Details have emerged from the Senate about a proposed overhaul of U.S. housing finance. Among other things, the proposed legislation includes servicer regulation and a provision for refinancing negative-equity properties in a bad housing market.
A draft of the Senate Banking Committee’s housing reform bill calls for the creation of an independent agency, the Federal Mortgage Insurance Corp., that is responsible for insuring mortgage-backed securities containing single-family and multifamily loans. Securities will be exempt from the registration requirements of the Securities and Exchange Commission.
It will be run by a five-member bipartisan board with staggered terms, with a chairman appointed by the president. The agency will have rule writing authority.
The Federal Housing Finance Agency would become an independent office inside the FMIC within six months of the law’s enactment. FHFA would continue to regulate the Federal Home Loan Banks.
The FMIC will eliminate and dissolve Fannie Mae and Freddie Mac and repeal their charters. The timing for this will be based on the development of the infrastructure. Within no more than five years, Fannie and Freddie should be prohibited from engaging in new business, though this deadline can be extended several times with heightened approval standards.
As part of Fannie’s and Freddie’s wind down, a holding corporation, multiple trusts and subsidiaries or joint ventures can be established to effect this.
The FMIC would supervise guarantors, aggregators, servicers and private mortgage insurers in addition to the FHLBs, the common securitization platform and the small lender mutual. It will establish minimum capital requirements and maximum market share for these entities if they don’t meet capital requirements, and it will have powers similar to the Federal Deposit Insurance Corp. to resolve critically undercapitalized guarantors and aggregators.
The agency would be authorized to liquidate a critically undercapitalized mortgage insurer if a state regulator doesn’t move quickly enough.
Mortgage servicers will be required to submit annual reports to the FMIC and will face on-site examinations every two years, though that could be more frequent for servicers that violate regulations or the subject law. Servicers that don’t meet standards could be forced to transfer mortgage servicing rights. In addition, holders of first-loss positions can petition for a change of servicer.
Servicers approved by Fannie or Freddie will be grandfathered in as approved FMIC servicers.
The agency would be able to establish and capitalize a mutually-owned company to facilitate access to the secondary market by smaller lenders. Mutual membership will be limited to insured depository institutions with less than $500 billion in total assets, non-depository institutions with more than $2.5 million in assets and less than $100 billion in annual loan originations, Federal Home Loan Banks and other small lenders.
“Bailouts to financial market entities to avoid insolvency or to those entities already insolvent are strictly prohibited,” the draft states.
The agency would be responsible for defining and identifying underserved markets such as loans on properties in rural and urban communities, manufactured housing loans and small-balance loans. Approved guarantors and aggregators will need to report on efforts to provide credit to underserved markets — though the FMIC cannot influence their selection of eligible mortgage loans in order fulfill its equitable access obligation.
“On enactment, the single-family and multifamily housing goals with respect to mortgage purchases of the enterprises are repealed,” the draft says. “Covered entities must comply with the Fair Housing Act and the Equal Credit Opportunity Act.”
In order to promote affordable housing, three funds will be created from an average 10-basis-point fee charged to guarantors. Fees will vary by guarantor depending on their performance in underserved areas relative to their peers.
A mortgage insurance fund will be established and maintain a 1.25 percent reserve ratio.
The FMIC will need to establish a credit risk sharing mechanism that ensures the first 10 percent of MBS losses will be absorbed before the mortgage insurance fund kicks in. First-loss investors will have access to loan documents and be immune from liability in lawsuits over the underwriting of the loans or violations of representations and warranties.
Loan limits will be based on a housing price index and cannot be reduced.
In extraordinary times where mortgage credit is threatened, the FMIC — with the approval of the Federal Reserve Board chairman and the Treasury Secretary — can waive the first-loss requirement for a period of as long as two years.
In the event of a national decline in home prices, covered loans could be refinanced regardless of the value of the collateral.
The FMIC will need to establish standards for force-placed insurance.