Tags: Senate | housing | explicit | guarantee

Senate Explores Housing Finance Reform — Part V

By    |   Thursday, 07 Nov 2013 01:50 PM

The Senate Banking Committee, chaired by Tim Johnson, D-S. D., held a hearing on Oct. 31 titled "Housing Finance Reform: Essential Elements of a Government Guarantee for Mortgage-Backed Securities," another in the series the committee is holding throughout the fall.

In an unusual mix of witnesses, the panel consisted of one bank regulator, one former Treasury official and two representatives from the trade associations that stand to benefit most from the draft bipartisan bill S. 1729, which is designed to give their business a big boost with the help of an explicit guarantee by the federal government.

David Stevens, a former commissioner of the Federal Housing Administration who regulated mortgage banking then took the job of CEO of the Mortgage Bankers Association, stated that the assets of Fannie Mae and Freddie Mac should be preserved, and this, in turn, would require an explicit guarantee of securities backed by qualified mortgages; protection of taxpayers by putting private capital behind the securities and ensuring that no financial institution is too big to fail; and creation of an FDIC-like fund to ensure catastrophic losses, which would be funded by fees paid by mortgage insurance companies, with the amount of the fee dependent on the characteristics of the underlying mortgages.

Michael Canter, director of securitized assets at AllianceBernstein, testified on behalf of the Securities Industry and Financial Markets Association, which represents the firms that distribute the mortgage-backed securities (MBSs) to customers, that the group's primary focus is on the preservation of the so-called to-be-announced (TBA) market, which enables borrowers who take out the standard 30-year, fixed-rate mortgage to lock in the interest rate and hedge against changes in rates that may occur between the time they receive a mortgage commitment and the time of closing. This requires the government to guarantee the credit risk so that the securities firms can trade on the basis of only interest-rate risk.

Joseph Tracy, executive vice president of the Federal Reserve Bank of New York, the principal regulator of the "too big to fail" banks that dominate the MBS market, fully supported the industry position that the government should stand behind the TBA market on the ground that "ensuring an easy, predictable path to securitization of standardized mortgage products is essential to making mortgage credit available throughout the country — in traditionally underserved rural areas and urban areas, and to all sorts of current and potential homeowners, provided by financial institutions of different sizes in different locations."

Phillip Swagel, a Treasury official in the administration of the Troubled Asset Relief Program for the Bush administration and now a professor at the University of Maryland School of Public Policy, served as the Republican appointee to the panel and also supported the provision of an explicit federal guarantee for housing finance because he subscribes to the view that housing occupies a special place in society. Thus, since the government is bound to intervene in periods of stress, it is best to establish the terms on which such intervention will be funded.

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The Senate Banking Committee, chaired by Tim Johnson, D-S. D., held a hearing on Oct. 31 titled "Housing Finance Reform: Essential Elements of a Government Guarantee for Mortgage-Backed Securities," another in the series the committee is holding throughout the fall.
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