Senate Banking Committee Examines a Transition Away from Fannie and Freddie
On Friday November 22, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the transition process that was outlined in S.1217, the Housing Finance Reform and Taxpayer Protection Act of 2013. This bill, introduced in June by Senators Bob Corker (R-TN) and Mark Warner (D-VA), intends to close the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and replace them with a new federal company called the Federal Mortgage Insurance Company (FMIC), which is designed to provide catastrophic reinsurance for mortgage-backed securities. S. 1217 would also abolish the Federal Housing Finance Agency (FHFA) and transfer its staff, infrastructure, technology and other resources to the newly created FMIC.
The witnesses in this hearing included:
- James Millstein, Chairman and CEO of Millstein & Co.
- John Bovenzi, Partner in Oliver Wynman
- Dr. Mark Zandi, Chief Economist and Cofounder of Moody’s Economy.com
- David Min, Assistant Professor of Law at the University of California, Irvine School of Law
Winding down Fannie and Freddie is a massive and complex job, and as the witnesses in this hearing remarked, the transition being contemplated would be the largest such undertaking in history. Fannie and Freddie currently hold slightly more than $5 trillion in mortgage-related assets and since the sudden and steep decline in private mortgage finance that occurred in 2008, the two GSEs have been responsible for more than 60% of new mortgage originations. In this hearing and others like it, lawmakers have considered the risk posed to affordable housing development in the transition to private reliance in the housing market. This is critically important because upon enactment, S. 1217 would eliminate the affordable housing goals currently in place and it would aggressively reduce the GSE portfolios over a period of five years. Fannie and Freddie’s affordable housing goals would be replaced with the “Market Access Fund”, which will attempt to provide both direct subsidies and explicit credit enhancement to foster affordable housing development.
David Min began his testimony by highlighting that the mortgage-backed securities issued by Freddie and Fannie have served a number of critically important policy goals, including offering a broadly available and affordable 30-year fixed-rate mortgage product, which met the credit needs of rural areas and multifamily housing. He believes the most important priority in structuring the transition under S. 1217 should be to ensure that there continues to be sufficient liquidity across all market segments, especially for affordable multifamily housing and for rural areas. Min’s concern with the proposed transition is that it may wind down key aspects of the current system that have provided financing for affordable housing without having fully established the Market Access Fund. He suggested that if S.1217 were enacted, it is sensible to start funding the Market Access Fund immediately. Similarly, it would be useful to immediately fund and activate guarantors with a specific focus on affordable housing finance.
The testimony of the other witnesses focused on single family homes and the need for more private capital in the housing market. Overall, these witnesses agreed that ending the current conservatorship of the GSEs Fannie Mae and Freddie Mac is a good thing. This sentiment has been echoed in numerous other hearings in the Senate Banking Committee as its members are concerned that a future housing market collapse could severely cost taxpayers due to the government’s role in housing finance.
According to Moody’s, demand for multifamily mortgage originations will increase, and are expected to total $170 billion in 2016. The GSE’s multifamily divisions had strong performance throughout the financial crisis with default rates for multifamily loans below one percent. Any reforms to the GSEs and housing finance structure should preserve this outstanding success and increase incentives for private investment in the multifamily market.
To read the witness testimony and to view an archived webcast of this hearing, please follow
this link to the Senate Budget Committee website.
House Committee Hearing on Disparate Impact
On Tuesday November 19, the House Subcommittee on Oversight and Investigations conducted a hearing to examine Disparate Impact Theory. Testimony was delivered by the following witnesses:
- Mr. Peter N. Kirsanow, Commissioner, United States Commission on Civil Rights
- Mr. Kenneth L. Marcus, President and General Counsel, Louis D. Brandeis Center for Human Rights Under Law
- Mr. Dennis Parker, Director, Racial Justice Program, American Civil Liberties Union
According to the legal theory of disparate impact, the government or private litigants can bring discrimination claims against other parties based solely on statistics that suggest that the application of a neutral policy disparately impacts a protected class. Unlike other illegal discrimination claims, disparate impact claims do not require the government or a private plaintiff to prove intent to discriminate. Some cases of disparate impact can be inconsistent or unclear, so the witness Kenneth Marcus discussed that there needed to be explicit policy on the subject.
Some of the testimony discussed HUD’s Affirmatively Furthering Fair Housing (AFFH)proposed rule, which aims to provide HUD program participants with more effective means to affirmatively further the purposes and policies of the Fair Housing Act. Peter Kirsanow claimed in his testimony that this rule is based on disparate impact theory, but that the AFFH rule does little to combat unintentional discrimination. He raised numerous concerns to the proposed rule, particularly to the HUD’s scrutinizing of housing patterns based on race and ethnicity and for its collection of such data. He also mentioned the latest Supreme Court case dealing with disparate impact as it relates to housing, entitled Township of Mount Holly v. Mt. Holly Gardens Citizens. However, the Mt. Holly case was settled before reaching the Supreme Court and the issues is now moot.
(NAHMA joined an amicus brief to this case and has hoped that the disparate impact question as it relates to the Fair Housing Act would be answered.)
To read the witness testimony and to view an archived webcast of this hearing, please follow
this link to the House Financial Service Committee website.
