Treasury official says government guarantee a must in housing finance legislation

A top Treasury Department official said Friday that the debate around overhauling the mortgage finance system had solidified the government’s continued role in the sector. 

Mary Miller, Treasury’s undersecretary for domestic finance, said that there is broad acceptance that a government guarantee is necessary to support stability in the housing market and that Congress has been tasked with defining that level of involvement. 

{mosads}“Those of us who are working on reform no longer ask whether there should be a government role in the housing market, we are defining it,” she said at the National Housing Conference’s policy meeting. 

“We are no longer debating the merits of countercyclical authority so the government can help mitigate a downturn, we are working on determining the best tools and triggers for that intervention.”

Miller insisted that legislation is a must even amid the improving financial condition of government-controlled mortgage giants Fannie Mae and Freddie Mac. 

“Only legislation can protect taxpayers by responsibly winding down the GSEs and replacing them with a system where a government guarantee is transparent and explicitly priced,” she said. 

Otherwise, taxpayers will continue backstopping housing credit.

Miller, who is planning to leave her post in September, said that some argue that Fannie’s and Freddie’s recent profitability negates the need for Congress to produce a bill. 

Meanwhile, some critics have suggested that recapitalizing Fannie and Freddie and avoiding the difficult decisions around creating a new system is the way to go. 

But she warned that the mortgage giants will not be able to replicate the levels of revenue they achieved in the past two years and recapitalizing them adequately would take at least 20 years, leaving the taxpayer at risk.

“We would also be signing up for another 20 years of underserving responsible credit-worthy Americans seeking to buy a home,” she said.

Despite other efforts by the Obama administration and the Federal Housing Finance Agency, headed up by Mel Watt, “these measures do not eliminate the need for comprehensive housing finance reform,” Miller said. 

“Everything we are doing administratively is directed towards ensuring better outcomes for renters and homeowners, but these efforts attack only the symptoms of an unhealthy housing finance system,” she said. 

She noted that the Senate Banking Committee’s approval of a bill has gone beyond setting markers to significantly changing the approach of Fannie and Freddie’s overhaul and eventual elimination.

“In getting this bill voted out of committee, the senators have solidified points of broad agreement among policymakers on both sides of the aisle,” she said. 

“Setting these markers down has not merely advanced the debate on housing finance reform, it has fundamentally changed it.”

The legislation crafted by Senate Banking Committee Chairman Tim Johnson (D-S.D.) and ranking member Sen. Mike Crapo (R-Idaho) has attracted support from both sides of the aisle, the White House, academics, housing experts and consumer groups.

Despite the efforts, some panel Democrats remain skeptical about the affordable housing initiatives while some Republicans argue that the government’s hand in the future market is still too large.

Still, the Banking panel’s approval of housing reform legislation last month is “no small feat given the political dynamics in Congress right now,” Miller said.

She also pointed to an often overlooked element of the bill that would extend the government guarantee to loan originators that have been left out of the process, so far. 

“If this bill were to become law, state HFAs and community development financial institutions, among others, would be able to originate eligible mortgages thereby granting them access to the secondary market,” she said.

“This, in and of itself, would make it significantly easier for mission-oriented entities to provide affordable mortgages to historically underserved borrowers.”

Congress has finally moved beyond a messaging bill and has taken “great care in creating a bill that works,” she said.

Nearly six years ago the government took control of Fannie and Freddie and poured $188 billion of taxpayer help into the entities so they could stay afloat.