Will Democrats’ midterm success spur progress on GSE reform?
WASHINGTON — Since 2015, Republicans have largely presided over congressional attempts to reform housing finance, or the lack thereof. Come January, House Democrats will have more say about where to place Fannie Mae and Freddie Mac on the agenda.
But after years and years of inaction on reforming the government-sponsored enterprises, which are still in 10-year-old federal conservatorships, many observers say it is still uncertain whether new leadership on the House Financial Services Committee will be enough to break the GSE logjam.
If the presumptive chair of the committee, Rep. Maxine Waters, D-Calif., prioritizes GSE reform, experts say she may bring her own ideas to the table. Outgoing Chairman Jeb Hensarling, R-Tex., drafted a bill with Democrats to boost Ginnie Mae's role as a mortgage market backstop, but Waters has not endorsed that bill.
“I think that she’d start with a fresh sheet of paper from the reform ideas she’s put forward in the past, and then work to try and bring other members along,” said Michael Barr, a law professor at the University of Michigan and a former Treasury Department official in the Obama administration. “Some elements of prior bills you might see being brought in, but I think the fundamental framework will start with her own views about GSE reform.”
In July, Waters said housing finance reform would be "very important to me" if she chaired the committee. But in a statement following the Nov. 6 midterm elections, which handed the Democrats House control, she signaled a focus on other issues, such as consumer protection and affordable housing.
Some analysts say the relative calm in the housing and financial sectors have led to lawmakers not feeling pressured to move more quickly on GSE reform. The Democrats' takeover of the House is not likely to change that.
“We’re still absent a crisis, and we’re still absent a deadline in housing,” said Ed Mills, a policy analyst at Raymond James. “A lot of the reforms have been slow and incremental, and I think that’s kind of going to be the case until there is a big change.”
Still, the end of one-party rule in Washington could possibly move the needle. One obstacle to progress on GSE reform has been a lack of support from Senate Democrats for GOP-driven plans. In the Senate, which will still be led by the GOP in the new Congress, filibuster rules and a 60-vote threshold to pass legislation requires at least some support the minority to do anything.
Barr said Democrats in control of the House could influence bipartisan legislation, considering that the reform proposals that have gone the furthest to date have been bipartisan.
“The odds of getting GSE reform done legislatively have been relatively low for quite a number of years, and they’re still really low, but I’d say they’re somewhat higher now than they were before the election,” he said.
But another point against progress is, along with new leadership in the House, the next Congress will be without figures who have been active on GSE reform in the past. Hensarling is retiring, although he has been mentioned as a possible new director for the Federal Housing Finance Agency, the GSEs' regulator.
Also departing are Sen. Bob Corker, R-Tenn., who has focused on GSE reform on the Senate Banking Committee, and Rep. John Delaney, D-Md., who sponsored the Ginnie Mae bill with Hensarling and Rep. Jim Himes, D-Conn. Delaney is leaving Congress to pursue a presidential bid.
Observers say it is unlikely that Waters would take up GSE reform proposals that her colleagues have introduced before, such as Hensarling’s bipartisan reform bill. Waters introduced her own bill in 2014 to replace the GSEs with a new lender cooperative that would issue government-backed securities. Her proposal would have also established a new regulator to oversee the cooperative as well as the Federal Home Loan Banks.
Hensarling's bill and other legislative proposals like it had boosted hopes that lawmakers could coalesce around a plan that expanded Ginnie Mae's role. But some Democrats have criticized that idea.
“I am really questioning and rather skeptical that Ginnie Mae is equipped to handle this type of responsibility or that the Ginnie Mae model would work for a deeper, larger mortgage market,” said New York Rep. Carolyn Maloney, a senior Democrat on the House committee, when the bill was unveiled.
If Waters opts not to spearhead GSE reform on the committee, it is also not clear which other Democrats could take up the mantle.
"In theory a split Congress could improve the prospects for a bipartisan bill. The problem is that we do not believe Rep. Maxine Waters is going to prioritize GSE reform," Jaret Seiberg, an analyst at Cowen Washington Research Group, said in a research note after the midterm elections. "And we don't see this as a priority on the Senate side. Even if both sides wanted to act, it is hard to see them working through all the complexities in time for a vote in fall 2019."
Seiberg said administrative moves by the FHFA to reform the GSEs, without legislation, are more likely.
“We continue to believe that Team Trump will use the next two years to reshape Fannie and Freddie. This includes shrinking their size,” he wrote. “That would then lead to the real push for a permanent solution after the 2020 presidential election."
On the Senate side, Sen. Mike Crapo, R-Idaho, who chairs the Senate Banking Committee, has been involved in housing finance reform in the past. But following the elections, the ratio of Republicans to Democrats is not likely to change significantly, making it difficult to get any proposal through the committee that didn’t include provisions for affordable housing, which is a must-have for Democrats.
Even if a bill "has support, I’m not sure given the setup now with the Senate that they could add anything more for the Democrats to make it more palatable,” said Bose George, a managing director at Keefe, Bruyette & Woods.
Barr acknowledged that in addition to there not being a financial crisis or “action-enforcing decision” to spur GSE reform, Congress also has a slew of other priorities.
“The relevant committees are also busy with issues of oversight and investigations, which I think are an important part of the checks and balances in our system, and I think that Chairwoman Waters is likely to devote a significant amount of time on those oversight kinds of activities,” he said.
Some figures within the Trump administration appear poised to tackle Fannie and Freddie reform without the help of Congress. Treasury Secretary Steven Mnuchin has even said that GSE reform will be a priority in 2019.
But other forces could also be a hindrance. With the effects of rising interest rates on the housing market still an uncertainty, analysts said Trump appointees might even be reluctant to make administrative GSE reforms that could upset a fragile landscape, especially headed into the 2020 presidential election.
“One of the big debates that I have had has been as the Fed continues to raise interest rates and as mortgage rates go up, is that the catalyst? Or does that slow down housing finance reform?” said Mills. “There’s always a reason not to do housing finance reform. Very infrequently do we have a reason to do it.”
The administration could also focus on making noncontroversial reforms, such as adjustments to conforming loan limits or reducing the government’s role in affordable housing, said George.
“I think it’s a market where housing is already slowing a little bit and it’s unclear if the administration would want to do something that puts additional pressure on that,” he said.