At a forum sponsored by the Bipartisan Policy Center, Senators Mark Warner (D-VA) and Bob Corker (R-TN) discussed their legislation to reform the mortgage securitization process. Senator Corker said that the bill strikes the appropriate competitive balance, with 10 percent capital up front and a reliance on the market. It also separates issuers from guarantors. Senator Warner said that the status quo of private sector gains and public sector losses is neither palatable nor sustainable. He noted that reform of housing finance was a bridge too far in the Dodd-Frank Act, but the time to do it is now. The Senator expects the Banking Committee to take up the bill in September.
Senator Corker is reasonably optimistic that there is a five-month window of time in which to get a bi-partisan bill done. The legislative calendar is fairly open right now, he said, adding that he and Senator Warner are working closely with the Obama Administration to get legislation enacted. Senator Warner emphasized that a bill rebranding and recapitalizing Fannie and Freddie is not the way to go and, in any event, could not get through Congress. Many senators are moving to support the bill, he noted.
The Housing Finance Reform and Taxpayer Protection Act, S. 1217, would create the Federal Mortgage Insurance Corporation (FMIC) as an independent federal agency to capitalize the housing finance system by separating credit risk from interest rate risk, and bringing in private capital to take on both. All of these risk sharing options will have a minimum of 10 percent equity. In addition to this capital buffer, FMIC will also leave the securitization and insurance functions to private market participants. Every mortgage-backed security issued through FMIC will have a private investor bearing the first risk of loss and holding at least 10 cents in equity capital for every dollar of risk.
Senator Corker noted that the 10 percent capital buffer is the right balance and sends the right signal to the financial markets. He noted that SIFIs will be close to a 10 percent buffer when all is said and done. In addition, the 10 percent piece in the legislation is appealing to Democratic co-sponsors. Senator Warner noted that the 10 percent may be tranched into different components and the market could price it appropriately. He added that the current system of no private capital is dramatically underpriced.
Senator Warner pointed out that the legislation would create a common securitization platform with a front-end process with sound underwriting standards. All secuitizers will pass through a common securtization platform and will drive us towards a single security
The House Financial Services Committee has reported out the Protecting American Taxpayers and Homeowners (PATH) Act, H.R. 2767. Senator Warner described the House bill as an ideologically pure exercise that will not get Democratic support. While the PATH Act represents a coherent approach, he acknowledged, it would completely upend the existing housing finance system, destroy the 30-year fixed mortgage, and chill purchasers of securities, particularly foreign purchasers of securities. Senator Warner said that S. 1217 represents a balance between the status quo and a rigidly ideological and disruptive approach. S. 1217 starts with a good structure, and he believes that the Senate process will improve it.