The proposed legislation winds down and eventually eliminatesrnFannie Mae and Freddie Mac (the GSEs), replacing them with an entity called thernFederal Mortgage InsurancernCorporation (FMIC).  This agencyrnwill be modeled in part on the Federal Deposit Insurance Corporation (FDIC)rnwhich will create and manage a Mortgage Insurance Fund and regulate memberrnentities. </p

The new systemrnestablishes a type of mortgage-backed security with an explicit government backstop and a “10%rnfirst loss” for privaternsecondary market capital to absorb losses and protect taxpayersrnfrom future bailouts. In general, these securities will be executed in the following manner:</p<ul<liOriginators will underwrite mortgages for homebuyersrnand sell eligible loans into the secondary market.</li<liAggregators will pool the mortgages they purchasernor originate, obtain a guarantee from a guarantor or a credit enhancementrnthrough a capital marketsrnexecution, and deliver the pool to a Securitization Platform. A mortgage-backedrnsecurity (MBS) would then be issued with a FMIC-backed government guarantee.</li<liThe Guarantor will hold 10% capitalrnand provide a guarantee on MBS. The governmentrnbackstop only applies when thernguarantor fails.</li<liInvestors hold fully-funded first loss positions of atrnleast 10% of the mortgage-backedrnsecurity’s value, putting privaterncapital in front of the government guarantee.rnAll typesrnof capitalrnmarkets mechanisms must be approved by FMIC.</li</ul

FMIC is designed tornbe a strong regulator with supervision and examinationrnpowers and will have authority to approvernand supervise guarantors, aggregators, and private mortgage insurers (PMIs) who want to participate in the new system and will havernenforcement powers sufficient to pursue any violations by those it regulates.  FMIC will also have authority to set standards for servicers of eligiblernmortgage loans that must not disadvantage small servicers </p

FMIC will be managed by an accountable, independent bipartisan board of directors.rnThe board of five members willrnbe appointed by the President and confirmed by the Senate.  Nornmore than three members of the board may be members of the same politicalrnparty.  There will also be a nine-member advisoryrncommittee made up of housing industry stakeholders to provide input and advicernto the board of directors and the Office of Consumer and Market Access.  </p

FMIC underwriting standards will be robust and mirror the definitionrnof “qualified mortgage“, and set therndown payment requirement at 3.5% for firstrntime homebuyers and at 5.0% forrnother homebuyers.  The latter will be phasedrnin over a short time period. </p

The Securitization Platform will be an independent entity, acting as a utility, owned andrnoperated by its members and regulated by FMIC and managed initially by a five-memberrnboard of directors comprised of Platformrnmembers and established by FMIC.rn After the initial terms expire the boardrnwill be comprised of nine elected directorsrnmade up of representatives of Platformrnmembers, at least one of whom must represent small mortgage lenders, and onernmember an independent director.</p

Fees would generally be uniform and basedrnon member usage of the Platform. Platform directors will have the discretion tornset tiered usage fees that will facilitate access for small mortgage lenders, andrnorganizations that promote the goals of affordable housing; and set different usagernfees for issuance of FMIC and non-FMIC securities.  In addition to aggregators, originators, andrnguarantors, membership in the platform would be open to Federal Home Loan Banks, small lender mutuals, and other marketrnparticipants deemed by the directors to bernnecessary or helpful to the purposes of the Platform. </p

All FMICrnsecurities using the Platformrnwill be required to use a Uniform Securitization Agreement for FMIC guaranteedrnsecurities while non-FMIC securitiesrnwill be required to use one ofrnseveral optional agreements suggested in the legislation that includerna commonrnset of basic contractualrnterms.  </p

Under the legislation small lenders will have multiple accessrnpoints to the secondary market, including the optionrnto sell individual loans through arnnew small lender-owned cooperative or “mutual.” rnThis would provide communityrnbanks, credit unions, and otherrnsmall lenders direct access to the secondary marketrnoutside of direct competition with larger competitors when thernGSEs are dissolved.  The mutual will provide members with arncash window in which to sell individual, eligible mortgages, pooling, aggregationrnand securitizationrnservices; and assistance in retaining servicing rights.</p

The small lender mutual will be governed by a board ofrndirectors selectedrnfrom its membership.  The mutualrnboard has authority to set membership standards and feesrnwhich must be equitably assessedrnregardless of member size, loanrnvolume, or entity type.</p

The legislation eliminates the affordable housing goals ofrnFannie Mae and FreddiernMac and establishes anrnOffice of Consumer andrnMarket Access (OCMA) withinrnFMIC which will be responsiblernfor administering the Market Access Fund, monitoringrnmarkets to determine which are underserved, and reporting on thernFMIC on securities market and available liquidity,rnand conducting studiesrnon incentives to encourage the serving of underserved markets,</p

The draft acknowledges the importance of the multifamilyrnrental market and provides that during the transition period the GSEs will be permittedrnto continue to offer financing to that market. rnAt the same time they are each charged with laying the groundwork for arnfuture system by establishing distinct multifamily subsidiaries.  </p

FMIC will approve multifamily guarantorsrnto both guarantee the firstrnloss position on multifamily securities and issue securities for which they provide guarantees.  Thernsuccessful mechanismsrncurrently offered by the enterprises, the DUS and Series K products,rncan be used by approvedrnmultifamily guarantors in the newrnsystem.  Approved multifamily guarantorsrnwill have 10% capital requirementsrnstanding before the public guarantee.</p

Each enterprise andrnapproved multifamily guarantorrnmust ensure that 60% of the rental housing units financed are affordable to low-income families (families with incomes at or belowrn80% of Area Median Income)rnatrnorigination although FMIC may suspendrnor adjust this requirement to meet adverse marketrnconditions.  The bill also establishes a pilot program in FMIC’srnOffice of Multifamily Housingrnto test and assess methods or products designed to increasernsecondary mortgage market accessrnfor small (under 50 units)rnmultifamily properties</p

The bill also contains provisions tornsupport existing affordable housing allocations such as the Housing Trust Fund,rnsupport rural and tribal housing needs, and promote lending initiatives tornaddress the needs of underserved communities. rnIt will also allow current conforming loan limits to be maintained so that mortgage credit continues to be available inrnhigh-cost areas.</p

The measure will allow consumers therncertainty of locking-in interest rates prior tornclosing on a home and ensure the availability of the 30-yearrnfixed-rate mortgage by maintaining broad liquidityrnin the To-Be-Announced (TBA) market.  Itrnalso directs FMIC to take into account the impact of new productsrnon the TBA market.</p

In order to ensure a smooth transitionrnto a new housing finance system the draft allows for five years to put the new systemrnin place and allows for extensions if necessary. It creates a framework tornsimultaneously ramp up the new system while winding down the GSEs.  Six months after the law is enacted thernFederal Housing Finance Agency’s (FHFA) functions, powers, and duties are transferredrnto FMIC, and FHFA will exist as an independent office within FMIC, continuing tornbe responsible for supervision and regulation of the GSEs and the Federal Home LoanrnBanks. As of FMIC’s certification date, Fannie Mae and Freddie Mac will no longerrnbe able to conduct new business and assessments will be collected from the GSEsrnto fund the operations of FMIC. rnA Transition Committee will be formed to advise the FMIC Transition Chairrnor the FMIC Board of Directors.  .</p

The bill contains a number ofrnprovisions, some of which has been detailed above, to protect taxpayers.  </p<ul class="unIndentedList"<liAllrnfuture MBS guarantors would be completelyrnprivate and be required to hold a minimum of 10%rnprivate capital. The billrnfurther prohibits bailing out anyrnof these institutions in thernevent that they fail.</li<liTornbe eligible for FMIC reinsurance, any market structuredrnmortgage-backed security must firstrnsecure private capital in a first loss position of at leastrn10%.</li<liStrongrnunderwriting provisions will be put in place including higher downpaymentrnrequirements and an ability to repay requirement.</li<liThernproposed Mortgage Insurance Fund maintained by FMIC will be funded by private companiesrnthat choose to participate in the new housing finance system, not by taxpayers.</li</ul

The bill’s drafters say the new system protectsrntaxpayers and levelsrnthe playing field for all creditworthy borrowers, includes strong, market-basedrnincentives for lenders to support the housingrnmarket in underserved communities, and providesrncertainty to investors and homeowners through standardization andrnimproved market liquidity.

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