These days you don’t have to be a Wall Street oligarch to make owning a home less affordable for everyone, push minorities out of the home mortgage market, and help mega banks at the expense of community banks. You just have to vote for the latest version of housing finance “reform” being pushed in Washington – the Johnson-Crapo “Housing Finance Reform and Taxpayer Protection Act.”
“It’s widely accepted that mortgage rates will rise for borrowers under the Johnson-Crapo measure,” The Washington Post reported on Monday. I doubt that struggling middle-class families will find that idea widely acceptable. I don’t think minorities will either. In fact, the Urban League has firmly opposed the bill because it would make owning a home more difficult for African-Americans and Latinos.
Part of the mission of Fannie Mae and Freddie Mac is to promote affordable housing in America. Even though unscrupulous, predatory lending was the problem throughout the housing crisis, Washington seems to have accepted the idea that it was those low-income borrowers who caused the bust. Thus, Johnson-Crapo abolishes Fannie and Freddie and replaces them with a new, federal agency that would insure home mortgages – but without any mission to promote affordable housing.
To make matters worse, the bill would grant unprecedented power to private lenders – at least, unprecedented since the creation of Fannie Mae during the New Deal. The bill would have private investors act as “guarantors” of mortgage-backed securities. They would buy the securities, provided they could show that they could cover the losses if 10 percent of their securities went bad. But the bill doesn’t spell out what types of capital would qualify for the guarantee. These private firms would basically be guaranteeing America’s home loans on behalf of the government, and the FMIC, which oversees them, would presumably never develop a cozy relationship with the institutions it regulates. No, that kind of self-dealing between big financial institutions and Washington would never happen.
Even more, the bill was primarily written by a former Countrywide and Wachovia executive, Michael Bright, who now works for Sen. Bob Corker. Mr. Bright wrote the Corker-Warner bill, which was the framework for Johnson-Crapo. This appears a lot like Washington and big banks teaming up to write the regulatory framework for the housing market!
When Johnson-Crapo kills Fannie and Freddie, it also kills the investments made in those Government-Sponsored Enterprises by local community banks. Community banks and public pension funds were some of the investors who will see their money wiped out along with Fannie and Freddie. And many small banks won’t qualify as guarantors under the new law.
So, to recap: Johnson-Crapo will make home mortgages more expensive, increase the cozy relationship between the big banks and Washington, eliminate the affordable housing mission of Fannie and Freddie, and make big banks stronger at the expense of small banks. Heckuva job, Congress.
Authored by a friend of the blog with experience in housing finance.
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