Lawmakers spar over housing finance plan

The North Carolina Democrat got a bipartisan round of applause for clearing his first hurdle to head up the Federal Housing Finance Agency (FHFA) during the contentious hearing on exactly what Watt would oversee — the housing finance system. 

Watt opted out of the question-asking process but he was the only one as the hearing lasted nearly seven hours. 

While there is general agreement that Fannie and Freddie must eventually be wound down and the government’s role in the mortgage market greatly diminished, there is a difference of opinion on the process. 

Lawmakers on both sides of the aisle, along with the batch of witnesses also made clear that taking no action would be the worst choice for Congress. 

Republicans, several of whom crafted and released the proposal a week ago, defended their plan, arguing that the bill is what is needed to eliminate Fannie and Freddie, overhaul the cash-strapped Federal Housing Administration (FHA) and get private capital injected back into the system. 

A primary co-sponsor Rep. Randy Neugebauer (R-Texas), chairman of the Financial Services Subcommittee on Housing and Insurance, said the bill will provide for a “healthy and stable housing market.”

He said the measure would ensure that FHA serves first-time homeowners and low-to-moderate-income borrowers and would “facilitate increased investor interest in the secondary mortgage market by removing impediments to private capital and defining a clear set of rules for private securitization.”

The House plan does not include any government guarantee for mortgages — a major sticking point for Democrats who argued that it effectively make it impossible for moderate- to lower-income borrowers to obtain the popular 30-year fixed-rate loan. Only loans insured by the FHA would get a government backstop. 

Overall, the bill got mixed reviews from a panel of experts who testified before the committee. 

Democrats spent most of the hearing trying to get witnesses to acknowledge that the GOP measure would end the 30-year mortgage and leave few options for borrowers who are unable to make larger down payments or may not have sky-high credit scores.

Mark Zandi, chief economist at Moody’s Analytics, said if the GOP bill is implemented in its current form, it would “lead to significantly higher mortgage rates, particularly in tough economic times, and would put 30-year fixed rate mortgage loans out of reach for most borrowers.”

Under the bill, the FHA would account for no more than 20 percent of the mortgage market and the rest of the market would receive no government support, he said. 

He said the 30-year-fixed loan option needs to be preserved and is “absolutely critical to a well-functioning mortgage system” but that doesn’t happen under the GOP plan. 

Ranking member Maxine Waters (D-Calif.) said the so-called PATH bill is a “path to nowhere act” because, she argued, that nearly privatizing the mortgage market and ending the government guarantee cuts out a large majority of borrowers. 

“I’m deeply disappointed in the radical and unworkable discussion draft that is before us today, as well as the lack of interest in making this a bipartisan effort,” Waters said. 

Democratic Rep. David Scott of Georgia said the GOP bill reminds him of Darth Vader and called the proposal a “dark star” that would wreck havoc on mortgage lending. 

Panel Chairman Jeb Hensarling (R-Texas) and other Republicans and a couple of witness suggested that the 30-year fixed mortgage isn’t needed because most people sell their homes within six or seven years and never approach an equity position. 

Peter Wallison, who is with the American Enterprise Institute, argued that retaining a government guarantee in an overhaul will only lead to the same problems that nearly collapsed the economy nearly five years ago, and that banks can still offer a 30-year loan without government backing. 

Jerry Howard, CEO of the National Association of Home Builders, told the panel that “federal support is particularly important to ensure that 30-year, fixed-rate mortgages, the bedrock of the nation’s housing finance system since the 1930s, remain available at reasonable interest rates and terms.”

“As currently drafted, the PATH Act does not provide the federal support necessary to ensure a strong and liquid housing finance system, and we urge the committee to make the necessary changes.”

On Wednesday, Sen. Mark Warner (D-Va.), a lead co-sponsor of the Senate’s bipartisan effort to overhaul Fannie and Freddie, called the House measure an “ideologically pure exercise that will never have a single Democrat support it.”

This story was first posted at 3:41 p.m. and then updated.