Efforts to overhaul the housing-finance system could hinge on how far Congress is willing to go to ensure that young, low-income and minority homebuyers can get mortgages.
A bipartisan bill drafted by Senate Banking Committee leaders Tim Johnson and Mike Crapo relies on incentives to persuade financiers to lend to groups with higher risk profiles. Consumer and civil-rights organizations are pushing instead for a mandate that those groups must be served, a concept that has become a political flash point since the housing bubble burst.
Key Democrats on the banking panel whose support is needed to pass the measure may vote against a bill that doesn't include a mandate, especially as mortgage borrowing has dropped among blacks, Latinos and first-time buyers.
"Thereís not enough attention to affordable housing goals" in the draft, Sen. Sherrod Brown, an Ohio Democrat, said in an interview last week. Brown said he is discussing the billís language with colleagues ahead of an April 29 hearing where the measure will be amended.
The debate goes to the heart of political divisions over whether the government is to blame for the housing collapse, and any move to include a mandate could jeopardize the votes of Republicans. Some Republicans and free-market advocates say the real estate bubble was caused by Fannie Mae and Freddie Macís affordable-housing goals, which require the companies to buy loans made to borrowers in underserved communities.
Civil-rights groups and consumer organizations including the National Association for the Advancement of Colored People and the National Community Reinvestment Coalition say unscrupulous subprime lenders, not the affordable-housing goals, were to blame for the deteriorating lending standards that caused the bubble. Without a mandate, these groups say, disadvantaged buyers could be shut out of the market, hurting the broader economy.
"Access to the market for first-time homebuyers and people of color is extremely limited," said Julia Gordon, director for housing finance and policy at the Center for American Progress, a Washington advocacy group with ties to the Democratic Party. "Weíre not living in a nirvana right now, but itís crucial not to go backwards."
The Johnson-Crapo draft measure would dismantle Fannie Mae and Freddie Mac, which buy loans and package them into securities with guaranteed payments of principal and interest. The U.S.-owned companies would be replaced by a system in which mortgages are mostly backed by private capital. The government would play a smaller role in the market by taking a backstop position on mortgage securities, stepping in only if private interests were wiped out by catastrophic losses.
Issuers of mortgage securities would pay lower fees if they include loans to disadvantaged groups or communities. Gordon and other analysts say they aren't convinced the cost difference will be enough of an incentive to prevent some private securitizers from focusing only on wealthy borrowers.
The consumer and civil-rights groups are making their push as homeownership among minorities and first-time borrowers has plummeted. Banks have tightened credit standards in response to the waves of defaults that began in 2006.
Only 131,000 black families obtained mortgages in 2012, compared to nearly 600,000 in 2005, according to an analysis of Home Mortgage Disclosure Act data by the Urban Institute Center for Housing Finance Policy.
The share of black borrowers dropped from 8% to 4.8% in that time, and Hispanic borrowers dropped from 13.3% of purchases in the market to 8.6%. Meanwhile, white borrowers increased from 65% of the market to 71.2%.
The percentage of borrowers who are buying for the first time has declined to historic lows of about 27% from the long-term average of about a third of buyers, according to an analysis by Bank of America Merrill Lynch Global Research.
"If you donít allow first time homebuyers to have meaningful market share then youíre preventing everybody else who wants to trade up in the market," Mitria Wilson, director of policy and advocacy at the community reinvestment group, said in an interview. "It matters for new buyers but also matters for all those millions of older adults out there who have been counting on being able to cash out of owning their homes as part of their retirement security."
Lobbying for changes that would benefit traditionally disadvantaged borrowers is largely confined to advocacy groups. Housing-industry trade organizations including the Mortgage Bankers Association say they think the financial incentives could be enough to persuade securitizers to serve those groups.
A potential cost difference of as much as $500 per loan is "a lot," MBA President David Stevens said in a telephone interview. "That can make the difference competitively of whether you win that mortgage or donít in some marketplaces."
Still, pressure from the consumer and civil-rights advocates could be enough to keep the measure from moving forward this year if it causes Brown and other Democratic senators on the Senate Banking committee, including Jeff Merkley of Oregon, Robert Menendez of New Jersey and Elizabeth Warren of Massachusetts, to withhold support.
Broad backing among those Democrats will be necessary to convince Senate Majority Leader Harry Reid, a Nevada Democrat, to schedule the measure for a vote. Leadership aides have described Reid as lukewarm about dismantling Fannie Mae and Freddie Mac.
In an interview last week, Menendez said he"s "concerned about" whether first-time homebuyers, particularly from disadvantaged communities, would be able to get mortgages.
"I'm not quite sure that the incentives that they think would generate that possibility are sufficient to get there," he said.