Advertisement

SKIP ADVERTISEMENT

Senators Draft Housing Finance Overhaul

WASHINGTON — The top Democrat and Republican on the Senate Banking Committee said on Tuesday that they had agreed on a plan to overhaul the nation’s housing finance system and eliminate Fannie Mae and Freddie Mac, the mortgage giants that were bailed out by taxpayers in 2008.

The committee chairman, Tim Johnson, a Democrat from South Dakota, and Mike Crapo of Idaho, the ranking Republican, have come up with a compromise that provides an explicit government guarantee for mortgages, but only after private investors have taken the first losses. The plan would set up a new federal regulator, called the Federal Mortgage Insurance Corporation, to provide the guarantee and regulate the system.

“There is near unanimous agreement that our current housing finance system is not sustainable in the long term and reform is necessary to help strengthen and stabilize the economy,” Senator Johnson said in a news release. “This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country.”

More than two dozen plans have been floated for changing the housing finance system, but this one carried bipartisan clout significant enough to move markets. The price of Fannie Mae stock fell 43 percent on Tuesday, and Freddie Mac was down 33 percent. Both of the stocks had been rising on investors’ hopes that the mortgage giants’ functions would be privatized.

The bill, to be released in the coming days, still faces an uphill battle. Although its creators were under pressure to release a plan in time for a vote this year, the chances of the legislation reaching the Senate floor are uncertain.

But supporters hoped that it would put pressure on House Republicans, and the White House applauded the effort as a “workable bipartisan approach to complete the biggest remaining piece of postrecession financial reform.”

The bill is modeled on an earlier bipartisan bill by Senators Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat. But Julia Gordon, the director of Housing Finance and Policy at the Center for American Progress, a liberal think tank, said the new plan was centered more on housing than on the needs of investors and included an explicit commitment to serving all markets.

Image
Senator Tim Johnson, left, and Senator Mike Crapo, the leading members of the Senate Banking Committee, agreed on a plan to eliminate Fannie Mae and Freddie Mac.Credit...Chip Somodevilla/Getty Images

Jeb Hensarling, chairman of the House Financial Services Committee, which approved its own bill last year, said the Senate plan “features several common-sense provisions” but said he was “skeptical” of any plan that did not address the Federal Housing Administration, which offers low down payment loans.

The new agreement would establish the Federal Mortgage Insurance Corporation as the insurer of last resort, but would require 10 percent private capital reserves. The guarantee, provided for a fee equivalent to 0.1 percent interest, would not kick in until the private reserves were wiped out. Fannie and Freddie would have remained solvent during the housing crisis if they had kept 4 percent of their capital in reserve.

The bill would create a single platform to standardize mortgage-backed securities, which are investment vehicles created by bundling mortgages and then selling off pieces of the bundle to spread the risk of default.

The bill would also set a minimum down payment of 5 percent, except for first-time home buyers, who would have to put down 3.5 percent for the mortgage to qualify for the guarantee. Some advocates have said they would prefer that the down payment amounts be left to the new regulator, who could adjust them in response to economic conditions.

Still, the agreement received tentative praise from industry and consumer groups, including the National Community Reinvestment Coalition, a housing advocacy group, and the Mortgage Bankers Association.

“It’s a seminal moment really, because this is the first truly comprehensive and viable plan to address Fannie Mae and Freddie Mac,” said Mark Zandi, the chief economist at Moody’s Analytics, who testified before the banking committee. “It’s well thought out, it’s very detailed, they considered all the moving parts. And really, this is the last big thing lawmakers need to do to put the great recession in the history books.”

The increased capital requirements and the government guarantee would raise the cost of borrowing for homeowners, Mr. Zandi said, because the risks of the system would no longer be borne by all taxpayers. He estimated that interest rates would increase by 0.4 to 0.5 percentage points.

The bill would eliminate the affordable housing goals that governed Fannie and Freddie, which required them to make a certain number of loans to people with low incomes but which some advocates said were easily gamed and worked to discourage lending in particularly expensive markets. John Taylor, president and chief executive of the National Community Reinvestment Coalition, said he had been assured that lenders would be encouraged to offer loans to low-income families through incentive pricing or would be required to do so by the regulator.

“It looks like members of Congress and the administration understand the need to make sure that product is available to all income levels, including working-class people,” he said.

A correction was made on 
March 13, 2014

An article on Wednesday about a new Senate plan to wind down the mortgage finance agencies Freddie Mac and Fannie Mae paraphrased incorrectly from comments by Julia Gordon of the Center for American Progress. She said the new plan included a commitment to serving all markets, not “people of all income levels.” Because of an editing error, the article also misidentified, in some editions, an agency that Representative Jeb Hensarling said the proposal failed to deal with. It is the Federal Housing Administration, not the Federal Housing Finance Agency. The article also misstated, in some copies, an estimate by the economist Mark Zandi of how much the proposal might increase mortgage rates. He estimated they would rise 0.4 to 0.5 percentage points, not 0.25 of a percentage point.

How we handle corrections

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Senators Draft Housing Finance Overhaul. Order Reprints | Today’s Paper | Subscribe

Advertisement

SKIP ADVERTISEMENT