Key Aspects of the Johnson-Crapo Housing Finance/GSE Reform Bill

Published by Peter Lawrence on Tuesday, March 18, 2014 - 12:00am

On March 16, Senate Banking Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho, released the 442-page discussion draft of their housing finance reform bill, on which they announced their agreement on March 11. The legislation, using S. 1217, the "Housing Finance Reform and Taxpayer Protection Act of 2013,” the bipartisan bill originally introduced by Senators Mark Warner, D-Va., and Bob Corker, R-Tenn., as its foundation, represents a significant milestone on resolving the future of U.S. housing finance and the status of the housing government sponsored enterprise (GSEs)—Fannie Mae and Freddie Mac—the mortgage securitization companies that were placed under government conservatorship nearly six years ago.  The Banking Committee also released a bill summary and section-by-section analysis of the legislation.

The bill calls for Fannie Mae and Freddie Mac to be eventually dissolved over five years and replaced with well-capitalized, private entities that would securitize qualifying single-family and multifamily mortgages with an explicitly priced government guarantee provided by a new federal agency called the Federal Mortgage Insurance Corporation, or FMIC.  The FMIC’s mission would be to regulate the entire secondary mortgage market, insure investors against catastrophic losses on qualifying mortgage-backed securities and ensure a liquid and resilient mortgage market.

For single-family mortgages, these entities would need to cover at least the first 10 percent of losses on mortgage-backed securities through private risk-share agreements or through the use of an approved, well-capitalized private guarantor before the FMIC would pay any claims. For multifamily securities, approved multifamily guarantors would be able to use the existing delegated underwriting system and Series K multifamily underwriting mechanism currently used by Fannie Mae and Freddie Mae as a means of putting private capital in a first-loss position. Only the approved securities themselves would be backed by the government, not the companies that issue them.

The FMIC would charge an appropriate guarantee fee to cover expected losses, plus a capital buffer of 2.5 percent. Fees would be kept in a Mortgage Insurance Fund to handle incoming claims, backed by the full faith and credit of the U.S. government.

The bill also requires all entities that seek the government guarantee to pay a 10 basis point fee to support affordable housing activities.  Based on recent filings of Fannie Mae and Freddie Mac, such a fee would generate about $5 billion annually.  This funding would be allocated as follows:

  • Seventy-five percent would go to the Housing Trust Fund (HTF), as originally authorized by the Housing and Economic Recovery Act of 2008 (HERA), with two revisions:
  1. Establishes a set-aside of $20 million or 2 percent of the annual allocations for competitive grants supporting housing activities targeting federally recognized Native American tribes
  2. Increases the HTF small-state minimum to $5 million
  • Fifteen percent would go to the Capital Magnet Fund (CMF), also as originally authorized by HERA, while similarly clarifying that Treasury’s Community Development Financial Institutions Fund (CDFI Fund) must consider tribal housing needs when making CMF allocation awards.
  • Ten percent would go to the newly created Market Access Fund (MAF), which is designed to support innovation in responsible lending products, education, underwriting, and servicing in addressing both homeownership and rental housing needs of underserved markets, such as affordable housing preservation, manufactured housing, and rural communities.  A new division of the FMIC, the Office of Consumer and Market Access, would administer the MAF, and it would have the ability to set market-based incentives to attract lenders to serve those underserved markets.

Filling in much more detail than the previous Warner-Corker legislation, and recognizing that the GSE multifamily businesses were profitable before and during the recession, the bill would create an Office of Multifamily Housing to focus on ensuring a robust, liquid market for multifamily mortgages.  The multifamily divisions of Fannie Mae and Freddie Mac could be spun off and operate under the new capital and government guarantee requirements.

Each entity applying for a government guarantee of multifamily mortgage securities must ensure at origination that 60 percent of the rental housing units financed is for low-income families and such families are charged affordable rents equal to no more than 30 percent of family income.  “Low-income” is defined as incomes at or below 80 percent of area median income (AMI).

The bill would also direct the Office of Multifamily Housing to explore new financial products designed to increase secondary mortgage market access to small multifamily properties, those with less than 50 units.

Any issuer of FMIC-insured securities must serve all eligible single-family and multifamily borrowers, provided they meet certain down-payment, credit and other safety and soundness requirements. This requirement, which would be enforced the Office of Consumer and Market Access, would mean issuers seeking the government guarantee will not be allowed to serve only the highest-income borrowers with pristine credit or avoid certain borrowers or communities that are perceived to be riskier.  The bill, however, would repeal the affordable housing goals that Fannie Mae and Freddie Mac are currently required to meet.

In their press statement announcing the release of their bill, Chairman Johnson and Ranking Member Crapo said they “plan to hold a committee markup in the coming weeks.”  Furthermore, they note that “[t]hey took rare action in releasing the text over the weekend in an effort to balance the Committee Members’ interests in having adequate time to review the legislation while advancing housing finance reform in a timely manner.”

Despite these sentiments, it will be very difficult to advance such a complex piece of legislation affecting a large of part of the U.S. economy through the Senate in an election year.  Furthermore, the bill is significantly different from the House Financial Services Committee-approved housing finance reform bill, H.R. 2767, Protecting American Taxpayers and Homeowners Act of 2013 (PATH Act), which would largely remove government involvement from the secondary mortgage market.  Such differences will make reconciling legislation even more difficult.

Nevertheless, the Johnson-Crapo bill, like the draft comprehensive tax reform legislation from House Ways and Means Committee Chairman David Camp, R-Mich., represents a foundation upon which future reform legislation will be built.