Progress on Mortgage Finance Reform?

March 12, 2014

More than five years after the housing bust pushed Fannie Mae and Freddie Mac into conservatorship, housing finance reform seems a step closer to reality with the announcement  on March 11, 2014 that the Chair of the Senate Banking Committee and the Ranking Minority Member have reached agreement on a comprehensive bill.

In announcing the agreement yesterday, staffs from both Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) provided a high-level summary of the bill they have been drafting for months, following an extensive series of hearings and meetings with stakeholders.  Staff was only able to provide a brief, one-page summary of the developing legislation’s details yesterday at a hastily convened briefing for stakeholders.  They said that actual legislative language will be circulated to committee members “shortly,” with the expectation that a full draft bill will be available within weeks and a mark up in the full  Senate Committee scheduled within months.

Staff said that the bill is “built” on S. 1217, the bill introduced last year by Sens. Bob Corker (R-TN) and Mark Warner (D-VA) and cosponsored by a bipartisan group of 10 Senators.  That bill built on recommendations from, among others, the Bipartisan Policy Center’s housing commission, and would wind down Fannie and Freddie and replace them with a full faith and credit guarantee on mortgage backed securities, offered through a new public regulator to issuers of securities that first obtained significant private guarantees that would protect investors ahead of any government-funded guarantee.  The bill attracted significant attention throughout the year, and has become the “chassis” for other approaches.

Staff yesterday said that their bill will change some important aspects of S. 1217 in response to all the hearings and stakeholder feedback.  These changes include the following important features:

• All guaranteed securities would be issued by a single entity, created by the public guarantor (called the Federal Mortgage Insurance Corporation, FMIC, in S. 1217) and operated as a utility mutually owned by the private entities making use of it.  Other, non guaranteed securities could use the same platform, but all guaranteed securities would be required to do so.  It was unclear if such PLS customers would have to join the cooperative operating the platform or not.  This single securitization platform would build on one that the Federal Housing Finance Agency (FHFA) has sponsored through a new corporation jointly owned by Fannie and Freddie. (Progress on this new platform has been slow, with no Chairman or CEO yet chosen to run the company, although it has leased space in suburban Washington, D.C.)  This platform would establish consistent underwriting, servicing and other requirements for insured bonds.  The servicing rules would build on those issued by the Consumer Financial Protection Bureau (CFPB) last year as part of the Dodd-Frank implementation; how they would elaborate on that rule is not clear. Staff said the underwriting requirements would “mirror” the so-called “Qualified Mortgage” definition issued by the CFPB that became effective earlier this year, but no details were provided.  The current maximum single family mortgage amounts would be retained.    
• The bill would require a minimum down payment of at least 5 percent, phased in over a short period.  First time homebuyers could put down a minimum of 3.5 percent. 
• FMIC is modeled in part on the FDIC.  It will collect guarantee fees to finance its work and to fund a reserve that would be used to cover timely payment of principal and interest to investors in the event the private capital required is exhausted.  FMIC would require aggregators to obtain private credit guarantees backed by capital equal to at least 10 percent of the exposure, in a form determined by the FMIC.  This could include straight equity as well as back-end risk sharing arrangements through capital markets structures.  Private guarantees provided by capital market structures alone would have to include a full 10 percent first loss.  
• Mortgage assets would be aggregated by private firms for issuance by the new utility.  To facilitate participation in the system by smaller lenders, the bill would establish a new, mutually owned lender cooperative open to any lender with less than $500 billion in assets which would operate a cash window and keep servicing rights for lenders who wish to use that execution, a holdover from S. 1217.  In addition, FMIC would require all aggregators to offer a “level playing field” for lenders by barring variable pricing based on size.  
• Fannie and Freddie would be wound down over a 5 year transition period, which could be extended if certain benchmarks in developing the new system are not met.  Their existing MBS would receive a full faith and credit guarantee to assure continued liquidity after the new system is launched.  
• Staff said that their bill will include a mandate that the system facilitate the broad availability of credit, and monitor consumer and market access to credit.  S. 1217 lacked both a strong mandate and a viable mechanism for monitoring the performance of both the system and its users.  Whether the new bill accomplishes this important objective successfully will depend on the actual language.  The bill would terminate the current housing goals regime for Fannie and Freddie.   
• Like S. 1217, the bill would impose a new fee on all insured mortgage backed securities in the form of a 10 basis point strip on the bonds’ outstanding UPB.  This fee would directly fund affordable housing and community development activities through the Housing Trust Fund at HUD and the Capital Magnet Fund for CDFIs at Treasury.  Whether and how the fee would finance a so-called “Market Access Fund” within the FMIC, a key goal for many consumer and progressive groups, is unclear. Staff also said that the fee could vary depending on issuers and guarantors success at meeting certain objectives to fully serve the market as determined by the FMIC. But they said while fees could be lower or higher for individual issuers, the average charged fee on each year’s production would have to be 10 percent,  
• The bill would extend a federal guarantee to multifamily mortgage bonds.  It would retain the current risk-sharing models at Fannie and Freddie and spin out their current multifamily businesses.  Multifamily issuers and guarantors could be the same entities, which how the current GSE risk-sharing models are run.  This this is not the case for single family guarantors, who have to be separate and, if part of a larger institutions, separately capitalized.  Staff described but did not detail affordability requirements that would apply ao all insured multifamily securities.

As in all things congressional, the devil of this new attempt to reform the mortgage finance system will be in its details.  These will become clear once actual legislative language is available for review.  But the agreement on these major “architectural” features, and the commitment to move forward, are very important steps.  And based on the staff briefing, the new draft has incorporated a number of important new features sought by progressive and consumer groups, including the preservation of the fee at the maximum level of 10 bps included in the early version of S. 1217; the addition of what staff described as a strong, clear mandate to make sure the system supports widespread access for the widest range of credit-worthy borrowers and communities; a clear expectation that the FMIC judge the performance of both the system and its participants; and a significant approach to ensuring federal support for rental housing finance, including a requirement that it primariliy serve tenants at affordable rents.