The PATH to a Sustainable Housing Finance System for the 21st Century
Posted by on August 07, 2013

House Republicans are hard at work reforming America’s housing finance system so it’s sustainable for home owners, respectful of hard-working taxpayers, and built to last.

Today – more than five years after the financial crisis and three years since the passage of the Dodd-Frank Act – President Obama delivered a speech outlining his principles for housing finance reform.  While it’s encouraging that the president is finally engaging in this debate, House Republicans have already taken the lead in moving legislation and consistently called for housing finance reform in order to protect taxpayers, homeowners, and middle-class families from the devastating impact boom-bust housing cycles have on our economy and the lives of millions of Americans. 

Homeownership is a cherished tradition that binds families together, builds financial security and strengthens communities. The right to own property is one of the most sacred rights won for us by our Founding Fathers.  We want every American who wants to own a home—and is willing to work hard for it and save for it—to have that opportunity to be part of the American Dream. But we have to remember: the American Dream isn’t just buying a home; the American Dream is being able to keep a home.

Over the past few years, we’ve seen how easy it is for Washington’s misguided policies to turn the American Dream into a nightmare.  That’s why House Republicans are fighting for a better, fairer and sustainable housing finance system.

In his speech today, the president outlined principles for reform that are all addressed in the Protecting American Taxpayers and Homeowners (PATH) Act that passed the Financial Services Committee in July. 

President Obama: “Private capital should take a bigger role in the mortgage market.” 

House Republicans agree that private capital should take a bigger role in the mortgage market.  Currently, the government insures nearly 90 percent of all mortgages.  This dominance of the mortgage market is crowding out private sector capital sitting on the sidelines.  These artificial barriers must be removed to attract investment and encourage innovation. 

The PATH Act solution: Free America’s housing markets from government distortion and control by Washington elites.  The PATH Act implements reforms to increase competition, enhance transparency, and maximize consumer choice. 

President Obama: “[Housing finance reform] begins with winding down the companies known as Fannie Mae and Freddie Mac.”

Mr. President, we couldn’t agree more.  That’s why it is so disappointing that the Dodd-Frank Act that was passed in response to the housing crisis does absolutely nothing to reform Fannie and Freddie or end their taxpayer-funded bailout. 

Nearly everyone agrees that Fannie and Freddie were at the epicenter of the financial crisis.  Misguided Washington policies pushed financial institutions to lend money to people to buy homes they couldn’t afford to keep.  The result was an economic cataclysm.  Washington cronies were installed in lucrative jobs at Fannie and Freddie.  They fleeced the GSEs, cooked the books, doctored earnings, and bought riskier mortgages to meet their earnings targets and collect hundreds of millions of dollars in bonuses.  Taxpayers picked up the nearly $200 billion tab. 

The PATH Act solution: End the taxpayer-funded bailout of Fannie Mae and Freddie Mac and phase out these failed Government-Sponsored Enterprises within five-to-seven years. 

President Obama:  “[W]e should preserve access to safe and simple mortgage products like the 30-year, fixed-rate mortgage.” 

House Republicans agree that basic products like the 30-year fixed-rate mortgage play an important role in helping some families who want to buy a home.  That’s why the PATH Act sustains and protects the 30-year fixed-rate mortgage for those borrowers who want that option. 

  • Section 213 of the bill specifically states that the “FHA shall provide, among other mortgage insurance products, for the availability of a 30-year fixed rate mortgage.”  Not that the FHA can provide, may provide or should provide, but SHALL provide.
  • The PATH Act also cuts the regulatory burdens and red tape for more community banks to make 30-year fixed rate loans and hold them on their own books, as well as to use the new public securitization utility to sell those loans off into the secondary market as an alternative to Fannie and Freddie.
  • The Washington Post correctly noted in its editorial praising the PATH Act that you don’t need big government GSEs or other programs to have 30-year fixed-rate mortgages:  From the Post:  “30-year fixed loans already exist without government help:  These are ‘jumbo’ mortgages too big to fit within Fannie and Freddie’s loan limits.  Presumably private-sector innovation could create loan products, with 30-year terms or otherwise, appropriate for smaller borrowers as well.”
  • Fannie Mae and Freddie Mac have never made a 30-year fixed rate mortgage to a borrower -- or any type of mortgage, for that matter.  Fannie and Freddie only buy loans made by others; they are not lenders. The terms of a mortgage are up to the homebuyer and the lender, and phasing out Fannie and Freddie will do nothing to limit financing options.

Under the PATH Act, the 30-year fixed rate mortgage will continue.  The PATH Act won’t change that.  What will change is this:  Washington won’t steer homebuyers into products that they do not want and that cost more than they want to spend.  All Americans will benefit from a sustainable housing finance system that offers more choices and opportunities.

The PATH Act solution:  More opportunities and more choices, including the 30-year fixed-rate mortgage, for those who want to buy a home. 

Other Key Points:

The Administration’s Own Red Tape Will Make It Harder for Middle-Class Americans to Buy a Home

Think that Dodd-Frank or the Consumer Financial Protection Bureau (CFPB) it created will help put more middle class families into homes they can afford?  Think again. Dodd-Frank Act rules that are being implemented by the CFPB could make homeownership more difficult and more costly.  This powerful agency has been given unprecedented power over housing finance, giving Washington elites more of a say over who gets a mortgage in this country than your local bank. 

  • Chief economist Mark Zandi of Moody’s Analytics has testified that one single mortgage-related regulation of the Dodd-Frank Act could cause mortgage interest rates to increase 1-4%.  Likewise, the American Securitization Forum stated that a Dodd-Frank regulation “could double the interest rate” and the National Association of Homebuilders has warned that proposed Dodd-Frank regulations “could grind the housing finance system to a halt.”
  • CoreLogic, a firm that analyzes markets, reports 52% of the Americans who bought homes in 2010 would not be able to finance a mortgage under requirements in the Dodd-Frank Act.
  • The non-partisan Congressional Research Service has also stated in a report that Dodd-Frank’s mortgage provisions are likely to “reduce access to mortgage credit” and “increase barriers to homeownership for both creditworthy and disadvantaged borrowers.”
  • The difficulty in obtaining a mortgage was not unintended.  As former Democrat Rep. Brad Miller (NC-13), whose Mortgage Reform and Anti-Predatory Lending Act became the basis for the Dodd-Frank’s mortgage restrictions,  said of his bill: "Yes, there are fewer loans being made, that is also an intended consequence of reform...This is the heart of the bill.”

The PATH Act solution: The PATH Act will free America’s housing markets from the control of Washington elites by implementing reforms to increase competition, enhance transparency, and maximize consumer choice.  

Creating a New Government Guarantee is Simply a Fannie-Freddie Do-Over

One key area of disagreement is the need for Washington to provide a taxpayer-funded government guarantee to the housing market.  It doesn’t matter if it’s Fannie Mae and Freddie Mac or a new entity that serves a similar function – if the government is providing that backing it will crowd-out the private sector and again put taxpayers on the hook for Washington’s failed policies.  That is not reform – it’s the status quo with new packaging.   And a look at housing finance in other countries show that for all the costs and market distortions, a government guarantee doesn’t provide any real benefit to our housing finance system and middle-class families. 

The PATH Act solution: The PATH Act will end the nearly $200 billion Fannie Mae and Freddie Mac bailout by phasing them out over five years.

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