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Revise the Johnson-Crapo Bill to Make Housing Finance Reform Viable

For the past few years, many thoughtful people have been engaged in a heated debate over the future of Fannie Mae and Freddie Mac, the two government-sponsored mortgage enterprises (GSEs) that required a taxpayer bailout in 2008. A consensus has been slowly developing on the goals of GSE reform. While there is guarded optimism about the resulting bill, called Johnson-Crapo, there is also a great deal of controversy over specific sections, and many suggestions for improvement. The authors of the bill, Senator Tim Johnson (D-SD) and Senator Mike Crapo (R-ID), Chairman and ranking member, respectively, of the Senate Banking Committee, entertained amendments on April 29.

A major section of the Johnson-Crapo bill supports the availability and affordability of rental housing, especially its provision of robust funding ($3.75 billion each year) for the National Housing Trust Fund NHTF). Its intent is to benefit millions of extremely low-income Americans who are at the greatest risk of being or becoming homeless. This section of the bill supporting affordable housing for low-income households is of major interest to NETWORK. It provides a secondary market for multifamily housing stipulating that 60% of the units securitized must be affordable for low and very low-income households, the latter earning just 30% of the area median or less.

Once funded, the NHTF will build, preserve, rehabilitate and operate rental housing affordable to both low-income and extremely low-income families. At the present time there is a nationwide shortage of seven million rental homes that are affordable and available to households in this income group.

While the bill is expected to garner the support of the Senate banking committee, it may never reach a floor vote due to Reid's lukewarm support, the need for additional co-sponsors from the 22-member banking committee, as well as the timing in the short window before mid-term elections heat up. Even if these hurdles are overcome, House Republicans remain far apart over how to overhaul Fannie and Freddie, having passed a separate proposal last summer through the House Financial Services Committee (with only Republican votes) that is almost the complete antithesis of Johnson-Crapo, but have never brought their bill to a complete House vote.

Housing Wire reported on April 22 that Shaun Donovan, Secretary of the Department of Housing and Urban Development (HUD) gave the Johnson-Crapo bill the Administration's and his firm support and urged members of Congress to pass the bill, even if imperfect, now, because "this is the worst rental affordability crisis this country has ever known."

The Johnson-Crapo bill owes a heavy intellectual debt to Senators Bob Corker (R-TN) and Mark Warner (D-VA), who initially introduced their bill (S.1217) last year. However, while using the Corker-Warner bill as a base, Senators Johnson and Crapo conducted an intensive series of hearings and meetings with all interested parties and tried to reflect all their perspectives, to the extent possible, in their bill. The result is a bill with several significant differences from Corker-Warner.

The centerpiece of the Johnson-Crapo legislation is the Federal Mortgage Insurance Corporation (FMIC), a new government entity, replacing Fannie Mae and Freddie Mac, which serves several purposes. First, the FMIC acts as a new federal regulator of the mortgage industry, monitoring the safety and soundness of various financial institutions. Secondly, the FMIC administers an insurance fund, contributed by private entities to cover losses on mortgage-backed securities. These two objectives are attempts to achieve similarities with how the FDIC regulates banks and provides deposit insurance.

The FMIC would also provide an explicit taxpayer guarantee of 90% of losses on these securities, thereby demanding a 10% first-loss provision. The idea is that the FMIC picks up the tab only after losses exceed the amount put up by private investors, thus providing a "risk-sharing mechanism."

Another major provision of the Johnson-Crapo bill is that it would repeal the affordable housing goals that applied to Fannie Mae and Freddie Mac, but these goals would be replaced by a new "market incentive" to compel mortgage guarantors and aggregators using the FMIC to reach credit-worthy borrowers in underserved markets. The "market incentive" would work through a fee structure that motivates participants by charging less for those who meet or exceed certain targets. Many groups complain that the affordable housing goals have been replaced with a rather nebulous mandate.

Opposition to Johnson-Crapo from both the Right and the Left has been heating up for some time. A key difference is that most opposition from the Right rejects the entire approach of the bill, asserting that the government should get out of the housing finance market altogether, while those on the Left, with some exceptions, believe the bill should be improved through carefully-drawn amendments, especially in the area of affordable housing goals.

On the Right, the Heritage Foundation, in addition to opposing a new government entity, also believes that explicit taxpayer guarantees will lead to unnecessary risk-taking and that in a national crisis taxpayer revenue will still be the last resort, despite a mortgage insurance fund. Many others on the Right also oppose a continuation of Fannie's and Freddie's profits for the next five years heading to the Treasury instead of into the coffers of the preferred and common shareholders of the companies, an issue now before the courts. Unfortunately, caught in this court web are numerous community banks, many small and rural, who were encouraged by bank regulators to buy about $6 billion of Fannie and Freddie preferred stock prior to the conservatorship.

A super-PAC called 60Plus, which supports conservative causes, has issued TV attack ads against 7 Senators for their support of Johnson-Crapo, calling the bill the "Obamacare for the mortgage industry." The 7 Senators serve on the Senate Banking Committee, including two up for re-election this fall -- Mark Warner and Kay Hagan (D-NC). has already shown that the assertions made in the ads are false.

On the Left, the National Low Income Housing Coalition (NLIHC) is strongly supportive of Johnson-Crapo, since the bill would assess a 10-basis point fee on users of the new housing finance system which would generate about $5 billion a year, 75% of which would fund the National Housing Trust Fund (another 15% to the Capital Magnet Fund --CMF and 10% to a new Market Access Fund -- MAF), long sought by NLIHC. However, NLIHC, like the organizations listed below, opposes the demise of affordable housing goals, lest underserved communities lose access to credit.

The National Urban League, the Leadership Conference on Civil and Human Rights, the NAACP, the National Coalition for Asian-Pacific American Community Development, the National Council of La Raza, the National Fair Housing Alliance, and the Center for Responsible lending -- all have voiced their opposition to ending the affordable housing goals of Fannie and Freddie. NETWORK also believes that affordable housing goals need to be restored and be an explicit part of the Johnson-Crapo bill.

Many organizations fear that without explicit affordable housing goals, the Johnson-Crapo bill would make home ownership unaffordable for millions of Americans with lesser incomes and wealth. By ending affordable housing goals, the National Urban League, in particular, believes the Johnson-Crapo bill would also exacerbate widening economic disparities, especially between White and Black America.

Using data from the most recent Home Mortgage Disclosure Act, the National Urban League states in an article in the April 24 issue of the Huffington Post that the combined loans of Latinos, African-Americans and Asian American Pacific Islanders currently have been a minuscule part of both the mortgage and refinance-loan market. These groups view the resultant exclusion of people of color from today's mortgage market as inequitable and wrong and conclude that the Johnson-Crapo bill must acknowledge these verities and restore affordable housing goals to their bill.

The National Community Reinvestment Coalition (NCRC) issued a paper with 9 recommendations on ways to improve the Johnson-Crapo bill, nearly all of which center on assuring fair access to the market for all communities. This is an area where sensitivities appear to be extremely high.

Other groups have issued suggestions for revising Johnson-Crapo in other areas. The Urban Institute, for example, believes that the structure of the market incentive fee that would be used to fund the NHTF and the structure of provisions that place private capital in the first-loss position have "intellectual appeal" but are "in practice, impossible to calibrate." They recommend that "private capital should be provided exclusively by guarantors, and the affordable housing incentive structure should be replaced with an explicit loan-level fee structure, to create greater certainty on the part of market participants" in order to better serve underserved markets. (See the Urban Institute's "Johnson-Crapo GSE Discussion Draft: A Few Suggestions for Improvement" for further details)

As Shaun Donovan, Secretary of HUD, has said in numerous venues over the past several months, the lack of private capital in the market is shrinking the amount of credit available and leaving worthy borrowers out in the cold. Only legislative reform through revising a viable bill like Johnson-Crapo can return liquidity to the entire market. Today's mortgage market is not healthy for many reasons (see Mark Zandi's and Jim Parrott's article "Reject the Status Quo for Fannie and Freddie" in the April 25 Washington Post) and unless reformed will deteriorate furt