“This bill has the opportunity to be the blueprint that could spark the debate both in the House and the Senate, and ultimately become” a pathway for reform, said David Stevens, chief executive of the Mortgage Bankers Association.
The senators are attempting to bridge the contentious divide in Washington over the role of the government in the housing market. Congressional Republicans, who partly blame Fannie and Freddie for the financial crisis, want to leave mortgage financing solely in the hands of the private market.
Many Democrats, however, argue that though the current system is not ideal, the government is needed to ensure that affordable mortgages are available for a wide range of Americans.
Since the financial crisis in 2008, Fannie, Freddie and other government-backed agencies have insured nearly 90 percent of new mortgages. While that has made home loans widely available despite the financial upheaval, it means taxpayers are at risk if homeowners default on their loans.
Against this backdrop, Corker and Warner have proposed a compromise that would make the government the last line of defense in the event of a housing crash. Under the new proposal, homeowners, banks and other private-sector firms would suffer first if a borrower stops paying a mortgage.
A borrower would either have to put 20 percent down to get a government-backed loan, or, if the borrower put down less money, would have to pay for mortgage insurance to make up the difference. That puts the borrower or private mortgage insurance company on the line for 20 percent of the value of the loan. (And the home could be sold for the remainder of the loan value, assuming that it has not declined in value by more than 20 percent.)
If the home’s value had dropped more than 20 percent — the bank issuing the loan would have to absorb losses, up to 10 percent of the value of the loan. Finally, if that’s still not enough, the government would promise to cover the losses on the loan.
The government would create a new single agency, modeled after the Federal Deposit Insurance Corp., to insure these mortgages. The new agency would charge premiums to lenders in exchange for the guarantee, which likely would be passed onto borrowers.
Most mortgage loans are pooled into securities that are traded around the world, from foreign central banks to domestic pensions. Without the U.S. government’s stamp of approval, investors would be more wary of putting money into American home loans, and financing the purchase of a home could become more expensive, as is it in many other countries.