A Guide to the Johnson-Crapo Housing Finance Reform Bill

Today Senators Tim Johnson, D-S.D., and Mike Crapo, R-Idaho, introduced legislation that, if enacted, would meaningfully change the way that most Americans buy homes. The bill, formally known as the Housing Finance Reform and Taxpayer Protection Act of 2014, reflects an emerging bipartisan consensus on housing finance reform.

Two issues are at the core of any comprehensive housing finance reform bill:

• The extent and mechanics of government guarantees against mortgage lending losses, and
• The role of the federal government in promoting affordable housing.

The first promotes financial and macroeconomic stability, while the second ensures equitable access to housing, both of which are traditionally core government competencies.

The Johnson-Crapo bill makes private investors responsible for most losses (more precisely, 10 percent of first losses), providing for a government guarantee only in the case of a catastrophic scenario. To fund this catastrophic insurance, the bill requires a minimum mortgage insurance premium of 55 basis points and the insurance fund to hold capital reserves equal to 2.5 percent of liabilities within 10 years. The federal government would only be responsible for losses once the resources of the borrower, insurance fund, and capital reserves have been exhausted.

With respect to affordable housing, the Johnson-Crapo bill repeals mandatory affordable housing goals that Congress enacted in the early 1990s, but charges borrowers a 10 basis point premium dedicated to three affordable housing funds:

• The National Housing Trust Fund, which provides block-grants to states to operate rental housing units for extremely low-income families (typically families who earn 30 percent or less of the median income in a metro area);
• The Capital Magnet Fund, which is a competitive grant program for nonprofits that, among other activities, helps low-income families purchase homes; and
• A new Market Access Fund to promote “innovation and experimentation” in the housing finance system.

Below, Zillow Research outlines several key questions about the Johnson-Crapo bill.

What will happen to Freddie Mac and Fannie Mae?n

Freddie Mac and Fannie Mae, together known as the Government Sponsored Enterprises (GSEs), are the two corporations that have historically owned or guaranteed roughly the middle half of all new home mortgages. (Private investors and banks own the least-risky mortgage originations, while the U.S. government has historically directly guaranteed the riskiest one-third of mortgage originations through the Federal Housing Administration [FHA] and other smaller programs.)