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Path to Nowhere Act

In the 113th Congress, House Financial Services Committee Republicans introduced the “Protecting American Taxpayers and Homeowners (PATH) Act” (H.R. 2767). The bill would dramatically reduce the government’s role in ensuring access to homeownership and rental housing opportunities for middle-class and lower-income American households. In fact, economists, industry stakeholders and advocacy groups have uniformly stated that the PATH Act would prevent most American families from purchasing a home with an affordable 30-year, fixed-rate mortgage. Moreover, the bill would drastically reduce the government’s role in providing access to multi-family housing, driving up rental prices at a time when vacancy rates in many parts of the country are already at an all-time low.

In response to this radical remake of our housing finance system, Financial Services Committee Democrats have provided the following materials explaining the negative impact this legislation would have on American communities.

A comprehensive set of Committee resources are below. 


  


​How the GOP’S Radical Plan to Remake Housing Finance Will Hurt the Middle Class, Damage Community Banks & Credit Unions, Limit the Supply of Rental Housing, an Leave Taxpayers on the Hook

Chairman Jeb Hensarling—joined by the Republican Leadership of the Financial Services Committee—reported legislation, (H.R. 2767), intended to reform our country’s housing finance system. However, the bill, the inaptly-named Protecting American Taxpayers and Homeowners or PATH Act, is nothing more than an extreme experiment with America’s housing finance system. For the millions of Americans who will be impacted by this ideological legislation, this bill is truly a PATH to nowhere.

THE PATH TO NOWHERE ACT WILL HURT THE MIDDLE CLASS:

  • Ends the affordable 30-year fixed rate mortgage. The facts on this point are clear: the 30-year fixed rate mortgage is great for consumers but investors are reluctant to offer such long-term financing at an affordable price without a government guarantee. With no government role in the secondary mortgage market, mortgage investors will pick and choose the mortgages that work best for them, and not those that work best for consumers. Under the PATH to Nowhere Act, the affordable 30-year fixed rate mortgage will become a thing of the past.

  • Forces homeowners into risky mortgages. Without the 30-year fixed rate mortgage, America’s homeowners will be forced into variable interest rate, short-term loans with massive balloon payments. Moreover, because the bill guts the carefully crafted mortgage protections in the Wall Street Reform Act, homebuyers will be once again subjected to the very same subprime mortgages and tactics that caused the financial crisis and millions of foreclosures.

  • Wipes out trillions of dollars in family wealth. Mortgages will become more expensive for those lucky few Americans who will be able to qualify for one. But since these Americans will pay more (through higher fees, debt-to-income levels, and downpayments of up to 30 percent) for mortgages that will have smaller loan amounts, they are probably not so lucky after all. The lower loan amounts will put downward pressure on home prices nationwide, causing housing prices—which have begun to rebound after years of decreases—to plummet. The result will be the loss of trillions of dollars in household wealth for all homeowners, a loss so large it could destabilize the middle class as we know it. 

  • Puts FHA out of reach. The bill limits FHA to first-time homebuyers and caps eligibility for the program at 115 percent of area median income (AMI) and severely reduces its insurance coverage. This means that FHA, which has played a critical role in building middle class homeownership in America, especially during the current economic downturn, will no longer be available to many American families.

The Bottom Line: Without a government guarantee, homeownership will radically change for middle class families, becoming riskier, more expensive, and, for some families, will disappear altogether.


THE PATH TO NOWHERE ACT WILL DAMAGE COMMUNITY BANKS AND CREDIT UNIONS

  • Squeezes community banks and credit unions out of mortgage lending. The bill creates a National Mortgage Market Utility (Utility) to facilitate the securitization of mortgages sold on the secondary mortgage market. An institution of this size and scope is likely to be controlled by big banks because only the big banks will have the infrastructure and capacity to replicate the securitization platforms of Fannie Mae and Freddie Mac. This gives big banks a leg up over community banks and credit unions, which would have to jump through additional hoops to get access to liquidity in the secondary market.

  • Provides phantom regulatory relief for community banks. While the Republican bill makes it easier for community banks to originate loans for their portfolio, community banks won’t be able to sell these mortgages on the secondary mortgage market. This will vastly decrease the volume of mortgages that community banks can originate because they will be forced to keep them on their books.

  • More regulatory uncertainty for community banks. The PATH Act repeals mortgage rules that have been carefully crafted with community banks in mind and will replace them with new rules written by the largest banks. This will cast further uncertainty on the market and force community banks to focus additional resources on compliance rather than lending. 

  • Opens the door for the return of subprime mortgage brokers. By repealing the predatory lending provisions in Wall Street Reform, the bill will invite unscrupulous subprime lenders to run roughshod over the market, pushing lenders that want to provide quality mortgages out of business.

  • Cuts Community Banks and Credit Unions out of FHA. The bill slashes the guarantee on FHA loans from 100 percent to 50 percent. With a 50% guarantee, Ginnie Mae, which securitizes FHA loans, would need to either be willing to accept greater losses (and run the risk of requiring taxpayer assistance), or, more likely, be substantially more conservative in their issuer approval process. This would most likely mean that community banks and credit unions would no longer qualify to issue FHA loans, pushing these small financial institutions even further out of the mortgage business.

The Bottom Line: Community banks and credit unions won’t be able to compete with the big banks and unscrupulous lenders that will control the mortgage market.


THE PATH TO NOWHERE ACT WILL LIMIT THE SUPPLY OF RENTAL HOUSING

  • Makes low-income families keep waiting for affordable rental housing. The bill repeals the National Housing Trust Fund, which if capitalized would provide a dedicated source of funding to build affordable rental housing options. While not currently funded, the Trust Fund is still needed to address the nation’s affordable rental housing crisis but has not been funded by FHFA despite the fact that the GSEs have returned to profitability.

  • Dries up capital for rental housing developers. The PATH to Nowhere Act eliminates the GSEs’ multifamily business, which is one of the only sources of mortgage capital for the multifamily market.

  • Leaves renters out in the cold. The bill doesn’t have a duty to serve the rental housing market and all geographies. Without a government role in the housing market, small value rental properties and those in rural areas will be unable to access financing, resulting in fewer rental housing options in those communities. 

  • Drives up the cost of rental housing while lowering its value. Without a government role in the housing markets, mortgage rates for apartment owners would increase, and values for multifamily properties would decrease by 4 – 16 percent, according to a recent report by the Federal Housing Finance Agency.

The Bottom Line: With the share of renters, who represent a third of all Americans, at a 15-year high (and the share of homeowners at a 15-year low), affordable rental housing is more important than ever; however, the Republican plan puts this critical housing resource at risk.

THE PATH TO NOWHERE ACT WILL LEAVE TAXPAYERS ON THE HOOK

  • Puts the Deposit Insurance Fund (DIF) at risk. The PATH to Nowhere Act creates a “covered bonds” program—with an implicit government guarantee—to help big banks keep mortgages on their books. Covered bonds provide investors with a senior claim on both the mortgages in the pool as well as the issuing institution. If an institution with covered bonds fails, the FDIC has to honor the bond and pay off investors. And if the losses are severe, the FDIC will have to use taxpayer money or raise money from banks that don’t issue covered bonds.

  • Ensures another TARP-style bailout. When the Republican experiment in housing finance reform fails, the only way to for regulators to stave off an epic Depression will be to request—and receive—a government bailout. Given the size of the secondary mortgage market, it’s possible that this bailout will make TARP—which required $700 billion—seem small in comparison.

  • Wipes out trillions of dollars in family wealth. Mortgages will become more expensive for those lucky few Americans who will be able to qualify for one. But since these Americans will pay more (through higher fees, debt-to-income levels, and downpayments of up to 30 percent) for mortgages that will have smaller loan amounts, they are probably not so lucky after all. The lower loan amounts will put downward pressure on home prices nationwide, causing housing prices—which have begun to rebound after years of decreases—to plummet. The result will be the loss of trillions of dollars in household wealth for all homeowners, a loss so large it could destabilize the middle class as we know it. 

The Bottom Line: More bailouts, more debt. American taxpayers shouldn’t be forced to bail out Wall Street again, yet the Republican PATH to Nowhere Act guarantees a future of big bailouts, bigger deficits, and less financial security. American taxpayers deserve better.


The GOP Housing Finance Plan: A True PATH to Nowhere for the Middle Class, Community Banks & Credit Unions, Renters, and the American Taxpayer

Industry Concerns with PATH

NAR, NAHB, LBA, CMLA, CCIM Institute, IREM, SIOR, RLI - "we are concerned that the PATH Act would hinder the ability for American families to have access to quality homeownership and rental options and hurt job growth. Public policy reforms should promote responsible, sustainable housing opportunities, protect the American taxpayer and not endanger the future of this critical economic sector."

National Association of Home Builders (NAHB) - "NAHB supports the creation of a sustainable housing finance system. By eliminating the federal guarantee for the conventional mortgage market and severely reducing the scope and reach of FHA’s programs for homebuyers, the PATH Act will greatly limit homeownership and rental housing opportunities for many qualified Americans."

Mortgage Bankers Association (MBA) - "We have consistently stated, and I reiterated in my testimony last week, that one of our key principles is that a federal backstop must be a part of any future secondary market system."

California Association of Realtors (C.A.R) -"While C.A.R. has supported the reform or replacement of the government sponsored enterprises (GSE), Fannie Mae and Freddie Mac, we do not support the manner in which the GSE are wound-down in PATH, or the creation of a replacement entity, such as the Mortgage Market Utility (Utility), without an explicit government guarantee."

National Council of State Housing Agencies (NCSHA) - "The lack of an explicit government guarantee will increase lending costs, pricing many low- and moderate consumers out of the market. Many of these consumers would have been first-time home buyers, which historically play a large and catalytic role in the housing market. Without these buyers, many “move-up” buyers will struggle to sell their current homes and will have to delay their moves. Given the critical role housing plays in the U.S. economy, any slow-down could have severe effects on economic growth."

National Association of Realtors (NAR) -"NAR believes the PATH Act will jeopardize the ability of American families to purchase a home, as well as the future of the housing industry itself."

"Our opposition falls primarily into two areas: 1) The PATH ACT does not include an explicit federal guarantee; and 2) the PATH act dramatically restructures FHA and proposes targeting of its mission."

NAR Letter to Representatives - "Housing finance reform should be a priority for this Congress, but it must be done in a responsible manner that can garner widespread support. The National Association of REALTORS® urges you to oppose the PATH Act and not cosponsor this destabilizing legislation."

NAR - Why ‘PATH’ Approach to Fannie, Freddie Phase-out is Troubling

  

Articles on PATH to Nowhere Act


Mark Zandi on PATH to Nowhere Act

Mark M. Zandi is chief economist of Moody’s Analytics, where he directs economic research. Moody’s Analytics, a subsidiary of Moody’s Corp., is a leading provider of economic research, data and analytical tools. Dr. Zandi is a cofounder of Economy.com, which Moody’s purchased in 2005.

  • Moody's Analytics (Special Study) - Evaluating PATH
  • In response to a question from Rep. Heck, Dr. Zandi provided the following analysis of what type of borrower would qualify for a mortgage at today’s rates under the Republican bill:

Mark Zandi: “For a borrower to get the same mortgage rate in a privatized housing finance system like that proposed in PATH as they can get today, they would need a loan with a LTV of no more than 65%, a credit score of no less than 750, and a DTI of no more than 31%. In the current non-FHA market, approximately just over one-fifth of borrowers meet these credit standards.”. 




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