GSE reform bill clears Senate Banking Committee

Mortgage Banking, July, 2008

A long-awaited major housing bill that would create a new regula- tor for all of the government-sponsored enterprises (GSE), as well as provide funding for FHA refinancings and create affordable housing cleared committee in the Senate in May--a move lauded by the Mortgage Bankers Association.

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In a vote of 19-2, the Senate Banking Committee passed the Federal Housing Finance Regulatory Reform Act of 2008 (H.R. 634) on May 20. The bill establishes an Office of Ombudsman at the new regulator for Fannie Mare, Freddie Mac and the Federal Home Loan Banks, and calls for up to $400 billion in funding for FHA mortgage refinancings.

The bill also requires the regulator to issue regulations establishing criteria governing the portfolio holdings of the GSEs, to ensure the holdings are backed by sufficient capital and are consistent with the mission and the safe and sound operation of the enterprises.

In establishing the criteria, the regulator must consider: the ability of the enterprises to provide a liquid secondary market through securitization activities; the portfolio holdings in relation to the overall mortgage market'; and adherence to prudential management standards, according to a summary of the manager's amendment.

"The passage of this bipartisan legislation marks tremendous progress in my ongoing effort to help stabilize our markets and provide relief to hundreds of thousands of Americans who, due to no fault of their own, are struggling to keep their homes," said Senate Banking Committee Chairman Christopher Dodd (D-Connecticut).

"By creating a voluntary initiative to help distressed borrowers refinance their mortgages, establishing a new fund that will help create more affordable housing for millions of Americans and reforming the GSEs so they are better able to fulfill their mission of providing affordable housing options, this bill addresses the root of our current economic problems--the foreclosure crisis--and takes a step in the right direction toward getting our economy back on track," the chairman noted.

The bill establishes the high-cost loan limit for Fannie Mae and Freddie Mac of 132 percent of the conforming loan limit. Currently, this would allow for the purchase of loans up to $550,000.

The bill also prohibits the GSEs from "holding loans purchased with principal obligations greater than the normal conforming limit on their portfolios, either as whole loans or mortgage-backed securities (MBS), except to the extent that such loans are held for the purposes of securitization."

Furthermore, the bill renames the Affordable Housing Block Grant Program as the Flousing Trust Fund, allows additional monies to be placed in the fund, and clarifies that 75 percent of the amounts in the fund shall be used for the benefit of extremely low-income families.

MBA Chairman Kieran P. Quinn, CMB, called the bill's passage out of committee a "very important development" that could play a large part in helping the recovery of the housing and mortgage sectors.

"The GSEs need strong regulatory oversight to ensure they operate in a safe and sound manner, consistent with their charters. Further, we believe the GSEs ought to be subject to reasonable affordable-housing goals that do not distort the market," said Quinn. "The proposal to allow FHA to assist troubled borrowers has the potential to help stabilize markets and avoid foreclosures. We want to ensure there are appropriate safeguards to help deserving borrowers while keeping the program voluntary for lenders."

Dodd said he is hopeful the bill could reach the Senate floor for a vote before Congress adjourns for summer recess in July.