GSE reform will drive up mortgage rates
Johnson-Crapo faces markup as opposition grows
The Senate will put its hand to the future of GSE reform Tuesday morning, and how Fannie Mae and Freddie Mac evolve could affect the future of the housing market.
And any GSE reform, no matter where it lands, will likely drive up mortgage rates, sources say.
Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, of the Senate Committee on Banking, Housing, and Urban Affairs will markup their housing finance reform bill on Tuesday, April 29, 2014 at 10 a.m. ET.
“From the start, members of the committee have been extremely engaged on the issue and have demonstrated a sincere interest in advancing reform in a bipartisan manner,” Johnson said. “I look forward to a thoughtful debate in committee as we seek to move reform one step closer to the finish line.”
Johnson-Crapo is one of four GSE reform measures on the Hill. The other primary contenders are the House’s PATH Act, the House’s HOME Forward Act, and the Senate’s Corker-Warner. (The full report on the measures from the Structured Finance Industry Group can be read or downloaded here.)
The four reform measures could have substantial impact on housing, or more likely none at all, at least as they stand.
There won’t be any serious vote before the mid-term elections. Should the Republicans take the Senate, as it appears they could at this time, it’s very likely Johnson-Crapo could be scrapped in favor of something that looks more like the House PATH Act. But that more conservative measure in turn would face a roadblock at the White House.
Johnson-Crapo would unwind the role of Fannie and Freddie, replacing it with a model where financial entities would issue mortgage-back securities and be required to take losses before any government insurance relief is available.
In memos first reported by the Wall Street Journal, executives at the GSEs said they are concerned about the capital requirements for these financial firms, and how that would affect mortgage rates. Freddie says it could raise its rates 2.2 percentage points; Fannie says as much as 1.4 percentage points.
"A key question for all reform proposals, including this one, is how they will affect mortgage rates. Late last week, the Federal Housing Finance Agency released a range of cost estimates for the Johnson-Crapo legislation, provided by Fannie Mae and Freddie Mac. I thought these worthy of comment, given the importance of the issue as the Senate takes up the bill," said Mark Zandi of Moody's Analytics. "Cristian deRitis and I have estimated that the reforms proposed in Johnson-Crapo are likely to cause mortgage rates to rise anywhere from 41 to 58 basis points. The range reflects uncertainty about how the new housing finance system's regulator would implement capital requirements of the bill."
"There is no question that…mortgage rates would increase under the bill because of the increased capital requirements" for any successors to the firms, Freddie said in its memo. "The question is by how much."
Industry supporters of GSE reform took out an ad just last week supporting GSE reform without specifying Johnson-Crapo. Signers include the National Association of Home Builders, the National Housing Conference, the Mortgage Bankers Association and Habitat for Humanity.
Despite having more bipartisan support than the other three GSE reform bills, there is no shortage of critics on all sides.
A source in a Washington think tank tells HousingWire that lobbyists hired by hedge funds are going to see that Johnson-Crapo is watered down, though there's uncertainty to what degree.
GSE shareholders, meanwhile, want recapitalization and their shares before any reform.
Many fiscal conservatives and Republicans oppose the heavy hand government will play under Johnson-Crapo.More than two dozen free market organizations including the Competitive Enterprise Institute, the National Taxpayers Union, and the Club for Growth oppose the Johnson-Crapo bill.
(In an interesting twist, the American Banker posits the idea that fiscal conservatives might actually back off their opposition to many elements if liberal U.S. Sen. Elizabeth Warren, D-Mass., were to back it, and that they’ll fight harder if she supports it. Interesting horse-race calling but the opposition among fiscal hawks runs deeper than “If they’re for it, I’m against it.”)
Johnson-Crapo backers hoped to shore up support among Democrat lawmakers by appealing to the affordable housing elements of the bill, but plenty of affordable housing and low-income advocates are coming out against Johnson-Crapo.
Ahead of Tuesday’s hearing, the National Community Reinvestment Coalition and 300 other community groups sent a letter to senators Johnson and Crapo, outlining their concerns with the access provisions in the Johnson-Crapo housing finance reform legislation.
The letter calls on legislators to ensure that reforms to the housing finance system support access to mortgage credit for all creditworthy borrowers, and affordable rental housing. (A copy of the letter can be read here.)
“We want to make it clear to the Senate Banking Committee that communities across the country are concerned that the Johnson-Crapo housing finance reform legislation does not do enough to ensure access for all communities,” said NCRC’s president and CEO John Taylor. “In its current form, this bill falls short for working people, and particularly communities of color, Millennials, and low- and moderate-income communities.”
To catch a lively discussion in the run-up, here’s CNBC’s Rick Santelli.