March 17, 2014

Senate lawmakers release text of proposed GSE reform legislation

Key members of the Senate Banking Committee recently released the text of a proposal that could impact U.S. debt sales by reforming current housing finance regulations.

Senator Tim Johnson, chairman of this committee, and Mike Crapo, ranking member of this group of lawmakers, provided the language for this legislation on March 16. They announced the proposal during the previous week.

How the proposal would impact US debt sales
If approved, this legislation would impact the market for U.S. debt sales in several key ways. First of all, the proposal would create the Federal Mortgage Insurance Corp. - a new regulator for the housing finance market. The bill would also slowly shut down Freddie Mac and Fannie Mae.

Banks with as much as $500 billion in assets under management would be able to sell their mortgages into a mutual cooperative, according to American Banker. In addition, the bill would create a standardized securitization platform. The proposal would also impact the fixed-income markets by guaranteeing some mortgage-backed securities.

FMIC would create more stringent standards
The FMIC would help provide a safer market for mortgage-backed securities by developing and implementing higher standards for these bonds. To be eligible for inclusion in these financial instruments, loans would need to meet more stringent requirements for both underwriting and securitization.

A wide range of industry participants and other key parties reacted positively when lawmakers announced that they had reached an agreement on the proposed legislation. These different entities, which included the White House, members of both the Senate and the House, and others, lauded the progress created by providing this bill.

The lawmakers spent several months negotiating the different facets of this bill, and the Senate Banking Committee met several times in the fall to finalize the language of this legislation. Johnson noted the momentum that surrounds the proposal in a statement.

"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," said Johnson. "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."