FHFA Nominee Is Blocked, But Reform Debate Inches Forward

WASHINGTON — Republicans successfully blocked a vote Thursday to confirm Rep. Mel Watt, D-N.C., to head the Federal Housing Finance Agency, even as Senate Banking Committee members from both parties continued to discuss mortgage finance reform options.

Only two GOP senators — Ohio's Rob Portman and Richard Burr from Watt's home state of North Carolina — voted in favor of a motion to stop debate on Watt's nomination and confirm him by a simple majority. (The Senate voted 56 to 42 for the "cloture" motion, short of the required 60-vote threshold.)

"It is disappointing that a sitting member of Congress with over 40 years of relevant experience was denied an up-or-down vote by a minority of Senators today. It is not a secret that this vote was pure obstructionist politics at play," Sen. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, said in a statement. "This is not the end for Congressman Watt's nomination, and I will continue to fight to see that he is confirmed."

Senate Majority Leader Harry Reid filed a subsequent motion to reconsider the cloture motion at any time. Still, even though Democrats are expected to try to keep the nomination alive, the vote was a blow to Watt's chances of leading the regulator of the government-sponsored enterprises. The cloture motion failed despite Watt's heightened support this week from Obama administration officials and the housing industry.

But while the administration faces an uphill battle to confirm an FHFA chief, Democrats and Republicans are continuing talks on how best to reform the GSEs. Before Watt's vote Thursday, the Senate Banking Committee, which is considering proposals to replace Fannie Mae and Freddie Mac with a federal insurance agency to both regulate and backstop private mortgage market participants, held a hearing aimed at examining how the mortgage-backed securities market should be structured in a new system.

One important consideration for lawmakers remains whether Congress should require a minimum capital buffer for private stakeholders in the mortgage market, which would serve to absorb a portion of the losses backed by the new federal agency. The primary legislative proposal — by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va. — would require a 10% first-loss capital provision. (Johnson and Sen. Mike Crapo of Idaho, the committee's top Republican, are also working behind the scenes on a bipartisan GSE reform plan.)

Testifying at the hearing, Phil Swagel, a professor at the University of Maryland, noted that setting the minimum capital level up front could be valuable for keeping industry players from trying to lobby regulators to lower the figure.

"We all understand the pressures on the regulator will be in the direction of less capital and lower [underwriting] standards, and that's why I would have the capital requirement specified directly in the legislation to avoid those kinds of pressures," he said.

But David Stevens, president and chief executive of the Mortgage Bankers Association, argued that allowing the new agency to establish the capital requirement also has benefits, because it would be able to consider evolving market conditions and the diverse needs of different lenders and products in making the decision.

"Legislating these numbers may be locking in to a position where a regulator could do a better job if they were required to be transparent, use econometric modeling, use the data elements of the loans that are being distributed and make certain that the catastrophic position of the government is never breached," said Stevens. "The question is, do you legislate the capital standard, or do you set a framework in place that the regulator must be obligated to follow in order to protect the U.S. taxpayer?"

Among other issues, lawmakers and witnesses at the hearing also explored how government support would be triggered in times of crisis. Sen. Elizabeth Warren, D-Mass., raised concerns that the Corker-Warner bill could trigger government support simply after a private institution had exhausted its 10% first-loss position without other evidence of systemic failure.

"As I understand it, one would think in a structured transaction, what we may be doing is any time any particular transaction runs beyond the 10% first-loss money, then the government is in the position of writing a check. Which would mean if that is so, the government is in the position of writing checks long before there is any systemic risk, but really just backing up a bad deal," she said.