House Prioritizes Housing Finance Reform

U.S. House

On October 3, 2017, the U.S. House of Representatives’ Financial Services Committee conducted a hearing on possible housing finance reform measures titled “Sustainable Housing Finance: An Update from the Director of the Federal Housing Finance Agency.”  The hearing specifically addressed housing finance reform as it pertains to government-sponsored entities (GSEs) Fannie Mae and Freddie Mac and their controversial conservatorships.  The Federal Housing Finance Agency (FHFA) regulates and supervises Fannie and Freddie, in addition to Federal Home Loan Banks.  The FHFA is also Fannie’s and Freddie’s conservator and has been since September 6, 2008.

Committee Chairman Jeb Hensarling (R-TX) delivered an opening statement at the hearing that condemned the “failed GSE experiment” and expressed a desire to “build in its place a new housing finance system that provides opportunity, affordability, and sustainability for homeowners, for taxpayers and for the broader economy.”  He further admonished Fannie and Freddie for “represent[ing] a virtual government monopoly in housing finance that lacks meaningful competition or innovation,” and conveyed concern that mortgage loan “[u]ndewriting standards are being eroded.”  The Congressman said he envisioned housing finance reform where “private capital plays the predominant role.”  To thwart a second taxpayer bailout of Fannie and Freddie, he proposed instituting measures to ensure that only people who can “actually afford to keep” their homes are permitted to buy them, which includes ridding efforts to “lower down-payment requirements, rais[ing] the debt-to-income ratio, and divert[ing] funds into a housing trust fund that lacks accountability.”

Former Committee member Melvin L. Watt, who is currently the Director of the FHFA, was the sole witness during the hearing, through whose testimony the Committee examined the GSEs’ nearly decade-long conservatorships.  Mr. Watt explained that the FHFA, as conservator, has been operating the GSEs in “the here and now,” “in line with [his] belief … that it is the role of Congress, not FHFA, to decide on housing finance reform.”  Various aspects of Mr. Watt’s testimony reinforced points made during Congressman Hensarling’s opening statement, as he testified that Congress should reform housing finance to do away with the conservatorships.  Mr. Watt testified that such conservatorships are “unsustainable,” but stressed that Fannie’s and Freddie’s operations under the conservatorships have been successful.  For instance, he noted that the GSEs’ “delinquency rates … substantially declined” since the financial crisis and that “their financial performance has improved significantly.”

To transition from conservatorships to a permanent reformed housing finance system, Mr. Watt urged Congress to consider four questions:

  1. “How much backing, if any, should the federal government provide and in what form?”
  2. “What process should be followed to transition to the new housing finance system and avoid disruption to the housing finance market, and who should lead or implement that process?”
  3. “What roles, if any, should [Fannie and Freddie] play in the reformed housing finance system and what statutory changes to their organizational structures, purposes, ownership and operations will be needed to ensure that they play their assigned roles effectively?”
  4. “What regulatory and supervisory structure and authorities will be needed in a reformed system and who will have responsibility to exercise those authorities?”

The very the existence of this hearing is significant because many doubted that this Congress would even attempt to prioritize housing finance reform.  LenderLaw Watch will provide any updates on any future measures taken to move on from the GSEs’ conservatorships.

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