House Financial Services Committee Passes GSE Reform Bill
On July 24, 2013, the House Financial Services Committee approved, by a vote of 30-27, H.R. 2767 the Protecting American Taxpayers and Homeowners Act of 2013 (PATH Act), a measure that would ultimately replace Fannie Mae and Freddie Mac with a largely privatized housing finance system, without federal backing. Two Committee Republicans — Rep. Gary Miller (R-CA) the committee's vice chairman, and Rep. Michael Fitzpatrick (R-Pa) — joined Democrats in opposing the bill, which was originally released as a discussion draft on July 11, 2013. The measure would also reduce the role and size of the Federal Housing Authority.
The Committee defeated all of the proposed amendments offered by Democrats, only accepting a small number of second degree amendments offered by the bill's co-sponsors. Notably, the bill's chief sponsor, Scott Garrett (R-NJ) added a provision that would modify the definition of "interests in real estate" as referenced in section 3(c)(5)(C) of the Investment Company Act of 1940 to specifically include "risk-sharing transactions, qualified securities, and any other mortgage-related instruments or products created pursuant to the Protecting American Taxpayers and Homeowners Act of 2013 or amendments made by the Act."
The Committee's Chairman, Jeb Hensarling (R-TX), himself a co-sponsor of the bill, described it as an initiative to create "a housing finance system that's designed for hardworking taxpayers so they never again have to bail out corrupt financial government enterprises…." By contrast, the Committee's Ranking Democrat, Representative Maxine Waters (D-CA) characterized the bill as "radical and unworkable" and "a failure on all counts, and for all stakeholders."
The bill would require Fannie and Freddie to be scaled down and liquidated over a period of five years. During this five year transition the two government-sponsored enterprises would be required to shrink their portfolios at a rate of 15% per year until they hit a floor of $250 billion and to share 10% of the credit risk from new business every year with the private market.
The bill departs significantly from the bipartisan S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013, as sponsored by Senators Bob Corker (R-TN) and Mark Warner (D-VA),which calls for: 1) replacing Fannie and Freddie within five years with a new FDIC-like governmental entity, the Federal Mortgage Insurance Corp (FMIC), intended to support private sector securitization activities by developing standard form credit risk-sharing mechanisms, standards and products; 2) insuring the portion of covered securities for which private market participants have not taken a first loss position; 3) charging and collecting fees, including guarantee fees to be charged to private sector participants; and, 4) serving as a catastrophic reinsurer. By contrast, H.R. 2767 would create a "National Mortgage Market Utility" which would serve as a standard-setter charged with developing best practices for private mortgage players; the utility would be banned from any direct role in the market and could not provide guarantees.
Prior to the July 18 hearing on the bill, Committee Democrats unveiled their bottom-line "must-have" principles for GSE reform, which included preserving the 30-year fixed mortgage, assurances that all federal guarantees be paid for by the private sector by retrospective fees, prevention of excessive risk-taking by private lenders and access to homeownership for qualified borrowers. Several witnesses at the hearing, including both market experts and representatives of housing market stakeholders, presented evidence suggesting that the PATH Act's wholesale elimination of a federal guarantee would threaten the continued availability of the affordable 30-year fixed rate mortgage. Moody's economist Mark Zandi, coauthor of an alternative proposal to address the housing GSEs, predicted that under the PATH Act, the supply of mortgages would be significantly curtailed and that mortgage costs for even the most qualified buyers would increase by roughly 90 basis points.
The PATH Act's supporters, including Peter Wallison of the American Enterprise Institute and Mark Calabria of the Heritage Foundation, insisted that the private sector is well-equipped to take over this role. As Calabria noted during the July 18 hearing, "…proof of the mortgage market's ability to function without Fannie Mae and Freddie Mac is the existence of the jumbo mortgage market. Thirty-year fixed-rate financing is readily available at affordable rates in the United States without the backing of a government sponsored enterprise…the jumbo market is currently around 5 percent of the mortgage market."
Following the release of the Corker-Warner bill, two other senators — the Senate Banking Committee's chairman Tim Johnson (D-SD) and ranking member Mike Crapo (R-ID) — released a discussion draft of the Federal Housing Administration Solvency Act of 2013, a bipartisan bill intended to improve the financial condition of FHA, strengthen underwriting standards, enhance lender accountability measures, and reform the FHA's reverse mortgage program. Several House Committee Democratic Members indicated their support for this measure, and Committee Ranking Member Maxine Waters introduced an unsuccessful amendment that would have inserted provisions of this bill in the Chairman's Mark.
Chairman Hensarling indicated he would like to move this bill to the House Floor for a vote prior to the August recess. However, the partisan divide in the House Financial Services Committee does not bode well for developing a consensus bill that could pass both the House and Democratic-controlled Senate.