This summer has brought a wave of housing finance reform efforts in both chambers of Congress. Legislators are finally proposing ways to downsize and eliminate two housing finance giants – Fannie Mae and Freddie Mac (the “GSEs”) – even though the GSEs posted sizable second quarter profits and will send nearly $15 billion to the U.S. Treasury in related dividends. In contrast to winding down the finally profitable GSEs, legislators are continuing to look for ways to shore up the FHA, which last year reported a $16.3 billion deficit in its insurance fund, and is expected to make a nearly $1 billion draw from its Treasury line of credit in October (a first in its 78-year history).
Thus far, the House and Senate have proposed different approaches to housing finance reform. The leading House proposal, introduced by Republicans, leans heavily toward privatization and would eliminate the GSEs’ affordable housing responsibilities. In contrast, the Senate proposal, introduced in a bipartisan effort, would combine a government backstop (arguably through more transparent means) with a continued attempt to fund affordable housing programs. Notwithstanding those differences, there is one common element of both proposals – a reduced government role in the housing finance sector. This core principle has been echoed by the President, who recently laid out general principles for housing finance reform that include winding down the GSEs, amplifying the role of private risk capital, and preserving the function of FHA insurance. Below we summarize key aspects of several recent housing finance proposals, which we will continue to monitor once Congress reconvenes after its August recess.
The Protecting American Taxpayers and Homeowners Act (H.R. 2767)
On July 11, 2013, Representatives Jeb Hensarling (R-TX), Scott Garrett (R-NJ), Randy Neugebauer (R-TX), and Shelley Moore Capito (R-WV) introduced legislation in the House Financial Services Committee (the “HFSC”) that would significantly limit government’s role in the housing finance sector. Highlights of the Protecting American Taxpayers and Homeowners Act (the “PATH Act”) include:
Winding down the GSEs. The PATH Act would wind down the conservatorship of the GSEs over five years, ultimately leading to receivership. (Under conservatorship, the GSEs have been operational, although subject to the direction of a government conservator; under receivership, the GSEs would be wound down and ultimately liquidated). During this five-year period, the GSEs would continue to pay dividends to taxpayers, while their holdings and purchases would be significantly scaled back. In pursuit of these objectives, the PATH Act would, among other things, require an annual review/update of GSE guarantee fees; incrementally lower conforming loan limits; establish risk-sharing programs with the private sector; restrict the GSEs to purchasing only Qualified Mortgages (as defined by the CFPB); restrict purchases and guarantees in jurisdictions that have used eminent domain to seize underwater mortgages during the past ten years; rescind the GSEs’ affordable housing goals; and eliminate the Housing Trust Fund.
Limiting the Role of FHA Insurance. The PATH Act includes various mechanisms that would significantly scale back the FHA’s role so that it more directly targets certain first-time and low-income borrowers. Among other things, the PATH Act would reduce the maximum insurable loan limit, increase FHA’s minimum down payment requirement to 5%, implement private sector risk sharing, and gradually reduce FHA insurance coverage to 50% of the original principal amount of the loan. The PATH Act would ultimately remove FHA from within the Department of Housing and Urban Development, requiring it to be a self-funded and self-sustaining entity. It also would prohibit FHA from insuring loans in municipalities that have seized properties through eminent domain during the past ten years.
Creating a National Mortgage Market Utility. A new non-governmental not-for-profit entity would be regulated by the FHFA (the GSEs’ current regulator), and would serve to develop certain voluntary “best practices” for the securitization industry. Unlike the Federal Mortgage Insurance Corporation contemplated by concurrent Senate proposals (see below), this entity would not directly insure or guarantee payment on any loans or securities. Instead, the entity would issue voluntary standards for increased transparency in mortgage loan origination, pooling, and securitization. It would also maintain a securitization outlet to match originators with investors.
Delaying/modifying/repealing certain Dodd-Frank Act rulemakings and capital markets requirements. The PATH Act would, among other things, delay the implementation of Basel III capital rules, delay Dodd-Frank Act mortgage rules until January 2015, repeal Qualified Residential Mortgage (“QRM”) risk retention requirements, and exclude certain fees imposed by affiliates of lenders, as well as GSE loan-level price adjustments, from the calculation of loan “points and fees” for purposes of Qualified Mortgages (“QMs”) and HOEPA eligibility. (For further detail regarding amendments to the calculation of “points and fees” in the CFPB’s Qualified Mortgage Rule, please see our recent client alert and blog post).
The PATH Act was approved by the HFSC on July 24, 2013, by a vote of 30-27, primarily along partisan lines. It is expected that the PATH Act will be revised prior to it reaching the House floor for a full vote in October or November.
The Housing Finance Reform and Taxpayer Protection Act of 2013 (S. 1217)
On June 25, 2013, Senators Bob Corker (R-TN) and Mark Warner (D-VA), alongside eight of the members of the Senate Banking Committee, introduced legislation that similarly seeks to pave the way for increased privatization of the secondary mortgage markets and the elimination of the GSEs. However, the Housing Finance Reform and Taxpayer Protection Act of 2013 (“Corker-Warner”) would replace the current GSE structure with a government guarantor that would provide a more transparent backstop for mortgage securitizations.
Key highlights of Corker-Warner include:
Creating the Federal Mortgage Insurance Corporation (the “FMIC”). The FMIC would be a government created entity that provides catastrophic loss insurance, funded through premiums and guarantee fees on eligible mortgage securitizations. FMIC insurance would be voluntary. Private investors in mortgage-backed securities would bear the first risk of loss and would be required to hold at least a 10% stake (in addition to loan level credit enhancement). This 10% capital buffer must be “sold” or in place before the MBS can obtain FMIC protection. Moreover, the 10% stake represents 10% of the value of the MBS (not 10% of losses). This legislation would impose civil money penalties against an approved private mortgage insurer, servicer, issuer, or bond guarantor that has failed to comply with or otherwise violates any standard adopted by the FMIC, among other requirements.
Abolishing the FHFA, and transferring its functions to the FMIC.
Creating a Market Access Fund. In order to provide certain assistance to affordable housing programs and borrower counseling, the Market Access Fund would be funded by a user fee of 5-10 basis points of each loan securitized by FMIC. Many components of this Market Access Fund are already in place, viz. the Capital Magnet Fund, among others.
Winding down the GSEs. In this process, the GSEs would maintain a fiduciary duty to maximize taxpayer returns. However, their conforming loan limits would be reduced, the GSEs’ portfolios would be increasingly constrained, and their charters would be revoked no later than five years after passage of the legislation.
Unlike the PATH Act, Corker-Warner neither directly addresses FHA reform issues nor repeals or amends portions of the Dodd-Frank Act’s QM/QRM requirements. The Senate is considering issues pertaining to FHA reform in separate legislation, the FHA Solvency Act of 2013 (see below). This FHA reform legislation would be appended to the Corker-Warner bill for Senate floor consideration.
To date, Corker-Warner has not been approved by the Senate Banking Committee. It is currently being vigorously vetted by the Senate Banking Committee and there will be biweekly hearings of the full Committee this fall as Members develop a comprehensive, bipartisan approach to GSE reform. Early reports indicate that the housing industry is getting organized around two issues: decreasing the 10 % capital buffer and adjusting the affordable housing funding requirements. Corker-Warner is expected to serve as the template for the discussion, although the legislation that will be introduced for a markup will reflect significant edits from Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID). Such legislation may also include concepts from members of the Senate Banking Committee that have not co-sponsored Corker-Warner, such as Senator Jack Reed (D-RI) (who is rumored to be working on a separate proposal), or from the FHFA.
President Obama has suggested, in his recent speech, that he generally supports the efforts proposed in the bill (at least with respect to winding down the GSEs).
The FHA Solvency Act of 2013 (S. 1376)
The FHA Solvency Act of 2013 was introduced in the Senate Banking Committee by Chairman Johnson and Ranking Member Crapo on July 25, 2013. Among other things, this legislation would require FHA to increase capital reserves and update mortgage underwriting standards to keep pace with recent Dodd-Frank Act/CFPB ability-to-repay requirements. The legislation would also require the FHA to charge a minimum annual insurance premium of at least 55 basis points, and would raise the annual mortgage insurance premium caps by 50 basis points. The FHA Solvency Act of 2013 would also enhance FHA’s authority to seek indemnification from Lender Insurance and Direct Endorsement mortgagees; attempt to shore up FHA’s capital reserves; create a rather complex set of new authorities for the FHA to require sub-servicers to step in for poorly performing servicers; and allow the HUD Secretary to administer the HECM program through mortgagee letters issued in connection with standard proposed rulemakings.
This legislation was approved by the Senate Banking Committee on July 31, 2013.