The Fate of Housing Reform

Senate Banking Committee Chairman Tim Johnson and ranking minority member Mike Crapo released their version of restructuring the housing government-sponsored enterprises last weekend. While their version had been rumored for some time to be nearly complete, it was built upon the prior release introduced several months ago by Sen. Mark Warner and Sen. Bob Corker. While these four senators and several others support moving quickly on this issue, other key senators, led by Elizabeth Warren and Sherrod Brown, seek to slow down the process, contending that it is too important to rush.

The reality is that any passage of a housing reform bill is at least a year away. Even if the Senate could rush something through, it would differ greatly from the vision held by House Financial Services Committee Chairman Jeb Hensarling. There are significant philosophical differences between the two Chambers as to how much support for the housing market should be guaranteed by the federal government.

While both proposals intend to eliminate Fannie Mae and Freddie Mac, the Senate version replaces them over a five-year period with a new Federal Mortgage Insurance Corp. (FMIC), patterned after the Federal Deposit Insurance Corp. The FMIC would collect fees from lenders using FMIC services to hold in an insurance fund, to be used before any taxpayer dollars would be called upon. FMIC is to create a platform, where lenders can bundle loans into securities that are sold to investors. FMIC would insure the bonds after the lender suffered a 10 percent loss. The fund would be tapped only after losses exceeded the 10 percent from private capital, with the fund expected to reach 1.25 percent in five years and 2.5 percent in 10 years.

The loans eligible for the FMIC guarantee would closely mirror the qualified mortgages as defined earlier this year by the Consumer Financial Protection Bureau, plus would require a 5 percent down payment, unless the loan is to a first-time homebuyer, who would be required to put down only 3.5 percent.

The FMIC would be governed by a five-member board of directors, nominated by the president and approved by the Senate for five-year terms. In the event of market crisis, the five-member board, the chair of the Federal Reserve, the secretary of the Department of the Treasury and the secretary of the Department  of Housing and Urban Development could permit — on a temporary basis — guarantees of loans that otherwise do not qualify.

A widespread concern has been how to continue support of affordable housing. The goals currently in place for Fannie and Freddie would be abolished, and a new system would replace it. The new plan is to finance, with fees to lenders, a pot of money for affordable rental properties, and a second fund to create incentives to serve low-income borrowers.

To keep smaller lenders on par with larger lenders, a small lender mutual company owned by community banks, credit unions and other small lenders would provide access to the secondary markets. It is to be available to insured depository institutions with less than $500 billion in assets, and to nondepository lenders with assets greater than $2.5 million that originate less than $100 billion of loans annually. The mutual company would be managed by a 14-member board of directors, authorized to promulgate other requirements as necessary.

The next few weeks will be interesting, as experts analyze this draft and express their opinions. Its fate may be determined within that same, short period of time.

S. Joe DeHaven, 03/19/14

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