Senators Pressing Ahead on GSE Bill This Fall

WASHINGTON — 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.

Chairman Tim Johnson, D-S.D. and Sen. Mike Crapo, the panel's lead Republican, said they would hold a series of hearings over the next few months in an effort to reach consensus on a legislative proposal.

"Recognizing that there are many details that need to be explored and discussed by the full committee, and that many committee members have input of their own that they would like to include, we plan to hold hearings this fall to explore the finer points of proposed changes," Johnson said during his opening remarks at a hearing on the issue. "This will give the entire committee the opportunity to explore the various modifications and wholesale changes that we will consider."

Johnson and Crapo are expected to borrow heavily from a bill introduced in June by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va. That bill would unwind the government-sponsored enterprises, expand the role of private mortgage insurers and install a government backstop that would offer a common securitization platform and provide catastrophic re-insurance.

The legislation has garnered the support of 10 senators on the panel as well as an endorsement from President Obama and Treasury Secretary Jacob Lew.

During the hearing, Crapo also acknowledged the work of other lawmakers, including Sen. Jack Reed, D-R.I., and House Financial Services Committee Chairman Jeb Hensarling, who is seeking a House vote for his separate bill to revamp the GSEs.

"We must use this opportunity to concentrate on building consensus around ending the conservatorships, while building a stable secondary market that brings back private capital and avoids repeating the mistakes of the past," said Crapo.

Long dormant since the government's seizure of Fannie Mae and Freddie Mac five years ago, reform gained momentum in early summer after Corker and Warner struck a bipartisan agreement on a path forward. But many fear the issue is likely to be sidelined during the remainder of the year by other pressing matters, including a possible military strike on Syria and the nomination of the next chairman of the Federal Reserve Board.

But lawmakers said Thursday they should not happen. Sen. Jon Tester, D-Mont. urged his colleagues not to make excuses and talk about "how we're too busy to do this."

"We can talk about Syria. We can talk about the debt limit. We can talk about all that stuff. But the bottom line is we can multitask, we must multitask," said Tester.

At the hearing, panelists aired their views on how the Corker-Warner bill could be strengthened or potential consequences of the legislation, including possibly disadvantaging regional banks like SunTrust in the mortgage business.

Under the Corker-Warner bill, private mortgage insurers would have to hold 10% in capital and pay into an insurance fund that the government could use in case of catastrophic losses. The concept is similar to banks' Deposit Insurance Fund, which is funded by fees and used to pay the cost of institution failures.

But Mark Zandi, chief economist at Moody's, said the proposed capital requirement was too high, suggesting it be slashed in half to 5%. He said capital should derive from two broad sources including insurance entities, which would help to bring stability to mortgage credit, and capital markets, which would help to manage the cost of mortgages for borrowers.

"A good benchmark for the appropriate amount of capital is the Great Recession," Zandi said. "In the recession, Fannie, Freddie, the private [mortgage insurers] lost, or will lose, ultimately about 4%…To be conservative, I think it would be appropriate to capitalize the system at 5 percent."

Richard Johns, executive director at the Structured Finance Industry Group, praised the Corker-Warner bill's proposal to create a common securitization platform and the allowance of various forms of capital.

But he, along with Jerome Lienhard, chief executive at SunTrust Mortgages and Julie Gordon, director of Housing Finance and Policy at the Center for American Progress, said the bill must preserve the so-called To Be Announced, or TBA market. If a government guarantee is too small, the TBA market could potentially be curtailed, which might hurt credit availability.

"To create a deep, liquid market and support widespread availability of a long-term, fixed rate mortgage, we need both a government guarantee and a healthy TBA market," said Gordon.

Lienhard said another critical problem of the bill was the potential to disadvantage regional banks — a concern both Corker and Warner acknowledged.

"One of the things I am concerned about — and it's not entirely clear to me that the bill yet addresses this — is the relative potential to disadvantage a regional originator versus a national originator," said Lienhard. "Simply because of the regional concentration or various exposures that exist in certain states."

Separately, Gordon said any housing finance bill should not include specific underwriting metrics, such as a down payment requirements, credit scores, or income levels.

"I think we can't just isolate that one factor and say this factor in and of itself is a big problem," said Gordon. 'That said… different lenders will have different views as to down payment, which I think is appropriate. What I don't think we should do is enshrine a particular number in legislation. I think that would be a mistake regardless of which number we pick."

Lienhard agreed, saying underwriting expertise changes over time with banks presumably getting better at measuring risk. Specifying a down payment requirement would make it difficult to "innovate and advance," he said.