On September 6, the tenth anniversary of the federal government’s takeover of Fannie Mae and Freddie Mac, retiring House Financial Services Committee chair Jim Hensarling (R-TX) released a discussion draft for the Bipartisan Housing Finance Reform Act. The measure is co-sponsored by Reps. John Delaney (D-MD) and Jim Himes (D-NY) and would eliminate Fannie Mae and Freddie Mac, moving most of their functions into Ginnie Mae. Billed as a “grand bargain” the measure would codify an explicit government Mortgage Backed Securities (MBS) guarantee into law, coupled with an affordability program in exchange for placing the taxpayer in a catastrophic loss position only diffusing the credit risk beyond two GSEs, and creating market competition.
While, in Hensarling’s estimation, comprehensive market-based reform which he prefers is not currently achievable, the new bill, proposes using a relationship between the private sector and Ginnie Mae in place of the current GSEs to guarantee qualified privately insured mortgage-backed securities. According to the press announcement, the new process would “allow qualified mortgages backed by an approved private credit enhancer with regulated, diversified capital resources to access the explicit, full government securitization guarantee provided by Ginnie Mae.”
Loan originators would have to acquire coverage from an approved “credit enhancer,” or private mortgage credit guarantor, to use the Ginnie Mae system. That would function as a private capital buffer on the loan, which could then be securitized by any of Ginnie Mae’s more than 400 approved issuers with an explicit, full government guarantee of mortgage-backed securities.
Hensarling warned that if the political will to enact reform stalls, the Trump Administration, which plans to announce a new Federal Finance Housing Agency director in January, can institute the reforms administratively. “And I call on them to do so,” Hensarling concludes.
Given the short amount of time left in the current legislative session, it is unlikely that the measure will be enacted before 115th session of Congress concludes this winter. However, additional hearings and debate is possible and the measure could serve as a starting point for GSE reform in the 116th Congress. Click here for a section by section summary of the legislation.
