President Trump Should Push the Senate on GSE Reform
By Norbert Michel, Heritage Foundation Financial Regulations Expert
The House Financial Services Committee has just passed a major financial regulatory reform bill, the Financial CHOICE Act. It’s a welcome and significant step toward repealing the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, an incredibly flawed law that neither reformed Wall Street nor protected consumers.
Wisely, Chairman Jeb Hensarling (R-Texas) decided to keep his housing finance reform ideas, included in the 2013 PATH Act, out of the Financial CHOICE Act. This decision makes perfect sense because the House and the Senate could not be farther apart on their housing finance reform ideas.
The House bill would remove government backing from the housing finance market, but the Senate is on the verge of expanding it with a new federal agency that makes government guarantees explicit.
Including the House’s version of housing finance reform in the Financial CHOICE Act would all but ensure the bill’s speedy demise; leaving it out means that the Senate Banking Committee can now focus on a companion bill for the CHOICE Act.
Democrats are in no rush to repeal large chunks of Dodd-Frank, but many other financial regulatory reform ideas have passed the House during the last few years with broad bipartisan support. Oddly, the Banking Committee has decided to focus on housing finance reform anyway.
Last Thursday the Committee held a hearing to explore “The Status of the Housing Finance System After Nine Years of Conservatorship.” The title pretty much says it all –Congress has done nothing substantive on housing finance reform in almost a full decade.
If the hearing is any guide, Congress is no closer to fixing the housing finance system. One of the more memorable exchanges was a testy back and forth between Sen. Elizabeth Warren (D-Mass.) and Federal Housing Finance Agency (FHFA) Director Mel Watt, a former Democratic Congressman.
“After the crisis the money just flew out the door to the banks, billions and billions of dollars,” Warren said Thursday, while people “ripped off by those very same banks” got little help.
“I certainly hope you’re not blaming me for that,” Watt said. “I tried to stop it when I was a member of the House.”
“I agree that all of those things have taken place, but to make it sound like I’m responsible for that is unfair, untrue and unjust,” said Watt, who left Congress three years ago to lead the FHFA.
Warren was unrelenting.
“You’ve been driving this bus since 2013,” Warren said. “At best, a few thousand people have gotten help and that’s shameful.”
The closest things came to a debate over substantive issues was when Watt hinted that the FHFA could start withholding Fannie/Freddie dividend payments to the Treasury. It is not at all clear that the FHFA has such authority, but the exchange does highlight the question of how best to protect the taxpayers.
The obvious answer is to get the government out of the housing finance business altogether. But given the current makeup of the Senate, the only way to pass a housing finance reform bill is to give the Democrats what they want: explicit government backing of mortgage securities.
The two chambers of Congress are so far apart, one has to wonder why the Senate is even bothering to hold housing finance hearings now.
This ordeal makes it very clear that the best way to advance real housing finance reform – policies that finally get the federal government out of the business – is for the Trump administration to lead the way.
The administration cannot wind down Fannie and Freddie without legislation, but it can take targeted steps to reduce their footprint in the mortgage market, thus minimizing the risks they pose to taxpayers. As pointed out in February, the administration can take the following steps.
- Direct the HUD Secretary to establish sound underwriting policies for mortgages insured by the FHA, including consideration of higher collateral requirements, a maximum seller concession, the use of a residual income test, a consumer disclosure regarding an affordable housing loan’s historical propensity to default, and an increase in the capital ratio of the Mutual Mortgage Insurance Fund.
- Require the HUD Secretary to raise the insurance fees for FHA-insured loans, and to lower the loan limits for mortgages eligible for FHA insurance.
- Require the FHFA Director to raise the guarantee fees for loans securitized by Fannie and Freddie, and to the lower the loan limits for mortgages eligible for their purchase.
- Require the FHFA director to suspend Fannie and Freddie contributions to the Housing Trust Fund while the companies remain in conservatorship.
President Trump has ordered a comprehensive review of financial regulations, and made it the official policy of his administration to regulate the United States financial system in a manner consistent with seven core principles, such as preventing taxpayer-funded bailouts.
Many of these principles closely track the ideas prevalent among members of the House Financial Services Committee, so it’s now the perfect time for the administration to lead the Senate in same direction.
The housing finance system that imploded relied on the federal government to plan, protect, and prop up favored groups, all of which are contrary to the principles that support free enterprise and maximize individual wealth.
It was the wrong approach for America, and Dodd-Frank simply doubled down. The Trump administration can work with Congress to correct these mistakes, and there’s no better time to start than the present.
*Originally published in Forbes, click here.