I 114th CONGRESS 2d Session H. R. 6500 IN THE HOUSE OF REPRESENTATIVES December 8, 2016 Mr. Delaney (for himself, Mr. Carney , and Mr. Himes ) introduced the following bill; which was referred to the Committee on Financial Services , and in addition to the Committee on Ways and Means , for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned A BILL To establish a Mortgage Credit Risk Sharing Pilot Program at Fannie Mae and Freddie Mac, and for other purposes.

1. Short title This Act may be cited as the Moving Housing Forward Act of 2016 . 2. Definitions (a) Incorporation of definitions Except as otherwise provided in this Act, the terms used in this Act have the meaning given those terms, respectively, under section 1303 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 ( 12 U.S.C. 4502 ). (b) Other definitions For purposes of this Act: (1) Catastrophic credit loss The term catastrophic credit loss means all potential credit loss that exceeds both expected and unexpected credit loss. (2) Counterparty risk The term coun­ter­par­ty risk means, with regard to an enterprise, the risk that any person contractually obligated to the enterprise in any transaction will fail to perform in accordance with the terms of the contractual obligation. (3) Credit risk The term credit risk means the risk of loss to an enterprise on a residential mortgage loan held or guaranteed by the enterprise or on any security guaranteed by the enterprise that could result from a mortgagor’s failure to repay the loan in accordance with its terms. (4) Credit risk transfer The term credit risk transfer means, with regard to an enterprise, the sale or disposition of credit risk on loans guaranteed by an enterprise to another party, who assumes the credit risk in accordance with agreed upon terms. (5) Excluded refinancing The term excluded refinancing means a single family residential mortgage loan that was originated under the Home Affordable Refinance Program established by FHFA or any other mortgage loan refinanced under a temporary program that FHFA has determined not to include in a credit risk transfer transaction entered into by an enterprise prior to the date of enactment of this Act. Such a determination not to include any refinanced mortgage loan may be demonstrated by prior actual exclusion and no other determination by FHFA is required. (6) Expected credit loss The term expected credit loss means credit loss that is reasonably anticipated under baseline economic conditions. (7) FHFA The term FHFA means the Federal Housing Finance Agency. (8) Pari passu The term pari passu means having equal rights of payment and equal seniority. (9) Unexpected credit loss The term unexpected credit loss means credit loss that is reasonably anticipated under stressful, yet plausible, economic conditions, and does not include expected loss or catastrophic loss. 3. Mortgage Credit Risk Sharing Pilot Program (a) Sense of Congress It is the sense of Congress that— (1) at the direction of FHFA, the enterprises have entered into transactions to transfer credit risk they assume by guaranteeing the payment of principal and interest on securities backed by certain residential mortgage loans; and (2) credit risk transfer transactions should be encouraged that reduce taxpayer exposure to credit risk assumed by an enterprise and do not expose an enterprise to excessive counterparty risk. (b) Establishment Subject to the requirements of this section, the Director shall require each enterprise to establish a Mortgage Credit Risk Sharing Pilot Program (in this section referred to as the Pilot Program ). (c) Pilot program requirements Under the Pilot Program, FHFA shall direct each enterprise to, each quarter beginning with the first quarter following the end of the 9-month period beginning on the date of the enactment of this Act, conduct risk-sharing transactions that provide for an enterprise to share credit risk on a pool of single-family residential mortgage loans that back securities on which the enterprise guarantees the timely payment of principal and interest with the private sector. Such transactions shall meet the following requirements: (1) Targeted loans Credit risk shall be transferred on targeted loans. Targeted loans are residential mortgage loans that— (A) are single family residential mortgage loans; (B) are not the result of an excluded refinancing, as determined by FHFA; and (C) are a representative sample of the unpaid principal balance loans eligible for the to-be-announced market. (2) Losses transferred through the Pilot Program (A) In general Each enterprise shall transfer to the private sector— (i) either all or the majority of the aggregate risk shared on a pari passu basis of the expected and unexpected loss on the unpaid principal balance on the transactions; and (ii) a target of at least 10 percent in a vertical position of the risk of all of the catastrophic credit loss on the unpaid principal balance on the transactions. (B) Authority of the Director The Director may permit an enterprise to transfer less than 10 percent in a vertical position of the risk of catastrophic credit loss during a transition period, up until 15 months after the date of the enactment of this Act, to compliance with the 10 percent target of the Pilot Program. (C) Treatment of catastrophic risk Risk of catastrophic credit loss shall be transferred on a pari passu basis. (3) Scope of the Pilot Program The Director shall require that credit risk on at least 5 percent of new acquisitions, as defined by the Director, of targeted loans described in paragraph (1) shall be transferred through the Pilot Program. Each enterprise may vary the percentage of new acquisitions of targeted loans transferred through the Pilot Program, provided that the average annual percentage over each year of the Pilot Program is not less than 5 percent. (4) Measurements In carrying out the Pilot Program, FHFA shall measure the credit risk and the amount of risk transferred. (5) Additional requirements In carrying out the Pilot Program, the enterprises shall— (A) collect and disclose loan-level data on each of the mortgage loans backing the credit risk transactions, including consumer credit score information and the loan-to-value ratio of the loan; and (B) refine transaction structure designs to improve execution. (d) Promotion of market for credit risk transactions With respect to all credit risk transfer transactions of an enterprise, including any transaction under the Pilot Program, the Director shall do the following: (1) Work to ensure a secondary market for credit risk transfer products that will give investors as deep and liquid a market. (2) Not later than 1 year after the date of the enactment of this Act, in consultation with the Securities Exchange Commission, the Commodity Futures Trading Commission, and any Federal banking agency as appropriate, issue a report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate that provides recommendations on how to incentivize additional sources of private capital to participate in credit risk transfer transactions, including regulatory actions taken and recommendations for legislative proposals to remove impediments to such participation. Nothing in the preceding sentence is intended to prevent or delay FHFA or another agency from developing and implementing a regulatory action to remove any impediment to or incentivize such participation prior to issuance of such report as authorized under current law. (3) Require the enterprises to make 60 percent of mortgages available to be subject to credit risk transactions in the first fiscal year after the date of the enactment of this Act, 70 percent in the second fiscal year after such date of enactment, and 80 percent in the third fiscal year after such date of enactment. (e) Capital standards (1) In general The Director may set capital or collateral requirements for participants in the Pilot Program. (2) Use of certain capital markets transactions In setting capital standards under paragraph (1), the Director shall allow participants to prudently reduce or eliminate any capital requirements for credit-risk sharing transactions through the use of capital markets transactions that pre-fund the risk, including credit-linked notes. (f) Economic considerations If the Director of the FHFA and the Secretary of the Treasury determine that the Pilot Program is economically unreasonable due to housing market conditions, the Director may lower the percentage amounts specified under subsection (c)(2), (c)(3), or (d)(1)(C). (g) FHFA reports (1) In general Not later than 1 year after the date of the enactment of this Act, and annually thereafter, the Director shall provide a report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate containing— (A) information on credit risk transfer transaction pricing on quarterly basis; (B) the amount of credit risk that has been transferred from the enterprises on a quarterly basis; (C) metrics and annual goals regarding the Pilot Program; (D) the percentage of the unpaid principal balance of mortgage loans covered under the Pilot Program in each year; (E) a description of how the FHFA intends to move forward with mortgage insurance focused transactions following the recently finalized mortgage insurance master policy requirements and private mortgage insurer eligibility requirements, and how the FHFA evaluates the remaining counterparty risk with mortgage insurers; (F) a description of new credit risk transfer pilot programs that FHFA intends an enterprise to undertake over the next three years and steps FHFA intends to take to solicit new ideas for new and innovative ways to transfer credit risk away from the enterprises and the taxpayers, including transfers of expected, unexpected, and catastrophic credit loss; and (G) a description of how FHFA plans to transition from credit risk sharing pilot programs to a regular standardized program of credit risk transfers that establish a stable and liquid market for mortgage credit risk. (2) Solicitation of public feedback In preparing any report required under paragraph (1), the Director shall solicit public feedback, including feedback to— (A) generate new potential forms of credit risk transfer; and (B) identify potential barriers to entry for private sector parties to invest in such transactions. (3) Confidentiality In issuing any report under paragraph (1), the Director shall protect counterparty proprietary data, including in making information available about the Pilot Program. (h) Rule of construction Nothing in this section shall be construed to limit the ability of the Director to conduct customized risk sharing transactions as authorized under current law. (i) Duration of the Pilot Program (1) In general The Pilot Program shall last a minimum of 3 years after the first transfer of catastrophic credit loss. The Director may continue to direct the enterprises to transfer risk of credit loss, including risk of catastrophic credit loss, and may continue to enter into credit risk transfer transactions to transfer such risk after the end of 3 years under authority prior to the enactment of the Pilot Program. (2) Analysis After the Pilot Program is executed for 3 years, the Director shall examine the economics of developing the Pilot Program into a continuous risk sharing program. 4. Regulatory implementation of credit risk-sharing market (a) Application of section 3 of the Investment Company Act of 1940 For any credit risk transfer transaction approved by the Director, including a transaction in which credit risk is transferred on mortgage loans that do not directly back the securities being issued, the issuer shall be deemed to be a person primarily engaged in the business of purchasing or otherwise acquiring mortgages or other liens on and interests in real estate for purposes of section 3(c)(5) of the Investment Company Act of 1940 ( 15 U.S.C. 80a–3 ). (b) Federal income tax treatment (1) Real estate mortgage investment conduits For purposes of sections 860A through 860G of the Internal Revenue Code of 1986 (the Code )— (A) any financial instrument issued by an enterprise (or a legal entity sponsored by an enterprise to implement a credit risk transfer transaction) as part of a credit risk transfer transaction shall be treated as a qualified mortgage ; and (B) any amount includible in gross income with respect to such a financial instrument shall be treated as interest on a qualified mortgage . (2) Real estate investment trusts For purposes of Code sections 856 through 860— (A) any financial instrument issued by an enterprise (or a legal entity sponsored by an enterprise to implement a credit risk transfer transaction) as part of a credit risk transfer transaction shall be treated as a real estate asset ; and (B) any amount includible in gross income with respect to such a financial instrument shall be treated as interest on an obligation secured by a mortgage on real property. (3) Taxable mortgage pools A credit risk transfer transaction entered into by an enterprise (or a legal entity sponsored by an enterprise) shall not be treated as a taxable mortgage pool for purposes of section 7701(i) of the Code. (4) Regulations The Secretary of the Treasury shall prescribe such regulations or administrative guidance as may be necessary or appropriate to carry out the purposes of this subsection. (c) Rule of application Subsections (a) and (b) shall apply in the case of any risk transfer transaction and any financial instrument issued by the enterprise (or a legal entity sponsored by an enterprise to implement a credit risk transfer transaction) as part of a credit risk transfer transaction that is outstanding on, or is issued after, the date of the enactment of this Act. (d) Conforming amendments (1) Investment Company Act of 1940 Section 3(c)(5) of the Investment Company Act of 1940 ( 15 U.S.C. 80a–3(c)(5) ) is amended by adding at the end the following: For any credit risk transfer transaction approved by the Director of the Federal Housing Finance Agency, including a transaction in which credit risk is transferred on mortgage loans that do not directly back the securities being issued, the issuer shall be deemed to be a person primarily engaged in the business of purchasing or otherwise acquiring mortgages or other liens on and interests in real estate. . (2) Rule of application The amendments made by paragraph (1) shall apply in the case of any credit risk transfer transaction and any financial instrument issued by an enterprise (or a legal entity sponsored by an enterprise to implement a credit risk transfer transaction) as part of a credit risk transfer transaction that is outstanding on, or is issued after, the date of the enactment of this Act.