Leaders of the Senate Banking Committee have agreed on a draft outline for a bill that, if passed, would eventually replace Fannie Mae and Freddie Mac with a new federal agency.
The new agency, Federal Mortgage Insurance Corporation (FMIC), would function differently than Fannie Mae and Freddie Mac. Instead, it would act as a backup mortgage insurer. FMIC program participants would absorb the first 10 percent of losses on defaulted mortgages. and could then request reimbursement of remaining losses from FMIC
FMIC payouts would be funded by user fees paid by users of the agency's programs, similar to the way FHA's insurance program does.
Fannie Mae and Freddie Mac to Wind Down - Someday
Fannie Mae and Freddie Mac aren't going away any time soon. At minimum, the two government sponsored corporations would be phased out over several years after the bill becomes law.
According to the draft outline, Fannie Mae and Freddie Mac would "wind down" their present functions of purchasing loans and packaging mortgage-backed securities. The two government-sponsored enterprises (GSEs) currently back approximately 60 percent of U.S. mortgages. Fannie Mae and Freddie Mac's participation in the secondary mortgage market provides a significant source of capital for U.S. mortgage lenders.
The federal government took control of Fannie and Freddie in 2008 after they suffered steep losses on defaulted home loans originated before the recession. The two GSEs received a federal bailout of $187.5 billion. Fannie and Freddie have repaid their bailout, but legislators remain concerned over potential risk to federal taxpayers.
More Underwriting Changes
The Senate Banking Committee's draft outline also contains proposed changes to mortgage underwriting requirements.
Minimum down payments of five percent would be required for FMIC-backed mortgages, with exceptions made for first-time home buyers, who would be allowed a minimum down payment of 3.50 percent. Eventually the five percent minimum down payment would apply to all borrowers of mortgages backed by FMIC.
Under the proposed FMIC legislation, participating mortgage lenders would be required to use "strong underwriting guidelines" based on qualified mortgage requirements recently adopted for mortgages sold to Fannie and Freddie. The new mortgage underwriting requirements were designed to provide standardized loan approval requirements and protect taxpayers from potential losses associated with non-conforming mortgage loans and future economic downturns.
Senate Goal to Preserve Affordable Housing
According to the draft outline, federal affordable housing goals would be replaced by housing-related funds that would promote affordable housing for homeowners and renters. A spokesman for the Senate Banking Committee said that the committee's proposal would preserve fair and affordable housing throughout the U.S.
Opposition, Obstacles Could Thwart Proposal
Although the Senate draft outline is described as a bi-partisan effort toward mortgage finance reform, gaining enough legislative support for the proposed bill is expected to be difficult. One analyst said that it would take years before enough legislators would support the proposal and the market would be ready to accept a new mortgage finance system.
The FMIC proposal resembles FHA mortgage insurance programs that protect mortgage lenders in exchange for mortgage insurance premiums paid by mortgage borrowers. The draft outline notes that the FMIC program would be paid for with user fees paid by mortgage lenders and investors in mortgage-backed securities. The outline does not indicate whether or not mortgage lenders would be allowed to pass along all or part of FMIC fees to borrowers.
The role of private mortgage insurers in relation to FMIC was not described in the draft outline.
A final draft of the outline is expected to be released soon and may provide answers to issues not addressed in the initial draft outline.