In what’s become a familiar drama to most Americans, the two houses of Congress are lining up on opposite sides of an issue with a broad, deep gorge between them. This time the fight will be over reform of the secondary mortgage market.
The two large GSEs (Government Sponsored Enterprises) Fannie Mae and Freddie Mac have been in receivership for five years after nearly collapsing in the mortgage meltdown of 2008-2009.
While the Dodd-Frank Wall Street Reform and Consumer Protection Act rolled out a long line of regulations impacting the banking industry, it did nothing to reform the two GSEs that played a large part in the collapse.
Now, Congress is turning its attention to reform of the secondary market. In the Senate, Mark Warner, D-Va., and Bob Corker, R-Tenn., have introduced a bill that would create a “Federal Mortgage Insurance Corporation,” based on the Federal Deposit Insurance Corporation, which would collect insurance premiums and provide a backstop only after a certain amount of private capital is exhausted. The measure would wind down Fannie Mae and Freddie Mac within five years, and transfer all resources of the Federal Housing Finance Agency to the new FMIC as soon as it’s established. And, it would levy a small fee on every loan securitized by the FMIC for a Mortgage Access Fund to support affordable housing programs.
In the House, Rep. Jeb Hensarling, R-Texas, has offered the PATH (Protecting American Taxpayers and Homeowners) Act, which moves more aggressively toward privatization of the mortgage market.
Similar to the Warner-Corker bill, the PATH Act would also wind down Fannie and Freddie within five years; centralize all housing finance operations within a Federal Housing Administration, independent of the Department of Housing and Urban Development; and, establish limits for federally-insured mortgages.
It also would prohibit borrowers from getting another mortgage for seven years after they go into foreclosure; set up a National Mortgage Market Utility as a nonprofit platform that develops standards for servicing, pooling and securing residential mortgages, as well as serves as a repository for mortgage data; delay some effective dates of Dodd-Frank mortgage rules for another year to allow community financial institutions time to comply; and repeal the provision of Dodd-Frank that requires securers to maintain an interest in the credit risk of asset-backed securities.
With the House and Senate not agreeing on much, it’s anyone’s guess as to when a bill could be passed. David Schroeder, vice president of federal government relations for the Community Bankers Association of Illinois, said he’s heard estimates that range anywhere from later this year to five years down the road.
“Fannie and Freddie will go away because politically they have to,” Schroeder said. “There’s just no support on either side of the aisle for continuing both of those two entities either separately or for merging them together. So, something will replace Fannie and Freddie assuming there continues to be a place for government in housing finance and we hope there is. It will be called something different; it will have some of the same features that Fannie and Freddie have right now; but Fannie and Freddie will go away.”
There are significant differences between the Warner-Corker bill and Hensarling’s PATH Act, Schroeder said. “But in both cases they talk about winding down Fannie and Freddie. There’s not the political will to keep them in their current form, so they are going to go away. It’s just what’s going to replace them is the big question.”
What will replace Fannie Mae and Freddie Mac is a concern that is shared by the Independent Community Bankers Association. It issued a “white paper” on Sept. 30 that laid out concerns and presented features it deems key to a successful replacement. The banker associations share a fear that the PATH Act would throw the secondary mortgage market into the laps of the big banks and make it more difficult for community banks to place mortgages.
“Our primary concern with Hensarling’s bill is that we think it would force a consolidation of the market and the remaining players would be the large banks like Wells Fargo, Chase, Citi and the like,” Schroeder said. “In effect, we would be replacing one giant with several other giants and it would not be good for Illinois’ community banks. One of our requirements in terms of the reform of the GSEs is for community banks to have equal access with the large players into the secondary market for residential mortgages.”
Ron Haynie, senior vice president of mortgage finance policy at the Independent Community Bankers Association, said Congress should focus on fixing what’s broke.
“We certainly think that policymakers need to look at existing structure,” Haynie said. “What were the downfalls? How do we fix that? Let’s make sure that we correct those issues and address them going forward and not disrupt a really liquid and deep market. The mortgage-backed securities are traded globally so we’ve got to be really careful about that, about disturbing that market and creating something that’s not liquid, because that translates to higher rates, which translates into a portability issue.”
Haynie acknowledges the need for reform and laid out some of the features the Independent Community Bankers are working to get incorporated into the final bill.
“There are problems with Fannie and Freddie,” he said. “We don’t agree with everything they do. They certainly got off mission. But in the paper we stress the need for certain key components. We think there should be a really strong, effective regulator of the GSE and that is something that we were very much missing prior to the crash. Also, if the government is to still be involved, what are the limits of the government involvement? What does that guarantee look like? It needs to be priced into the market and it needs to be transparent. And, you can’t have a pricing structure that inherently favors the large and strong players.”