WASHINGTON — Housing finance reform discussions are heating up and a plan to wind down Fannie Mae and Freddie Mac could become law sooner than many anticipate, according to a key senator involved in the discussions.
“I think the stars may align … where you could actually see housing finance reform happen ahead of some of the Dodd-Frank reforms, because I think there is more consensus here,” Sen. Mark Warner, D-Va., said during a Mortgage Bankers Association conference this week.
Warner and Sen. Bob Corker, R-Tenn., appear to be taking the lead on the housing finance reform talks, picking up where the two lawmakers left off with an effort in 2013. Warner said the two plan to sit down with the top Republicans and Democrats on the Senate Banking Committee to discuss an updated plan “in the very near future.”
“The chances are pretty good that we come out with a Senate product that the industry would feel would be a good step forward,” Warner said. “Our hurdle will be how do we deal with the House?”
Warner and Corker introduced legislation four years ago that would replace Fannie and Freddie with private entities in a new system where the government provided catastrophic insurance for the mortgage market. Senate Banking Committee leaders tweaked the bill, which was eventually passed by the panel, but it lacked necessary support to be approved by the full chamber.
The House approach was markedly different. House Financial Services Committee Chairman Jeb Hensarling introduced a bill called the Path Act that would largely privatize the entire mortgage market.
Warner said the House negotiations are already on their minds.
“I don’t want to do a bill, though, where we make a lot of gives and reach … compromises and then run into a buzz saw in the House,” he said.
For his part, Hensarling reiterated Wednesday that he supports his former approach.
“I believe” the Path Act “still represents the best vehicle for reform,” he said.
Rep. Blaine Luetkemeyer, R-Mo., who is also on the financial services panel, sounded more bearish than Warner on enacting housing finance reform.
“I would think by this fall, maybe winter, we have some hearings,” Luetkemeyer said Wednesday at an event sponsored by the Financial Services Roundtable. “I wouldn’t expect anything to get done until next year. It is a very difficult issue. It is very controversial.”
Craig Phillips, a top counselor to Treasury Secretary Steven Mnuchin, said last week that housing reform remains an issue to be tackled later this year.
“In the second half, we are going to dive right into talking about” housing reform, Phillips said.
Fresh approach
Warner indicated that he and Corker will tweak their approach to housing reform this time around, which will include a longer transition period and getting affordable housing advocates on board.
“We are going to do a better job this time of trying to make sure we bring in those affordable housing advocates from the front end of the process,” Warner said.
Some prominent Senate Democrats, including Sen. Charles Schumer, who is now the minority leader, opposed the Corker-Warner approach the last time around because they felt it insufficiently addressed affordable housing issues.
Warner said the new bill will include a 5- to 10-basis-point fee to go to affordable housing, similar to the former legislation’s approach.
“That idea and notion will be included as we go forward,” said Warner, who called it a “much better solution” that not only provides more money on an annual basis but it is also easier to account for.
The thrust of the updated Senate plan, however, will still be based on private capital taking the initial mortgage risk and government backing for catastrophic losses.
He also said the plan may include using Ginnie Mae as a “wrap” for mortgage-backed securities, but stressed the importance of keeping the open infrastructure of the common securitization platform that the Federal Housing Finance Agency has been developing.
“We are not set on” on using Ginnie Mae. “That is one of the possibilities,” Warner told reporters after the MBA event.
However, Warner also stressed that the FHFA continues its work on the common securitization platform, which is viewed as another way for the federal government to issue a single security rather than having the current bifurcated system.
The mortgage industry backs the common securitization platform, which is supposed to allow Congress to end the conservatorship of Fannie and Freddie.
David Stevens, the head of the MBA and a former head of the Federal Housing Administration, said policymakers will likely have to decide between using the common securitization platform or Ginnie Mae.
"We don't advocate the use of Ginnie Mae because Ginnie doesn't issue securities," Stevens said in an interview Wednesday. "The model of how [the common securitization platform] has been developed would allow them to serve many more lenders, have a cash window so they could create their own security and roll into a single security issued off the platform."
Community banks and small credit unions typically use the cash window to sell individual loans to Fannie, which buys the loans and pools them into a multilender security. Ginnie has no cash window, making it difficult for small banks and credit unions to sell individual loans for cash.
But other housing finance players have seen Ginnie as a possible solution. A proposal by the Milken Institute's Michael Bright and Ed DeMarco, the former acting director of the FHFA, envisions expanding the capabilities of Ginnie as a platform to create a new secondary market for 30-year fixed-rate mortgages.
"There is a lot of agreement in the proposal in terms of the government guarantee and private capital taking the first loss, but there is divergence on which platform is better," Stevens said. "We believe that the CSP is a better option than Ginnie because Ginnie is so antiquated and under-resourced. Having been the FHA commissioner, I have severe skepticism that the buildout and separation of Ginnie into a private corporation can be done in an efficient manner."
This time it’s different
Overall, there is more optimism about the chances for housing finance reform because think tanks and the private sector have been active in pushing different solutions.
There is a general feeling that many of the plans are close enough that a compromise can be struck, said Michael Stegman, a fellow at the Bipartisan Policy Center and former housing point man for the Obama administration.
“If you really dig into these plans and they are not all that much different, then there is a deal to be had with a lot of hard work,” Stegman said.
Stegman noted that Mnuchin and Phillips are both very knowledgeable about the mortgage-backed securities market and are well equipped to develop their own plan.
“I really do think what will be coming out of Treasury is a proposal that is broadly in line with the prospects coming out of the Senate Banking Committee,” Stegman said.
Dividend and the debt ceiling
But Mnuchin will also have to balance competing challenges, including the $10 billion to $15 billion dividend that Fannie and Freddie pay to the Treasury as part of their conservatorship.
That money flowing from Fannie and Freddie has been used to fund other government projects and may be a factor as the U.S. approaches the debt limit.
“Some members still want to do reform, but they are not going to give up $10 billion to $15 billion unless it is a really good plan,” Stevens said in an interview earlier this month.
Warner acknowledged to reporters that working around the dividend issue will be a challenge.
Stevens said his group’s plan has taken it into account by including an explicit fee that would go into a mortgage insurance fund, which would be counted as appropriated dollars and still used for other causes.
Kate Berry contributed to this article.
