Republicans' "Holistic" Bill to End Most Government Mortgage Support

Republicans in the House ofrnRepresentatives have unveiled a sweeping piece of legislation that,rnif passed, will almost completely revamp the housing finance system. Unlike a bi-partisan bill introduced last month in the Senate, thernHouse approach would virtually eliminate the government’s role inrnhousing finance. </p

The bill, which is still in draft form,rnis sponsored by Republican members of the House Financial ServicesrnCommittee led by its chairman Jeb Hensarling (R-TX). It would windrndown Fannie Mae and Freddie Mac (the GSEs) over a five year periodrnand replace them with a non-profit securities platform. The platformrnwould act as a utility for the private sector to package individualrnmortgages into pools, securitize them, and sell the securities torninvestors. Unlike a somewhat similar proposal from the FederalrnHousing Finance Agency (FHFA), the mortgage-backed securities wouldrnnot carry a government guarantee. </p

The House bill would also create arnsystem of “covered bonds” backed by mortgages. Unlike thernmortgage-backed securities issued by the GSEs, these bonds wouldrnremain on the issuer’s balance sheet. At the same time the lawmakersrnwould repeal the qualified residential mortgage (QRM) rule whichrnrequires a lender to maintain “skin in the game,” i.e. a 5rnpercent share of riskier loans they write. It would also delayrnimplementation of the qualified mortgage (QM) rule that setsrnunderwriting standards for mortgages and offers legal shields forrnlenders that follow them.</p

Reuters News Agency quoted Hensarlingrnas calling the legislation “a holistic approach.” He said hisrngoal is to limit taxpayer risk and replace the current system, wherern”the federal government has almost a virtual monopoly.” </p

The government would retain a role inrnlending through the Federal Housing Administration (FHA) whichrnguarantees loans written by its approved lenders but that role wouldrnbe sharply curtailed. FHA increased its share of the mortgage marketrnfrom its traditional 15 percent range to over 30 percent during thernrecent housing crisis (which is its intended counter-cyclical role)rnand has faced mounting losses from loans it wrote in the early partrnof that period. The bill proposes to raise the current minimumrndownpayment for a FHA guarantee from 3.5 percent to 5 percent andrnmake its loans available only to first time and moderate-incomernborrowers.</p

Fannie Mae and Freddie Mac, which ownrnor guarantee about half of all new U.S. home loans, were seized byrnthe government in 2008 as loan defaults and falling home pricesrnpushed them to the brink of collapse. The GSEs required $187.5rnbillion in support from the U.S. Treasury while they were resolvingrnthousands of bad loans but are both profitable and have paidrntaxpayers $132 billion in dividends. They are currently preventedrnfrom building any cash reserves and their dividends do not go towardrnreducing their debt. </p

The Senate bill introduced last month by Mark Warner (D-VA) andrnBob Corker (R-TN) would also liquidate the GSEs within five years butrnreplace them with a reinsurer which would backstop the private sectorrnentities issuing mortgage-backed securities. The reinsurance wouldrnkick in only after private creditors had absorbed a loss equal to 10rnpercent of the principal balance of the affected securities. </p

The reinsurer would charge and collect fees to cover its operatingrncosts and maintain a catastrophic fund and would continue the effortsrnof FHFA to develop a securitization platform.

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