Bipartisan Agreement Calls for Replacing GSEs with a New Entity Called Federal Mortgage Insurance Corp. Modeled in Ppart After the FDIC Including its Regulatory Authority
Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Michael Crapo (R-ID) announced a bipartisan agreement covering wide-ranging housing finance reform in a proposal that, if fully enacted, would rewrite how the nation’s housing capital markets work.
In this version of the script, the nation’s two largest government sponsored enterprises (GSE), Fannie Mae and Freddie Mac, are snuffed out in the end. It’s not likely to be the final version.
“It’s not a good day for anyone who wants to get a mortgage or who may want to refinance a mortgage in the future, because it is not certain how the liquidity of the mortgage market will be affected,” said Jeff Cooper, chairman and executive managing director of Savills U.S., which is involved in real estate investment banking, investment management and capital markets activities. “The agreement doesn’t really answer the big question, 'What’s going to happen to liquidity in the housing market?' ”
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Last fall, the Senate Banking Committee hosted an in-depth series of hearings exploring essential elements necessary for reform. Over the past few months, committee members have been negotiating and drafting the reform proposal.
“There is near unanimous agreement that our current housing finance system is not sustainable in the long-term and reform is necessary to help strengthen and stabilize the economy,” said Sen. Johnson.
“This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie, while protecting taxpayers with strong private capital, building the components for a stable secondary market and avoiding repeating the mistakes of the past,” Sen. Crapo said. “Government control of Fannie and Freddie with no private capital to protect taxpayers against losses is unacceptable.”
As with any proposed far-reaching legislation, the proposal was not without its share of critics.
"I’m not sure there is enough private capital out there to take over a $10 trillion market," said Savills' Cooper. "Who is going to step up and take that first loss, and what inducements will be offered to do so?”
"We appreciate Senators Johnson and Crapo's attention to this critically important issue," said Mike Calhoun, president of the Center for Responsible Lending. "The mortgage market is a $10 trillion industry and any changes to it will resonate through the entire economy. This is why any change must be considered carefully."
Calhoun said the housing finance system overhaul should ensure access to affordable and responsible mortgage credit for consumers.
"If legislation fixes what was broken and builds on what works, we can create a housing finance system that will support economic growth and provide loans to creditworthy families in good times as well as bad. We will be looking closely at the Johnson-Crapo proposal to see how it measures up against these goals."
CRL has proposed replacing Fannie Mae and Freddie Mac with a mutually owned entity that banks would invest in, thereby incentivizing banks to make prudent, well-underwritten loans. It's also the current structure used by the Federal Home Loan Banks, which CRL said served the market well through the recent financial crisis.
Senate banking Committee Chairman Johnson and Ranking Member Crapo said they are in agreement that keeping Fannie Mae and Freddie Mac in conservatorship is not a viable option. The senators said they used the following five principles in crafting the housing finance reform legislation:
• Protect taxpayers from bearing the cost of a housing downturn.
• Promote stable, liquid and efficient mortgage markets for single-family and multifamily housing.
• Ensure that affordable, 30-year, fixed-rate, prepayable mortgages continue to be available, and that affordability remains an important consideration.
• Provide equal access for lenders of all sizes to the secondary market.
• Facilitate broad availability of mortgage credit for all eligible borrowers in all areas and for single family and multifamily housing types.
Although the Senate committe has yet to unveil the full proposal, some of the major components of the plan include:
Winding down and eliminating Fannie Mae and Freddie Mac while establishing a stable transition to a new housing finance system headed by a new entity called Federal Mortgage Insurance Corp. (FMIC) that would be modeled in part after the FDIC, including its regulatory authority.
Mandating that the FMIC be funded by 10 percent of private capital, up front, and create a mortgage insurance fund for the system to protect taxpayers against future bailouts.
Creating a mortgage lender-owned securitization platform that will issue a single, standardized FMIC-wrapped security, and permit private label securities to be issued in a manner that encourages standardization and improved market liquidity.
Maintaining the multifamily lending market by expanding current risk-sharing mechanisms and products, while providing access to a broader range of markets.
The plan would also eliminate affordable housing goals and establish what it calls more transparent and accountable housing-related funds to subsidize affordable housing. The funds would not use tax money, but instead be funded through a small FMIC user fee (10 basis points) paid only by those who choose to use the new housing finance system.
The Independent Community Bankers of America and The National Association of Federal Credit Unions said they were encouraged by provisions of the draft plan that would specifically support continued access for community banks and credit unions to securitize and sell their loans.
Kevin Kelly, chairman of the National Association of Home Builders (NAHB) said the plan would provide a federal backstop to ensure that the 30-year mortgage, the bedrock housing finance tool for most consumers, remains readily accessible and affordable.”
“The proposal also includes many elements advocated by NAHB that will boost private capital in the marketplace and ensure a reliable and adequate flow of liquidity for single-family and multifamily housing,” Kelly added.
Savills U.S. Executive Managing Director Cooper called the agreement “a start of a very long process, but (it) is bumping up against a mid-term national election, then a presidential election. I doubt anything gets resolved until after that presidential election, if then.”
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