06/27/2013 | by
Nareit Staff

GSE Reform Update

June 27, 2013


GSE Reform Update

A number of influential Members of Congress and Washington think tank policy experts have recently advanced housing finance reform proposals that have garnered significant attention. Because we believe that these proposals reflect the current thinking of some who will ultimately influence the future of U.S. housing finance, we briefly summarize these below and provide links to them.

One feature of the current debate is greater attention to government support for rental housing as a public policy goal, a development that apparently tracks national trends. A recent national survey commissioned by the MacArthur Foundation found that more than sixty percent of self-identified Democrats (69 percent), Independents (65 percent) and Republicans (62 percent) believe that the focus of U.S. housing policy should be devoted equally to rental housing and homeownership.

While we do not anticipate decisive legislative action near term, NAREIT will continue to monitor these and other emerging developments and update you accordingly. If you do not wish to receive future similar updates, please email Dominique Wilburn at dwilburn@nareit.com. __________________________________________________________________________________

Bipartisan Senate GSE Reform Legislation

On June 25, 2013, a bipartisan group of Senators, led by Senators Bob Corker (R-TN) and Mark Warner (D-VA), and including Senators Mike Johanns (R-NE), Jon Tester (D-MT), Dean Heller (R-NV), Heidi Heitkamp (D-ND), Jerry Moran (R-KS), and Kay Hagan (D-NC), introduced S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013 (the Housing Reform Act) and provided a section-by-section summary. Their proposal calls for replacing Fannie Mae and Freddie Mac within five years with a new FDIC-like governmental entity, the Federal Mortgage Insurance Corp (FMIC). The FMIC, would not have the ability to purchase or hold mortgages, but would: 1) support and oversee private sector securitization activities by developing standard form credit risk-sharing mechanisms, products, structures, contracts and standards for the approval of private issuers of MBS; 2) provide market liquidity by insuring the portion of covered securities for which private market participants have not taken a first loss position; 3) charge and collect fees, including guarantee fees (g-fees) to be charged to private sector participants; and 4) serve as a catastrophic reinsurer.

The single-family conforming loan limits would be reduced by roughly $42,000 a year over six years to $417,000, down from $625,000. Guarantees on existing single-family mortgage-backed securities would be assumed by the Treasury, while multi-family guarantees would be transferred to the FMIC.

The FMIC would operate: 1) a Mortgage Insurance Fund to collect g-fees and other payments, to be maintained at a level no less than 2.5 percent of outstanding insured FMIC balances; and, 2) a Market Access Fund, funded by "5-10 basis points of every loan securitized" and dedicated to affordable rental housing in low-income and underserved areas.

Senate Banking Committee Chair Tim Johnson (D-SD) responded to the introduction of this bill stating that "[r]eforming the nation's housing finance system is critical to the long-term health and stability of the American economy, and Ranking Member Crapo and I plan to turn the Committee's attention to broader housing finance reform after we address the more timely issue of FHA solvency. Ranking Member Crapo and I agree that any reform effort that moves through the Banking Committee must be bipartisan and include ideas and input from all members of the Committee."

Proposal from the Urban Institute, Moody's and Milken Institute Experts

On June 19, 2013, Milken Institute, Moody's and the Urban Institute jointly released a new proposal titled, A Pragmatic Plan for Housing Finance Reform. The report, authored by four well-known public policy experts associated with both political parties, sets forth a structure similar to the one proposed in the Housing Finance Reform Act, but also includes a detailed proposal to fund efforts to expand affordable housing. In addition to recommending the abolishment of Fannie Mae and Freddie Mac, and the creation of new federal government overseer, also called the FMIC, financed by g-fees, the report recommends creating a governmental Market Access Fund (MAF), to be financed by a 6 basis point assessment on all MBS. The MAF would have the following constituent funds: 1) a Research and Development Fund to support R&D and pilot testing of innovations to expand homeownership and unsubsidized affordable rental housing; 2) a Credit Support Fund to provide limited credit enhancement and other credit support for promising, scale-able products emerging from R&D efforts; 3) a Capital Magnet Fund, to enable Community Development Financial Institutions (CDFIs) and nonprofit housing developers attract private capital for affordable housing and community development; and, 4) a National Housing Trust Fund, to provide funding for an existing block grant program aimed at stabilizing the existing stock of low-income rental housing, which was previously authorized by Congress, but never funded.

Two Groups Propose Mortgage Securitization Fee to Fund Affordable Housing

A progressive Washington think tank, the Center for American Progress (CAP), and La Raza, a Washington based Hispanic Advocacy Organization, issued a report on June 5, 2013, titled Making the Mortgage Market Work for American Families. The report recommends assessing a fee on future securitized home loans to fund new housing projects for lower-income Americans, to replace affordable housing funding activities previously undertaken by the GSEs. The proposal envisions that fees would accumulate in a federal Market Access Fund (MAF) administered by the SEC, and be devoted to funding new types of home loans and rental housing through grants to community groups and nonprofits.

As Many as 18 GSE Reform Proposals Now Circulating in Washington

In February, 2013, the Bipartisan Policy Center's (BPC) housing commission, chaired by Former Senators Christopher S. "Kit" Bond (R-Mo), Mel Martinez (R-Fla) and George Mitchell (D-ME) and former Clinton HUD Secretary Henry Cisneros, issued a report following more than a year of research and fact-finding titled Housing America's Future. The Commission proposes replacing Fannie and Freddie with a government owned Public Guarantor, to provide only limited catastrophic guarantees for both single and multi-family finance, triggering only when private sector "first guarantors" failed. The report envisions that a robust market in private sector issuers, insurers, and credit enhancers would emerge and provides that the new Public Guarantor would have standard setting and oversight authority over this market, also establishing g-fees. The Public Guarantor would also have the ability to underwrite multifamily loans directly.

Additional proposals have been released by a range of groups in the last several months, including the Center for American Progress, which also recently released a chart cataloguing eighteen pending GSE reform proposals, including its own, the National Multi Housing Council, and the American Enterprise Institute, among others. A plan advanced by former Treasury restructuring officer James E. Millstein, widely covered in the press and reportedly favored by certain hedge fund managers, recommends that Fannie and Freddie be restructured, recapitalized and spun off to private investors, a plan that its author believes would be a fiscal "win" for Treasury, enabling it to recover fully its investments in Fannie and Freddie.


We will continue to analyze these and other emerging developments. If you have any questions, please contact Penny Rostow, at (202) 739-9431 or vrostow@nareit.com or Kirk Freeman at (202)739-9415 or kfreeman@nareit.com.