WASHINGTON — Nearly every policymaker jumped into the fray last week with some kind of action related to the subprime housing crisis. The Federal Reserve Board cut interest rates; the Office of Federal Housing Enterprise Oversight eased caps on the mortgage portfolios of Fannie Mae and Freddie Mac; Treasury Secretary Henry Paulson shifted the White House stance on the government-sponsored enterprises; and the House and the Senate Banking Committee passed a Federal Housing Administration reform bill.
But the flurry of activity left plenty of questions about what was really happening, and whether more changes are on the way.
What is most likely to come out of all this?
Though lawmakers are considering a wide range of mortgage-related reforms, legislation modernizing the FHA is closest to enactment. The House approved a bill 348 to 72 on Tuesday that would raise the limit for which the program could insure loans and lower down-payment requirements. A similar but narrower bill cleared the Senate Banking Committee the next day by a 20-to-1 vote.
The wide margins in both votes indicate bipartisan momentum behind the bill, as President Bush and leaders from both parties said it would help struggling borrowers keep their homes. Senate Majority Leader Harry Reid praised the reform as a critical step in addressing problems in the housing market, and is expected to schedule the bill for Senate action soon.
What about GSE reform? Is that also on the fast track?
Though the issue garnered a host of headlines last week, the fate of a bill to revamp regulation of the GSEs remains uncertain. The most surprising development came Thursday when Mr. Paulson, recognizing the political winds had changed, reversed the Bush administration's position on the conforming loan limit.
The Treasury chief acknowledged for the first time that raising the conforming loan limit beyond $417,000 could help the struggling jumbo mortgage market. Mr. Paulson did add a few conditions, saying the change had to be part of a broader GSE reform package and that any hike in the limit must be temporary and immediate. The conditions were supported by House Financial Services Committee Chairman Barney Frank.
While the discussion was noteworthy, however, it was missing a key person: Senate Banking Committee Chairman Chris Dodd. The House has already passed a GSE reform bill, after Rep. Frank and Mr. Paulson cut a deal on the issue. The Senate Banking Committee has yet to act.
Is that why Mr. Paulson sent a letter to Sen. Dodd requesting a meeting on the issue?
Yes. Mr. Paulson wants to broker a deal among Sen. Dodd, Sen. Richard Shelby, the panel's lead Republican, and the Bush administration. The letter, which the Treasury made public, appears to show some frustration that he has been unable to meet with Sen. Dodd on the topic. It's unclear whether Mr. Paulson will get his wish. Traditionally, Senate lawmakers are unwilling to let third parties resolve their differences for them.
Is GSE reform going to happen?
It is unlikely a bill will be enacted this year, though it is still theoretically possible. Sen. Dodd and Sen. Shelby have both said they want a bill. If the two are talking behind the scenes and working on issues, the lawmakers could announce a deal and move forward quickly. The key issue remains how a new regulator will treat the mortgage portfolios of Fannie and Freddie. The Democrats want to ensure that any restrictions are done solely for safety and soundness reasons, while the Republicans are concerned about systemic issues caused by the portfolios.
Aren't there already portfolio caps? And didn't OFHEO just lift them?
A little. On Wednesday OFHEO raised the mortgage portfolio cap by $8 billion to $735 billion for both GSEs. Still, the increase was derided in many circles. Fannie and Freddie both said they could do more to help ease the housing crisis if the regulator would let them significantly expand their mortgage holdings. Sen. Dodd called OFHEO's move "timid."
OFHEO Director James Lockhart seems to be responding to the mood on Capitol Hill by floating the possibility that the caps could vanish in February.
"Under the consent agreement with Fannie Mae and the voluntary agreement with Freddie Mac, it is possible that the portfolio caps could be lifted with the publication of the enterprises' 2007 financial statements — with a clean audit opinion and no material weaknesses — in February 2008," he said in a written statement on Friday.
Where's the Fed in all of this?
The Fed is working to avoid getting in the middle of a nasty political fight between Congress and the White House. In a letter to Rep. Frank last week, Fed Chairman Ben Bernanke continued to discourage lifting the portfolio caps, but in light of Mr. Paulson's about-face, he silenced the central bank's opposition to a higher conforming loan limit.
The Fed made much bigger waves last week by cutting the federal funds and discount rates by 50 basis points on Tuesday.
What else are regulators liable to do?
The Fed's next course of action will likely be issuing rules under the Home Ownership and Equity Protection Act. On Thursday Mr. Bernanke gave a preview of how the rule might look: "We are looking closely at some mortgage lending practices, including prepayment penalties, escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the evaluation of a borrower's ability to repay."
Mr. Paulson acknowledged he is not sure policymakers are doing enough to stabilize the markets. "I can't tell you that every action has been taken that needs to be taken. I think we are doing the right things for now and we are watching this very carefully and we need to be vigilant," he said.
What other steps are lawmakers liable to make?
Several lawmakers are pursuing legislation to create uniform national lending standards for all lenders, including nonbanks, with specific sets of protections for subprime and high-cost loans.
The one with the best chance of passage is from Rep. Frank, who is expected to introduce a bill soon that among other things would limit assignee liability to hold securitizers accountable for the loans they package and curb certain loan features. Rep. Frank has said he plans to vote on his bill in committee in October. Sen. Dodd has also committed himself to pursuing comprehensive legislation to rein in lending practices.
A host of other lawmakers are seeking reforms related to the subprime crisis. Rep. Brad Miller, D-N.C., introduced a bankruptcy reform bill Thursday that would allow homeowners to restructure a primary mortgage in bankruptcy proceedings to avoid foreclosure. Sen. Richard Durbin, D-Ill., and Sen. Arlen Specter, R-Pa., are also weighing bankruptcy reform. But industry observers who oppose reopening bankruptcy argue any reform faces an uphill battle, since 2005 changes took almost nine years to achieve.
