As promised last week, the leadership of the Senate Banking Committee has released draft legislation to revamp the nation's housing finance system.  Chairman Tim Johnson (D-SD) and ranking member Mike Crapo (R-ID) said their draft builds on S 1217, the Warner-Corker bill submitted last year.  Johnson and Crapo said their draft is designed to protect taxpayers from bearing the cost of a housing downturn; promote stable, liquid, and efficient mortgage markets for single-family and multifamily housing; ensure that affordable, 30-year, fixed-rate mortgages continue to be available, and that affordability remains a key consideration; provide equal access for lenders of all sizes to the secondary market; and facilitate broad availability of mortgage credit for all eligible borrowers in all areas and for single-family and multifamily housing types.

The proposed legislation winds down and eventually eliminates Fannie Mae and Freddie Mac (the GSEs), replacing them with an entity called the Federal Mortgage Insurance Corporation (FMIC).  This agency will be modeled in part on the Federal Deposit Insurance Corporation (FDIC) which will create and manage a Mortgage Insurance Fund and regulate member entities.

The new system establishes a type of mortgage-backed security with an explicit government backstop and a "10% first loss" for private secondary market capital to absorb losses and protect taxpayers from future bailouts. In general, these securities will be executed in the following manner:

  • Originators will underwrite mortgages for homebuyers and sell eligible loans into the secondary market.
  • Aggregators will pool the mortgages they purchase or originate, obtain a guarantee from a guarantor or a credit enhancement through a capital markets execution, and deliver the pool to a Securitization Platform. A mortgage-backed security (MBS) would then be issued with a FMIC-backed government guarantee.
  • The Guarantor will hold 10% capital and provide a guarantee on MBS. The government backstop only applies when the guarantor fails.
  • Investors hold fully-funded first loss positions of at least 10% of the mortgage-backed security's value, putting private capital in front of the government guarantee. All types of capital markets mechanisms must be approved by FMIC.

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

FMIC will be managed by an accountable, independent bipartisan board of directors. The board of five members will be appointed by the President and confirmed by the Senate.  No more than three members of the board may be members of the same political party.  There will also be a nine-member advisory committee made up of housing industry stakeholders to provide input and advice to the board of directors and the Office of Consumer and Market Access. 

FMIC underwriting standards will be robust and mirror the definition of "qualified mortgage", and set the down payment requirement at 3.5% for first time homebuyers and at 5.0% for other homebuyers.  The latter will be phased in over a short time period.

The Securitization Platform will be an independent entity, acting as a utility, owned and operated by its members and regulated by FMIC and managed initially by a five-member board of directors comprised of Platform members and established by FMIC.  After the initial terms expire the board will be comprised of nine elected directors made up of representatives of Platform members, at least one of whom must represent small mortgage lenders, and one member an independent director.

Fees would generally be uniform and based on member usage of the Platform. Platform directors will have the discretion to set tiered usage fees that will facilitate access for small mortgage lenders, and organizations that promote the goals of affordable housing; and set different usage fees for issuance of FMIC and non-FMIC securities.  In addition to aggregators, originators, and guarantors, membership in the platform would be open to Federal Home Loan Banks, small lender mutuals, and other market participants deemed by the directors to be necessary or helpful to the purposes of the Platform.

All FMIC securities using the Platform will be required to use a Uniform Securitization Agreement for FMIC guaranteed securities while non-FMIC securities will be required to use one of several optional agreements suggested in the legislation that include a common set of basic contractual terms.  

Under the legislation small lenders will have multiple access points to the secondary market, including the option to sell individual loans through a new small lender-owned cooperative or "mutual."  This would provide community banks, credit unions, and other small lenders direct access to the secondary market outside of direct competition with larger competitors when the GSEs are dissolved.  The mutual will provide members with a cash window in which to sell individual, eligible mortgages, pooling, aggregation and securitization services; and assistance in retaining servicing rights.

The small lender mutual will be governed by a board of directors selected from its membership.  The mutual board has authority to set membership standards and fees which must be equitably assessed regardless of member size, loan volume, or entity type.

The legislation eliminates the affordable housing goals of Fannie Mae and Freddie Mac and establishes an Office of Consumer and Market Access (OCMA) within FMIC which will be responsible for administering the Market Access Fund, monitoring markets to determine which are underserved, and reporting on the FMIC on securities market and available liquidity, and conducting studies on incentives to encourage the serving of underserved markets,

The draft acknowledges the importance of the multifamily rental market and provides that during the transition period the GSEs will be permitted to continue to offer financing to that market.  At the same time they are each charged with laying the groundwork for a future system by establishing distinct multifamily subsidiaries.  

FMIC will approve multifamily guarantors to both guarantee the first loss position on multifamily securities and issue securities for which they provide guarantees.  The successful mechanisms currently offered by the enterprises, the DUS and Series K products, can be used by approved multifamily guarantors in the new system.  Approved multifamily guarantors will have 10% capital requirements standing before the public guarantee.

Each enterprise and approved multifamily guarantor must ensure that 60% of the rental housing units financed are affordable to low-income families (families with incomes at or below 80% of Area Median Income) at origination although FMIC may suspend or adjust this requirement to meet adverse market conditions.  The bill also establishes a pilot program in FMIC's Office of Multifamily Housing to test and assess methods or products designed to increase secondary mortgage market access for small (under 50 units) multifamily properties

The bill also contains provisions to support existing affordable housing allocations such as the Housing Trust Fund, support rural and tribal housing needs, and promote lending initiatives to address the needs of underserved communities.  It will also allow current conforming loan limits to be maintained so that mortgage credit continues to be available in high-cost areas.

The measure will allow consumers the certainty of locking-in interest rates prior to closing on a home and ensure the availability of the 30-year fixed-rate mortgage by maintaining broad liquidity in the To-Be-Announced (TBA) market.  It also directs FMIC to take into account the impact of new products on the TBA market.

In order to ensure a smooth transition to a new housing finance system the draft allows for five years to put the new system in place and allows for extensions if necessary. It creates a framework to simultaneously ramp up the new system while winding down the GSEs.  Six months after the law is enacted the Federal Housing Finance Agency's (FHFA) functions, powers, and duties are transferred to FMIC, and FHFA will exist as an independent office within FMIC, continuing to be responsible for supervision and regulation of the GSEs and the Federal Home Loan Banks. As of FMIC's certification date, Fannie Mae and Freddie Mac will no longer be able to conduct new business and assessments will be collected from the GSEs to fund the operations of FMIC.  A Transition Committee will be formed to advise the FMIC Transition Chair or the FMIC Board of Directors.  .

The bill contains a number of provisions, some of which has been detailed above, to protect taxpayers. 

  • All future MBS guarantors would be completely private and be required to hold a minimum of 10% private capital. The bill further prohibits bailing out any of these institutions in the event that they fail.
  • To be eligible for FMIC reinsurance, any market structured mortgage-backed security must first secure private capital in a first loss position of at least 10%.
  • Strong underwriting provisions will be put in place including higher downpayment requirements and an ability to repay requirement.
  • The proposed Mortgage Insurance Fund maintained by FMIC will be funded by private companies that choose to participate in the new housing finance system, not by taxpayers.

The bill's drafters say the new system protects taxpayers and levels the playing field for all creditworthy borrowers, includes strong, market-based incentives for lenders to support the housing market in underserved communities, and provides certainty to investors and homeowners through standardization and improved market liquidity.