WASHINGTON — Although the issue has generally divided Democrats and Republicans, Rep. Scott Garrett, R-N.J. received bipartisan support — as well as a nod from a key regulator — Thursday for his latest proposal to reform the housing finance market.
Edward DeMarco, the acting director of the Federal Housing Finance Agency, has been critical of past efforts by Republicans to unwind Fannie Mae and Freddie Mac, but called the Garrett bill a "thoughtful approach to a framework that does not rely on a government guarantee."
To date, House GOP members have introduced more than a dozen bills that tackle the future of the housing finance system, with most focusing on ways to phase out a government guarantee of the secondary mortgage market and unwind Fannie and Freddie, which have been under conservatorship for more than three years.
Garrett's latest bill, introduced last week, attempts to chart a way forward after the government-sponsored enterprises' demise, including repealing a recently proposed risk retention proposal and requiring the FHFA to set new mortgage underwriting standards.
DeMarco said the ongoing conservatorship of Fannie and Freddie is untenable, and the system must be reformed soon.
"Conservatorship is not a long- term solution, yet we just passed the three-year anniversary of conservatorship," DeMarco said testifying before the House Financial Services subcommittee on capital markets and government-sponsored enterprises.
DeMarco praised the Garrett plan for envisioning a secondary market that is free of government support.
"I don't see how one would interpret or perceive an implied guarantee as a federal taxpayer — in the general framework that's outlined here," said DeMarco. "I believe it's pretty clear that this is putting investors on the hook for assessing and bearing mortgage credit risk."
Still, DeMarco said it will take time to transition to a new system, including developing appropriate standards designed to ensure the creation of a new securitization market.
But when "the market has certainty that these are the rules of the road and that these rules of the road are not going to be changing every 18 months, I think the private market can step in and do a great portion of what is currently being done by Fannie and Freddie," said DeMarco.
Garrett's reform plan is designed to draw the private sector back to the secondary-mortgage market after the troubled GSEs are eventually terminated. It would call on FHFA to establish a uniform set of underwriting standards for mortgages that could be securitized in the new market, as well as set up as many classes of loans it deemed necessary. The credit risk of each class of mortgage would be based on a number of factors including debt-to-income and loan-to-value ratios, credit history and loan documentation.
The agency would also take steps to standardize the securitization process as well, including standardizing pooling and servicing agreements, purchase and sale agreements and trust agreements.
The draft bill's introduction comes at a time when the cost to taxpayers from the takeover of Fannie and Freddie continues to rise. On Thursday, Freddie said they would need an additional $6 billion in taxpayer support, bringing the total to $170 billion.
"The taxpayers and you got some bad news this morning," Rep. Randy Neugebauer, R-Texas, told DeMarco. "The thing most troubling about that is they lost $6 billion in the previous quarter."
Critically, Garrett's bill also found support among some Democrats, raising the chances it could build significant momentum.
"There is a lot to like in Mr. Garrett's bill," said Rep. Brad Miller, D-N.C. who has introduced similar legislation earlier this year.
He noted the differences between the two party lines appear to be drawing closer.
"It appears that the differences that we have are not deep philosophical difference," said Miller. "There's no partisan divide. We're trying to do the same thing in a somewhat different way."
Even Rep. Barney Frank, who has clashed with Garrett in the past as the top Democrat on the House Financial Services Committee, said he appreciated the "tone so far" of Garrett's bill. The Massachusetts Democrat recommended a second hearing to hear from other witnesses including direct lenders, as well as the National Association of Homebuilders, who have expressed doubts over Garrett's bill.
Rep. Gary Peters, D-Mich., also agreed the bill was "constructive."
"I think the bill attempts to replicate some of the things that the existing GSEs do right. It'll provide transparency and standardization that'll make it easier for investors to have confidence in the market for private label securities," said Peters.
For their part, Republicans applauded the bill's aim of luring back the private sector to the mortgage market — a necessary feat to lessen the government's already overburdened role. Currently, 90% of the mortgage market is backed by the government.
Still, some lawmakers raised questions, including whether the bill would do enough to make sure that the 30-year fixed rate mortgage will continue to be affordable to the middle class.
"We should not abandon the system that has, for decades, made the American dream of home ownership a reality for millions of middle class Americans just because irresponsible lending exploited a weakness," said Peters.
Frank also protested the legislation's attempt to repeal risk retention.
"At first glance it seems to me the solution that's in the bill as an alternative to risk retention is excessively elaborate and relies too much on the decision of regulators and the judgment of regulators and not enough on a market incentive," Frank said. "And I think risk retention does that. It does impose the basic retention, but after that it's entirely up to the market."
