Source: http://www.jdsupra.com/legalnews/residential-mortgage-securitization-upda-18505/
Timestamp: 2014-10-21 21:56:34
Document Index: 76516326

Matched Legal Cases: ['§ 501', '§ 103', '§ 303', '§ 203', '§ 202', '§ 204', '§ 205', '§ 215', '§ 213', '§ 221', '§ 224', '§ 225', '§ 211', '§ 216', '§ 217', '§ 222', '§ 506', '§ 401']

Residential Mortgage Securitization Update: GSE Reform Bill | Dechert LLP - JDSupra
Linda Ann Bartosch, Patrick D. Dolan, Robert H. Ledig, Ralph R. Mazzeo, Gordon L. Miller, Thomas P. Vartanian | Dechert LLP
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Senators Bob Corker (R-TN) and Mark Warner (D-VA) have introduced a bi-partisan bill to reform the U.S. housing finance market.1 Entitled the “Housing Finance Reform and Taxpayer Protection Act of 2013” (the “Reform Bill” or the “Bill”),2 it would replace Fannie Mae and Freddie Mac, the two government-sponsored enterprises (“GSEs”) that currently dominate the U.S. housing financing market, with a new independent government agency. This agency, the Federal Mortgage Insurance Corporation (“FMIC”), would operate a Mortgage Insurance Fund (“MIF”) charged with providing a limited government-backed guarantee of qualifying privately issued residential mortgage-backed securitizations (“RMBS”). The Reform Bill leaves many important issues to be resolved. It would create a general structure for a fundamentally new approach to the mortgage finance market which would be put in place within five years of enactment of the Reform Bill. Its key points include the following:
With respect to FMIC-insured securities (“Covered Securities”), the MIF would provide a second level back-up guaranty on Covered Securities of principal and interest not covered by the private sector first loss position. Unlike under the current law with respect to the GSEs, the MIF’s obligations would be expressly backed by the full faith and credit of the U.S. government. Parties that wish to act as issuers, servicers, bond guarantors, or private mortgage insurers under the FMIC Securitization program would have to meet FMIC standards and requirements and would be subject to FMIC regulation.
The FMIC would establish uniform documentation requirements, a uniform mortgage database and an electronic registration system. Unlike under current law applicable to the GSEs, the FMIC would not have a role in providing for affordable housing finance. Instead, certain fees related to FMIC Securitizations would be directed to other government entities to address those needs. The Reform Bill contemplates a wind-down of the GSEs beginning upon the Bill’s enactment, followed by a repeal of their charters within five year of enactment. The Bill provides few specifics on how the transition from the GSEs to the FMIC and the MIF would be handled. The Bill would allow individual Federal Home Loan Banks (“FHLBanks) to become approved issuers in the FMIC Securitization program and would shift responsibility for the regulation of the FHLBanks from the Federal Housing Finance Agency (“FHFA”) to the FMIC.
This OnPoint provides a brief summary of the key provisions of the Reform Bill and how it may affect the recovery of a private market for RMBS. Winding Down the GSEs
The Bill further provides that during the period between the date of its enactment and the Certification Date, the FHFA, the current regulator of the GSEs, in consultation with the FMIC and the Secretary of the Treasury, is to take action to wind down the operations of the GSEs. The Bill calls for the development of plans for the distribution and liquidation of the assets and liabilities of the GSEs. This may involve the establishment of a holding company for the purpose of winding down a GSE and the establishment of one or more trusts to which outstanding debt obligations or mortgages held for the purpose of collateralizing GSE MBS may be transferred. The Bill provides that as a general matter, any proceeds from the wind-down of a GSE would be paid for first to the holders of Senior Preferred Stock of the GSE, then to other preferred shareholders and then to the common shareholders. The Bill would mandate certain reductions in the business of the GSEs following enactment. Each GSE would be subject to a cap on mortgage assets of $525 billion (as determined under the Bill) as of December 31, 2013, with a reduction each year for five years to 85 percent of the amount permitted as of the prior December 31.
There are a wide range of legal, business and operational issues that would arise in connection with any such termination of the GSEs. The handling of these issues remains far from clear. Establishment of the FMIC
The FMIC would be responsible for supervising the various aspects of the FMIC Securitization program as described below. Public and Private Sector Protection for Covered Securities
The FMIC would establish the MIF,6 which would insure the payment of principal and interest on Covered Securities to the extent that losses exceed the private sector first loss position.7 Private holders of Covered Securities would be required to assume a first loss position in an amount that is adequate to cover losses consistent with the economic conditions observed in the U.S. during moderate to severe recessions experienced during the last 100 years and that is equal to not less than 10% of the principal amount or face value of a securitization in order for the securities to be eligible to be covered.8 The FMIC would be charged with establishing acceptable risk sharing mechanisms to be used with Covered Securities. Alternatively, the private risk sharing component could be satisfied by a guaranty of timely payment of principal and interest on Covered Securities from an FMIC-approved bond guarantor. In the event of a payment default on an eligible mortgage that collateralizes a Covered Security that exceeds the first loss position, or in the case of an approved bond guarantor that has become insolvent, the FMIC would pay any shortfalls on the payment of principal and interest under the eligible mortgage.9 The FMIC would be required to seek to have the MIF maintain a reserve balance equal to at least 1.25% of the outstanding principal balances of the Covered Securities, to be attained within five years of enactment of the Reform Bill and seek to maintain at least that level thereafter, and to seek to maintain a reserve balance equal to at least 2.5% of the outstanding principal balances within ten years of the Certification Date. The MIF would be funded through fees paid for FMIC insurance on Covered Securities,10 guaranty fees collected by the FMIC in regard to the multi-family businesses of the GSEs, which would be transferred to the FMIC on the Certification Date, and amounts earned on investments of MIF funds. The full faith and credit of the United States would expressly back the payment of all insurance obligations of the MIF. The Reform Bill contemplates the possible termination of the FMIC’s insurance program by requiring the Government Accountability Office to submit a report to Congress within eight years after enactment of the Reform Bill regarding the feasibility of maintaining a fully privatized secondary mortgage market, and by requiring the FMIC to submit a plan within six months thereafter to transition to such a market.
The Bill requires the FMIC to establish the FMIC Mutual Securitization Company (“Company”) to help meet the securitization needs of credit unions and community and mid-size banks with respect to Covered Securities.11 Eligible institutions would be limited to insured depository institutions having less than $15 billion in total consolidated assets at the time of the institution’s initial participation and to non-depository mortgage originators having a minimum net worth of $2.5 million. The Company would purchase eligible loans from member participants to be securitized in a Covered Security. The board of directors of the Company would establish standards for institutions to become members of the Company. The Reform Bill provides that if the FMIC approves the FHLBank System to become an approved issuer of Covered Securities, the FMIC must develop a process by which individual FHLBanks may elect not to participate in the issuer activities of the FHLBank System.12 The FMIC would be required to ensure that any Covered Securities issued by the FHLBank System would not be treated as obligations of any individual FHLBank that elects not to participate. The Bill provides that any FHLBank, subject to regulations prescribed by the FMIC, may establish a subsidiary to perform the functions of an approved issuer of Covered Securities. Increased RMBS Transparency
Under the Bill, all Covered Securities insured or guaranteed by the FMIC would be exempt securities under federal securities law to the same extent as securities that are direct obligations of, or obligations guaranteed as to principal and interest by the U.S. government.22 Furthermore, Covered Securities would be treated as being subject to the Qualified Residential Mortgage exception to the risk retention rules to be issued under the Dodd-Frank Act. Affordable Housing Finance Support
The the future of the GSEs and any successors are intimately tied to the future of mortgage finance, which, in turn, will be significantly impacted by the January 2014 implementation of the Bureau’s ATR Rules.25 Those rules will significantly impact the business by transforming it from one that is disclosure-based to one that is suitability-based. The new protections provided to consumers and the proof burdens that will be imposed on lenders to establish suitability may have an impact on the value of their mortgages as collateral because of (i) the defenses to repayment that borrowers will have, and (ii) new rules and servicing enforcement standards that make it more difficult for lenders to foreclose on delinquent mortgages. Any diminution in the value of mortgages will likely have an impact on originators and on the secondary market as mortgages may be given a larger haircut by securitizers, the GSEs and wholesale lenders.
Certain lenders may decide not to offer loans that are not qualified mortgages (“QMs”) under the ATR Rules because such non-QM loans may be deemed to be riskier than QM loans, and therefore less valuable. In this regard, the FHFA has already directed the GSEs to limit their loan purchases as of January 10, 2014 to loans that meet certain QM standards. These lenders may find themselves subject to fair lending investigations or claims by the Bureau, federal bank regulators, HUD or the Department of Justice for the use of facially neutral underwriting standards that may be considered discriminatory based on disparate impact discrimination analysis. The upheaval in the mortgage finance system in the U.S. has leveled off, but the disruptions and market changes yet to come as lenders, servicers and securitizers begin to deal with the reconstruction of the GSEs and new consumer protection rules are likely to have an impact of their own on mortgage credit availability, rates, liquidity and housing starts.
1 Other sponsors are Senators Kay Hagan (D-NC), Dean Heller (R-NV), Heidi Heitkamp (D-ND), Mike Johanns (R-NE), Jerry Moran (R-KS) and Jon Tester (D-MT).
2 The full text of the Reform Bill is available here. 3 Reform Bill, § 501.
4 Id. § 103.
5 Id. § 303.
6 Id. § 203.
7 “Covered Securities” would include any RMBS that is: (i) collateralized by eligible mortgages; (ii) issued subject to a standard form or mechanism for credit-risk sharing; and (iii) eligible for insurance by the FMIC that is purchased by an approved issuer.
An eligible mortgage under the Reform Bill would be a residential loan secured by 1-4 single family units that meets the requirements of the Consumer Finance Protection Bureau’s (“Bureau”) ability-to-repay rule (“ATR Rule”). An eligible mortgage would be subject to the conforming loan limits (not to exceed $417,000 for a mortgage secured by a single-family residence, with higher amounts for multi-family residences, and higher amounts for high-cost areas) established for the GSEs under section 504 of the Bill. It would establish a range of minimum down payment levels which would vary based on the use of private mortgage insurance and lender recourse or other credit enhancement. 8 Id. § 202. The Bill provides that no Federal funds may be used to purchase or guarantee obligations of, issue lines of credit to, provide direct or indirect access to any financing provided by the U.S. government to, or provide direct or indirect grants and aid to ay private market holder of the first loss position on a Covered Security which, on or after the date of enactment of the Bill, has defaulted on its obligations, is at risk of defaulting, or is likely to default, absent such assistance from the U.S. government. Id. § 204.
9 In the event of “unusual and exigent circumstances,” as determined by the Chairman of the Board of Governors of the Federal Reserve System and the Secretary of the Treasury, the FMIC would be able to provide insurance for Covered Securities that do not satisfy the private sector first loss position requirement. This authority could not be exercised more than once in any three-year period. Id. § 205.
10 The Bill provides that fees charged shall be set at a uniform amount applicable to all institutions that obtain insurance from the FMIC. Fees may not vary by geographic location, or by the size of the institution and may not be based on the volume of insurance purchased by an approved issuer.
11 Id. § 215.
12 Id. § 213.
13 Id. § 221.
14 Id. § 224.
15 Id. § 225.
16 FHFA Updates Its Strategic Plan – Charts Course for a New Securitization Infrastructure, DechertOnPoint, October 31, 2012
17 A Progress Report on the Common Securitization Infrastructure, Federal Housing Finance Agency, April 30, 2013, p.2.
18 Id. §§ 211 – 214.
19 Id. § 216.
20 Id. § 217.
21 Id. § 222.
23 Id. § 506.
24 Id. §§ 401-403.
25 See U.S. Consumer Financial Protection Bureau Issues Rules on Qualified Mortgages and Ability to Repay, Dechert OnPoint, January 14, 2013; and U.S. Consumer Financial Protection Bureau Seeks Comments to Proposed Amendments to the Ability-to-Repay Requirements and Qualified Mortgage Rule, DechertOnPoint, February 14, 2013.
Topics: Compliance, FHFA, FMIC, Housing Finance Reform, Mortgage Insurance Fund, Mortgages, RMBS
Published In: General Business Updates, Finance & Banking Updates, Insurance Updates, Residential Real Estate Updates, Securities Updates
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