This bipartisan effort is the latest in a succession of moves to repair and improve the nation’s housing finance markets, which began with the Housing and Economic Recovery Act of 2008 (HERA). HERA was comprehensive legislation that was intended to address issues that caused or resulted from the financial crisis. Besides focusing on modernizing FHA, HERA also set its sights on Fannie and Freddie by creating the Federal Housing Finance Agency (FHFA) to oversee the Government Sponsored Entities (GSE) and possibly reducing Fannie and Freddie’s role in the housing industry.
Although FHFA acted as “conservator” for Fannie and Freddie because of capitalization problems, poor financial performance and deteriorating market conditions; the role was intended to be temporary. The oversight agency provided guidance in increasing liquidity so Fannie and Freddie would become streamlined and profitable. Since FHFA took control, experts have speculated on the fates of the mortgage giants; some articulated an eventual shut down of Fannie and Freddie, while others described a modified role in housing finance.
For those not plugged into the industry, the replacement of the GSEs might be a surprise. However, Housingwire reported in April (FHFA gears up for single GSE securitization platform) of FHFA’s initial plan to reduce Fannie and Freddie’s mortgage backed securities holdings. The idea was to create a new single entity to facilitate the reduction of the GSEs secondary market involvement so as to increase private capital participation.
A June 25th press release quoted Senator Bob Corker (R-TN) (corker.senate.gov) as saying, “Five years after the financial crisis, it is past time for us to modernize our unstable system of housing finance”… “The framework we’re presenting here will protect taxpayers while maintaining market liquidity, and is the best opportunity we’ll have to finally move beyond the failed GSE model of private gains and public losses.”
Because there has not been much reform to housing finance since the financial crisis, the proposed legislation was crafted in response to the consequences of a $188 million Fannie and Freddie bailout. The bailout resulted in a mortgage market where “nearly every loan made in America today comes with a full government guarantee,” and that private capital has all but disappeared from the mortgage secondary markets.
Co-sponsor Senator Mark Warner (D-VA) was quoted to say, ““Housing finance is the last piece of unfinished business remaining after the 2008 economic meltdown” …“We have designed thoughtful reforms that will protect taxpayers from future downturns while responsibly preserving the availability of the 30-year fixed-rate mortgage for homebuyers. We believe the housing market is ready for reforms like this, and that the private sector has been waiting for new rules of the road.”
Besides having the intention of protecting taxpayers from future bailouts, the Housing Finance Reform and Taxpayer Protection Act (S. 1217) is intended (among other purposes) to “wind down” within five years the FHFA, Fannie Mae, and Freddie Mac; “ensure that lending institutions of all sizes have access to the secondary markets;” and “transfer duties and functions” to a new entity – the Federal Mortgage Insurance Corporation (FMIC).
By Dan Krell
Copyright © 2013
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