Bipartisian GSE Replacement Bill Takes Shape. Mirrors MBA Plan

Two lawmakers have introducedrnbipartisan legislation that would eliminate Freddie Mac and Fannie Mae whilernstill keeping a government presence in the housing finance marketplace.</p

HR 1859, “The Housing Finance Reform Act ofrn2011”, is sponsored by Congressmen Gary Peters (D-MI) and John Campbell (R-CA).   According to the official release , the legislation would:</p<ul class="unIndentedList"<liEnsurernthe availability of reasonably priced conventional mortgages.</li<liProvidernincentives for private sector capital to support the secondary mortgage market.</li<liLimitrnthe role of the government in the secondary mortgage market; and</li<liProvidernfor a gradual wind down of Fannie and Freddie.</li</ul

Peters/Campbell have aimed this bill at overhauling the federal mortgage finance system and winding down the embattled mortgage giants, Fannie Mae and Freddie Mac, while establishing a new system of private mortgage associations – funded by private capital.  Sponsor’s believe the legislation will ensure liquidity in the secondary mortgage market because mortgage investments would still be backed by a government guarantee, which the plan has mandated strict standards around to safeguard taxpayers.</p

The Mortgage Bankers Association quicklyrnweighed in on the Peters-Campbell bill. rnMichael Berman, the organization’s Chairman said in a press release, “The bipartisan legislationrnintroduced by Congressmen Campbell and Peters to reform our secondary marketsrnclosely mirrors the proposal of MBA’s Council on Ensuring Mortgage Liquidity,rnwhich was the first to put forward a comprehensive blueprint for the future ofrnour housing finance system. (This is) legislation that reforms our housingrnfinance system in a way that encourages the return of private capital whilernalso providing for a limited but explicit government role in backing thernavailability of affordable mortgage products through all marketrnconditions.”</p

HRrn1859 authorizes the Director of the Federal Housing Finance Administrationrn(FHFA) to issue charters for “Housing Finance Guaranty Associations” with thernpower to “deal in conventional mortgages only for the purpose of creating arnsecondary market for these mortgages, facilitating mortgage securitization, andrnsupporting multifamily housing.”  </p

These entities would not be allowed to discriminate against anyrnoriginator, but thern”Associations” could be formed for the general purposes of serving a particular mortgage market or category ofrnmortgage lenders such as community banks. rnThe legislation does allow banking organizations to acquire an interest in such categories of lenders.
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The housing finance guaranty associations would issue securities collateralized by conventional mortgages only and wouldrnestablish a trust not subject to the claims of creditors in order to provide  for the sale of interests in mortgages pool and the accumulation of guarantee fees (Reserve Fund). The bill creates the Office of Securitization within FHFA to issue the federal guarantee, impose and collect the fee, and administer and service the FHFA securities.</p

Thernnew entities will not be allowed to originate or service non-conventional mortgages, offer arnguarantee for any security backed by a non-conventional mortgage, speculate orrnunderwrite or sell insurance.  They will only be allowed to invest in conventionalrnor government-backed MBS. Beyondrnthe term “conventional mortgage” which will defined as a “qualified mortgage”rnas determined for the purposes of Dodd-Frank, the legislation limits the typernof mortgage the guaranty associations can securitize as those with a loan-to-value (LTV)rnratio of 80 percent and a loan amount not exceeding the larger of either 150rnpercent of the average U.S. home price or 150% of the median home price in thernproperty’s local area.  An associationrncan purchase a mortgage with an LTV higher than 80 percent if the seller retainsrna 10 percent stake in the loan, agrees to repurchase the mortgage on the demandrnof the association or private mortgage insurance is used to cover the balancernof the loan above 80 percent. </p

Thernassociations would be supervised by FHFA which will conduct examinations atrnleast once a year, set capital standards, and issue capitalrnclassifications.  FHFA will alsornestablish standards for management and operation including management ofrninterest rate exposure, market risk, asset and risk management, and maintenancernof records.  The agency will alsornestablish standard forms and contractual terms for the securities that willrninclude details on the payment of interest and principal, address servicingrnstandards and other terms.  FHFA’s costsrnin managing the program will be covered by a fee charged to the associations.</p

The “Catastrophic Federal Guarantee” deems failurernof an association to make timely payments of interest or principal as groundsrnfor placing an association in conservatorship or receivership. That is the only way to trigger the federal guarantee.  The fee that supports the guarantee fund willrnbe reevaluated on a regular basis and if the fund is depleted FHFA will imposerna special assessment to recoup all its costs related to the guarantee. </p

Thernbill’s “Transition Section” terminates the GSE’s housing goals and requiresrnFreddie and Fannie to reduce their asset portfolios to a maximum of $250 billionrnwithin 5 years and increase their guarantee fee over a period of three years tornreflect the risk posed by the guarantee. rn FHFA has six months to provide arntransition plan to wind down the GSEs and must determine within one year afterrnfive associations have been chartered whether the GSEs can be safely placedrninto receivership, an event that must occur no later than three years after twornassociations have been chartered.  </p

One last note…</p

Unlikernmost of the informal proposals that have been floated, HR 1859 does not allowrnthe temporary higher conforming loan limits to expire this fall but continuesrnthem as long as the GSEs remain in conservatorship

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