Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac would be replaced with a single government guarantor known as the Federal Mortgage Insurance Corp. (FMIC) under legislation proposed by a bipartisan group of U.S. senators and introduced in the U.S. Senate this week.
The Housing Finance Reform and Taxpayer Protection Act of 2013, which is being drafted by Sens. Bob Corker, R-Tenn., Mark Warner, D-Va., and six other members of the Senate Banking, Housing and Urban Affairs Committee, aims to transition the GSEs out of government conservatorship over a five-year period, while at the same time protecting taxpayers during the transition process.
The bill has many similarities to the legislation that led to the wind-down of the government's sponsorship of AIG. What's more, many of the bill's provisions were included in a previous bill Sen. Corker introduced in 2011. The failed Residential Mortgage Market Privatization and Standardization Act was to ‘responsibly unwind government-sponsored enterprises Fannie Mae and Freddie Mac and end dependence on the government for housing finance.’
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Under the newly introduced legislation, the Federal Deposit Insurance Corp. (FDIC) would continue existing efforts to build a single-securitization platform to assist small lenders in issuing securities. In addition, the FDIC would continue both enterprises' existing multifamily guarantees.
Private investors in securities insured by the FMIC would assume first-loss positions. In addition, they would be exposed to a loss of 10% of the principal underlying securities, according to the draft bill.
Unlike previous efforts at GSE reform, the Housing Finance Reform and Taxpayer Protection Act of 2013 appears to have support from a wide range of stakeholders. In fact, there are signs that Congress and the administration are starting to get serious about tackling the issue – however, it is unlikely that they will take any action on the matter until after the 2014 elections.
‘The introduction of this bipartisan bill represents an important step in redefining the government role in housing finance and is a positive framework on which to begin this crucial debate,’ said David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA). ‘Senators Warner and Corker are to be commended for taking a thoughtful and comprehensive approach to drafting a bill to restructure the secondary mortgage market in a way that provides sufficient liquidity to the market so that lenders can offer a full range of sustainable mortgage credit to qualified borrowers through all market conditions.’
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‘Fannie Mae and Freddie Mac have been in conservatorship for almost five years now, and it is important that policymakers begin defining a long-term plan for the future role of the federal government in the mortgage market,’ said Debra W. Still, chairman of the MBA. ‘We are pleased to see a number of synergies between this bill and MBA members' thinking on the future secondary market, and we believe the Corker-Warner approach is consistent with the broad objectives of the secondary market transition concepts that MBA has recently announced.’
Tom Deutsch, executive director of the American Securitization Forum (ASF), said his group was ‘strongly supportive’ of the legislation and is looking forward to having a ‘tangible, constructive dialogue concerning the future of housing finance reform in the U.S.’
‘For the five years since the onset of the GSEs' conservatorship, the mortgage reform dialogue has been far too theoretical,’ Deutsch said. ‘While ASF and others all along the political spectrum will likely offer amendments to this or any other GSE reform proposal, this bill represents a strong, concrete first step towards comprehensively restructuring the currently misguided U.S. housing finance system that relies on the U.S. government to backstop over 90% of mortgages made in this country. No other country in the world, small or large, has ever put their taxpayers in such an extreme position.’
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When Congress will take up the proposed bill, however, is still largely unknown, as members are not in session and Capitol Hill is dealing with sequestration. In addition, the bill will likely have to be reconciled with other proposals in the House and Senate. Senate Banking Committee Chairman Tim Johnson, D-S.D., and ranking member Mike Crapo, R-Idaho, are reportedly working on their own plan. What's more, House Financial Services Committee Republicans are expected to release a bill as early as this year.
Meanwhile, the ASF is pushing Congress and regulators to move forward with other measures that will help get the process started, including increasing GSE guarantee fees, reducing conforming loan limits and establishing a covered bond market.