Proposed Housing Bill Would Create a Co-op of Mortgage Lenders
By Shaila Dwan
Yet another proposal for winding down Fannie Mae and Freddie Mac and overhauling the nation’s housing finance system will be put before Congress on Thursday, this one by Representative Maxine Waters of California, the ranking Democratic member of the Financial Services Committee. The major distinction of Ms. Waters’s proposal is that it would make the mortgage lending system more like a public utility, by creating a co-op of lenders that would be the sole issuer of mortgage-backed securities guaranteed by the government. Such a system would significantly differ from those proposed by the major bills in the Senate, which would allow banks and bond guarantors to participate independently in the market. Both Ms. Waters’s proposal and the Senate ones would establish a new federal regulator. The Waters bill would require private backers to take the first 5 percent loss before the government guarantee kicks in. By contrast, the latest Senate bill, by the Senate Banking Committee’s chairman, Tim Johnson, a Democrat from South Dakota, and Mike Crapo of Idaho, the committee’s ranking Republican, requires private capital to take the first 10 percent loss. “Everyone talks about wanting to put private sector capital ahead of the federal government, but the key to any of these proposals working is whether enough entities will provide such capital,” said Karen Shaw Petrou, a co-founder and managing partner at Federal Financial Analytics. “A utility, or co-op, may solve for that because it creates a special purpose entity that doesn’t need to meet shareholder demand the same way a big bank or bondholder does.”