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A quick bye-bye to Fannie and Freddie? Don’t bank on it.
With the sudden gush of congressional proposals designed to kill the two government-sponsored companies as fast as possible — the most recent floated at the end of last week by a key committee leader in the House — you’d think Fannie’s and Freddie’s days are numbered.
In the long run they probably are, but a close look at legislative plans such as the “PATH Act” (Protecting American Taxpayers and Homeowners Act) offered Friday by House Financial Services Committee Chairman Rep. Jeb Hensarling (R-Texas) tells me that Fannie and Freddie are going to be around for years — maybe into the next decade, beyond 2020.
Depending on how you see their current and past roles supplying the bulk of funds for home mortgages along with FHA, that’s either good news or terrible news.
Here’s how I see it.
Fannie and Freddie have been in “conservatorship” — which was designed to be a short-term legal purgatory allowing the White House and Congress time to figure out what to do with both companies — for nearly five years. Despite a bold-sounding commitment by the Obama administration in early 2011 to work with Congress to return housing finance primarily to the private sector and out of the grips of federally chartered Fannie and Freddie, 2013 has been the first year we’ve seen a serious proposal for how to do that.
The bipartisan Housing Finance Reform and Taxpayer Protection Act, introduced last month by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.), would create a catastrophic insurance entity modeled on the FDIC that would provide a federal guarantee for mortgage lenders and investors against losses, but only in the event of a massive credit crisis.
Most housing analysts agree that the Corker-Warner bill represents a plausible first step in a process that could lead to the eventual phase-out of Fannie and Freddie.
On the other hand, the debut of the PATH Act last week — which essentially represents the get-the-government-out-of-housing-altogether approach favored by the Republican leadership in the House–– potentially sets back the process by years. The bill is scheduled for its first hearing July 18, and Hensarling says he wants to move it out of committee within a couple of weeks.
PATH would immediately attack the foundations of the mortgage market that have been in place for decades, handing over most responsibilities to Wall Street, banks, private mortgage insurers, and a new, nonprofit securitization platform known as the National Mortgage Market Utility.
Under the plan there would be no federal backstop for most loans if the capital market seized up as it did in 2008 — or even in a credit crunch during a mild recession. However, FHA (and presumably Veterans Affairs and the Department of Agriculture) would still retain guarantees in some form for lenders.
But over a five-year period, FHA’s insurance level would be cut back to just 50 percent of the loan amount, instead of the 100 percent insurance guarantee the agency has used to attract lenders to financing moderate-income homebuyers since the 1930s.
In addition, FHA would see its minimum down payment raised to 5 percent for non-first-time home purchasers (first-timers could still put down just 3.5 percent), and the agency’s loan limits would be slashed.
For the first time ever, FHA borrowers would also be subject to income limitations — 115 percent of area median income in most parts of the country, 150 percent in the highest-cost markets. Everybody else would have to hope for an approval from a bank somewhere.
Fannie and Freddie would be dismantled within 60 months, their assets liquidated and sold off to the highest bidder.
In the meantime, however, they’d have their maximum loan limits cut, and they’d have to institute a new “risk sharing” co-insurance program with private lenders on at least 10 percent of their new loan volume per year until their demise.
Though the draft summary of the bill isn’t completely clear, it also appears that Fannie and Freddie might be prohibited from purchasing loans that do not comport in all respects with the requirements of the Consumer Financial Protection Bureau’s “Qualified Mortgage” (QM) rule.
That would negate the CFPB’s special, “temporary” exception for Fannie and Freddie to purchase loans that get green lights from their in-house automated underwriting systems despite having debt-to-income ratios in excess of the QM rule’s 43 percent maximum.
That special exception — seen as crucial for millions of creditworthy homebuyers who cannot quite make the 43 percent cutoff — was intended by the CFPB to remain in place for up to seven years, or as long as Fannie and Freddie remain in conservatorship. It’s important.
Initial reactions to PATH late last week by real estate and mortgage groups were carefully worded so as not to offend Hensarling, whose position gives him far-reaching influence over what moves, and what doesn’t move, on Capitol Hill.
David Stevens, president and CEO of the Mortgage Bankers Association, said the bill helps define “the boundary of the debate” — kind of a polite way of calling it far out.
One longtime congressional analyst for the housing industry likened the PATH Act to a “grape that by the end of (this) Congress will turn into a raisin.”
Gary Thomas, president of the National Association of Realtors, said, “We believe this legislation will ignite the conversation necessary to reform our housing system.”
That hardly even qualifies as faint praise.
The fact is: Real estate and mortgage industry experts see Hensarling’s total reliance on Wall Street and private investors and insurers — with no federal backstop in the event of economic downturns — as radical, bad for consumers, bad for housing and ultimately politically unworkable.
They are not completely on board with the Corker-Warner formula, but they see its retention of some measure of government guarantees as a framework on which to build bipartisan consensus. After all, the resolution of Fannie and Freddie ultimately has to make it through Congress, and at least for the time being, a Democrat occupying the White House.
But Hensarling’s opening gambit on the subject essentially tells the Republicans and Democrats in the Senate who support the Corker-Warner approach: Forget about it. You’re not getting anything that involves a broad federal guarantee in the event of an economic crisis — not as long as we control the House.
So here’s the timeline: Zero chance of anything emerging from Congress this year, although the Senate might be able to pass a version of Corker-Warner. There’s not enough time on the calendar; there are tax, budget and other issues standing in the way; there’s no prospect for consensus.
Next year is an election year, and assuming House Republicans believe they will retain a majority to control the House, they’ll be even less open to compromises on federal supports for housing than they are today.
That takes us into 2015. We’ve got a new Congress that has to get organized and up to speed on complex matters like Fannie and Freddie. That could start the process all over again.
The following year, of course, is a presidential election year, so all bets are off, absent unseen political changes. You can see where there is all headed: Since it will take at least five years to phase down Fannie and Freddie even if reform legislation passes, both could still be alive and kicking in 2021-2022, maybe beyond. And that’s only if Congress buckles down and gets serious about a bipartisan solution.
Ken Harney writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.