Bipartisan Bill Introduced to Wind Down and Replace GSEs

On May 12, House Financial Services Committee members John Campbell (R-CA) and Gary Peters (D-MI) introduced the Housing Finance Reform Act of 2011 (HFRA), H.R. 1859, which would wind down Fannie Mae and Freddie Mac and set up a system that allows new entities, called housing finance guaranty associations (HFGAs), to replace them.  The bill authorizes HFGAs to issue federally guaranteed securities backed by mortgages that meet defined underwriting standards.  The HFGAs themselves would not be federally guaranteed.

The bill’s approach is consistent with one of the options presented in the housing finance reform white paper the Obama Administration released in February.  The bill provides more federal backing than the Republican House Financial Services Committee leadership has proposed to date, but appears to be the kind of compromise many interest groups have encouraged Congress and the Administration to consider.  The bill does not contain any affordable housing goals or mission-related directives that NCSHA and other groups have proposed. 

The bill authorizes the Federal Housing Finance Agency (FHFA) to issue HFGA charters to qualified applicants, including special purpose HFGAs that would target a certain segment of the market, such as multifamily housing, or a particular type of mortgage lender, such as community banks.  The bill directs the FHFA to set capital requirements and issue regulations, orders, and interpretations to ensure HFGAs operate in a safe and sound manner.

Federal backing for HFGA securities would only be provided if the mortgages backing such securities met strict underwriting features, including an 80 percent-or-greater loan-to-value (LTV) ratio requirement.  The bill provides an exception from the 80 percent LTV requirement for loans with lower down payments if the lender retains a 10 percent stake in the loan or agrees to repurchase the mortgage at an HFGA’s request.  The bill also would allow HFGAs to securitize mortgages with private mortgage insurance to make up down payments of less than 20 percent.

The bill requires HFGAs to pay into a catastrophic reinsurance fund maintained by FHFA, with fees based on a Government Accountability Office (GAO) study the bill requires to determine the market value of the guarantee fees that would be charged to investors.  Claims on guarantees would only be paid if the HFGA that issues the security cannot make payments and falls under a federal conservatorship or receivership.  If the fund becomes depleted, the FHFA would be authorized to impose a special assessment to recoup any out-of-pocket claims paid by the federal government.

Other bill provisions include: winding down Fannie Mae and Freddie Mac by requiring them to reduce their asset portfolios to $250 billion each within five years of the bill's enactment; repealing Fannie Mae and Freddie Mac’s affordable housing goals; requring them to pay state and local taxes; and requiring FHFA to place Fannie Mae and Freddie Mac into receivership no later than one year after it charters five or more HFGAs, two of which could not be considered “special purpose HFGAs.” 

A detailed summary of the bill is available on NCSHA’s website.