Congresswoman Maxine Waters has drafted legislation that would end Fannie Mae and Freddie Mac within five years, and establish a new, mortgage lender-funded cooperative that would be the only issues of government-guaranteed securities.
Waters’ legislative proposal, known as the Housing Opportunities Move the Economy (HOME) Forward Act of 2014, would wind down Fannie and Freddie within five years and establish the Mortgage Securities Cooperative. The MSC would be funded by mortgage lenders based on each lender’s mortgage volume, but the MSC would be governed by a “one member, one vote” basis.
“Reforming a 10 trillion dollar housing finance market is an immense undertaking that must be carefully considered,” said Congresswoman Waters. “Fannie Mae and Freddie Mac’s return to profitability and repayment of taxpayer dollars has led some to rightly speculate whether the enterprises need any reform at all. I believe that we have an opportunity to address some of the fundamental flaws of the current system, by ending the perverse incentives created by Fannie Mae and Freddie Mac's ownership structure and providing an explicit government guarantee that is paid for by industry.”
Waters’ legislation would also create the Mortgage Insurance Fund. The MIF is modeled after the deposit insurance fund managed by the Federal Deposit Insurance Corp. The MIF would only be used “in the event of private first-loss capital and capital of the MSC being exhausted.” The MIF would provide a federal guarantee on eligible mortgages.
Waters’ legislation also would establish a “strong new” regulator, the National Mortgage Finance Administration, which would oversee both the MIF and the MSC.
The NMFA will determine the fees to be charged for insurance on securities backed by eligible mortgages, capital, and underwriting standards, as well as overseeing all guarantors to which the MSC is exposed.
This marks the second time in less than a week that Waters-authored legislation made news. Last week, the Biggert-Waters Flood Insurance Reform Act of 2012 was signed into law.
“I am hopeful that this legislation will continue to move the conversation on housing finance reform forward,” Waters said. “While there are differences, this legislation and the two bipartisan proposals in the Senate embrace a number of common themes. These include preserving the 30-year, fixed rate mortgage, protecting taxpayers from the costs of a housing downturn by establishing a strong new regulator, and ensuring that small and community financial institutions can participate in the new system.”
For HousingWire's breakdown of the current GSE reform measures, click here.
The HOME Forward Act would make 9 major changes to housing finance:
1. Maintain the affordable 30-year fixed rate mortgage
HOME would provide for a catastrophic government guarantee on eligible single-family mortgages. The Act makes the government guarantee on eligible securities explicit and paid-for with a fee, which will be used to capitalize a Mortgage Insurance Fund (MIF) overseen by a new regulator, the National Mortgage Finance Administration (NMFA). Capital in the MSC, as well as private credit risk-sharing on guaranteed securities, will hold a first-loss position, with the MIF providing a catastrophic guarantee.
2. Protect taxpayers from the costs of a housing downturn
HOME will establish a strong new regulator known as the NMFA, which will oversee the new lender-owned MSC. The NMFA will have authority over underwriting standards, as well as oversight responsibilities over third-party vendors and counterparties to the MSC. Further, the NMFA will oversee the MIF, modeled after the Deposit Insurance Fund managed by the FDIC, which will only be triggered in the event of private first-loss capital and capital of the MSC being exhausted. The new issuer will no longer operate as a hedge fund with a leveraged portfolio, but instead with very limited authority to provide a “cash window” to small financial institutions, aggregate loans from the smallest lenders into multi-lender securities, and work out troubled loans.
3. Ensure that small and community financial institutions can participate in the new system
Waters' legislation says that the strength of our financial system depends on creating an environment where a diverse set of institutions can thrive, regardless of size. For that reason, the Act provides for strong representation of small financial institutions in terms of governance of the MSC and also provides for a “cash window” to which small institutions can sell individual mortgages.
4. Provide stability and liquidity in our housing finance system
The NMFA will set prudent underwriting standards, adequate capital levels for the MSC, and provide for first-loss credit risk sharing on mortgages. In order to ensure access to mortgage credit during all periods of the economic cycle, the Act provides flexibility to the NMFA to adjust standards during exigent market conditions.
5. Prevent disruptions to the U.S. housing market during a transition to a new finance system
The Act provides for a 5-year transition period to the new system, and creates a framework to simultaneously build-up the MSC while winding-down Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac’s portfolios will continue to wind down at the current rate, and the Treasury will explicitly guarantee all outstanding enterprise securities.
6. Provide transparency and standardization across the market
This will be achieved through uniform pooling and servicing agreements, as well as with new databases to facilitate access to mortgage data. The Act also builds-upon the current work being done to create a Common Securitization Platform.
7. Maintain access for all qualified borrowers that can sustain homeownership
The Act will serve homeowners of the future by providing for strong underwriting standards, which also provide flexibility on down payments for first-time homebuyers. Moreover, the Act provides that the new MSC has a responsibility to ensure broad market access.
8. Maintain the multifamily housing market by largely transferring what has worked at Fannie Mae and Freddie Mac
Building off of the work of Congresswoman Carolyn Maloney, the Act seeks to preserve both Fannie Mae and Freddie Mac’s forms of risk sharing on securities backed by multifamily mortgages by bringing a new establishing a new multifamily platform at the MSC.
9. Ensure access to affordable rental housing by funding the Housing Trust Fund, Capital Magnet Fund, and the new Market Access Fund
The Act provides for robust funding for the Housing Trust and the Capital Magnet Funds created under the Housing and Economic Recovery Act of 2008, and creates a new Market Access Fund to support innovation in housing and housing finance. Further, the Act provides that the Housing Trust and Capital Magnet Funds are included in the distribution of earnings when Fannie Mae and Freddie Mac are liquidated.