

The National Association of Home Builders "is pleased that initial reform plans that called for winding down Fannie Mae and Freddie Mac have moderated to allow the enterprises to remain important participants in the proposed new system,” said Greg Ugalde, the chairman of the group's board. “The chairman's outline calls for Fannie Mae and Freddie Mac to become private guarantors, which essentially preserves the current secondary market role of the enterprises and allows the mortgage market to continue to benefit from their comprehensive and well-tested infrastructure.”

Others cautioned the committee on making sweeping changes or eliminating Fannie and Freddie, warning that it could destabilize the market and jeopardize lower-income borrowers.

“Today’s housing finance market is functioning well,” Levitin said. “Most creditworthy Americans are today able to obtain mortgage financing, no matter where they live — metropolitan areas or rural communities.”
But a 'recap and release' plan for the GSEs is unpopular
Sen. Mark Warner, D-Va.
Senator Mark Warner, a Democrat from Virginia, speaks during a Senate Intelligence Committee hearing in Washington, D.C., U.S., on Tuesday, Jan. 29, 2019. North Korea is unlikely to give up its nuclear capabilities, the top U.S. intelligence official said, even as President Donald Trump expresses confidence he can persuade Kim Jong Un to disarm. Photographer: Aaron P. Bernstein/Bloomberg
Perhaps the widest area of agreement among lawmakers was that the Trump administration should not merely recapitalize Fannie and Freddie and release them from conservatorship before structural housing finance reforms are put in place.

“I’m glad to hear such consensus around recap and release would be a disaster,” said Sen. Mark Warner, D-Va.

Although some have argued that the administration should pursue GSE reform on its own because Congress has failed to act, recapitalizing and releasing Fannie and Freddie would have dire consequences, many of the witnesses said.

“Recap and release should not even be on the table for discussion,” said Ed DeMarco, the president of the Housing Policy Council and former acting FHFA director, in response to a question from Rounds about the consequences of the strategy.

“I think that would be going back to the future of the system we had before the crisis,” echoed Mark Zandi, the chief economist at Moody’s Analytics. “It’s just a duopoly like we had before. Maybe more highly regulated and more highly capitalized than before, but they have the same incentives to make the same errors and mistakes they made in the past.”
More fights to come on affordable housing
Sen. Sherrod Brown, D-Ohio
Senator Sherrod Brown, a Democrat from Ohio and ranking member of the Senate Banking Committee, makes an opening statement during a confirmation hearing for Kathy Kraninger, director of the Consumer Financial Protection Bureau (CFPB) nominee for U.S. President Donald Trump, not pictured, in Washington, D.C., U.S., on Thursday, July 19, 2018. Kraninger, a little-known official who has worked for the White House's Office of Management and Budget (OMB) since March 2017, is poised to succeed her boss Mick Mulvaney as director of the CFPB. Photographer: Andrew Harrer/Bloomberg
Senate Democrats were particularly frustrated with the Crapo’s outline elimination of the "duty-to-serve" obligations and affordable housing goals, both of which require Fannie and Freddie to direct resources to low- and moderate-income housing options.

Crapo's outline would replace those components with a Market Access Fund that would “provide grants, loans and credit enhancement to address the homeownership and rental housing needs in underserved and low-income communities.” The National Housing Trust Fund and Capital Magnet Fund would be rolled into the Market Access Fund.

But Democrats pushed back on the idea that a Market Access Fund could completely stand in for the GSEs’ current efforts to address affordable housing.

“The duty to serve and affordable housing goals have to be maintained and we can change the structure at the securitization level without undermining those goals,” Sen. Brian Schatz, D-Hawaii, told American Banker. “It’s become a trade that’s being proposed, and there’s actually no reason to do that.”

Sen. Sherrod Brown, D-Ohio, the ranking member of the committee, framed his comments at the hearing around affordable housing, and asked witnesses to elaborate on the impact of the duty-to-serve obligation.

“Clearly, there is more work to be done to make sure every family can access the homeownership opportunities and rental housing that meets their needs,” he said in his opening statement. “As we begin these two days of discussions, we should start by asking: What housing options do families have today, and what housing opportunities we will make available for families in the future?”

Yet Sen. Pat Toomey, R-Pa., was skeptical that duty-to-serve requirements could exist in a system with multiple guarantors such as the one Crapo proposed.

“If we mandated a nationwide duty-to-serve, doesn’t that potentially discourage some potential entrants to the market?” he asked.

DeMarco agreed, telling Toomey that requiring duty-to-serve “certainly creates a barrier to entry and certainly creates unintended consequences.”