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From Banking and Finance Law Daily, March 11, 2014

Johnson and Crapo forge agreement to move housing finance reform forward

By John M. Pachkowski, J.D.

Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-Idaho) announced that they have reached an agreement on a housing finance reform proposal. Johnson and Crapo expect to release draft legislative text publicly in the coming days, and plan to hold a markup in the coming weeks.

The agreement came after a series of hearings held by the committee that focused on aspects that needed to be taken into consideration regarding housing finance reform. Specifically, these hearings discussed:

As part of the agreement, 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,” will be the base text for the legislation being developed by Johnson and Crapo. The Corker-Warner bill would overhaul the mortgage-backed securities markets and reform the government-sponsored enterprises. Among other things, the legislation would require that private market participants hold 10 percent of the first loss of any mortgage-backed security that purchases a government reinsurance wrap and dissolves Fannie Mae and Freddie Mac (GSEs) within five years of enactment of the legislation. Another provision of the bill would create the Federal Mortgage Insurance Corporation (FMIC) as an independent federal agency to capitalize the housing finance system by separating credit risk from interest rate risk and bringing in private capital to take on both.

Johnson noted that “There is near unanimous agreement that our current housing finance system is not sustainable in the long-term and reform is necessary to help strengthen and stabilize the economy. This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country.” “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.

Following the announcement, fellow legislators and trade groups weighed in with their reaction.

Sen. Corker noted, “I have been working with Senator Warner and a bipartisan group of senators for months to advance legislation that ends the failed model of private gains and public losses in our housing finance system and moves our country to a modernized structure that protects the American taxpayer. I am pleased the Banking Committee is demonstrating their commitment to this effort by putting pen-to-paper and releasing a set of principles based on the bill we introduced, and I look forward to working closely with them in the coming months.”

Sen. Warner added, “I applaud Chairman Johnson and Ranking Member Crapo for all the work that went into this agreement. This shows that a bipartisan approach is the best way to get something this important and this complicated across the finish line. Responsible reform of the housing finance system will strengthen the economic recovery, protect taxpayers and preserve the availability of affordable mortgages for Virginia families. I look forward to continued work with my partner Sen. Bob Corker, our eight bipartisan cosponsors and other members of the Committee on this important legislation.”

Heidi Heitkamp (D-ND) said, “we’re taking another giant step forward” and looks “forward to continuing to move this bill through the legislative process in the near future.” She concluded, “This important effort shows that Congress can compromise and work together to make our nation stronger.”

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) stated “As someone who has worked for years on the complicated and contentious issue of housing finance reform, I salute Senator Johnson and Senator Crapo for working hard and producing a reform plan because the status quo is unacceptable. I look forward to seeing the details of the senators’ plan and welcome this long-awaited development. Still, I fear the window of opportunity to pass sustainable housing finance reform during this Congress is rapidly closing.”

In July 2013, the Financial Services Committee approved H.R. 2767, the Protecting American Taxpayers and Homeowners Act of 2013 or PATH Act. The House bill would, among other things, require the Federal Housing Finance Agency to repeal the charters of Fannie Mae and Freddie Mac (GSEs) and end the operations of those firms five years after enactment of the bill; create a statutory framework for regulating financial instruments known as covered bonds which are full-recourse debt obligations that are secured by a pool of performing assets; and establish a National Mortgage Market Utility which would operate a securitization platform that was created by the GSEs.

Rep. Scott Garrett (R-NJ), Chairman of the House Subcommittee on Capital Markets and Government-Sponsored Enterprises, also issued a statement on the Banking Committee’s agreement. He stated, “I’m glad to see that the Senate is acknowledging that our current housing finance system is not sustainable in the long-term and reform is necessary to help strengthen and stabilize the economy. But, to ensure that real reform is adopted, we must address the root cause of our 2008 financial crisis: the government’s misguided efforts at allocating mortgage credit through Fannie Mae and Freddie Mac.” He added, “While I believe the PATH Act is the best way forward, I am pleased that Senators Johnson and Crapo are working on this important issue. I look forward to working with them as we forge ahead on reform.” It should be noted that Garrett is the principal sponsor of the PATH Act.

The Independent Community Bankers of America® said it “appreciates the bipartisan efforts of [Johnson and Crapo] in reaching an agreement on core principles for reforming the housing-finance system and secondary mortgage market” and it “strongly supports continued community bank access to a financially strong, reliable and impartial secondary mortgage market to ensure the continued flow of mortgage credit to consumers nationwide. The ICBA was also “encouraged by provisions of the draft Johnson-Crapo plan that would specifically support continued access for community banks to successfully securitize and sell their loans.” The trade group concluded that “Any viable plan to reform the secondary mortgage market must be acceptable to the community banking sector to be successful.”

David H. Stevens, president and chief executive officer of the Mortgage Bankers Association (MBA), said the announced agreement “reinforces the immediate need to address GSE reform in a substantive, transparent way. Chairman Johnson and Ranking Member Crapo are to be commended for coming together in a bi-partisan 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, the “MBA looks forward to continuing to work with members of the Senate Banking Committee as well as other policymakers and stakeholders to create a system that allows for a vibrant and liquid residential and multifamily mortgage market.”

Tim Pawlenty, CEO of Financial Services Roundtable called the agreement a “positive step towards needed reform” and added the “time for reform is long overdue and we hope the broad, bipartisan support for the principles and agreement unveiled today helps propel action by the Senate.”

Finally, Frank Keating, president and CEO of the American Bankers Association, called the agreement a “positive next step in what is certain to be a long process toward creating a sustainable, rational and limited role for the federal government in supporting and regulating a mortgage market that is appropriately and predominately filled by the private sector.” He added, “There is much work yet to be done, but this is a strong foundation on which to begin the process.”

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

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