March 19, 2015 Alert - SFIG’s Analysis of the Partnership to Strengthen Homeownership Act
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March 19, 2015
 

SPECIAL ISSUE SPOTLIGHT:

SFIG's Analysis of the Partnership to Strengthen Homeownership Act

By Michael Flood, Director of Advocacy, SFIG

This afternoon, Congressmen Carney (D-DE), Delaney (D-MD) and Himes (D-CT) reintroduced their vision for reforming the government-sponsored enterprises (“GSEs”), The Partnership to Strengthen Homeownership Act of 2015 (“Act”).

Below, please see a special issue spotlight that provides a high-level overview of the Act, along with a broad comparison to SFIG's established policies. To review a detailed summary of the Act, as well as how it compares to other legislative efforts to reform the housing finance system (e.g., Johnson-Crapo, PATH), please see SFIG’s GSE reform legislative comparison here.

Overview of the Act 

Purpose: The purpose of the Act is to facilitate a liquid, resilient and transparent secondary mortgage credit market through preserving the liquidity of all products currently eligible to trade in the to-be-announced (“TBA”) market.

Regulatory Structure: Ginnie Mae (“Ginnie”) is removed from the Department of Housing and Urban Development and established as an independent agency governed by a five-member Board of Directors. Ginnie will have the power to regulate, examine and set capital levels for any market participant that securitizes loans receiving a government guarantee. Ginnie will also set underwriting and servicing criteria for participants. The Federal Housing Finance Agency (“FHFA”) is abolished, and its assets are moved to Ginnie.

GSE Wind Down: The GSE’s are wound down over a 5-year period (with options to extend the deadline as needed), with the government guarantee and charter removed.

Guarantee Structure: Ginnie will create an insurance program, whereby all government guaranteed mortgage-backed securities (“MBS”) are backed by the full faith and credit of the U.S. government. The guarantee will be supported by 5 percent private sector capital standing in a first loss position. The remaining 95 percent of the risk will be shared between Ginnie and a private reinsurer on a pari passu basis. Aggregators and originators are allowed reduce the capital requirements through the use of capital markets transactions to pre-fund the risk, (such as credit-linked notes). Ginnie will design and study two programs to implement such a structure, with the ability to implement either or both:

  1. Reinsurance Bid Program: Ginnie will secure forward reinsurance contracts with market participants on a periodic basis to cover 100 percent of its expected exposure on the 5 percent first-loss. For the 95 percent second-loss, Ginnie will seek reinsurance contracts for 100 percent of its expected exposure, but will offer retrocessional reinsurance for up to 90 percent of the 95 percent exposure. 

  2. Guarantor Program: Any originator or aggregator that securitizes a pool of eligible mortgage loans and wants a government wrap must contract directly with a market participant to insure the first 5 percent of loss. Ginnie will also sign reinsurance contracts with market participants to reinsure the last 95 percent of losses, as well as a retrocessional contract to reinsure up to 90 percent of the 95 percent.

Fiduciary Duty: The Act requires Ginnie and the U.S. Treasury to conduct a joint study to determine the proper roles and responsibilities with respect to a fiduciary duty for each participant in a private-label security (“PLS”), as well as the appropriate compensation and proper placement in the transaction for such a duty. Ginnie and Treasury must take into account stakeholder efforts to conclude which party (if any) should have a fiduciary duty. The findings and conclusions of the study will be reported to Congress.

Eligible Loans and Loan Delivery: Ginnie is required to establish a common securitization platform (“CSP”) and single-security as requirements for securitized loans to receive a government guarantee. Eligible loans must also meet qualified mortgage (“QM”) standards and loan limits are reduced to pre-crisis levels of $417,000. Small lenders may use either the GSE’s (during the wind-down period), or the Federal Home Loan Banks in order to aggregate pools of mortgages.

Multifamily Housing: The current GSE multifamily business will continue to function within the new housing market as private entities with an explicit government guarantee provided by Ginnie together with a private sector reinsurer.

Affordable Housing: Ginnie will have a duty to serve all markets. Similar to Johnson-Crapo, the Act will assess a 10 basis-point fee on the total principle balance of securitized mortgages, and allocate 75 percent to the Housing Trust Fund, 15 percent to the Capital Magnet Fund, and 10 percent to the Market Access Fund.

Application of SFIG’s Principles to the Act

SFIG's established policy positions have been developed around several core principles that it believes are critical to any effort to reform our nation’s housing finance system, most notably:

  • Maintain private capital as a vital component of a well-balanced housing finance system;
  • Preserve and grow the TBA market;
  • Preserve the 30-year fixed-rate mortgage;
  • Create a common TBA security and common securitization platform specific to GSE issuance;
  • Preserve the liquidity of legacy securities; without creating a bifurcated market; and
  • Create a deliberate and orderly transition from the existing GSE’s.

If we apply SFIG’s principles to the Act, we find much agreement, as well as a few concerns:

Maintain Private Capital as a Vital Component of a Well-Balanced Housing Finance System: The Act benefits private capital in four important ways:

  1. Loan Limits: It re-sets conventional loan limits to $417,000, with few exceptions. Over 90 percent of newly originated loans are guaranteed by the government. Reducing loan limits would effectively reduce the government’s market share, thereby reducing the risk to taxpayers, and allow expansion of the PLS market. 
  2. Qualified Mortgage (“QM”) Loans: The Act limits the government guarantee to QM loans. Such a limitation might also allow PLS to securitize high-balance and prime-quality non-QM loans, a mainstay of the marketplace. 
  3. Fiduciary Duty: The bill requires a study to determine whether a fiduciary duty should be required for PLS transactions. Importantly, the study must take into account any industry efforts to conclude which party (if any) should have such a duty. This approach aligns perfectly with SFIG’s RMBS 3.0 project, whereby our Role of the Transaction Parties and Bondholder Communications work-stream are already heavily engaged in this exact evaluation.
  4. Credit Risk Transfer: The Act allows credit risk transfer to take place through a guarantee model with an option to pre-fund the risk. The guarantee is supported by 5 percent private sector capital standing in a first-loss position. The remaining 95 percent of the risk is shared between Ginnie and a private reinsurer. While SFIG appreciates that this guarantee structure is a stimulant for private capital, we are cognizant that the model would likely fail without the provision to pre-fund the risk. In the case of either the 5 percent or the 95 percent, SFIG believes that the magnitude of day one capital required for a guarantor or reinsurer could be a substantial barrier to entry, as it would need to account for a severe crisis scenario. Therefore, SFIG supports the Act’s provision that creates opportunities to build capital by prudently laying-off, or hedging the risk through the use of a capital markets execution (e.g. credit-linked note). Such transactions create immediate cash on hand which may be invested in highly-liquid assets (e.g., U.S. Treasuries) to guarantee that in the event of losses, any investor shortfalls are covered. 

Provided it is carried out on a staged and measured basis, lowering loan limits, restricting government loans to QM loans, and enabling the use of capital markets transactions – taken in conjunction with conclusions drawn from SFIG’s RMBS 3.0 project – may provide meaningful stimulus towards establishing PLS as a strong pillar of the U.S. housing finance system.

Preserve the TBA Market: The purpose of the Act includes a clear goal of preserving the TBA market. SFIG believes that the TBA market provides an important hedge for loan originators that allows borrowers to “lock in" rates – a critical component to providing consumers with certainty of execution, usually at an advantageous interest rate.

Preserve the 30–Year FRM: The 30–year Fixed-Rate Mortgages ("FRM") is extremely important in the United States, as it allows consistency in payments over the life of the loan for consumers. The ability to lock in long term fixed rate funding is somewhat unique to the U.S. housing system, with other countries often exposing the consumer to floating rate mortgages and potential payment shock due to the absence of payment predictability. The Act aligns with SFIG’s principle to preserve the 30-year FRM, as it specifically mentions preserving the liquidity of eligible TBA products such as the 30-year FRM.

Create a Common TBA Security and Implement a Common Securitization Platform Specific to GSE Issuance: The Act requires Ginnie to establish a common TBA security and create a common securitization platform for guaranteed securities, which SFIG supports. However, there is a concern that the FHFA’s current initiative to create a single-security is being undertaken in advance of GSE reform. Therefore, great care must be taken to avoid any ‘double transition’ risk if the FHFA initiative does not completely align with this Act or any other future housing finance legislative reform efforts.

Preserve the Liquidity of Legacy Securities without Creating a Bifurcated Market: The Act calls for Fannie Mae and Freddie Mac to be wound down, however, it ensures that guarantees on legacy securities are insured by the full faith and credit of the U.S. government. The Act also allows for legacy securities to be exchanged, at the request of the holder, for Ginnie guaranteed securities. However, there is a concern that confidence in the market could be shaken if the transition from the current system is not handled correctly. Specifically, a bifurcated market could be created if some legacy securities are converted to Ginnie guarantees and some are not.

Create a Deliberate and Orderly Transition from the Existing GSE’s: The Act requires a five-year transition period from the current system to the new Ginnie guarantee structure, while allowing for multiple two-year extensions as needed. The bill requires Ginnie to test and retest the CSP, single-security, guarantee structures, and eligibility criteria, with market participants to ensure they are operational before certifying that the market is ready to transition to the new system. If Ginnie determines that there are operational concerns, then it is allowed to use Fannie Mae and Freddie Mac’s infrastructure to perform issuance until all issues are resolved. As a governance check, Ginnie must report its implementation progress on a quarterly basis to Congress. On its face, the bill’s checks and balances prior to a full transition to the new structure aligns with SFIG’s principles. In fact, when SFIG testified before the Senate Banking, Housing, & Urban Affairs Committee, we recommended that while new infrastructure is tested, the current system should operate in tandem to protect the marketplace.

The above is intended as a "first–read" high-level summary of the new bill, together with a high-level SFIG policy application. SFIG, through its GSE reform task force, will be updating its legislative briefing book to develop a more comprehensive review, which will be published in the next few days. To be part of that task force please email Amanda.Bateman@sfindustry.org.

 
 
SFIG COMMITTEES AND TASK FORCES

SFIG has a number of Committees and Task Forces meeting and working on many topics of interest to the securitization industry. Please email us for more information, including how to join.

SFIG is pleased to share this edition of its newsletter with our members, as well as our supporters in the structured finance community. To ensure that you receive future editions of the newsletter, please visit our website or email us to learn more about membership opportunities.

Contact Information

Richard Johns Executive Director

Kristi Leo Investor Relations

Sairah Burki Director of ABS Policy

Michael Flood Director of Advocacy

Mary Robinson Policy Manager

Alyssa Acevedo Policy Analyst

Amanda Bateman Policy Analyst

Daniel Tees Policy Analyst

Jennifer Serpas Office Manager

Allison Creswell Executive Administration

1775 Pennsylvania Ave. NW
Suite 625
Washington, DC 20006

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