Go Back to the Drawing Board on GSE Reform
Senators Bob Corker (R., Tenn.) and Mark Warner (D., Va.) recently unveiled their bill to eliminate the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and replace them with a new agency that would insure mortgage-backed securities. Their effort has been met with praise from many quarters.
But the praise is badly misplaced. In its current form, Corker-Warner would be a disaster for Main Street.
Today, Fannie Mae and Freddie Mac are required by law to devote a certain percentage of their business to buying loans that support homeownership and rental housing for working-class families. These benchmarks, known as the affordable-housing goals, are not subsidies or credit enhancements; instead, they help sustain investor demand on the private market to meet the mortgage needs of creditworthy Americans who are often neglected -- people who live in rural areas, make less than 80 percent of the median income of the area in which they live, or are minorities. In 2012, the affordable-housing goals generated $267 billion in affordable loans, up from $196 billion in 2011.
Under Corker-Warner, these important goals are eliminated immediately. As a result, the bill asks American taxpayers to guarantee that they will cover the secondary market's losses without maintaining any obligation for the market to serve the full scope of America's creditworthy low- and moderate-income borrowers.
What's equally troubling about Corker-Warner is the belief that a new affordable-housing mechanism that the bill includes is somehow an acceptable substitute. The bill includes only nominal fee assessment on guaranteed loans that, in 2011, would have generated just $456 million to $913 million. The bill allocates some of these funds to the existing Housing Trust Fund and Capital Magnet Fund, but the majority go to a new Market Access Fund. That program would pay for the "research, design, and testing" of mortgage products for low-income people and offer credit enhancements to induce market participants to make mortgages.
Let's be clear: Credit enhancements are no substitute for requiring the mortgage market to treat equally creditworthy individuals the same. To suggest otherwise is offensive.
In another highly problematic element of the bill, Corker-Warner's fee assessment won't be charged for the first five years after the bill becomes law. And in order to allow the funds to ramp up, the dollars generated by the fees might not be disbursed for another five years. That's ten full years of nothing.
Corker-Warner also imposes a 5 percent down-payment requirement and a 43 percent debt-to-income ratio limit for a mortgage to be considered eligible for a guarantee in the new system. These unnecessary barriers to entry will badly curtail access to mortgage capital for many creditworthy borrowers.
More than 50 percent of the average American's personal wealth comes from the equity in their home. But that wealth disappears if, in the future, there is no one that they can sell their home to. Stagnant wages, growing student-loan debts, and changing demographics suggest that America's next generation of creditworthy homebuyers are the very people who the Corker-Warner proposal would allow the market to exclude.
These are just a few of the major problems with the legislation. And these problems make the bill a nonstarter. In planning for the future of housing finance, we must retain the elements of our old system that made it successful in growing the middle class and helping Americans climb the economic ladder. Moving forward, any serious GSE-reform bill needs to ensure that the users of a federal-government guarantee have an obligation to make conventional home loans available to the full swath of creditworthy borrowers. Currently none of the GSE-reform bills before Congress do this. That means it is time to go back to the drawing board.
John Taylor is president and CEO of the National Community Reinvestment Coalition.