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
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
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.
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.
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
set of basic contractual
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
services; and assistance in retaining servicing rights.
The small lender mutual will be governed by a board of
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
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)
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)
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
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.
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.
be eligible for FMIC reinsurance, any market structured
mortgage-backed security must first
secure private capital in a first loss position of at least
underwriting provisions will be put in place including higher downpayment
requirements and an ability to repay requirement.
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.