In The News: Bloomberg BNA: Senate Banking Committee Leaders Target Bipartisan Housing Reform Bill by Year's End

By Mike Ferullo

September 12, 2013 09:57PM ET | Bloomberg BNA

(BNA) -- Key Development: Senate Banking Committee intends to complete a bipartisan bill to replace GSEs by the end of 2013.

Key Development: Witnesses tell committee that the Corker-Warner bill is a good starting point.

What's Next: Chairman Johnson said the committee will hold a number of hearings this fall to examine the “finer points” of an overhaul for secondary mortgage market.

Senate Banking Committee Chairman Tim Johnson (D-S.D.) said he is hopeful that members of the panel can reach agreement on a bipartisan bill to reform the secondary mortgage market by the end of 2013.

Johnson said that the committee will now focus much of its attention on replacing government-sponsored housing enterprises (GSEs) Fannie Mae and Freddie Mac, after clearing legislation in July aimed at improving the fiscal health of the Federal Housing Administration (148 BBD, 8/1/13).

Johnson said that there is a broad consensus emerging for a limited government guarantee in a new housing finance system, but said that the committee will first convene several hearings this fall to examine the “finer points” of a legislative overhaul.

“To that end, it is essential that we fully understand the mechanics of how a new system would function, and how we should smoothly transition from the current system to a new one,” he said before a hearing with representatives from the financial services industry and Washington policy groups.

Ranking Member Mike Crapo (R-Idaho) echoed Johnson's sentiments. Noting recent action by the House Financial Services Committee and a speech by President Obama in favor of abolishing the GSEs, Crapo said that the prospects for an overhaul are at their highest levels since Fannie and Freddie entered federal conservatorship in 2008 (152 BBD, 8/7/13).

Legislation (S. 1217) introduced by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) is regarded as the primary Senate vehicle to overhaul the government's role in the secondary mortgage market, but other proposals are expected as the Senate committee homes in on the issue.

The Corker-Warner bill would create the Federal Mortgage Insurance Company (FMIC), a government agency that would provide catastrophic reinsurance for mortgage-backed securities issued by government-chartered private entities.

The FMIC would establish a mortgage insurance fund, funded through guarantee fees charged to the private market. In addition, private entities would be expected to cover losses of at least 10 percent of the principal of a covered security before FMIC's catastrophic coverage would take effect.

Good Starting Point

Moody's Analytics Inc. chief economist Mark Zandi told Corker that S. 1217 is a good starting point because it would create a hybrid mortgage finance system that puts private capital ahead of a government guarantee. Other witnesses also characterized Corker-Warner as a solid framework.

“In almost all circumstances, private investors will shoulder the burden of the losses. In very rare circumstances—catastrophes—the government would step in and backstop the system,” he said.

“The guarantee would be explicit. It would be paid for by lenders and borrowers, and not taxpayers. The hybrid system is the spirit of Corker-Warner,” he told the committee.

Zandi said a new system should accommodate as many sources of private capital as possible, including but not limited to mortgage bond guarantors, private mortgage insurance companies, and the capital markets. “It's going to take a lot of capital and it should come from everywhere,” he said.

Zandi also said that reducing the government's guarantee role will inevitably lead to higher costs for borrowers seeking mortgage credit. For that reason, he said the system should be capitalized at 5 percent, rather than the 10 percent level proposed by Corker-Warner.

At 5 percent levels, Zandi estimates that the average borrower would pay an additional 40 basis points on mortgage interest rates, which translates into about $60 per monthly payment. If private market players were required to kick in 10 percent capital ahead of a government guarantee, the extra borrowing costs would double to about $120 per month, he said.

TBA Market

Richard Johns, executive director of the Structured Finance Industry Group, said that any reform effort must include preservation of the to-be-announced market, or TBA market, a sentiment shared by the other witnesses. The term is used to describe a forward-looking trading venue for securities issued by the GSEs and Ginnie Mae, which securitizes Federal Housing Administration loans. The buyer in the TBA market is only given a few basic pricing characteristics about the securities and does not know the specific collateral or pools of mortgages that are part of the transaction until a few months later.

Johns said the TBA market is the third-most liquid securities market in the world, handling more than 90 percent of government-guaranteed mortgage-backed securities (MBS) trading volume. He attributed the deep liquidity to standardization of loan pools and underwriting criteria, strong market standards and history, and the government's guarantees to investors.

“This deep liquidity not only drives down costs, allowing a cheaper interest rate to be charged to the consumer, but it also enables the mortgage originator to hedge his risks, which in turn can be passed through to the consumer in the form of a rate lock to give them certainty of interest rate,” he said.

Julia Gordon, director of housing finance and policy at the Center for American Progress, said preservation of the TBA market, together with a continued, albeit more limited, government guarantee role will do much to preserve the 30-year, fixed-rate mortgage in the U.S. marketplace.

“The 30-year, fixed-rate mortgage has been a tremendous product for families. It's sustainable. It helps make home ownership affordable. Protecting it should be one of the key goals of what we are doing,” she told the committee.

Input from Regional Banks

Jerome Lienhard, chief executive officer of SunTrust Mortgage, a subsidiary of SunTrust Banks Inc. (STI) said the open-ended conservatorship of Fannie and Freddie is an “untenable situation” that it causing a lot of uncertainty for regional banks' lending operations.

He told senators that regional banks are concerned that they will be put at a disadvantage to large national banks under a revamped secondary market that does not include the GSEs.

Lienhard said the Senate legislation must ensure that midsize regional banks and small community banks have the same access to mortgage securitization outlets as large financial institutions.

Corker and other committee members agreed. He said lawmakers have given a lot of thought to making sure “that the smaller institutions have a lot of access” to a redesigned secondary mortgage market through a common securitization platform.

“But we need to do more to ensure that the regionals, which in many ways are in no-man's land, end up in a good place,” Corker said.

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