While Rep. Jeb Hensarling’s (R-Texas) Protecting American Taxpayers and Homeowners (PATH) Act seems to be gathering little momentum, Rep. Maxine Waters (D-California) announced her intention to create an alternative bill regarding the future of the housing finance system and the government’s role in it.
Waters’ counterproposal is likely to incorporate a set of housing finance principles the Democratic members of the House Financial Services Committee released in July, according to Barclays’ newsletter, Securities Products Weekly.
“In several respects, the principles look broadly similar to many of those in the PATH Act,” state Barclays’ analysts in the newsletter.
“However, the devil is in the details, and a closer comparison of the two reveals some significant differences,” they say.
Both support a 30-year mortgage, and both seek to protect taxpayers; yet the way they plan to protect taxpayers varies.
The Democrats’ principles put private capital in a first-loss position but do require a taxpayer bailout if private capital is insufficient to cover future losses. On the other hand, the PATH Act does not involve any government guarantee of the housing market. The only government participation in the housing market under the PATH Act is the continuation of the Federal Housing Administration.
Another difference is the treatment of the GSEs. The PATH Act offers a distinct plan for the wind-down of the GSEs, calling for portfolio reductions and repealing the GSEs’ charters after five years.
The Democrats’ plan does not detail a final plan for the GSEs.
Both plans support a government guarantee of any outstanding mortgage-backed securities held by Fannie Mae and Freddie Mac.
Both plans also include industry-wide standards for underwriting, servicing, and securitizing.
The Democratic plan specifically mentions credit access for low- and moderate-income borrowers and minority borrowers as well as affordable housing.
In contrast, the PATH Act does not address these issues. It does detail the creation of the National Mortgage Market Utility, which would create standards for debt-to-income ratio, loan-to-value ratio, documentation requirements, credit standards, and loan terms.
Additionally, while the Democrats specify support for the TBA market – in which investors lock in dates for future MBS trades – the PATH Act does not address the TBA market at all. “This seems to us an area that is ripe for compromise,” Barclays says.
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