GSE Compromise No Closer Despite Panel Vote
By Victoria Finkle, Joe Adler
24 July 2013
(c) 2013 American Banker and SourceMedia, Inc. All rights reserved.
WASHINGTON — The gulf between two competing plans to reform the nation's housing finance system appeared ever wider Tuesday even though House Republicans were poised to advance their bill to a full floor vote.
The House Financial Services Committee met to vote on legislation backed by Chairman Jeb Hensarling, R-Texas, and other GOP leaders to accelerate the wind-down of Fannie Mae and Freddie Mac and replace the two government-sponsored enterprises with a system devoid of any new government guarantees. But the vote was scheduled the same day as a Senate Banking Committee hearing where members continued to tout a more bipartisan plan — co-sponsored by Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn. — that would preserve a government backstop.
While the Republican-backed bill, titled the Protecting American Taxpayers and Homebuyers Act, appeared headed for committee approval, the committee markup featured continued Democratic claims that the legislation would destabilize the housing finance system, render the 30-year mortgage unaffordable for many potential homebuyers and fail to get adequate support from the Senate.
"I would just urge the chairman to pull this bill and work with us to advance a bill that stands a chance of becoming law — because this bill will never receive a Democratic vote in the House or the Senate," said Rep. Stephen Lynch, D-Mass. "And we're wasting an opportunity — we're squandering an opportunity here to do something important."
But Hensarling and other Republicans were steadfast, arguing that House Democrats were in essence defending the current system dominated by Fannie and Freddie by not offering alternative solutions.
"[I]f you plan to offer no alternative, then you are left protecting the status quo — the status quo … [that] … can make home ownership twice as difficult and twice as expensive," Hensarling told Rep. Maxine Waters, D-Calif., the top Democrat on the panel. "If you choose to offer a substitute, and I hope that you do, then certainly I look forward to putting it under the same scrutiny that your side will put on the PATH Act."
Democrats fired back, denying allegations that they are supportive of the current system. They urged the committee's GOP leadership to follow Corker and Warner's lead and try to develop a bipartisan proposal, rather than continue to back a plan that Democrats say is too focused on relying on the private sector without a realistic approach for transitioning away from Fannie and Freddie.
"Instead of working across the aisle like Mr. Corker and Mr. Warner and others in the Senate, where they have a bipartisan approach to the same challenge, my Republican colleagues have decided to pursue an ideologically extreme and dangerous bill," Lynch said.
The key difference between the two bills is whether a new housing finance system includes a government backstop to support whatever new private market is established for mortgages. Under the House GOP's plan, a five-year wind-down of Fannie and Freddie would be followed by the creation of a new "utility" that, while authorized to develop "best practices" for private mortgage participants, would be barred from providing any direct support for the housing market.
By contrast, Corker and Warner's bill, while aiming to reinvigorate the private market, would preserve a government backstop in the form of a new agency, known as the Federal Mortgage Insurance Corp., established to cover the losses of private mortgage insurers in a crisis.
"Most people on" the Senate committee "have come to the conclusion that some type of backstop is a reasonable place to be," Corker said at the Senate hearing later in the day.
The House committee debated a series of amendments to the PATH Act, including a proposal by Waters — strongly opposed by Republicans — to include a government guarantee similar to that proposed in the Corker-Warner plan. (The committee was expected to pass the overall bill as early as late Tuesday, potentially moving it to the floor for a full House vote in coming weeks.)
"This amendment is actually worse than existing law," said Rep. Patrick McHenry, R-N.C., who raised concerns that it could lead to the same type of taxpayer bailouts at the heart of the conservatorships of Fannie and Freddie.
Rep. Lynn Westmoreland, R-Ga., agreed, saying, "This amendment basically guts the intent of what we're trying to do in reform."
Another amendment proposed by Democrats would require the Federal Housing Finance Agency to determine if there was sufficient private market funding in the new system for multifamily housing projects before the GSEs were wound down. A third amendment would require the FHFA director and Treasury Secretary to ensure that 30-year mortgages are still available to low and medium-income borrowers ahead of the elimination of the GSEs. (All three Democratic amendments, along with several others addressing the issuance of covered bonds and the Federal Housing Administration, were expected to fail.)
At the Senate hearing, which was specifically called to focus on ensuring access for community-based institutions to the housing finance system, Corker and Warner along with others continued to argue that some type of government role is still needed to ensure a smooth transition.
Both Corker and Warner attempted to get agreement from Sandra Thompson, an FHFA deputy director who testified at the hearing, that a mortgage system lacking some backstop would make it hard for smaller institutions to compete with the biggest banks.
"Wouldn't the larger institutions more and more dominate the market if there weren't some type of government backstop?" Corker said.
Although Thompson declined to express support for either approach being discussed by lawmakers, she did suggest that community-based institutions could face higher costs in a system lacking government support.
"Can you envision a system where they would be on an equal footing with Wells Fargo and JPMorgan?" Warner said.
Thompson responded that that was "difficult to imagine" since "I've never worked in an environment where there wasn't that" support. Still, she was careful about expressing preference either way.
"I am envisioning the Congress working to enact legislation that I am happy to implement," she said.