Housing: “I’m Ready For My Close-Up,...

spotlight From John Grant, Lobbyist & Advocate for Retail REI. After six months of working Capitol Hill, we are pleased with the progress so far this year on meaningful housing reform, and we expect this fall to be the setting for the first major battles to decide the future of the American housing market.

Our private advocacy efforts, spearheaded by top leaders in the residential real estate industry, will have a prominent voice during the upcoming debates.

Most importantly, the U.S. Senate has introduced a comprehensive housing reform bill (details are provided below). So far, the measure has garnered mostly positive reviews.

Some critics believe the bill does not offer a dramatic shift away from the current GSE model. These critics largely believe there should be no government backing of the housing market, and from a political perspective that is simply a non-starter.

momentum The Senate activity has fortunately galvanized the House into action as well. We were concerned by reports from the House side that they were going to concentrate largely on messaging for the remainder of the year. Our intelligence reports indicate the House will introduce a bill in late summer…

…but our expectations for the House’s bill remain tepid as the measure will likely remove all government backing from the housing market. As stated, that proposal will meet too much opposition to pass.

We believe that in the final analysis, the new Senate bill will likely be the basic framework for housing reform. The measure will do several things:

Reduce Taxpayer Risk
Reduce Government Involvement
Increase Private Investment in the Market
Eliminate Fannie and Freddie

While Fannie and Freddie have certainly done some good things for the American housing market, their reversal on attitudes toward non-institutional investors post housing crisis makes them too great a threat to our community for the long-term.

And while we resolved a substantial amount of the problems Fannie and Freddie tried to create for investors, we are far from satisfied with the current policies still in place, and we believe the Senate bill will provide us a fresh start to create a regulatory atmosphere that embraces our industry.

Putting the Senate Bill Under a Microscope

microscope Senator Bob Corker (R-TN) and Senator Mark Warner (D-VA) formally revealed their bipartisan legislation to reform the U.S. housing market (S. 1217) on June 25th, so we are taking some time to review the proposal. The measure has six co-sponsors so far – from both sides of the aisle. Following are some of the key provisions of the Senate bill:

Creating the FMIC. The Senate bill would create the Federal Mortgage Insurance Company (FMIC), an agency that would provide catastrophic reinsurance for mortgage-backed securities. The agency would be governed by a five-member board and replace the FHFA, the existing regulator and conservator of the GSEs.
Mimicking the FDIC. The FMIC would operate a mortgage insurance fund modeled on the Federal Deposit Insurance Corporation's insurance fund. Guaranty fees and other payments made to the agency would provide the money for the Mortgage Insurance Fund. Under the bill, the fund must have at least 2.5% of outstanding principal balances insured by the agency.
Allocating Risk to the Private Sector. The FMIC must ensure that the private market entities are in a first loss position and develop appropriate credit risk-sharing standards within five years. The draft bill says the first loss position must be "adequate to cover losses that might be incurred as a result of adverse economic conditions." Such losses should be "not less than 10% of the principal of" a covered security. Additionally, the bill says the pools of mortgage securities should be pulled from loans that are geographically diverse and include borrowers with different risk characteristics.
Creating Standards for Secondary Markets. The FMIC would be responsible for creating standards across the secondary mortgage market including for servicing and private mortgage insurance.
Ensuring Equal Access. The bill requires the FMIC to ensure equal access to mortgage securitization platforms by community banks and credit unions. Under the legislation, the FMIC could create a mutual securitization company to meet the securitization needs of smaller institutions, if the agency determined it was necessary.
Creating the Market Access Fund. The bill calls for the creation of the Market Access Fund, an office within the Department of Housing and Urban Development designed to promote rental housing and assist low-income and underserved areas.
Liquidating Fannie & Freddie. The bill would wind down the existing investment portfolios at the GSEs at 15% annually until they are liquidated, likely leaving nothing for current preferred or common shareholders.
Reducing Conforming Loan Limits. The bill would cut single-family conforming loan limits by roughly $42,000 a year over six years to $417,000, down from $625,000. Guarantees on existing single-family mortgage-backed securities would be assumed by the Treasury, while multi-family guarantees would be transferred to the FMIC at no cost.

As a lobbyist fighting on your behalf, I will analyze the measure in more detail and set meetings for the fall – and hopefully have an opportunity to testify before the Senate on this bill and the important role non-institutional investors.