Financial Services Committee Responds to PATH Criticism

By: Jann Swanson •

After a less-than-favorable reception at a hearing last Thursday, The House Financial Services Committee (FSC) continues to campaign for the Protecting American Taxpayers and Homeowners Act or "PATH." Those giving testimony were particularly critical of what they termed the elimination of government guarantees on mortgages securitized into mortgage-backed securities (MBS). The proposed law was authored by Committee Chairman Jeb Hensarling (R-TX) .

Ostensibly in response to the criticism, the FSC blog fired back on Friday, quoting an exchange between Ed Royce (R-CA) and Federal Reserve Chairman Ben Baranke at a FSC hearing on another matter. Specifically, Royce questioned whether provisions of PATH, authored by FSC Chairman Jeb Hensarling (R-TX), will ensure continued access to the mortgage market for a great majority of borrowers regardless of market conditions. 

Bernanke responded: "We need to think about the situation where there is a lot of stress in the market and we need some kind of backstop... It seems to me that FHA could be structured to supply such a backstop, it would depend on the details.  That would be one way to have the government supply a backstop."

This exchange, the blog says, shows how the PATH Act "preserves the FHA's counter-cyclical role by allowing it to insure loans to any borrower during period of significant credit contraction." This would allow FHA to "serve as a backstop to keep mortgage credit flowing, to promote stability in the housing market, and to ensure that middle-class families can still buy homes."

The blog goes on to lay our several provisions of Title II of the Act it said are meant to allow FHA to play that counter-cyclical role:

  • Section 260 provides the authority to suspend the mandatory capital ratio should it be determined that: (1) available credit throughout the country has contracted significantly, as determined by the credit availability measures published by the OCC, (2) housing prices have declined significantly, or (3) other negative economic conditions exist that impact the availability of capital in housing finance markets.

  • Section 232, which governs FHA borrower eligibility, allows for the income restriction to be waived during an economic downturn described above.