Senate Banking Committee Chairman Tim Johnson, D-S.D., and ranking member Mike Crapo, R-Idaho, have introduced a bipartisan housing finance reform bill that builds on an earlier proposal introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va.
As with the Corker-Warner bill – which has had support from the Obama administration, but last year never made it to the Senate floor – the Johnson-Crapo bill calls for winding down and eliminating government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, as well as establishing a Federal Mortgage Insurance Corporation (FMIC) in their place that would backstop qualified mortgages (QMs). The Johnson-Crapo bill still does not have a title nor has it yet been assigned a number.
Certain functions that the GSEs currently handle would be transferred to the ‘modernized, streamlined and accountable’ FMIC, which will be modeled after the FDIC, according to a statement from the two senators. Lenders would be required to allocate 10% private capital, up front, in order to fund the FMIC.
The bill also calls for the creation of a ‘member-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.’
The effort to build the platform is already underway: In October, the Federal Housing Finance Agency (FHFA), conservator of Fannie Mae and Freddie Mac, announced that the GSEs had formed a joint venture to build and operate the new platform. In addition, the FHFA announced the formation of a new company that will develop the platform, called Common Securitization Solutions (CSS), which will operate as an equally owned subsidiary of Fannie Mae and Freddie Mac.
One of the key challenges in implementing housing finance reform is finding ways to increase private capital in the market. To address this, the Johnson-Crapo bill would ‘establish a mutual cooperative jointly owned by small lenders to ensure institutions of all sizes have direct access to the secondary market." This way, once the GSEs are dissolved, smaller lenders will not be "at the mercy of their larger competitors.’
‘The small lender mutual cooperative would provide a cash window for individual eligible loans, and small lenders could retain servicing rights,’ according to a statement from the senators.
Other major elements of the proposal include the following:
- Provide clear rules of the road for servicers that choose to participate in the FMIC system;
- Maintain a vibrant multifamily market by building upon successful risk-sharing mechanisms and products and providing access to a broad range of markets;
- Require strong underwriting standards that mirror the definition of "qualified mortgage," and set the down-payment requirement at 5% (with a short phase-in), except for first-time homebuyers, which would be 3.5%;
- Facilitate the broad availability of credit for eligible single-family and multifamily borrowers, monitor consumer and market access to credit, and provide market-based incentives and transparency to serve underserved areas;
- Eliminate affordable housing goals and establish transparent and accountable housing-related funds that would focus on ensuring there is sufficient decent housing available. The funds are not paid for with tax dollars, but through a small FMIC user fee (10 basis points) that only those who choose to use the system pay;
- Allow current conforming loan limits to be maintained so that mortgage credit continues to be available in high-cost areas; and
- Maintain broad liquidity in the to-be-announced (TBA) market and direct FMIC to take into account the impact of new products on the TBA market.
The senators say they are putting finishing touches on the draft bill, which will be released to the public ‘in the coming days.’
‘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,’ Johnson says in the statement. ‘This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country.’
Johnson thanked Warner and Corker – the duo that last year championed Federal Housing Administration reform – ‘for providing us a strong framework to build on.’
‘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 adds. ‘Government control of Fannie and Freddie with no private capital to protect taxpayers against losses is unacceptable. Chairman Johnson and a bipartisan coalition of senators deserve a tremendous amount of credit for making the hard decisions that will move us toward a stronger housing system that provides a balance between providing broad access to mortgages while protecting taxpayers from losses.’
For the most part, the Johnson-Crapo bill has the same lofty goals as the Corker-Warner version. These goals include the following:
- 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, pre-payable mortgages continue to be available, and that affordability remains an important consideration;
- Provide equal access for lenders of all sizes to the secondary market; and
- Facilitate broad availability of mortgage credit for all eligible borrowers in all areas, and for single family and multifamily housing types.
On Tuesday, Sen. Bob Corker applauded members of the Senate Banking Committee for their efforts in developing the proposed bill.
‘I have been working with Senator Warner and a bipartisan group of senators for months to advance legislation that ends the failed model of private gains and public losses in our housing finance system and moves our country to a modernized structure that protects the American taxpayer,’ says Sen. Corker. ‘I am pleased the banking committee is demonstrating [its] commitment to this effort by putting pen-to-paper and releasing a set of principles based on the bill we introduced, and I look forward to working closely with them in the coming months.’
In addition, David Stevens, president and CEO of the Mortgage Bankers Association commended Johnson and Crapo, as well as the other members of the committee, ‘for coming together in a bipartisan fashion and advancing a comprehensive solution to improve the function of the secondary mortgage market in a way that engages private capital and reduces risk for taxpayers.’