A Closer Look at the Johnson-Crapo Housing Reform Bill
Senator Tim Johnson and Mike
Crapo first introduced the bill in hopes of changing the way Americans buy
their homes. The bill proposes to wind down government-sponsored enterprises
Freddie Mac and Frannie Mae and replace them with a new government agency known
as the Federal Mortgage Insurance Corporation (FMIC). The FMIC will act as a new federal regulator
of the mortgage industry to be able to monitor the safety of several financial institutions.
The new agency will also administer a special refund to cover losses on
mortgage-backed securities.
Taxpayer Protection Act of 2014,
formerly known as the Housing Finance Reform Bill, aims to promote financial
and macroeconomic stability by making private investors responsible for 10% of
first losses providing for a government guarantee only during cases of a catastrophic
scenario. Of course the US Economy doesn't
know how to do anything less than a catastrophic financial disaster that may
require another bail out. To believe we
are not already headed into more trouble is naive.
Supporters of the bill claim that
pursuing the new agency will improve the old system since the FMIC requires
private capital to share in the losses. The
federal government would only be responsible to pick up the tab once the borrower’s
resources, capital reserves and insurance funds have all been exhausted. But when you have very big players in the
industry the risk of that very scenario is a reality and we are right back to a
Federal Bailout.
The bill also ensures equitable
access to housing by releasing mandatory affordable housing goals that the
Congress has enacted but charges borrowers a 10 basis point premium dedicated
to three different affordable housing funds. It is a well-meaning and
long-overdue effort given that Freddie Mac and Frannie Mae were required a
massive taxpayer bailout five years ago.
This plan then proposes to
replace Freddie Mac and Fannie Mae with a federal mortgage insurance provider
changing the federal government’s role into a last resort guarantor in housing finance.
It will also increase the role of
private capital bearing the risks associated with mortgage lending. No offense to the Congressmen but this is
Crapo Crap.
While the Johnson-Crapo Plan
would not change the range of mortgages available to consumers, costs are very
likely to increase substantially because that is how the private sector rolls -
capitalism at its finest. You have to
love it if you are a businessman and an American. We all know it's true. In
addition, the lack of lending to minorities and low income borrowers will be
worse than it already is with the current Federal mandates in place. Many organizations are opposed to this bill
mainly because the plan does not do enough to promote affordable housing. Reducing government guarantees will make
homeownership even more unaffordable to many low-income Americans and
minorities than it already is now.
The opposition also prefers to
shift all housing finance functions to the private sector because establishing
first-loss thresholds for private investors will not change the incentives for mortgage
lenders to assume risk beyond their means. When mortgage lenders are allowed to
price their own risks knowing that their losses are capped, this may lead to
more risk leaving taxpayers liable for mortgage losses in the future.
The 2008 crisis demonstrated that
government guarantees lead to more leverage in the economy and eventually
magnified underlying economic risks. Supporters of this bill claim that such
risks will not amount to a taxpayer-funded bailout because the new agency will
provide loss coverage using a federal mortgage insurance fund. The mentioned
fund is financed by user’s fees that mortgage-backed securities investors would
pay. However, these government funds just amount to obligations that, in case of
a crisis, would still be paid from tax revenue. This is a shell game folks. Do not fall for it. We need to keep FNMA and FHLMC right where
they are, especially now and kick the well intended reforms down the road for
another time.
Unfortunately on May 15, the
supporters of the bill had enough votes to approve the bill. The final vote was
13-9 which was a smaller margin than supporters had initially hoped for. With
its approval vote from the committee, the next move will be up to the Senate
majority leader who will decide whether to bring the bill to a vote into the
full Senate. But many observers claim that even if the bill were to have a
Senate floor vote and pass, it still will not pass the House. It seems like the
bill is still up for a rough road ahead. Some say the bill is set to be dead on
arrival. I only hope they are right.
Several leading national
organizations, including the National Community Reinvestment Coalition (NCRC)
and National Association of Real Estate Brokers, sent a letter to Senate
Majority Leader Reid calling on him not to give the bill a floor vote in the
Senate. By outlining the negative impacts for first-time buyers, minorities,
working-class and rural families, these organizations made it clear that they
were opposed to the bill.
Former Treasury Secretary
Timothy Geithner expressed his thoughts about the bill on Fox News. “If people
are worried … are we going to recreate or preserve the same set of systems that
contributed to the crisis, that’s a very valid concern? We shouldn’t do that,” More than two dozen free market organizations
are opposed to the bill while the Mortgage Bankers Association, National
Association of Realtors, National Association of Home Builders, the National
Housing Conference, the Mortgage Bankers Association and Habitat for Humanity support it. Is
anyone surprised?
While the Johnson-Crapo bill was created
to address homeownership and rental housing needs of the people, the bill also
provides explicit taxpayer guarantees that are simply not necessary. The
Johnson Crapo bill will not help people buy homes but will only shut more low
income people and minorities out of home ownership. What it will do is protect investors at the
taxpayers’ expense again. Although the
Johnson-Crapo bill is not likely to become a law anytime soon, investors in
Freddie Mac and Fannie Mae will continue to push for resolutions of their
lawsuit. This is America. The US Government can't have it both ways or
can they? Should Investors be made whole just like the
US Government has been made whole by the profitability of FNMA and FHLMC? That is another blog. I pray that the profitability of FNMA and
FHLMC continues well into the next administration. Thankfully, several senators rightfully stood
strong to refuse a bill that is not right for communities and the working
people. Will Hillary solve this issue if she wins the election? I believe she will run for the Presidency. What do you think? Let me know.
Comments
Post a Comment