Setting The Stage

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Th e M Rep o RT | 57 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET Department senate Banking leaders Unveil Proposal for Housing Finance reform The new plan builds on ideas introduced in 2013—namely, the elimination of Fannie and Freddie. t he leaders of the Senate Banking Committee an- nounced in March plans to move forward on a new proposal to wind down Fan- nie Mae and Freddie Mac in favor of a new government backstop for private financiers. According to committee chair- man Tim Johnson (D-South Dakota) and ranking member Mike Crapo (R-Idaho), the newly unveiled reform proposal is the result of months of exploratory hearings, negotiations, and draft- ing work from members on both sides of the aisle. "There is near unanimous agreement that our current hous- ing finance system is not sustain- able in the long-term and reform is necessary to help strengthen and stabilize the economy," Johnson said. "This bipartisan effort will provide the market the certainty it needs, while preserv- ing fair and affordable housing throughout the country." The proposal builds on a bill introduced last year by Sens. Bob Corker (R-Tennessee) and Mark Warner (D-Virginia), keeping as its base the eventual elimina- tion of Fannie Mae and Freddie Mac and installation of a Federal Mortgage Insurance Corporation (FMIC), which would be modeled after the FDIC and which would assist private creditors with losses after the first 10 percent. Also included in the proposal is a provision requiring strong un- derwriting standards that would mirror the Consumer Financial Protection Bureau's qualified mortgage definition and would set a phased-in down payment re- quirement of 5 percent—except for first-time borrowers, who would be required to pay 3.5 percent. Finally, other provisions in the outlined plan call for the elimination of affordable housing goals—to be replaced with funds created through a small FMIC user fee—and the formation of a mutual cooperative owned by small lenders to ensure institu- tions of all sizes have access to the secondary market. "This agreement moves us closer to ending the five-year sta- tus 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. With Johnson and Crapo's draft not yet complete, it remains to be seen how the proposal will fare in front of the largely Democratic Senate and the Republican- controlled House. On the industry side, responses seemed positive, with Mortgage Bankers Association president and CEO David Stevens saying the an- nouncement "reinforces the imme- diate need to address GSE reform in a substantive, transparent way." "Chairman Johnson and Ranking Member Crapo are to be com- mended for coming together in a bi-partisan fashion and advancing a comprehensive solution to improve the function of the secondary mort- gage market in a way that engages private capital and reduces risk for taxpayers," he added. Also adding their praise were the Securities Industry and Financial Markets Association and the National Association of Home Builders, which each pledged their support to second- ary market reform efforts, and Corker, who said he is "pleased the Banking Committee is demon- strating their commitment to this effort by putting pen-to-paper and releasing a set of principles based on the bill we introduced." Perhaps less enthusiastic would be Fannie and Freddie's inves- tors, who have sued the govern- ment, urged corporate changes, and even offered to buy parts of the GSEs' businesses in hopes of seeing returns now that both enterprises are profiting again. "There is near unanimous agreement that our current housing finance system is not sustainable in the long- term and reform is necessary to help strengthen and stabilize the economy." — Tim Johnson (D-South Dakota)

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