Like FHA, Fannie Mae and Freddie Mac were also financially battered during the financial and housing crises. While FHA became the mortgage to rescue many distressed home owners, the Federal Housing Finance Agency (FHFA) was created in 2008 as conservator for the hemorrhaging Fannie and Freddie. Although the writing was on the wall about necessitating change in the conventional mortgage sector, there could only be speculation about what that change would entail.
Fast forward to June 2013, and the bipartisan bill S.1217 Housing Finance Reform and Taxpayer Protection Act of 2013 was introduced as the groundwork for replacing Fannie and Freddie with the (to be created) Federal Mortgage Insurance Corporation (FMIC). Moving along to last week, Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) released a draft for “A New Housing Financing System” (banking.senate.gov).
Building upon S.1217, the Bipartisan Housing Reform Draft’s intention is stated to “…protect taxpayers from bearing the cost of a housing downturn; promote stable, liquid, and efficient mortgage markets for single-family and multifamily housing; ensure that affordable, 30-year, fixed-rate mortgages continue to be available, and that affordability remains a key consideration; provide equal access for lenders of all sizes to the secondary market; and facilitate broad availability of mortgage credit for all eligible borrowers in all areas and for single-family and multifamily housing types.”
In addition to supervision and enforcement authority, the purpose of the FMIC is to maintain a re-insurance fund that will insure mortgage backed securities meeting FMIC guidelines. The re-insurance fund is to be modeled after the Deposit Insurance Fund (maintained by the FDIC), and to be funded by private companies. Additionally, the new system is meant to protect taxpayers by requiring future mortgage backed security guarantors to be private and hold a minimum of 10% private capital as a first loss position; bailouts of these private institutions are to be prohibited.
The FMIC will also institute underwriting guidelines that are to “mirror” the Qualified Mortgage (QM). The recent definition and rules for the QM announced by the Consumer Finance Protection Bureau (CFBP) were effective January 10th. The QM is characterized to be a safer loan compared to some loans originated prior to the crises because the lender must assess and the borrower must demonstrate the ability to repay the loan; the ability to repay is based on typical factors that include the borrower’s income, assets, and debts. Additionally, the borrower cannot exceed a total monthly debt-to-income ratio (all monthly obligations including mortgage payments) of 43%.
Conforming loan limits will be maintained, so as to provide the additional credit needed to purchase homes in “high-cost” areas. If you’re a first time home buyer, you will need a minimum down payment of 3.5%; however if you’re not a first time home buyer you will need at least a 5% down payment for your home purchase.
The transition period is expected to be at least 5 years, however possible extensions may be required to prevent market disruptions and cost spikes to borrowers. The plan is to simultaneously wind down Fannie and Freddie’s operations while increasing expansion of the new system. The FMIC will take over the functions and duties of FHFA; and as of the FMIC’s certification date, Fannie and Freddie won’t be able to conduct new business.
by Dan Krell
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