Fannie Mae, Freddie Mac Reform: A Johnson-Crapo Dialogue
by Jim Parrott, Ellen Seidman, And Laurie Goodman
The May 15, 2014, passage by the Senate Banking Committee of S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013, otherwise known as “Johnson-Crapo,” marks a key moment in the ongoing debate over housing finance reform.Nevertheless, it appears unlikely the bill will reach the Senate floor this year. Accordingly, Laurie Goodman (LG), Ellen Seidman (ES), and Jim Parrott (JP) sat down to discuss and distill progress in this Congress, identifying the fault lines in the negotiations, where reform stands now, and the likelihood and consequences of further action or inaction in the coming months.
Q: Do you think Johnson-Crapo captured part of a growing consensus around Fannie Mae and Freddie Mac reform?
LG: Yes. Most of the proposed bills are based on a similar set of principles. This includes not only Johnson-Crapo, but also several bills and discussion drafts in the House of Representatives, including those by Representatives Delaney-Carney-Himes, Waters, and Campbell-Peters.
Among the common principles are:
- The 30-year fixed rate mortgage must be preserved.
- To preserve the 30-year fixed rate mortgage, wemust preserve the TBA (To-Be-Announced)Market for mortgage-backed securities, amarket in which large quantities of securitiesare traded as if they are completely fungible. (Infact, the buyer does not know which mortgageloans will stand behind his security, hence theTBA moniker.) To make the securities fungible,the government must ultimately stand behindthe credit of these securities.
- Private capital must take the first loss, with the government providing a catastrophic guarantee behind that first loss.
- A Federal Deposit Insurance Corporation (FDIC)-like fund can provide the catastrophic government guarantee.
- The liquidity of this market is best served with asingle platform and a single security.
- The infrastructure of the system should be run by the government, and separated from the risk taking.
- Some type of affordable housing provision is necessary.
JP: I agree for the most part. While it’s easy to focus on what ultimately doomed negotiations in the committee, one shouldn’t ignore the remarkable degree of consensus that we now appear to have on a range of thorny and previously controversial issues. In particular, the “get the government out of backing the market” crowd has all but fled the field for the moment, or retreated to parts of the House, and even there they appear resigned to fight over design issues rather than the existential question of a government backstop.
The one qualification I would offer is that I think there is stronger support for a quasi-nationalized housing market than I had expected. Some progressive groups, and perhaps even some members, appear to be deeply skeptical of increasing the role of private capital in the system. You didn’t hear the argument made explicitly, because it would have been a nonstarter, but you saw it lurking beneath the surface in various arguments over the role of private actors in the system, and in particular in concern over how underserved communities would be treated in a system in which these private actors would play such a central role.
Q: Why do you think that is?
ES: I agree with Jim that the breadth of progressive opposition to Johnson-Crapo as negotiations came down to the wire came as something of a surprise. People asked why the focus was on bringing in private capital and protecting investors, rather than on ensuring that Americans are well-housed. My sense is that this was based on a concern that the consensus Laurie describes had developed without anyone really coming to grips with how the structure proposed was going to affect current and upcoming generations of first-time homebuyers. What would this kind of reform do to access and to the price of mortgages? That’s an important issue not only for those potential homebuyers, but also for the economy, and our society as a whole.