A Sensible Framework For Housing Reform

June 27, 2013 at 8:14 am 1 comment

This week Senator Corker (R-Tennessee) and Senator Warner (D-Virginia) proposed legislation to bring about a post Fannie Mae, Freddie Mac FHA world.

The legislation is broadly along the lines of what I talked about in an earlier blog post.  The basic idea is that Fannie, Freddie and the FHFA would be done away with.  In their place would be a new government insurer, the Federal Mortgage Insurance Corporation (FMIC), would be responsible for developing a standard platform for mortgage-backed securities.  In the legalese of the legislation the new corporation would be responsible for developing a “standard form risk sharing mechanism, products, structures , contracts, or other security agreements which would require, among other things, that holders of mortgage-backed securities always take the first losses in the event of default.”  This new government insurer would have the power to set minimum standards so, in theory, the government could prevent the issuing of poorly underwritten securities that caused so much of the devastation that credit unions are still paying for.

From a credit union perspective the primary concern has always been and will remain ensuring that there is a secondary market entity to which they can sell their mortgages.  The good news is that the sponsors of this legislation have gotten the message loud and clear and they seek to protect credit unions and small banks in several ways.  For example, one of the insurance corporation’s obligations  in creating a standard platform would be to consider how any future securitization requirements would impact the availability of mortgage credit for “small financial institutions such as credit unions and community and mid-sized banks.”

Another primary concern has been if you do away with Fannie Mae and Freddie Mac, then who will purchase credit union mortgages?  This legislation authorizes a mutual securitization corporation that would be responsible for meeting the issuing needs of credit unions and mid-sized banks.  As part of this obligation, it would be given the explicit authority to purchase mortgages from participating credit unions.

The legislation is an important first step if only because a group of legislators are finally willing to put forth legislation to deal with one of the most difficult issues resulting from the financial crisis:  what to do with the bankrupt GSEs  that the American mortgage market is more, not less, dependent on than it was five years ago?  Still, it underscores how much farther we have to go before anything gets done.  One of my biggest complaints about Dodd-Frank is that it was written in such broad terms that it ended up amounting to nothing more than a legislative wish list, leaving regulators to do all the heavy lifting.  This first draft suffers from all the same problems, but as a first draft and not a final solution, it provides a great framework to start working out the tough details that need to be considered if we are going to do true housing reform.

Entry filed under: Advocacy, Regulatory. Tags: , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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