CHN: Senate Committee Passes Mortgage Bill That Differs with the House
By an overwhelming vote of 19 to 2 on May 20, the Senate Banking Committee approved The Federal Housing Finance Regulatory Reform Act of 2008. The bill contains three main provisions. It establishes a new program to help homeowners at risk of foreclosure, creates a new fund to help create more affordable housing, and tightens regulations on Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs).
Like the House bill that passed two weeks earlier, the centerpiece in the Senate bill is a voluntary program to help borrowers at risk of foreclosure to refinance their mortgages. It would allow the Federal Housing Administration (FHA) to expand to insure and guarantee refinanced mortgages restructured by mortgage holders and lenders to a level that the borrower can reasonably be expected to pay. The lender holding the initial mortgage would receive a cash payment from an FHA-approved lender of less than the original mortgage but more than they could collect from the borrower. In exchange, lenders would be relieved of further risk from the mortgages and borrowers must share any profit from the resale of a refinanced home with the government. The estimated $1.7 billion cost for this new program, named the HOPE for Homeowners Program in the Senate bill, is based on the assumption that ultimately some of the mortgages will result in foreclosure.
Last fall the House passed a bi-partisan bill to establish a national affordable housing trust fund to construct, rehabilitate, and preserve over one million units of affordable housing during the next 10 years. The bill contains several dedicated sources of funding, not dependent on the annual appropriations process, to increase the stock of affordable housing. One funding source is Fannie Mae and Freddie Mac, which would dedicate a small percentage of their profits to the fund. The first-year funds would go to housing in Louisiana and Mississippi to help them recover from Hurricane Katrina and thereafter to all states. The Committee-passed bill in the Senate establishes a similar housing trust fund targeted more deeply than the House bill to housing for very low-income families, and sets up a mechanism to accept funding from multiple sources.
The conflict between the House and Senate foreclosure bills stems from insistence by Senator Richard Shelby (R-AL), the Ranking Member of the Senate Banking Committee, that Fannie Mae and Freddie Mac pay all costs associated with the HOPE for Homeowners Program to avoid using federal tax revenues. Contingent on Sen. Shelby’s willingness to allow the establishment an affordable housing fund, an agreement was reached to take money that would have flowed into the affordable housing fund in the first year, and to a lesser extent in the next two years, and divert it from affordable housing to pay for the HOPE for Homeowners Program. The Chairman of the House Financial Services Committee, Rep. Barney Frank (D-MA), along with housing advocates, disagree with Sen. Shelby that the GSEs, who do not originate loans but buy bundled mortgages in the secondary market, should have to pay, in essence, to reimburse lenders who were responsible for making the risky loans. Further, they are appalled that the money should come from a source intended to fund housing for low-income families. Frank has signaled that this will be a contentious issue to resolve after the full Senate passes the bill, perhaps as early as June.
(See HNR 5/12/08 for more details of what’s in the House-passed bill)