House Democrats have submitted their own bid to bring an end to the bailed-out government-sponsored mortgage businesses Fannie Mae and Freddie Mac, joining House Republicans and two bipartisan groups in the Senate in proposing a broad overhaul of the American system of housing finance.
Rep. Maxine Waters of California, the ranking Democrat on the House Financial Services Committee, announced the legislation Thursday, calling it “an opportunity to address some of the fundamental flaws of the current system.”
Waters’ bill would, over the course of the next five years, wind down the two mortgage behemoths, a step favored by both Democrats and Republicans. All sides agree that a return to the pre-2008 bailout Fannie and Freddie business model of private companies operating with an implicit government guarantee would be a recipe for further disaster. They hope to phase out the companies, which currently play a dominant role in U.S. housing finance, backstopping about two-thirds of all new home loans.
But Waters’ bill departs from the reform bill advanced last year by her Republican colleagues on the Financial Services Committee in that it includes an explicit federal guarantee of insurance for mortgage-backed securities through a “Mortgage Securities Cooperative” owned by mortgage lenders.
It also differs from the bipartisan approach introduced earlier in March in the Senate by Sens. Tim Johnson, D-S.D., and Mike Crapo, R-Idaho, in that it would require only require 5 percent of losses to be borne by private capital before government insurance kicked in. The Senate bill would require 10 percent.
Nevertheless, Waters’ bill would require that the protections against taxpayers having to pay out for failed securities be “sufficient to cover losses incurred in recessions in the last 100 years.” Furthermore, the Mortgage Securities Cooperative would be overseen by a new regulatory agency, the National Mortgage Finance Administration, that would have authority over underwriting standards and monitor the fund that would pay out on mortgage-backed securities in the case that both private investors and the cooperative had already taken losses.
The bill also would address other Democratic priorities, such as regulating the transfer of mortgage deeds and funding a low-income housing trust fund set up in 2008 but never funded.
Waters' bill is not likely to go anywhere in the current Congress, given that Republicans control the committee as well as the House. Furthermore, the Johnson-Crapo bill is widely seen as the leading vehicle for housing finance reform, as it is bipartisan and closely parallels another Senate measure that received a nod of approval from President Obama last year.
Nevertheless, Waters said the blueprint she and other Democrats have produced “will continue to move the conversation on housing finance reform forward,” and noted that it shares “a number of common themes” with the Senate approach.
Chief among those is the framework for supporting the 30-year, fixed-rate mortgage -- the defining feature of the U.S. system of housing finance. Democrats have charged that the legislation advanced by committee Chairman Jeb Hensarling, R-Texas, would make the 30-year fixed-rate mortgage unavailable because it would not provide for a government backstop for mortgage-backed securities.