After months of suspense and many hearings late last year, Sens. Johnson (D-SD) and Crapo (R-ID) have finalized their housing-finance reform plan and yesterday released a detailed outline soon, they say, to be followed by legislative language and bipartisan support at a successful mark-up. The approach is as anticipated very similar to that in last year’s Corker-Warner bill (see FSM Report GSE126), dashing hopes harbored by many on Wall Street that the compromise bill would reduce the ten percent first-loss tranche of private capital ahead of the federal government. The final bill also rejects calls from some on the Street to reprivatize or restructure the GSEs so that preferred and common shareholders can realize their investments, with the bill continuing to require GSE liquidation, albeit in a gradual fashion to prevent market disruption as mortgage markets learn to live without Fannie and Freddie. Mortgages eligible for this new securitization structure could have loan-to-value ratios as high as 97.5 percent as long as they meet the QM criteria, with the new bill permitting loans to be up to the current conforming loan limit ($625,000 in high-cost areas). The measure also includes contributions to the affordable-housing trust fund and many measures designed to assuage small lenders. Upon its release, the White House called the bill “workable,” and FinServ Chairman Hensarling (R-TX) pledged to work towards reform this year. He did, however, demand that any package include FHA reform and objected to any continued federal backstop for residential mortgages. This report analyzes key sections of the outline; we will follow up with an in-depth report once legislative language is available.

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