Housing Finance Reform Proposals Seek Larger Role for Private Sector

The PATH Act faces stiff opposition in Washington. In addition, leaders of the national Mortgage Bankers Association and the Center for Responsible Lending said they favor the Senate proposal.

Opponents of the bill say it would mean the end of 30-year fixed rate mortgages. Critics also worry that the private sector is not capable of providing a reliable and adequate supply of housing credit without a federal backstop. They argue these mortgages are good for consumers but risky for banks because it is so hard to hedge against uncontrollable risks over so many years.

“The [Hensarling’s] proposal would badly hurt America’s middle class, ending the affordable 30-year fixed-rate mortgage, the lifeblood of our housing market,” Waters said. “It severely limits the availability of FHA backed mortgages and raises the costs of those mortgages significantly. By severely undercutting the FHA, the PATH Act is bad for community banks, consumers and taxpayers.”

The National Association of Home Builders (NAHB) said federal support is particularly important in continuing the availability of the 30-year fixed-rate mortgage. NAHB Chairman Rick Judson told the Senate Banking Committee Thursday that an effective housing finance reform plan must include a federal backstop to ensure that these mortgages remain affordable.

“There are serious doubts on whether a private housing finance system would be capable of supporting this type of product without some government backing,” he said. “At a minimum, the cost and terms of 30-year mortgages would be significantly less favorable under a totally private system and many fewer families would be eligible for home loans.”

Any housing finance reform faces the question whether private capital is ready and able to provide mortgage credit to U.S. homebuyers through a secondary market if Fannie and Freddie are closed.

Mark Calabria, director of financial regulation studies at the Cato Institute, is confident the private market will step in to replace the government’s role in the mortgage business. To back up his claim, he points to the existence of the jumbo mortgage market.

In most markets, Fannie and Freddie cannot back loans of more than $417,000, although the cap ranges as high as $625,000 in areas that are more expensive and up to $721,050 in Hawaii. Mortgages within these FHFA-mandated limits are known as “conforming loans.” Loans that exceed that amount, called jumbo loans, cannot be bought by Fannie and Freddie, and consequently are not guaranteed by the U.S. government. Instead, these loans have to be originated and then securitized by private financial institutions.

Calabria said if a government guarantee was essential we would expect the jumbo market to be relatively small compared to the relevant segment of the housing market. Instead, the jumbo loans, which have comparable interest rates to conforming loans, currently amount to 5 percent of the mortgage market even though homes exceeding the FHFA high-cost limit are only 4 percent of the market.

He said one effective way to start the phase-out process would be to reduce the limits for conforming loans, giving Fannie and Freddie a smaller share of the mortgage market.

President Obama has voiced his support for the Corker-Warner proposal. In August, the president outlined his proposal, which is largely in line with the Senate overhaul.

He said any measure he signed into law should “preserve access to safe and simple mortgage products like the 30-year fixed-rate mortgage.”