Senate drops housing reform legislation

A Senate plan to overhaul the housing finance market aims to wind down Fannie Mae and Freddie Mac in five years, eventually eliminating the government-controlled mortgage giants.

Leaders of the Senate Banking Committee provided details of the bipartisan agreement announced last week in its 442-page legislative text released on Sunday afternoon.

The bill, crafted by Senate Banking Committee Chairman Tim Johnson (D-S.D.) and panel ranking member Mike Crapo (R-Idaho), would eventually dissolve Fannie and Freddie and replace them with the Federal Mortgage Insurance Corp. (FMIC).

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“This proposal includes an explicit government guarantee in order to add stability to the economy, keep costs reasonable for borrowers and renters, and ensure fair access to the secondary market for all lenders,"  Johnson said. 

"We also include important provisions that will preserve the 30-year mortgage, as well as fair and affordable housing options for buyers and renters alike."

The five-year deadline is flexible and could stretch beyond the 10-year mark, if needed.

Essentially, the legislation dims the lights at Fannie and Freddie instead of cutting off power on a specific date. 

But the bill includes built-in political deadlines to push the transition to completion within, at least, that decadelong timeframe. 

The measure builds on bipartisan legislation authored by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) that also called for the five-year wind down while adding flexibility by allowing for extensions to prevent market disruptions and spikes in borrowing costs.

If enacted, the bill would require the Federal Housing Finance Agency (FHFA) to write a transition plan and eventually set up a five-person board for the FMIC, which is modeled after the way the Federal Deposit Insurance Corp. (FDIC) regulates banks.

Six months following enactment, the FHFA’s functions are transferred to the FMIC, and the agency, now run by former Rep. Mel Watt, will exist as an independent office housed within the new regulator.

The FHFA will continue to be responsible for supervision and regulation of Fannie and Freddie, and the Federal Home Loan Banks as well as their conservatorship.

As of the FMIC’s certification date, Fannie and Freddie will no longer be able to conduct new business.

Fannie and Freddie were taken under government control during the 2008 financial crisis. They borrowed nearly $188 billion from taxpayers and have, through growing profits, paid that amount back to the Treasury, even though the dividends don't technically count against the loans.

Fannie and Freddie have become the central backstop in the mortgage market, owning or backing about 60 percent of all mortgages. The federal government guarantees about 90 percent of all new loans.

In addition, the measure creates a reinsurance fund, known as the Mortgage Insurance Fund, which is designed to protect taxpayers.

The new system establishes a mortgage-backed security with an explicit government backstop and a 10 percent capital requirement to cover potential losses and protect taxpayers from future bailouts.

The FMIC will be managed by an independent bipartisan board of directors that will be appointed by the president and confirmed by the Senate.

The president will appoint one of the board members to be the chairperson and one to be the vice chairperson. No more than three of the board members may be members of the same political party.

The FMIC underwriting standards are expected to mirror the definition of “qualified mortgage” and set the down payment requirement at 3.5 percent for first-time home buyers and at 5 percent for others.

Also, small lenders will have several options to access the secondary mortgage market, including selling their individual loans through a new small lender mutual, jointly owned by small lenders.

The bill doesn’t seek to overhaul the Federal Housing Administration (FHA), but it is expected that the Senate could pass the FHA and housing finance overhaul in tandem as part of a broader reform plan. 

A committee markup of the long-awaited legislation is expected in the coming weeks.

Johnson and Crapo opted to release the text on Sunday to ensure all lawmakers have time to review the legislation well ahead of a markup.

“There is broad support to fix our flawed housing system, and today’s actions are a strong step toward ending the status quo," Crapo said. 

The measure has gotten a largely positive response from lawmakers and the housing industry. 

“This bill is an important step toward ending the government monopoly over the housing finance market, a system that leaves taxpayers financially responsible in the event of another economic downturn,” said Tim Pawlenty, CEO of the Financial Services Roundtable in a Sunday statement.

“The Senate should act quickly to review this bill and move forward on reform.”