FHA Bill, Housing Finance Reform in Limbo After Senate Panel Vote

WASHINGTON — Legislation to reform the Federal Housing Administration sailed through the Senate Banking Committee on Wednesday, but the bill's future, along with that of broader, comprehensive mortgage reform, remain up in the air as Congress prepares to break for the August recess on Friday.

Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, the top Republican on the panel, said the committee plans to turn its efforts to Fannie Mae and Freddie Mac when lawmakers return in September, with some members already urging the leaders to pair the FHA bill with reforms to the government-sponsored enterprises.

Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., introduced legislation to unwind the entities and establish a new mortgage finance regulator earlier this summer, and have been vocal about the need to move reforms to the FHA and the GSEs together. Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, has advanced his own comprehensive legislation out of the committee, which proposes more sweeping changes to the FHA and lacks a government backstop for mortgage-backed securities.

"It's my understanding that we're going to take up GSE reform when we get back and that the FHA bill that we're contemplating today would be part of a larger package that would deal with all of housing finance before we try to progress on the floor," Corker said at Wednesday's markup. "I appreciate the fact that you all stated that and I look forward to working with you towards that end."

Still, it's not clear that Johnson and Crapo have fully committed to that strategy over moving the FHA legislation as a standalone bill.

"Chairman Johnson is committed to working in a bipartisan fashion to advance the FHA Solvency bill and more comprehensive housing finance reform when the Senate returns from the August work period," said a Democratic committee aide. "The goal is to get both efforts across the finishing line and all options remain on the table for how that gets done."

Crapo indicated after Wednesday's markup that his work with Johnson on the GSEs is still in its early stages.

"At this point I'm not going to discuss — and actually don't have substance to discuss, because we're putting together principles and developing a framework," he said, declining to speak on how much the lawmakers are likely to pull from the Corker-Warner legislation.

Johnson and Crapo are likely trying to take advantage of growing momentum around GSE reform, observers said, and their willingness to try and tackle the issue suggests the two have forged a solid working relationship.

"I think what has probably happened is that negotiations and drafting went reasonably well on the FHA bill, and they have some momentum going, so both sides figure they should take a stab at a comprehensive bill," said Brandon Barford, a vice president at ACG Analytics. "They could be somewhat close in terms of what they want to do moving forward, or, more likely, close enough in terms of trust and respect to move forward — they have no qualms about going out on a limb and trying to work something out."

A key political driver for lawmakers in deciding whether or not to pursue a narrow FHA bill or broader reform is likely to come at the end of the fiscal year in September, when the agency is expected to determine whether it needs to accept taxpayer funds from the Treasury Department to bolster its cash reserves.

"I suspect the odds of anything becoming law is heavily determined by what exactly shows up at the end of the fiscal year at FHA," said Jeb Mason, a managing director at the Cypress Group.

If the FHA's fiscal woes continue, that could persuade lawmakers to move forward with legislation absent changes to the broader mortgage finance market, despite ongoing divisions in the Senate and House plans.

"If FHA continues to show a shortfall or if we need to transfer funding from Treasury, that could provide enough of a boost to get some kind of FHA reform over that final hurdle," said Edward Mills, a policy analyst at FBR Capital Markets.

He added: "What gives me some faith is that you could possibly see … the Senate agreeing to some additional constraints on FHA spending — lower loan limits or focusing more on first-time homebuyers. Those are things that are in the realm of reasonable negotiations."

But other observers were less optimistic about the possibility of standalone reform, because it could serve to distract from the larger debate.

"Broad-based FHA reform is a lynchpin of the House Republican mortgage finance plan and I simply do not see them as willing to accept a targeted fix when it would weaken their leverage on facilitating comprehensive, mission-focused FHA reform," said Isaac Boltansky, an analyst at Compass Point Research & Trading.

Alternatively, if the FHA says its finances are improving this fall it could buy lawmakers more time to pursue negotiations around broader legislation.

"If FHA doesn't show a big capital hole, then there's less urgency to do FHA reform, so you can take your time with comprehensive reform. That would be the tendency in both chambers," said Mason.

Still, the hurdles to comprehensive reform remain numerous, despite signs of movement in both chambers. Hensarling's proposal, which gained no Democratic support and lost two Republicans in a committee vote, is also likely to face some opposition in the full chamber, if and when it is considered in the fall. If Johnson and Crapo decide to pursue a plan similar to the Corker-Warner bill, it will contrast sharply with the House effort, which provides no government backstop for the mortgage-backed securities market. Smaller matters, like the role for affordable housing, will also need to be hammered out.

Even if both chambers managed to pass a bill in coming months, the 2014 elections will soon become a primary focus, reducing the chances for major compromise.

"This winter you start running into the election," Barford added. "It would be extremely difficult to have a successful conference at that time — it's really difficult to overcome the current ideological chasm at the best of times, but an election year makes that especially hard."