In case you were looking for a short primer on the merits of the Senate Banking Committee’s contemplated overhaul of America’s mortgage-lending industry, the Johnson-Crapo bill, you can find it in a recent headline. The April 17 Wall Street Journal carries an Op-Ed piece authored by former Banking Committee Chair Phil Graham and AEI Fellow, Peter Wallison. The Journal’s headline for Graham and Wallison’s article is Worse Than Fannie and Freddie.
Former Sen. Graham and Mr. Wallison claim that under Johnson-Crapo, “housing financial reform is held hostage to the political allocation of housing credit.” They point out that the revenue from the fees Johnson-Crapo imposes on mortgage originations “will not be earmarked for subsidized mortgages for low-income Americans. A significant amount will go to advocacy groups that pressure lenders to make subprime loans, creating what will almost certainly be the largest community-action slush fund in American history.”
Johnson-Crapo, according to Mr. Graham and Mr. Wallison, is also an exercise in wealth redistribution. They write that “low-risk, prime borrowers will be forced to pay far more than the true cost of their mortgage insurance so that subprime borrowers, who defaulted five times more often than prime borrowers during the financial crisis, can pay far less than the actual cost of their insurance . . . . A standard political argument for the federal guarantee of mortgage-backed securities is to help people who play by the rules and behave responsibly to obtain affordable 30-year, fixed-rate mortgages. But a close reading of Johnson-Crapo’s 442 pages makes it clear that much of the gain to the responsible, low-risk borrower coming from federal guarantees is taken away by a parasitic system in which the prime borrower overpays to fund subprime mortgages and community action groups.”
Graham and Wallison’s commentary suggests that Johnson-Crapo increases the federal government’s involvement in the housing credit market, imposes higher costs on prime borrowers to subsidized their subprime counterparts, funnels billions of dollars to special interest advocacy groups, and makes a replay of the mortgage default meltdown that fueled the financial crises more likely.
Let us know what you think.