Rise of the Rentals

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58 | Th e M Rep o RT 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 the latest cOntinued frOm page 56 senate Banking leaders unveil Housing finance reform proposal Sens. Johnson and Crapo introduce the latest bipartisan plan to wind down Fannie and Freddie. t he leaders of the Senate Banking Committee an- nounced plans to move forward on a new proposal to wind down Fannie 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 mod- eled after 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 elimina- tion 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 lend- ers to ensure institutions of all size have access to the secondary market. "This agreement moves us closer to ending the five-year status quo and beginning the wind-down of Fannie and Freddie while protect- ing 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, re- sponses seemed positive, with Mortgage Bankers Association (MBA) president and CEO David Stevens saying the announcement "reinforces the immediate need to address GSE reform in a substan- tive, transparent way." "Chairman Johnson and ranking member Crapo are to be com- mended for coming together in a bipartisan fashion and advancing a comprehensive solution to improve the function of the secondary mortgage 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 (SIFMA) and the National Association of Home Builders (NAHB), who each pledged their support to second- ary market reform efforts, and Corker, who said he is "pleased the Banking Committee is demonstrat- ing their commitment to this effort by putting pen to paper and releas- ing 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. mortgages, Stegman says, mistrust the system that upended in September 2008 and is still reeling from the economic haymaker wrought by the Great Recession. To re-establish trust, Stegman says, U.S. housing needs a stron- ger, single-source federal mortgage insurance system. To achieve this, the existing dual-source GSEs must confront the fact that the system has been undercapitalized, overextended, and overcompli- cated. Add to that the fact that implied government security for loans has not really provided lower mortgage costs for even good-risk borrowers, and trust is out the window, he says. First, Stegman says, the GSE system needs to be restructured to withstand the bubble-and-bust trends that plague the housing market. This is an important step, considering that mortgage holders owe Fannie and Freddie around $5.6 trillion, which is half the U.S. budget. Second, Stegman says, the improved liquidity and removal of credit risk afforded by a single security would reduce spreads, thereby lowering relative post- reform mortgage costs. And third, creating a single-source govern- mental insurance entity would improve efficiency and oversight and reduce operating expenses through greater standardization. Stegman's remarks come on the heels of calls by inves- tor Bruce Berkowitz, managing member and chief investment officer of Fairholme Capital Management, to protect Fannie Mae and Freddie Mac shareholder agencies through GSE reform and better oversight. Fairholme, along with Perry Capital, has sued the Fed for devaluing stocks based upon Treasury changes in agree- ments with the GSEs. But the underlying issue for Stegman is the public trust. Borrowers, he says, must feel that their creditors are accountable and responsible. Anything short of a government that standardizes and enforces its regulations as a way to buttress the housing mar- ket against traditionally destabiliz- ing forces simply will not work. "This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country." — Tim Johnson (D-South Dakota)

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