Delaney, Carney, and Himes Announce Housing Finance Reform Proposal, Plan to Introduce Legislation this Spring
Washington, D.C.—Representatives John K. Delaney (MD-6), John Carney (DE-AL), and Jim Himes (CT-4) today outlined a housing finance reform proposal that uses private sector market forces to appropriately price risk while putting the scale and security of a government guarantee behind the program. They plan to introduce legislation this spring to create a housing finance system that is fair for borrowers, lenders, and taxpayers.
Key elements of Delaney-Carney-Himes Housing Finance Proposal
- Housing reform legislation allows the government to expand the capacity of housing finance while allowing the private sector to price all of the risk
- Creates incentives for private capital’s market share in housing to grow over time;
- Creates a path for Fannie Mae and Freddie Mac to be sold as independent companies without any government support or monopoly status
- Creates additional funds for low income housing
The Delaney-Carney-Himes housing finance proposal creates a structure that enables the government to significantly expand the availability of capital in the insurance market, while ensuring the mortgage market is open and efficient – with private capital participating in the market and pricing all of the risk. The plan adds discipline to the mortgage market, creates meaningful paths and incentives for private capital to flow into the mortgage market, and ensures that the mortgage market benefits from the liquidity provided by government participation.
This structure creates a unique public-private partnership mechanism whereby private “first loss” capital of up to 5% is required in all mortgage securitizations, and the government – acting through Ginne Mae – in partnership with private capital will provide reinsurance of up to 95% of any mortgage securitization. Specifically, Ginnie Mae will provide reinsurance and prospectively contract with private reinsurance companies to share in the government’s reinsurance policy. Both the private reinsurance carrier and the government will receive the exact same pricing and bear the exact same risk.
“We are excited to begin the roll out of this idea and believe this legislation will be an important addition to housing finance reform discussion,” said Congressman Delaney. “To ensure a stable housing finance system, we must move past the current state to a new system that engages more private sector capital and private sector pricing of risk in partnership with an explicit government role in the provision of stabilizing liquidity to the market – this bill does that. Chairman Hensarling has shined an important spotlight on housing reform and understands, deeply, how important this debate is to the economy and our fiscal future. For decades, Ranking Member Waters has led on affordable housing issues and I look forward to her forthcoming legislation as well. Senators Warner and Corker have shown similar leadership with their proposed legislation and we look forward to deep collaboration with these truly outstanding Senators as well. We hope our legislation will complement these efforts.”
“I’m looking forward to working with Mr. Himes and Mr. Delaney to advance our ideas around housing finance reform,” said Congressman Carney. “My priority in developing this proposal is to preserve the thirty-year fixed rate mortgage while protecting taxpayer dollars. Getting this effort right is critical to the success of our economy. Absent a smart, sensible solution, affording a home will become more expensive for families across the country, and taxpayers will remain on the hook in the event of another downturn in the housing market. There are a lot of good ideas out there -- I think this one strikes the right balance between public and private sector involvement in the housing market.”
“I’m excited to join this effort to merge the efficiency of markets with the scale of government to create a safer, more liquid housing market that will help make housing more affordable while reining in the risk to our economy,” Himes said. “I look forward to gathering input from housing experts across the spectrum and am particularly interested in working to improve the availability of multi-family housing.”
“I welcome the principles and approach that are included in this proposal,” said Congressman Gregory Meeks. “It preserves a government back stop, which is critical for sustaining the thirty-year fixed rate mortgage, and creates additional funding for low income housing. I look forward to further discussions and clarifications on the specific details that will be included in the legislation.”
Below please find a summary of concept.
Key Components of Delaney, Carney, Himes Housing Reform Proposal
This bill establishes a system of government reinsurance for eligible mortgage backed securities, marrying the government’s ability to provide the necessary capacity to accommodate the size of the United States housing market and the private sector’s ability to better price risk. A government guarantee under this system will be explicit, but taxpayer money will be protected through adequate private sector capital and accurate pricing of government reinsurance.
Under this system, issuers will be required to secure 5% private sector capital (standing in a first loss position) provided by adequately capitalized monoline insurance companies. After securing this minimum level of private capital, issuers may securitize their mortgages through Ginnie Mae. Separately, private insurers will prospectively contract with Ginnie Mae and share the reinsurance pricing and risk, with the private insurer assuming a minimum 10 percent on a pari passu basis.
By leveraging the government’s capacity and the market’s ability to price risk, you strike the correct balance between public and private participation in the U.S. housing market.
Private Capital and Extraordinary Government Guarantee
- Private monoline insurers would be required to hold a first-loss position on an eligible government security of no less than 5%.
- A mortgage reinsurance system would be supported by Ginnie Mae and carry the full faith and credit of the United States Government, but with private sector directed pricing.
- 95% of the senior risk will be shared between Ginnie Mae and private reinsurance companies (on a 90% to 10% split).
Private Sector Pricing of Risk
- Ginnie Mae will prospectively contract with private reinsurers to lock rates based on private sector assessment of market risk.
- Ginnie Mae and the private reinsurers will receive the same terms and the same price for the risk that they share.
- Any loss on the remaining 95% will be shared equally between Ginnie Mae and the private reinsurer based on their market share of the security (90% to 10%).
Small Lender Access
- Fannie and Freddie may remain as aggregators of mortgage loans for smaller entities such as credit unions and community banks that do not have the sufficient volume to pool and create these new securities with their mortgage loans alone
- Ginnie Mae will securitize and reinsure each mortgage-backed security. Ginnie Mae will stand behind the 5% private capital once it is exhausted.
- 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 FHA regulation to Ginnie Mae with oversight over the secondary mortgage market
- The FHFA and the Federal Reserve will collaboratively regulate the new secondary market
- FHFA will be funded through assessments of the entities it regulates
Winding Down Fannie and Freddie
- The Director of the FHFA will oversee the discontinuance of the Enterprises’ ability to issue, guarantee, or purchase any mortgage-backed securities.
- After the Ginnie Mae platform is established, the Enterprises will operate as one of the several anticipated monoline insurers and one of the several anticipated private reinsurers for a five year period.
- By the end of the five year period, the FHFA Director will ensure that the total market share of mortgage-backed securities insured by the Enterprises in either of these capacities will not exceed 30 percent of the total market share.
- Ginnie Mae will charge a fee for the insurance that they provide for these securities.
- The fees charged will range between 5-10 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 Department of Housing and Urban Development (Housing Trust Fund) and the Department of Treasury (Capital Management Fund).
- Create a structure for multi-family housing financing that follows this public-private model and provides the government backing necessary to create a fluid market.
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.