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Certain conclusions can already be drawn about the effort to unwind Fannie Mae and Freddie Mac and set up an entirely new housing finance system, including whether it will include a controversial government guarantee.
September 25 -
The top leaders of the Senate Banking Committee said Thursday that they intend to reach a bipartisan agreement by yearend on a bill to revamp the mortgage finance system despite fears that the issue is losing momentum.
September 12 -
The Independent Community Bankers of America and the American Association of Bank Directors warned regulators that the Volcker Rule will force banks to lower capital to dangerously low levels.
December 19
WASHINGTON Senate Banking Committee leaders reiterated their optimism Wednesday for forging a bipartisan housing finance reform plan, but offered little additional detail on when legislation will emerge.
Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, the banking panel's ranking member, both spoke at an event organized by the Bipartisan Policy Center, detailing their efforts to develop a bill to revamp Fannie Mae and Freddie Mac. The lawmakers had previously said they hoped to reach agreement by yearend, but with just over a week left before the Senate is scheduled to break for the holiday recess, the odds of them making that deadline continue to fall.
"Having just concluded our series of hearings yesterday, our full attention is now on drafting and negotiating a bipartisan compromise. But these areas of concern have made it clear we have our work cut out for ourselves," said Johnson. "To that point, we are not as far along in the committee process as I had originally hoped we would have been at this time."
He pointed to several "curveballs" in the schedule over the last few months, including the 16-day government shutdown and "a couple of weeks of unanticipated congressional recess" that have slowed progress despite continuing work by committee staff.
"I was never going to let this process be dictated by aspirational, and frankly arbitrary, deadlines," Johnson said. "When I set out to tackle housing finance reform, my primary goal was to get it right - not get it done hastily."
Crapo added that efforts remain underway towards getting a proposal written and that he's pushing to have a plan completed soon.
"I said for months that I wanted to have a markup by the end of this year - I still do, although obviously what we are looking at in the short time available, it's probable that we won't have that markup," he said. "I'm still pushing us to get very close to getting a bill prepared by then, and if not then, in the early part of next year. I don't think we want to lose our momentum on this important process."
Meanwhile, panelists at the housing event continued to delve into the details of existing proposals, including a bill introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., earlier this year. Industry experts and others debated various aspects of how a new mortgage finance system should operate, including how much private capital is needed in the system and how that first-loss capital should be structured.
Michael Stegman, counselor to Treasury Secretary Jack Lew on housing finance policy, raised several issues for considering the costs and benefits of a bond guarantor model versus capital market executions for securities, both laid out the Corker-Warner bill.
He pointed to areas where the misalignment of incentives could pose problems both when mortgage pools are formed as well as through the process of servicing and loss mitigation, noting that a guarantor model could better avoid the kind of gaming that potentially puts taxpayers at risk.
"If you start with a well-capitalized guarantor, an entity that is responsible for paying all credit risks on a given pool and that triggers the mortgage insurance fund only when all capital is exhausted, here the interests of the guarantor entity and the mortgage insurance fund are powerfully aligned," he said. "In capital markets transactions, you may need some minimum requirements on the size and diversification of pools backing the security to prevent gaming. Unlike a guarantor, there's no obvious master servicer in this type of execution."
He added that additional guidelines could mitigate the differences, including charging a higher guarantee fee for certain securities and establishing standardized procedures for securitization, pooling and servicing agreements.
Stegman also noted that more thought needs to be given to how first-loss capital requirements will be structured under the two models. This would hold whether legislation mandates 10% first-loss capital, as in the Corker-Warner bill, or some other figure, like 5%.
"If you really want to have healthy competition between guarantors and the various types of capital markets executions, you've got to be careful on how you translate whatever the first-loss capital requirements are," he said.
