Mark Warner: Fannie Freddie Reform Can’t Wait Another Year

The Housing Policy Council supports the GSE reform proposal crafted by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., but it goes too far in requiring guarantors to take a 10% first-loss position on privately issued MBS.

“The 10% requirement is overly conservative,” said HPC president John Dalton. “It fails to consider the other layers of private capital in front of the taxpayers, including the downpayment on the mortgages that back the security and the private mortgage insurance,” he said Wednesday at an American Mortgage Conference in Raleigh, N.C.

Earlier in the week, Warner indicated that the 10% capital requirement might be too high. “We will probably have some negotiations on that issue,” the senator said Monday at a National Association of Federal Credit Unions conference.

But the Virginia senator pointed out that the co-author of the bill wants credit enhancers to put up 10% private capital. “Sen. Corker feels very strongly it is the kind of guarantee that we need.”

The credit enhancer would also pay a small guarantee fee that would go to the new Federal Mortgage Insurance Corp. FMIC would protect MBS investors if the losses exceed the amount guaranteed by the private sector.

The Cork-Warner bill, like the GSE reform bill that cleared the House Financial Services Committee, winds down Fannie Mae and Freddie Mac over five years. But the House measure doesn’t provide a government backstop for the development of a private secondary mortgage market.

That conservative, ideological “approach coming out of the House will have no chance of Democratic support,” Warner said.

But the senator warned that GSE reform needs to be enacted relatively soon. The “ability and need for reform” could slip away “if we wait a year” and Fannie and Freddie are more profitable.

Meanwhile, the Housing Policy Council urged House Financial Services Committee chairman Jeb Hensarling, R-Texas, to expand his bill—the Protect American Taxpayers and Homeowners Act—to include a federal backstop.

The PATH Act “should be modified in order to create a strong and stable system of housing finance—most notably the inclusion of a federal backstop to ensure a stable source of liquidity in the mortgage market,” Dalton said. The HPC is part of the Financial Services Roundtable.

The HPC president also stressed that the time to pass a GSE reform bill is now. It should take “months not years,” Dalton said.