Senate Banking Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho, announced that they have reached an agreement on a housing finance reform proposal.
Last fall, the committee hosted an in-depth series of hearings exploring essential elements necessary for reform, and over the past few months, they have been negotiating and drafting the reform proposal. The bipartisan agreement includes measures from committee members on both sides of the aisle, the administration and stakeholders.
“There is near unanimous agreement that our current housing finance system is not sustainable in the long-term, and reform is necessary to help strengthen and stabilize the economy,” Johnson said. “This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country. Ranking Member Crapo has been a great partner to work with from the start, and I appreciate all of the important contributions members of the committee made to this effort.”
Crapo thanked Senators Mark Warner, D-Va. and Bob Corker, R-Tenn., for providing the committee with a strong framework to build upon.
“This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie while protecting taxpayers with strong private capital, building the components for a stable secondary market and avoiding repeating the mistakes of the past,” Crapo said. “Government control of Fannie and Freddie with no private capital to protect taxpayers against losses is unacceptable. Chairman Johnson and a bipartisan coalition of Senators deserve a tremendous amount of credit for making the hard decisions that will move us toward a stronger housing system that provides a balance between providing broad access to mortgages while protecting taxpayers from losses.”
Johnson and Crapo agreed that the status quo in which Fannie Mae and Freddie Mac remain in conservatorship is not a viable option for the nation’s housing finance system. To move forward, they indicated that the following principles would need to be reflected in any housing finance reform legislation:
- Protect taxpayers from bearing the cost of a housing downturn;
- Promote stable, liquid and efficient mortgage markets for single-family and multifamily housing;
- Ensure that affordable, 30-year, fixed-rate, prepayable mortgages continue to be available and that affordability remains an important consideration;
- Provide equal access for lenders of all sizes to the secondary market; and
- Facilitate broad availability of mortgage credit for all eligible borrowers in all areas and for single family and multifamily housing types.
Johnson and Crapo agreed to use S.1217, the Housing Finance Reform and Taxpayer Protection Act of 2013, as the base text of the housing reform. The bill was introduced in the Senate by Corker in June 2013.
They plan to wind down Fannie and Freddie and provide timelines and benchmarks to promote a smooth transition into the new system.
They also plan to:
- Transfer appropriate functions to the Federal Mortgage Insurance Corp.;
- Mandate 10 percent private capital up front, and create a mortgage insurance fund for the system to protect taxpayers against future bailouts;
- Create a member-owned securitization platform that will issue a single, standardized FMIC-wrapped security, and permit private label securities to be issued in a manner that encourages standardization and improved market liquidity;
- Establish a mutual cooperative jointly owned by small lenders to ensure institutions of all sizes have direct access to the secondary market so community banks and credit unions are not at the mercy of their larger competitors when Fannie Mae and Freddie Mac are dissolved. The small lender mutual cooperative would provide a cash window for individual eligible loans, and small lenders could retain servicing rights;
- Provide clear rules of the road for servicers that choose to participate in the FMIC system;
- Require strong underwriting standards that mirror the definition of “qualified mortgage,” and set down payment requirement at 5 percent except for first-time homebuyers at 3.5 percent; and
- Allow current conforming loan limits to be maintained so that mortgage credit continues to be available in high cost areas.
Industry reaction
Industry representatives generally favored the housing reform proposal.
“This announcement reinforces the immediate need to address GSE [government-sponsored enterprise] reform in a substantive, transparent way,” said David Stevens, president and chief executive officer of the Mortgage Bankers Association (MBA). “Chairman Johnson and Ranking Member Crapo are to be commended for coming together in a bi-partisan fashion and advancing a comprehensive solution to improve the function of the secondary mortgage market in a way that engages private capital and reduces risk for taxpayers.”
Stevens said MBA looks forward to working with members of the committee to help create a system that allows for a vibrant and fluid residential mortgage market.
Kevin Kelly, chairman of the National Association of Home Builders (NAHB), commended Johnson and Crapo for reaching the reform agreement.
“The plan would provide a federal backstop to ensure that the 30-year mortgage, the bedrock housing finance tool for most consumers, remains readily accessible and affordable,” Kelly said. “The proposal also includes many elements advocated by NAHB that will boost private capital in the marketplace and ensure a reliable and adequate flow of liquidity for single-family and multifamily housing. NAHB looks forward to working with the Senate to create a strong, sustainable housing finance system.”
Kelly urged the Senate to move quickly to enact the reform legislation into law.
Michelle Korsmo, chief executive officer of the American Land Title Association (ALTA), said the association is grateful for the proposed reform.
“For several years, ALTA has advocated for reform that preserves affordable access to credit, promotes market competition and provides stability in the secondary market for residential mortgages,” Korsmo said. “We congratulate the Senators for recognizing the importance of the 30-year, fixed-rate, prepayable mortgage, which has been a staple of American homeownership for nearly 75 years.”
The Financial Services Roundtable (FSR) also came out in favor of the reform agreement.
“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, chief executive officer of FSR. “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 helps propel action by the Senate.”