The House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises has voted in favor of a bill designed to create a new market for financing home loan mortgages.
If passed, the bill – which already has White House support – will help the U.S. mortgage market transition off of government support.
The bill has a long way to go before becoming law: needing the approval of the full committee, the House of Representatives and the Senate before moving on to the desk of President Barrack Obama for the final OK.
Once signed into law, the bill would create a system of covered bonds. These bonds would be bank-issued securities backed by pooled loans. Unlike the system that went so awry, where banks sell the loans off to Freddie Mac and Fannie Mae to be pooled into securities and sold off in shares, the loans would remain tied to the issuing banks.
With covered bonds, banks would be able to borrow against the value of the mortgages backing the bonds in order to finance new loans. In the result of a bank default, investors would have a right to the assets backing the covered bonds.
New Jersey Representative Scott Garrett, the subcommittee’s chairman, does not envision the covered bonds system completely replacing the two government mortgage companies, but serving as another option for funding home loan mortgages, and perhaps even engendering some competition.
Hopefully, the re-tooled system would result in banks showing more restraint in their mortgage lending practices, and would reduce the role of the FNMA and FMCC, which were seized by the Federal Government as the mortgage crisis spiraled out of control in 2008.
The Obama Administration has voiced a desire to eventually phase-out Fannie Mae and Freddie Mac and manufacture incentives to bring private capital back into the housing market.
The FDIC believes the plan puts their bank deposit insurance fund at risk for losses but Treasury Secretary Timothy Geither assures these sorts of kinks would be worked out before the system went into action.