On September 6, 2018, House Committee on Financial Services Chairman Jeb Hensarling and Representative John Delaney released a discussion draft of the Bipartisan Housing Finance Reform Act (the “Act”). The Act would require eligible private credit enhancers (as approved by the Federal Housing Finance Agency, “PCEs”) to engage in approved credit risk transfer transactions. PCEs would be new entities in the secondary mortgage market that would be required to provide eligible private insurance for conventional mortgage loans financed through Ginnie Mae. In order to encourage investment in the credit risk transfer securities issued by the PCEs, the Act would expand the current Section 3(c)(5)(C) exemption to include all risk-sharing transactions and the investment in any other products created pursuant to the Act with an aim of diversifying risk away from the current government housing finance system.

The current Section 3(c)(5)(C) exemption generally excludes from the definition of “investment company” any entity primarily engaged in, among other things, purchasing or otherwise acquiring mortgages and other interests in real estate. In order to qualify for this exemption, a mortgage REIT must comply with strict asset tests, including having at least 55 percent of its assets consist of mortgages and other liens on, or interests in, real estate that are the functional equivalent of mortgage loans, referred to as “qualifying assets,” and at least 80 percent of its assets consist of qualifying assets and real estate-related assets. The Act would expand the exemption’s qualifying asset definition to expressly include any financial instrument that transfers credit risk on mortgage loans.

Neither Chairman Hensarling nor Representative Delaney is planning to run for re-election to Congress in 2018. We will continue to track the progress of the draft Act as it is considered by the House Committee on Financial Services.

A summary of the draft Act is available here.