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As Congress struggles to determine the appropriate role for government in the mortgage market, affordable housing may prove a politically charged hurdle on the path to reform.
August 7 -
President Obama ended his administration's self-imposed blackout regarding housing finance reform on Tuesday, finally endorsing a specific approach after effectively punting on the issue more than two years ago.
August 6 -
While the Obama administration has publicly kept its distance from the housing finance reform debate during the past two years, it has been privately working in recent months to help move a bill forward.
August 2 -
Federal Reserve Board Chairman Ben Bernanke told lawmakers that a future housing finance reform plan should provide clarity to the private sector about the level of support the government provides to the market.
July 17 -
Federal Reserve Board Chairman Ben Bernanke told lawmakers that a future housing finance reform plan should provide clarity to the private sector about the level of support the government provides to the market.
July 17
WASHINGTON For the first time in five years, policymakers appear to have a significant opportunity to enact broad housing finance reform.
With two separate bills already gaining steam in the House and Senate, the administration broke its silence on the issue this week, with President Obama laying out his hopes for legislation, including keeping at least a limited government role in the market.
As the pace of the reform efforts appears to be quickening, we offer the following frequently asked questions about what the Obama administration wants, widening Democratic support for a bill and when GSE reform is likely to happen.
What's Obama's plan to reform Fannie Mae and Freddie Mac?
The White House wants to see the two mortgage giants completely unwound over several years, and put private capital at the epicenter of the housing finance market. Since the financial crisis, the government has been playing a significant role, backing more than 80% of mortgages through Fannie, Freddie and the Federal Housing Administration a level administration officials have said is unsustainable.
Will the government still play a role in the new system?
Almost certainly. Obama wants a "limited" government role as do a bipartisan group of lawmakers working on a bill in the Senate. Almost as important, there is huge political support for a government role in the market, including from the National Association of Realtors, National Association of Home Builders and banking industry groups.
House Republicans, however, have strongly objected to any government presence in the mortgage market and have introduced their own bill that would unwind Fannie and Freddie and replace them with a system that lacks any government guarantee. That legislation does not have any Democratic support, however, and faces challenges given the mortgage industry's strong desire to keep a government role. Even if the bill passes the House in its current form, it seems unlikely a final piece of legislation will envision a fully privatized system.
Has the White House endorsed any other specifics?
Obama has outlined four principles: keeping a government role in the market, eliminating the possibility of bailouts, preserving products such as the 30-year fixed-rate mortgage and promoting affordable housing.
Those goals dovetail with the Senate bill, authored by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., which Obama said was "pretty consistent" with his own vision for GSE reform.
In contrast, Obama has refrained from publicly mentioning the GOP-led plan by House Financial Services Committee Chairman Jeb Hensarling of Texas.
What will Corker-Warner's bill do?
It would unwind the government-sponsored enterprises, expand the role of private mortgage insurers and provide a government backstop that would offer a common securitization platform. Fannie and Freddie would be replaced with a new system under which private market entities would purchase loans from originators, bundle them and provide credit guarantees. The private entities would be in a first loss position, but there would be a government guarantee for catastrophic losses.
What would the House bill do?
The GOP plan, which is co-sponsored by Rep. Scott Garrett, R-N.J., and others, would effectively take the government out of the housing market. It would unwind Fannie and Freddie in five years, while simultaneously reducing the role of the FHA in the mortgage market. Before Fannie and Freddie would be dismantled, the bill would require the 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.
Are there any other GSE bills in the works?
It's possible we could see other proposals. Sen. Jack Reed, D-R.I., has previously said he'd like to introduce his own bill to reform the GSEs, but has kept tight-lipped on the subject in recent weeks. The administration has also said publicly it has been working with Senate Banking Committee Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, the panel's top Republican, on a broader housing finance reform bill.
What are Johnson, Crapo and Reed going to do?
Discussions are still in the early stages, but most observers believe the Johnson-Crapo bill will incorporate many aspects of the Corker-Warner legislation. Both Johnson and Crapo have worked on an FHA reform bill that passed the Banking Committee late last month. Although they initially said they would like to pursue GSE reform after the FHA bill was enacted, lawmakers indicated during the vote that may have changed. Corker has publicly urged Johnson and Crapo to package both issues together, similar to the House legislation.
Reed's plan, meanwhile, is thought to be different. It would likely restructure and refashion Fannie and Freddie without eliminating them entirely. The two companies would be stripped of their federal charters and investment portfolios, but would be permitted to issue government-guaranteed securities. The plan mirrors an earlier proposal by Jim Millstein, a former Treasury official who oversaw the restructuring of American International Group.
Would the administration support a plan that kept Fannie and Freddie intact?
Given Obama's ringing endorsement of the Corker-Warner plan, it appears highly unlikely that the administration would shift its view. Obama has also said repeatedly that he wants to unwind Fannie and Freddie.
It's not even clear Reed still wants to introduce the bill, or whether instead he might seek to make an impact on the Corker-Warner compromise.
Is there broad Democratic support for the Corker-Warner plan?
Not just yet. Obama's backing could pave the way for other Democrats who might have been waiting to see if the White House would deliver its own plan. The Corker-Warner bill is supported by five Republicans and five Democrats, but there are several holdouts who have not publicly embraced the bill, including Sens. Elizabeth Warren, D-Mass., and Sherrod Brown, D-Ohio.
One of the key issues in the debate will be how any compromise is struck on affordable housing goals a concern of vital importance to both Democrats and Republicans.
Why are affordable housing goals such a critical issue?
The issue has divided both political parties for decades. Republicans view the goals as a significant contributor to the financial crisis, while Democrats want to ensure there's government support to provide housing assistance to low- and moderate-income borrowers. Obama even lent some weight to the issue saying it was critical to make homes affordable for first-time homebuyers as well as renters. Some speculate that mandated affordable housing goals that were used by Fannie and Freddie could be a nonstarter. While no path ahead is clear, the issue will prompt heavy negotiating from both sides in order to strike a deal that won't hurt the possibility of GSE reform.
How soon could we see GSE reform happen?
The president indicated he hopes to push Congress to complete a broader housing reform package this fall, which would also include expanding a government refinance program to borrowers who don't have government-backed mortgages. But given all the politics and complexities still to be worked out, a final deal is unlikely to come together this year.
