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From Securities Regulation Daily, July 24, 2013

House panel marks up, approves legislation to reform securitized mortgage market

By Jim Hamilton, J.D., LL.M.

The House Financial Services Committee marked up and approved legislation that would reform the mortgage securitization process in the U.S. The Protecting American Taxpayers and Homeowners (PATH) Act, H.R. 2767, is designed to protect American taxpayers and homeowners by creating a sustainable housing finance system for the 21st century. The PATH Act is designed to be a comprehensive proposal to create a sustainable housing finance system by ending the federal government’s domination of the housing finance market and giving consumers more choices in determining which mortgage product best suits their needs. The bill was reported out of committee by a partisan vote of 30-27.

Asset-backed securities. Among other things, the Act would exempt issuers of asset-backed securities from the proposed definition of “covered funds,” which is the list of private investment funds and vehicles in which banks are restricted from investing. The sponsors reasoned that adopting a broad definition for covered funds to include asset-backed securities issuers would render impossible many beneficial types of securitization for banks. The bill would also ensure that the SEC’s implementation of its Regulation AB, which imposes requirements for the registration, disclosure, and reporting of all publicly registered asset-backed securities, including mortgage-backed securities, does not negatively impact ABS issuances.

Covered bonds. The Act also directs the Secretary of the Treasury, in consultation with other relevant federal financial regulators, to establish a covered-bond regulatory oversight program. The Act clarifies that covered bonds are securities but not asset-backed securities. An amendment offered by Rep. Scott Garrett (R-N.J.), and approved by voice vote, would clarify that the exemption from the Investment Company Act for persons acquiring interests in real estate would include qualified securities created by the PATH Act.

FHA board. The Act creates a new Federal Housing Authority (FHA). An amendment by Rep. Randy Neugebauer (R-Tex.), approved by voice vote, would provide for a board of directors for the FHA of five voting members to be named by the President with the advice and consent of the Senate. At least one board member must have experience in mortgage finance. and one must have experience in affordable housing serving the low- and moderate-income population.

Committee Chairman Jeb Hensarling (R-Tex.) noted that the PATH Act ends the bailout of Fannie Mae and Freddie Mac by gradually winding them down over a five-year transition period. The PATH Act also protects taxpayers and homeowners by finally codifying what most everyone claims the FHA was designed to do—that is, function as an agency to help first-time homebuyers and those with low and moderate incomes. The PATH Act also tears down barriers to private capital and frees homebuyers from a government-dominated system, said Chairman Hensarling. He added that reforms in the PATH Act increase competition, enhance transparency, and give consumers more freedom to choose the mortgages that are right for them, as long as the terms are fully disclosed and understandable.

Financial Services Committee Ranking Member Maxine Waters (D-Cal.) released a set of critical core principles, which Democrats believe should be part of legislative efforts to address the future of housing finance reform. The principles include: (1) maintaining the 30-year fixed rate mortgage; (2) providing stability and liquidity; and (3) requiring transparency and standardization.

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