Rep. Maxine Waters (D-Calif.) believes the housing finance system should act more like a public utility, a concept backed by consumer advocates like the Center for Responsible Lending. The lawmaker is proposing a reform bill that would create a co-op of lenders that would serve as the sole issuer of mortgage-backed securities insured by the government. Private backers would be required to take the first 5 percent loss before the government guarantee takes effect.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, points to adequate private-sector capital as a concern. "A utility, or co-op, may solve for that because it creates a special purpose entity that doesn't need to meet shareholder demand the same way a big bank or bondholder does," she explains.
Waters' proposal would establish a new federal regulator. A minimum down payment of 3.5 percent would be expected from a first-time buyer and 5 percent from everyone else, although the regulator would have the authority to lower those requirements.
One reason that CRL and other supporters are receptive to the co-op format is because it would create a single entity that could be held responsible for making sure that mortgages are available in all markets. It also would deter cherry-picking of loans in more desirable or profitable areas. “If you’re going to have a duty-to-serve requirement, then there is a question about how you enforce it if there’s multiple guarantors,” said CRL executive director Gary Kalman. “If somebody’s not serving South Dakota, who do you hold accountable?”