ABA SECTION-BY-SECTION ANALYSIS S. 1217, THE HOUSING FINANCE REFORM AND TAXPAYER PROTECTION ACT OF 2013

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1 ABA SECTION-BY-SECTION ANALYSIS S. 1217, THE HOUSING FINANCE REFORM AND TAXPAYER PROTECTION ACT OF 2013 INTRODUCED BY SENATORS BOB CORKER (R-TN), MARK WARNER (D-VA), JON TESTER (D-MT), MIKE JOHANNS (R-NE), KAY HAGAN (D-NC), HEIDI HEITKAMP (D-ND), DEAN HELLER (R-NV) AND JERRY MORAN (R-KS) Section 1(a) Short Title and Table of Contents Section 1(b) Definitions Includes the following: Approved Issuer: must be approved by the Federal Mortgage Insurance Corporation (FMIC) (established in Section 101) to issue covered securities, and purchase insurance offered by the FMIC for the portion of the covered security for which private market holders have not assumed a first loss position. Defines Approved Mortgage Insurer, Issuer, Servicer, and Bond Guarantor. Defines the Board of Directors of the FMIC. Defines Certification Date as a date not later than five years after enactment when the FMIC Board must certify that it is fully operational. Defines a covered security as MBS collateralized by eligible mortgages, issued subject to a standard credit risk sharing mechanism, product, structure, contract or other securitization agreement developed by the FMIC and which is eligible to be insured by FMIC. Defines an eligible mortgage as a residential loan secured by 1 to 4 single-family dwellings that conforms with QM, and has a maximum loan limit (starting at $625,000 and falling to $417,000 over six years). Loans must also have 20% down payment or mortgage insurance. TITLE I Federal Mortgage Insurance Corporation Section 101. Establishment Establishes the FMIC 1

2 Establishes the purpose of the FMIC to foster liquidity and availability of mortgage credit in the market and protect taxpayers from losses. Section 102. Director Establishes the position of FMIC Director and sets a five-year term requiring appointment by the President and confirmation by the Senate. Disallows any prior Director of the FHFA from serving as Director of the FMIC or from serving as both Director of FHFA and of FMIC or from serving on the FMIC Board after FHFA is abolished. Establishes the FMIC Director as a member of the FSOC. Section 103. Board of Directors Establishes a five-person Board of Directors with the FMIC Director as Chairperson. Board members must include: individual with mortgage market experience; individual with insurance experience; individual with community banking experience; and individual with multifamily housing experience. The FHFA Director serves as a non-voting member of the FMIC Board until FHFA is abolished. Section 104. Office of the Inspector General Establishes an independent Inspector General for FMIC. Requires IG to report annually on the adequacy of insurance (guarantee) fees charged by the FMIC and on the adequacy of the mortgage insurance fund. Section 105. Staff, Experts, and Consultants FMIC is authorized to hire staff, experts and consultants as needed to meet its mission. Section 106. Reports, Testimony and Audits Requires the FMIC to report annually to the House Financial Services Committee and the Senate Banking Committee on its operations, budget, and activities over the previous 12-month period. The report must include the financial condition of the mortgage insurance fund, exposure of the fund to changing economic factors, analysis of the secondary mortgage market, and the housing market generally. The report must also provide analysis of the reserve ratio of the fund and analysis on further reducing the conforming loan limit beyond reductions made in the Act. Section 107. Initial Funding 2

3 Authorizes the FMIC to receive annual assessments (beginning upon enactment) from Fannie Mae and Freddie Mac in an amount not exceeding the amount sufficient to provide for the reasonable costs and expenses of the FMIC. Title II Duties, Responsibilities and Structure of the FMIC Subtitle A Duties and Authorities Section 201. Duties and Responsibilities FMIC is charged with: Ensuring a liquid and resilient housing finance market and the availability of mortgage credit; Developing standard risk sharing mechanisms, products, structures, contracts or other security agreements requiring private-market holders to assume a first-loss position before the government assumes any losses; Providing insurance on the portion of the covered security for which private market participants have not taken a first-loss position; Charging and collecting insurance premiums sufficient to protect taxpayers from loss; Establishing the Mortgage Insurance Fund; Facilitating securitization for all sizes and types of financial institutions participating in the mortgage market; Developing and maintaining databases needed for public use and dissemination of uniform loan level information on eligible mortgages; Establishing and maintaining a registry for eligible mortgages that collateralize covered securities; Oversight of the common securitization platform. Section 202. Standard Form Credit Risk Sharing Mechanisms, Products, Structures, Contracts, or Other Security Agreements Requires the FMIC to develop standard risk-sharing mechanisms that ensure first-loss positions of private market participants adequate to cover losses that may be incurred as a result of adverse economic conditions ranging from moderate to severe, taking into account recessions observed over the last 100 years and NOT LESS than 10 percent of the principal or face value of any covered security. 3

4 Mechanisms must be complete and implemented within five years of enactment. FMIC is directed to consider structures and participants, such as credit linked notes and insurers with sufficient equity capital to absorb losses, as well as to consider mechanisms being studied by the FHFA for the common securitization platform. FMIC must consider the impact on the availability of mortgage credit, interaction with the To Be Announced (TBA) market, and the impact on smaller financial institutions and individual borrowers. FMIC is required to report to the House Financial Services Committee and the Senate Banking Committee within one year of enactment on the structures/approaches being considered, and again after the end of five years. Section 203. Mortgage Insurance Fund Establishes the Fund to cover losses incurred on covered securities when losses exceed the first loss position absorbed by private market holders of said securities. The Fund is composed of insurance fee amounts deposited in the fund, g-fee amounts (required under Section 601 below) and amounts earned on investments of the fund. Within five years of enactment, the Fund must maintain a balance equal to 1.25 percent of the sum of outstanding principal balance of covered securities for which insurance in being provided. Fund must reach 2.5 percent of outstanding principal within ten years of enactment OR such higher amount as the FMIC deems appropriate. FMIC is required to set and collect fees from institutions and must do so through uniform pricing. Fees cannot vary by geographic location or size of the institution charged. The Fund carries the full faith and credit (explicitly) of the United States Government. Section 204. Insurance Authorizes the FMIC to insure the timely payment of principal and interest on the portions of covered securities not covered by the first loss of private investors. Section 205. Authority to Protect Taxpayers in Unusual and Exigent Market Conditions Authorizes the FMIC Director, in coordination with the Chairman of the Board of Governors of the Federal Reserve System, and the Secretary of the Treasury to determine that unusual and exigent circumstances have created a lack of mortgage credit and allow for the issuance of securities without private capital risk sharing, for a period not to exceed six months. This authority cannot be used more than once in a three-year period. Section 206. General Powers 4

5 Sets forth generalize powers of the FMIC. Section 207. Exemptions Provides an exemption from the securities laws for all covered securities as well as an exemption from QRM for covered securities. Subtitle B Oversight of Market Participants Section 211. Approval of Private Mortgage Insurers FMIC charged with developing standards for approval of private mortgage insurers to provide PMI on eligible securities. Required standards to include: financial history and condition, adequacy of capital, general character and fitness, risk presented by the insurer to the fund, audited financial statements, and any other standard FMIC deems necessary and appropriate. To avoid conflicts of interest, Mortgage Insurers of individual mortgages are not allowed to also be Bond Guarantors of securities guaranteeing timely payment of principal and interest to investors. Section 212. Approval of Servicers FMIC is charged with developing standards for the approval of servicers to administer eligible mortgages. Standards must include: collection processes, maintenance of escrow accounts, collection of taxes and insurance premiums, maintenance of records, and foreclosure and loss mitigation services. Section 213. Approval of Issuers FMIC is charged with developing standards for the approval of issuers to administer eligible mortgages. Standards must include: ability to aggregate loans into pools, ability to securitize loans for sale to private investors as a covered security, transfer of risk to private market participants, ability to ensure equitable access to the secondary market for all institutions regardless of size, ability to create multi-lender pools. Additionally, issuers must meet standards including financial history and condition, adequacy of capital, general character and fitness, risk presented to the fund, audited financial statements and any other standard the FMIC deems necessary and appropriate. Federal Home Loan Banks are authorized to become approved issuers (but must be separately capitalized from their existing business). 5

6 Limits any approved issuer from gaining more than 15 percent aggregate market share over a 12 month rolling average. Such market caps do not apply to issuance of loans originated by the issuer or their affiliate. Section 214. Approval of Bond Guarantors FMIC is charged with developing standards for the approval of bond guarantors to ensure timely payment of principal and interest on covered securities. Required standards include: financial history and condition, adequacy of capital, general character and fitness, risk presented to the fund, audited financial statements, minimum tangible common equity level, and any other standard deemed necessary and appropriate by the FMIC. Section 215. Authority to Establish FMIC Mutual Securitization Company FMIC is required to set up a mutual structure for small- and medium-sized community banks, credit unions, and non-depository mortgage originators to develop, securitize, sell and otherwise meet the issuing needs of such institutions. Eligible members of such a mutual structure shall have less than $15 billion in total consolidated assets, or if a non-depository, have a minimum net worth of $2.5 million. Section 216. Additional authority relating to oversight of market participants FMIC is provided with additional authority to draft rules to ensure adequate competition among market participants. Section 217. Civil Money Penalties FMIC is authorized to issue civil money penalties, as well as to suspend or revoke approval of market participants to engage within the FMIC structure. Section 218. Protection of Privilege and Other Matters Relating to Disclosure by Market Participants FMIC is required to establish policies and procedures to ensure that information provided to the FMIC by market participants is adequately protected. Subtitle C Transparency in Market Operations Section 221. Review of Loan Documents; Disclosures FMIC is required to issue rules requiring approved issuers and bond guarantors to grant access to all loan documents and files of loans collateralizing a security, as well as servicing reports, to investors seeking to take a first-loss position. Rules must also establish the right to material information that a reasonable investor would want to know and not allow for any material omission of information. 6

7 FMIC must also consider privacy concerns when setting disclosure rules. Section 222. Investor Immunity Investors in covered securities are provided broad immunity from civil liability under federal and state law. Section 223. Uniform Securitization Agreements FMIC is required to develop uniform securitization agreements for covered securities. These agreements must include: PSA s, practices permitting transfer of servicing rights, reps and warrants, indemnifications and remedies, and the qualifications, responsibilities and duties of trustees. Section 224. Uniform Mortgage Database FMIC is required to establish and maintain a database for the collection, public use, and dissemination of uniform loan-level pricing information including: loan characteristics, borrower information, property information, appraisal information, industry servicing standards, and any other information the FMIC deems appropriate. Section 225. Electronic Registration of Eligible Mortgages FMIC is required to establish and maintain an electronic registry system for eligible mortgages. Subtitle D FMIC Structure Section 231. Office of Underwriting An Office of Underwriting is created within the FMIC and charged with the following duties: oversight, analysis and examination of eligible mortgages collateralizing a covered security to ensure adherence to the guidelines set forth by the FMIC. Section 232. Office of Securitization An Office of Securitization is created within the FMIC and charged with overseeing all securitization activities regulated by the FMIC including: transitional issues previously done by Fannie Mae and Freddie Mac, coordination and operation of the TBA market, supervision of the securitization platform developed by the FHFA. This office shall also ensure equal access for all market participants regardless of size and shall consult with the Federal Home Loan Banks to establish a securitization platform to address the needs of FHLB member users. Section 233. Office of Federal Home Loan Bank Supervision A Deputy Director is established and charged with supervision of the Federal Home Loan Banks. 7

8 Title III Transfer of Powers, Personnel, and Property to FMIC form FHFA Section 301. Powers and Duties Transferred All powers and duties of the FHFA are transferred to the FMIC Section 302. Transfer of Right and Employees of the FHFA All FHFA employee positions are transferred to the FMIC and all employees of the FHFA are granted guaranteed positions. Section 303. Abolishment of FHFA FHFA is abolished after all powers and duties are transferred. Section 304. Transfer of Properties and Facilities FHFA properties and facilities are transferred to the FMIC. Section 305. Technical and Conforming Amendments Title IV Improving Transparency, Accountability, and Efficacy Within Affordable Housing Section 401. Affordable Housing Allocations Not less than 5 basis points and not more than 10 basis points for each dollar on the outstanding principal balance on each covered mortgage are set aside and 80 percent of these funds is transferred to the Housing Trust Fund (established under HERA) and 20 percent is transferred to the Capital Magnet Fund, so long as such allocation does not contribute to the financial instability of the Mortgage Insurance Fund. Section 402. Housing Trust Fund Subsection (b) of Section 1338 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, allocating funds for HOPE bond payments is repealed. Activities eligible for grants from the Housing Trust Fund are amended by allowing grants and loans that support the research and development of sustainable homeownership and unsubsidized affordable rental programs for the benefit of families with incomes not exceeding 120 percent of the area s median income. Limited credit enhancements for these same purposes are also authorized. 8

9 Section 403. Capital Magnet Fund Repeals paragraph 7 of subsection (h) of Section 1339 of the Federal Housing Enterprises Financial Safety and Soundness Act of Section 404. Additional Taxpayer Protections Provides that grant amounts are used only for the benefit of lawful U.S. citizens and permanent residents and are not to be used for political purposes. Title V Wind Down of Fannie Mae and Freddie Mac Section 501. Repeal of GSE Charters Repeals Fannie Mae and Freddie Mac charters upon certification of FMIC and prohibits new business by them after such date. Provides for subsumation of all existing rights, responsibilities and obligations of Fannie Mae and Freddie Mac by the FMIC. Existing guarantee obligations of Fannie Mae and Freddie Mac receive full faith and credit of the United States Government. Section 502. Wind Down After certification date, the FMIC Director, in consultation with the Secretary of the Treasury, shall put in place a process for winding down Fannie Mae and Freddie Mac. Wind down must be carried out consistent with the goal of maximizing the return to the taxpayer, along with ensuring maximum value for the senior preferred and common shareholders of Fannie Mae and Freddie Mac. Section 503. Aligning Purpose of Conservatorship with FMIC Rewrites the current powers of FHFA as conservator of Fannie Mae and Freddie Mac to support the goals of the FMIC under this Act. Section 504. Conforming Loan Limits Establishes the wind down of conforming loan limits described above (reducing the loan limits by $42,000 per year over six years). Allows maximum amounts to be increased by percentage increases in the home price index. Also allows for high-cost area loan adjustments upward but sets that limit at 115 percent of the median home price (as opposed to the current 150 percent). 9

10 Section 505. Portfolio Reduction Requires FMIC to wind down Fannie Mae and Freddie Mac current portfolios. Does not establish a time frame. Section 506. Repeal of Mandatory Housing Goals Fannie Mae and Freddie Mac housing goals are repealed. Title VI Improvements to Functioning of Housing Market Section 601. Continuation of Multifamily Business of the Enterprises All multifamily functions of Fannie Mae and Freddie Mac are transferred to the FMIC. Section 602. Multiple Lender Issues Requires that for any second-lien transactions causing the original loan to value to exceed 80 percent, the creditor of the new mortgage must seek and obtain the approval of the creditor of the senior eligible mortgage loan before any transaction can occur. Section 603. GAO Report on Full Privatization of the Secondary Mortgage Market Requires GAO to submit a report to the House Financial Services and Senate Banking Committees (within eight years of enactment) on the feasibility of maintaining a fully privatized secondary mortgage market. The report must include recommendations on how to best carry out any displacement of the insurance model established by this Act. Title VII General Provisions Section 701. Authority to Issue Regulations FMIC is given general rule writing authority. Section 702. Fair Value Accounting FMIC is required to use fair value accounting with respect to oversight of the insurance fund. Section 703. Rule of Construction Allows that nothing in the Act prevents a covered security from being restructured, retrenched, or re-securitized. 10

11 Section 704. Severability General severability clause so that if any part of the Act is declared inoperable, the other parts stand. 11