UNITED THEY STAND - HousingWire Magazine
Thursday, 04 August 2011 09:24
UNITED THEY STAND
CONGRESSMEN CAMPBELL AND PETERS SAY THEY CAN SOLVE HOUSING.
FOR REAL THIS TIME.
Jacob Gaffney - HousingWire Magazine
Rep. John Campbell (R-Calif.) couldn't take it anymore. He sat patiently while Tom Deutsch, the head of the American Securitization Forum, introduced him and bipartisan collaborator Rep. Gary Peters (D-Mich.) at the trade groups mid-annual meeting in Washington.
Campbell and Peters sat quietly, occasionally smiling at the crowd of 50 or so attendees. The two Congressmen were set to make a case for some legislation they plan to introduce. Legislation they say, needs to become law. Legislation that will finally fix the housing economy and usher in the long-sought return to economic prosperity.
Many lawmakers have tried what Campbell and Peters — members of the House Financial Services Committee — think they can accomplish. Many more are still trying.
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The heads of the Senate Banking and Urban Affair Committee are one example. Sens. Tim Johnson (D-S.D.) and Richard Shelby (R-Ala.) often bring the spirit of bipartisan cooperation to theirdiscussions on financial reform. But Campbell and Peters insist this time it's different. This time it's for real.
Deutsch passed the floor to Campbell first and the energetic representative from sunny Southern California said a few words before popping out of his chair. He wanted to bring the concept to the heart of the mortgage finance industry. And he wanted to do it face-to-face. But he did not want to be rude. He excused his effervescence, blaming it on old habits picked up during his days as a car salesman.
"How many of you are going to be excited to buy a package of 30-year, mortgage-backed securities in the TBA market that's not government guaranteed?" Campbell asked the crowd of secondary market issuers and investors.
"Let the record show, the hands showing are zero."
Campbell said the insurance program will be on bonds and not on institutions. It's an idea that holds bipartisan support and is supported by the Federal Insurance Deposit Corp., as well, he added.
"Thirty-year mortgages will need to be securitized. The FDIC will not allow banks to hold them. And the banks want to do it privately," Campbell said. "We don't like to call it a GSE bill, because we aren't going to have GSEs. If we are going to have housing recover, we need housing finance to recover."
The jury is still out on whether or not the ASF will throw its weight behind the Campbell/Peters initiative. Peters says once the idea was presented to the National Association of Realtors and the Mortgage Bankers Association, both trade groups offered immediate support.
After listening to the Congressmen, both at the ASF and in separate one-on-one interviews for this article, it's clear they are 100% behind this housing finance solution. And, so far, it's getting hard to find a big hole in the reasoning.
"Our whole idea is to insulate the taxpayer from risks," said Peters, in an exclusive interview with HousingWire. "There is a sign that the private capital is out there."
"We went through research reports, white papers in order to develop this concept and we determined the more entities, the more competition that get into this, the better."
THE BIG IDEA
Campbell and Peters plan to introduce a bill replacing the government-sponsored enterprises with five chartered entities that have an explicit government backing for mortgage bonds. That's five firms offering a type of insurance against bond defaults. The aim is to eventually create more.
Their bill, H.R. 1859, would create a hybrid system, using private dollars supported by a government backstop. It is a concept similar to the third-option model presented by the Treasury Department in February.
The bill would wind down Fannie Mae and Freddie Mac over five years and place them into receivership. In a letter to other lawmakers in early July, Campbell and Peters explained the legislation ensures financial products such as the 30-year fixed-rate mortgage would remain available.
"Securities issuers would be required to keep healthy capital reserves, which would stand in between taxpayers and potential losses, and would also pay into a privately capitalized catastrophic reinsurance fund," the Congressmen said in the letter. "The fund could only be tapped after (an) issuer's assets had been exhausted, and would cover payment of principal and interest on MBS investors only, not lenders or traders."
Mortgage Bankers Association Chairman Michael Berman expressed support for the bill, likely because it mirrors the huge trade group's own proposal put forward earlier this year.
Washington think tank MFGlobal said the legislation has legs, but analysts believe it was introduced too soon in the process, which could take years.
"This is the type of legislation that we believe could eventually emerge from Congress," MFGlobal analysts said. "For us, the problem here is that the bill is too early in the political fight."
Analysts said the legislation essentially preserves the old system of different government-sponsored enterprises issuing mortgage-backed securities with government backing, which MFGlobal said would attract few votes.
However, the Campbell-Peters bill provides the guarantee only for the investors in the individual securities – not the issuer. According to the legislation, there will be layers of private capital, including a fund paid for up front by fees, between the taxpayers and the risk.
Most such insurance funds act similarly, Peters explains. The two Congressman invoke the FDIC primarily because its implementation of deposit insurance funds are "handled in the most organized and efficient way insomuch as it does not rattle markets or investors," Peters said.
Commentators including Moody's Analytics Chief Economist Mark Zandi and the Center for American Progress support the idea of a catastrophe fund, built by these guarantee fees. It's also a plan laid out for Congress by the Treasury.
In its third option outlined in the February white paper, the government would continue to leave the mortgage market to private players outside of the FHA and other programs. But, it would offer reinsurance for "securities of a targeted range of mortgages."
One approach for this system would be to approve some private bond guarantors with capital and oversight requirements from the government. These companies would provide guarantees for mortgage-backed securities collateralized by loans written to strict underwriting standards. The government would then reinsure these securities, only paying claims to shareholders if the company is "entirely wiped out."
A premium would be charged to cover future claims and to repay taxpayers.
The Treasury said this option would provide borrowers with the cheapest access to mortgages, and would provide more competition for smaller lenders and community banks. But, this plan, too, has a downside. If it's enacted, the government and the taxpayer are still exposed to the market, and housing remains in danger of same artificially inflated values as before.
If regulators of these private companies fail as they did leading up to the crisis of 2008, a repeat of the events that took place afterward would be inevitable, the Treasury said.
Rep. Barney Frank (D-Mass.) told Bloomberg Television earlier this year that a deal would be struck between Democrats and Republicans by the end of the year. Banking analysts and even the Treasury say installing a new system is years out. Still, there is much that can be done now.
Shaun Donovan, secretary of the Department of Housing and Urban Development, said in the conference call with Treasury Secretary Tim Geithner that there are still choices to be made now, including a national mortgage servicing standard and allowing the elevated loan limits to expire on
Response to the federal white paper has been mixed with some firms applauding the proposals they agree with and others concerned over the lack of detail. Geithner said Dodd-Frank required regulators provide options and give the pros and cons of each, which they have done. Now, he said, they will continue to confer with market participants, academics and community organizations to implement the plan.
"We should not wait. We should move forward," Geithner said.
IN THEIR OWN WORDS
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Both Peters and Campbell independently worked to a similar solution, and both admit Campbell likely thought of it first. At any rate, Peters approached Campbell after learning the California congressman was working on a similar solution, and somewhat further along.
"I'm from the area around Detroit that's been hit hard," Peters said. "Stabilizing housing is critical for repairing the economy. And I believe with bipartisan support we will get this through the Hill."
Peters and Campbell will not sacrifice the spirit of cooperation on any aspect of the legislation. As the bill picks up a Republican cosponsor, the representatives say they will not move forward until it becomes balanced with a Democratic cosponsor.
"There are a lot of bills here in Congress, we passed a few (in late June) that will never become law," said Campbell. "Everyone knows the president is not going to sign them, or the Senate is not going to pass them. The president has proposals that will never because it will never pass the House."
"There are alternatives here on Capitol Hill, and there are people with different ideologies who may be at one extreme or the other who oppose some of what we’re doing," he added. "But this is something that actually, because of its bipartisan, more centrist approach and nature has the opportunity to pass the House, the Senate, and be signed by president before this Congress is over."
SO, WHAT'S THE PROBLEM?
One particularly open objector to the reform proposal commented anonymously during the Campbell-Peters panel at the ASF. His main complaint is that the two congressmen are needlessly funneling taxpayer money to creating entities, when Fannie and Freddie can be modified more easily to actualize this solution.
According to Campbell, Fannie and Freddie absorbed $140 billion of taxpayer money, and there is tremendous controversy around the way the GSEs manage their business. In short, Campbell thinks no bill will be considered if spoken in the same breath as 'Fannie Mae' or 'Freddie Mac'.
"There’s a lot of very negative energy around Fannie and Freddie, and I think they just need to be liquidated and all their assets sold off once we have somebody to replace them," Campbell said. "And I don't believe there’s any political aptitude for maintaining or rejuvenating Fannie and Freddie in anyway at all.
Campbell said the problem with the GSE system is basically that it is a duopoly supporting the entire housing market. In the future, there needs to be more than two supported entities.
"In our bill, we require a minimum of five before we begin a transition of these associations," Campbell said. "We’d like to have 20, or 30 or 40, the more the better because that spreads the risk and enables one or more of them to fail if they do something wrong and not bring the system down."
What spurred Campbell to Action? - Additional reporting by Jon Prior.
In his words:
"That 30-odd days between the collapse of Lehman Brothers and when the final TARP program was passed were an area in a time, which I never worked harder in my life nor was I more scared because we were so close to literally having a collapse of financial system and a complete loss of trust between anybody and anything. And we prevented it. That's a good thing that we did that.
Afterwards during that and after that, I kept saying to myself: 'I do not want to do this again, I don't want to go through this again. We can't get this close to that kind of collapse again.' Started thinking about what would the solutions be?
There's derivatives and other things that need some solutions, and housing was certainly one of them. I kept turning to this so-called public utility model. I started turning towards the kind of models that are out there and work already in some other form of the economy. Public utilities work pretty well and have for a long period time in providing necessary utilities, electric gas, or whatever to people.
The FDIC insurance has been something that has worked rather well since the '30s and has never cost a taxpayer a dime, but yet has given confidence to the banking sector and enabled failures to happen without taking the whole sector down.
Those sorts of models made sense to me as something that could be applied to housing.
So, I start thinking about a public utility/FDIC model back in late 2008 or early 2009. It wasn't until this year it came to pass, because, last year, Democrats were in charge and I was trying to work with someone but they didn't seem to have interest in doing a replacement of Fannie and Freddie at that time.
But now we're in charge. And it's now two years later. We have to replace this thing. I mean, everybody understands Fannie and Freddie in their current format need to go, but the debate is, of course, on what to replace them with.
So, I started getting a little more in the details on what we needed and this bill was the result."
Congressman Peter's take on cooperation
In his words:
"I think the main focus or the main benefit of us coming together is that we want this to be truly a bipartisan solution to a very important issue.
We signed on together in a bipartisan way, and we’re in a process now of getting cosponsors for the legislation, but we want to make sure as we get those cosponsors. We're getting one Democrat and one Republican together, so that it's an equal number of cosponsors and an equal numbers of Republicans and Democrats.
A bipartisan solution, I think, is the best way to go in this area. And certainly, I believe, the American people want to see Democrats and Republicans working together to deal with difficult issues. We're hoping this would be a model of bipartisan cooperation.
I think what we’re trying to do is to take ideology out of the process.
This is not the ideology of the right or ideology of the left. It's about practical problem solving.
John and I, we're all about rolling up our sleeves and just solving problems.
If we're working in a bipartisan fashion and getting equal numbers of Democrats and Republicans working together, we’re hoping to remove ideology and just interject good common sense and practical problem solving."