Photographer: Jacob Kepler/Bloomberg

This Political Fight Is a Big Threat to Fixing the Mortgage Market

  • Ex-Obama adviser aims to bridge divide that doomed 2014 bill
  • Lawmakers split over rules for low-income, minority borrowers

The latest effort to fix the U.S. housing-finance system may hinge on solving a riddle that wrecked the last attempt: How far will Congress go to ensure that low-income and minority borrowers can get loans while protecting taxpayers against bailouts?

Lawmakers have begun laying the groundwork for legislation that could redefine the government’s role in the mortgage market. The effort comes three years after a bipartisan bill stalled in the Senate amid disagreement over requirements that Fannie Mae and Freddie Mac set aside loans for less-wealthy homebuyers and underserved communities.

A plan to be released Wednesday aims to square the circle by eliminating those goals and requiring that the government-sponsored companies and potential competitors have plans to provide financing to underserved markets with new quantitative yardsticks to measure success or failure.

The proposal comes from Michael Stegman, the Bipartisan Policy Center fellow who helped develop the 2014 bill while working as a housing-policy adviser for then-President Barack Obama. He said new requirements also could expand mortgage access and boost the amount of money the companies spend to promote affordable rental housing.

Under current law, Fannie and Freddie devote a certain percentage of their business to low- and moderate-income borrowers and accommodate underserved markets such as rural areas and manufactured homes. The earlier Senate Banking Committee legislation that would’ve replaced the mortgage-finance giants with a new system was doomed by a lack of agreement on what to do with the mandates.

QuickTake: Fannie Mae and Freddie Mac

If the new effort is to succeed, lawmakers will have to break the stalemate. Many Republicans say they won’t stomach a bill that preserves the affordable housing goals, while some Democrats won’t vote for a bill that kills them.

The contentious nature of the debate was underlined at a House Financial Services Committee hearing earlier this month.

“The government’s housing policies themselves, beginning with the enactment in 1992 of affordable housing goals, principally caused’’ the financial crisis, said Representative Andy Barr, a Kentucky Republican.

As Barr spoke, he was interrupted by Wisconsin Democrat Gwen Moore, who asked if she could respond.

“I am just sick and tired; It’s a lie,’’ Moore said of the assertion that Fannie and Freddie caused the crisis. The private market sold toxic assets to the companies, making them victims themselves, she said.

1992 Law

The 1992 law Barr referred to requires that Fannie and Freddie finance a certain percentage of affordable mortgages to low- and moderate-income borrowers.

The two companies don’t lend directly to borrowers. They buy mortgages from lenders, wrap them into securities and make guarantees in case borrowers default.

Fannie and Freddie have been under U.S. control since they were seized during the financial crisis, and the overhaul efforts are aimed at dialing back the government’s role in the housing market.

As the market crashed in 2008, some conservatives pointed the finger at the affordable housing goals as a reason for the crisis. The obligation pushed lenders to make ever riskier loans, precipitating the downturn, they said.

Those arguments have been undercut by academic studies arguing that private lenders like Countrywide Financial Corp., rather than Fannie and Freddie, drove the market for the riskiest loans and that the government-sponsored companies’ mortgages performed far better.

‘Symbolic Cause’

The goals “became a symbolic cause of the crisis even though there is very strong evidence to the contrary,” Stegman said.

Despite the housing recovery, there’s evidence that some minority and low-income borrowers are still struggling to get loans. Between 2005 and 2015, the share of mortgages made to black and Hispanic borrowers dropped to 16 percent from 25 percent, according to an Urban Institute analysis of government data.

Stegman’s proposal would kill the affordable housing goals, but introduce new requirements. The companies, or the housing-finance system as a whole, would create plans to increase lending to underserved markets with benchmarks to help gauge success. The plan also would increase the amount of money they send to help develop affordable rental housing and to expand mortgage access.

It remains to be seen whether Stegman’s plan will satisfy both sides of the aisle. Some Republicans may say it’s just affordable-housing goals by another name. On the other hand, Democrats have been dubious that a new system could provide as many subsidies for low-income borrowers as the current one does.

Meet Objectives

“The paper should bring some people that had been overly dug in off of those positions to discuss what a better way would look like,” said Jim Parrott, a consultant for financial firms who also used to be a housing adviser in the Obama administration. Parrott said he thought Stegman’s proposal could meet objectives of some members of both parties.

The proposal “would hurt rural and working families across the country,” said Michael Calhoun, president of the Center for Responsible Lending. He said Stegman’s proposal in effect abandons the affordable housing goals and waters down the companies’ duty to serve all markets.

One problem not addressed in Stegman’s plan, Calhoun said, is how to prevent new housing-finance models from charging more to less-well-off borrowers than to rich borrowers.

“This is 180 degrees in the wrong direction,” he said.

The 2014 bill also eliminated the goals and replaced them with an adjustable fee on mortgage balances that would give more funding to affordable housing efforts. That bill, sponsored by South Dakota Democrat Tim Johnson, who led the Senate Banking Committee, and Idaho Republican Mike Crapo, the panel’s current chairman, passed the committee but died because of middling support from progressive Democrats.

The Federal Housing Finance Agency, which controls Fannie and Freddie, enforces the companies’ current affordable housing requirements. The FHFA is headed by Obama appointee Mel Watt until 2019, at which point President Donald Trump will pick a successor.

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