WASHINGTON, DC-Sens. Bob Corker (R-TN) and Mark Warner (D-VA) authored the “Housing Finance Reform and Taxpayer Protection Act.” Sen. Mike Johanns (R-NB); Sen. Jon Tester (D-MT); Sen. Heidi Heitkamp (D-ND); Sen. Dean Heller (R-NV); and Sen. Jerry Moran (R-KS), sponsored the legislation. In short, there is some powerful forces lined up behind the legislation.
It will be necessary as the bill calls for radical change in the mortgage finance industry. As Sen. Warner explained in a lengthy post published on his website and in Politico, the bill calls for:
- Private market participants to hold 10% of the first loss of any mortgage-backed security that purchases a government reinsurance wrap–twice the loss severity experienced by Fannie and Freddie during the crisis. The authors note that if this standard had been in place during the crisis, taxpayers would have taken no losses.
- A new infrastructure that would split up credit investors, who want to take on this risk of loss, from rate investors, who have traditionally supplied our market with the funds necessary to borrow at low rates. “This will help keep mortgage rates competitive, while also isolating the taxpayer from loss.”
- The dissolution of Fannie and Freddie within five years of bill passage and transfer appropriate utility duties and functions to a different, modernized and streamlined agency. “All of this is done with a fiduciary duty to maximize returns to the taxpayer, via the Treasury, as the GSE’s assets are sold off.”
- The elimination of the GSEs’ affordable housing goals, which will be replaced with more transparent and accountable counseling and rental assistance programs. A new access fund paid through a small assessment on those loans that go through the government platform will be dedicated to the sustainability of homeownership, “while making it very clear where the money goes and putting in place strict criminal penalties against misuse.”
- The formation of a new corporation mutually owned by small banks and credit unions to make sure that they have direct access to the secondary market. “This ensures that local banks and credit unions aren’t gobbled up by the mega banks as soon as Fannie and Freddie are dissolved.”