WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
August 1, 2008
In a hectic week as the U.S. House of Representatives and the U.S. Senate prepared to begin the five-week summer recess, the president signed a comprehensive housing package into law. The Housing and Economic Recovery Act of 2008 (H.R.3221) includes $11 billion of additional tax-exempt bond authority in 2008 to provide loans to first-time homebuyers and to finance the construction of low-income rental housing. The bill also exempts interest on tax-exempt housing bonds from the alternative minimum tax (AMT) for bonds issued after the date of enactment. It temporarily allows qualified mortgage revenue bonds (MRBs) to be used to refinance certain subprime loans. H.R.3221 would also establish a new program to allow the Federal Housing Administration (FHA) to insure up to $300 billion worth of refinanced mortgages for borrowers facing foreclosure, modernize the FHA, and create a new regulator for the government-sponsored enterprises (GSEs). The Act grants the Treasury Department the authority to purchase stocks and debt of the GSEs as necessary for the next 18 months and increases the federal debt limit by $800 billion.
The House defeated legislation (H.R.6604) mandating the Commodity Futures Trading Commission (CFTC) to set position limits with respect to futures and options in energy and agriculture commodities. H.R.6604 failed to receive the two-thirds majority required to approve the bill. SIFMA, along with its member companies and other trade associations, lobbied against H.R.6604. Debate on anti-speculation legislation also stalled in the Senate this week, as members failed to reach an agreement on the number of amendments to be offered.
A procedural vote on energy and tax extender legislation failed in the Senate this week. The Jobs, Energy, Families and Disaster Relief Act of 2008 (S.3335) includes a one-year extension of alternative minimum tax (AMT) relief without revenue offsets, $18 billion in energy tax extenders and a one-year extension of a number of tax provisions scheduled to expire in 2008 or that expired in 2007, including a one-year extension of the active financing exception under Subpart F.
The House Financial Services Committee approved by voice vote legislation (H.R.6308) that would require credit rating agencies to apply rating symbols consistently for all securities.
The SIFMA Credit Rating Agency Task Force issued its recommendations for credit rating agency reform this week. The Task Force endorsed the development of a more transparent credit rating system and called for greater disclosure, enhanced surveillance, and comparable ratings performance metrics.
In a comment letter submitted in response to Revenue Procedure 2008-28, SIFMA expressed appreciation to the IRS for its quick response to obstacles to obtaining loan modifications where mortgage loans are held by REMICs and grantor trusts and asked for clarifications that would improve the administrability of the rules.
The Treasury Department released Best Practices for Residential Covered Bonds this week. In conjunction with the release of the best practices, SIFMA announced formation of the U.S. Covered Bonds Traders Committee comprised of participants in the primary and secondary trading markets for covered bonds.
During a House Financial Services Committee hearing on mortgage servicing practices and foreclosure mitigation, Chairman Barney Frank (D-MA) said if mortgage servicers cannot respond to the modification needs of homeowners facing foreclosure because of the obligation to trustees or security holders, he will make the elimination of that structure a priority in the next Congress.
President Signs Housing Bill
The president signed the Housing and Economic Recovery Act of 2008 (H.R.3221) into law this week. The bill was sent to the president after being approved by the Senate during a rare weekend session. The Senate approved the bill, which would establish a new program to allow the Federal Housing Administration (FHA) to insure up to $300 billion worth of refinanced mortgages for borrowers facing foreclosure, modernize the FHA, and create a new regulator for the government-sponsored enterprises (GSEs), by a vote of 72-13. The House approved the bill last week 272-152. The housing bill also provides the Treasury Department the authority to purchase stocks and debt of the GSEs as necessary for the next 18 months. Any resulting Treasury borrowings would be subject to the federal debt limit. The bill increases the debt limit by $800 billion to $10.6 trillion. The Housing and Economic Recovery Act also includes a number of tax provisions, including $11 billion of additional tax-exempt bond authority in 2008 to provide loans to first-time homebuyers and to finance the construction of low-income rental housing. The bill would temporarily allow qualified mortgage revenue bonds (MRBs) to be used to refinance certain subprime loans. The bill permanently exempts interest on tax-exempt housing bonds from the AMT effective for bonds issued after the date of enactment. Under the bill, municipal bonds guaranteed by the Federal home loan banks would temporarily be treated as tax-exempt. The bill also temporarily relaxes the mortgage revenue bond rules for homes purchased in Presidentially-declared disaster areas.
Prior to the Senate vote, SIFMA sent a letter of support for the bill to Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY). SIFMA said the legislation responds to the critical and urgent housing needs faced by troubled homeowners; should aid in providing liquidity and stability to the mortgage market; and supports the credit markets and the economy at large. SIFMA expressed particular support for the tax-exempt bond provisions in the legislation, including the increase in the annual volume cap on tax-exempt housing bonds, the repeal of the AMT limitation on tax-exempt housing bonds, and the expansion of the MRB program to allow MRBs to be used to refinance subprime loans. SIFMA said exempting housing bonds from the AMT will improve the marketability of new bond issuances and reduce the cost of implementing housing programs. SIFMA said providing additional bond capacity would enhance the ability of state and local governments to respond to urgent housing needs.
Anti-Speculation Bill Fails in House
The Commodity Markets Transparency and Accountability Act of 2008 (H.R.6604) was defeated in the House this week after the bill failed to receive the two-thirds majority necessary to pass. The vote was 276-151, fifteen votes shy of the required 291 votes. SIFMA, its member companies and other trade associations opposed H.R.6604. The bill would mandate the Commodity Futures Trading Commission (CFTC) to set position limits with respect to futures and options in energy and agriculture commodities and limits the hedging exemption for bona fide hedges. The bill requires the CFTC to mandate routine reporting of fungible over-the-counter (OTC) agricultural and energy transactions and to impose and enforce position limits if it determines the agreement has the potential to disrupt market liquidity and price discovery functions, cause severe market disturbance or prevent prices from reflecting supply and demand. In addition, the CFTC would be prohibited from permitting a foreign board of trade to provide its members or other participants subject to CFTC jurisdiction direct access to its electronic trading and order matching system unless it agrees to meet requirements similar to those imposed on U.S. exchanges. In a letter of opposition to the bill, SIFMA warned the legislation raises significant scope and policy issues as well as technical issues that will cause long-term damage to the U.S. financial markets. SIFMA said H.R.6604 will impair the ability of pension plans, university endowments and charitable foundations to protect their beneficiaries by making it more difficult to hedge various forms of financial risks and shield them from market downturn. SIFMA also warned the bill will significantly reduce liquidity in the U.S. futures and derivatives markets and may have the unintended consequence of increasing energy commodity prices.
SIFMA also joined other financial trade associations in a letter of opposition to the bill. SIFMA, the International Swaps and Derivatives Association, the Futures Industry Association, the Investment Company Institute, the Financial Services Roundtable, the Financial Services Forum and the Investment Adviser Association said the bill limits the ability of millions of American consumers, investors, foundations and retirees to use the futures markets and derivatives transactions to manage inflation. The trade groups warned by restricting access to the commodity markets, H.R.6604 threatens to increase price volatility and instability and could increase prices. A statement of administration policy this week said if the bill were presented to the president in its current form, his senior advisers would recommend he veto it. In particular, the administration opposed Section 8 of the bill, saying the current regulatory structure that allows exchanges to set and administer position limits with oversight from the CFTC is functioning properly and requiring the CFTC to manage these position limits directly would be harmful for the markets and burdensome for the CFTC. The administration also expressed concern about Section 14 of the bill, which would require new reporting requirements on certain OTC transactions.
Debate over the number of amendments to be offered stalled energy speculation legislation in the Senate this week. The Stop Excessive Energy Speculation Act (S.3268) would require the CFTC to set maximum speculative position limits on nonlegitimate hedge trading and to routinely collect detailed information from index traders and swap dealers. The bill also prohibits the CFTC from permitting a foreign board of trade to provide its members or other participants subject to CFTC jurisdiction direct access to its electronic trading and order matching system unless it agrees to meet requirements similar to those imposed on U.S. exchanges. The bill would require institutional traders to provide more detailed and disaggregated reporting on their OTC transactions. SIFMA opposes S.3268.
Tax Extender Bill Fails Senate Procedural Vote
The Senate failed to receive the 60 votes necessary to move forward with debate on the Jobs, Energy, Families and Disaster Relief Act of 2008 (S.3335), which was introduced last week by Senate Finance Chairman Max Baucus (D-MT) and Senate Majority Leader Harry Reid (D-NV). The procedural vote failed 51-43. S.3335 is a revised version of a previous energy tax and tax extender package (S.3125) Baucus introduced in June. The Jobs, Energy, Families and Disaster Relief Act of 2008 includes a one-year extension of alternative minimum tax (AMT) relief (without revenue offsets), $18 billion in energy tax extenders (including $2 billion in Clean Renewable Energy Bonds), and a one-year extension of a number of tax provisions scheduled to expire in 2008 or that expired in 2007. S.3335 would extend the active financing exception under Subpart F for one year through 2009. The bill is partially paid for with the following provisions: delaying the effective date of the worldwide interest allocation for an additional eight years (the housing bill would delay it for two years); requiring basis reporting for brokers; imposing current taxation on certain amounts deferred in offshore compensation arrangements; conforming the definition of “child” under various sections of the code; and extending the coal excise tax. About $69 billion of tax relief (including AMT relief, disaster aid for the Midwest and tax incentives for a rail project in New York) are not offset. SIFMA sent a letter of support for S.3335 to Senate leaders and leaders of the Senate Finance Committee this week. In particular, SIFMA expressed support for the extension of the active financing rules. SIFMA said failure to extend the active financing rules would result in a substantial tax increase on the U.S. financial services sector and place U.S.-based companies at a significant disadvantage compared to their foreign-based competitors.
Earlier in the week, the Senate failed to receive the necessary 60 votes to move forward on the House-passed version of the bill (H.R.6049). The motion to proceed to H.R.6049 failed by a vote of 53-43. S.3335 makes a number of changes to H.R.6049 including dropping the Davis Bacon requirements for Clean Renewable Energy Bonds. It was the third cloture vote on H.R.6049 that has failed to receive the necessary votes to move forward in the Senate. In a statement of administration policy (SAP) released prior to the vote, the administration said the president’s senior advisers would recommend he veto S.3335 in its current form. Specifically, the administration opposes the following provisions: 1) further delaying the worldwide interest allocation election, 2) imposing current taxation on certain nonqualified deferred compensation plans in offshore jurisdictions, 3) transferring $8 billion from the General Fund of the Treasury to the Highway Trust Fund, 4) expanding the use of tax-credit bonds, and 5) reinstating the tax exclusion for amounts received under qualified group legal services plans. The administration also objects to a provision in the bill, which would allow the offshore deferred compensation provision to expire at the end of the current budget window. The administration said allowing the provision to expire is a “gimmick” that would allow the provision to be used as a revenue raiser again in the next 10-year budget window.
HFSC Approves Muni Rating Scale Bill
The House Financial Services Committee approved by voice vote legislation requiring credit rating agencies to apply rating symbols consistently for all securities. The Municipal Bond Fairness Act (H.R.6308) requires nationally registered statistical rating organizations (NRSROs) to ensure ratings on securities and money market instruments reflect the risk investors will not be repaid. H.R.6308 also requires the Securities and Exchange Commission (SEC) to create a system to measure NRSRO accuracy and to use the results to help guide the SEC’s decision on when to initiate an examination of an NRSRO. The bill also requires the Treasury Department to collect information on the municipal bond insurance industry related to the firms’ financial soundness, concentration of risk, risk management, performance under stress scenarios and underwriting standards. Prior to approving the bill, the Committee adopted a manager’s amendment, offered by Chairman Barney Frank (D-MA), which makes technical corrections to the bill. The manager’s amendment includes clarification that credit rating agencies could distinguish between general obligation debt and revenue bonds.
The committee also approved an amendment offered by Rep. Peter Roskam (R-IL) that calls for the Government Accountability Office (GAO) to review the different treatment for classes of bonds, the causes for the different treatment, factors other than risk of payment that should be considered and the extent to which retail investors could be disadvantaged by a single ratings scale. The committee approved an amendment offered by Rep. Michael Capuano (D-MA) that calls for standards of bond ratings to be objective, not subjective and verifiable through documentation and disclosure. A number of amendments were offered and withdrawn after Chairman Frank and Ranking Member Spencer Bachus (R-AL) announced they would hold a hearing in September to further examine municipal bond disclosures.
SIFMA Credit Rating Agency Task Force Issues Global Recommendations
The SIFMA Credit Rating Agency Task Force issued its recommendations for credit rating agency reform. The Task Force includes asset managers, underwriters and issuers. The recommendations respond directly to the designation by the U.S. President’s Working Group on Financial Markets (PWG) of the Task Force as the private-sector group providing the PWG with industry guidance on credit rating issues. The recommendations endorse the development for a more transparent credit rating system and call for greater disclosure, enhanced surveillance, and comparable ratings performance metrics. The Task Force also encourages a more harmonized and convergent global regulatory framework and independent risk analyses by investors.
SIFMA Submits Comments to IRS on Rev. Proc. Related to Loan Modifications
In a comment letter submitted to the Internal Revenue Service (IRS) in response to Revenue Procedure 2008-28, SIFMA expressed appreciation to the IRS for its quick response to the obstacles to obtaining loan modifications where mortgage loans are held by REMICs and grantor trusts. The Revenue Procedure describes conditions under which certain mortgage loans held in REMICs or grantor trust may be modified prior to default or delinquency, without the IRS challenging the tax status of those securitization vehicles as a result of the modifications. SIFMA said the guidance will permit many loan modifications that will enable homeowners to stay in their homes and avoid foreclosures. SIFMA asked the IRS to consider some clarifications that would improve the administrability of the rules including clarifying that the Rev. Proc. is intended to apply to a mortgage secured by a single-unit dwelling within a multi-unit structure, as long as the single-unit dwelling is owner occupied in accordance with Section 5.02 of the rules, and clarifying the term “owner occupied.” SIFMA also asked the IRS to consider changing the applicability limit to loans securitized in pools in which no more than 20 percent of the pool was delinquent by 30 days or more to be more consistent with the Securities and Exchange Commission’s Regulation AB.
Treasury Releases Covered Bonds Best Practices
The Treasury Department released Best Practices for Residential Covered Bonds this week. To be consistent with the Treasury’s Best Practices, a covered bond program must conform to all the provisions through the life of the program, including: the cover pool must be owned by the depository institution; the issuer must provide first priority claim on the assets to bond holders and the assets in the cover pool must not be burdened by other liens and must be clearly identified on its books and records. The complete criteria for eligible mortgages includes, but is not limited to: one-to-four family residential properties, underwritten at the fully-indexed rate, underwritten with documented income, current when added to the pool, first lien only and a maximum loan-to-value of 80 percent when added to the pool. Issuers must maintain an overcollateralization value at all times of at least five percent of the outstanding principal balance of the covered bonds. The issuer must perform an asset coverage test on a monthly basis to ensure collateral quality. The Best Practices are intended to complement the Federal Deposit Insurance Corporation’s (FDIC) Final Covered Bond Policy Statement released early this month. The policy statement specifies the actions the FDIC will take during an insolvency or receivership if the covered bond meets certain minimum requirements. In conjunction with the release of the Best Practices, SIFMA announced formation of the U.S. Covered Bonds Traders Committee, comprised of participants in the primary and secondary trading markets for covered bonds.
Frank Warns Mortgage Servicers
During a House Financial Services Committee hearing late last week, Chairman Barney Frank (D-MA) said if mortgage servicers cannot respond to the modification needs of homeowners facing foreclosure because of the obligation to trustees or security holders, he will make the elimination of that structure a priority in the next Congress. He said the Committee would work to remove any obstacles that exist for servicers when modifying loans. Mary Coffin, executive vice-president, Wells Fargo Home Mortgage and Michael Gross, managing director for loss mitigation, Bank of America, said servicers have the authority to make loan modifications. Gross said once the housing legislation is enacted more servicers will be able to reduce the principle of a loan. David Kittle, CMB, Chairman-Elect, Mortgage Bankers Association, and James Barber, chairman and CEO, Acacia Federal Savings Bank, testifying on behalf of the American Bankers Association, said lawmakers should wait until the effects from the recent housing legislation can be realized before commenting on the need for legislation to address servicers. Chairman Frank said the committee will hold a follow-up hearing on mortgage servicing practices and foreclosure mitigation in September. After the hearing, the committee issued a press release urging the mortgage industry to forbear foreclosures until the new housing bill takes effect.
Bills Introduced This Week
Rep. Scott Garrett (R-NJ) introduced legislation to amend the Federal Deposit Act to provide the same treatment for covered bonds as for other qualified financial contracts. The Equal Treatment for Covered Bonds Act (H.R.6659) would define a covered bond as a non-deposit recourse debt obligation of an insured depository institution and ensure a bank failure does not impair the value of the bonds. The bill provides joint rulemaking authority to the Secretary of the Treasury, the Federal Reserve, Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC) for any new regulations affecting covered bonds.
Senate Finance Ranking Member Charles Grassley (R-IA) and Sen. Ron Wyden (D-OR) introduced a draft proposal that would change the tax treatment of certain oil and natural gas commodity transactions. The proposal would treat gains and losses from the sale of “applicable commodities” as short-term capital gains and subject the gains and losses to ordinary income tax rates instead of the 15 percent capital gains rate. An applicable commodity includes: actively-traded oil or natural gas, a specified index that is substantially based on oil or natural, notional principal contracts with respect to oil and natural gas and oil and natural gas derivatives, including options, forward and futures contracts and short positions.
The Week Ahead
The House and Senate will be in recess for the Summer District Work Period through September 5. The SIFMA Washington Weekly will resume publication on Friday, September 12.
- The House Financial Services Committee announced it will hold a hearing on Thursday, September 18 to review the state of the auction rate securities market.
- The House Financial Services Committee also set a tentative date of Thursday, September 11 for a hearing on improvements in municipal financial disclosure.