On March 15, Senator Pat Toomey (R-PA) issued a press release titled “Toomey Outlines Housing Finance Reform Principles” with the subtitle “Signals willingness to work with Congressional Dems & Admin.” Toomey is the new top Republican on the Senate Banking Committee (SBC), a position he will hold for just two years as he does not plan to run for re-election in 2022. The press release lists seven specific principles after some meaningful introductory language.

What are we to think of this? Does it signal a full-court Senate press on comprehensive housing finance reform? Or is it next in a line of declarations of “high-level principles” that do not amount to much? In the decade that housing finance reform has been a major topic of discussion in Congress, there has been just one proposed Senate bill (Johnson-Crapo, which emerged from the Corker-Warner proposal) that resulted from a major, bipartisan push for comprehensive reform, though it ultimately failed. Will Sen. Toomey’s announcement kick-start the second one?

I believe the answer is no, but it could lay the groundwork for something successful and worthwhile.

As background, traditional conservative Republicans have a skeptical but not overly-doctrinaire view of the two government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae. Meanwhile, the more doctrinaire Tea Party Republicans believe that the two companies represent an unacceptable government distortion of private capital markets and should be radically reduced in size, if not eliminated. Sen. Toomey, at least until now, has more been associated with the latter viewpoint than the former. By contrast, Democrats, believing government intervention in the economy is necessary to help the less fortunate, are generally supportive of the GSEs. Also, the current Chairman of the SBC, Sen. Sherrod Brown (D-OH) has made it clear that, while he supports the utility model for GSE reform, right now he is primarily focused on addressing pandemic-related problems (e.g. rental assistance) while more broadly prioritizing the improvement of housing affordability and reducing racial differences in homeownership rates. It is not clear that there exists a comprehensive reform plan that can satisfy such different viewpoints and thereby gain bipartisan support, especially during what remains of Sen. Toomey’s tenure.

Against this background, there are four key takeaways from Sen. Toomey’s press release:

1. It’s about the GSEs, not broader reform.

When people in DC say “housing finance reform” they often mean solely changing the business model of the GSEs to suit their policy and political objectives while also ending direct government control of the companies by their regulator, the Federal Housing Finance Agency (FHFA). This is true for Sen. Toomey as well. Significant possible reforms of the Federal Housing Administration (FHA), Ginnie Mae, and other aspects of housing finance are beyond the scope of his focus on housing finance reform.

2. It offers a necessary concession.

One policy objective of the Tea Party Republicans is to end government financial support provided to the GSEs, or their successors, as part of shrinking or eliminating them. Sen. Toomey, however, emphasizes that he supports the “continued availability of affordable 30-year and other long-term fixed-rate mortgage loans across the United States and throughout the economic cycle.” This means the Senator has effectively abandoned the “end government financial support” policy objective because such support is absolutely required to provide the continued availability he describes. He then signs on to the standard proscription that “significant first-loss private capital stands in front of any government support and that taxpayers are appropriately compensated for that support.” (Note that this concession was made by the then-Republican Chair of the House Financial Services Committee over two years ago, so it is not without precedent.) This concession is a good start, as without it  no agreement with the Democrats would be possible. Interestingly, putting private capital in front of the taxpayer actually began almost eight years ago, when large-scale single-family credit risk transfer began; the retention of earnings by the GSEs beginning in late 2019 then accelerated the process. In other words, as such a reduction of taxpayer exposure is well underway, Congress just has to let it continue as part of any reform legislation.

3. It nevertheless maintains a distinct anti-GSE posture.

Sen. Toomey’s press release repeats politically-loaded, anti-GSE language, which seems dated as it does not reflect developments and GSE reforms that have been implemented during conservatorship. For example, the press release says “[t]he current system exposes taxpayers to risk of future bailouts, fosters excessive risk taking, and crowds out private capital.” While this was somewhat true prior to 2008, it denies the major GSE reforms of the last decade. For example, the pandemic has clearly shown that the GSEs are not taking excessive risk, as their mortgages–based upon publicly-available information about forbearances and delinquencies–are performing noticeably better than those of the FHA and also of private market sources, such as banks or the private label securitization market.

Also dated is the call to “end the [GSE] duopoly.” This was a policy goal shared by most in the mortgage industry and many Democrats (and me) in the immediate years after the 2008 financial crisis, but not for several years now. This collective change of view has occurred for the simple and practical reason that efforts to construct the details of how to end the duopoly, without likely massive disruption to housing markets during a transition, have failed. These failed efforts specifically include going to a “competitive secondary market,” where there would be well-more-than-two GSE-type companies. Despite this history, Sen. Toomey nevertheless proposes it in the press release. By about 2017, the industry and most of the policy community (again, including me) had moved on, and were focused on the “utility model.” This is where the GSEs are regulated not just for safety-and-soundness but also, as with an electric or water utility, their pricing and terms of service are set by a commission which allows the shareholders of the utility to earn a needed market rate of return, but no more. Such a utility model is now, I believe, widely regarded as the only reasonable path out of conservatorship that is credibly believed will work as predicted and without unacceptable transition risk. Sen. Toomey’s call to end the duopoly and replace it with a “competitive secondary market” is therefore outdated, and fails to recognize the reality of what has been learned over a decade of unsuccessful reform proposals.

4. It abandons the comprehensive approach, and instead aims for reforms that are “incremental and realistic, leveraging existing regulatory and market structure.”

This is indeed a breakthrough. Until now, almost all of the focus–both in Congress and the housing finance policy community–has been on “comprehensive” housing finance reform, even when restricted to just the GSEs. This means proposals for change had to cover at least the GSE share (almost 50 percent) of the $11 trillion housing finance market supporting more than 50 million single-family homes, all through a mortgage system which is widely regarded (accurately, in my view) as exceedingly complex, especially with respect to GSE operations. I saw first-hand how high-level proposals for reform got bogged down and became unsustainable when attempts were made to develop the necessary details. Indeed, “comprehensive” has been the enemy of progress; Congress has produced 100 percent of nothing instead of 10 or 20 percent of something. So, it is good to see that Sen. Toomey is abandoning the comprehensive approach in favor of specific, narrowly-defined reforms that could potentially work as promised and could pass in a Congress controlled by Democrats. The press release does not indicate the specific narrow reforms Sen. Toomey might propose (I have my suspicions, but that may be for another blog), or what he would offer Democrats in exchange, but focusing narrowly rather than comprehensively is, I believe, a step in the right direction.

Will Sen. Toomey’s principles kick-start a second major push for comprehensive, bipartisan housing finance reform? Given Sen. Brown’s priority of mitigating the impact of the pandemic on renters and homeowners, and his interest in broad housing affordability rather than the “inside baseball” of housing finance reform, as well as the wide gulf between Sen. Toomey’s push to eliminate the GSE duopoly and Sen. Brown’s support for the utility model that keeps it, surely the answer is a firm no. The saving grace may be a new focus on incremental reform; we shall now see whether even narrowly-drawn reforms can make it through a partisan Congress.