The House Financial Services Committee approved a draft bill that would wind down mortgage buyers Fannie Mae and Freddie Mac Wednesday morning, staking out an aggressive position in favor of reducing the government’s role in the nation’s housing finance system.
The measure, referred to as the PATH Act, would dissolve the two mortgage businesses, which have been in the government’s possession since requiring massive bailouts during the financial crisis of 2008. It also would limit the role of the Federal Housing Administration and create a new privately run utility to standardize mortgage-backed securities.
The House Republican bill is one of several reform plans for Fannie and Freddie proposed in recent weeks on Capitol Hill. In the Senate, a bipartisan group of Banking Committee members is pushing a bill that also would end the two government-sponsored enterprises within five years. Unlike the GOP bill, the Senate group led by Bob Corker, R-Tenn., and Mark Warner, D-Va., would include a mechanism for a government guarantee of mortgage securities. The Senate Banking Committee’s chairman and ranking member, Tim Johnson of South Dakota and Mike Crapo of Idaho, are also working on a separate housing finance reform bill.
House Republicans’ bill passed the committee on a mostly party-line vote, with one Republican voting no. Democrats opposed the bill on the grounds that it would make the traditional 30-year fixed-rate mortgage unavailable to most homebuyers by removing government guarantees from the secondary mortgage market. Rep. Maxine Waters of California, the ranking Democrat on the committee, called the bill “radical and unworkable” during hearings.
Rep. Scott Garrett of New Jersey, the Republican chairman of the subcommitee overseeing the GSEs, called the bill’s passage “a critical step in reforming our nation’s housing finance system and ensuring the American taxpayers no longer have to fund $200 billion bailouts.”
Since entering government conservatorship, Fannie and Freddie have required $187.5 billion in support from the Treasury Department, according to the two companies’ regulator, the Federal Housing Finance Agency.
The two GSEs play a prominent role in the U.S. housing market. Between Fannie and Freddie and other agencies, the federal government owns or guarantees half of U.S. mortgages and backs 90 percent of new home loans.
Jeb Hensarling, the Financial Services chairman, warned during deliberations on the PATH Act that “taxpayers remain on the hook for more than $5 trillion in mortgage guarantees, roughly one-third the size of our economy.”
In recent months, Fannie and Freddie have returned to profitability and paid $131.5 paid in dividends to the Treasury. Those payments have helped reduce the deficit and postpone the date at which the Treasury will exhaust its ability to continue meeting its obligations under the debt ceiling.
The bill will now proceed to the full Republican-controlled House. The united opposition of Democrats on the Financial Services Committee to the measure indicates that it would have little chance of gaining traction in the Senate. Warner called the measure an “ideologically pure exercise that will never have a single Democrat support it.”
It’s also unlikely to gain the White House’s approval. Treasury Secretary Jack Lew has said that housing finance “is going to require a bipartisan solution.” In 2011, the Treasury Department under Secretary Timothy Geithner issued a white paper laying out several options for GSE reform, but the White House has devoted few or no resources to the issue in the meantime.
The main point of disagreement between House Republicans and Democrats concerns the viability and affordability of the 30-year fixed-rate mortgage in the absence of some kind of government backstop for securities in the secondary mortgage market. The PATH Act reflects the small-government preferences of House Republicans, but proponents insisted throughout the bill’s mark-up that the 30-year fixed-rate mortgage could exist without a government guarantee.