The Honorable Scott GarrettU.S. House of Representatives2232 Rayburn House Office BuildingWashington, DC 20515
Dear Congressman Garrett:
On behalf of the 362,000-member National Taxpayers Union (NTU), I am honored to offer our enthusiastic endorsement of H.R. 2767, the Protecting American Taxpayers and Homeowners (PATH) Act. Thanks to your dedicated efforts, along with those of Financial Services Committee Chairman Hensarling and other conscientious House colleagues, you have crafted the most comprehensive, pro-taxpayer housing finance reform package we have seen in many years.
As you know, NTU has long expressed concern about the potential risks to taxpayers posed by Government-Sponsored Enterprises (GSEs). Our Founder and Chairman Emeritus James Davidson testified before the House Ways and Means Committee on this topic in September 1989, at what was then billed as the “first oversight hearing on GSEs in recent memory.” Throughout the early 1990s, NTU actively sought GSE oversight legislation in Congress, and pointed to the unfairness of rising compensation packages among senior GSE officials while the entities they managed were enjoying taxpayer subsidies. In 2000, I testified before a subcommittee of the Banking and Financial Services Committee on H.R. 3073, the Housing Finance Regulatory Improvement Act. During 2008, NTU strenuously opposed creation of the Troubled Asset Reform Program (TARP), and worked to develop more constructive responses to the financial crisis of that time.
We are therefore quite encouraged by the care you have exercised in authoring the PATH Act. Unlike the less detailed plans that other elected officials have offered, your legislation provides a specific five-year wind-down of housing GSEs from conservatorship to receivership, along with a 15 percent annual reduction of their retained portfolios (with an end target of $250 billion). The misguided affordable housing goals that helped to drive Fannie and Freddie’s reckless practices would be ended, as would their cost-of-funds advantage over private-sector institutions. Equally vital, the bill would finally rightsize the outrageous high-cost conforming loan limit for purposes of the GSE backstop, to $525,000 over a five-year period. The upshot of all these actions is to end the GSEs’ pernicious habit of exposing taxpayers to severe liabilities.
But one of the best features of your legislation is its ability to reach beyond GSE reform and bring a truly systemic approach to housing finance. The PATH Act would focus the mission of the Federal Housing Administration (FHA) toward assisting first-time and moderate-income home-buyers, and ensure that it does not simply supplant GSEs in stifling the potential for private mortgage insurance. Maximum insurable loan limits as well as insurance coverage levels would be modified to more manageable amounts, while down-payment requirements for non-first-time buyers would be adjusted upward. Furthermore, FHA would be encouraged to function more like a private-sector actor, by subjecting the agency to Generally Accepted Accounting Principles and reporting standards, establishing financial self-sufficiency mechanisms, and providing for risk-based pricing capacity for insurance. Here again, taxpayers would be safeguarded from future meltdowns as the role of yet another federally-chartered entity would be thoughtfully redesigned.
NTU is also pleased with the PATH Act’s attempt to encourage a more robust private-sector alternative to the flawed federally manipulated structure that has not served our nation well. Key to this approach is a two-year hiatus in the imposition of Basel III capital adequacy rules (to study harmful effects on secondary market capital) and, at long last, the development of a framework for covered bonds. The latter reform, which you wisely proposed as one alternative to the overbearing TARP scheme some five years ago, is a commonly utilized liquidity tool in other nations’ financial markets whose employment here is long overdue. And although it is not an ideal substitute for voluntary private institutional mechanisms (many of which are well underway), the non-profit National Mortgage Market Utility created by the bill would be at least preferable for fostering transparency and competition than the machinations of the Wall Street Reform and Consumer Protection Act.
Indeed, that law, a.k.a. Dodd-Frank, has failed to adequately address threats to taxpayers and created new distortions in financial markets, ranging from draconian price controls on credit-card interchange fees to near-codification of the “too big to fail” doctrine through the Financial Stability Oversight Council. Yet, the Dodd-Frank law is also imposing a plethora of rules surrounding mortgage availability, many of which do little to address systemic risk and appear instead to be further federalizing the realm of housing finance. In an ironic twist for “affordable housing” advocates, some dictates may even be working against their purposes. A June 2012 Congressional Research Service (CRS) report noted that “risk-retention standards that translate into more stringent qualification requirements for borrowers are likely to increase barriers to homeownership for both creditworthy and disadvantaged borrowers.”
While NTU would argue that taxpayers must be safeguarded against liabilities from overgenerous lending practices, CRS’s observation should serve as motivation for lawmakers on both sides of the aisle to consider better alternatives to Dodd-Frank’s strictures. Here again, the PATH Act provides such guidance, by repealing the Qualified Residential Mortgage risk retention rules as well as complex mandates surrounding prepayment fees and high-cost mortgages. Other qualified mortgage regulations would be given a prudent pause, until at least January 2015, to further evaluate their potential consequences.
Few pieces of legislation can be described as perfect from a pro-taxpayer, free market perspective. Yet, the PATH Act is far and away the best chance this Congress has to steer a dramatically different course in federal housing finance policy at a time when a change of direction could not be more urgent. Our concern cannot be overstressed: with five years having passed to learn from the mistakes of TARP, and only a short time left to avoid even bigger mistakes about to be triggered from Dodd-Frank, lawmakers in both parties must seize the opportunity to adopt the PATH Act now. Accordingly, NTU looks forward to helping you and your colleagues win prompt passage of H.R. 2767. Roll call votes in favor of the legislation will be heavily-weighted in NTU’s annual Rating of Congress.
Sincerely,
Pete SeppExecutive Vice President