Senator Johnny Isakson (R-GA) has submitted
legislation to Congress that would put Fannie Mae and Freddie Mac out of
business while creating a new FDIC-like guarantee facility for the mortgage
industry. The Mortgage Finance Act of
2011 is similar to an idea proposed by the Mortgage Bankers Association (MBA). Isakson’s plan, however, anticipates the
termination of the agency he is creating by privatizing it once its value is
Isakson maintains that no plan for
reform of the two government sponsored enterprises (GSEs) has yet appropriately
dealt with the issue of whether there is to be a government wrap or
guarantee. Even though every
mortgage-backed security and debt issuance from the GSEs carried a disclaimer
that they were not backed by the full faith and credit of the U.S. government,
no one ever truly believed it. And now
that the government has funded the two GSEs to the tune of tens of billions of
dollars since they were placed in conservatorship it is obvious that under such
dire circumstances in the future the government will have no choice but to
become involved again. “The issue then
is to recognize that dilemma, eliminate any implied guarantee, replace it with
an explicit government guarantee, properly manage and pay for the guarantee,
and build in protection for the American taxpayer,” the summary of the bill
Isakson said that the debate over the
guarantee should not be the obstacle when other workable models exist and holds
up the FDIC as a prime example. Banks
customers, through fees collected by the bank, pay for the protection of the
federal government through an insurance fund and the same can be done for high
quality mortgage securitization.
The bill would create a new Mortgage
Finance Agency (MFA) a government agency that guarantees pools of qualified
residential mortgages (QRM) for a fee.
The fee will be actuarially based and priced to cover expected losses,
capitalize the new catastrophic fund, finance purchases of private sector supplemental
insurance and finance operations of the agency.
The fee will protect the agency from the risks of guaranteeing the
performance of mortgage backed securities (MBS) by building an industry funded
catastrophic fund that would eliminate the need for the government to step in
with taxpayer money in the event of a future mortgage market collapse. After recoupment of start-up cost MFA will
operate on revenues and not require further government resources.
The MFA will establish standards for QRM that reflect the
statutory language and intent of Dodd Frank rather than the narrower
interpretation of the March 2011 rule developed by regulators. It will specifically permit lending with a 5
percent downpayment supported by private mortgage insurance. The Agency will also establish standards for
multi-family mortgages and guarantee the liquidity of that market by guaranteeing
commercial MBS backed by high quality multifamily mortgages.
The MFA will be headed by a director appointed by the
president and regulated by a board composed of the Director, a presidentially
appointed Vice Chair, the Chair of the Securities and Exchange Commission, the
Secretary of Housing and Urban Development, and the Chairman of the Federal
Reserve. There will also be an advisory
board selected by the president and composed of individuals with industry
Within three years of the creation of the MFA, Isakson’s bill
would require it to begin planning for its transition to private hands no later
than at the conclusion of its tenth year of operation. When that transition is complete, all
proceeds from the sale of the MFA would be used to satisfy the unpaid balance
of any debt remaining from the conservatorship of the GSEs, then the remaining
obligations of the MFA with any residual used to pay down the national debt.
Operating on a separate track from the
establishment of this guarantee facility is Isakson’s proposal to terminate the
GSEs. His bill would require the Federal
Housing Finance Agency (FHFA) which functions as conservator for Fannie Mae and
Freddie Mac to consolidate their operations and mortgage portfolios and place
them into receivership no later than 18 months after the law becomes
effective. Once in receivership the two
would be prohibited from engaging in any new business and required to
immediately commence an orderly liquidation.
All remaining proceeds from the
operations under receivership and well as monies recovered from the liquidation
of GSE assets will go to repaying the taxpayers for the obligations incurred in
connection with the failure of the two GSE’s in September 2008.
View a one page summary of the bill.
View the full text of the bill.