(Bloomberg)—A Senate bill to overhaul the U.S. mortgage-finance system would devote billions of dollars to boosting home ownership among lower-income borrowers, according to a recent draft obtained by Bloomberg News. For some left-leaning lawmakers, that won’t be enough.
The draft, the result of discussions between Tennessee Republican Bob Corker and Virginia Democrat Mark Warner, gives the clearest view yet into how the senators aim to woo progressive politicians to back their plan for addressing mortgage-giants Fannie Mae and Freddie Mac. Support from those Democrats is likely needed to meet the 60-vote threshold for passing major bills in the Senate.
Corker and Warner would levy a “market access fee” on new loans. That money would be used to help build affordable-rental housing and make buying homes cheaper for low- and moderate-income borrowers, according to the draft.
That approach is being met with skepticism by some affordable-housing groups. They say other parts of the proposal could lead to lower-income borrowers getting less aid than they do in the current system. If the authors move to appease those critics, they could lose Republicans who want the government’s involvement in the mortgage market to be reduced if not eliminated.
Micah Johnson, a spokeswoman for Corker, said the draft obtained by Bloomberg “is not current or complete. Discussions are ongoing and nothing has been finalized.”
“We continue to have productive discussions about the appropriate path forward,” Corker said in a statement through the spokeswoman. “I am hopeful we will be able to reach consensus on legislation that will scale back the government’s role in housing finance and protect taxpayers from future economic downturns.”
Warner spokeswoman Rachel Cohen said in an email that “to get his support, any proposal would have to have strong affordability provisions, including enhanced assistance for first-time homebuyers.”
Fannie and Freddie, which have been under the federal government’s control since the 2008 financial crisis, don’t make loans. They buy them from lenders, wrap them into securities and make guarantees to investors in case the mortgages default. That process gives lenders money to keep making loans, while the guarantees keep interest rates down for borrowers.
The new proposal includes an explicit guarantee of mortgage-backed securities provided by the U.S. government through mortgage agency Ginnie Mae. The structure wouldn’t begin until there are at least five or six competitors approved to work in the new system, including descendants of Fannie and Freddie, according to the draft.
As in prior versions, Senate negotiators still haven’t specified how legacy shareholders in Fannie and Freddie and the government’s controlling stake in the companies will be addressed. People familiar with the matter have said the proposal would likely make legacy preferred investors whole or close to it. Fannie and Freddie investors include prominent hedge funds that have been fighting for years to get their hands on the companies’ profits, which now flow to the Treasury Department.
At a Senate Banking Committee hearing on Tuesday with U.S. Treasury Secretary Steven Mnuchin, Corker acknowledged the companies’ private shareholders and said, “we’ve got an opportunity though to really deal with all of the interests in a manner that is fair but also moves our nation ahead.”
In response to questions from Corker, Mnuchin said the administration has considered “lots of things” they could do if the Congress doesn’t act, but declined to detail those options.
The draft obtained by Bloomberg shows lawmakers are still negotiating crucial aspects for revamping the housing-finance system, as some sections include brackets or placeholders without text.
Today, Fannie and Freddie in effect overcharge safer borrowers to help subsidize lower rates for riskier borrowers. The new system would let mortgage guarantors charge borrowers based on their individual risk.
It would also abolish affordable housing goals that stipulate how many loans mortgage companies must finance to less-affluent borrowers.
The version of the bill obtained by Bloomberg doesn’t specify the market access fee, but people familiar with the matter said that the most commonly discussed level is 0.1 percent of a loan balance. Assuming guarantees of about $5 trillion, that would result in about $5 billion a year in funds to help low- and moderate-income borrowers.
“The bottom line is that under most assumptions, low- and moderate-income borrowers do better in the future system than they do in the current system,” said Mark Zandi, an economist with Moody’s Analytics who has advised Corker and Warner on the legislation. Zandi is also on the board of a private mortgage insurer, whose business could be impacted by the new system.
Some progressive groups, however, have expressed skepticism that Republican lawmakers will back a system that helps low-income home buyers as much as Fannie and Freddie do now. Abolishing the current affordable housing goals, which some GOP politicians blame for the financial crisis, is also a deal-breaker for some Democrats.
In December letters to leaders of the Senate Banking Committee and the House Financial Services Committee, groups including the Center for Responsible Lending and the NAACP wrote that any new law needed to ban “excessive” risk-based pricing.
The $5 billion in funds to promote home ownership, they wrote, “is not an adequate substitute for the existing pooling of risk or the affordable housing goals.”
If such groups can’t be won over, the Corker-Warner plan will likely fail. In 2014, a bipartisan group of senators attempted to pass legislation to replace Fannie and Freddie with a new system, but the effort foundered amid progressive opposition.
In January 2019, President Donald Trump will be able to appoint a new Fannie-Freddie regulator atop the Federal Housing Finance Agency who could restrict the companies’ mortgage lending. Still, the progressive groups say the risk of Trump’s pick chipping away at the companies’ affordable-housing requirements isn’t justification for rushing legislation.
“We wouldn’t rewrite the civil rights law because we have individuals at the helm we disagree with,” said Scott Astrada, director of federal advocacy for the Center for Responsible Lending. “This legislation would define the housing-finance system for decades.”
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