WASHINGTON Details on a plan by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., to reform Fannie Mae and Freddie Mac are beginning to emerge in a discussion draft being circulated around Capitol Hill.
The 112-page draft bill would unwind the government-sponsored enterprises, expand the role of private mortgage insurers and install a government backstop that would offer a common securitization platform and provide catastrophic re-insurance.
"It's a necessary and meaningful step forward. Based on the discussion draft that's circulating, this is the most serious effort at addressing the future of Fannie and Freddie since the conservatorship began," said Jeb Mason, a managing director at Cypress Group, who laid out additional details contained in the discussion draft in an analyst note on Thursday.
The draft bill appears heavily influenced by earlier plans released by the Bipartisan Policy Council and Ed DeMarco, the acting director of the Federal Housing Finance Agency.
The bill would eliminate Fannie and Freddie and replace them with a new system under which private market entities would purchase loans from originators, bundle them and provide credit guarantees. The private entities would be in a first loss position, but there would be a government guarantee for catastrophic losses.
Following are some of the key provisions of the draft bill:
- The draft bill would create the Federal Mortgage Insurance Company, an agency that would provide catastrophic reinsurance for mortgage-backed securities. The agency would be governed by a five-member board and replace the FHFA, the existing regulator and conservator of the GSEs.
- The FMIC would operate a mortgage insurance fund modeled on the Federal Deposit Insurance Corporation's insurance fund. Guaranty fees and other payments made to the agency would provide the money for the Mortgage Insurance Fund. Under the bill, the fund must have at least 2.5% of outstanding principal balances insured by the agency.
- The FMIC must ensure that the private market entities are in a first loss position and develop appropriate credit risk-sharing standards within five years. The draft bill says the first loss position must be "adequate to cover losses that might be incurred as a result of adverse economic conditions." Such losses should be "not less than 10% of the principal of" a covered security. Additionally, the bill says the pools of mortgage securities should be pulled from loans that are geographically diverse and include borrowers with different risk characteristics.
- The FMIC would be responsible for creating standards across the secondary mortgage market including for servicing and private mortgage insurance.
- The draft bill requires the FMIC to ensure equal access to mortgage securitization platforms by community banks and credit unions. Under the legislation, the FMIC could create a mutual securitization company to meet the securitization needs of smaller institutions, if the agency determined it was necessary.
- The bill calls for the creation of the Market Access Fund, an office within the Department of Housing and Urban Development designed to promote rental housing and assist low-income and underserved areas.
- The bill would wind down the existing investment portfolios at the GSEs at 15% annually until they are liquidated, likely leaving nothing for current preferred or common shareholders.
- The bill would cut single-family conforming loan limits by roughly $42,000 a year over six years to $417,000, down from $625,000. Guarantees on existing single-family mortgage-backed securities would be assumed by the Treasury, while multi-family guarantees would be transferred to the FMIC without at no cost.
Analysts said the bill was a critical step forward in the debate over the future of housing finance reform.
"This discussion draft, particularly because it includes affordable housing requirements and a vision for a specific yet limited governmental role, is by far the most detailed and plausible plan for housing finance reform that has been released to date," said Brandon Barford, a vice president at ACG Analytics. "Congress and the housing industrial complex now have actual legislative langue to debate, rather than just ephemeral concepts."
To be sure, the bill is in flux and will be subject to further revisions once it is introduced.
"It's still a draft," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics Inc., who raised the possibility of changes that could made to a final bill. "One of the key questions is how much private capital is ahead of the government. The hope is that the taxpayer is at very remote risk but the structure of the new securitizations needs to be carefully designed to ensure that's the case.
A spokeswoman for Corker said the Tennessee Republican is working with other lawmakers on the Senate Banking Committee to craft the bill, but declined to get into details.
"Discussing specifics of legislation would be premature at this point because the process is still very fluid, but we hope to find something that materially improves from the past system where gains were privatized, losses were left for the taxpayer to clean up, and the system was way too thinly capitalized against downturns," said Laura Herzog, a spokeswoman for Corker.