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From Banking and Finance Law Daily, June 16, 2014

Treasury official praises Senate housing finance proposal to reform unacceptable system

By Richard A. Roth, J.D.

Declaring that the current housing finance market system is not acceptable, Treasury Under Secretary for Domestic Finance Mary John Miller offered strong Obama administration support for a bill pending in the Senate that would restructure the housing finance market. The Housing Finance Reform and Taxpayer Protection Act (S. 1217), is a “significant substantive and political achievement” that would be a major step toward creating a housing finance system in line with administration goals, the Under Secretary told the National Housing Conference Annual Policy Symposium.

The housing market has not fully recovered from the financial crisis, Miller told the symposium, and many credit-worthy potential homebuyers do not have access to necessary credit. This has pushed up the demand for affordable rental housing at the same time that financing these projects has become more difficult, she added. Moreover, taxpayers remain in danger of be required to bail out Fannie Mae and Freddie Mac if there is another economic downturn.

Administration priorities. According to Miller, President Obama last year set out three priorities for a reformed housing finance system:

  • Private capital should be at the center of the system.

  • Shareholders and GSE executives should not benefit while taxpayers absorb losses.

  • The system should give buyers broad access to safe and responsible mortgage loans, including 30-year fixed rate loans.

S. 1217 would advance these goals, she said.

Bill provisions. The Housing Finance Reform and Taxpayer Protection Act, which Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-Idaho), based on an earlier proposal by Sen. Bob Corker (R-Tenn) and Sen. Mark Warner (D-Va), would eliminate Fannie Mae and Freddie Mac. Their mortgage-guarantee functions would be taken over by a new Federal Mortgage Insurance Corporation and a reinsurance fund known as the Mortgage Insurance Fund.

The bill would create a mortgage-backed security with an explicit government guarantee and 10-percent first-loss private secondary-market capital to absorb losses and protect taxpayers from future bailouts. It also includes provisions intended to open the secondary market to smaller lenders through the creation of a small lender mutual. (The bill was described more fully in Banking and Finance Law Daily, March 17, 2014.)

Outlook. S. 1217 was approved by the Banking Committee on May 15 with some bipartisan support. While the bill is not uniformly supported, a broad group of financial services-related entities have announced string support for bipartisan reform. On the other hand, some Democratic senators oppose significant parts of the bill they believe are insufficiently consumer-friendly, and this could threaten further progress.

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