Banking Committee Releases GSE Reform Text

WASHINGTON – Senate Banking Committee leaders released their highly anticipated legislation to overhaul the mortgage finance market Sunday afternoon, after announcing they had reached agreement on a plan last week.

Sens. Tim Johnson, D-S.D., chairman of the committee, and Mike Crapo, R-Idaho, the ranking member, unveiled a comprehensive, 442-page plan to unwind Fannie Mae and Freddie Mac, building on earlier legislation introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., last summer.

In place of the government-sponsored enterprises, the Johnson-Crapo plan would establish a housing finance market backed by a new housing finance regulator, the Federal Mortgage Insurance Corp., which would provide an explicit government guarantee for certain mortgage-backed securities. Private firms would be allowed to buy mortgages and sell the securities after putting up 10% in first-loss capital before any government guarantee kicked in. The FMIC would also establish standards for the securitization and underwriting requirements for loans that are part of any security.

"Our housing finance system is badly in need of reform. And it is clear from the reaction to our announcement last week that many people agree," Johnson said in a press release. "This proposal includes an explicit government guarantee in order to add stability to the economy, keep costs reasonable for borrowers and renters, and ensure fair access to the secondary market for all lenders. We also include important provisions that will preserve the 30-year mortgage as well as fair and affordable housing options for buyers and renters alike."

The White House, industry groups and other stakeholders largely lauded the efforts of the committee leaders on Tuesday when they announced that a deal had been reached after months of negotiation. The Banking Committee held numerous hearings on the issues this fall, and committee staff have reportedly been working around the clock to put the final touches on legislation in recent weeks.

Timing remains a crucial hurdle for those pushing reform, as attention turns more and more to the midterm elections in November. Johnson is retiring at the end of the year and the two political parties are preparing for what is likely to be a fierce battle for majority control of the chamber. The banking panel is said to be pushing for a vote on the bill before the spring recess starts on April 11.

"There is broad support to fix our flawed housing system, and today's actions are a strong step toward ending the status quo," Crapo said in the press release.

The bill would establish a standardized securitization platform as well as a mutual cooperative into which banks up to $500 billion in assets would be able to sell their mortgages. It also provides detail around the transition to a new system, which would take place over at least five years. As the GSEs are being wound down, assessments would be collected to fund the new regulator, establish the securitization platform and the cooperative and the multifamily subsidiaries of the enterprises.

The Johnson-Crapo plan would eliminate the GSEs' affordable housing goals, instead capitalizing several affordable housing funds and providing incentives for lending in underserved communities. The National Housing Trust Fund and Capital Magnet Fund would be supported by a user fee of 10 basis points paid to the FMIC, and the regulator would also establish a new market access fund to "support innovation in responsible lending products, education, underwriting, and servicing."