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What’s next for Johnson-Crapo?

Industry reacts positively; opponents say it's DOA

The Senate Committee on Banking, Housing, and Urban Affairs passed to the floor the Housing Finance Reform and Taxpayer Protection Act, commonly known as Johnson-Crapo, by a 13-9 vote Thursday morning.

Johnson-Crapo, supporters say, would reform the U.S. housing finance system by winding down Fannie Mae and Freddie Mac and replacing them with a new system in which private capital would be in a first-loss position prior to a catastrophic government guarantee being made available.

As described by the Structured Finance Industry Group, this system would be regulated by the newly created Federal Mortgage Insurance Corporation and backstopped by the Mortgage Insurance Fund.

Notably, two manager’s amendments, no. 2 and no. 98, passed the Committee to amend the bill. Summaries of these amendments can be read here. An amendment that would prohibit federal entities from purchasing or insuring mortgage loans in municipalities that use eminent domain to seize underwater mortgages was defeated by the Committee in a 14-8 vote.

With its approval vote from the committee, the next move will be up to the Senate majority leader, who will decide when or if to bring the bill to a vote in the full Senate.

Reaction within the housing industry is largely positive.

David Stevens, president and CEO of the Mortgage Bankers Association said the group will work to have Johnson-Crapo brought to the Senate floor.

“MBA commends the Senate Banking Committee for voting this bill out of committee for consideration by the full Senate. Chairman Johnson and Ranking Member Crapo are to be applauded for coming together in a bi-partisan fashion and creating a piece of legislation that reforms our housing finance system in a way that ensures sufficient liquidity for single family and multifamily mortgages while also protecting taxpayers,” Stevens said.

“Passing the committee is an important step on the road to reform, but plenty of work remains. MBA is eager to continue working with the members of the Senate, as well as other stakeholders, to find common ground and bring housing finance reform legislation to the Senate floor,” he said. 

Groups including the Credit Union National Association, National Association of Federal Credit Unions, National Association of Realtors, National Association of Home Builders, the National Housing Conference and Habitat for Humanity support the GSE reform.

Bipartisan Policy Center Housing Commission co-chairs Secretary Henry Cisneros and Sens. George Mitchell, Kit Bond and Mel Martinez said in a joint statement that they hope Johnson-Crapo passes because the current situation is untenable.

“Our nation’s government-dominated housing finance system is unsustainable and continues to pose unacceptable risks to our nation’s taxpayers and the overall economy. At the same time, too many creditworthy families are being shut out of the mortgage market altogether, in part because the uncertainty surrounding the future architecture of our mortgage system has discouraged lending and dampened the housing market,” the joint statement read.

The vote came even as fiscal conservatives, affordable housing advocates, GSE shareholders, and free market policy advocates are finding common cause against the measure.

“It's taken the Senate almost six years to produce a bill that can't pass the full Senate. Brilliant. Well done,” said Anthony Sanders, distinguished professor of real estate finance at George Mason University, and a critic of the legislation.

National Community Reinvestment Coalition’s president and CEO John Taylor said he sees the bill having a negative impact on access to credit for minorities and lower income borrowers.

“The deeply divided committee vote is a clear signal that this bill is dead in the water, and with good reason. Significant changes are needed before it could provide the access to affordable credit guaranteed by Fannie Mae and Freddie Mac. If this bill became law in its current form, it would be a giant step backward for the working class, people of color, millennials, and other traditionally underserved markets,” Taylor said. “Our system of housing finance is the most successful one in the industrialized world. The overwhelming majority of Americans build wealth through homeownership, and this bill would make it much harder to have that opportunity. Time to go back to the drawing board and develop legislation that works for everyone.” 

What is the future for Johnson-Crapo?

Should the bill not go before the Senate before the mid-term elections, it is unlikely it will see light again. This unlikelihood grows substantially if the Republicans take control of the Senate from the Democrats.

A note from Compass Point Research & Trading goes through the various scenarios.

“Depending on the result of the midterm election, and internal Senate politics thereafter, we believe one of four Senators will be the next Chair of the Senate Banking Committee: (1) Senator Shelby; (2) Senator Brown; (3) Senator Crapo; or (4) Senator Schumer. Of these four, only Senator Crapo voted in favor of the legislation,” Compass Point’s analysts say. “More notably, Senators Shelby and Brown – who we view as the Democratic and Republican front-runners for the post – both offered detailed statements of opposition to the bill. Senator Shelby noted his concerns about the mechanics of the platform, taxpayer protection, and the functioning of the regulatory framework.”

They also note that Senator Brown highlighted concerns that large banks would dominate the system, geographic disparities could arise, and mortgage credit for low-to-moderate borrowers could be constrained.

“The concerns expressed by both Senator Brown and Senator Shelby in their opening statements illustrate the difficulty in restarting the GSE reform conversation in the next Congress,” the Compass Point note says.

Johnson-Crapo is also pretty much dead in the House, at least according to the House leadership.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, who backs the PATH Act, said Johnson-Crapo was simply a wealth redistribution scheme.

“The fact remains the window for action this year is quickly closing, and I fear it may already be too late during this Congress with an already full agenda to get meaningful reform bills through both chambers. Additionally, while there are several commonsense provisions in Senate bill that are similar to those we included in the PATH Act, the Senate bill features a controversial and irresponsible new politicization of mortgage credit insisted by Senate Democrats under the guise of affordable housing,” Hensarling said. “This wealth redistribution scheme, far worse than that of the current system, would be a multi-billion dollar annual invitation to return to the lower credit standards, higher risks, and unsustainable lending that created the crisis in the first place.”

The FHFA will likely remain at the center of attention.

“We continue to believe that Senator Reid is unlikely to bring the Johnson-Crapo GSE reform bill to a floor vote due to both legislative and political concerns. Given our view that GSE reform legislation will not advance further in this Congress, we believe that the FHFA will likely remain the center of the housing policy universe for the foreseeable future,” Compass Point says.

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