Patrick McHenryChairman

Chairman Hensarling said taxpayers will “never ever, ever again be called upon to bail out Washington for irresponsible housing policies” if the Financial Services Committee’s sustainable housing finance reform bill becomes law. The Chairman’s comments came during a discussion of the bill – the Protecting American Taxpayers and Homeowners Act (the PATH Act) – on “Speaking of Taxpayers,” the podcast of the National Taxpayers Union.

America needs “a sustainable housing finance system, and that’s what we’re trying to create here,” Chairman Hensarling said during the interview. “Number one, it has to be sustainable for taxpayers. Taxpayers should never ever, ever again be called upon to bail out Washington for irresponsible housing policies.  Now second, it needs to be sustainable for homeowners, current and would-be. And what the federal government has done is essentially help put people into homes that they couldn’t afford to keep. That doesn’t do them any good at all.”

Chairman Hensarling said the housing finance system would also be “sustainable for our economy” with the PATH Act. “We’ve got to end the boom-bust cycles in housing because of all the damage it does to the economy.”

The PATH Act will end the current system where taxpayers are liable for $5.1 trillion in mortgage guarantees – “that’s about $42,000 for every household in America,” said Chairman Hensarling.  “So when taxpayers are struggling to pay their own mortgage, they’re having to insure the guy across the street as well.”

The PATH Act, which was approved by the committee on July 24, creates a sustainable housing finance system for taxpayers, homeowners and the economy by:

• Ending Fannie Mae and Freddie Mac and their nearly $200 billion taxpayer-funded bailout;
• Right-sizing the FHA and clearly defining its mission of serving first-time homebuyers and low- to moderate-income Americans;
• Implementing market reforms to increase competition, enhance transparency and maximize consumer choice; and
• Breaking down barriers to private capital investment.

Below are excerpts of the Chairman’s comments during the podcast: 

On the current state of the housing finance system:

 
Today, Fannie and Freddie represent the single largest taxpayer bailout in history, weighing in at a $189 billion dollars.

Today, the federal government has a virtual monopoly on mortgage finance. They purchase 99% of all new mortgages. 

Today, the Federal Housing Administration is going broke—bailout broke. Today, the Federal Housing Administration -- that was originally designed for first-time homebuyers; low and moderate income people -- has a bad case not only of bailout bankruptcy but also a bad case of mission creep. And now, hardworking taxpayers are being forced to insure the mortgages of millionaires.

Today, if you add it all up, taxpayers are on the hook for $5.1 trillion, which I figure more people can comprehend -- that’s about $42,000 for every household in America. So when taxpayers are struggling to pay their own mortgage, they’re having to insure the guy across the street as well. That’s just not fair.

And then last but not least, today Washington elites are deciding who gets a mortgage and who doesn’t. Think Dodd-Frank. Think the Orwellian-named Consumer Financial Protection Bureau. The rules that are coming out under Dodd-Frank essentially do this.  Half of all mortgages today would no longer meet the requirements of Dodd-Frank. And Moody’s Analytics has said one provision of Dodd-Frank could raise interest rates one to four points. So, in short, under today’s regime Dodd-Frank could cut the number of mortgages in half and make the remaining ones twice as expensive. That’s how bad things are today. 
 

On criticism of the PATH Act:

 
Now some will say, the detractors of the PATH Act, that the 30-year fixed mortgage will disappear. I have two answers to that. That is, you can Google 30-year fixed today and in the tiny space that government doesn’t operate, known as the jumbo market, the 30-year fixed is alive and well.  It was alive and well prior to the demise of our housing market in 2008. And free market capitalism, you know, if people want the 30-year fixed mortgage my guess is someone is going to supply it.

The second point I’d make is I want people to have the 30-year fixed mortgage if they want it. But it’s not the right product for everybody and our government shouldn’t be steering people into it. The average first-time homebuyer, I believe, keeps their home for about 7 years. And after 7 years, you have almost no equity in your home. It’s kind of like you’re almost a renter and you had to pay closing costs and you’re the guy in charge of the maintenance. So for a number of people, you know, again, I want the 30-year fixed to be there for people who want it, for who it’s the right product for. But I don’t want our federal government to be steering people into a product that may not necessarily be right for them.

So that’s what you hear from detractors. People say that you know, interest rates are going to go up. But I’ve got to tell you, relative to current law, where we know that Dodd-Frank could almost double interest rates, the PATH Act will take interest rates lower than what they would otherwise be. But I want to make it clear that ultimately interest rates are going to be determined by the supply and demand of money, and right now the Federal Reserve is pretty well pressing on the gas of the supply side of that. Sooner or later we all know that interest rates are going to have to rise.
 

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.

THE POLITICS of housing finance reform are starting to get interesting. On Wednesday, the Republican-controlled House Financial Services Committee passed the Protecting American Taxpayers and Homeowners (PATH) Act, which would wind down Fannie Mae and Freddie Mac and replace the busted entities with — well, nothing, pretty much. For the first time in decades, no “government-sponsored enterprise” would be responsible for bundling most mortgages into marketable securities.

Under PATH, private investors would perform that function; Washington’s only role would be to supervise the quality of securitized mortgages. The Federal Housing Administration (FHA) would remain as a source of government backing for mortgages to low-income first-time homebuyers, albeit to a more limited extent than present law allows. In short, Congress now has before it a fairly pure free-market alternative to the status quo, one that is likely to pass the House if and when the Republican leadership brings it to the floor.

Opponents of the PATH Act argue that the lack of permanent government backing will deprive the market of liquidity and consequently end the 30-year fixed-rate mortgage upon which so many consumers have come to rely.

One answer to that is that some 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. Also, where is it written that the U.S. economy must ensure a certain amount of liquidity for housing, of all economic sectors? A lesson of the Fannie-Freddie meltdown was that government probably had been encouraging over-investment in housing.

The PATH Act opponents’ best economic argument is that reducing the supply of government-backed securities would reduce the overall depth of the U.S. financial markets, which is one of this country’s greatest advantages in the competition for the world’s supply of capital.

Still, politics is the least refutable objection to the PATH Act — quite simply, realtors, home builders, bankers and other housing interest groups would exercise their clout to defeat it, or anything like it. Bowing to that perceived inevitability, a bipartisan group of senators offered a bill last month that would also end Fannie and Freddie but keep government in the business of insuring mortgage securities against catastrophic losses, as long as private investors paid a fee and agreed to risk a substantial amount of their own capital.

Unlike the House’s PATH Act, the Senate bill has yet to make it through committee. But between the two proposals, the debate now shapes up as a contest between a nearly pure free market and a continuing role for government that is significantly smaller and more transparent than it was. The old system is being challenged as never before, and that, in itself, represents progress.

“…if you don't get rid of the permanent, everyday government guarantee in the secondary mortgage market, I fear all you've done is put Fannie and Freddie in the Federal Witness Protection Program. Give them a facelift, give them new names, maybe they come out as Eddie and Annie. And yet they're released on an unsuspecting public.”

Hensarling on the PATH Act – Protecting American Taxpayers & Homeowners – and how it winds down Fannie Mae and Freddie Mac:

“Well, one, it doesn't get the government out of the housing business. What it does is, over a five-year transition period, it does get the government out of having a permanent presence in the secondary mortgage market. The truth is it hasn't worked out too well for us. Today, we have the federal government that is controlling virtually the entirety of our mortgage finance system. I don't think Americans want that to happen.”

“Today, Americans have had to pay over $187 billion to bail out Fannie and Freddie, institutions where everyone knows they manipulated their financial statements in order for their top executives to earn huge bonuses. Today, the American taxpayers are on the hook for over $5 trillion. The American people want out of the bailout business.”

Hensarling on opponents of the PATH Act and why housing finance reform is needed today:

“…these are the same people who also told us there was never a problem with Fannie and Freddie – ‘let's roll the dice’.  And so on the one hand people said, well, you can't do anything five years ago because the housing market is too fragile.  And now they say the housing market is coming back, why do you want to rock the boat?

“We want to rock the boat because we need a sustainable housing policy. Number one it has to be sustainable for homeowners. We've had federal policies that helped put people into homes they couldn't afford to keep. I mean it was tragic – all kinds of tragedy throughout our nation.”

Hensarling on how the Dodd-Frank Act will reduce homeownership:

“Under current law today CoreLogic has said 52 percent -- 52 percent -- of the Americans who bought homes in 2010 would not be allowed to finance under today's standards.

“Relative to current law, the PATH Act -- Protecting American Taxpayers and Homeowners -- is going to make homeownership more affordable. And it's going to give American home buyers options so that their federal government doesn't steer them into one product that may not be right for them.”

Hensarling on other housing reform proposals:

Under the PATH Act, “we have a counter cyclical provision in our bill, as well. The FHA is not going away. And so in times of economic stress you have the FHA that can ramp up, should we have another crisis like we've had in 2008.

“Dodd-Frank punted the ball. The administration has punted the ball, so I salute anybody who has a plan... but if you don't get rid of the permanent, everyday government guarantee in the secondary mortgage market, I fear all you've done is put Fannie and Freddie in the Federal Witness Protection Program.  Give them a facelift, give them new names, maybe they come out as Eddie and Annie. And yet they're released on an unsuspecting public.”

AEI: FHA Watch – July 2013

The Protecting American Taxpayers and Homeowners (PATH) Act provides for comprehensive reform of the government’s role in housing finance.

Heritage Foundation: Dodd-Frank at Year Three: Onerous and Costly

July 21 marks the third anniversary of Dodd–Frank, Washington’s massive regulatory response to the housing market collapse, the failure of major financial firms, and the resulting shock to the economy in 2008. Consumers are facing dramatically higher banking fees and fewer service options because of new government constraints on credit. And for all its vast regulatory scope, Dodd–Frank utterly fails to address some of the principal causes of the 2008 crisis

Fox Business: Dodd-Frank Turns 3: What Has it Wrought?

The 2008 financial crisis laid bare flaws in our financial sector, and the economy suffered severe consequences from those flaws.  We can all agree something should have been done to reform the financial sector.  But as Dodd-Frank celebrates its third birthday, it’s worth evaluating the costs, the implementation progress, problems created, and consider whether this was really the right reform.

Washington Examiner: Fat paychecks for CFBP officials

Employees of the CFPB may be the most lavishly paid of all federal workers.  Hundreds earn more than the Supreme Court justices, senior White House officials, members of Congress, and all 50 governors.

USA Today: Housing recovery leaves Millennials behind

The house needed work — weatherproofing, a new back fence, a basement to transform into a bedroom — but the couple was excited nonetheless. The house would have been their first.

Rep. Ed Royce hit the nail on the head this week when he correctly pointed out that the PATH Act does not eliminate all government guarantees as some have incorrectly claimed.

Courtesy of Rep. Royce’s office, below is his exchange with Federal Reserve Chairman Ben Bernanke this week on how the PATH Act preserves the FHA’s countercyclical role by allowing it to insure loans to any borrower during period of significant credit contraction.

This means the PATH Act would preserve the FHA’s existing countercyclical role in mortgage lending, which enables the FHA to serve as a backstop to keep mortgage credit flowing, to promote stability in the housing market, and to ensure that middle-class families can still buy homes.

Royce Q&A with Fed Chairman Bernanke
Support Countercyclical Role of FHA within PATH Act

Washington, D.C. - Today at the House Financial Services Committee “Humphrey-Hawkins” Hearing, Rep. Ed Royce (R-CA) asked Federal Reserve Chairman Ben Bernanke about the need for the government to play a countercyclical role in the housing market, rather than the extraordinarily pro-cyclical role the government played during the last crisis. 

Specifically, Royce questioned whether provisions of the recently proposed PATH Act - the Protecting American Taxpayers and Homeowners Act – which enable the FHA to play an expanded role in times of crisis, will ensure continued access to the mortgage market for a great majority of borrowers regardless of market conditions.  Bernanke responded: “We need to think about the situation where there is a lot of stress in the market and we need some kind of backstop… It seems to me that FHA could be structured to supply such a backstop, it would depend on the details.  That would be one way to have the government supply a backstop.”

As you may know, Title II of the PATH Act includes several provisions meant to allow FHA to play that countercyclical role:

• Section 260 provides the authority to suspend the mandatory capital ratio should it be determined that: (1) available credit throughout the country has contracted significantly, as determined by the credit availability measures published by the OCC, (2) housing prices have declined significantly, or (3) other negative economic conditions exist that impact the availability of capital in housing finance markets.


• Section 232, which governs FHA borrower eligibility, allows for the income restriction to be waived during an economic downturn described above.