New Proposal Would End GSEs, Create Mortgage Finance Agency

Senator Johnny Isakson (R-GA) has submittedrnlegislation to Congress that would put Fannie Mae and Freddie Mac out ofrnbusiness while creating a new FDIC-like guarantee facility for the mortgagernindustry.  The Mortgage Finance Act ofrn2011 is similar to an idea proposed by the Mortgage Bankers Association (MBA).  Isakson’s plan, however, anticipates therntermination of the agency he is creating by privatizing it once its value isrnestablished.</p

Isakson maintains that no plan forrnreform of the two government sponsored enterprises (GSEs) has yet appropriatelyrndealt with the issue of whether there is to be a government wrap orrnguarantee.  Even though everyrnmortgage-backed security and debt issuance from the GSEs carried a disclaimerrnthat they were not backed by the full faith and credit of the U.S. government,rnno one ever truly believed it.  And nowrnthat the government has funded the two GSEs to the tune of tens of billions ofrndollars since they were placed in conservatorship it is obvious that under suchrndire circumstances in the future the government will have no choice but tornbecome involved again.  “The issue thenrnis to recognize that dilemma, eliminate any implied guarantee, replace it withrnan explicit government guarantee, properly manage and pay for the guarantee,rnand build in protection for the American taxpayer,” the summary of the billrnstates.</p

Isakson said that the debate over thernguarantee should not be the obstacle when other workable models exist and holdsrnup the FDIC as a prime example.  Banksrncustomers, through fees collected by the bank, pay for the protection of thernfederal government through an insurance fund and the same can be done for highrnquality mortgage securitization.  </p

The bill would create a new MortgagernFinance Agency (MFA) a government agency that guarantees pools of qualifiedrnresidential mortgages (QRM) for a fee. rnThe fee will be actuarially based and priced to cover expected losses,rncapitalize the new catastrophic fund, finance purchases of private sector supplementalrninsurance and finance operations of the agency. rnThe fee will protect the agency from the risks of guaranteeing thernperformance of mortgage backed securities (MBS) by building an industry fundedrncatastrophic fund that would eliminate the need for the government to step inrnwith taxpayer money in the event of a future mortgage market collapse.  After recoupment of start-up cost MFA willrnoperate on revenues and not require further government resources.</p

The MFA will establish standards for QRM that reflect thernstatutory language and intent of Dodd Frank rather than the narrowerrninterpretation of the March 2011 rule developed by regulators.  It will specifically permit lending with a 5rnpercent downpayment supported by private mortgage insurance.  The Agency will also establish standards forrnmulti-family mortgages and guarantee the liquidity of that market by guaranteeingrncommercial MBS backed by high quality multifamily mortgages.</p

The MFA will be headed by a director appointed by thernpresident and regulated by a board composed of the Director, a presidentiallyrnappointed Vice Chair, the Chair of the Securities and Exchange Commission, thernSecretary of Housing and Urban Development, and the Chairman of the FederalrnReserve.  There will also be an advisoryrnboard selected by the president and composed of individuals with industryrnexperience.</p

Within three years of the creation of the MFA, Isakson’s billrnwould require it to begin planning for its transition to private hands no laterrnthan at the conclusion of its tenth year of operation.  When that transition is complete, allrnproceeds from the sale of the MFA would be used to satisfy the unpaid balancernof any debt remaining from the conservatorship of the GSEs, then the remainingrnobligations of the MFA with any residual used to pay down the national debt.</p

Operating on a separate track from thernestablishment of this guarantee facility is Isakson’s proposal to terminate thernGSEs.  His bill would require the FederalrnHousing Finance Agency (FHFA) which functions as conservator for Fannie Mae andrnFreddie Mac to consolidate their operations and mortgage portfolios and placernthem into receivership no later than 18 months after the law becomesrneffective.  Once in receivership the twornwould be prohibited from engaging in any new business and required tornimmediately commence an orderly liquidation. rn</p

All remaining proceeds from thernoperations under receivership and well as monies recovered from the liquidationrnof GSE assets will go to repaying the taxpayers for the obligations incurred inrnconnection with the failure of the two GSE’s in September 2008.</p

View a one page summary of the bill.

View the full text of the bill.

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