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Republicans unveil plan for private mortgage funding

by Ira Teinowitz | Published October 28, 2011 at 9:20 AM

House Republicans on Thursday, Oct. 27 took a step toward their goal of replacing Freddie Mac and Fannie Mae by announcing plans for legislation they said could make it easier for the private market to assert a bigger role in financing residential mortgages.

At the same time, they said the legislation would include two controversial elements.

The legislation would remove the risk retention section of the Dodd-Frank Act that requires banks to retain "skin in the game" on more risky loans. That section, intended to force banks to be more careful in the loans they make, as proposed by regulators would require banks to hang on to a part of loans with less than a 20% down payment.

It could also bar regulators from unilaterally trying to force investors to write down the value of any securitizations.

Rep. Scott Garrett, R-N.J., the chairman of the panel of the House Financial Services Committee that oversees the Government Sponsored Enterprises, announced plans for the new legislation, telling reporters that he will introduce a detailed bill next week.

The legislation would require the Federal Housing Finance Administration to set uniform federal standards for securitization, with the agency required to set several categories based on the potential level of risk.

Garrett said the uniformity would make the trading of securitized instruments much easier, reducing some of the problems that differing securitization standards by individual aggregators now create.

"My proposal will facilitate continued standardization and uniformity, ensure rule of law and legal certainty and provide investors with the standardization and transparency necessary to ensure that a deep and liquid market develops in the absence of Fannie and Freddie," he said in a statement.

Garrett said that the measure will include several steps.

The FHFA, besides creating the new standards, would get authority to ensure that all mortgages included in any category comply with those standards. As part of the process, investors would get far more information about individual securitizations prior to a sale. The sale process would be streamlined, but investors would get more time in advance of a sale to evaluate a securitization.

The legislation would also prescribe how restructuring, modifications and work outs would be accounted for and seek to remove conflicts of interest between servicers and investors.

Garrett described the legislation as an attempt to rectify a current government-facilitated system that is "systemically dangerous to our economic security" and "un-American."

"For too long the government's manipulation of the housing market has crowded out private market participants at the expense of American taxpayer. It's time to move from the era of crony capitalism to an era of free-market capitalism."

Both Democrats and Republicans have suggested that the current reliance on the GSEs as the main source of home mortgages needs to changed. President Obama has suggested three ways to change the current system but hasn't said which he favored or offered legislation.

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