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On February 1, Chairman of the Senate Banking, Housing, and Urban Affairs Committee, Mike Crapo (R-ID) released an outline for a sweeping legislative overhaul of the U.S. housing finance system. Most notably, the plan would end the Fannie Mae and Freddie Mac (GSEs) conservatorships, making the GSEs private guarantors while also allowing other nonbank private guarantors to enter the market. Highlights of the proposal include:
- Guarantors. The GSEs would be private companies, competing against other nonbanks for mortgages, subject to a percentage cap. The multifamily arms of the GSEs would be sold and operated as independent guarantors. Consistent with current GSE policy, the eligible mortgages would, among other things, be subject to loan limits set by FHFA and would be required to have an LTV of no more than 80 percent unless the borrower obtains private mortgage insurance.
- Regulation of Guarantors. FHFA, structured as a bi-partisan board of directors, would charter, regulate, and supervise all private guarantors, including the former GSEs. FHFA would be required to create prudential standards that include (i) leverage requirements; (ii) if appropriate, risk-based capital requirements; (iii) liquidity requirements; (iv) overall risk management requirements; (v) resolution plan requirements; (vi) concentration limits; and (vii) stress tests. Guarantors would be allowed to fail.
- Ginnie Mae. Ginnie Mae would operate the mortgage securitization platform and a mortgage insurance fund. Additionally, Ginnie Mae would provide a catastrophic government guarantee to cover tail-end risk, backed by the full-faith and credit of the U.S.
- Transition. In addition to a cap on the percent of all outstanding eligible mortgages, the legislation would require guarantors to be fully capitalized within an unspecified number of years after enactment.
- Affordable housing. Current housing goals and duty-to-serve requirements would be eliminated and replaced with a “Market Access Fund,” which is intended to address the homeownership and rental needs of underserved and low-income communities.
As previously covered by InfoBytes, on January 29, Chairman Crapo released the Senate Banking Committee’s agenda, which also prioritizes housing finance reform.
On May 13, FHFA Director Mel Watt presented a new strategic plan for the FHFA under his direction, which will focus on fulfilling the FHFA’s obligations under current law, and will shift away from efforts to position the agency—and Fannie Mae and Freddie Mac—for a potential future role in a reformed secondary market. Mr. Watt discussed the representation and warranty framework changes announced by Fannie Mae and Freddie Mac (see Byte below), and also announced that (i) for loans with DTI above 43%, the FHFA will continue to permit the use of compensating factors in each company’s underwriting standards; (ii) the FHFA will not alter loan limits, as proposed under prior leadership; (iii) the FHFA will not expand HARP but will “retarget” the program to capture already qualified borrowers; and (iv) the FHFA will launch a new modification pilot program. Mr. Watt’s remarks did not cover principal reduction or servicing rights transfers, but during a question and answer session he indicated both issues are on the FHFA’s agenda for further consideration. Further, Mr. Watt explained that under his leadership the FHFA will not seek to affirmatively reduce Fannie Mae’s and Freddie Mac’s footprint, though the FHFA will continue to work to increase the role of private capital, and soon will issue a request for comment on potential guarantee fee changes. The FHFA also will focus on private mortgage insurance counterparties, including by strengthening master policies and eligibility standards for private mortgage insurers. Finally, the FHFA will continue to build a common single-family securitization platform and transition Fannie Mae and Freddie Mac to a single common security, but the FHFA is taking steps to “de-risk” the securitization platform project, including by emphasizing that the agency’s top objective for the common platform is to ensure that it works for the benefit of Fannie Mae and Freddie Mac and their current securitization operations.
On May 15, the Senate Banking Committee voted 13-9 to approve S. 1217, the Housing Finance Reform and Taxpayer Protection Act. A draft version of the bill, which generally would end the government’s conservatorship of Fannie Mae and Freddie Mac and reform the housing finance system, was first released in March. That draft built off of legislation introduced last year by several committee members. The draft was subsequently amended in advance of the committee vote, and during the committee’s session, a package of additional amendments was approved. Committee members indicated they will engage in further efforts to build support for the bill and a potential vote by the full Senate, though at this time such a vote is unlikely.
House Republicans Urge FHFA Not To Direct GSEs To Start Contributing To Affordable Housing Funds Established By HERA
On April 2, House Financial Services Committee Chairman Jeb Hensarling (R-TX), joined by Congressmen Scott Garrett (R-NJ) and Ed Royce (R-CA), urged FHFA Director Mel Watt to continue the FHFA’s five-year-old policy of suspending contributions to the Affordable Housing Trust Fund and the Capital Magnet Fund. These two funds were established in the Housing and Economic Recovery Act (HERA) to direct a percentage of GSE profits into affordable housing using a mechanism that would be off-budget and thus not subject to the Congressional appropriations process. In January, more than 30 Democratic Senators pressed Mr. Watt to change course and lift the suspension. Given that the federal government owns $189 billion in outstanding senior preferred shares, the Republican House members believe that lifting the suspension would divert money from Fannie Mae and Freddie Mac that could be used to compensate taxpayers. They added that funding the affordable housing programs would violate the “letter and spirit of the Housing and Economic Recovery Act,” and would be premature given ongoing congressional deliberations over broader housing finance reform.
On March 27, Congresswoman Maxine Waters (D-CA), Ranking Member of the House Financial Services Committee, released draft legislation to reform the housing finance market. Congresswoman Waters also released a summary of the proposal and a section-by-section analysis of the bill. The proposed bill, titled the Housing Opportunities Move the Economy (HOME) Forward Act of 2014, offers a counter to a bill already approved by the committee—without any Democratic votes—that would replace Fannie Mae and Freddie Mac with a secondary market funded only by private capital. In certain ways, the HOME Forward Act parallels legislation recently unveiled by the leaders of the Senate Banking Committee. Like its Senate counterpart, Ms. Waters’s bill would establish an insurance fund to provide an explicit government guarantee for certain mortgage-backed securities. Also, similar to the Senate bill, Congresswoman Waters’s proposal would require private backers to take the first 5 percent of any loss (the Senate bill requires private backers to take the first 10 percent of any loss) before the government guarantee is activated. But unlike the Senate bill, which would allow for a variety of issuers to access the mortgage backed security market, the HOME Forward Act would create a co-op of lenders with exclusive authority to issue government-backed MBS. In further contrast to the Senate bill, the HOME Forward Act includes a “waterfall” plan for distribution of Fannie Mae’s and Freddie Mac’s earnings in conservatorship to (i) Treasury Senior Preferred shares; (ii) any reserve funds needed in connection with wind-down of Fannie Mae and Freddie Mac; (iii) outstanding Affordable Housing Fund payments; and (iv) existing preferred and common shareholders, including Treasury as holder of warrants. The HOME Forward Act also would eliminate rigid affordable housing goals and replace them with a broad based duty to serve requirement.
On January 22, Michael Stegman, Treasury Department Counselor for Housing Finance Policy stated in remarks to an industry conference that the Treasury Department opposes expansion of the Home Affordable Refinance Program (HARP) to include loans originated after the current May 31, 2009 cut-off date. Treasury believes that few loans originated after that date are underwater, and that expanding the eligibility date would only prolong market and investor uncertainties. Treasury also does not support efforts by some local jurisdictions to employ eminent domain to seize and restructure underwater mortgages, stating that the administration instead supports legislation to increase refinancing opportunities. Dr. Stegman also discussed housing finance reform generally—he expressed support for the ongoing Senate efforts to reform Fannie Mae and Freddie Mac, and indicated that the Treasury Department plans to facilitate reform of the private label securities sector by holding “a series of conversations with relevant regulators, market participants, and other stakeholders.”
On August 6, President Obama delivered remarks on federal housing policy, which included the President’s four core principles for single-family housing finance reform: (i) creating a larger role for private capital in the mortgage market, (ii) protecting taxpayers from future mortgage market bailouts, (iii) preserving access to safe and simple mortgage products like the 30-year, fixed-rate mortgage, and (iv) ensuring affordability for first-time buyers. In connection with the speech, the White House released a housing fact sheet with more detail on those principles and other administration housing policy positions. On August 7, the President participated in a question and answer session on housing in which he expressed support for the concepts included in the bipartisan Senate housing finance reform bill introduced in June. The President did not comment on the bill passed last month by the House Financial Services Committee.
On July 24, the House Financial Services Committee approved a comprehensive housing finance reform bill, outlined recently by Committee Chairman Jeb Hensarling (R-TX). The Chairman has indicated that the bill could move to the House floor for consideration by the full body shortly after the August recess and that in the interim he will work to explain the bill to his conference and build support. The House bill differs in several substantial ways from a Senate proposal. For instance, the House bill provides for an overhaul of the Federal Housing Administration while the Senate Banking Committee intends to address the FHA separately from, and in advance of, the Senate’s broader housing finance reform bill. The Senate Banking Committee held a hearing this week on its FHA legislation and intends to amend and vote on the bill next week.
On July 11, House Financial Services Committee Chairman Jeb Hensarling (R-TX) outlined legislation set to be unveiled next week that is designed to reform the housing finance market. The centerpiece of the comprehensive bill is a plan to end the government’s conservatorship of Fannie Mae and Freddie Mac over a five year period, move those entities into receivership, and liquidate them. The bill would aim to replace the government-backed mortgage finance companies with a secondary market funded only by private capital, supported by a non-government, not-for-profit mortgage market utility regulated by the FHFA. The legislation also will include numerous provisions designed to “break down barriers to private investment capital,” including by delaying implementation of Basel III capital rules for community financial institutions and incorporating portions of a bipartisan proposal to change the calculation of loan points and fees in determining qualified mortgage eligibility. Finally, the bill would separate the FHA from HUD, limit the FHA’s mission to only serving first-time homebuyers and borrowers below 115% of area median income (AMI) nationwide or 150% of AMI in high-cost areas, lower the minimum and maximum FHA loan limits, and increase FHA down payment requirements, among other changes to the FHA program.
On June 25, Senators Mark Warner (D-VA) and Bob Corker (R-TN) announced the introduction of a new bill to reform the secondary mortgage market. The bill, known as the Housing Finance Reform and Taxpayer Protection Act, has bipartisan support from several other members of the Senate Banking Committee. The bill is designed to draw private capital back into the secondary mortgage market by providing a limited government guarantee to qualifying mortgage-backed securities (MBS). It would replace over a period of time Fannie Mae and Freddie Mac and in their stead establish the Federal Mortgage Insurance Corporation (FMIC), which would oversee a variety of secondary market utility functions, many of which are similar to those under development by the FHFA. Under the new system, the FMIC would insure MBS securitized by FMIC-approved issuers, provided that the MBS place in the first loss position a private investor with at least 10 cents in equity capital for every dollar of risk. FMIC-insured MBS also would be required to be collateralized by “eligible mortgages” – mortgages that, among other things, meet the CFPB’s ability to pay requirements, have a down payment of at least five percent, and are below the conforming loan limit. The FMIC also would have responsibility for approving bond guarantors to provide credit enhancement, servicers eligible to service loans in MBS pools, and private mortgage insurance companies to insure mortgages with a loan-to-value ratio above 80 percent. The bill also would establish an affordable housing fund subsidized through fees on securitized loans and would grant the FMIC authority to back the entire MBS market for a limited period of time in emergencies.
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