In January, U.S. Rep. John K. Delaney, D-Md., announced a plan for housing finance reform.
Partnering with fellow representatives John Carney, D-Del., and Jim Himes, D-Conn., the Delaney-Carney-Himes proposal calls for the use of private sector market forces to price risk while providing the security of a government guarantee behind the program.
Delany details the plan in an editorial posted Sunday on the Financial Times website, ft.com.
Delany says that with the government conservatorship of Fannie Mae and Freddie Mac, “The government now backs roughly 90% of all new mortgages in the county.”
Because of the government’s massive stake in the market, Delany says that the government sets the price of mortgage finance, “probably at the wrong level.”
Delany cites the government’s “mispricing of risk” as a significant contributor to the financial crisis and says, “We have ample evidence of what happens when the government distorts the massive mortgage market.”
Delany says that the bipartisan Senate Johnson-Crapo bill authored by Chairman Tim Johnson, D- S.D., and Sen. Mike Crapo, R-Idaho, of the Senate Committee on Banking, Housing, and Urban Affairs, is likely to stall without support in Congress because “there are legitimate concerns that it would leave the government with an outsize role in the housing market – and that it could make mortgage finance unaffordable for some households.”
Delany says that the plan he authored with Carney and Himes devises a system that combines the government’s financial muscle with the market’s ability to price risk. He calls this “the cornerstone” of the proposal.
“Under our plan the holders of mortgage-backed securities would absorb losses of up to 5% of their value,” Delany writes. “The remaining 95% would be covered by insurance, which would be provided jointly by the government and the private sector.”
Delany says that their plan would require at least a 10th of this insurance coverage to be purchased from private sources.
“The portion supplied by the government would have the same price as the private component, and it would insure against precisely the same risks,” he says. “Consequently the market – rather than government agencies – would determine the price for insuring mortgage risk, eliminating the damaging distortions that exist today. At the same time, the government would ensure that the market retained enough capacity to provide affordable homes for American households.”
Delany says that over time, their plan would give private capital a greater role, and decrease the government’s share of the reinsurance market, “since the private market, bearing the same risk and earning the same return, would have no incentive to use the government, save for lack of capacity.”
Delany says that Fannie and Freddie could “conceivably return to the private sector and insure mortgages under our scheme,” with the stipulation that the GSEs would receive no special deal from the government.
“Our plan would ensure that they do not return to monopoly status,” he says. Delany calls this “essential for effective reform.”
Delany calls their plan a “pragmatic” one because it gives the government a smaller role than Johnson-Crapo would, but a larger role than it would have under the PATH Act, sponsored by Financial Services Committee Chairman Jeb Hensarling, R-Texas.
“Over time the government needs to get out of the mortgage finance market that it has long dominated,” Delany says. “But it must do so with care, to ensure that creditworthy American households have access to the affordable housing loans they need. (Our plan) combines a gradual transition to private finance in the housing market with an immediate end to the government’s counterproductive role in setting the price of mortgage finance.”
Delany says “we desperately need to reform the mortgage finance system for the good of our economy, our taxpayers and the stability of the global financial system. Until we take important steps on housing reform, we will remain haunted by the ghosts of 2008.”