Reform Bill Would Wind Down GSEs, Boost Ginnie Mae Role

The 114th Congress's first attempt at housing financial reform legislation hit the House hopper on Thursday. The bill, H.R. 1491 establishes an insurance program through Ginnie Mae and winds down Fannie Mae and Freddie Mac and allows them to be sold and recapitalized. 

The legislation is sponsored by John K. Delaney (D-MD). John D. Carney (D-DE), and James A. Himes (D-CT), all members of the House Financial Services Committee and currently has 10 cosponsors.  Tagged as The Partnership to Strengthen Homeownership Act, text of the bill is not yet available on the Thomas-Library of Congress website, but is apparently similar if not identical to one introduced by the trio in the last Congress (H.R. 5055) which never made it out of committee. 

The following information was taken from a press release issued by Himes' office.

The bill, is designed to "protect the fixed-rate 30-year mortgage...and shield American taxpayers from future bailouts by reforming the housing finance system."  It "combines the private sector's superior ability to price risk with the federal government's unique ability to provide capacity." 

Under the proposed insurance program all government guaranteed single-family and multi-family mortgage-backed securities would be supported by a minimum of 5% private sector capital, which will stand in a first loss position. The remaining 95% of the risk will be shared between Ginnie Mae and a private reinsurer on a pari passu* basis.

Ginnie will design and study two types of programs, then implement one, although they could implement both if they further an effective, efficient secondary mortgage market and maintain the risk sharing principles outlined above.

Program 1 - Reinsurance Bid Program

• Aggregators and issuers will be permitted to deliver qualified mortgage pools to Ginnie. The price Ginnie charges for the guarantee will be ascertained through the following insurance bidding process.
• Forward reinsurance contracts will be secured on a periodic basis (30-90 days), with the assistance of a reinsurance broker appointed annually in a competitive process. The bids will seek coverage for two levels of risk on each securitization - the 5% "first loss" and the remaining 95% "second loss."

• From these bids, Ginnie will contract with a series of carriers for each risk and aggregate the policies. 
• For the first loss, Ginnie will seek bids for 100% of its expected exposure and will seek bids for 100% of its aggregate exposure on the second loss but will offer retrocessional reinsurance for up to 90% of the second loss cover.
• Ginnie's guarantee fee quote will cover a forward period (Quote Period) as determined by Ginnie.
• Prices passed onto originators may vary based on quality of product, and other factors as determined by Ginnie, so long as the overall pricing equals a weighted-average bid in a given period. 

Program 2: Bond Guarantor Program

• Ginnie will reinsure first loss holders of risk through an insurance system where insurers/guarantors will hold mortgage credit risk on an aggregate, loan by loan, or security basis.
• In addition to security level coverage, insurers/guarantors are authorized to issue loan level coverage to lenders as long as the coverage is for 100%, or if less than 100% loan level coverage, the servicer is responsible for any losses the guarantor did not cover.
• Ginnie will reinsure bond guarantor and/or issuers by entering into contracts with private sector reinsurers sharing risk on a 90/10 pari passu basis.
• To the extent Ginnie Mae will be reinsuring insolvency of a bond guarantor and/or insurers, it will be required to enter into risk-sharing contracts with private reinsurers to assess the risk of default of any entity.

Under either of the programs, each MBS meeting the outlined private sector capital requirements will carry the full faith and credit of the United States Government, but with private sector directed pricing.

Banks, life insurance companies, Real Estate Investment Trusts (REITs), insurance companies and other Ginnie approved market participants will be eligible to participate in the insurance and risk sharing transactions with Ginnie Mae. All market participants will be overseen by Ginnie Mae and Ginnie will have authority to establish necessary capital levels and stress tests.

The bill provides for Fannie Mae and Freddie Mac to remain as aggregators of mortgage loans for small lenders without sufficient volume to create new securities unless adequate private sector alternatives exist.  The Federal Home Loan Banks (FHLBs) will be authorized to aggregate and pool mortgages for small lenders.

The issuing platform will allow for standardized securities and for creating a single security and a deeper and more liquid TBA market.  Regulation of Ginnie Mae and oversight of the secondary market will be the responsibility of the Federal Housing Finance Agency (FHFA). Mortgages eligible for the full faith guaranty must meet minimum underwriting standards.

Ginnie Mae will charge a fee of 10 basis points of the total principal balances of mortgages it insures.  The fees will be allocated to the Housing Trust Fund (75%), the Capital Management Fund (15%) and the Market Access Fund (10%) to strengthen affordable housing programs.

The government sponsored enterprises (GSEs) will be wound down over a five year period and their multifamily business will be spun out as separate entities.   Ginnie will be required to create and implement a workable multifamily guarantee that utilizes private sector pricing consistent with the single family model. The GSEs' current multifamily businesses will continue to function within the new multifamily housing market as purely private organizations with an explicit government guarantee provided by Ginnie Mae and a private sector reinsurer. 

The GSEs' government guarantee and charter will be removed and they will repay the government with interest for the government's investment in the institutions.  The repayment must take into account both the injection of capital and overall exposure to the government.  The assets of Fannie and Freddie will be returned to the private sector and may operate within the new mortgage system as issuers and/or aggregators. 

The bill also envisions a well-functioning TBA market under which investors will receive timely principle and interest payments through Ginnie Mae.  The model will also ensure that one standardized security is delivered to the TBA Market. This will increase liquidity and limit disruptions to the secondary mortgage market, which will ultimately benefit consumers.

In separate statements each of the bill's primary sponsors emphasized the bill's merger of government and private sector interests and abilities and the potential of the legislation to provide homeowner access to affordable home ownership.  Delaney said in part, "The financial crisis and the bailout of Fannie Mae and Freddie Mac made it clear that we need reform to protect taxpayers. The Partnership to Strengthen Homeownership takes the best ideas from both parties to create a 21st century housing finance system that combines the strengths of the private sector and the public sector. Housing finance reform is too important for us to ignore and I look forward to working with my colleagues in both parties in moving this legislation forward."  

Through a statement issued by David H. Stevens its President and CEO the Mortgage Bankers Association (MBA) expressed support for the proposed legislation, calling it a constructive proposal and one that furthers MBA's primary objectives of ensuring liquidity for all forms of housing while reducing taxpayer risk.

Stevens said, "We particularly appreciate the bill's approach regarding the appropriate level of private "first-loss" capital required, its mechanisms for the pricing of a federal guarantee, and its recognition of the unique attributes and importance of the multifamily finance market. Furthermore, MBA believes the proposal will complement ongoing efforts by the Federal Housing Finance Agency to strengthen the secondary mortgage market." 

 *According to Investopedia, pari passu is a Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations are equally managed without any display of preference.