In line with our expectations featured in GSE Reform: Never Say Never (2/21/2014) and following the announcement of an agreement last week, the full draft of the Johnson-Crapo GSE reform legislation (S.1217) was released earlier today. All in all, there were few major surprises from the full text of the bill, with few significant changes from the language outlined in Corker-Warner. However, the key issue to watch in coming weeks is whether the Johnson-Crapo bill will be able to generate enough Democratic support from the committee to continue momentum for a Senate vote within the next few months – on this note, significant hurdles remain.

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Key provisions of the proposed Johnson-Crapo bill

 

  • 10% private capital, first-loss layer: In line with Corker Warner, the Johnson-Crapo bill requires 10% first-loss to be held by private market participants, with the proposed Federal Mortgage Insurance Corp (FMIC) to act largely as a reinsurer to mortgage-backed securities. Our Securitized Products Team discusses this in greater depth in The future of US housing finance (2/13/14).
  • Five-year phase-in (but flexible): The system certification date is to be within 5 years of bill enactment, with extensions by the FMIC possible. The date is defined at which point the FMIC must fulfill certain minimum criteria and the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Key provisions of the proposed Johnson-Crapo bill are no longer able to engage in new business. We view this as less concerning than a hard five-year phase-in that industry stakeholders had previously feared.
  • Legacy Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Key provisions of the proposed Johnson-Crapo bill securities to gain full faith and credit: Importantly, legacy GSE securities gain full faith and credit under the bill, which should aid in the transition period between the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)s and the FMIC.
  • Focus on maintaining the TBA market: The bill authorizes the FMIC to approve risk-sharing mechanisms that require a first-loss piece to be held by private market participants; the FMIC must also keep in mind whether the risk-sharing mechanism will impair the liquidity or operation of the TBA market.
  • First-loss investors to be immune from reps and warranties: Investors in the first-loss piece position (10%) will be protected from civil liability regarding representations and warranties by originators on these loans.

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Getting additional Democratic support remains the biggest hurdle

In order to gain sufficient momentum to receive a full Senate vote in 2014, the bill will likely need the support of 15+ of the 22 members from the Senate Banking Committee, no strong opposition from Republican members of the committee, as well as support from the Administration, industry and consumer groups. 12 votes are already likely given the 10 co-sponsors of the Corker-Warner bill, with the addition of Senators Johnson and Crapo.

 

However, there seems to be emerging push-back from high-profile Senators on the left, with Senators Warren (D-MA) and Brown (D-OH) indicating concerns that the bill lacks sufficient provisions for affordable housing goals. Overall, we continue to believe that gaining sufficient Democratic support remains the key hurdle for this bill to gain passage out of the Committee within the coming weeks.

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Likely Supporters for Johnson-Crapo: Co-Sponsors of Corker Warner Bill

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