The U.S. Senate is displaying crisis amnesia in its attempt at fixing housing finance. The bipartisan bill proposed this week by Democrat Tim Johnson, who heads the chamber's finance committee, and Republican Mike Crapo would – just like the system that existed before 2008 – promote risky lending and leave taxpayers on the hook.
Fannie Maeand Freddie Mac would at least be scrapped. Both government-backed behemoths cooked their books years before the crisis and helped perpetuate the mortgage boom. After the ensuing crash, they required $190 billion of emergency taxpayer funding between them.
Lawmakers, though, want to replace them with a new financing vehicle controlled by Uncle Sam – dubbed the Federal Mortgage Insurance Corp. Johnson and Crapo reckon this new backstop would be fine holding reserves of just 2.5 percent of the loan balances it guarantees.
That would leave FMIC, perhaps eventually nicknamed "Freddie Mike," with a paltry cushion against another housing crisis. The bailout handed to Fannie and Freddie, for example, equates to 5 percent of their combined $3.8 trillion portfolio in mid-2008. True, the new bill envisages the private sector being on the hook for the first 10 percent of any losses. But in a crisis officials would be able to temporarily waive that requirement.
The bill also contains proposals that encourage risky lending. Each year FMIC would have to raise the maximum loan amount it would back, based on average home prices – currently only Congress can change this. And no reduction would be permitted, even after a downturn in home prices.
Moreover, the new entity would allow first-time buyers to make a down payment as low as 3.5 percent – a subprime mortgage-like feature that the existing Federal Housing Authority is already mandated to offer. And Johnson and Crapo flip prudent pricing on its head by suggesting lower guarantee fees for loans made in areas banks judge to be most risky.
There are bright spots, such as a national mortgage database and a plan to help smaller lenders compete. But all in, the proposal looks politically convenient rather than financially sound. It may still be too controversial to pass in this midterm election year. But it's increasingly likely that eventual reforms to the U.S. mortgage finance system will look like a rebuild of Fannie and Freddie.
Source: Reuters
Fannie Mae
Lawmakers, though, want to replace them with a new financing vehicle controlled by Uncle Sam – dubbed the Federal Mortgage Insurance Corp. Johnson and Crapo reckon this new backstop would be fine holding reserves of just 2.5 percent of the loan balances it guarantees.
That would leave FMIC, perhaps eventually nicknamed "Freddie Mike," with a paltry cushion against another housing crisis. The bailout handed to Fannie and Freddie, for example, equates to 5 percent of their combined $3.8 trillion portfolio in mid-2008. True, the new bill envisages the private sector being on the hook for the first 10 percent of any losses. But in a crisis officials would be able to temporarily waive that requirement.
The bill also contains proposals that encourage risky lending. Each year FMIC would have to raise the maximum loan amount it would back, based on average home prices – currently only Congress can change this. And no reduction would be permitted, even after a downturn in home prices.
Moreover, the new entity would allow first-time buyers to make a down payment as low as 3.5 percent – a subprime mortgage-like feature that the existing Federal Housing Authority is already mandated to offer. And Johnson and Crapo flip prudent pricing on its head by suggesting lower guarantee fees for loans made in areas banks judge to be most risky.
There are bright spots, such as a national mortgage database and a plan to help smaller lenders compete. But all in, the proposal looks politically convenient rather than financially sound. It may still be too controversial to pass in this midterm election year. But it's increasingly likely that eventual reforms to the U.S. mortgage finance system will look like a rebuild of Fannie and Freddie.
