June 26, 2013

Everything You Need to Know about the Corker-Warner GSE Reform Bill

Yesterday Sen. Bob Corker (R-Tenn.), Sen. Mark Warner (D-Va.) and a bipartisan group of cosponsors introduced a bill that would dissolve Fannie Mae and Freddie Mac and establish a new system of housing finance in the U.S. This is a significant step in deciding the future of Fannie and Freddie, who were placed under government conservatorship almost six years ago.

Here’s how the proposed system would work. Fannie and Freddie would be wound down over a five-year period and replaced with private companies and a new government-owned corporation, called the Federal Mortgage Insurance Corporation or FMIC. The corporation’s mission would be to regulate the entire secondary mortgage market, insure investors against catastrophic losses on qualifying mortgage-backed securities and ensure a liquid and resilient mortgage market.

How Would the Corker-Warner Bill Work?

On the single-family side, privately funded, government-approved entities would buy qualifying mortgages and package them into securities, much like what Fannie and Freddie do today. Other privately funded, government-approved entities would then insure timely payment of principal and interest on those securities—another role Fannie and Freddie play today.

If the security meets a few basic requirements, issuers would then have the option to purchase reinsurance against catastrophic risk from the FMIC. The government guarantee would only be available on securities made up of safe mortgages—defined by the recent “Qualified Mortgage” rule and an additional five-percent down payment requirement—and the guarantee would only cover up to 90 percent of the security’s value. The remaining 10 percent must be covered by private sources, except in times of crisis.

The FMIC would charge an appropriate fee to cover expected losses, plus a capital buffer of 2.5 percent. Fees would be kept in a Mortgage Insurance Fund to handle incoming claims, backed by the full faith and credit of the U.S. government.

The FMIC would also set rules for the entire secondary mortgage market and manage a single platform for the issuance and management of all FMIC-backed securities. In exchange, it would charge a 5 basis point fee on all FMIC-backed securities to fund affordable housing initiatives through the Housing Trust Fund and Capital Magnet Fund. All affordable housing goals would be eliminated.

The multifamily system would function a little differently. Instead of winding down Fannie’s and Freddie’s multifamily business—both of which have remained steadily profitable since the crisis began—the bill simply transfers this business to FMIC. The bill authorizes the FMIC to purchase, securitize and guarantee multifamily mortgages—for a fee, of course—backed by the full faith and credit of the U.S. government.

The Corker-Warner bill is a promising step forward in the debate over housing finance reform, and it takes many of the necessary steps to ensure a stable, liquid and equitable housing market. Enterprise looks forward to working with members of Congress, the Obama administration and our partners across the country to hone the finer details of the proposal and ensure that any future system supports both sustainable homeownership and affordable rental opportunities.

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