Himes, Delaney and Carney File Housing Finance Reform Legislation to Protect 30-Year Mortgage and Taxpayers
WASHINGTON – Representatives Jim Himes (CT-4), John K. Delaney (MD-6) and John Carney (DE-At Large) have introduced legislation designed to protect the fixed-rate 30-year mortgage – a key instrument to ensure home affordability for the middle class – and shield American taxpayers from future bailouts by reforming the housing finance system. The Partnership to Strengthen Homeownership Act combines the private sector’s superior ability to price risk with the federal government’s unique ability to provide capacity.
Original cosponsors of The Partnership to Strengthen Homeownership Act are: Rep. Denny Heck (WA-10), Rep. Gregory Meeks (NY-5), Rep. Patrick Murphy (FL-18), Rep. Jared Polis (CO-2), Rep. Mike Quigley (IL-5), Congressman David Scott (GA-13), Rep. Kyrsten Sinema (AZ-9), and Rep. Peter Welch (VT – At Large).
“This bill ensures that new homeowners will continue to have access to the affordable, predictable financing options they need, while safeguarding taxpayers and our economy from future downturns,” said Congressman Himes. “Our legislation brings together the market’s efficiency in pricing risk with government's unique ability to provide scale to create a safer, more liquid housing market that preserves access to affordable housing for American families.”
“Without access to quality affordable housing, there’s no American Dream for millions of middle class families,” said Congressman Delaney. “I’m proud to work with Congressman Himes and Congressman Carney on legislation that keeps the fixed-rate thirty-year mortgage alive and preserves a government guarantee while introducing greater fiscal responsibility and stability to the housing finance system. The financial crisis and the bailout of Fannie Mae and Freddie Mac made it clear that we need reform to protect taxpayers. The Partnership to Strengthen Homeownership takes the best ideas from both parties to create a 21st century housing finance system that combines the strengths of the private sector and the public sector. Housing finance reform is too important for us to ignore and I look forward to working with my colleagues in both parties in moving this legislation forward.”
“This proposal seeks to preserve housing affordability while protecting taxpayers from another bailout," said Congressman Carney. “It finds the middle ground between public sector and private sector involvement in the housing sector. If we to want to preserve the dream of home ownership and make sure taxpayers aren’t on the hook for another bailout -- the status quo has to change. Our bill is the right policy, and it’s also an approach that appeals to both sides of the aisle. As Congress works to reform our housing finance system, I’m optimistic that a proposal like ours -- that combines private sector pricing with the government’s ability to expand access to credit – can cut through the partisan divide.”
The Delaney-Carney-Himes legislation, first introduced last Congress, establishes an insurance program through Ginnie Mae which maintains the full faith and credit of the federal government, but protects taxpayer investment by requiring adequate private sector capital and accurate pricing of government reinsurance. All government guaranteed single-family and multi-family mortgage-backed securities will be supported by a minimum of 5% private sector capital, which will stand in a first loss position. The remaining 95% of the risk will be shared between Ginnie Mae and a private reinsurer on a pari passu basis. Fees paid to Ginnie Mae for providing these securities will be allocated to affordable housing programs. The bill winds down Fannie Mae and Freddie Mac and allows them to be sold and recapitalized.
The Partnership to Strengthen Homeownership
Private Capital and Privately Priced Government Guarantee
- Ginnie Mae will establish a mortgage insurance program where at least 5% of the “first loss” is held by private entities and the remaining 95% of the risk is shared on a pari passu basis between the government and private reinsurer.
- Ginnie will design and study two types of programs, then implement one , or both programs, if they further an effective, efficient secondary mortgage market and maintain the risk sharing principles outlined above.
Program 1: Reinsurance Bid Program
- Aggregators and issuers will be permitted to deliver qualified mortgage pools to Ginnie. The price Ginnie charges for the guarantee will be ascertained through an insurance bidding process described below.
- Ginnie will secure forward reinsurance contracts on a periodic basis (30-90 days), with the assistance of a reinsurance broker appointed annually in a competitive process.
- The bids will seek coverage for two levels of risk on each securitization – the 5% “first loss” and the remaining 95% “second loss.”
- From these bids, Ginnie will contract with a series of carriers for each risk and aggregate the policies.
- For the first loss, Ginnie will seek bids for 100% of its expected exposure.
- For the second loss, Ginnie will seek bids for 100% of its aggregate exposure but will offer retrocessional reinsurance for up to 90% of the second loss cover.
- Ginnie’s guarantee fee quote will cover a forward period (Quote Period) as determined by Ginnie.
- Prices passed onto originators may vary based on quality of product, and other factors as determined by Ginnie, so long as the overall pricing equals a weighted-average bid in a given period.
Program 2: Bond Guarantor Program
- Ginnie will reinsure first loss holders of risk through an insurance system where insurers/guarantors will hold mortgage credit risk on an aggregate, loan by loan, or security basis.
- In addition to security level coverage, insurers/guarantors are authorized to issue loan level coverage to lenders as long as the coverage is for 100%, or if less than 100% loan level coverage, the servicer is responsible for any losses the guarantor did not cover.
- Ginnie will reinsure bond guarantor and/or issuers by entering into contracts with private sector reinsurers sharing risk on a 90/10 pari passu basis.
- To the extent Ginnie Mae will be reinsuring insolvency of a bond guarantor and/or insurers, it will be required to enter into risk-sharing contracts with private reinsurers to assess the risk of default of any entity.
- Under either program, each MBS meeting the outlined private sector capital requirements will carry the full faith and credit of the United States Government, but with private sector directed pricing.
- Banks, life insurance companies, Real Estate Investment Trusts (REITs), insurance companies and other Ginnie approved market participants will be eligible to participate in the insurance and risk sharing transactions with Ginnie Mae.
- All market participants will be overseen by Ginnie Mae and Ginnie will have authority to establish necessary capital levels and stress tests.
Small Lender Access
- During the transition Fannie and Freddie may remain as aggregators of mortgage loans for small lenders that do not have the sufficient volume to pool and create these new securities with their mortgage loans on their own, so long as adequate private sector alternatives do not exist.
- The Federal Home Loan Banks (FHLBs) will be authorized to aggregate and pool mortgages for small lenders.
- The platform will allow for standardized securities thus creating a single security and creating a deeper and more liquid TBA market which will reduce the cost of mortgage credit for consumers.
Standardized Mortgages, Servicing, and Capital Requirements
- Transition Federal Housing Finance Agency (FHFA) regulation to Ginnie Mae with oversight over the secondary mortgage market.
- Mortgages eligible for the full faith guaranty must meet minimum underwriting standards.
- Ginnie will maintain the power to stress test all market particpants and define adequate capital standards.
Winding Down Fannie and Freddie
- Fannie and Freddie will be wound down over a five year period. Their government guarantee and charter will be removed and they will repay the government with interest for the government’s investment in the institutions. The repayment must take into account both the injection of capital and overall exposure to the government.
- During the transition, Fannie and Freddie may act as an aggregator for small lenders to retain small lender access to the new Ginnie Platform.
- The transition will continue until competitive access for small lenders is established and Ginnie has achieved an adequate return to taxpayers and established a competitive private housing finance market.
- The assets of Fannie and Freddie will be returned to the private sector and may operate within the new mortgage system as issuers and/or aggregators.
- Ginnie Mae will charge a fee for the insurance that they provide for these securities.
- The fees charged will be 10 basis points of the total principal balance of these mortgages.
- The money acquired will be allocated to strengthen affordable housing programs facilitated by the federal government. The funds received will be allocated to the Housing Trust Fund (75%), the Capital Management Fund (15%) and the Market Access Fund (10%).
- Ginnie will be under a duty to serve all markets.
- Fannie and Freddie’s multifamily business will be spun out as separate entities. Ginnie will be required to create and implement a workable multifamily guarantee that utilizes private sector pricing consistent with the single family model.
- The current multifamily businesses of Fannie and Freddie will continue to function within the new multifamily housing market as purely private organizations with an explicit government guarantee provided by Ginnie Mae and a private sector reinsurer.
Well-functioning TBA Market
- Investors will receive timely principle and interest payments through Ginnie Mae.
- This model will also ensure that one standardized security is delivered to the TBA Market. This will increase liquidity and limit disruptions to the secondary mortgage market, which will ultimately benefit consumers.