WASHINGTON — House Financial Services Committee Chairman Barney Frank said Wednesday that he would delay until at least November the release of legislation outlining the future of the housing finance system, citing a shorter legislative calender than he expected.
The Massachusetts Democrat offered no details about what his bill would include, and it is unclear if the midterm elections may make it moot before it is even introduced. Republicans are likely to gain seats in the November elections, possibly enough to give them control of the House.
"We are not going to be able to do some of the things we thought," Frank said during a panel hearing on the future of Fannie Mae and Freddie Mac. "I had hoped we would be dealing with a piece of legislation. But there is no point in rushing that pace. We are seven days shorter than we were [expecting]. I do think it's important for there to be different pieces of legislation … that's not going to be possible until November when we come back because we lost the seven days."
During the hearing, witnesses continued to square off on a potential future for housing finance, including whether the government should grant some kind of explicit guarantee.
"Government involvement is inevitable in housing finance," said Phil Swagel, a professor at the McDonough School of Business at Georgetown University and a former Bush administration official.
He told lawmakers that a government backstop would be necessary to ensure the availability of 15- and 30-year fixed-rate mortgage products with no prepayment penalty. But even more importantly, Swagel said, the government will be required to step in to ensure that mortgage financing is available on reasonable terms whenever the next financial crisis occurs. "There are substantial benefits to be had from a framework in which private firms compete and innovate, backstopped by a limited government guarantee to ensure liquidity under stressed market conditions," Swagel said.
But Ed Pinto, a consultant and former chief credit officer at Fannie, who also testified in front of the panel, made the case that a housing finance system built upon government guarantees posed an inherent risk to taxpayers.
"Some have argued that federal intervention and guarantees are inevitable," Pinto said. "Beware of such advice. The failures caused by past interventions are evidence that such intervention does not work. Any explicit government guarantee of private mortgages will once again privatize profits and socialize the inevitable losses. We can only be sure that the guarantee will be mispriced and taxpayers will be called upon to make good on it."
Others outside of Wednesday's hearing have also echoed similar sentiments. Edward DeMarco, acting director of the Federal Housing Finance Agency has argued against an explicit guarantee, arguing that it could lead to pricing distortions. "To put it simply, replacing the enterprises' implicit guarantee with an explicit one does not resolve all the shortcomings and inherent conflicts in that model, and it may produce its own problems," DeMarco told a House subcommittee earlier this month.
Rep. Paul Kanjorksi, the chairman of the subcommittee with oversight of the GSEs, suggested Sallie Mae's transition from a GSE to private ownership as a possible model for Fannie and Freddie.
"We can use the lessons learned, both good and bad, from our work with Sallie Mae's privatization to help guide us as we take on the difficult task of constructing a new housing finance system," Kanjorski said.
Despite some disagreement among stakeholders about whether an implicit or explicit guarantee would do more to protect taxpayers, one proposal by Wells Fargo Home Mortgages was vetted by lawmakers during the hearing.
Wells' proposal calls for the creation of a smaller number of federally chartered, privately owned mortgage conduits. Those companies would buy loans from the primary market and deliver them into a federally guaranteed mortgage-backed security.
In exchange for that guarantee, the conduits would pay a risk-based fee that would be used to establish an insurance fund, similar to that of the Federal Deposit Insurance Corp.
"An explicit federal guarantee is needed to ensure a steady flow of mortgage finance at a reasonable cost to borrowers," said Michael Heid, co-president of Wells Fargo Home Mortgage on behalf of the Housing Policy Council of the Financial Services Roundtable.
Under the proposal, mortgage securities insurance companies would not be backed by the government, but it would call on the government to provide an "explicit" backup or catastrophic guarantee on the mortgage securities that were issued by MSICs.
To be sure, he said, the guarantee would only apply to the payment of principle and interest to investors in mortgage-backed securities packaged by MSICs. A MSIC would then pay a fee to the government for this guarantee, and this fee would be placed in a reserve.
Heid said that the use of private capital would help to insulate taxpayers from paying claims on the guarantee.
"We believe that those recommendations that call for complete nationalization miss the benefits to consumers of innovation and efficiency that private capital will allow and expose the taxpayer to more risk than is necessary to optimize MBS liquidity," Heid said. "Recommendations to completely privatize miss the necessity of a government backstop to ensure consistent functioning of MBS markets under all economic conditions."
Still, some lawmakers weren't fully convinced. Rep. Maxine Waters, D-Calf. pressed Heid on what the difference would be between the old Fannie and Freddie and compared to MSICs. Heid said that the mission of Fannie and Freddie would no longer exist under the Wells' proposal, as well as eliminate its significant amount of debt.