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AS HOUSING FINANCE REFORM STALLS IN CONGRESS, FHFA SEEKS INPUT ON FEES

© Krantz News Service, June 11, 2014

Housing finance reform has some backing -- from the White House and within Congress -- yet legislation has yet to come to the floor in either the House or the Senate.

And with new cross-currents in the political winds generated by top Republican Eric Cantor's primary loss on Tuesday, major substantive changes are unlikely soon.

As legislation to eliminate Fannie Mae and Freddie Mac has stalled, the immediate housing finance policy focus has turned to federal rulemaking. The Federal Housing Finance Agency recently announced that it is seeking comment on a proposal to increase loan generation fees.

Nevertheless, election season could elevate the debate on legislative proposals now out of committee in both chambers.

House and Senate versions of reform legislation had already slowed to a stop after passing key committees, but the defeat of Cantor (R-Va.), the House Republican Leader some hailed as a future Speaker, points to new uncertainties. A new leadership contest is likely to pull the House Republican Conference further to the right and strengthen fiscal conservatives, at least in the near term.

While interest in some kind of housing finance reform remains in play, the debate is likely to become more polarized, as those opposed to creating a new entity to replace Fannie Mae and Freddie Mac may be emboldened by Cantor's loss to hold firm to their position.

Fannie Mae and Freddie Mac, the giant government-sponsored enterprises (GSE's), have been under FHFA's conservatorship for nearly six years since the subprime mortgage crisis of 2008.

A bill to replace the GSE's with a single new entity, the Federal Mortgage Insurance Corporation, passed out of the Senate Banking Committee on May 15 by a vote of 13 to 9, but Majority Leader Harry Reid (D-Nev.), has not scheduled a floor vote on the measure.

FHFA Director Melvin L. Watt has gone out of his way not to take a position on the bill, known as Johnson-Crapo after its sponsors, but President Obama and a centrist coalition have signaled their support.

A significantly different bill passed the House Financial Services Committee last year. Sponsored by Chairman Jeb Hensarling (R-Tex.), the bill also would eliminate the GSE's. But it departs from Johnson-Crapo by rejecting the idea of a replacement entity.

Hensarling has said he is "skeptical of any approach that does not end the permanent government guarantee in the secondary mortgage market. Such an approach could very well perpetuate the cycle of boom, bust and bailout we tragically just witnessed."

What remains to be seen is the political impact on housing finance issues of Cantor's loss.

Immigration was widely seen as key issue among the electorate in Cantor's district, which is highly conservative and rated R+10 by the Cook Partisan Voting Index. (The index compares the district's performance in the past two presidential elections with that of the nation as a whole).

But it was more than immigration. Cantor's opponent, David Brat, an economics professor at Randolph-Macon College known to like Ayn Rand, broadly criticized Cantor for being insufficiently conservative. That message may resonate with already-conservative House Republicans, pushing the conference further to the right on a number of issues and prompting them to dig in on policy ideas for housing finance post-Fannie Mae and Freddie Mac.

Hensarling, who had been in Republican leadership before accepting chairmanship of House Financial Services, has strong support among conservatives and may now be a candidate for top leadership. That would appear to strengthen his argument against government guarantees, although his legislation received no Democratic support in committee.

As for Johnson-Crapo, further action had been seen as unlikely anyway before the November elections. Opposition in the Senate has come from both liberals and conservatives; the former seek to advance low-income home ownership, while the latter say the government is too involved in the housing market.

Sen. Elizabeth Warren (D-Mass.) is one of six key Senate liberals who have not backed Johnson-Crapo. On a range of issues she has expressed alarm at what she sees as a federal regulatory retreat over the past 30 years: "Washington took financial cops off the beat by slashing funding for our regulators, letting big banks load up on risk and target families with dangerous credit cards and mortgages," she wrote in a CNN editorial early in May.

On the other hand, a coalition of 26 conservative groups have publicly stated that phasing out Fannie Mae and Freddie Mac is not sufficient to qualify as reform in housing finance. Johnson-Crapo, they argued in a letter to the Senate Banking Committee, "replace(s) them with a new federal entity, the Federal Mortgage Insurance Corporation, which would give explicit guarantees to trillions of dollars of mortgages . . . . The increase in moral hazard and taxpayer risk should be clear."

So, with both liberals and conservatives opposed to Johnson-Crapo in the Senate and conservatives feeling newly emboldened in the House, final legislation is unlikely any time soon. But the picture can change in the longer term.

For one thing, this is an off-year election cycle, heightening the drama of Tuesday's development but perhaps exaggerating as well any perceived momentum for a substantially free market solution. In addition, there is still broad support from bankers, realtors and others to accommodate the push for reform while maintaining government-backed securities, albeit in a new entity.

Meanwhile, FHFA has asked for input "regarding the optimum level of g-fees required to protect taxpayers and implications for mortgage credit availability."

The FHFA first proposed in December to increase the guarantee fees, which are known as g-fees, that Fannie Mae and Freddie Mac charge to lenders. The g-fees support a credit guarantee to investors in mortgage-backed securities.

Director Watt, who assumed his post in December, had suspended the increase in January pending further review, and the FHFA now seeks comments by August 4, 2014 as part of that review.




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