President Obama had his Rip Van Winkle moment on housing policy Tuesday. He hadn't lifted a rhetorical finger in the direction of new housing policy since his State of the Union address, where he called for lower mortgage costs and a streamlined application process.
"Right now, there's a bill in this Congress that would give every responsible homeowner in America the chance to save $3,000 a year by refinancing at today's rates," Obama said. "Democrats and Republicans have supported it before. So what are we waiting for?"
Congress, specifically the GOP-controlled House, wanted the president to join the broader debate about the government's role in the mortgage industry. Access to mortgages, costs related to first-time applications, and messy foreclosures are all important housing issues. But for House Republicans, the central question in housing policy is Washington's role: Do Fannie Mae (the Federal National Mortgage Corp.) and Freddie Mac (the Federal Home Loan Corp.) continue to exist and, if so, why?
These government-sponsored enterprises vacuumed mortgages before and during the housing boom and repacked them into securities. They did so with the implicit backing of taxpayer guarantees. Investors bankrolled Fannie and Freddie because they couldn't lose. If Fannie and Freddie were shrewd, their investments rose in value. If Fannie and Freddie cratered, investors were bailed out. Fannie and Freddie were shrewd for years. Then the housing bubble, fueled in part by lower lending standards at Fannie and Freddie, burst. Homeowners lost trillions of dollars in equity and taxpayers coughed up $191 billion in bailout funds. Fannie and Freddie reported profits in the second quarter of 2012 for the first time since the fourth quarter of 2006 and have since paid back about $132 billion to the Treasury, but the future of GSEs sits at the heart of future housing policy and what lessons, if any, were learned.
Until now, Obama has been reluctant to call for an end to Fannie and Freddie. He glossed over the issue in all of the legislative debate over Dodd-Frank and throughout much of its tortured implementation. He didn't even take note of it in the State of the Union. Now Obama has finally , endorsing emerging Senate legislation to shutter them both and put private capital at the center of the mortgage market.
Obama's move toward the Senate bill, drafted by Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn., is the first signal that Washington may be getting serious about post-bubble housing policy. But the Warner-Corker bill has yet to have a hearing, let alone get a scheduled Banking Committee markup. It does, however, have bipartisan committee support.
Warner and Corker would wind down Fannie and Freddie over five years and also close the Federal Housing Financing Agency. It would stand up a new agency, the Federal Mortgage Insurance Corp., and require 10 percent of capital be permanently available as a hedge against default and bailout. The bill would continue to prioritize affordable housing goals in the real-estate and rental markets and retain a sliver of federal backstopping by charging a fee of five to 10 basis points on every new FMIC loan. The concept is to finance affordable housing loans and rental assistance separately from the overall, private real-estate market that Corker-Warner (and now Obama) envision.
There are critics of Corker-Warner who fear it will not do enough to protect affordable-housing goals because it is largely silent on access, geography, and income priorities. In 2011 and 2012, affordable-housing goals from GSEs generated nearly $400 billion in loans. Corker-Warner would no longer require specific targets and could thus reduce loan availability. As Obama defines housing policy in terms of middle-class gains, a key fight may well be over Corker-Warner prescriptions (implied but not stipulated) on affordable housing. Free-market critics denounce Corker-Warner for keeping the government involved in the housing market through a fee-based backstop, arguing that pressure from Congress, homebuilders and affordable-housing advocates will conspire to loosen standards and artificially goose the market.
House Republicans agree with this critique and have drafted a far more aggressive approach to housing reform. The so-called Protecting American Taxpayers and Homeowners Act would abolish Fannie and Freddie, eliminate any vestige of government backing for the mortgage market, and erase all federal affordable housing goals or mandates. The bill passed the Financial Services Committee on July 24 and is headed for floor consideration this fall. Corker doesn't think much of the House GOP bill, and Warner doubts it will pass the House.
The White House has not issued a veto threat but strongly opposes the bill, arguing that it would either eliminate or dramatically reduce the availability of a 30-year, fixed-rate loan; increase barriers to credit for first-time homebuyers; and ignore affordable-housing goals in the real-estate or rental markets. House Republicans reject the 30-year loan argument and question whether that loan is actually best for first-time homebuyers anyway.
The contours of the debate are stark. House Republicans want Washington out of the real-estate market forever and don't really care if that means some deserving home purchasers have to wait a bit longer or pay a slightly higher mortgage rate for their first house. House GOP housing policy is about caution in the marketplace and zero Washington influence, backstopping, or prioritizing. That is a harsh, free-market and low-risk approach. It's where they have been since the real-estate market collapsed.
Many of the assumptions of Corker-Warner reflect these House GOP impulses, and with Obama now endorsing an end to Fannie and Freddie, the House GOP posture matters and cannot be ignored. This will be especially true if House Financial Services Committee Chairman Jeb Hensarling, R-Texas, follows through this month on the quiet whipping of the GOP conference he began after his panel passed the PATH act. If Hensarling gives Speaker John Boehner a credible vote count, something chairmen are asked to do more commonly now, the PATH Act may see floor action and pass this fall. The recent resolution of the student-loan standoff proves that House legislation, even if opposed by the White House, can turn the debate.