Today, Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) said they reached an agreement on housing finance reform.
The pair is putting “finishing touches” on a piece of legislature they plan to release in a matter of days, which they plan to markup (debate and amend) in coming weeks.
It’s based on the Corker-Warner Housing Finance Reform and Taxpayer Protection Act (S. 1217) released back on June 25, 2013.
Sponsors of that bill include five Republicans and five Democrats from the Senate Banking Committee, giving it some added strength as a bipartisan effort.
What Are the Goals of Housing Finance Reform?
They’ve got a lot of goals, but I’ll focus on the more noteworthy ones and do my best to avoid the technical stuff.
Their legislation will pretty much rely on S. 1217 for the base text and keep its overall architecture.
– Wind down and eliminate Fannie Mae and Freddie Mac
First and foremost, they want to do away with the “status quo” in which Fannie Mae and Freddie Mac rule the mortgage market, despite being in government conservatorship.
The pair was taken over by the U.S. Treasury in September 2008, but continue to purchase and guarantee mortgages that meet their underwriting guidelines.
Ironically, they gained an even larger market share of newly-originated mortgages after the government takeover, which makes it quite clear the move was only a Band-Aid solution at best.
The bill would wipe them off the face of the Earth within five years, a tall order to be sure.
– Create a new mortgage securitization platform
– As part of the Fannie/Freddie wind down, they’ll need a new securitization platform, known in the bill as the Federal Mortgage Insurance Corporation (FMIC), which is modeled in part after the FDIC.
It would function in a similar way to the current secondary mortgage market, though it would require 10% private capital to absorb losses and create a mortgage insurance fund to protect taxpayers from future bailouts.
A mutual cooperative would also be established to ensure institutions of all sizes (community banks and credit unions) would have direct access to the secondary market.
– Require 5% down payments on nearly all new mortgages
Here’s a biggie. The proposal would require five percent down payments on all mortgages that run through the FMIC, except for first-time home buyers, who could put down just 3.5%, the FHA’s current minimum.
The Qualified Mortgage rule pretty much already did away with 3% down mortgages, so this isn’t all that noteworthy.
– Keep existing high-cost conforming loan limits intact
Additionally, it would keep the current conforming loan limits intact, meaning the high-cost limits would be a permanent fixture.
– Preserve the 30-year fixed mortgage
The legislation would also keep the 30-year fixed-rate mortgage alive despite a lot of people wanting to see it go the way of the dodo.
The bill would preserve long-term fixed mortgages and keep them prepayable without penalty, and based on some earlier predictions, rates would only be 25 to 40 basis points higher.
– Eliminate affordable housing goals
Lastly, they want to do away with affordable housing goals, which some blame for the mortgage crisis to begin with.
Instead, they want to collect a 10-basis point FMIC user fee (which I’m sure won’t be passed on to consumers) for housing-related funds to ensure there is sufficient housing available.
For the record, shares of Fannie Mae and Freddie Mac plunged on the news today, falling about 30% each and even more after hours.
Good riddance. Bunch of crooks Fannie and Freddie are.
As long as mortgage rates don’t rise too much, I’m OK with it. I’m sick and tired of ALL American taxpayers being on the hook for some people who choose to buy homes and not make good on their commitments.
Why are they preserving the 30-year fixed? So Americans will never pay off their mortgages and be riddled with debt for their entire lifetime. Someone other than a politician needs to look at this bill.