WASHINGTON Anyone thinking lawmakers are close to a consensus on housing finance reform was sorely disappointed Thursday.
A House hearing on a GOP-backed plan to virtually end federal guarantees in the system that replaces Fannie Mae and Freddie Mac a bill which Democrats have quickly rejected showed no signs of the bipartisanship that has accompanied reform proposals in the Senate.
Republican leaders on the House Financial Services Committee showcased their "Protecting American Taxpayers and Homeowners Act," which would replace the government backstop for mortgages with a "utility" to essentially referee a private securitization market.
The bill "tears down barriers to private capital and frees homebuyers from a government-dominated system that puts Washington elites in control of deciding who can and cannot buy a home," committee Chairman Jeb Hensarling, R-Texas, said at the hearing.
House Democrats said the plan offered by Hensarling and other Republicans was a nonstarter, even though it likely has enough support to move through the House committee. Democrats have been friendlier to a compromise approach backed by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., that would preserve a backstop.
The Hensarling bill "is an unrealistic proposal based on the notions of ideological academics whose ideas have no real audience or weight outside certain members on this committee," said Rep. Maxine Waters, D-Calif., the committee's ranking Democrat.
But Hensarling rejected the idea that the bill is ideological.
"Some say the PATH Act is ideological, but it seems to me that those who defend the status quo of a government-run monopoly complete with taxpayer bailouts, economic crises and mediocre rates of homeownership are the ones that are being ideological," he said.
Proponents of the bill argued that it takes a measured approach since certain government mortgage-related entities including the Federal Housing Administration and the Federal Home Loan banks would remain in the new system.
"The hemming and hawing and gnashing of teeth by my friends across the aisle maybe is a little bit surprising given all the compromises you will find in this draft," said Rep. Scott Garrett, R-N.J.
But unlike the Corker-Warner plan which would create a new agency like the Federal Deposit Insurance Corp. to cover losses suffered by private mortgage insurers the new entity created in the House bill is more like a standards-setter. It would create the "National Mortgage Market Utility" to develop best practices for private mortgage players; the utility would be banned from any direct role in the market and could not provide guarantees.
The bill would require Fannie and Freddie to be closed in five years, and would also take steps to reduce the role of the FHA in the mortgage market. Before Fannie and Freddie are dismantled, the bill would require portfolios of the two government-sponsored enterprises to fall by 15% per year until they hit a floor of $250 billion. Fannie and Freddie would also have to share 10% of the credit risk from new business every year with the private market.
Hensarling said the intent is to get Washington out of the national housing market, unleashing the private capital needed to strengthen the mortgage system for the long run.
"Today, the federal government has a virtual monopoly on the housing finance system that is unwise, unfair and unsustainable," he said. "The proposal will give Americans the better, fair and sustainable housing finance system they deserve."
Yet Democrats said the GOP plan would go too far, creating a system that stops short of a smooth transition for the mortgage market following Fannie and Freddie's closure and increasing mortgage borrower costs to the point of killing the 30 year fixed-rate mortgage.
"While the chairman's bill includes vague language about maintaining the 30-year fixed-rate mortgage, wishing doesn't make it happen," said Rep. Carolyn Maloney, D-N.Y. "The bill would virtually eliminate the 30-year fixed-rate mortgage by making it unaffordable and inaccessible to middle-class Americans."
Still, the hearing continued a conversation about GSE reform that many say is necessary before lawmakers can really sit down and compromise. Policymakers had long been criticized for neglecting housing finance proposals, but the sudden emergence of a legislative debate on the subject has stoked hope of progress.
Following release of the Corker-Warner plan, two other senators the Senate Banking Committee's chairman, Tim Johnson of South Dakota, and ranking Republican, Mike Crapo of Idaho announced bipartisan legislation aimed at fixing the FHA's finances. (A draft of their FHA bill was released this week.) Before Thursday's hearing, House Democrats unveiled their must-have "principles" in any resulting plan, including preservation of the 30-year fixed mortgage, assurances that the private sector pays for whatever government guarantee backs up the market, prevention of excessive risk-taking by private lenders and access to homeownership for qualified borrowers.
In a show of collegiality, Rep. Mel Watt, D-N.C. who earlier in the day was approved by Senate Banking as the nominee to run the Federal Housing Finance Agency, the GSEs' current regulator praised Hensarling for allowing the debate.
"I wanted to take the opportunity to commend the chair for starting this discussion," Watt said.
Yet the hearing also revealed persistent differences among housing experts about how to proceed, as well as reluctance among industry insiders about the Hensarling bill.
"We are keenly interested in how the 'National Mortgage Market Utility' would perform in a live marketplace dominated by large lenders wielding outsized market power," William Loving Jr., the chief executive of Pendleton Community Bank, said in testimony submitted for the hearing on behalf of the Independent Community Bankers of America. "We believe there is uncertainty in this regard and the potential for unintended consequences."
Meanwhile, outside experts called to testify were divided over the anticipated effects of the GOP-backed legislation, with some saying a stop to the government's major role in the housing market was needed to reinvigorate private capital, and others echoing concerns of Democrats on the panel.
"The legislation being discussed today represents a long-overdue effort to address damaging weaknesses in the U.S. system of housing finance," Douglas Holtz-Eakin, president of the American Action Forum, said in prepared testimony.
But others said the idea of a sustainable mortgage market almost exclusively supported by private investment is unrealistic.
"Despite privatization's ideological appeal, there is a fundamental problem with privatization proposals for the housing finance system: they don't work," Adam Levitin, a Georgetown University law professor, said in prepared testimony. "Fully private housing finance systems simply do not exist in the developed world. Every developed economy either has an explicit or implicit guarantee of its housing finance system, and there is every reason to favor an explicit guarantee, which can be prudently structured and priced, rather than an implicit guarantee."