In response to the 2008 crash of the housing market, the Housing and Economic Recovery Act of 2008 created the Federal Housing Finance Administration (FHFA) to serve as government conservator of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; and injected $188 billion in taxpayer funds to bailout the agencies collectively known as the enterprises.
As the U.S. housing market continues to improve, there is renewed interest in implementing reform, which would prevent a similar meltdown and create provisions to shield taxpayers from expending bailout funds in the event of future economic downturns.
The current housing finance model, in which nearly ninety percent of mortgages are held by Government Sponsored Entities (GSEs) and supported by government guarantees, imposes major risk on taxpayers in the event of a collapse and subsequent bailout. GSEs purchase mortgages from lenders and pool them into mortgage backed securities, which are retained or sold to investors. Despite official disclaimers that the U.S. government does not back GSEs, there is considered to be an “implicit guarantee” of debt obligation,which lowers the interest rates on bonds and prices out private investment.
The Housing Finance and Taxpayer Protection Act (S. 1217) has been proposed by Senator Bob Corker (R-TN) and Senator Mark Warner (D-VA) as a bipartisan approach to reform. Commonly referred to as the Corker-Warner bill, the bill would create the Federal Mortgage Insurance Corporation (FMIC) that would be modeled after the Federal Deposit Insurance Corporation (FDIC) to replace the enterprises and enforce regulations.
Main components of the Corker-Warner bill include:
- Ten percent upfront capital requirement in order to protect taxpayers from future bailouts
- Wind down of Fannie Mae, Freddie Mac, and the FHFA within five years of passage
- Replacement of past housing goals to low income borrowers with transparent and accountable market access fund supported by user fees
- Ensure access to the secondary market for institutions of all sizes after dissolution of Fannie and Freddie
- Annual review by the Government Accountability Agency (GAO) and review after eight years of the fully privatized market, which could lead to a wind down of FMIC
Government involvement in the mortgage market is intended to reduce market failures and ensure that housing is affordable and available to underserved populations. However, policies intended to address blight, which established minimum lending requirements to below median income borrowers, are considered to have contributed to the crash. The resulting proportion of subprime mortgages held by GSEs left the enterprises extremely vulnerable to market failure. Under Corker-Warner, the “Affordable Housing Goals” established by the Department of Housing and Urban Development (HUD), would be replaced by the Mortgage Access Fund to ensure affordable housing availability through transparent practices.
Another housing finance reform concern is the continued provision of a thirty-year fixed rate mortgage; this mortgage is popular in the United States, but almost non-existent in other developed countries. Corker-Warner would keep availability of this lending term intact.
At the recent event “From Recovery to Reform: Building a Sustainable Housing Finance System” hosted by the American Action Forum and Progressive Policy Institute, panelists noted that Corker-Warner makes massive strides towards GSE reform, but may not completely resolve housing finance concerns. The bill may therefore serve as a launching point for the reform that is eventually passed. While Corker-Warner is not the only reform proposal, there is consensus on the need for future housing finance reform. The potential bipartisan solution would strengthen the economy and demonstrate Congress’s ability to govern effectively.
- No Fannie or Freddie means adios, 30-year mortgage (agbeat.com)