Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) announced the broad outlines of their plan to eliminate Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) last week, and today they made the draft proposal available online. It still has a long way to go (it’s still in committee, to say nothing of wrangling in the full Senate or with the House), but this is still the first look at what could be the future of the US mortgage market.
“This bipartisan draft winds down and eliminates Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and establishes the modernized, streamlined and accountable Federal Mortgage Insurance Corporation (FMIC), modeled in part after the FDIC,” says the summary released by Johnson and Crapo. “New entities will be regulated by FMIC in the same manner banks are regulated by the FDIC. It also creates a reinsurance fund, known as the Mortgage Insurance Fund, to protect taxpayers.”
FMIC would manage remainder of Freddie Mae, Fannie Mae conservatorship
The new FMIC would be created six months after the law is passed, and the Federal Housing Finance Agency (FHFA) would become a wing of the FMIC, so that the new organization could coordinate the unwinding of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) with the launch of the new system. The FHFA director would be acting director of FMIC until the President appoints a new director subject to Senate approval.
Under the new system, mortgage aggregators would be able to securitize those mortgages into financial products with an explicit Federal guarantee. But the aggregator would be required to maintain 10% in private capital in order to qualify, and the government would only step in after the guarantors had failed, and the bill prohibits the government from bailing out institutions that are involved in the FMIC market.
To further shield taxpayers from the secondary mortgage market, the FMIC would collect fees (10 basis points) from all participating institutions and maintain a re-insurance fund called modeled after the FDIC’s policies.
Senate proposal abandons affordable housing goals
The bill proposal explicitly states that it wants to guarantee that American homeowners have access to fixed-rate 30 year loans, something that wouldn’t be widely available without some form of government involvement, and it does mention some affordable housing initiatives, but that clearly isn’t the main focus.
“The bipartisan draft will eliminate the affordable housing goals of Fannie Mae and Freddie Mac,” says the proposal summary.
The proposal also gives local and regional banks (defined as less than $500 billion in assets) access to the FMIC market through a small lender mutual governed by a board elected by the small banks themselves. The small bank mutual will also get one of nine seats on the securitization platform board of directors so that they have a say in the direction of the FMIC market (one seat will go to an independent candidate, and the other seven will presumably go to representatives of major banks).