Senate Banking Committee Chairman Tim Johnson and Sen. Mike Crapo, the panel’s top Republican, laid out a preliminary bipartisan agreement Tuesday on housing finance reform after months of deliberation.
The highly anticipated plan would wind down Fannie Mae and Freddie Mac and establish an explicit federal backstop for the secondary mortgage market, building on legislation released last summer by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va.
Johnson and Crapo are expected to release a bill soon and hope to schedule a committee vote in coming weeks, according to a press release.
“This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country,” Johnson said in a statement. “I look forward to moving this effort through committee once Members have had a chance to review our forthcoming legislation.”
The agreement appears to closely hew to the Corker-Warner bill in a number of ways. The Johnson-Crapo plan would establish a housing finance market that in many ways mirrors the deposit insurance framework set up under the Federal Deposit Insurance Corp.
The legislation would establish a new housing finance regulator, the Federal Mortgage Insurance Corp., which would provide an explicit government guarantee for certain mortgage-backed securities. It would allow for the creation of private firms to buy mortgages and sell those securities, but only after putting up 10% in first-loss capital before any government guarantee kicked in. The FMIC would also establish standards for the securitization and underwriting requirements for loans that are part of any security.
According to an outline of the bill, such underwriting standards would include it match the Consumer Financial Protection Bureau’s “qualified mortgage” rule and mandate a 5% downpayment for most borrowers.
Regulators would also establish a mutual cooperative owned by small banks, allowing them better access to participate in the secondary market. Affordable housing goals under the government-sponsored enterprises would be abolished, replaced by a housing trust fund based on user fees of 10 basis points paid to the FMIC.
While the agreement is close to the Corker-Warner legislation, the Johnson-Crapo bill is expected to provide more details on a transition to a new housing finance system as well as the creation of a standardized securitization platform.
It also differs on certain specifics. Under Corker-Warner, the FMIC would have lowered conforming loan limits. But the Johnson-Crapo agreement specified that the loan limits would stay at its current level so as not to disrupt the market.
The Johnson-Crapo bill also would lower the downpayment requirements to 3.5% for first-time homeowners, a break from Corker-Warner’s flat 5% standard for all borrowers.
“This agreement moves us closer to ending the five-year status 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 in a statement.
