Achieving housing finance reform received a major boost when Senate Banking Committee Chairman Tim Johnson (D-SD) and ranking member Mike Crapo (R-ID) recently unveiled their long-awaited reform proposal.
Over the past year, Senators Johnson and Crapo have convened an extensive series of hearings examining the key elements of a new housing finance system. The thoughtful, deliberate approach they have taken is a model for how a congressional committee should legislate on a subject so complex and with the potential for so many unintended consequences.
Johnson-Crapo builds on the solid work of Senators Bob Corker (R-TN) and Mark Warner (D-VA), who helped renew congressional interest in reform by introducing comprehensive legislation last year.
The Johnson-Crapo proposal shares the same key objectives of the Housing Commission’s plan — the gradual wind down of Fannie Mae and Freddie Mac; a greater role for private capital in assuming mortgage credit risk; and a commitment to ensuring access to safe and affordable mortgages for all borrowers in all geographic markets.
— Mark Warner (@MarkWarner) April 23, 2014
Like the commission’s plan, Johnson-Crapo proposes a continued, but more limited, role for the federal government as the insurance backstop of last resort in the secondary market for mortgage-backed securities. Unlike the failed GSE model, this government guarantee would be explicit, fully paid for, and triggered only after private capital in the “first loss” position has been fully exhausted.
The commission believes that a limited government guarantee in the secondary market is necessary to ensure widespread access to long-term, affordable, fixed-rate mortgage financing. We are pleased the Johnson-Crapo proposal endorses this view.
With the Corker-Warner bill as its foundation, Johnson-Crapo makes a number of positive adjustments. It establishes a Transition Committee that must submit an annual plan to Congress outlining the specific steps that will be taken during the transition period, including how the existing intellectual property, technology, and infrastructure of the GSEs will be utilized. Recognizing the importance of preserving stability in the housing market, it also provides for more flexibility by allowing extensions to the five-year transition deadline to prevent market disruptions and spikes in borrowing costs.
The Johnson-Crapo proposal also makes explicit that the Federal Mortgage Insurance Corporation (the federal agency at the center of the new system) would guarantee a single, common security. A common securitization shelf is essential to promote liquidity in the new system and ensure it interacts effectively with the To-Be-Announced (TBA) market.
In any new system, access to the government-guaranteed secondary market must be open to lenders of all sizes and types, including community banks, credit unions, housing finance agencies, and community development financial institutions. Like Corker-Warner, the Johnson-Crapo proposal endorses this objective by establishing a mutual securitization company for small lenders (including non-profits) and provides additional detail on the mutual’s structure and governance.
With more than one-third of America’s households now renting their homes, Johnson-Crapo also recognizes the critical importance of multifamily housing to meeting our nation’s housing needs. It preserves the successful multifamily programs of the GSEs and envisions a continued government backstop in the multifamily secondary market. It also conditions access to this guarantee on meeting an affordability requirement and proposes a pilot program to improve access to secondary-market financing for smaller rental properties with fewer than 50 units.
To keep the momentum going, we urge the Senate Banking Committee to complete a mark-up the Johnson-Crapo legislation as expeditiously as possible, where further refinements can be made. The goal should be to send a bipartisan bill to the full Senate with sufficient time for debate and a vote later this year.
Today’s government-dominated housing finance system is undesirable and unsustainable. It limits the choices available to consumers and imposes excessive risk on the taxpayers. The time has come to put in place a new housing finance system that can more effectively meet our nation’s diverse housing needs and contribute to a fuller economic recovery.
We commend Senators Johnson and Crapo for helping us move a big step closer to this goal.