House Democrat moves goalposts for GSE reform

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WASHINGTON — A housing finance reform plan must maintain a government backstop for the mortgage system, modernize credit scores and provide troubled homeowners with ways to avoid foreclosure, a senior House Democrat said Tuesday.

Rep. Gregory Meeks, D-N.Y., who chairs the House Financial Services Committee’s subcommittee on consumer protection and financial institutions, said those three components are “non-negotiable” requirements for any legislative fix for the government-sponsored enterprises.

"The federal government must continue to pay a central role in the mortgage market, and it should do so with a paid-for guarantee of mortgage-backed securities and through affordable housing requirements," Meeks said at a Mortgage Bankers Association conference. He added, "Housing finance reform must include reasonable alternatives to foreclosure … to help distressed borrowers.”

Meeks said that it is critical that GSE reform include a federal guarantee for MBS to maintain adequate mortgage options particularly for low- and moderate-income borrowers.

“A liquid secondary mortgage market means a deeper primary market,” Meeks said. “It means the most underserved or hard-to-serve communities may have a greater shot at participating in the housing market.”

Meeks went on to say that the credit evaluation processes that Fannie Mae and Freddie Mac use to evaluate whether a mortgage is creditworthy enough must also be modernized as part of any reform package. For example, he said, the traditional FICO credit model does not take into account things like phone bills that a consumer pays, meaning a consumer with a demonstrated track record of paying bills on time may not benefit from that record when it comes time to apply for a loan.

“Housing finance reform must include modernization of credit scoring models used by the GSEs,” Meeks said. “We should be moving toward incorporating credit scoring models that include as much predictive information as possible.”

Meeks concluded by saying that any housing finance proposal should include alternatives to foreclosure for borrowers who become delinquent on their loans. The foreclosure crisis that began in 2008 wreaked havoc on many American communities, he said, including the Queens neighborhood in New York City that he represents.

The displacement for homeowners and financial turmoil of the crisis greatly exceeds any benefit that might have come to lenders in repossessing so many homes, Meeks said. Additional alternatives to foreclosure must be developed.

“Whether it’s displacing families and destabilizing communities through vacancies, stripping equity from neighboring families, damaging consumer credit scores, starving local communities of property tax revenue, or disrupting the education of children forced to move, there are larger societal harms associated with foreclosures that are in the public’s interest to prevent to the greatest extent feasible,” Meeks said.

Meeks’ comments are some of the most concrete goalposts to emerge from the Democratic-controlled House Financial Services Committee since the White House directed government agencies to develop a proposal for GSE reform. The White House directive followed the release of a legislative summary by Senate Banking Committee Chairman Mike Crapo, R-Idaho, that would convert Fannie and Freddie into private guarantors and require Ginnie Mae to provide a government backstop.

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GSE reform Credit scores Foreclosures Housing finance reform House Financial Services Committee Senate Banking Committee FHFA Fannie Mae Freddie Mac