Mortgage Market Reform Includes New Insurance Fund
Their proposal for a reformed secondary mortgage market, released Tuesday, also envisioned credit unions and community banks sharing a “mutual cooperative jointly owned by small lenders” that would guarantee them access to the new secondary market.
The proposal also preserved the 30-year fixed rate mortgage.
Johnson chairs the Senate Banking Committee and Crapo serves as its Ranking Member. Any secondary market reform legislation will need to win the committee's approval to move to the full Senate for a vote.
Also of interest:
The proposal’s Federal Mortgage Insurance Corporation, modeled after the FDIC, would have FDIC-like regulatory authority over secondary mortgage market participants. The FMIC would also oversee the creation and administration of a mortgage insurance fund which participants would fund by a 10% fee or premium.
Operationally, the Johnson-Crapo proposal foresees a mortgage securitization platform that would be owned by market participants and would offer FMIC-insured securities for sale to investors.
Firms could also produce so-called private label mortgage backed securities “in a manner that encourages standardization and improved market liquidity,” the senators wrote.
The proposal would also guarantee secondary market access for credit unions and other small volume originators forming a cooperative that, collectively, would give them a place at the table.
“The small lender mutual cooperative would provide a cash window for individual eligible loans, and small lenders could retain servicing rights,” the senators wrote in the proposal.
In addition, Johnson and Crapo said the proposed new market would provide clear rules of the road for servicers that choose to participate in the FMIC system and require strong underwriting, with a requirement of 5% down payments on many mortgage loans.
First time homebuyers would be allowed to put down only 3.5%.
Read more: Reaction from Capitol Hill and trades ...
The Johnson-Crapo agreement moves the secondary market reform effort one step closer to eventually passing Congress. The Senate has not yet produced a mortgage market reform proposal to match the one passed in the House of Representatives.
The House Financial Services Committee in July 2013 passed the "Protecting American Taxpayers and Homeowners Act,” a legislative proposal championed by the committee’s chairman, Rep. Jeb Hensarling (R-Texas).
The PATH Act would reform some of the CFPB’s mortgage rules, phase out Fannie Mae and Freddie Mac over a five-year period and sharply limit the government's role in the housing finance system.
Hensarling praised the proposal Tuesday in a release.
“As someone who has worked for years on the complicated and contentious issue of housing finance reform, I salute Sen. Johnson and Sen. Crapo for working hard and producing a reform plan because the status quo is unacceptable,” he said.
However, Hensarling cautioned that the window of opportunity to pass housing finance reform during this Congress is rapidly closing.
The Texas Republican also cautioned against reform that does not include changes at the Federal Housing Administration.
“Without the FHA reforms found in the PATH Act, all you’re probably doing is simply squeezing one side of a balloon only to have it bulge out on another,” Hensarling said.
The senate's efforts to come up with a legislative proposal have been focused on building on a previous proposal from by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.).
When announcing the agreement with Crapo, Johnson thanked Corker and Warner for their previous work.
“I want to thank Senators Warner and Corker for providing us a strong framework to build on,” wrote Johnson in a statement announcing the agreement. “I look forward to moving this effort through committee once members have had a chance to review our forthcoming legislation.”
In many ways the Crapo-Johnson agreement mirrors the work of Warner and Corker. It winds down Fannie Mae and Freddie Mac, and promises to use a system of deadlines and benchmarks to ensure a smooth transition from the old to the new.
Reactions to the proposal are still coming in.
The Financial Services Roundtable, the trade group representing large asset banks, praised the announcement.
“The government housing finance monopoly should end and the reform principles and agreement announced today are a positive step towards needed reform,” said Tim Pawlenty, FSR CEO. “We are pleased these principles and agreement reflect key reforms FSR has been advocating for, including a smooth transition to replacing the GSES with the private market participants and better protection for taxpayers. The time for reform is long overdue and we hope the broad, bipartisan support for the principles and agreement unveiled today helps propel action by the Senate. FSR looks forward to seeing a full bill from Senators Johnson and Crapo.”
NAFCU stressed that it is still tracking the development of secondary market reform legislation but said it was encouraged by the development.
“NAFCU appreciates the continued work of Chairman Johnson and Ranking Member Crapo as they tackle the complex issue of housing finance reform in a bipartisan way,” NAFCU President/CEO Dan Berger said. “We are encouraged that the announcement today recognizes that credit union access to the secondary market is vital for homeownership and a healthy housing finance system.”
CUNA has not yet commented on the development.
The Johnson-Crapo announced proposal is also notable for what it leaves out. For example, the senators' plan does not speak to what, if anything, happens to the Federal Housing Finance Agency in the plan.
It could be dissolved if its two principle regulated organizations, Fannie Mae and Freddie Mac, are winded down.
However, the FHFA also regulates the Federal Home Loan Bank System. The proposal did not mention what happens to the Federal Home Loan Banks.