ICYMI Praise for PATH Act
"a big and welcome political breakthrough" | "a sensible reform position"
Washington,
July 11, 2013 -
One perverse result of the financial crisis is that Washington has nationalized housing finance. Taxpayers guarantee about 85% of new mortgages, some $5.1 trillion in mortgage credit and growing. So it's a big and welcome political breakthrough that House Republicans are taking steps to protect taxpayers and restore some rationality to housing markets.
On Thursday, House Financial Services Chairman Jeb Hensarling unveiled legislation to close down Fannie Mae and Freddie Mac, add much-needed discipline to the Federal Housing Administration, and clear away regulatory barriers to more private housing capital. Much like Paul Ryan's Medicare reforms, Mr. Hensarling is widening the Washington debate and giving Republicans a sensible reform position to rally around.
The Texas Republican starts by taking the White House up on its February 2011 offer to wind down Fannie and Freddie, which still owe taxpayers $187 billion for their bailouts. He'd do so over five years by shrinking their mortgage portfolios by 15% a year, gradually lowering their loan limits to $525,500 from $625,500, and eliminating their politicized "affordable housing" goals and slush fund.
This statement of intent is especially crucial as memories fade of the toxic duo's central role in the crisis. Amid rising home prices, the political temptation will be to give up the hard slog of reform and use Fan and Fred's renewed profits to finance other spending. Mr. Hensarling's reform is also superior to the Senate's Corker-Warner bill, which would wind down Fan and Fred but still give other private lenders a federal guarantee.
The House proposal also takes some useful steps to reform the Federal Housing Administration, if less ambitious than we'd prefer. Washington has used the crisis as an excuse to greatly expand FHA, which may still need a federal bailout. So the bill would try to limit mission creep by defining FHA's purpose as insuring first-time homebuyers and low- to moderate-income borrowers.
Mr. Hensarling would try to force FHA to act more like a private mortgage insurer by spinning it off from the Department of Housing and Urban Development and requiring it to be financially self-sufficient with GAAP-accounting and a minimum 4% capital cushion from 2%. Today, any mortgage loan worth $271,050 or less is eligible for FHA backing. The proposal would move that threshold to $200,000, thus reducing taxpayer risk.
The bill also would eliminate FHA's money-losing reverse mortgage business and gradually reduce FHA's taxpayer-backed coverage levels to 50% from today's 100%. We'd prefer 0% taxpayer backing, but that would have cost GOP votes and thus doomed the bill.
The housing lobby will still oppose this as a threat to the housing recovery, but don't believe it. All first-time borrowers will be eligible for FHA backing, regardless of their income. The bill would reduce FHA's loan limits to the lower of 115% of area median home prices, or 150% of high-cost area loan limit, with a maximum limit of $625,500 from $729,750 today. That's still tens of millions of home buyers.
The third leg of the bill aims to increase market competition with a hodgepodge of initiatives, notably easing Dodd-Frank's rules for "qualified mortgages." When fully implemented, these rules will limit the supply of mortgage credit without any reduction in taxpayer exposure.
Less admirable is the bill's proposal for a National Mortgage Market Utility that would set best practices for mortgage securitization and operate a clearinghouse to match loan originators with investors. This echoes Dodd Frank's creation of clearinghouses for derivatives that expand taxpayer risk. Many industries set best practices without government intervention, and mortgages should be no different.
The bill also institutes a three-year delay to the Basel III capital rules and creates rules for a "covered bond" market. Covered bonds are debt securities that stay on a bank's balance sheet and are backed by other mortgages. They can increase liquidity and make it easier for lenders to modify loans that run into trouble.
Covered bonds are new to the U.S., but they have been used for decades in Europe. This provision has been promoted by New Jersey Republican Scott Garrett in an effort to show that a robust private mortgage market can exist without government guaranteeing 30-year mortgages. They deserve a market trial.
As ever, the political opposition to all this will come from the housing industrial complex of Realtors, homebuilders and Wall Street mortgage lenders who don't want to give up their taxpayer guarantee. But they should understand that the same Dodd-Frank restrictions they loathe are the political price of that guarantee. Give up the guarantee, and after a transition they'd have a much more sustainable housing market going forward, one less subject to boom and bust and with less political interference.
House Democrats won't help Mr. Hensarling, so he'll have to count on GOP votes. Whatever its fate in the Senate, Mr. Hensarling's proposal is an important statement of GOP principles and intent. He deserves support if Republicans elected on the tea-party wave want to maintain credibility as reformers against crony capitalism.
Government favoritism for housing was one of the main causes of the crisis, and political control over mortgages will only lead to more misallocation of capital and future taxpayer bailouts. The housing markets need a private rescue.
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