Editor: David Reiss
Brooklyn Law School

January 31, 2018

What Housing Finance Reform May Look Like

By David Reiss


A class photo of the 111th United States Senate

Senate Staff Discussion Draft #29 of the much discussed housing finance reform bill has just seen light of day. The purpose clause of the draft gives an overview of what the drafters are trying to accomplish:

  1. to offer a guarantee backed by the full faith and credit of the Federal Government of the timely payment of principal and interest on eligible mortgage-backed securities in order to foster a liquid housing finance market across the United States and during changing economic conditions and to promote the continued availability of an affordable, fixed rate, pre-payable long-term mortgage loan, such as the 30-year fixed rate mortgage loan;
  2. to protect taxpayers against losses that might arise out of that guarantee by arranging for private sector entities to assume the risk of loss on guarantee mortgage-backed securities and to capitalize a mortgage insurance fund;
  3. to protect taxpayers against bailouts of any of those entities by ensuring that none becomes “too big to fail”;
  4. to foster a competitive secondary mortgage market;
  5. to promote access to affordable mortgage credit and affordable housing across the United States, including to underserved borrowers;
  6. to ensure that mortgage lenders of all sizes, charter types, and locations have equitable access to the secondary mortgage market; and
  7. to provide for a gradual and smooth transition to the housing finance system contemplated by this Act. (Sec. 2)

There are no real surprise here, but there are a couple of things worth emphasizing. The draft proposes a framework where the Common Securitization Platform currently being built to support a Single Security would be used by a half dozen or more mortgage guarantors. This would be a significant move away from the Fannie/Freddie duopoly we now have. The draft even goes so far as to forbid the use of the names Fannie and Freddie by any of the mortgage guarantors. The draft also appears to contemplate a strong affordable housing role for the actors in this new system, with its emphasis on “underserved borrowers.”

As with all important bills, though, the devil is in the details. We’ll have to wait and see how those details start to fill out before we have a real sense who the real winners and losers will be in this new system. That being said, it is great to see that Congress is making some bipartisan progress in addressing the last unresolved issue from the financial crisis — defining the scope of the government’s appropriate role in the housing finance system.

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