This fall President Obama partnered with online real estate giant Zillow to introduce his administration’s housing finance reform agenda. Seventy-five years after the founding of Fannie Mae and five years into the government-sponsored enterprise’s conservatorship with sibling Freddie Mac, housing finance reform is gaining steam and looks to be the dominant legislative battle of 2014.
With partisan politics dogging every major reform effort from immigration to healthcare, the chasm separating proposed Senate and House bills reforming housing finance remains predictably wide. Here’s what we know: first, the conservatorship of Fannie Mae and Freddie Mac must end in a controlled, transparent wind-down. Second, the markets—and America’s future homeowners—need a reformed housing finance system that offers access, affordability and accountability. Third, the new system and regulatory framework must acknowledge the securitization process as part of the modern mortgage wheelhouse and create viable oversight mechanisms with clear lines of authority for where structured finance and housing finance intersect. Both chambers of Congress have presented plans to achieve a mix of these goals, shedding light on the next incarnation of Amerca’s housing finance system.
The current housing finance system was built in the aftermath of the great depression and on the heels of returning veterans and booming young families. What the current system was not designed for was the relatively recent intersection of structured finance and housing finance in the form of mortgage backed securities. A Senate bill, the Housing Finance Reform and Taxpayer Protection Act of 2013 (S.1217) seeks to institutionalize that market shift and build on work the Federal Housing Finance Agency (FHFA) has already begun by laying the foundation for a common mortgage securitization platform.
The bill is a clean effort to minimize the federal government’s involvement in the secondary market, limiting it to providing a platform and shifting the government’s focus to securitization, security and mortgage insurance and issuance. The new agency would provide insurance on any covered securities, essentially those built from qualified mortgages and where the issuer or other private market holders have assumed a first loss position (“skin in the game”). What comes with this shift is a move away from affordable housing goals, long promulgated through the GSEs and their required purchases of loans made to low- and moderate-income buyers.
S.1217 not only repeals the GSE charters but also their affordable housing goals, instead directing appropriations to two funds: the Housing Trust Fund and the Capital Magnet Fund.
In a November 7th Senate Committee on Banking, Housing & Urban Affairs hearing the consensus from those testifying was clear: the projected $2.5 – 5 billion awarded to these two funds annually would pale in comparison to the impact AHGs have historically had in rural areas, predominantly minority communities and with low- and moderate-income homebuyers across the board.
On the upside, the bill allows for the agency to expand its reach during a crisis much like the Federal Housing Administration was able to step into the void as private lending dried up in the years following the 2008 financial crisis. During a market crunch, the agency would be authorized to “provide insurance to any covered security regardless of whether it has satisfied credit-risk sharing requirements if unusual and exigent circumstances have created, or threatened to create, an anomalous lack of mortgage credit availability within the housing markets that could materially and severely disrupt the functioning of the housing finance system.”
The bill also takes a nod from the Mortgage Electronic Registration System (MERS) in that the bill prescribes requirements for a uniform mortgage database and electronic registration of eligible mortgages.
With regard to regulatory oversight, the bill amends the Securities Act of 1933 and the Securities Exchange Act of 1934 to “exempt covered securities insured by the FMIC from Securities and Exchange Commission (SEC) regulation in general and from credit risk retention requirements in particular.”
This exemption would presumably not apply to all interest yielding asset-backed securities, only those built on residential mortgages as the underlying asset.
The Senate bill creates a new entity to do all this: the Federal Mortgage Insurance Corporation (FMIC), which would absorb the FHFA, thereby abolishing the agency. The Act would, in effect, officially bookend the financial crisis as the FHFA was itself a product of the crisis. Created in 2008, it is the successor agency to the Federal Housing Finance Board (FHFB) and the Office of Federal Housing Enterprise Oversight (OFHEO). Both the Board and Office were created in the early 1990s after the savings and loan crisis and were merged into the FHFA barely two decades later during the 2008 crisis.
In practice, the FMIC would most closely resemble the Federal Deposit Insurance Corp. The bill establishes the FMIC as an independent agency of the federal government and directs it to charge an insurance fee “according to a specific formula” in a similar fashion to how the FDIC self-funds through industry assessments.
The Senate bill repeals both GSE charters, with no specifics outside a transfer of the GSE’s multifamily guarantee business, and requires a General Accounting Office (GAO) report on full privatization of the secondary mortgage market, which is where the logic stops. Unlike the House’s efforts at GSE reform to date, the Senate bill offers no timeline on GSE wind-down or an incremental phase out of the federal government’s now-dominant role in the secondary mortgage market.
“It’s striking that a bill of this magnitude would not offer a more detailed plan of two major policy changes: the end of Fannie and Freddie and the privatization of the secondary mortgage market,” said Kelly Gring, Esq., an attorney with Virginia-based Glasser & Glasser, PLC, a default services law firm.
Gring added, “I recently met with the ALFN and staff members of my Senator’s office to discuss these important considerations in moving this bill forward.”
The “wind down” is where industry focus should shift to a House bill, the Protecting American Taxpayers and Homeowners Act of 2013 (H.R. 2767) or much-trumpeted PATH Act. The PATH Act provides for a timely wind-down of the GSEs over a five-year period. Whether five, seven or ten is the right number remains hotly debated. What is important is the need for market predictability and a recognition that nearly a century of housing finance policy cannot be unwound overnight and that recognition is not currently evident on the Senate side of the issue.
The PATH Act also recognizes the same shift as the Senate bill—the need for the federal government’s future housing finance policy to put one foot solidly in the securitization market. When merging the bills, should these two survive in tact or make it to the other chamber, the agreement on this issue is a promising starting point.
Shifting focus to 2014
Though Senate and House visions of what a common securitization platform, utility, fund or regulator would be empowered to do remain at odds, the bills drafted by each chamber offer significant starting points for the required bipartisan work ahead.
And though no two banking or financial crises are alike, the industry can expect a serious regulatory turf war should Congress not clearly establish oversight responsibilities, exemptions and emergency authority.
With the initial salvo fired by the Obama Administration this fall, housing finance reform is in sight, thought the battle will certainly last through 2014—possibly the last viable year for the Obama Administration to push through one last major and undoubtedly controversial piece of reform legislation.
While it is impossible to know the fate of all of these bills today, one thing remains clear: 2014 may become known as the year of housing reform, should the House and the Senate all it to happen.
