Bipartisian GSE Replacement Bill Takes Shape. Mirrors MBA Plan

By: Jann Swanson •

Two lawmakers have introduced bipartisan legislation that would eliminate Freddie Mac and Fannie Mae while still keeping a government presence in the housing finance marketplace.

HR 1859, "The Housing Finance Reform Act of 2011", is sponsored by Congressmen Gary Peters (D-MI) and John Campbell (R-CA).   According to the official release , the legislation would:

  • Ensure the availability of reasonably priced conventional mortgages.
  • Provide incentives for private sector capital to support the secondary mortgage market.
  • Limit the role of the government in the secondary mortgage market; and
  • Provide for a gradual wind down of Fannie and Freddie.

Peters/Campbell have aimed this bill at overhauling the federal mortgage finance system and winding down the embattled mortgage giants, Fannie Mae and Freddie Mac, while establishing a new system of private mortgage associations - funded by private capital.  Sponsor's believe the legislation will ensure liquidity in the secondary mortgage market because mortgage investments would still be backed by a government guarantee, which the plan has mandated strict standards around to safeguard taxpayers.

The Mortgage Bankers Association quickly weighed in on the Peters-Campbell bill.  Michael Berman, the organization's Chairman said in a press release, "The bipartisan legislation introduced by Congressmen Campbell and Peters to reform our secondary markets closely mirrors the proposal of MBA's Council on Ensuring Mortgage Liquidity, which was the first to put forward a comprehensive blueprint for the future of our housing finance system. (This is) legislation that reforms our housing finance system in a way that encourages the return of private capital while also providing for a limited but explicit government role in backing the availability of affordable mortgage products through all market conditions."

HR 1859 authorizes the Director of the Federal Housing Finance Administration (FHFA) to issue charters for "Housing Finance Guaranty Associations" with the power to "deal in conventional mortgages only for the purpose of creating a secondary market for these mortgages, facilitating mortgage securitization, and supporting multifamily housing." 

These entities would not be allowed to discriminate against any originator, but the "Associations" could be formed for the general purposes of serving a particular mortgage market or category of mortgage lenders such as community banks.  The legislation does allow banking organizations to acquire an interest in such categories of lenders.

The housing finance guaranty associations would issue securities collateralized by conventional mortgages only and would establish a trust not subject to the claims of creditors in order to provide  for the sale of interests in mortgages pool and the accumulation of guarantee fees (Reserve Fund). The bill creates the Office of Securitization within FHFA to issue the federal guarantee, impose and collect the fee, and administer and service the FHFA securities.

The new entities will not be allowed to originate or service non-conventional mortgages, offer a guarantee for any security backed by a non-conventional mortgage, speculate or underwrite or sell insurance.  They will only be allowed to invest in conventional or government-backed MBS. Beyond the term "conventional mortgage" which will defined as a "qualified mortgage" as determined for the purposes of Dodd-Frank, the legislation limits the type of mortgage the guaranty associations can securitize as those with a loan-to-value (LTV) ratio of 80 percent and a loan amount not exceeding the larger of either 150 percent of the average U.S. home price or 150% of the median home price in the property's local area.  An association can purchase a mortgage with an LTV higher than 80 percent if the seller retains a 10 percent stake in the loan, agrees to repurchase the mortgage on the demand of the association or private mortgage insurance is used to cover the balance of the loan above 80 percent.

The associations would be supervised by FHFA which will conduct examinations at least once a year, set capital standards, and issue capital classifications.  FHFA will also establish standards for management and operation including management of interest rate exposure, market risk, asset and risk management, and maintenance of records.  The agency will also establish standard forms and contractual terms for the securities that will include details on the payment of interest and principal, address servicing standards and other terms.  FHFA's costs in managing the program will be covered by a fee charged to the associations.

The "Catastrophic Federal Guarantee" deems failure of an association to make timely payments of interest or principal as grounds for placing an association in conservatorship or receivership. That is the only way to trigger the federal guarantee.  The fee that supports the guarantee fund will be reevaluated on a regular basis and if the fund is depleted FHFA will impose a special assessment to recoup all its costs related to the guarantee.

The bill's "Transition Section" terminates the GSE's housing goals and requires Freddie and Fannie to reduce their asset portfolios to a maximum of $250 billion within 5 years and increase their guarantee fee over a period of three years to reflect the risk posed by the guarantee.   FHFA has six months to provide a transition plan to wind down the GSEs and must determine within one year after five associations have been chartered whether the GSEs can be safely placed into receivership, an event that must occur no later than three years after two associations have been chartered. 

One last note...

Unlike most of the informal proposals that have been floated, HR 1859 does not allow the temporary higher conforming loan limits to expire this fall but continues them as long as the GSEs remain in conservatorship