The house that Jeb built

15 July 2013 By Daniel Indiviglio

A new House bill offers some good ways to construct a durable financing market for home loans. It still has warts, but would reduce reliance on taxpayers and entice private capital back in. Together with the Senate’s more politically palatable version, it could be a winning mix.

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Republican members of the U.S. House of Representatives unveiled a bill on July 11 to reform the nation’s housing finance system. It would wind down mortgage guarantors Fannie Mae and Freddie Mac over five years and put in place new structures to encourage private capital to bear mortgage risk.
The proposal would establish a National Mortgage Market Utility (NMMU) to develop best-practice standards for private origination, servicing, pooling and securitizing of mortgages. It would also operate a publicly accessible securitization outlet to match loan originators with investors. The utility would be allowed no role in lending or servicing mortgages in any way. The bill would also authorize the Federal Home Loan Banks to serve as loan aggregators to compile pools of mortgages originated by community banks through the NMMU’s securitization platform.
The bill also seeks to shrink the scope of the Federal Housing Administration. Only first-time home buyers or those satisfying strict low to middle-income bands would be eligible to borrow. The minimum down payment would increase to 5 percent from 3.5 percent of the home value, while the size of loans the FHA could guarantee would shrink. If private funding is scarce due to market stresses, the FHA would be allowed to expand its role.
The bill aims to remove some existing and proposed regulations. Some aspects of the Basel III capital requirements affecting mortgage credit would be delayed or abandoned. The Dodd-Frank Act’s credit risk retention requirements would be repealed. And asset-backed securities issuers would be exempt from being classified as covered funds that the Volcker Rule bans banks from investing in.
U.S. senators introduced a bipartisan bill in June to create a new Federal Mortgage Insurance Corp that would act as a market backstop for most mortgage-backed securities. It would force investors to take a first loss of 10 percent and create an insurance fund to cover additional losses. Separately, the Senate is preparing a bill to deal with the Federal Housing Administration’s solvency problems.

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