July 23, 2014

Housing finance bill would continue to leave taxpayers on the hook

Ray Romano
Guest Columnist
“The full faith and credit of the United States is pledged to the payment of all amounts from the Mortgage Insurance Fund which may be required to be paid under any insurance provided under this title.”
That is the text of legislation that has passed out of the Senate Banking Committee on May 15, S. 1217, the “Housing Finance Reform and Taxpayer Protection Act of 2013.”
The plan promises to unwind Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac and create a private mortgage insurance fund, all the while protecting taxpayers against future bailouts.
But, says Americans for Limited Government President Nathan Mehrens, it will do nothing of the sort, noting it “neither reforms housing finance nor protects taxpayers.”
He pointed to explicit taxpayer guarantee of mortgage markets, saying, “At the heart of the financial crisis was the federal government’s implicit guarantee of mortgages to lenders. That guarantee ensured if the debts went bad, taxpayers or the central bank would step in to cover the losses. The Johnson-Crapo bill doubles down on this mistake that encouraged risky lending, making explicit a guarantee that taxpayers were previously promised they would never have to cover in the first place.”
Adding insult to injury, Mehrens said, “supporters of the legislation claim it somehow protects taxpayers. Nothing could be further from the truth, as it puts the full faith and credit of the U.S. government at risk — again.”
Moreover, the legislation requires lending institutions to pay 10 percent equity up front, and pay into a mortgage insurance pool on top of that, which Mehrens said “will undoubtedly be passed along to borrowers.”
He explained, “whether via personal mortgage insurance premiums or higher closing costs, even if borrowers put 20 percent down, under the Senate bill they should plan on paying even more to own a home.”
There presently are 32.3 million Americans that either have 20 percent down or whose mortgages are now worth less than 80 percent loan to value, according to CoreLogic.
Currently, only conventional mortgages with a loan-to-value ratio greater than 80 percent, such as FHA and VA loans but also other types, require the insurance.
By implication, that will now change with the new mortgage insurance fund being envisioned. But it is unclear how financial institutions will raise the funds.
The bill would create a new government entity to replace the Federal Housing Finance Agency and to administer the insurance fund, the Federal Mortgage Insurance Corporation (FMIC).
It would be required to levy fees on lenders such that after five years, the fund contains 1.25 percent of the principal of loans guaranteed by the fund. That number jumps to 2.5 percent after 10 years.
Assuming that eventually comes to cover all $5 trillion of Fannie and Freddie’s current loan portfolio, that would be about a $125 billion insurance fund. Banks would need to hold about $500 billion in capital atop that.
Additionally, assuming almost every mortgage in the nation comes under FMIC’s purview, to cover the $125 billion, if the burden falls on the 32.3 million equitied homeowners, they could owe an additional $3,834 on their mortgages.
And even then, should another major housing downturn come, and the insurance fund fails and banks do not have enough capital, the legislation guarantees there will be another bailout, only this time without any vote in Congress.
If this is the Senate’s idea of “reforming” housing finance and “protecting” taxpayers, they’ve got another thing coming.
Robert Romano is the senior editor of Americans for Limited Government.

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