The U.S. Treasury placed Fannie Mae and Freddie Mac into conservatorship in September 2008 as a result of the subprime mortgage crisis. Five years later, the first indications of potential reform are emerging from Capitol Hill. Senators Bob Corker (R-TN) and Mark Warner (D-VA) are currently working on a draft bill entitled, the "Secondary Mortgage Market Reform and Taxpayer Protection Act of 2013," copies of which began circulating on June 6, 2013. The bill contemplates winding down Fannie Mae and Freddie Mac and replacing them with a new government agency called the Federal Mortgage Insurance Company (the "FMIC").
The following are some of the key provisions of the draft bill:
Creation of FMIC: The FMIC would be modeled after the Federal Deposit Insurance Corporation and provide catastrophic reinsurance in the secondary market for mortgage-backed securities. The FMIC would be governed by a five-member board, which would replace and assume the responsibilities of the Federal Housing Finance Agency.
Insurance Fund: The FMIC would operate a mortgage insurance fund paid through premiums, guarantee fees and investments. Under the bill, the fund would be required to maintain at least 2.5 percent of outstanding principal balances of covered securities.
Standards for Private Mortgage Servicers and Issuers: The FMIC would develop standards for approval of private mortgage servicers and issuers. The private market would be in a first loss position for an amount not less than 10% of the principal or face value of the covered security. Pools of mortgages would be geographically diverse and include borrowers with varied credit characteristics.
Community Banks and Credit Unions: Community banks and credit unions would have equal access to mortgage securitization platforms. If the agency deems it necessary, the FMIC could create a mutual securitization company to meet the securitization needs of smaller institutions.
Affordable Housing: The bill would also create the Market Access Fund, operated within the Department of Housing and Urban Development. The Market Access Fund, paid by a Market Access Fee collected with each guarantee, would promote rental housing and assist low-income and underserved geographic areas.
Wind Down of Fannie Mae and Freddie Mac: The bill would wind down the existing portfolios of Fannie Mae and Freddie Mac by at least 15% annually until they are completely liquidated.
Reduction in Loan Limits: Over a six-year period, the loan limit for single-family conforming loans would decrease from $625,000 to $417,000. Guarantees on existing single-family mortgage-backed securities would be assumed by the Treasury. Multi-family guarantees would be transferred to the FMIC.
The Secondary Mortgage Market Reform bill is still in draft form. While Senator Corker declined to provide additional details, he said he is working with other lawmakers on the Senate Banking Committee prior to formally introducing the bill. For a full version of the draft bill, please click here.
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