The Capitol

WASHINGTON, DC—Congress has released-or rather is poised to release-its second ambitious legislative proposal in weeks that will have a direct impact on the commercial real estate industry. The first was a plan to revamp the US code, which CEO Real Estate Roundtable Jeff DeBoer analyzed here, here and here.

Now, Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) have announced they are putting the final touches on draft legislative text that will wind down the GSEs. The legislation will be released in the coming days, followed within weeks by a markup.

Briefly, the proposal would provide an explicit government guarantee for mortgages, but only after private investors have taken the first losses. A new federal regulator would be established, the Federal Mortgage Insurance Corp., that would provide this guarantee and oversee the system.

The chances of this legislation passing this year are slim to none, David Johnson, CEO of Strategic Vision, tells “We have heard from some of the House leaders that they want to do minimal legislative work before election.”

After the election, though, may be a different story especially if there is a shakeup in the Senate as many conservatives are expecting. There are also persistent rumors of a shakeup in House leadership as well, Johnson says, which, if true, could introduce an environment of almost “anything goes” in terms of legislative activity.

“We could well see far-reaching legislation passed, especially during a lame duck session,” he predicted.

That bodes either well, or not, for the Senate GSE plan-depending on one’s perspective of the legislation. S.1217, the legislation proposed last year which President Obama signalled he supported at the time, would be used as the base text. Some details about the proposal include:

  1. Fannie and Freddie are wound down and eliminated.
  2. There will be specific benchmarks and timelines to guide Federal Mortgage Insurance Corporation and market participants in the transition.
  3. Certain functions will be transferred to the FMIC, which will be modeled in part after the FDIC including its regulatory authority.
  4. Some 10 percent of private capital will be mandated up front to create a mortgage insurance fund for the system to ward against future bailouts. A member-owned securitization platform will be created that will issue a single, standardized FMIC-wrapped security, and permit private label securities to be issued.
  5. A mutual cooperative jointly owned by small lenders will be established to ensure institutions of all sizes have direct access to the secondary market. This is meant to help community banks and credit unions stay competitive when Fannie Mae and Freddie Mac are dissolved. The small lender mutual cooperative would provide a cash window for individual eligible loans, and small lenders could retain servicing rights.
  6. Servicers that participate in the FMIC system will be provided clear rules.
  7. Underwriting standards will mirror the definition of “qualified mortgage” and set down payment requirement at 5% (with a short phase-in) except for first-time homebuyers at 3.5%.
  8. Affordable housing goals are eliminated. In their place would be housing-related funds that are supported through a small FMIC user fee of 10 basis points.
  9. The current conforming loan limits would be maintained.
  10. The multifamily market would be supported with the development of risk-sharing mechanisms and products.