With the housing market back on its feet, the question of what the government's role in housing finance should be in the coming years has yet to be answered.
One potential solution, and the most likely option in Washington, is the "Housing Finance Reform and Taxpayer Protection Act", which was introduced by Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.) at the end of June.
If passed, this legislation would create an entirely new government reinsurer, the Federal Mortgage Insurance Corporation, modeled after the Federal Deposit Insurance Corp. Within five years of the bill's passing, government-sponsored enterprises Freddie Mac and Fannie Mae would be dissolved, and the Federal Housing Finance Agency that placed both mortgage giants under conservatorship in 2008 would transition all resources to the new, streamlined FMIC.
The First Thing to Do Before Buying a Home
The FMIC's Role
This new FMIC would collect insurance premiums, fees on securitized loans, and use this funding as "backstop insurance" for mortgage-backed securities. However, this insurance would only kick in after private investors back 10 percent of the loss, incentivizing investors to manage risk more carefully.
This legislation also includes a sunset provision—after eight years, the Government Accountability Office will study the feasibility of a fully privatized market, and within six months, Congress will consider recommendations to disband the FMIC entirely in favor of privatization.
The Corker-Warner bill has garnered criticism from both sides of the political spectrum. Conservatives say it's an "incomplete remedy" in The National Review, favoring less government involvement, while consumer advocacy groups are disappointed that the bill "fails to place the needs of families at the center of the legislation, focusing instead mainly on investors and lenders," as stated in a letter to the Senators from the Center for American Progress and several allied organizations.
What This Would Mean for Borrowers
Though the bill does include a provision for the gradual reduction of loan limits (to end government guarantees on more expensive homes), the letter expresses fear that low-wealth borrowers may find this system inaccessible.
Credit.com contributor and financing expert Mitchell Weiss echoes much of these sentiments, and says that this legislation is reminiscent of the discontinued Federal Family Education Loan program. FFEL was eliminated in 2010 after a Congressional Budget Office report found that replacing the private sector program with direct lending would save $80 billion over 10 years.
"Risk and reward should go hand-in-hand," said Weiss. "Briefly, thanks to FFEL, the private lenders made student loans to all comers at pretty healthy rates, even though the loans were backstopped by the full faith and credit of the U.S. government."
He described it as "the best of both worlds from a lender's standpoint—low risk, high reward."
Another Option: The PATH Act