Senate bill to overhaul Fannie, Freddie gets rave reviews

“The mortgage market is a complex and intricate part of our nation’s economy and addressing the many concerns and interests of a wide range of participants will require much negotiation, compromise and cooperation,” he said.  

{mosads}Specifically, the bill would require the private market to hold 10 percent of the first loss of any mortgage-backed security that purchases a government reinsurance wrap, which amounts to twice the loss severity experienced by Fannie and Freddie during the 2008 financial crisis.

Had the requirement been in place ahead of the housing market crash, the senators argue, taxpayers would not have needed to provide about $188 billion to keep Fannie and Freddie afloat. 

The government is involved in about 90 percent of all the nation’s loans among Fannie, Freddie and the Federal Housing Administration.  

In an effort to keep mortgage rates low and competitive, the bill would provide a way for splitting up credit investors, who want to take on loss risk, from rate investors, who have provided the necessary funds to keep loan rates low. 

The plan also nixes Fannie and Freddie’s affordable housing goals and replaces them with improved counseling and rental assistance programs. 

The bill would create a new access fund, paid for through an assessment on loans that go through the government.

The legislation also would try to ensure that all financial institutions have direct access to the secondary market by forming a new corporation mutually owned by small banks and credit unions.

The Independent Community Bankers of America (ICBA) commended the plan, saying “continued community bank access to a financially strong, reliable and impartial secondary mortgage market is essential to preserving access to mortgage credit in all areas of the country and supporting the housing recovery.”

“ICBA appreciates and is encouraged by the inclusion of certain provisions in the bill that would help provide access for community banks to the secondary market without requiring them to take on the additional risk and cost of securitizing loans.”

Some housing experts have estimated that it could take several more years to put a viable plan in place — possibly not until 2017 — meaning another decade or so of Fannie and Freddie, which are currently thriving in the recovering market. 

Former Senate Majority Leader George Mitchell (D-Maine), former senator and Housing and Urban Development (HUD) Secretary Mel Martinez, former HUD Secretary Henry Cisneros and former Sen. Kit Bond (R-Mo.), co-chairmen of the Bipartisan Policy Center’s (BPC) Housing Commission, said they hope the introduction of the “legislation signals a renewed focus in Congress to repair our nation’s broken system of housing finance.”

“We are pleased that the Corker-Warner legislation incorporates many of the elements of the housing finance reform plan proposed earlier this year by the BPC,” they said. 

Similar to that plan, a key objective is to create a new system that encourages private capital to play a far greater role in bearing mortgage-credit risk, they said. 

“The legislation envisions a new system in which private entities are responsible for most of the mortgage system’s functions — not only as mortgage originators and servicers but also as issuers of mortgage-backed securities and credit enhancers,” they wrote. 

“This government-dominated status quo is undesirable and unsustainable and exposes taxpayers to unnecessary risk.

“Recent developments such as rising home prices and the return to profitability by Fannie Mae and Freddie Mac should not lull us into a false sense of complacency.”

The Financial Services Roundtable’s Housing Policy Council President John Dalton said the legislation includes a number of “steps critical to establishing a stronger mortgage finance system.” 

“While we are studying all the details of the new bill, its introduction represents a significant step forward in the important and complex task of building a new housing finance system for the future.”

Dalton said the bill is based on principles the group backs, including private capital taking the primary risk, an opportunity for a variety of risk-sharing methods, a reserve fund to protect the taxpayers and a limited and defined government backing role that will help ensure consistent liquidity in the market.  

Besides Warner and Corker, Sens. Jon Tester (D-Mont.), Mike Johanns (R-Neb.), Kay Hagan (D-N.C.), Jerry Moran (R-Kan.), Dean Heller (R-Nev.) and Heidi Heitkamp (D-N.D.) have signed on to the bill.