Sen. Mike Crapo, Idaho Republican, has been in a yearlong tug of war to revamp the nation’s $10 trillion mortgage market.
The ranking member of the Senate Banking, Housing and Urban Affairs Committee, has been fighting opponents on his left — who say his bill to overhaul Fannie Mae and Freddie Mac doesn’t do enough to help lower-income Americans find affordable housing — and those on his right, who claim the legislation he crafted with Sen. Tim Johnson, South Dakota Democrat, gives an explicit taxpayer-funded bailout to the banking industry.
“The fact that it’s being assaulted by the extremes in both parties indicates to me that it’s a good, centrist, middle-of-the-road compromise that has been the hallmark of our legislative process,” said Jerry Howard, chief executive officer of the National Association of Home Builders, an organization that supports the bill. “What Sen. Johnson and Sen. Crapo, what they’ve been able to do in these political times, is an outstanding effort. It’s to their credit.”
Walking the political tightrope between making mortgages available and limiting taxpayer liability has been difficult for those at the helm of the banking committee. The ideological opposition between Republicans and Democrats, in terms of what the role of government should play in the housing market, has crippled reform.
Still, the White House and the president are behind Mr. Crapo’s efforts. Meaning, if the Senate can get behind the bill, it has a real chance of being signed into law.
Restructuring the mortgage market is the largest piece of unfinished business from the 2008 credit crisis, when the U.S. government seized Fannie Mae and Freddie Mac, which were left for dead after backing too many subprime loans. The companies, which buy mortgages and package them into securities to sell to investors, were bailed out with $188 billion in U.S. taxpayer money, the single largest bailout in America’s history.
“We’ve taken it from where the government is essentially shareholder, board of directors and CEO of the mortgage market — and a first-line position for loss — and moved them to a point where it’s extremely remote that they’d be even called upon for any kind of a financial role in the market,” said Mr. Crapo. “So I think that’s a critical step.”
Mr. Crapo, 63, prides himself on his ability to be a collaborative, common-sense lawmaker who can find the middle road on hot-button issues such as rehauling the mortgage market. Mr. Crapo understands that concessions will need to be made in a Democrat-controlled Congress, but that’s all for the greater good of unwinding Fannie and Freddie.
“We need to go back to a private-sector oriented housing market,” said Mr. Crapo. “We need to get to a system in which government — or I should say the taxpayer — is not in the first-line position against loss.”
Mr. Crapo’s bill would replace Fannie and Freddie with U.S.-owned mortgage financiers with government bond insurance that would kick in only after private capital suffered losses of at least 10 percent. The bill also would require most borrowers to make down payments of at least 5 percent of the mortgage cost and establish funds for affordable housing that would be paid for with a fee on users of the new government reinsurance agency, among other architectural tenants.
If Republicans win back the Senate in the fall, a push will be made to drop Mr. Crapo’s 10 percent insurance guarantee. Many conservatives say the guarantee is an explicit taxpayer bailout, making the bill far more untenable for Democrats because it may deter private companies from issuing loans to riskier, low-credit applicants.
If Democrats remain in control — and with moderate Mr. Johnson stepping in as chairman — the bill will be at the hands of a far more leftist committee. That may look to guarantee affordable loans for most buyers and include significant support for low-income rental housing.
Republicans say such ideological provisions led to the financial crisis in the first place.
“The left is always looking to water down credit requirements,” said Norbert Michel, a banking analyst at the Heritage Foundation. “Fannie and Freddie themselves didn’t start with low credit standards; they were watered down over time. Eventually, their mission morphed into an affordable housing institution, and you see where that got us.”
Although Mr. Crapo’s bill dismantles the two institutions, it also gives private enterprises an explicit guarantee that if they take risks and experience losses greater than 10 percent, the taxpayer will back them up, Mr. Michel said. Thus, Mr. Crapo’s bill cements the taxpayer’s role as a financial backstop.
Mr. Michel would rather see Mr. Crapo’s bill stall in Congress, gamble that Republicans take control of the Senate, then have legislation that resembles what is in the House of Representatives, which demolishes Fannie and Freddie without any government-backed guarantees.
Sen. Richard C. Shelby, an Alabama Republican who will vie with Mr. Crapo for the committee chairmanship if Republicans take control, has indicated that he has serious concerns with the current bill.
Still, 60 votes would be needed for any housing bill to pass the Senate, even with Republican control. If the bill leans harder right, many centrist Democrats may drop their support, leaving Fannie and Freddie to linger in U.S. conservatorship indefinitely.
That worries Mr. Howard.
“The housing markets are getting stagnant again and the economy as a whole is becoming stagnate. Something is amiss in the housing sector,” said Mr. Howard. “A significant component of what is amiss is the uncertainly concerning Fannie and Freddie. This status quo of where the [government-sponsored enterprises] are in conservatorship is untenable.”
Mr. Crapo agrees and has dedicated himself to pushing through a bill either this year or next.
If Republicans win Senate control, Mr. Crapo will continue to push his version of the bill, although he hasn’t publicly opposed dropping the 10 percent private-loss threshold.
Right now, Mr. Crapo is focused on this year, this bill, and dismantling Fannie and Freddie no matter what the battle.
“The bottom line is: If you look at the status quo, you have Fannie Mae and Freddie Mac. And if you add the [Federal Housing Administration], 95 percent of the market is now dominated by the government,” said Mr. Crapo. “If we stay where we are, we are back to a very heavy hand of the government regulating the industry and controlling, literally, the markets.”
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