Senate Banking on a Housing Finance Regulator
At
November 21st’s Senate Banking Committee hearing entitled “Housing Finance Reform:
Powers and Structure of a Strong Regulator,” lawmakers discussed S. 1217, Housing
Finance Reform and Taxpayer Protection Act of 2013, with regulators and
industry experts.
Opening
Statements
Chairman
Tim Johnson (D-S.D.), in his remarks, stated that S. 1217 creates a new
regulator, the Federal Mortgage Insurance Corporation (FMIC), which would “wear
many hats” by: providing an insurance function; regulating federal home loan
banks; creating a common securitization platform; and authorizing servicers and
guarantors.
Johnson
continued that it is critical to have a strong regulator because the housing
system is so complex and said the regulator would need to coordinate closely
with other federal and state regulatory agencies. He concluded that the
Committee will need to consider if the FMIC should regulate for “safety and
soundness concerns” by determining capital standards, counter cyclical
measures, and enforcement actions.
Ranking
Member Mike Crapo (R-Idaho) stated that Congress must learn from the mistakes
of Fannie Mae and Freddie Mac, which “acted like leverage hedge funds” and work
structure a “strong, independent regulator with appropriate checks and
balances.” He noted three issues that must be addressed: 1) how to
balance the dual role of regulator and re-insurer in a highly complex market;
2) giving authorities and powers to the regulator without being duplicative of
other agencies’ functions; and 3) determining the structure of the governing
board.
He
said the FMIC should be a “hybrid” between the Federal Deposit Insurance
Corporation (FDIC) and the Federal Housing Finance Administration (FHFA) whose
finances would be examined frequently and be subject to stress tests. He added
that the governing board should consist of five members with no more than three
from the same party.
Witness
Testimony
Alfred
Pollard, General Counsel, FHFA, in his testimony,
stated that even if a regulator has adequate powers, it “will not always get it
right” and thus sufficient private capital “must be available in front of
taxpayers.” He said that the FMIC’s regulatory authority should be made
“clear and explicit” in the legislation and that providing the agency with the
ability to set prudential standards would give a “high degree of confidence” to
the markets.
Pollard
said “greater sharing of supervisory information” and more transparency are
essential. He also called for the FMIC’s role in the Financial Stability
Oversight Council (FSOC) to be clarified, saying that it should be given a
place on its Examination Council.
Pollard
noted that funding the FMIC exclusively with insurance fees “may present
challenges,” with larger fees being needed in the first few years, and
recommended that funding be expanded to other fees including mortgage
application fees and restoring assessments for the supervision of Home Loan
Banks. He concluded that the FHFA’s expertise “argues for immediate transfer”
of functions and personnel from the FHFA to the FMIC to allow for a smooth
integration of functions and that “certainty of action” in this transition will
benefit home owners and taxpayers.
Diane
Ellis, Director of the Division of Insurance and Research, FDIC, stated
that during the 80 years the FDIC has been in operation it has learned many
lessons and made improvements to the deposit insurance system including: clear
and explicit statutory authority; monitoring to assess risk exposure and to
take action in response when necessary; appropriately pricing insurance; and
setting up adequate funding arrangements. She noted that explicit
capital standards and setting prices based on risk are important tools for
minimizing losses to the deposit insurance fund (DIF) and added that a “pay as
you go” system ultimately increases the cost of a failure.
Kurt
Regner, National Association of Insurance Commissioners, stated
that issues with mortgage guaranty insurance as it exists now include: 1)
overconcentration of mortgage originations in only a few banks; 2) the cyclical
nature of mortgage insurance; and 3) the lack of incentives to continue
adhering to strict underwriting standards. He cautioned against legislative
solutions that rely on private mortgage insurance and guarantors, saying that
they “should not be seen as a substitute” for due diligence or sound
underwriting by mortgage servicers or bond issuers.
Bart
Dzivi, Dzivi Law Firm, P.C., stated
that S. 1217 represents an “important first step” but said two structural issues
should be addressed: 1) the appropriate level of safety and soundness
supervision of the various private entities that do business with the FMIC; and
2) if the FMIC’s business of granting a government guarantee on mortgage
securities should be subject to safety and soundness oversight by a separate
federal agency.
He
recommended that the legislation be improved by: 1) expanding the scope of
private parties subject to government oversight; 2) granting the FMIC the same
authorities afforded to other bank regulators; and 3) creating an express
enforcement system modeled after the federal banking laws.
Robert
Couch, on behalf of the Bipartisan Policy Center Housing Commission, stated
that a regulatory system for the housing market should focus on providing a
widely accessible mortgage market while protecting taxpayers. He
suggested that the legislation be strengthened by: 1) allowing the FMIC to
replicate the model used by Ginnie Mae; 2) creating a single security or
“common shelf” for single-family mortgages, in order to ensure the system’s
liquidity, interact effectively with the To-Be-Announced (TBA) market, and
establish an equal playing field for lenders of all sizes; 3) giving the FMIC
resolution authority over failed businesses; and 4) empowering the FMIC with
the flexibility to respond more quickly to emergency conditions in the
mortgage market.
Paul
Leonard, Senior Vice President, Financial Services Roundtable, stated that the
primary duty of a housing market regulator should be to ensure that the
secondary mortgage market operates in a safe and sound manner. He
suggested that the FMIC should: 1) oversee the establishment of a
securitization platform; 2) have rulemaking authority to set capital standards,
subject to a notice a comment period; and 3) have examination and enforcement
powers. Leonard added that the FHFA should take the transitional steps of
creating a single securitization platform and provide clarity on
representations (reps) and warrantees.
Question
and Answer
Chairman
Johnson began the discussion by asking what tools have enabled the FDIC to
protect from losses due to bad actors and if housing reform legislation should
be explicit about the FMIC’s supervisory and enforcement authorities. Ellis
replied that having the ability to monitor risk, approve or deny insurance
applicants, and setting minimum capital standards through explicit and other
broad authorities has helped the FDIC protect the DIF. Pollard followed up,
saying that the giving the FMIC explicit authority would help avoid litigation
and “impairment of action,” adding that “the best model is strong and clear
legislation with flexibility on implementation.”
Johnson
then asked if capital requirements should be set in statute or be determined by
the regulator. Leonard replied that the regulator should have flexibility
in setting the capital standards to allow for different treatment in different
credit situations.
Next,
Johnson asked how the updates to the FHFA’s master policy for mortgage insurers
noted by Director Ed DeMarco, would better protect taxpayers. Pollard replied
that the changes are still under review and discussion with the industry but
expects something public to come out “shortly.”
Ranking
Member Crapo asked how the Committee can assure that proper powers, authority,
and scope are given to the FMIC while avoiding duplication of other regulators
authorities and avoiding an increase in regulatory burdens which may lead to
higher credit costs.
Leonard
responded “we don’t want to be regulated too much,” but said this issue is “so
important” that “significant regulatory authority” is necessary. He added
that the FMIC should “act like a bank regulator” and that “anything getting a
government guarantee would be a qualified mortgage.” Pollard added that
“markets do want” active and appropriate regulation.
Sen.
Bob Corker (R-Tenn.) asked about “hardwiring capital” and how it is defined for
the FDIC. Ellis replied that Congress had defined several categories of capital
and required certain restrictions as firms reach specific categories. She
said that above the minimum thresholds, the FDIC is given flexibility in
setting capital ratios and added that the quality of capital is also important,
as capital “should not be able to flee in times of stress.”
Pollard
followed up, saying that he agrees with the 10 percent private first loss
capital position. He stated that the private sector needs certainty of
the “value proposition” and defined “rules of the road.”
Corker
asked Pollard if having minimum underwriting standards, a so called “QM
(qualified mortgage) plus five,” would be beneficial. Pollard replied
that he is “comfortable with that approach.”
Corker
then asked Couch if the legislation does “a good job preserving good things in
the system and eliminating bad things” to which Couch replied yes. Leonard
followed up, agreeing with Couch and added that firms “shouldn’t have
portfolios for arbitrage purposes” but that portfolios should be used “for maintaining
markets.”
Sen.
Bob Menendez (D-N.J.) expressed concern with FHFA Director DeMarco’s
“unilateral” decision to lower the conforming loan limits of the GSEs and asked
Pollard if it is within the FHFA’s authority to do so, even though Congress has
been repeatedly involved in this issue. Pollard replied that the statutes
governing the GSEs state that they may set conforming loan limits “at any
time,” adding that during the conservatorship, the director stands in for the
management of the GSEs and may set the limits. Pollard continued, saying
that the DeMarco has stated he is “very attentive” and sensitive to the market,
and that the limits are “still under review” and would likely be “gradually
phased in.”
In
a later response, Pollard noted that the reason for lowering the limit is in an
attempt to reduce the footprint of the GSEs in the marketplace.
Second
Round Question and Answer
Johnson
noted that the “emergency powers” granted to the FMIC in the legislation would
only last for six months, and asked if this timeframe should be extended.
Leonard replied that his organization did not have a formal opinion, but said
it is “worth considering” that the regulator may need more flexibility and time
than just six months.
Crapo
asked what specific powers the regulator should have when dealing with private
market insurers. Regner replied that capital standards should be regulated and
maintained at the state level and noted that very expensive capital would
create barriers to entry.
Crapo
then asked the rest of the panel how give the regulator proper authority but
not “pile on the regulatory burden” on the housing finance system.
The
panel all agreed that information sharing amongst regulators would be important
in the new system to allow each agency to learn from the experiences of the
others.
In
closing, Pollard noted that third party service providers are very important
but that they may pose potential risks and should be under the watch of a new
regulator.
For
more information on this hearing and to view a webcast, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Housing,Hearing Summaries Agency:Senate Banking Committee,Publish Year:2013
At
November 21st’s Senate Banking Committee hearing entitled “Housing Finance Reform:
Powers and Structure of a Strong Regulator,” lawmakers discussed S. 1217, Housing
Finance Reform and Taxpayer Protection Act of 2013, with regulators and
industry experts.
Opening
Statements
Chairman
Tim Johnson (D-S.D.), in his remarks, stated that S. 1217 creates a new
regulator, the Federal Mortgage Insurance Corporation (FMIC), which would “wear
many hats” by: providing an insurance function; regulating federal home loan
banks; creating a common securitization platform; and authorizing servicers and
guarantors.
Johnson
continued that it is critical to have a strong regulator because the housing
system is so complex and said the regulator would need to coordinate closely
with other federal and state regulatory agencies. He concluded that the
Committee will need to consider if the FMIC should regulate for “safety and
soundness concerns” by determining capital standards, counter cyclical
measures, and enforcement actions.
Ranking
Member Mike Crapo (R-Idaho) stated that Congress must learn from the mistakes
of Fannie Mae and Freddie Mac, which “acted like leverage hedge funds” and work
structure a “strong, independent regulator with appropriate checks and
balances.” He noted three issues that must be addressed: 1) how to
balance the dual role of regulator and re-insurer in a highly complex market;
2) giving authorities and powers to the regulator without being duplicative of
other agencies’ functions; and 3) determining the structure of the governing
board.
He
said the FMIC should be a “hybrid” between the Federal Deposit Insurance
Corporation (FDIC) and the Federal Housing Finance Administration (FHFA) whose
finances would be examined frequently and be subject to stress tests. He added
that the governing board should consist of five members with no more than three
from the same party.
Witness
Testimony
Alfred
Pollard, General Counsel, FHFA, in his testimony,
stated that even if a regulator has adequate powers, it “will not always get it
right” and thus sufficient private capital “must be available in front of
taxpayers.” He said that the FMIC’s regulatory authority should be made
“clear and explicit” in the legislation and that providing the agency with the
ability to set prudential standards would give a “high degree of confidence” to
the markets.
Pollard
said “greater sharing of supervisory information” and more transparency are
essential. He also called for the FMIC’s role in the Financial Stability
Oversight Council (FSOC) to be clarified, saying that it should be given a
place on its Examination Council.
Pollard
noted that funding the FMIC exclusively with insurance fees “may present
challenges,” with larger fees being needed in the first few years, and
recommended that funding be expanded to other fees including mortgage
application fees and restoring assessments for the supervision of Home Loan
Banks. He concluded that the FHFA’s expertise “argues for immediate transfer”
of functions and personnel from the FHFA to the FMIC to allow for a smooth
integration of functions and that “certainty of action” in this transition will
benefit home owners and taxpayers.
Diane
Ellis, Director of the Division of Insurance and Research, FDIC, stated
that during the 80 years the FDIC has been in operation it has learned many
lessons and made improvements to the deposit insurance system including: clear
and explicit statutory authority; monitoring to assess risk exposure and to
take action in response when necessary; appropriately pricing insurance; and
setting up adequate funding arrangements. She noted that explicit
capital standards and setting prices based on risk are important tools for
minimizing losses to the deposit insurance fund (DIF) and added that a “pay as
you go” system ultimately increases the cost of a failure.
Kurt
Regner, National Association of Insurance Commissioners, stated
that issues with mortgage guaranty insurance as it exists now include: 1)
overconcentration of mortgage originations in only a few banks; 2) the cyclical
nature of mortgage insurance; and 3) the lack of incentives to continue
adhering to strict underwriting standards. He cautioned against legislative
solutions that rely on private mortgage insurance and guarantors, saying that
they “should not be seen as a substitute” for due diligence or sound
underwriting by mortgage servicers or bond issuers.
Bart
Dzivi, Dzivi Law Firm, P.C., stated
that S. 1217 represents an “important first step” but said two structural issues
should be addressed: 1) the appropriate level of safety and soundness
supervision of the various private entities that do business with the FMIC; and
2) if the FMIC’s business of granting a government guarantee on mortgage
securities should be subject to safety and soundness oversight by a separate
federal agency.
He
recommended that the legislation be improved by: 1) expanding the scope of
private parties subject to government oversight; 2) granting the FMIC the same
authorities afforded to other bank regulators; and 3) creating an express
enforcement system modeled after the federal banking laws.
Robert
Couch, on behalf of the Bipartisan Policy Center Housing Commission, stated
that a regulatory system for the housing market should focus on providing a
widely accessible mortgage market while protecting taxpayers. He
suggested that the legislation be strengthened by: 1) allowing the FMIC to
replicate the model used by Ginnie Mae; 2) creating a single security or
“common shelf” for single-family mortgages, in order to ensure the system’s
liquidity, interact effectively with the To-Be-Announced (TBA) market, and
establish an equal playing field for lenders of all sizes; 3) giving the FMIC
resolution authority over failed businesses; and 4) empowering the FMIC with
the flexibility to respond more quickly to emergency conditions in the
mortgage market.
Paul
Leonard, Senior Vice President, Financial Services Roundtable, stated that the
primary duty of a housing market regulator should be to ensure that the
secondary mortgage market operates in a safe and sound manner. He
suggested that the FMIC should: 1) oversee the establishment of a
securitization platform; 2) have rulemaking authority to set capital standards,
subject to a notice a comment period; and 3) have examination and enforcement
powers. Leonard added that the FHFA should take the transitional steps of
creating a single securitization platform and provide clarity on
representations (reps) and warrantees.
Question
and Answer
Chairman
Johnson began the discussion by asking what tools have enabled the FDIC to
protect from losses due to bad actors and if housing reform legislation should
be explicit about the FMIC’s supervisory and enforcement authorities. Ellis
replied that having the ability to monitor risk, approve or deny insurance
applicants, and setting minimum capital standards through explicit and other
broad authorities has helped the FDIC protect the DIF. Pollard followed up,
saying that the giving the FMIC explicit authority would help avoid litigation
and “impairment of action,” adding that “the best model is strong and clear
legislation with flexibility on implementation.”
Johnson
then asked if capital requirements should be set in statute or be determined by
the regulator. Leonard replied that the regulator should have flexibility
in setting the capital standards to allow for different treatment in different
credit situations.
Next,
Johnson asked how the updates to the FHFA’s master policy for mortgage insurers
noted by Director Ed DeMarco, would better protect taxpayers. Pollard replied
that the changes are still under review and discussion with the industry but
expects something public to come out “shortly.”
Ranking
Member Crapo asked how the Committee can assure that proper powers, authority,
and scope are given to the FMIC while avoiding duplication of other regulators
authorities and avoiding an increase in regulatory burdens which may lead to
higher credit costs.
Leonard
responded “we don’t want to be regulated too much,” but said this issue is “so
important” that “significant regulatory authority” is necessary. He added
that the FMIC should “act like a bank regulator” and that “anything getting a
government guarantee would be a qualified mortgage.” Pollard added that
“markets do want” active and appropriate regulation.
Sen.
Bob Corker (R-Tenn.) asked about “hardwiring capital” and how it is defined for
the FDIC. Ellis replied that Congress had defined several categories of capital
and required certain restrictions as firms reach specific categories. She
said that above the minimum thresholds, the FDIC is given flexibility in
setting capital ratios and added that the quality of capital is also important,
as capital “should not be able to flee in times of stress.”
Pollard
followed up, saying that he agrees with the 10 percent private first loss
capital position. He stated that the private sector needs certainty of
the “value proposition” and defined “rules of the road.”
Corker
asked Pollard if having minimum underwriting standards, a so called “QM
(qualified mortgage) plus five,” would be beneficial. Pollard replied
that he is “comfortable with that approach.”
Corker
then asked Couch if the legislation does “a good job preserving good things in
the system and eliminating bad things” to which Couch replied yes. Leonard
followed up, agreeing with Couch and added that firms “shouldn’t have
portfolios for arbitrage purposes” but that portfolios should be used “for maintaining
markets.”
Sen.
Bob Menendez (D-N.J.) expressed concern with FHFA Director DeMarco’s
“unilateral” decision to lower the conforming loan limits of the GSEs and asked
Pollard if it is within the FHFA’s authority to do so, even though Congress has
been repeatedly involved in this issue. Pollard replied that the statutes
governing the GSEs state that they may set conforming loan limits “at any
time,” adding that during the conservatorship, the director stands in for the
management of the GSEs and may set the limits. Pollard continued, saying
that the DeMarco has stated he is “very attentive” and sensitive to the market,
and that the limits are “still under review” and would likely be “gradually
phased in.”
In
a later response, Pollard noted that the reason for lowering the limit is in an
attempt to reduce the footprint of the GSEs in the marketplace.
Second
Round Question and Answer
Johnson
noted that the “emergency powers” granted to the FMIC in the legislation would
only last for six months, and asked if this timeframe should be extended.
Leonard replied that his organization did not have a formal opinion, but said
it is “worth considering” that the regulator may need more flexibility and time
than just six months.
Crapo
asked what specific powers the regulator should have when dealing with private
market insurers. Regner replied that capital standards should be regulated and
maintained at the state level and noted that very expensive capital would
create barriers to entry.
Crapo
then asked the rest of the panel how give the regulator proper authority but
not “pile on the regulatory burden” on the housing finance system.
The
panel all agreed that information sharing amongst regulators would be important
in the new system to allow each agency to learn from the experiences of the
others.
In
closing, Pollard noted that third party service providers are very important
but that they may pose potential risks and should be under the watch of a new
regulator.
For
more information on this hearing and to view a webcast, please click here.