Government-Sponsored Enterprise Reform Gains Momentum with Bipartisan Senate Banking Committee Agreement on Legislative Outline (with Schwartz Comment)

On March 11, Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho) announced that they had reached an agreement on the principles to be included in a soon-to-be-introduced bill on reforming the current U.S. housing finance system. The legislation, which builds upon the Corker-Warner housing reform bill introduced in the Senate last June, would wind down Fannie Mae and Freddie Mac and replace them with a Federal Mortgage Insurance Corporation ("FMIC"), an FDIC-like entity that would be charged with facilitating the broad availability of credit for eligible single-family and multi-family borrowers, including establishing an insurance fund to protect taxpayers against catastrophic losses. FMIC would guarantee securities backed by eligible mortgages against losses in excess of 10% of private first-loss capital.

The Johnson-Crapo agreement on a proposal for government-sponsored enterprise ("GSE") reform also covers the creation of a common securitization platform for the issuance of both FMIC-wrapped and private label securities and a cooperative mechanism for community banks and other small lenders to sell loans on a cash basis while maintaining servicing rights. The agreement further contemplates the adoption of underwriting standards for eligible mortgages similar to the Consumer Financial Protection Bureau's guidelines for qualified mortgages, but with a minimum down payment requirement, and the elimination of current affordable housing goals for lenders in favor of a FMIC user fee of 10 basis points to support affordable housing.

Schwartz Comment: As with Corker-Warner before it, the bill resulting from the Johnson-Crapo agreement will be an important step toward reducing taxpayer support for the nation's housing finance system. Of course, the devil is in the details. Shifting the risk of housing finance primarily to private capital without undermining some of the mechanisms, such as a vibrant and efficient TBA market which has been essential to the fairly unique availability in the United States of 30-year fixed-rate mortgages, will require considerable focus by Congress and the housing finance industry for months or years to come.

See: Senate Banking Committee Press Release.