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Legislative Overview

The Corker-Warner and Johnson-Crapo Approach

View the Johnson-Crapo Housing Reform Bill Here

Summary: S. 1217 abolishes the Federal Housing Finance Authority (FHFA) and establishes and transfers all responsibility to the Federal Mortgage Insurance Corporation (FMIC) as an independent agency of the federal government to: (1) develop standard form credit risk-sharing mechanisms, products, structures, contracts, or other security agreements that require private market holders of a covered security insured under this Act to assume the first loss position with respect to losses incurred on such securities; (2) provide insurance on any covered security for which any private market holders have assumed the first loss position with respect to losses; (3) establish a Mortgage Insurance Fund; and (4) oversee and supervise the common securitization platform developed by a business entity announced by the Federal Housing Finance Agency (FHFA) and established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (government sponsored enterprises [GSEs]). (Source: Library of Congress).

The bill provides for the continued payment of net worth sweeps from Fannie and Freddie to the Treasury until the enterprises are wound down and replaced with a new government entity that would provide an explicit government catastrophic backstop on qualifying mortgage-backed securities (“MBS”).

Legislative Proposals Fall Short

  • The bill still allows the federal government and Treasury to continue their confiscation of private property from investors, setting bad precedent for future investors.
  • Investors such as community banks, insurance companies and individuals have $33 billion in outstanding preferred shares of Fannie and Freddie. The Treasury’s decision to take all of Fannie and Freddie’s dividends for itself is tantamount to theft, leaving investors and retirees out in the cold. This should not be tolerated.
  • It creates another federal insurance program tied so heavily to such a large share of the mortgage market that it is unsustainable and, as we have seen, susceptible to collapse and government bailout.
  • Even when Fannie and Freddie needed emergency capital in 2008, a sticker tag of $187 billion, the government did not provide a guarantee of assets. If it was not necessary in 2008 when the GSEs were under water, it is not necessary now when taxpayers are scheduled to be paid back as early as next year.
  • The proposed new institution, FMIC, does little to change the status quo and still keeps taxpayer on the hook: only increases the minimum down payment from 3 percent to 5 percent and still covers up to 80 as opposed to 90 percent of potential losses.

PATH Act

Following the introduction of the Corker-Warner bill in the Senate, Representative Jeb Hensarling (R-TX) introduced his own housing finance reform bill, the Protecting American Taxpayers and Homeowners Act of 2013 (H.R. 2767) (the “PATH Act”).  The bill, introduced in the House of Representatives, would go even further in scaling back the government role in housing finance by replacing the enterprises with a legal framework more conducive to private-label mortgage-backed securities (“MBS”) securitization and mortgage-backed covered bonds.  Although the two bills take different approaches to housing finance, the two bills take substantially the same approach to the Third Amendments and the winding down of the enterprises.  Under the PATH Act, “net worth sweeps” from Fannie and Freddie to the Treasury arguably would be affirmed, the existing MBS guarantees would become explicit obligations of the U.S. government, the guarantee fees on those existing guarantees would be payable to Treasury instead of the enterprises.  As a result, shareholders would have little, if any, chance of recovering any value.

The PATH Act Falls Short

  • The bill still allows the federal government and Treasury to continue their confiscation of private property from investors, setting bad precedent for future investors.
  • Investors such as community banks, insurance companies and individuals have $33 billion in outstanding preferred shares of Fannie and Freddie. The Treasury’s decision to take all of Fannie and Freddie’s dividends for itself is tantamount to theft, leaving investors and retirees out in the cold. This should not be tolerated.
  • The key assumption that PATH Act rests entirely on, that private capital will rush in and take the place of Fannie and Freddie in providing mortgage liquidity, is flawed.
  • Even if private investment was able to provide the financial backing for mortgages, it would not. By allowing private investors to be wiped out, the bill undercuts its own key assumption.
  • The PATH Act, as written combined, with the Corker-Warner Senate Bill, as written, add $5 trillion dollars in liability to the government’s balance sheet and put the big banks in charge of the mortgage system going forward. (“Protecting American Taxpayers and Homeowners (PATH) Act”, Sec. 109; “Housing Finance Reform & Taxpayer Protection Act”, Sec. 502)
  • Even when Fannie and Freddie needed emergency capital in 2008, a sticker tag of $187 billion, the government did not provide a guarantee of assets. If it was not necessary in 2008 when the GSEs were under water, it is not necessary now when taxpayers are scheduled to be paid back as early as next year.
  • If the government fully liquidates and extricates from Fannie and Freddie and onus is completely put to the private sector, it will threaten access to affordable housing for millions of Americans and possibly even spell an end to a 30-year fixed mortgage. 30-year fixed mortgages represent 93% of those originated between 2009 and 2011.