Roboform Re-do? It's Housing Reform Gone...

wild House Financial Services Committee Chairman Jeb Hensarling (R-TX) has introduced legislation to reform the U.S. housing market. The bill is co-sponsored by fellow Republicans Randy Neugebauer of Texas, Scott Garrett of New Jersey and Shelley Moore Capito of West Virginia. The bill comes on the heels of a Senate proposal that has garnered support from both Republicans and Democrats.

Here are some of the highlights from the House bill:

Unwinding Fannie and Freddie: Under the House bill, Fannie and Freddie would be unwound and eliminated in 5 years.
National Mortgage Market Utility: The legislation creates the NMMU, a voluntary securitization platform for loan originators, investors, aggregators, and security issuers.
Role of the NMMU: The NMMU is prohibited under the bill from originating, servicing or guaranteeing any mortgages or mortgage-backed securities.
Role of the Government: This housing reform proposal offers no government guarantees on the NMMU platform.
FHA Reform: The measure shifts the focus of FHA primarily to first-time homebuyers. Certain FHA insured loans would be subject to government backing. The down payment for non-first-time buyers would be raised from 3.5% to 5.0%.
Covered Bonds: Covered bonds are debt securities banks keep on their books that are back by other mortgages. Used for decades in Europe, covered bonds are designed to increase liquidity and allow banks to modify distressed loans.

We are still reviewing the legislation and will reserve our support or opposition until further review. We are attending a July 18th hearing on the bill, and Chairman Hensarling has stated that he expects the bill will be passed out of committee by the end of the month. You can view the 300 page bill can for yourself (in PDF format) by clicking here.

A Few Initial Concerns

During my initial review of the legislation, a number of items stood out to me. The virtual complete privatization of the housing market is an interesting experiment, but also carries substantial risk. As the lobbyist for a group promoting the simple idea of making houses easier to buy and sell for investors, risk concerns me. The Senate legislation, which I have written about before, offers more taxpayer protection and injects more private capital in the housing market. This bill from the House removes all taxpayer risk and leaves the housing market almost exclusively in the hands of the private market. But this begs the question: What if this drastic reform fails?

Another item in the legislation caught my attention as well. Remember the robo-signing crisis? The Hensarling bill creates the National Mortgage Data Repository. The Repository seems virtually identical to MERS, only it would have the force of federal law. Here’s the section on the Repository that caught my eye:

“Notwithstanding any provision of State or Federal law to the contrary, by proper demonstration of registration with the Repository, any holder of an interest in any mortgage-related note shall satisfy any requirement for demonstration of a right to act regarding such note or other registered data that exists in State or Federal law, including any obligation to produce or possess an original note. The Director (of FHFA) shall provide for the establishment of procedures for proper demonstration of registration of any mortgage-related document and of an interest by the holder of an interest in any such document with the repository. Once registered with the Repository, such registration shall be a legal right enforceable in any judicial or nonjudicial process.”

This provision would apparently transfer control of property law from the states to a private entity. All of the issues with MERS and the robo-signing that had to be resolved in court and in a settlement would simply go away because there would be no recourse for homeowners. In essence, the provision would make it impossible to challenge foreclosure fraud.

empty From a political perspective, this legislation has no chance of becoming law. The lack of virtually any government support of the housing market will spark vigorous opposition from the housing industrial complex. The bill will probably not garner a single vote from Democrats, and a significant number of Republicans will decline to support it, due to opposition from real estate agents and homebuilders. Simply put, the votes are not there for this.

What does this mean for reform efforts? From our perspective, we are focused primarily on the Senate legislation, and we are continuing to forge a positive relationship with FHFA – an agency we presume will become the full-time regulator of Fannie and Freddie should reform efforts stall for the long-term.