As the Senate continued work last week on financial regulatory overhaul bill S. 3217, the Restoring American Financial Stability Act, NAHB helped to defeat two amendments that threatened to impair the flow of mortgage credit to the nation’s housing finance system.

The Senate voted 56 to 43 to reject a proposal offered by Sen. John McCain (R-Ariz.) to end government control of Fannie Mae and Freddie Mac within two years and then force the two housing government sponsored enterprises (GSEs) to reduce the size of their mortgage portfolios.

In a letter sent to Senate Banking Committee Chairman Chris Dodd (D-Conn.), Ranking Member Richard Shelby R-Ala.) and the full Senate expressing strong concerns with this plan, NAHB stated that provisions in the McCain amendment dealing with portfolio limitations, loan limit repeals and escalating mandatory downpayments would impair the ability of Fannie and Freddie to participate in the secondary housing market. NAHB also warned that the McCain language could effectively end the current housing finance delivery system without offering a thoughtful replacement.

During floor debate, Dodd read excerpts from NAHB’s letter: “We remain concerned about how to get from the current structure to a future arrangement without undermining ongoing financial rescue efforts and disrupting the operation of the overall housing financing system. Any changes should be undertaken with extreme care and with sufficient time to ensure that U.S. home buyers and renters are not placed in harm’s way, and that the mortgage funding and delivery system operate efficiently and effectively as a new system is put in place.”

The Senate opted to approve a competing amendment offered by Dodd that would require the Treasury Department to study how to end the conservatorship of Fannie Mae and Freddie Mac and present its recommendations by January 2011. The measure passed by a vote of 63 to 36.

After disposition of the McCain amendment, the Senate moved to consider a motion put forth by Sen. Bob Corker (R-Tenn.) that would have mandated a 5% downpayment requirement for all mortgages, including those insured by the Federal Housing Administration (FHA).

Again, NAHB sent a letter to the full Senate detailing how this plan would harm the housing market and limit the availability of affordable mortgage options. Increasing FHA’s downpayment requirements from the current 3.5% would deny credit to many worthy borrowers, the letter stated, while mandating a similar 5% statute for all other mortgages would impose overly rigid constraints on the regulation and exercise of mortgage underwriting practices.

While NAHB supports steps to ensure that mortgage lending occurs in a safe and sound manner, the letter to senators pointed out that the pendulum has swung well past center so that mortgage credit is currently available only to those with unblemished credit histories with resources to make a significant downpayment on their home.

The Corker amendment was subsequently defeated by a 57 to 42 margin.

To defeat the Corker amendment, Democratic leaders supported a new amendment offered by Sens. Jeff Merkley (D-Ore.) and Amy Klobuchar (D-Minn.) that would effectively ban yield-spread premiums and require lenders to verify a borrower’s income. The measure would also require a mortgage originator to ensure a borrower’s ability to repay a mortgage for five years based on verifiable income documentation as defined and enforced by the new consumer protection bureau. 

The amendment is similar to the Nontraditional Mortgage Guidance issued by the bank regulators in 2006, which NAHB generally supported. A key difference is that the amendment applies to all mortgage products, not just nontraditional or exotic loans. The amendment passed by a vote of 63 to 36, and will now have to be reconciled with the tougher underwriting standards provisions passed by the House late last year.

Further, NAHB supported two additional amendments that would help creditworthy borrowers to obtain affordable home loans.

An amendment offered by Sens. Mary Landrieu (D-La.), Kay Hagan (D-N.C.) and Johnny Isakson (R-Ga.) addressed a key concern of NAHB on the bill’s overall risk retention requirements. Throughout the debate on this legislation, NAHB has warned that without further modification, the provision requiring loan originators to keep 5% of the credit risk on each loan they securitize or sell could raise consumer borrowing costs and limit the availability of affordable mortgage options.

NAHB, along with a coalition of real estate and banking groups, worked to secure support and adoption of language in the Landrieu-Hagan-Isakson amendment that would create a special category for carefully defined, fully documented and properly underwritten residential mortgage loans, which would be exempt from the statutory risk retention requirements in the overall bill.

This approach to provide an incentive for financial institutions to adopt high lending standards without making sound mortgage products more expensive was approved by unanimous consent.

Finally, NAHB and a coalition of other organizations acted to address a provision in the Senate’s financial overhaul legislation that would severely hamper the ability of the Federal Home Loan Banks (FHLBs) to provide much-needed liquidity to the financial system. The measure would prohibit institutions deemed systematically important from lending an amount to any unaffiliated company that exceeds 25% of the capital stock and surplus of the lending institution.

NAHB has repeatedly and strongly weighed in with key Senate leaders about the need to address this language, which would effectively force the FHLBs to reduce their advance positions to comply with the cap.

As a result of this effort, an amendment was introduced by Sen. Tim Johnson (D-S.D.) to exclude the FHLBs from this onerous provision. The Johnson amendment is currently awaiting floor action.

The Senate will continue work on its financial regulatory reform legislation this week. Once the chamber passes its bill, it will need to be reconciled with its House counterpart, H.R. 4173, the Wall Street Reform and Consumer Protection Act, which was approved in December.

To view the legislation, click here and type the bill numbers in the box at the center of the page.

For more information, e-mail Scott Meyer at NAHB, or call him at 800-368-5242 x8144.