He also expressed his optimism that the Housing Reform and Taxpayer Protection Act of 2013—a bill he helped co-sponsor—“actually has a chance” of passing. Fellow co-sponsor Sen. Bob Corker (R-Tennessee), who was also part of the discussion with Humphries, expressed similar sentiment, saying the bill is “gaining momentum.”
The major components of the bill include winding down Fannie Mae and Freddie Mac over a period of five years; placing private capital in a first-loss position in which they would absorb 10 percent of losses before a government bailout ensued; and creating a Federal Mortgage Insurance Corporation (FMIC) to ensure securitized loans.
Corker and Warner said 10 percent risk retention by the private market is double what would have been necessary to prevent the bailout that took place in the recent housing crisis.
Not only does the 10 percent provision likely preclude the need for a government bailout in the future, but also the private market “does a much better job than the government ever would pricing that risk,” Warner said.
Warner said the combination of the roles the GSEs have played in the housing market—securitizing loans, insuring those loans, and supporting low-income housing and first-time home buyers—“makes no long-term sense.”
Therefore, the Taxpayer Protection Act of 2013 splits these objectives up so that securitization is achieved in the private market, and the FMIC insures securities.
Regional banks would gain access to the secondary market through the FMIC, and the FMIC would be owned by member institutions rather than the government.
Corker added that any need for a bailout is also reduced by the bill’s enhanced underwriting standards.
When asked about the viability of a market with no government guarantee, Corker said, “Going to a completely privatized system today, to me, is not something that has one chance of passing.”
A government backstop encourages market liquidity, he said.
Warner said the industry has given the bill “a seven or eight” on a scale of one to 10, and the bill already has 10 co-sponsors in congress.