Himes, Delaney and Carney Introduce Housing Finance Reform Legislation
Washington, D.C. – Representatives Jim Himes (CT-4), John K. Delaney (MD-6) and John Carney (DE – at large) today introduced innovative housing finance reform legislation, the Partnership to Strengthen Homeownership Act (H.R. 5055). This legislation preserves the 30-year fixed rate mortgage and protects American taxpayers by using private sector pricing to reduce the risk of future bailouts. It shifts the housing finance market away from Fannie Mae and Freddie Mac, and keeps home ownership attainable for working families by strengthening affordable housing programs.
The Partnership to Strengthen Homeownership Act combines the federal government’s unique ability to provide capacity with the private sector’s superior ability to price and analyze risk. Joining Delaney, Carney, and Himes are 9 additional original cosponsors: Rep. Jared Polis (CO-2), Rep. Denny Heck (WA-10), Rep. Bill Owens (NY-21), Rep. Kyrsten Sinema (AZ-9), Rep. Patrick Murphy (FL-18), Rep. Peter Welch (VT – at large), Rep. David Scott (GA-13), Rep. Gregory Meeks (NY-5), and Rep. Bill Foster (IL-13).
The bill establishes an insurance program through Ginnie Mae whereby it makes available the full faith and credit of the federal government, while protecting taxpayer dollars through 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, standing 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.
The bill winds down Fannie Mae’s and Freddie Mac’s current activities and revokes their charter, but allows them to be sold and recapitalized as entities with different business plans without any of their current unique powers.
“This legislation ensures that new homeowners will continue to have access to the affordable, predictable financing options they need, while protecting taxpayers and our economy from future downturns,” said Congressman Himes. “Our bill combines the market’s efficiency in pricing risk with government's ability to provide scale to create a safer, more liquid housing market that preserves access to affordable housing for American families.”
“America needs housing finance reform for the long-term health of the economy, the viability of the American Dream of homeownership, and the protection of the U.S. taxpayer. Congress has to act and we are committed to keeping housing finance reform on the agenda,” said Congressman Delaney. “We’ve seen what happens when the housing market becomes distorted and policy fails the public: hard-working Americans lose their homes, the economy slumps and the taxpayer is left responsible. By maintaining a government guarantee, introducing private sector pricing and increased taxpayer protections, our legislation can bring both sides of the aisle together. Neither side has a monopoly on good ideas and I look forward to working with my colleagues and stakeholder groups so that we can stabilize the housing finance market for decades to come.”
“The driving force behind my work on this bill is to keep home-buying affordable by preserving the thirty-year fixed rate mortgage, while protecting taxpayer dollars in the event of another housing downturn,” said Congressman Carney. “We aren’t the first group to try to find a solution to reforming our housing finance system. But we think our proposal has promise because it strikes the necessary balance between public and private sector involvement in the housing market. If we don’t fix the current system, taxpayers continue to be the backstop in case of another crisis, and the thirty-year fixed rate mortgage is in danger.”
The full text of the legislation is available here.
Delaney-Carney-Himes Partnership to Strengthen Homeownership Bill Summary
Private Capital and Privately-Priced Government Guarantee
- Ginnie Mae will establish a mortgage insurance program where at least 5% of the first loss capital 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 Mae will study and design two types of programs and implement the most efficient program to achieve the risk-sharing principles outlined above.
- Program 1: Reinsurance Bid Model
- Aggregators and issuers will be permitted to deliver qualified mortgage pools to Ginnie Mae. The pricing 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 Mae’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 is equivalent to a weighted-average bid in a given period.
- Program 2: Guarantor Model
- Ginnie Mae will reinsure first loss holders of risk through an insurance system where insurers/guarantors holding 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 mortgage-backed security 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, 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
- Fannie Mae and Freddie Mac 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 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 participants and define adequate capital standards.
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 the 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 Mae Platform.
- The transition will continue until competitive access for small lenders is established and Ginnie has achieved and 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 range 10 basis points of the total principal balance of these mortgages.
- The monies acquired will be allocated to strengthening 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 the 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.