The latest federal legislation to emerge that would reform U.S. housing finance protects community banks, maintains Qualified Mortgage standards and establishes servicing standards.
The Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. were both thrown into conservatorship in September 2008.
In 2011, the Obama administration disclosed plans in a report to Congress to wind down the pair of secondary lenders.
Since being placed under government control, Fannie Mae and Freddie Mac have received combined Treasury Department draws of $188.4 billion. But, including planned first quarter dividend payments, the two companies have paid out $202.9 billion in dividend payments — and those payments are expected to continue.
Recent GSE profits have eliminated the urgency to resolve Fannie and Freddie — creating uncertainty about the U.S. housing finance system.
Last June, S.1217, the Housing Finance Reform and Taxpayer Protection Act of 2013, was introduced in the Senate by a group of Republicans and Democrats. The legislation would replace Fannie, Freddie and the Federal Housing Finance Agency with a new Federal Mortgage Insurance Corp. that would provide a catastrophic guarantee for certain mortgage-backed securities.
In addition, Republican-supported GSE legislation was introduced in the House.
Rep. Maxine Water (D-Calif.) criticized the House bill because it would eliminate 30-year mortgages and leave the mortgage market controlled by big banks. She said she was working on an alternative approach that is consistent with principles established by House Democrats.
On Tuesday, Sen. Tim Johnson (D-S.D.), chairman of the Senate Banking Committee, and Sen. Mike Crapo (R-Idaho), ranking member of the committee, announced an agreement on a housing finance reform proposal. They expect to finalize a legislative draft and publicly release it in the coming days. A markup is expected to be held in the coming weeks.
The bill, which would wind down Fannie and Freddie, builds on the earlier senate legislation. It would provide specific benchmarks and timelines to guide market participants and the FMIC — which would be somewhat modeled after the Federal Deposit Insurance Corp.
The FMIC would be required to maintain 10 percent private capital up front and create a mortgage insurance fund for the system to avoid government bailouts.
The legislation would create a member-owned securitization platform to issue a single, standardized FMIC-wrapped security. It would allow the issuance of private label securities in a manner that encourages standardization and improved market liquidity.
A mutual cooperative jointly owned by small lenders would be established to ensure they have direct access to the secondary market and are not at the mercy of their larger counterparts. The cooperative would provide a cash window for individual eligible loans, and small lenders could retain servicing rights.
Independent Community Bankers Association President and Chief Executive Officer Camden R. Fine said in a written statement that his group is encouraged by this aspect of the legislation.
The proposed law would establish servicing rules for servicers that participate in the FMIC system.
Strong underwriting standards that mirror Qualified Mortgage guidelines would be required. Down payments would be a minimum of 5 percent for previous homeowners and 3.5 percent for first-time buyers.
While the legislation would use transparency to serve underserved areas, it would eliminate affordable housing goals. A 10-basis-point FMIC user fee would be established to ensure that there is sufficient decent housing available.
Current conforming limits would be maintained to ensure financing is available in high-cost areas.
The bill will be designed to maintain broad liquidity in the to-be-announced market, and the FMIC would be directed to take into account the impact of new products on the to-be-announced market.
“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,” Crapo said in a joint statement with Johnson. “Government control of Fannie and Freddie with no private capital to protect taxpayers against losses is unacceptable.”
Mortgage Bankers Association President and CEO David H. Stevens issued a statement commending Johnson and Crapo for their efforts and noted that the bill is designed in a way that engages private capital and reduces risk for taxpayers.
