A potential housing finance reform proposal has been announced by Senate Banking Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho. The bi-patrician committee have been negotiating and drafting the legislation for several months. The Freddie Mac and Fannie May restructuring has been pushed for many years. The heat kicked in when Freddie and Fannie had to be bailed out by the government when housing collapsed in 2007. Freddie and Fannie was under fire for years prior to the collapse, but several members of Congress didn’t want to “touch” a system that expanded homeownership.
Here is the 10-point path Johnson and Crapo plan to completely reform housing in the United States.
1. Wind down and eliminate Fannie Mae and Freddie Mac.
2. Promote a smooth and stable transition from the old system to the new system by providing specific benchmarks and timelines to guide Federal Mortgage Insurance Corporation – this will be modeled on the FDIC.
3. Keep current conforming loan limits so that mortgage credit continues to be available in high-cost areas.
4. Keep the To-Be-Announced secondary market liquid and direct FMIC to “take into account” the impact of new products on the TBA market.
5. Mandate 10% private capital, up front, and create a mortgage insurance fund for the system to protect taxpayers against future bailouts. We’ve seen these kinds of deals already.
6. Add multifamily as an asset class to those same risk-sharing mechanisms mentioned in point 5.
7. Create a member-owned securitization platform that will issue a single, standardized FMIC-wrapped security.
8. 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.
8a.The small lender mutual cooperative would provide a cash window for individual eligible loans, and small lenders could retain servicing rights.
9. Require strong underwriting standards that mirror the definition of “qualified mortgage”, and set down payment requirement at 5% (with a short phase-in) except for first-time homebuyers at 3.5%.
10. Eliminate affordable housing goals and establish transparent and accountable housing-related funds that would focus on ensuring there is sufficient decent housing available. The funds are NOT paid for with tax dollars, but through a small FMIC user fee (10 basis points) that only those who choose to use the system pay.
10a. Despite the elimination of affordable housing goals, the reformed housing market will still facilitate the broad availability of credit for eligible single-family and multifamily borrowers, monitor consumer and market access to credit, and provide market based incentives and transparency to serve underserved areas.
This being a bi-patrician proposal, this reform may have the ability to pass… but is it really needed? The original GSE system worked well for near a century. It originally had strong, tight underwriting guidelines for loans, an 80% loan to value criteria (or had mortgage insurance) and a limited quantity of programs. It wasn’t until the meddling of Congress mandating the GSE charter to expand the types of “sub-prime” loans Freddie and Fannie could take on, was there a risk to the system.
Yes, the government bailout of the GSEs of $187.5 Billion was to needed to keep Freddie and Fannie solvent when the housing bubble popped… but the GSE’s made $202.9 Billion last year!. Ironically the GSEs are highly profitable, and they should have already been able to payoff the government bailout, and no longer be in conservatorship. The treasury unilaterally changed the terms of the loan, and decided to take all the proceeds as dividends, and not apply any of the profit towards the principle.
Don’t be surprised if there are lawsuits for holders of Freddie and Fannie stock, as the US Treasury is conducting unlawful lending practices (interest only, changing terms, excessively high interest rates, etc) that he new Dodd Frank Regulations are supposed to make illegal, and the CFPB is supposed to regulate.
Now, when will the government quit messing with elements of the housing/finance system that may have only had a minor contribution to the housing meltdown, and concentrate on the primary issue that caused the problem? IMO that would be the credit rating system for mortgage backed securities. If the rating agencies analyzed the securities accurately the sub-prime loan product could not have been rated “investment” grade, and the garbage loans would not have existed as there would not have been a market for them.
As the prior White House Chief of Staff conveyed “Never let a serious crisis go to waste”. Instead of taking a scalpel to the problems in the system, they’re taking a shotgun to it. Unfortunately there’s a lot of collateral damage.
Ron Henderson GRI, RECS, CIAS
Multi Real Estate Services, Inc
Gov’t Affairs Chair – California Association of Mortgage Professionals
Real Estate market, Mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley