Sens. TimJohnson (D-S.D.) and Mike Crapo (R-Idaho)want future mortgage backed securities insured and regulated muchlike bank or credit union deposits.

Their proposal for a reformed secondary mortgage market,released Tuesday, also envisioned credit unions and community bankssharing a “mutual cooperative jointly owned by small lenders” thatwould 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 asits Ranking Member. Any secondary market reform legislationwill need to win the committee's approval to move to the fullSenate for a vote.

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ReformElusive in 2014

The proposal's Federal Mortgage Insurance Corporation, modeledafter the FDIC, would have FDIC-like regulatory authority oversecondary mortgage market participants. The FMIC would also overseethe creation and administration of a mortgage insurance fund whichparticipants would fund by a 10% fee or premium.

Operationally, the Johnson-Crapo proposal foresees a mortgagesecuritization platform that would be owned by market participantsand would offer FMIC-insured securities for sale toinvestors.

Firms could also produce so-called private label mortgage backedsecurities “in a manner that encourages standardization andimproved market liquidity,” the senators wrote.

The proposal would also guarantee secondary market access forcredit unions and other small volume originators forming acooperative that, collectively, would give them a place at thetable.

“The small lender mutual cooperative would provide a cash windowfor individual eligible loans, and small lenders could retainservicing rights,” the senators wrote in the proposal.

In addition, Johnson and Crapo said the proposed new marketwould provide clear rules of the road for servicers that choose toparticipate in the FMIC system and require strong underwriting,with a requirement of 5% down payments on many mortgageloans.

First time homebuyers would be allowed to put down only3.5%.

Read more: Reaction from Capitol Hill and trades…

The Johnson-Crapo agreement moves the secondary market reformeffort one step closer to eventually passing Congress. The Senate hasnot yet produced a mortgage market reform proposal to match the onepassed in the House of Representatives.

The House Financial Services Committee in July 2013 passed the“Protecting American Taxpayers and Homeowners Act,” a legislativeproposal championed by the committee's chairman, Rep. JebHensarling (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 andsharply limit the government's role in the housing financesystem.

Hensarling praised the proposal Tuesday in a release.

“As someone who has worked for years on the complicated andcontentious issue of housing finance reform, I salute Sen. Johnsonand Sen. Crapo for working hard and producing a reform plan becausethe status quo is unacceptable,” he said.

However, Hensarling cautioned that the window of opportunity topass housing finance reform during this Congress is rapidlyclosing.

The Texas Republican also cautioned against reform that does notinclude changes at the Federal Housing Administration.

“Without the FHA reforms found in the PATH Act, all you'reprobably doing is simply squeezing one side of a balloon only tohave it bulge out on another,” Hensarling said.

The senate's efforts to come up with a legislative proposal havebeen focused on building on a previous proposal from by Sens. BobCorker (R-Tenn.) and Mark Warner (D-Va.).

When announcing the agreement with Crapo, Johnson thanked Corkerand Warner for their previous work.

“I want to thank Senators Warner and Corker for providing us astrong framework to build on,” wrote Johnson in a statementannouncing the agreement. “I look forward to moving this effortthrough committee once members have had a chance to review ourforthcoming legislation.”

In many ways the Crapo-Johnson agreement mirrors the work ofWarner and Corker. It winds down Fannie Mae and Freddie Mac,and promises to use a system of deadlines and benchmarks to ensurea smooth transition from the old to the new.

Reactions to the proposal are still coming in.

The Financial Services Roundtable, the trade group representinglarge asset banks, praised the announcement.

“The government housing finance monopoly should end and thereform principles and agreement announced today are a positive steptowards needed reform,” said Tim Pawlenty, FSR CEO. “We are pleasedthese principles and agreement reflect key reforms FSR has beenadvocating for, including a smooth transition to replacing the GSESwith the private market participants and better protection fortaxpayers. The time for reform is long overdue and we hope thebroad, bipartisan support for the principles and agreement unveiledtoday helps propel action by the Senate. FSR looks forward toseeing a full bill from Senators Johnson and Crapo.”

NAFCU stressed that it is still tracking the development ofsecondary market reform legislation but said it was encouraged bythe development.

“NAFCU appreciates the continued work of Chairman Johnson andRanking Member Crapo as they tackle the complex issue of housingfinance reform in a bipartisan way,” NAFCU President/CEO Dan Bergersaid. “We are encouraged that the announcement today recognizesthat credit union access to the secondary market is vital forhomeownership and a healthy housing finance system.”

CUNA has not yet commented on the development.

The Johnson-Crapo announced proposal is also notable for what itleaves out. For example, the senators' plan does not speak towhat, if anything, happens to the Federal Housing Finance Agency inthe plan.

It could be dissolved if its two principle regulatedorganizations, Fannie Mae and Freddie Mac, are windeddown.

However, the FHFA also regulates the Federal Home Loan BankSystem. The proposal did not mention what happens to the FederalHome Loan Banks.