As lawmakers weigh options for reforming our housing finance system, financing for rental units often remains an afterthought. In order to ensure that our nation’s renters are adequately served, the Mortgage Finance Working Group—convened by Center for American Progress—proposes a set of concrete steps that would transition us to a new system. This proposal is designed to be compatible with the growing bipartisan consensus over the federal government’s future role in the mortgage market. This consensus envisions the government providing a “catastrophic” or last-resort guarantee on mortgage-backed securities, meaning that private capital would take losses before the government. In most plans, this guarantee is paid for by a fee on securities that receive it and is administered by the federal government through an insurance fund. The fund will also regulate any entities that utilize the government guarantee. The transition steps are as follows:
1. Spin off the current multifamily operations at Fannie Mae and Freddie Mac into two private entities that are initially owned by the federal government.
- Direct Fannie Mae and Freddie Mac to immediately spin off their current multifamily operations into two independent, private, and bankruptcy-remote entities, including all assets, staff, systems, and other resources necessary to be a self-supporting and separately functioning entity.
- The new entities will ensure that any multifamily business continues to operate in a manner consistent with existing Fannie and Freddie multifamily programs that incorporate risk sharing.
- The Department of the Treasury will ensure that the new entities have sufficient capital to carry out the operations of issuing securities, including the ability to obtain warehouse lines of credit.
- These new entities remain under the supervision of the Federal Housing Finance Agency and will later be transferred to the government regulator when it is fully operational.
- The new entities will contract with Fannie Mae and Freddie Mac to manage the dismantling of Fannie and Freddie’s existing multifamily portfolio.
- When the government insurance fund is fully operational, transfer the guarantor function at both companies to the fund—at no cost to the government; from that point on, the two entities will be able to purchase government insurance on qualifying multifamily securities from the fund.
- When the government insurance fund is fully operational, require the two entities to raise capital from private sources with the option to buy out the government’s interest.
2. Establish a separate insurance fund for qualifying multifamily mortgage-backed securities within the government insurance fund.
- In exchange for a fee, the government insurance fund shall cover the payment of principal and interest on a covered multifamily security with respect to losses that may be incurred on such security.
- Levels of risk sharing in the multifamily market must comply with the requirements for the single-family market.
- In times of market disruption, the terms under which the federal government offers its guarantee can be expanded with the written agreement of the Federal Reserve chairman and the secretary of the Treasury, in consultation with the secretary of Housing and Urban Development.
- The government insurance fund sets a fee for this insurance that covers risk to taxpayers and is subject to calibration based on predetermined criteria that considers market conditions.
- The government insurance fund holds all guarantee fees, minus operating costs, in a Multifamily Housing Insurance Fund, backed by the full faith and credit of the U.S. government; the Multifamily Housing Insurance Fund must be separate from the Single-Family Mortgage Insurance Fund.
- A covered multifamily security must be comprised of mortgages that finance properties of five or more rental units with terms of 5 years to 35 years; the government insurance fund shall establish at least one pilot program to test the securitization of rental properties with less than five units.
- The government insurance fund will establish uniform processes, contracts, documents, data disclosures, and other appropriate standardized rules that are consistent with the provisions for covered single-family securities.
3. After approval from the regulator, allow other private issuers of qualifying multifamily securities to purchase government catastrophic insurance.
- Require the government insurance fund to establish a third qualified multifamily issuer to develop, securitize, sell, and otherwise meet the multifamily issuing needs of credit unions, community and midsize banks, and nondepository mortgage originators with respect to covered securities.
- When the government insurance fund is fully operational, allow other private entities to issue qualifying multifamily mortgages with the option to purchase government catastrophic insurance.
- The regulator must approve all new issuers of covered multifamily securities. Any new issuer must show:
- Ability to securitize and transfer risk in compliance with the procedures set out by law
- Ability to ensure equitable access to the securitization market for all financial institutions
- Adequate capital structure and a good financial history
- Experience with multifamily housing finance, including financing of properties with fewer than 50 rental units and in a variety of markets and geographies
- Experience with subsidized affordable rental housing properties
- Ability to meet the portfolio affordability requirements
- Ability to foster a liquid capital market for multifamily mortgages in a wide variety of markets and geographies
4. Establish a minimum affordability threshold and other requirements for any issuer of government-backed multifamily securities.
- For any issuer of covered multifamily securities, at least 60 percent of the total rental housing units financed in the entity’s overall government-backed loan portfolio must—at the time of origination—have been for units whose rents were affordable to households that earn at or less than 80 percent of area median income for the locale in which such units were located. For this purpose, “affordable” means the tenant pays no more than 30 percent of their monthly income on rent, and the percent of total rental units should be calculated based on a rolling average of at least one year.
- Each issuer of covered multifamily securities will work with the regulator each year to create a plan for serving communities and market segments that are not well-served by private capital, including low-income communities, rural communities, subsidized affordable multifamily housing, and small rental properties. At the end of every year, each issuer must report on their performance under that plan.
- Each issuer of covered multifamily securities must—on an annual basis—demonstrate compliance with the above provisions to maintain government approval for future issuances.
5. Require private entities to pay a fee on multifamily securities to fund the Housing Trust Fund and the Capital Magnet Fund.
- The government insurance fund should charge and collect a fee of 5 basis points to 10 basis points of the outstanding principal balance of mortgages collateralizing multifamily securities to fund the Housing Trust Fund and the Capital Magnet Fund.
6. Establish the government insurance fund as the regulator of the entire secondary multifamily mortgage market.
- Establish a separate Office for Multifamily Finance within the government insurer, run by a deputy director for Multifamily Finance, with the responsibility to manage the Multifamily Housing Insurance Fund and ensure that participants in the secondary multifamily mortgage market—both covered and purely private—abide by all applicable nondiscrimination and consumer-protection laws and minimize risk to taxpayers.
- The government fund is responsible for approving and overseeing all private mortgage insurers, servicers, issuers, and guarantors associated with covered multifamily securities. The fund is authorized to suspend or revoke approved status and impose an appropriate civil money penalty of any approved entity that fails to comply with the rules of the fund.
- The fund is authorized to develop, publish, and adopt additional standards or requirements as necessary to ensure the availability of affordable rental housing and the liquidity, stability, transparency, and competition in the secondary multifamily mortgage market.
- The fund will establish uniform processes, contracts, documents, data disclosures, and other appropriate standardized rules for covered multifamily securities, consistent with the provisions for covered single-family securities.
- Each fiscal year, the fund produces a report on the state of the Multifamily Housing Insurance Fund and the covered lending activity from the prior year, including overall volume and rental units financed, affordability of those units, and activity directed to communities and market segments not well-served by private capital, such as low-income communities, rural communities, subsidized affordable multifamily housing, and small rental properties.
- The fund is authorized to conduct research, create indices, and publish reports on the state of the multifamily housing finance industry; this will be comparable to the research being done for the single-family industry.
The Mortgage Finance Working Group is a group of housing finance experts, affordable housing advocates, and leading academics who started meeting in 2008 to better understand the causes of the mortgage crisis and to discuss policies that will shape the future U.S. mortgage market.
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