Tag Archives: Corker-Warner

Reiss on Frannie Reform

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Law360.com quoted me in Capital Rules To Spread Beyond Banks Under Housing Bill (behind a paywall). The story reads in part,

Mortgage servicers, aggregators and other actors in the U.S. housing finance market would for the first time be subject to the same capital requirements that apply to banks under a new bipartisan bill aimed at replacing Fannie Mae and Freddie Mac, potentially eliminating an advantage nonbank firms currently enjoy.

The elimination of Fannie Mae and Freddie Mac is the centerpiece of S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2014, introduced by Senate Banking Committee Chairman Tim Johnson, D-S.D., and the committee’s ranking Republican, Sen. Mike Crapo, R-Wyo. The government-sponsored entities would be replaced by a proposed Federal Mortgage Insurance Corp. that would backstop the housing finance market in a manner similar to the Federal Deposit Insurance Corp.’s backing of the banking system.

Among the details in the 442-page bill released Sunday are provisions that would allow the FMIC to impose capital standards and other “safety and soundness” rules to mortgage servicers, firms that package mortgages into securities and guarantors that provide the private capital backing to mortgage-backed securities. Compliance with these standards would be required for access to a government guarantee.

Previously those types of institutions have not been subject to safety and soundness rules, unless they were part of a bank. If the Johnson-Crapo bill moves forward as currently written, those firms could be in for a big change, said David Reiss, a professor at Brooklyn Law School.

“Historically, nonbanks have had a lot less regulation than banks. So, by giving them a safety and soundness regulator you are taking away a regulatory advantage – that is, less regulation – that they have had as financial institutions,” he said.

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“What it effectively does is create safety and soundness standards for guarantors, aggregators and servicers, as if they were banks. There’s been this long debate about what you do about the nondepository institutions, and this would empower FMIC to supervise private-party participants like banks,” said Laurence Platt, a partner with K&L Gates LLP.

Specifically, the potential rules would apply to aggregators, which serve to collect mortgages and pack them into securities, and guarantors, or firms that provide the private capital to back those securities. Mortgage servicers that process payments and provide other services to mortgages inside those securities would also be included under the FMIC’s regulatory umbrella, according to the bill.

The FMIC would also have the power to force the largest guarantors and aggregators to maintain higher capital standards than their smaller competitors as a way to mitigate the risk of any such market player becoming too big to fail, and will be able to limit such firms’ market share if they get too big, according to the bill.

Underwriting standards for mortgages that would be backed by the FMIC would match, as much as possible, the Consumer Financial Protection Bureau’s qualified mortgage standards, which went into effect in January, according to the legislation.

Moreover, the FMIC would be able to write regulations for force-placed insurance that is applied to mortgages where borrowers do not purchase their own private mortgage insurance under the legislation. The CFPB and other regulators have tackled perceived problems in the force-placed insurance market in recent months.

Extending those capital and other safety and soundness requirements to nonbank firms would be akin to extending supervision authority of nonbank mortgage servicers and other firms to the CFPB, a power granted by the Dodd-Frank Act, Reiss said.

“It can be described as part of the effort since the passage of Dodd-Frank to regulate the breadth of the financial services industry instead of one part of it, the banking sector,” he said.

Mortgage Reform Schooling on 30 Year Term

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S&P has posted U.S. Mortgage Finance Reform Efforts and the Potential Credit Implications to school us on the current state of affairs in Congress. It provides a useful lesson on three major mortgage reform bills introduced in Congress this year.  They are the Housing Finance Reform and Taxpayer Protection Act of 2013 (Corker-Warner); Protecting American Taxpayers and Homeowners ACT of 2013 (PATH); and the FHA Solvency Act.

Given the current mood in D.C., S&P somewhat optimistically states that there “seems to be a bipartisan commitment to encourage private capital support for the U.S. housing market while winding down Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that hold dominant positions in the mortgage market.” (1) S&P uses this report as an opportunity to “comment on the potential credit implications of these mortgage finance reform efforts on several market sectors.” (1)

In this post, I focus on, and criticize, S&P’s analysis of the appropriate role of the 30 year fixed-rate mortgage. S&P states that

The 30-year fixed-rate mortgage has contributed significantly to housing affordability in the U.S. And while some market players have looked at current rates on jumbo mortgages (those that exceed conforming-loan limits) and suggested that the private market could support mortgage interest rates below 5%, we think this view is distorted. Jumbo mortgage rates carrying the lowest interest rates, for the most part, are limited to a narrow set of borrowers who have FICO credit scores above 750 and equity of roughly 30% in their homes. We don’t believe that these same rates would be available to average prime borrowers, such as those with credit scores of 725 and 25% equity in a property. (3)

While I think that S&P is probably right about the limited usefulness of comparing current jumbo loans to a broad swath of conforming loans, I see no support in their analysis for the assertion that the “30-year fixed-rate mortgage has contributed significantly to housing affordability in the U.S.” First, a 30-year FRM typically carries a higher interest rate than an ARM of any length. Second, a typical American household only stays in a home for about seven years. Thus, a 30-year FRM provides an expensive insurance policy against increases in interest rates that most Americans do not end up needing.

While we may end up providing governmental support for the 30-year FRM because of its longstanding popularity, S&P’s mortgage reform school should be based on facts, not fancy.