Mortgage

GSE reform proposals next on the to-do list

Housing recovery prompts Congress to move forward with GSE restructuring

With the housing recovery aiding an economic rebound, Congress seems intent on moving forward with mortgage-finance reform, Standard & Poor’s claims in a new report.

Overall, there seems to be a bipartisan commitment to encouraging private capital support for housing while winding down Fannie Mae and Freddie Mac’s dominant positions in the mortgage market.

Currently, lawmakers have presented three government-sponsored enterprise reform bills, including the Housing Finance Reform and Taxpayer Protection Act (Corker-Warner bill), the Protecting American Taxpayers and Homeowners Act and the FHA Solvency Act of 2013.

The Corker-Warner bill seeks to restructure the government’s role in housing, while maintaining its role as a lender of last resort. The PATH Act wants to reduce the government’s role significantly, limiting it to an oversight function and extending financial support only through Ginnie Mae.

Additionally, the FHA solvency Act aims at recapitalizing and reshaping the Federal Housing Administration’s role in housing.

Overall, the Corker-Warner proposal will have limited impact on banks given that servicers and aggregators of eligible mortgages would still have to get approval to participate in government-sponsored programs, S&P analysts pointed out.

“In this scenario, bigger banks could have an advantage if the approval process were strict and carried onerous minimum financial requirements,” they added.

The PATH bill could have a larger effect on banks though.

Notably, the plan proposes a delay in the implementation of the Basel III capital rules to ease the regulatory burden on community banks. It also proposes a number of other regulatory changes — further delays or the repeal of rules mandated by Dodd-Frank.

“Generally, we have a favorable view of the convergence of global bank regulatory standards, including Basel III, which requires higher minimum capital levels and more scrutiny on funding and liquidity,” S&P analysts noted.

While both PATH and Corker-Warner seek to create standard origination and securitization platforms through the oversight of the National Mortgage Market Utility, the Federal Housing Finance Agency continues to struggle to bring the GSEs onto a common platform.

Regardless of what type of GSE reform is passed, the longer the timeframe to determine the origination and servicing system, the more uncertainty the market will face.

As the market waited for the Consumer Finance Protection Bureau to issue final servicing rules, many servicers have been facing uncertainty for the past few years.

While some servicers implemented changes to their processes and systems based on the servicing alignment initiative, other servicers waited until the final rules were issued.

Currently, lenders are implementing qualified mortgage standards and platforms in anticipation of the effective date.

“We believe that lenders, servicers and, ultimately, borrowers would benefit from quick and thoughtful decisions following the adoption of any reform," S&P analysts stated.

Despite the momentum of the recovery that private mortgage insurers are enjoying, questions remain about the extent and nature of the insurers' future participation in the secondary mortgage market.

As a result, the new legislative proposals seek to retain private mortgage insurance as an absorber of risk.

“We believe the combination of diminished participation by the FHA and increased quality of business should bode well for private MIs,” the credit ratings agency concluded. 

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