Financial Reform - North Highland

The Impact of Mid-term Elections on Financial Reform

The votes have been tallied and the mid-term election results are in. So what will be the impact on the regulatory oversight of the mortgage industry or on housing reform now that the Republicans control both the House and Senate? Despite all the rhetoric, the shift in Congressional control is unlikely to result in a significant change in regulatory reform before the presidential elections. Here’s why:

  1. Too big to mess with: Fannie Mae and Freddie Mac now purchase the majority of U.S. mortgages, providing much needed liquidity to the US mortgage market. They set the standard for national underwriting policy, and their automated underwriting engines are ubiquitous in the industry. Their mortgage backed securities establish the baseline for mortgage prices. No politician, Republican or Democrat, is willing to risk upsetting this system, especially given the proximity to the presidential election.
  2. If it’s not broke …: Fannie and Freddie are now immensely profitable and have been sending substantial dividends to the US Treasury. In fact Fannie and Freddie have sent more money to the US Treasury than the $189 billion that the government invested to shore them up during the financial crisis. GSE dividends are being used to off-set tax reductions and help reduce the federal deficit. No Senator wants that party to end.
  3. If you don’t know where you are headed, any road will take you there: There is no consensus among either party on how to move from the current state to one less dependent on the GSEs. Republicans generally prefer less government and that is certainty true when it comes to housing reform, regulatory oversight, and the future roles of Fannie Mae and Freddie Mac. Sen. Richard Shelby, the former head of the Senate Banking Committee and a likely candidate to re-take that position would like end conservatorship and phase out the GSEs, but he has never been able to develop a clear roadmap or marshal the votes to do it. The Johnson Crapo bi-lateral bill on housing finance reform had the best chance of any legislative bill so far to phase out the GSEs and that bill never even made it out of the committee. Senator Johnson is now retiring.

So if broad financial reform is off the table, what will get done? It is likely that Congress will be able to complete some tasks which are already underway. These include extending the tax deduction for mortgage insurance and reducing some of the most onerous requirements of Dodd Frank. But, for meaningful mortgage finance reform, we will need to wait until after the presidential elections.

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