The Partnership to Strengthen Homeownership Act (H.R.5055), introduced last week by representatives John K. Delaney (MD-6), John Carney (DE – at large), and Jim Himes (CT-4), is yet another effort to advance the seemingly intractable agenda to reform the country’s housing finance system.
Previous proposals such as Johnson-Crapo, the PATH Act, the House’s HOME Forward Act, and the Senate’s Corker-Warner bill are already before lawmakers.
However, Richard X. Bove, VP Equity Research Financial Sector at Rafferty Capital Markets, is appreciative of the thrust of the latest bill. “The Bill introduced by Delaney et al. seems to have some attractive features that the others do not,” he says in his note of July 11, 2014 titled “New Housing Finance Bill Offers GSE Investors Some Hope.”
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Fannie Mae, Freddie Mac reform legislation: Key objectives
“The driving force behind my work on this bill is to keep home-buying affordable by preserving the thirty-year fixed rate mortgage, while protecting taxpayer dollars in the event of another housing downturn,” says Congressman Carney. “We aren’t the first group to try to find a solution to reforming our housing finance system. But we think our proposal has promise because it strikes the necessary balance between public and private sector involvement in the housing market. If we don’t fix the current system, taxpayers continue to be the backstop in case of another crisis, and the thirty-year fixed rate mortgage is in danger.”
Features of Fannie Mae, Freddie Mac reform the bill
The bill envisages that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) would be dissolved in about five years though their assets would be sold to the private sector and they could thereafter participate on their own in the country’s housing finance market. Their existing charters would be revoked and they would enjoy none of their current unique powers. The companies could also continue to function as aggregators of mortgage loans originated by smaller lenders that lack the volume to pool and securitise these loans.
On the other hand, Ginnie Mae would become the conduit through which the government, as well as private sector capital, would participate in an insurance program that would safeguard housing risks without the need for taxpayers to bear the brunt in case of an industry downturn.
Ginnie Mae’s program would split the risk on mortgage insurance with a minimum of 5% of the first loss capital to be shouldered by the private sector, and the balance of 95% shared on a pari passu basis between the government and a private reinsurer to be appointed by competitive bidding.
The proposed mortgage-backed securities will benefit from the efficiencies of mortgage pricing determined by the private sector as well as “carry the full faith and credit of the United States government.”
FHFA regulation, as well as a new issuing platform that will allow for standardised securities will become the responsibility of Ginnie Mae. That agency will also be authorised to subject market participants to adequate capital standards as well as conduct compliance stress tests.
Ginnie Mae would be entitled to charge an insurance fee that “will range 10 basis points of the total principal balance of these mortgages.” The fees collected would be made available to various affordable housing programs facilitated by the federal government.
Fannie Mae, Freddie Mac reform implications
The proposal separates buying and insuring housing debt, says Bove. “Fannie Mae and Freddie Mac would remain as viable companies with new charters and new goals and their shareholders would not be wiped out as all other legislation demands,” he observes.
Private public partnership is all very well, according to Bove, but he does takes a swipe at the government’s attitude so far towards the private sector: “The success of the legislation, if passed, would be based on the private sector increasing its commitment to mortgage funding in face of a government that has only fined, sued, and broken contracts in the private sector in the mortgage industry.”
Yet, overall, Bove is positively disposed towards the proposals saying the ideas presented have a great deal more traction then predecessor proposals. “This one should be watched. There is much that is good in this bill.”
Will it see the light of day?
Unfortunately, the bill, like its predecessors, is unlikely to pass according to Bove considering political timetables, particularly the ensuing fall pre-election campaigns. The bill will likely have to be reintroduced when Congress meets next year, with legislative discussions only commencing April.
More hurdles for Fannie Mae, Freddie Mac reform
Other analysts think Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform discussions could linger well into 2017. Possible roadblocks are a seeming lack of political will, the fallout from Obamacare, lack of consensus on these reforms from housing and banking trade groups as well as the resistance from consumer and free-market organisations.
“We do not think the 2014 mid-term elections will lead to legislation that unites different groups behind a bill, which throws the issue past the 2016 election,” say analysts at Keefe, Bruyette and Woods.