Hensarling Housing Finance Plan: The Beginning of the End for Fannie and Freddie
Rep. Jeb Hensarling (R-TX) has released a discussion draft of his proposal, the Protecting American Taxpayers and Homeowners (PATH) Act, which could be the beginning of the end for the federally sponsored (i.e., taxpayer-backed) housing finance agencies Fannie Mae and Freddie Mac. The Heritage Foundation explains the legislation would help create a housing finance system that protects both taxpayers and homeowners.
Heritage Action supports the PATH Act, calling it a “solid conservative [solution] to one of our nation’s most pressing problems.” Recall, these two entities have had ruinous effects on the financial system.
Heritage explains the flaws of Fannie and Freddie:
Fannie Mae and Freddie Mac represent a failed institutional model that shielded them from losses while allowing them to rake in profits during periods of growth. The underwriting record of these housing finance GSEs contains serious and systemic business and policy errors, and congressional leaders need to recognize the failure of this institutional arrangement.
Fannie and Freddie have had special access to federal funds and the implicit guarantee of a federal (again, taxpayer) bailout. The flawed policies behind these failed institutions have allowed them to have a de facto monopoly over the mortgage and secondary mortgage markets.
It’s time for all of this to change, for the sake of American taxpayers, not to mention the economy as a whole.
Hensarling’s plan provides for the complete dissolution of Fannie Mae and Freddie Mac. Heritage explains in detail the other changes the plan would make.
It creates the National Mortgage Market Utility (NMMU), which unlike Fannie and Freddie would not receive any federal government guarantees. NMMU would create a “framework in the U.S. financial markets for the issuance of covered bonds as an alternative to mortgage financing structure to securitization and portfolio lending.” It would also be barred from issuing securities.
The reform plan would also address the role of the Federal Housing Administration (FHA) in the housing finance system, which has grown beyond the scope of its original mission of providing lending opportunities to first-time and low- and moderate-income homebuyers. The FHA would become an independent government agency separate from HUD. FHA would be required to set up responsible credit requirements for borrowers and increased risk sharing from FHA lenders.
Finally, the plan would also provide relief to banks and mortgages securitized through the NMMU from certain Dodd-Frank Act regulations. This would provide some level of certainty for private capital to return to U.S. financial markets.
The Hensarling draft proposal is a much needed step toward market-based reform of housing finance.