So, after hearing so much about Sen Corker’s plan for the GSE’s I decided to read the fine print to see if it indeed was what is was being billed as. Wanna guess the answer?
Here is how the Bill is being framed the bullet points of the Bill:
The Corker-Warner Housing Finance Reform and Taxpayer Protection Act (S. 1217), introduced on June 25, 2013, would strengthen America’s housing finance system by replacing government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac with a privately capitalized system that preserves market liquidity and protects taxpayers from future economic downturns.
- Mandates 10 percent capital, up front, for the system to protect taxpayers against future bailouts.
- Winds down Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and the Federal Housing Finance Agency (FHFA) within five years of bill passage.
- Transfers appropriate utility duties and functions to the modernized, streamlined and accountable Federal Mortgage Insurance Corporation (FMIC), modeled in part after the FDIC.
- Replaces the failed “housing goals” of the past with a transparent and accountable market access fund that focuses on ensuring there is sufficient decent housing available. The fund is NOT paid for with tax dollars, but through a small FMIC user fee that only those who choose to use the system pay.
- Ensures institutions of all sizes have direct access to the secondary market so local banks and credit unions aren’t gobbled up by the mega banks when Fannie and Freddie are dissolved.
Sponsors of the bill include U.S. Senators Bob Corker, R-Tenn., Mark Warner, D-Va., Mike Johanns, R-Neb., Jon Tester, D-Mont., Dean Heller, R-Nev., Heidi Heitkamp, D-N.D., Jerry Moran, R-Kan., Kay Hagan, D-N.C., Mark Kirk, R-Ill., Joe Manchin, D-W.V., and Saxby Chambliss, R-Ga.
Now, I’ll grant this is a noble goal. More private capital is always better than a 100% gov’t backed market. But, is anyone going to really tell me what private entity is going to loan to a potential homeowner for 30yrs at 4%? Apple Inc. (NASDAQ:AAPL) maybe, a homeowner in Detroit? Um, not a chance. Are we really going to expect private insurers to step in and insure every home loan in America? So until someone can convince me that the Detroit homeowner gets a 30yr loan from a private company and the whole thing is insured by a private enterprise, this bill in a non starter.
Yes, I know banks do it now but they only do it because they have the backing of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA). Yes I know private insurers are in the market but they are only insuring the parts of loans the GSE’s won’t take. For instance a homeowners buys a $600k house and is putting 10% down and the loan will be $540k. The loan is structured in two parts, a $417k first (the GSE conforming limit) and then a second for $123. The $417 loan is sold to the GSE’s and private insurance will pick up the tab on the $123k (if the lenders require it). To be sure private insurance is wading into the market currently on a larger scale, but American International Group Inc (NYSE:AIG) is insuring loans at a credit rating >760 currently and that is a fraction of what is needed for the current housing market.
But, let’s play the game. Lets assume he does get the loan and in fact all his neighbors do and private insurers cover every penny of the loans and we again have a housing crisis like we seem to do every 10-20 yrs or so and the GSE’s are gone and the housing market is 100% private capital. The aim of this bill was to rid the taxpayer from exposure to another housing downturn. Does it? Read the bold below
SEC. 205. AUTHORITY TO PROTECT TAXPAYERS IN UNUSUAL AND EXIGENT MARKET CONDITIONS.
(a) In General- If the Corporation, upon the written agreement of the Chairman of the Board of Governors of the Federal Reserve System and the Secretary of the Treasury, and in consultation with the Secretary of Housing and Urban Development, determines that unusual and exigent circumstances have created or threatened to create an anomalous lack of mortgage credit availability within the housing markets that could materially and severely disrupt the functioning of the housing finance system of the United States, the Corporation may, for a period not to exceed 6 months, provide insurance in accord with section 204 to any covered security regardless of whether such security has satisfied the requirements of section 202(a).
(b) Considerations- In exercising the authority granted under subsection (a), the Corporation shall consider the severity of the conditions present in the housing markets and the risks presented to the Mortgage Insurance Fund in exercising such authority.
(c) Limitation- The authority granted to the Corporation under subsection (a) may not be exercised more than once in any given 3-year period.
Nope, when the shit hits the fan again, and be assured at some point down the road it will, the new entity will wade into the mortgage market and dole out aid to at that point probably dozens of private insurers who are going under for various reasons. If these entities cannot be saved, the ONLY scenario to stabilize markets will be to simply absorb/insure their loan portfolios. In other words, we are back to where we are now only the process will be a whole lot messier than what we just went through. Note the last part: “ provide insurance in accord with section 204 to any covered security regardless of whether such security has satisfied the requirements of section 202(a)”. In other words, they will be insuring everything out there no matter what a steaming pile of waste it is (and when housing falls again, what they are insuring will be junk). Think of like this entity insuring Countrywide loans 5x over. So, if there are hundreds of billions or trillion of crap that needs to be insured, this entity is sure to take large losses on that portfolio which mean they’ll need capital from somewhere……..which means we are back to today.
Further, what happens to private capital in times of crisis? It freezes. Lending and insuring loans by private entities in the midst of a housing downturn will not happen. As banks and private insurers deal with mounting losses, Dodd-Frank will require them to maintain adequate capital ratios. How do they do that? They do NOT do it by making additional loans and insurers do not do it by insuring increasingly risky assets, if anything they will be looking to sell risk, not take more on. So again, we are back to where we are now.
Let’s go further. The main goal here is to establish a “fully private secondary mortgage market” in which a bank makes a loan and sells it to a private investors who then securitizes it to other private investors (which is what the GSE’s do now).
If that is true, can anyone explain why the below is needed?
SEC. 215. AUTHORITY TO ESTABLISH FMIC MUTUAL SECURITIZATION COMPANY.