Five Biggest Questions Facing Housing Finance Reform
October 30, 2013 10:29 AM
As Washington continues to recover from the recent government shutdown and debt ceiling fight, the Senate Banking Committee is trying to reignite momentum on housing finance reform. The panel is holding two hearings this week while outside groups conduct roundtables on various proposals for government-sponsored enterprise reform. Following are the five largest questions that have to be resolved:
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Should there be a government backstop for the mortgage market?
This is the threshold question overhanging the entire reform effort. Conservatives like House Financial Services Committee Chairman Jeb Hensarling would like to remove the government from the market. His PATH Act, which has passed his panel but not the full House, would largely privatize the mortgage system. But the Senate's bipartisan bill, authored by Sens. Bob Corker and Mark Warner, would keep a government backstop in case of catastrophic losses.
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What is the proper role for affordable housing?
As difficult as resolving the question of government support is, what a new housing finance system should do to promote affordable housing is arguably a tougher issue to resolve. Conservatives see affordable housing goals as helping to cause the financial crisis, but liberals and consumer groups, like John Taylor's National Community Reinvestment Coalition, are unlikely to accept a new system that lacks significant support for low-income borrowers.
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How much capital should there be if there is government support?
At the moment, the Corker-Warner bill has greater momentum, in part because housing groups like the National Association of Realtors strongly favor some kind of government guarantee. But there is still significant debate around the bill's call for private lenders to be in a 10% first-loss position before a guarantee kicks in. Many mortgage groups want to reduce that level, arguing it is set far too high. But Corker has vowed to resist such pressures.
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Where does that capital come from?
Private capital has yet to return to the mortgage market in a big way, with the GSEs and other government agencies still insuring or guaranteeing more than 90% of new mortgages. Some observers have raised questions about whether a reformed system would be able to attract enough funding from banks and other investors to either support the 10% first-loss position described in the Corker-Warner plan or to back an entirely private market envisioned by Hensarling.
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What happens in a crisis?
The $64,000 question is what happens in a new system when the next crisis hits. Would 10% capital be enough to insulate the government from massive losses? Would private lenders continue to support the mortgage market, the way Fannie Mae and Freddie Mac have done even under government ownership?
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