We need reform that will protect 30-year mortgage, taxpayers

On Sept. 7, 2008, after six consecutive quarters of increased foreclosures, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship. Nearly seven years later, housing finance policy stands frustratingly still. The policies of 2008, while everything else around us has changed, are locked in place. The government-sponsored enterprises (GSEs) remain in conservatorship, the housing comeback has been uneven, and the taxpayer remains at risk.

After a $187 billion dollar bailout and a private mortgage industry still reeling from changes, the GSEs have come to dominate the mortgage market, insuring or purchasing the vast majority of home mortgages. Effectively, the mortgage market has been nationalized.

For this reason, since coming to Congress in 2013, I have made housing finance reform a priority.  For many Americans, the massive losses sustained during the crisis have not been recouped. We cannot lose sight of the fact that millions lost their homes and that, even today, more than 8 million homes remain seriously underwater. The mortgage crisis was a profound human tragedy that is still being felt. Seven years later, a distorted housing market continues to put homeowners and taxpayers at risk and is dragging down growth and opportunity.

The key word for housing finance reform is balance. I believe we must strike the right balance between public sector and private sector participation, creating a system that maintains affordability for the middle class while protecting taxpayers and homeowners from another meltdown. Unfortunately, the GSE reform proposals put forward so far have been stymied, leaning too heavily toward one side of the scale, either reducing affordability and access or not doing enough to prevent future bailouts.

With my colleagues Reps. John Carney (D-Del.) and Jim Himes (D-Conn.), I have introduced legislation that aims for the right balance. The Partnership to Strengthen Homeownership (H.R. 1491) combines the private sector’s superior ability to price risk with the government’s ability to provide capacity. Our legislation maintains an explicit government guarantee, which is essential to maintaining wide access to the fixed-rate 30-year mortgage, expands affordable housing programs and ensures that the private market prices all of the risk in government funded housing finance.  Importantly, our legislation also decreases the chances of another bailout, protecting taxpayers.

The way we strike this balance is through an innovative new solution. Under the Partnership to Strengthen Homeownership, we establish a new insurance program through Ginnie Mae, which maintains the full faith and credit of the federal government but protects taxpayer investment by requiring adequate private-sector capital and accurate pricing of government reinsurance. All government guaranteed mortgage-backed securities will be supported by a minimum of 5 percent private sector capital, which will stand in a first loss position. The remaining 95 percent of the risk will be shared between Ginnie Mae and a private reinsurer.  Under this structure, Ginnie Mae provides a guaranty for 95 percent of the risk but is required to sell off at least 10 percent of its guaranty exposure on a pari passu basis (same terms and conditions) to a private reinsurer; the pricing that the private market requires for its share will set the pricing for the Ginnie Mae share as well. This means that market forces and private capital will play a larger role in the housing market, reducing the chance of another housing bubble due to overheated conditions.

At the same time, our legislation protects the consumer in two key ways. First, as mentioned above, we maintain an explicit government guarantee as well as a government role in ensuring liquidity, both of which are essential for middle-class affordability. Prior to the federal government’s intervention in these key areas, which began in the 1930s, 30-year fixed rate mortgages were unheard of. This presence needs to be maintained. Second, fees paid to Ginnie Mae for providing these securities will be allocated to affordable housing programs. As we transition to a new housing finance system, it is essential that we make sure underserved communities have access to home ownership.

Lastly, the bill winds down Fannie Mae and Freddie Mac, and allows them to be sold and recapitalized. Conservatorship, with all the burdens and risks it carries, will end.

Our legislation builds on thoughtful proposals introduced by members of both parties in both chambers, including Sens. Mark Warner (D-Va.) and Bob Corker (R-Tenn.), House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and ranking member Maxine Waters (D-Calif.). The Partnership to Strengthen Homeownership has been endorsed by leading housing groups, including the National Low Income Housing Coalition, the Community Home Lenders Association and the National Association of Realtors.

The need remains urgent. Last month, the FHFA announced that the profitability of the GSEs “is not assured” and that Fannie and Freddie are unprepared to weather another downturn without another bailout. Housing is a hugely important sector of our economy and a hugely important component of the American dream; until we enact balanced reforms, the prospects for both will remain tenuous for many.

Delaney has represented Maryland 6th Congressional District since 2013. He sits on the Financial Services Committee.