As the current Congress winds down with its overburdened lame duck session, attention is beginning to turn to what the new Congress may mean for housing finance. Even though the new Congress has not yet been organized and Committee chairs and members picked, there are some themes that are worth paying attention to in the months ahead. Here are some of them.
- Come the end of January, the Administration will come forward with its long delayed proposals for the reformation of Fannie Mae and Freddie Mac (the GSEs). This is in response to a requirement set out in the Dodd Frank bill enacted into law last summer. At this point, it seems likely that the Administration’s proposal will call for closing down both GSE’s at some point and in some fashion and recommend the creation of one or more new entities. These are likely to have a primary function of issuing mortgage backed securities on single and multifamily mortgages. Issues to watch for is to what extent their securities will be backed by the federal government, what mortgages will be able to be included in the pools (i.e., will there be limits on the size of the mortgages, the incomes and credit scores of the borrowers, the structure of the mortgages themselves, etc.), and how these entities will be required to serve a wide range of borrowers and not just those with the top incomes and credit scores.
- The new Republican majority in the House is likely next year to bring forward a bill calling for the abolition of the GSEs within the next several years. It is quite possible that such a bill will not call for the creation of any new federally sponsored entities to replace them, contrary to the proposal the Administration is likely to put forward. This bill, if it reaches a vote, is likely to pass the House but it will be more of a symbolic gesture as the Senate is unlikely to take it up or pass similar legislation.
- In fact, despite hearings, a host of reports and recommendations on the future of the GSEs, and loud calls for their reform or elimination, don’t expect any legislation to this effect to get through both the House and Senate in the new Congress and be signed into law. The politics are too contentious, the views as to what should be done too divergent, and the housing markets too fragile to make it likely that legislation will get enacted until 2012 at the earliest.
- In the next few months, the Administration will issue proposed regulations called for by Dodd Frank on the definition of “qualified residential mortgages.” This is a critical definition because, under Dodd Frank, any mortgage pool consisting of only these mortgages escapes the requirement that the originators or securitizers retain 5 percent of the risk in the pool; this should reduce the cost of the mortgages in these pools and be more attractive to originators and securitizers. Watch whether the Administration draws the definition broadly to encompass a wide range of mortgages or defines it more narrowly. Will adjustable rate mortgages qualify or only fixed rate mortgages? Will the rules touch on the amount of down payment required, allowable credit scores, debt to income ratios and a whole host of other underwriting requirements? Whatever definition is proposed in the regulations, expect them to be very controversial and to elicit hundreds of comments from all sectors of the industry.
- There are likely to be hearings on FHA and its role in the housing markets today, especially in the House. There will be pressure to tighten up its underwriting criteria and increase its down payment requirements. The Administration is likely to resist this pressure as its new book of business is performing well and it is seen as vital to keep the collapsed housing markets alive.
All of this could change if the housing markets rebound and housing sales and production return to healthy levels next year. Unfortunately, most predictions are that 2011 and maybe even 2012 will be hard years for single family housing, while multifamily housing may begin to see a resurgence in 2012. If the housing markets do stay flat, as is likely, the consensus position in Washington, D.C., on the Hill and in the Administration, will be to do no harm and not to risk putting a new system in place while the patient is still in intensive care.