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From Banking and Finance Law Daily, May 16, 2014

Legislators, industry react to Senate Banking Committee approval of housing finance reform legislation

By Stephanie K. Mann, J.D.

The Senate Banking Committee approved S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013, on May 15, 2014, by a bipartisan vote of 13-9. The legislation included a bipartisan agreement drafted by Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-Idaho) and is designed to stabilize the housing finance market and strengthen the American economy. It will create greater competition in the housing finance system and reduce risk to the taxpayers while ensuring affordable, fair access to all creditworthy borrowers, stated the press release.

The legislation winds down and eliminates Fannie Mae and Freddie Mac and allows for a diverse set of private entities to step in and replace most of the functions of the government sponsored enterprises. The new system will be regulated by the modernized and streamlined Federal Mortgage Insurance Corporation (FMIC), modeled in part after the FDIC. It also creates a reinsurance fund, known as the Mortgage Insurance Fund, to protect taxpayers (for additional information, see the May 15, 2014, issue of Banking and Finance Law Daily).

“After the housing crisis we experienced, real reform is clearly necessary to stabilize the housing system and renew the faith in the American dream of homeownership for generations to come,” said Johnson. “I want to sincerely thank all of the members of this Committee for their hard work and input while drafting this legislation. Even though the support was not unanimous, every member on the Committee was actively engaged in this collaborative process, and passing this legislation out of committee is only the first step. I look forward to continue working with my colleagues to keep this important process moving forward.”

“Today’s vote marks an important milestone. For the first time in the nearly six-year conservatorship of Fannie Mae and Freddie Mac, both bodies of Congress have passed legislation to reform our broken housing finance system. I thank everyone for their continued work on this legislation and look forward to further discussions as the process continues,” said Crapo.

Legislative support. Sen. Bob Corker (R-Tenn) commended the committee’s passage of the bill and called on the Senate Majority Leader to schedule a floor vote on the bill as soon as possible. “After more than a year of discussions and a dozen hearings, I am extremely proud the banking committee took a significant step toward building a modern and more efficient housing finance system that provides access to creditworthy borrowers while protecting taxpayers from writing massive checks in the heat of a future financial crisis,” said Corker. “This bill serves as a model of how we can tackle the major challenges in our economy and should become the framework for how our housing finance system will ultimately look.”

Sen. Mark Warner (D-Va) thanked Johnson and Crapo for their leadership in furthering this important bill. “I think this is a day to be proud of the Senate. We started this 18 months ago. The evolution started with three economists: one from the left, one from the right, and one from the center. We then vetted it with all kinds of stakeholder groups,” said Warner. “I hope we don’t let this window pass, that we don’t adopt the attitude of ‘Let’s wait till after the election’ or ‘Let’s wait until next Congress.’ This is the time to take-on these issues, take this bill and improve upon it, and get it to the floor.”

Also applauding the committee passage of the bill was Sen. Mike Johanns (R-Neb). “A lot has changed since the beginning of the 2008 economic crisis, but the fundamentals that left American taxpayers footing the bill for other people’s risky investments haven’t,” Johanns said. “The Senate Banking Committee took an important step toward correcting that vulnerability with this bipartisan vote. This legislation is good news for taxpayers and good news for everyone who believes the government plays too large a role in the housing business.”

Urging Senate leadership to bring this bill to a vote, Sen. Mark Kirk (R-Ill) said, “American taxpayers should never again be on the hook for billion-dollar bailouts of the housing industry. The federal government has too high of a stake in the housing market, and specifically in Fannie Mae and Freddie Mac. S. 1217 will protect taxpayers from another costly bailout.”

Sen. Jon Tester (D-Mont) praised the bipartisan effort in passing this bill through the banking committee. “A strong housing market with a good foundation will protect taxpayers and keep our economy growing. Today's vote shows that the Senate can still do big things if we work together. This bipartisan bill faces a tough road ahead, but I'm going to keep fighting to provide the American people with the economic certainty they deserve," Tester said.

Also applauding the bipartisan nature of the bill, Sen. Dean Heller (R-Nev) stated, “The vote today is a result of hard work and a bipartisan, persistent effort to finally reform the housing finance market. This bill offers a smart, effective path forward to address the problem that Too-Big-To-Fail Fannie Mae and Freddie Mac pose for the American taxpayer. Already, Congress has waited far too long to take substantive steps to preventing a crisis in the future. The leadership of Senators Corker and Warner, and their insistence that many ideas be brought to the table by members from both sides of the aisle, should be applauded. I look forward to continuing to work with this group to help legislation get passed into law," said Heller.

Expressing hope for the future, Sen. Heidi Heitkamp (D-ND) said, “Seven years ago, our country faced a housing crisis. But to this day, we have yet to heed the lessons of that disaster to make our housing finance system work better or to protect American taxpayers from another similar situation. We all agree that something needs to be done. Today, we have a good, bipartisan bill that has been thoroughly debated by Senators on both sides of the aisle. It would finally take needed steps to reform our housing finance system so that it works for North Dakota and American families by protecting taxpayers from future bailouts, providing certainty to the industry, and guaranteeing the 30-year-fixed-rate mortgage remains available so families can afford homes.”

Representatives John K. Delaney (D-Md), John Carney (D-Del), and Jim Himes (D-Conn) had previously developed a housing finance reform proposal that uses private sector market forces to appropriately price risk while putting the scale and security of a government guarantee behind the program. Under the Delaney-Carney-Himes plan, the holders of mortgage-backed securities would absorb losses of up to 5 percent of their value, with the remaining 95 percent covered by insurance, which would be provided jointly by the government and the private sector (for additional information, see the Jan. 22, 2014, issue of Banking and Finance Law Daily). In response to the committee passage of S. 1217, the Representatives have commented that they are “committed to building a bridge between the House and Senate on housing by leveraging the strengths of both the government and the private sector. By imposing market discipline on government pricing and providing government capacity where the private sector cannot meet the demand for the U.S. mortgage market, we aim to strike a balance and inject private sector pricing into the government’s role in the housing market.”

Legislative opposition. Sen. Richard Shelby (R-Ala), senior member of the Senate Committee on Banking, Housing and Urban Affairs, stressed the need for housing finance reform but detailed his opposition to related legislation under consideration by the committee. Shelby pointed out that the proposed bill would greatly expand and further complicate the role of government in housing markets, empowering a new super-regulator with the same authorities used to bail out Wall Street and putting taxpayers on the hook for trillions of dollars of liability. In doing so, Shelby strongly challenged the assertion that the legislation is the best way to move beyond the unacceptable status quo.

While not necessarily opposed to the legislation, Sen. Sherrod Brown (D-Ohio) has expressed concern that the bill does not go far enough to prevent future bailouts and ensure affordability. “I am concerned that the guarantors and aggregators in the new system will be motivated by the same combination of private profit and public guarantee as the Enterprises. I am concerned that the “senior-subordinated” structure of the “capital markets execution” system will recreate the features of toxic structured securities that caused losses at the Enterprises, as well as some bailed out Wall Street banks,” said Brown. “And I am concerned that the definition of “capital” in the bill is too weak, that regulators can waive capital requirements during crisis, and that regulators can still bail out companies that are too important to the mortgage financing market. As we move forward, we must not re-create a failed system.”

Expressing his concern that the bill as written would limit homeowner opportunities is Sen. Robert Menendez (D-NJ). “Progress has been made over the last several weeks and months developing ideas for addressing these critical priorities. But before we pull the trigger on a major overhaul, we need to be confident that each element will work as intended, and that the system includes sufficient fallbacks in case parts of it do not work as planned. We also need a clear understanding of the effects on homeownership costs and access—both the size of the impact and the distribution—as well as financial stability, economic growth, and taxpayer protection,” said Menendez.

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) remarked that this Senate bill is remarkably similar to the Protecting American Taxpayers and Homeowners (PATH) Act that was passed by the Financial Services Committee last year (see July 24, 2013, issue of Banking and Finance Law Daily). However, Hensarling fears that the time for action by the Senate has passed. “"The fact remains the window for action this year is quickly closing, and I fear it may already be too late during this Congress with an already full agenda to get meaningful reform bills through both chambers,” said Hensarling. “Additionally, while there are several commonsense provisions in Senate bill that are similar to those we included in the PATH Act, the Senate bill features a controversial and irresponsible new politicization of mortgage credit insisted by Senate Democrats under the guise of affordable housing. This wealth redistribution scheme, far worse than that of the current system, would be a multi-billion dollar annual invitation to return to the lower credit standards, higher risks, and unsustainable lending that created the crisis in the first place.”

Trade association response. The American Bankers Association has commended Johnson and Crapo on a bill that establishes a thoughtful and realistic framework for a limited federal role in the housing finance system and which also incorporates many recommendations made by ABA and the Bipartisan Policy Center.

Viewing S. 1217 as a positive step in the right direction, Financial Stability Roundtable CEO Tim Pawlenty said, “Congress needs to address the financial danger that Fannie and Freddie currently pose to the American people. Americans paid nearly $187 billion to recover Fannie and Freddie once, and five years later, taxpayers remain 100 percent financial responsible for these two monopolies. The status quo is untenable and irresponsible.” The FSR sent a letter to Johnson and Crapo expressing their appreciation for the advancement of the bill.

The Mortgage Bankers Association has pledged to continually work with Congress to pass this important piece of legislation saying, “Passing the committee is an important step on the road to reform, but plenty of work remains. MBA is eager to continue working with the members of the Senate, as well as other stakeholders, to find common ground and bring housing finance reform legislation to the Senate floor.”

Also applauding the efforts of the Senate Banking Committee, the Bipartisan Policy Center issued a statement saying, “Our nation’s government-dominated housing finance system is unsustainable and continues to pose unacceptable risks to our nation’s taxpayers and the overall economy. At the same time, too many creditworthy families are being shut out of the mortgage market altogether, in part because the uncertainty surrounding the future architecture of our mortgage system has discouraged lending and dampened the housing market.”

The Independent Community Bankers of America have expressed their reservations about the bill that has continued to advance in the Senate. “The community banking industry remains concerned with how the legislation would work in the real-world marketplace and whether it would cause further market concentration of the housing-finance system into a few of the largest financial institutions. Ensuring continued community bank access to a financially strong, competitive, reliable and impartial secondary mortgage market is vital to supporting the flow of mortgage credit to consumers nationwide. Community banks must continue to be able to sell individual loans for cash, to retain servicing on those loans, and to access the secondary market without the complexity and costs associated with securitizing loans,” said ICBA President and CEO Camden Fine.

While the Center for Responsible Lending appreciates the efforts of the Senate Banking Committee, in their opinion, any mortgage finance reform needs to prioritize access to credit and affordability for all creditworthy borrowers, which is not present in S. 1217. “Without meaningful requirements to serve all markets nationally or follow fair lending obligations, the proposal undermines efforts to ensure equal access to mortgages credit for communities of color or modest incomes,” said the CRL’s statement.

National Community Reinvestment Coalition's President and CEO John Taylor is not optimistic about the future of this bill, saying, “The deeply divided committee vote is a clear signal that this bill is dead in the water, and with good reason. Significant changes are needed before it could provide the access to affordable credit guaranteed by Fannie Mae and Freddie Mac. If this bill became law in its current form, it would be a giant step backward for the working class, people of color, Millennials, and other traditionally underserved markets."

Reed amendment. Prior to the vote by the Senate Banking Committee, multiple trade associations wrote to Johnson and Crapo expressing their strong opposition to an amendment that was to be introduced by Sen. Jack Reed (D-RI) which would require each member of the audit committee of the board of directors (in addition to the chairman of the board and the CEO and CFO) of an approved entity certify in writing—on an annual basis—to the Federal Mortgage Insurance Corporation (FMIC) that they are in compliance with all provisions of S. 1217 and any regulations promulgated pursuant to it.

The associations believe that if adopted, the amendment would likely impose unwarranted burdens on all businesses, particularly small- and medium-sized businesses, and create an excessive focus on short-term actions, thereby distracting the board and management from some of their long-term objectives. These consequences would be to the detriment of the shareholders and customers of approved entities, who would ultimately pay the cost of such requirements.

Companies: American Bankers Association; Bipartisan Policy Center; Center for Responsible Lending; Financial Services Roundtable; Independent Community Bankers of America; Mortgage Bankers Association; National Community Reinvestment Coalition

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