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Senate Banking Committee discusses housing finance reform proposals

Federal Issues Senate Banking Committee Housing Finance Reform Mortgages Department of Treasury HUD GSE FHFA

Federal Issues

On September 10, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Housing Finance Reform: Next Steps” to discuss the federal government’s plans for reforming and strengthening the mortgage market. As previously covered by InfoBytes, the Department of Treasury and HUD released complementary proposals on September 5 discussing plans to end the conservatorships of Fannie Mae and Freddie Mac (GSEs) and reform the housing finance system. The Committee heard from Treasury Secretary Steven Mnuchin, HUD Secretary Ben Carson, and FHFA Director Mark Calabria. Committee Chairman Mike Crapo (R-ID) opened the hearing by stating a preference for comprehensive legislation to end the conservatorship of the GSEs but stressed that the agencies should “begin moving forward with incremental steps that move the system in the right direction.” Democratic members of the Committee stated their oppositions to the proposals, with Senator Sherrod Brown (D-Ohio) arguing that the Treasury’s plan “will make mortgages more expensive and harder to get,” make it more difficult for small lenders to compete, and roll back tools designed to help underserved families.

Treasury Secretary Mnuchin defended his agency’s proposal, and noted that while he prefers that Congress take the lead on ending the GSE conservatorships and plans to work with Congress on a bipartisan basis to enact comprehensive housing finance reform legislation, he also sees the need to concurrently develop administrative actions to protect taxpayers and foster competition. Among other things, Mnuchin discussed steps to remove the net worth sweep, which requires the GSEs to send nearly all their profits to the Treasury, arguing that ending the sweep will allow the GSEs to retain their earnings and build up capital.

FHFA Director Calabria emphasized that plans released by the Treasury and HUD are “broadly consistent” with his top priorities, which include developing capital standards for the GSEs to match their risk profiles that would “begin the process to end the [GSE] conservatorships,” as well as reforms to reduce the risks in the GSEs’ portfolios. All three witnesses agreed with Crapo’s assessment that the GSEs in their current form “are systemically important companies [and] that they continue to be too big to fail.” Calabria further emphasized that while he believes only Congress can reach a comprehensive solution, he believes the agencies can also make significant steps.

HUD Secretary Carson commented that a central principle of HUD’s housing finance plan is to improve coordination between HUD and FHFA to allow qualified borrowers access to responsible and affordable credit options, with HUD, the Department of Veterans Affairs, and the Department of Agriculture acting as the sole sources of low-down-payment financing for borrowers outside of the conventional mortgage market. Carson further noted that reform will “reduce the Federal Government’s outsized role in housing finance.”