April 16, 2014 / 4:45 PM / in 4 years

HUD's Donovan says US Senate housing bill is best chance of reform

WASHINGTON, April 16 (Reuters) - President Barack Obama’s top housing official on Wednesday said a proposed Senate bill provides the best chance to overhaul the mortgage finance system this decade, but more debate over down payment requirements for government-backed loans is needed.

“Despite its imperfections, this bill represents real progress and that’s why we have got to pursue it,” U.S. Housing and Urban Development Secretary Shaun Donovan said at a conference hosted by the National Council of La Raza and other civil rights and housing groups. “We must take action.”

Donovan gave the speech in hopes of reassuring housing advocacy and civil rights groups, which oppose the proposed Senate plan over worries that it would create a system that will prevent less affluent Americans from accessing credit even if a government role is retained.

His push comes as Senate Banking Committee leaders are negotiating with other senators and aiming to reach a compromise on their bill to wind down government-run mortgage financiers Fannie Mae and Freddie Mac. The panel is expected to consider the bill at the end of April.

“This is the single best chance that we will have...it may very well be the only chance we have this decade,” Donovan said in an interview of the prospects of enacting reform if the banking panel does not approve the proposed bill.

Under the draft bill, released last month, Fannie and Freddie would be replaced by a new industry-financed agency. The agency would provide a government backstop for mortgages, but only after private creditors shouldered 10 percent of any losses.

The proposal also would mandate that strong underwriting standards be built into the new system. It would require a 5 percent down payment for all but first-time buyers, who would only face a 3.5 percent threshold.

Committee Chairman Tim Johnson, a Democrat, and top Republican Mike Crapo authored the measure.

Civil rights groups and consumer and housing advocates believe requiring minimum down payments would price out of the market some low-wealth people who would nonetheless be good borrowers. Donovan did not express an opinion on down payments but said the discussion over whether such requirements are fair should continue.

“I have heard concerns about locking that into legislation. I understand the reasons for that concern,” Donovan said. He added that regulators would have the ability to toughen those standards, and perhaps make mortgages less available.

“It’s an important discussion we have to have,” he said.

Johnson is attempting to coax the panel’s Democrats into supporting the bill. They have started to splinter over reservations about how much the bill reduces the government’s support for the housing market and whether it adequately promotes affordable housing programs.

Republicans may support the overhaul, but it’s unclear whether they would back down if more emphasis is placed on low-incoming housing initiatives in the negotiation process. (Reporting by Margaret Chadbourn; Editing by Leslie Adler)

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