Monday, May 19, 2014

Senate Banking Committee Marks Up and Approves Bi-Partisan Legislation Reforming Mortgage Finance and Securitization Markets

The Senate Banking Committee marked up, approved and favorably reported to the full Senate, by a bi-partisan vote of 13-9, the Housing Finance Reform and Taxpayer Protection Act of 2013, S. 1217, which represents a sweeping overhaul of the current mortgage finance and securitization system. The legislation would wind down and eliminate Fannie Mae and Freddie Mac and allow for a diverse set of private entities to step in and replace most of their functions. The new system establishes a type of mortgage-backed security with an explicit government backstop and 10 percent first-loss private secondary market capital to absorb losses and protect taxpayers from future bailouts.

The legislation would establish the Federal Mortgage Insurance Corporation (FMIC) as an independent federal agency to develop standard form credit risk-sharing mechanisms, products, and security agreements that require private market holders of a covered security insured under the Act to assume the first loss position with respect to losses incurred on such securities. To be eligible for FMIC reinsurance, any market structured mortgage-backed security must first secure private capital in a first loss position of at least 10 percent.

S. 1217 would also establish a Securitization Platform tol improve standardization and liquidity in the secondary mortgage market. It would create a standardized security to be used for all FMIC guaranteed securities in order to promote broad mortgage availability for 30-year, fixed-rate mortgages, and will be available for the issuance of private label securities. The Platform would also provide infrastructure for market participants of all sizes seeking to securitize mortgages, and will not assume or hold credit risk.

Banking Committee Chair Tim Johnson (D-SD) said that the legislation represents the final chapter of financial reform by addressing the most significant unresolved issue from the financial crisis, which is the housing finance and mortgage securitization system. Senator Johnson said that he and Senator Mike Crapo (R-ID), the Committee’s Ranking Member, will continue to build additional bi-partisan support for the legislation as it moves towards the Senate floor.

A Managers Amendment to S. 1217, offered by Chairman Johnson and Ranking Member Crapo, was approved by a voice vote. Among other things, the Amendment would clarify that, with respect to a covered security, the term issuer means an approved aggregator that issues such covered security through the platform. For a non-covered security, the term issuer will have the same meaning as under the Securities Act. Also, the platform will not be deemed to be an issuer of either covered or non-covered securities for purposes of the Securities Act.

Under the legislation, FMIC must, after consulting with the SEC, adopt rules requiring market participants to make available to private market investors in connection with the first loss position on a covered security documents relating to eligible mortgage loans collateralizing that covered security. The Managers Amendment would also require market participants to disclose to investors information that is substantially similar, to the extent practicable, to disclosures required of issuers of asset-backed securities under the Exchange Act until the covered security is paid in full. The exception is information that FMIC determines, in consultation with the SEC, is not applicable to a covered security. All disclosures must be made consistent with the antifraud provisions of the federal securities laws. 

The legislation would also provide insurance on any covered security for which any private market holders have assumed the first loss position with respect to losses and establish a Mortgage Insurance Fund. S. 1217 would authorize FMIC to provide insurance to any covered security regardless of whether it has satisfied credit-risk sharing requirements if unusual and exigent circumstances have created, or threatened to create, an anomalous lack of mortgage credit availability within the housing markets that could materially and severely disrupt the functioning of the housing finance system.

The measure would also amend the Securities Act and the Securities Exchange Act to exempt covered securities insured by FMIC from SEC regulation in general and from credit risk retention requirements in particular.