WASHINGTON A bipartisan bill to reform the mortgage finance system being crafted in the Senate has already drawn praise from a variety of stakeholders, but the effort is almost certain to meet strong resistance from some House Republicans.
Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., are working on legislation that would unwind Fannie Mae and Freddie Mac and create privately owned insurers that buy and securitize mortgages. While the insurers would take initial losses, there would be an explicit government backstop for catastrophic losses, according to a discussion draft that leaked last week.
While that idea enjoys at least some bipartisan support, House GOP on Wednesday railed against the need for any government guarantee in the mortgage market during a Financial Services Committee hearing. The hearing underscored just how far apart negotiations in the Senate are from discussions in the House.
"The U.S. is practically alone in the modern industrialized world in having GSEs directly guarantee mortgage securities. We are practically alone in the level of government subsidy and intervention into our housing market," said Rep. Jeb Hensarling, chairman of the panel, during opening remarks. "We were also practically alone in the level of turmoil in our housing markets as measured by foreclosures and delinquencies. Clearly there is a direct causal link."
Hensarling also called into question the need for a 30-year fixed rate mortgage, a hallmark of the American housing system, which would likely be eliminated without a government guarantee.
"I believe it will be established that although the 30 year fixed rate with no pre-payment fees may be the 'gold standard' mortgage for some, it is clearly the 'rusty tin' standard for others," he said. "We again are practically alone in America having public policy assure its dominant role in the mortgage market. For home buyers facing rising interest rates or home buyers who keep their home for the market average of 7 years, it is almost assuredly not the best mortgage product. Successful alternative systems promote more consumer friendly choices."
The House hearing focused on what the impact of completely removing the guarantee might be, though predictions from a panel of academics varied.
A big concern for lawmakers remained the effect changes would have on average, middle-class homebuyers.
"If we end Fannie and Freddie, if we end the GSEs can my constituents still get a mortgage?" asked Rep. Patrick McHenry, R-N.C. "Is it one that they can afford?"
Still, other lawmakers, including Rep. Gary Miller, R-Calif., vice chairman of the banking panel, appeared more open to considering some role for the government. The California Republican sponsored a bill in 2011 to replace the GSEs with a government-owned credit facility that would purchase and securitize loans with a government guarantee.
"How do we get government out, and if we are involved in any way, we should make profits. I think the whole structure of the GSEs was wrong. They should have never gone public and the profits should have always gone back to the Treasury," said Miller, asking the panel for examples of other countries "to pattern ourselves after" given the size and demand of the U.S. market.
Democrats, meanwhile, maintained their support for government involvement in the housing market, although they acknowledged the limitations of the current system. They also made it clear that eliminating the 30-year fixed mortgage, the most popular mortgage product, was not an option.
"I am focused on pursuing reform proposals that preserve the beloved 30-year, fixed-rate mortgage here in the United States," warned Rep. Maxine Waters, D-Calif., in her opening statement. "I think the recent crisis has demonstrated that this is a stable product, which has actually outperformed the exotic mortgages that proliferated in the lead-up to the financial crisis. If we eliminated a government role in housing finance, these exotic products would likely again predominate."
Rep. Michael Capuano, D-Mass. also raised questions about whether it is possible to adopt another country's private mortgage system without adopting all of that system's features.
"If we're going to adopt any other country's system, we've really have to adopt the whole system. We shouldn't adopt it piecemeal. Which means we'd have to pick up covered bonds, which to me sounds a lot like 'too big to fail,'" he said.