WASHINGTON — Supporters of an unreleased Senate bill to revamp the housing finance system are fighting back against suggestions that the latest revision has become more conservative, arguing that it’s a centrist plan that should have wide bipartisan appeal.

American Banker reported last week on an outline of the plan, which would put Fannie Mae and Freddie Mac into receivership and create multiple private mortgage guarantors backed by an explicit government guarantee.

That broadly tracks a Federal Housing Finance Agency blueprint for housing finance reform, but the two plans diverge on certain details including how they handle affordable housing incentives and whether to mandate a specific rate of return for future guarantors that would replace Fannie and Freddie.

MBA president David Stevens
“I expect the legislation, if introduced, to reflect many of the core principles of the [Mortgage Bankers Association] plan including a single security issued off the [Common Securitization Platform],” said MBA CEO David Stevens. Bloomberg News

To some progressive groups, the Senate plan is tracking to the right, with Fannie and Freddie reincarnated as new entities that leave behind key elements of the GSEs' role. But mortgage industry representatives and other consultants who are close to the negotiations insist that’s not the case.

“There is actually not that much daylight between the Senate’s thinking on this and the FHFA’s recently released position,” said Jim Parrott, owner of Falling Creek Advisors and a former housing adviser to President Obama who is close to the Senate negotiations. “To the degree it’s different, it’s not more conservative, just more of a departure from the status quo.”

New guarantors

The FHFA’s plan would reconstitute Fannie and Freddie from wards of the state to private shareholder-owned corporations, while the Senate plan, which is still under discussion and subject to change, would put the government-sponsored enterprises into receivership and repeal their charters.

However, sources say the Senate proposal provides that the remnants of Fannie and Freddie could emerge with similar characteristics as the two current companies. They would be remade into private guarantors and allowed to build capital from investors. It also envisions that Fannie and Freddie’s successors and other competing guarantors would issue a single mortgage-backed security using the Common Securitization Platform that Fannie and Freddie are currently building under the oversight of the FHFA.

While some see the emerging plan as more conservative than the current GSE framework and other recent housing finance reform proposals, others see less deviation.

David Stevens, president and CEO of the Mortgage Bankers Association, said the plan gaining consensus in the Senate is similar to the housing finance proposal being developed by the MBA.

“I expect the legislation, if introduced, to reflect many of the core principles of the MBA plan including a single security issued off the" Common Securitization Platform, Stevens said.

Accounts differ on how many private guarantors the Senate plan would envision. Some sources cited discussions centering on more than 10, but others argue that number may be closer to five or six.

The FHFA did not specify how many guarantors a future housing finance system should have, but it suggested there should be at least two.

Affordable housing

Progressive groups are concerned that a housing finance system without Fannie and Freddie in their current state could jeopardize affordable housing, but Parrott said the plan that is being developed would ensure there is funding for low- and middle-income borrowers.

“On access and affordability, for instance, they are actually looking to increase the amount of subsidy in the system, but allocate it in a way that is more transparent and better targeted than it is today,” Parrott said. “So while it is more change than FHFA suggests, it is not obviously more conservative.”

The Senate plan is likely to create a fee to subsidize underserved borrowers, while the FHFA called for benefits “comparable” to existing affordable housing requirements at Fannie and Freddie, including duty-to-serve obligations and funding for the Housing Trust Fund.

Depending on the size of the fee, supporters of the Senate proposal say it could provide a larger subsidy for affordable housing than the current system.

However, some progressives argue that such a move would result in uncertainty about the level of resources for affordable housing, and therefore less housing to benefit low- and moderate-income borrowers. That uncertainty, they say, could also alienate some moderate Senate Democrats whose support is needed for an overall bill.

But Mark Zandi, chief economist at Moody’s, who has worked closely with Parrott in the past on a housing finance reform proposal, said the affordable housing piece of the Senate plan is likely to be constructed to appease Democrats and Republicans.

“The support to the underserved in the future system will also go beyond mortgage rates, and the support will be better targeted to those that need it than in the current system,” Zandi said.

“Conservatives should be comfortable with this support to the underserved as it can be accomplished while fully protecting taxpayers and allowing for multiple private guarantors that compete with each other and are able to use risk-based pricing.”

Opportunity for reform

Under the FHFA plan, the new guarantors would act as utilities with a regulated rate of return. But the Senate bill is not expected to go in that direction, as a utility model would not sit well with conservative Republicans.

Yet Parrott said Democrats should seize the moment to back the Senate plan, arguing that it’s the best chance to enact meaningful reform while maintaining key progressive priorities.

“Anyone who thinks that this administration is going to pursue an administrative path that is to the left of where the bipartisan group in the Banking Committee is has utterly lost their minds,” Parrott said.

“If this effort falls apart, in a year we’ll have a conservative FHFA director and Trump administration working as aggressively as they can to reduce the government's role in this market, and anyone who cares about progressive housing policy will regret that we let this moment pass without doing more to help.”

Sen. Bob Corker, R-Tenn., has helped lead reform efforts in the Senate and plans to step down from Congress at the end of the year. The term of FHFA Director Mel Watt, an Obama appointee, will expire next year. House Financial Services Committee Chairman Jeb Hensarling, R-Texas, is leading reform discussions in the lower chamber and also announced that he is leaving Congress.

Some view the exit of so many key policymakers as pivotal in focusing efforts on achieving a housing finance reform compromise.

“This is our greatest opportunity for a solution that will work for industry, taxpayers, and consumers,” Stevens said.

Micah Johnson, communications director for Corker, said, “Discussions are ongoing on the appropriate path forward.”