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The Podium

Protecting borrowers as Senate mulls housing finance reform

Throughout my district, working-class families struggle. Burdened with underemployment, a tight job market, and few opportunities to get ahead, parents are trying to provide for their children, while worrying about the future.

In the not so distant past, families in Mission Hill, Jamaica Plain, and Roslindale could depend on the equity in their homes for financial security. It helped fund college educations, small businesses, and retirements. But the financial landscape changed starkly with the housing collapse in 2007, and now the nation is at a crossroads on housing policy.

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The buzz word today among policymakers is “income inequality.” It’s how we express that the rich are getting richer and the poor are getting poorer. Those in the middle, which describes many of the families I know, are just stuck making ends meet.

While Washington talks about addressing income inequality, new laws are proposed that would expand the wealth gap instead of closing it. That is especially true with housing finance reform and legislation known as the Corker-Warner bill.

Under this legislation, which was proposed in the Senate by Republican Senator . Bob Corker of Tennessee and Democratic Senator Mark Warner of West Virginia, Fannie Mae and Freddie Mac would be dissolved. Their critical role of providing a secondary market for mortgage loans would fall to a new government entity, the Federal Mortgage Insurance Corporation. But the FMIC would usher in a housing policy that would be friendlier to the Big Banks and Wall Street, while creating barriers for moderate and low income homebuyers.

For instance, the affordable housing goals that Fannie and Freddie used to encourage lenders to originate loans to low and moderate income families will end. Economists estimate that the legislation would increase the cost of mortgages by a minimum of $1,400 a year, an amount that could keep some families out of the housing market. Furthermore, the lenders will have far greater discretion in setting the rates for loans, which housing activists fear will create a two-tier system where buyers in higher income, suburban communities get lower rates than those seeking homes in urban and rural communities. Simply put, the new system reduces risks for lenders, while creating barriers for working families.

It’s understandable that policymakers are seeking to strengthen the housing finance system and implement reforms to prevent another devastating crash of the housing market, but at the same time the federal government shouldn’t be rewarding the perpetrators of the financial crisis and making working people the victims —– yet again.

Perhaps Congress should seriously consider other policy alternatives such as reorganizing Fannie and Freddie rather than liquidating them.

It’s astonishing that these entities, formally known as Government Sponsored Enterprises, could play such a dramatic role in expanding homeownership since the 1940s, yet receive so much scorn for a crisis that was created by poor judgment at multiple levels of the government and private sector. To be sure, Fannie Mae and Freddie Mac were chasing profits for shareholders and securitized bad loans that should have undergone tougher scrutiny and underwriting. But the mortgage giants did so when their market share was severely threatened by Wall Street investors, who received the green light from Congress and bank regulators to enter the market with little regulatory oversight. It began a race to the bottom, with each side originating many mortgages that weren’t properly scrutinized.

I’m not recommending a return to the past. But there may be ways to secure and safeguard the system without victimizing working-class homebuyers.

For instance, there are proposals to create a cooperative structure for Fannie Mae and Freddie Mac that can preserve its basic mission of assuring the existence of a liquid secondary mortgage market in all economic environments. The government could end their current conservatorships and reorganize the institutions into a cooperative owned by members. This is the model followed by the the Federal Home Loan Bank, which not only survived the housing crisis largely unscathed but provided capital that helped keep financial institutions afloat until the Federal Reserve stepped up their activities.

A cooperative system would relieve the pressure from stockholders for Fannie and Freddie to chase profits, yet keep in place many of the safe, consumer-friendly practices that fueled the expansion of homeownership and wealth in communities across the country.

If the nation is serious about addressing income inequality, it has to start with providing a path towards homeownership because that is one of the few proven ways to generate wealth for working families. It can do it again — if the right housing policies are enacted.

Jeffrey Sanchez is a state representative from Jamaica Plain.
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