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From Banking and Finance Law Daily, March 17, 2014

Housing finance reform text released

By John M. Pachkowski, J.D.

Following their March 11, 2014, agreement, Sens. Tim Johnson (D-SD), Chairman of the Senate Banking Committee and Mike Crapo (R-Idaho), the Committee’s Ranking Member, have released the text of their legislative proposal to reform the nation’s housing finance system.

The “Housing Finance Reform and Taxpayer Protection Act 2014” was released by Johnson and Crapo over the weekend on March 15th in an effort to balance the Committee Members’ interests in having adequate time to review the legislation while advancing housing finance reform in a timely manner. In addition to the draft legislative text, Johnson and Crapo released a summary and section-by-section analysis.

The legislative text builds upon legislation co-sponsored by Sen. Bob Corker (R-Tenn) and Sen. Mark Warner (D-Va), S. 1217, the “Housing Finance Reform and Taxpayer Protection Act and is the result of a series of hearings held by the Banking Committee in late 2013 (see Banking and Finance Law Daily, March 11, 2014).

According to a statement issued by Johnson and Crapo, the legislation would protect taxpayers from bearing the cost of a housing downturn; promote stable, liquid, and efficient mortgage markets for single-family and multifamily housing; ensure that affordable, 30-year, fixed-rate, prepayable mortgages continue to be available, and that affordability remains an important consideration; provide equal access for lenders of all sizes to the secondary market; and facilitate broad availability of mortgage credit for eligible borrowers in all areas and for single family and multifamily housing types.

Winding-down GSEs. The legislation would create a framework to simultaneously ramp up the new housing finance system while winding down Fannie Mae and Freddie Mac by maintaining the 5-year transition period from S. 1217. The legislation also adds flexibility by allowing for extensions if they are necessary to prevent market disruptions and spikes in borrowing costs.

FMIC. To ensure safety and soundness of entities participating in the new housing finance system, the legislation would create the Federal Mortgage Insurance Corporation (FMIC) and be patterned along the lines of the Federal Deposit Insurance Corporation. The FMIC would, among other things, be responsible for providing insurance on any mortgage-backed security that satisfies FMIC standards; create “robust” underwriting standards; and monitor and supervise participants in the FMIC mortgage market;

Level playing field. The legislation also creates market-based incentives for lenders to promote business in underserved areas so as to ensure that the American dream of homeownership is attainable for all creditworthy borrowers in all areas. To achieve this goal, the legislation would establish an initial and incentive-based fee structure to support the Housing Trust Fund, the Capital Magnet Fund, and a newly-created Market Access Fund. The legislation would also maintain current conforming loan limits to be maintained so that mortgage credit continues to be available in high-cost areas.

Small lenders. The legislation would also ensure that small lenders will have multiple access points to the secondary mortgage market, including the option to sell their individual loans through a new small lender mutual. The mutual will be jointly owned by small lenders, providing community banks, credit unions, and other small lenders direct access to the secondary market so that they will not be at the mercy of their larger competitors when Fannie Mae and Freddie Mac are dissolved.

In a statement, the Independent Community Bankers of America said, “It is vital that community banks continue to have a financially strong, reliable and impartial secondary mortgage market to ensure the flow of mortgage credit to consumers nationwide. Because community banks must continue to be able to sell individual loans for cash and to retain servicing on those loans, ICBA is encouraged by provisions of the Johnson-Crapo plan that support continued access for community banks.” The statement added, “The community banking sector needs to access the secondary market without the complexity and costs associated with securitizing loans.”

Securitization platform. To improve standardization and liquidity in the secondary mortgage market, the legislation would create a standardized security to be used for all FMIC-guaranteed securities. This standardized security is envision to promote broad mortgage availability for 30-year, fixed-rate mortgages, and will be available for the issuance of private label securities. Non-FMIC securities issued using the platform will be required to use agreements that include a common set of basic contractual terms.

Multifamily initiatives. Recognizing that multifamily housing “is an important—and growing—segment of the nation’s housing market,” the draft legislation builds upon proven secondary market products while establishing important new provisions aimed at maintaining a vibrant multifamily market in the new housing finance system. During the transition period, the GSEs will be permitted to continue offering these products to support the multifamily market while laying the groundwork for the future system through the establishment of distinct multifamily subsidiaries within each enterprise to support the transition to the new finance system. Following the transition period, the Delegated Underwriting and Servicing and Series K products, offered by the Fannie Mae and Freddie Mac can be used by approved multifamily guarantors in the new finance system. Also, the legislation would call for a pilot program test and assess methods or products designed to increase secondary mortgage market access for small multifamily properties which typically have less than 50 units and serve families in urban, suburban, and particularly rural areas.

Following release of the legislative draft, Financial Services Roundtable chief executive officer and president Tim Pawlenty said, “The Senate should act quickly to review this bill and move forward on reform.”

Companies: Fannie Mae; Financial Services Roundtable; Freddie Mac; Independent Community Bankers of America

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