A critical vote may await the Senate upon its return next week.
The Senate Banking, Housing, and Urban Affairs Committee is scheduled to vote on a massive proposal to overhaul the nation’s mortgage finance market. Yet the draft language released by the authors – Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) -- has raised concerns across the political spectrum.
Organizations and individuals at polar ends of the political landscape, from Ralph Nader on the left to the Independent Community Bankers Association on the right, and from the right-leaning 60 Plus to the left-leaning NAACP, have all voiced objection to parts of this mammoth legislation. Others, such as HUD Secretary Shaun Donovan and the National Association of Realtors have been more supportive of the bill. Who is right and what should Senators do?
There is surprising consensus throughout the political spectrum on the goals of housing finance. The system needs to be reformed to attract more private capital, reduce the direct role of government involvement, and avoid any instability that would threaten the nascent housing recovery. The best element of the current system, the widespread availability of a 30-year fixed rate mortgage for families with sound credit and some ability to put money down, should be maintained. The question is not only how to get there, but also what are the risks of setting up the wrong system.
If you err in one direction, you can create a system that simply doesn’t attract private capital. Let’s face it, in a world with global competition for the best returns to housing capital, U.S. residential mortgages are not very attractive. The overhang of the recent financial crisis, sparked by a mortgage market gone haywire, looms large.
Further, the government’s attempt to wipe out existing private capital invested in the publicly traded stock of housing finance companies serves as a strong disincentive to other private investors. As consumer advocate Ralph Nader put it, “Taxpayers, consumers and shareholders should have serious reservations about this proposal for housing finance reform… It sets an objectionable precedent for shareholder rights and treatment in this country.” The key point is that by abridging property rights for existing private capital, the legislation cannot succeed in bringing private capital back into the housing market.