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2 Senators, 1 plan to completely reform housing finance?

Bipartisan strategy to replace Fannie Mae and Freddie Mac

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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 Senate Banking Committee hosted an in-depth series of hearings exploring essential elements necessary for reform. 

Johnson and Crapo worked together to contain guarantee costs at Fannie Mae and Freddie Mac as well as agreements to help maintain solvency at the Federal Housing Administration.

For the past few months they have been negotiating and drafting the reform proposal and plan to introduce the legislation soon.

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 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."

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