Senators Bob Corker (R-TN), Mark Warner (D-VA), David Vitter (R-LA), and Elizabeth Warren (D-MA) have introduced legislation that, if enacted, may make a partial dent in the U.S. housing reform effort. The “Jumpstart GSE Reform Act” (the “Legislation”), introduced on March 14 in the Senate Committee on Banking, Housing and Urban Affairs (the “Senate Banking Committee”), would prevent any increase in guarantee fees (“g-fees”) imposed by Fannie Mae and Freddie Mac (the “GSEs”) from offsetting other government spending. The Legislation would also prohibit the sale of GSE preferred stock by the United States Treasury (the “Treasury”) without Congressional approval and structural housing finance reform. Furthermore, on March 22, Senator Tim Johnson (D-SD), chairman of the Senate Banking Committee, offered a bipartisan amendment (the “Amendment”) to the Senate budget that would prohibit Congress from using g-fee increases to offset additional government spending. The Amendment was agreed to in the Senate by unanimous consent. Although this budget will not become law, the Amendment shows growing support for this issue.
The GSEs impose g-fees in order to compensate for the credit risk that they undertake when they own or guarantee mortgages. Some argue, as well, that the GSEs are increasing fees beyond an actuarial basis on current loans to generate revenue to pay off losses on earlier loans. While these fees are an essential ingredient in maintaining the liquidity of the GSEs, Congress has looked to these fees to fund government expenses outside of housing finance. For instance, in December 2011, Congress agreed to fund a short-term extension in the payroll-tax cut by directing the GSEs’ regulator, the Federal Housing Finance Agency (“FHFA”), to raise g-fees by 10 basis points (0.1 percent). Using g-fees to fund such external government shortfalls has undergone harsh criticism. Some critics have espoused that home buyers (who ultimately bear the cost of g-fees) should not be forced to subsidize tax cuts amidst a recovering housing market. Moreover, critics have suggested that g-fees must stay within the GSE family in order to promote GSE liquidity, and effectively wind the GSEs off of the taxpayer dole. As Senator Corker stated in a recent press release regarding the Legislation, “…if Congress were to spend ‘g’fee’ revenue from the GSEs on other programs, reforming these mortgage behemoths would become nearly impossible.”
Regarding the sale of GSE preferred stock, in September 2008, the Treasury agreed to provide financial assistance to the struggling GSEs in exchange for receiving senior preferred stock valued at the amount of assistance provided. As of December 2012, the Treasury has provided nearly $200 billion in support to the GSEs, and may be required to provide approximately another $275 billion, as needed. The Legislation would prevent the Treasury from divesting itself of this stock without Congressional approval and structural housing finance reform. In support of this position, Senator Corker has stated that “if Treasury were to decide to sell its preferred share investment without Congress having first reformed our housing sector, we would just be returning to a time when gains are for private shareholders and losses are for taxpayers.”
The Jumpstart GSE Reform Act offers two discrete solutions to the larger challenge of deleveraging government involvement from housing finance. However, both government and non-governmental stakeholders have called for comprehensive housing reform (by way of restructuring the government’s involvement in the GSEs, and perhaps the GSEs, themselves). Just last week, Acting FHFA Director Edward DeMarco delivered testimony before the House Committee on Financial Services, calling upon it to take aggressive action to overhaul the GSEs’ current role in the secondary market. As such, it is unclear what efficacy the Legislation’s two solutions, in isolation, would have.