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GSE bill would expand competition and Ginnie Mae

A housing-finance reform bill now pending in the Senate Committee on Banking, Housing, & Urban Affairs proposes to create a system where multiple entities are allowed to compete against each other to purchase and securitize mortgages, according to a draft of the bill leaked to the media this week.  

GSEreformThe bill's authors, Sen. Bob Corker, R-Tennessee, and Sen. Mark Warner, D-Virginia, envision a new system with several movable parts. Regulated entities resembling smaller-scale versions of Fannie Mae and Freddie Mac would purchase loans and securitize the loans through a shared platform.  

These companies would be required to hold hefty, but as yet unspecified, capital buffers that could absorb losses from loan defaults in a downturn akin to the Great Recession. They would also be expected to structure deals with other private companies and insurers that would spread around the risk widely in the markets.

The new system also would expand the role of Ginnie Mae, which currently insures the bonds underpinned by Federal Housing Administration (FHA) and other government-guaranteed loans.The legislation calls for Ginnie to also insure mortgage-backed securities underpinned by conventional loans through a newly created national insurance fund. 

The new secondary-market players would continue to be tightly regulated by the Federal Housing Finance Agency. The federal government also would provide an explicit government guarantee on the bonds issued by the entities in the event of a catastrophic downturn, but not on the entities themselves. This would guarantee that bond investors would get paid, thereby ensuring that long-term fixed mortgages could be financed at reasonable rates. The entities, at least in theory, would be allowed to fail and go out of business.

The proposed system also envisions multiple, smaller-scale enterprises, around five to seven guarantors. The new system could not launch until the new players were in place. Notably, however, the companies wouldn’t be converted into utilities with regulated rates of return.

The 80-page draft bill has not been released by the committee and is still evolving. Many of the sections contain brackets where information has been left blank or penciled in as subject to change. On Tuesday, Bloomberg News reported the main substance of the bill.  

During an appearance before the Senate banking committee on Tuesday, Treasury Secretary Steven Mnuchin reaffirmed the Trump administration’s preference for Congress to enact legislation to end the status quo.

At that hearing, Corker noted that the Jumpstart GSE Reform Act, which prevented the Treasury from selling its preferred shares in the government-sponsored enterprises (GSEs) Fannie and Freddie without approval from Congress, expired at the end of last year, thus giving the administration more options to change the system on its own.

 “I think we have got an opportunity, though, to really deal with all of the interests in a manner that is fair, but also moves our nation ahead in a manner where we don’t have these two behemoths that are basically 100 percent right now backed by the federal government,” Corker said. 

The bill faces an uphill battle, however. To succeed, it will need some support from Democrats. The small-lender trade associations, the Community Home Lenders Association (CHLA) and the Community Mortgage Lenders of America, oppose adding new players, fearing that it will give the nation’s biggest banks an opportunity to take control of the secondary market. The draft bill does propose guarantees designed to ensure that small lenders would have equal access to sell their loans, however.

"CHLA needs more time to review and analyze what is a complex issue and a complex bill,” CHLA Executive Director Scott Olson said Thursday. “Our preliminary analysis is that while CHLA continues to question the need to proliferate more guarantors and is concerned about disruptions inherent in such major market changes, we commend the strong 'equal access' provisions to protect smaller lenders."

Consumer and civil rights groups that hold sway with Democrats say the bill as drafted doesn’t go far enough to preserve affordable housing mandates. The bill proposes to create a multi-billion fund to pay for affordable housing initiatives. Civil rights groups say the bill strips out the mandatory requirements to serve minorities and underserved populations, however.  

"Our concern is there is no enforcement mechanism, no mandate for these guarantors to really serve the communities that will be traditionally priced out," said Scott Astrada, director of federal advocacy for the Center for Responsible Lending.  

“Without the national duty to serve and affordable housing goals, it is kind of a nonstarter for us," Astrada told Scotsman Guide News. "I won’t speak for any of the other coalition members, but I know that this is the same reasons why the initial Johnson-Crapo legislation was opposed by civil rights groups." 

Investors Unite, a group representing Fannie and Freddie shareholders, said the bill "leaves plenty for stakeholders across the spectrum to question and dislike." 


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