Yesterday, Rep. Jeb Hensarling (R-TX), Chairman of the House Financial Services Committee released a mortgage finance proposal that stands in sharp contrast to the bipartisan Corker-Warner proposal introduced last month in the Senate. The highly partisan bill focuses on private-label mortgage-backed securities while eliminating or ignoring critical pieces of housing finance that are essential to American families’ access to affordable mortgages and rental housing.
The bill proposes to dismantle the GSEs and curtail FHA’s role in hopes that private-label securities will fill in the rest of the secondary market. It would not provide an explicit government backstop, thereby leaving the country in a situation similar to the pre-financial crisis world, in which there was no explicit guarantee of mortgage markets, but everyone expected the federal government to step in if the system crashed. Without an explicit government backstop, however, there would be little room for the safe, sustainable 30-year fixed rate mortgage that provides stable housing and a way for American families to build wealth.
Certainly, some parts of the bill deserve a closer look. Transparency and standardization would do much to make private-label mortgage-backed securities more efficient. Regulatory provisions, like the risk retention rule, could be modified to let credit flow more freely to responsible borrowers without perfect credit or accumulated wealth. There may well be more buried in the bill’s 300-odd pages, but given the partisan rhetoric surrounding it, few may ever read it.
The rhetoric surrounding the bill is in some ways worse than the policy provisions. It relies on a simplistic, ideologically-driven view of the world that misses how unregulated private capital pumped up the housing market and then fled during the crash, leaving government-backed sources as the only option for families in need of mortgage credit. Ascribing the housing crash entirely to government is a tired lie that will lead policy astray.
Housing finance reform is a practical challenge that requires hard work and political compromise to overcome. Only a truly bipartisan effort has a chance to enact meaningful reform that would bring private capital back, protect taxpayers, and ensure reliable flows of capital for affordable homeownership and rental housing for all in America.