US Banking Committee Statement on Housing Finance Reform
On November 21, the United States Senate Committee on Banking, Housing, & Urban Affairs held a hearing titled Housing Finance Reform: Powers and Structure of a Strong Regulator. Both Chairman Tim Johnson and Ranking Member and U.S. Senator Mike Crapo gave statements as prepared for delivery.
United States Senate Committee on Banking, Housing, & Urban Affairs
Housing Finance Reform: Powers and Structure of a Strong Regulator
JOHNSON ON CREATING A STRONG SECONDARY MORTGAGE MARKET REGULATOR
WASHINGTON – Today, Senate Banking Committee Chairman Tim Johnson (D-SD) held a hearing titled “Housing Finance Reform: Powers and Structure of a Strong Regulator.”
Below is Chairman Johnson’s statement as prepared for delivery:
“I call this hearing to order.
“This hearing continues the Committee’s effort to examine housing finance reform proposals. Today we will explore the current regulatory structure related to the secondary mortgage market and survey the issues related to the proposed regulatory structure in legislation.
“S. 1217 creates a new regulator—the Federal Mortgage Insurance Corporation or FMIC. This new regulator would wear many hats, as the operator of the insurance fund, the regulator of the Home Loan Banks, mutual organization, and Common Securitization Platform, and authorizer of issuers, servicers and guarantors with regard to guaranteed mortgages.
“Because the structure of the housing finance system is complex with a wide range of market participants taking part, it is critical that we have a strong, effective regulator. Any piece of legislation will need to clearly detail the structure, functions, and powers of the new regulator. This regulator will need to coordinate closely with a variety of other federal and state regulators to be effective, and have flexibility to set appropriate standards and rules. In addition, we need to consider whether the new regulator should regulate for safety and soundness, conduct exams, set capital standards, play a counter-cyclical role, crack-down on bad actors through enforcement actions, and resolve failed institutions it regulates.
“We should not forget that we have experience with a weak secondary mortgage market regulator. OFHEO was widely viewed as weak, which contributed to the problems at Fannie and Freddie and Congress created FHFA in 2008 in response. We cannot afford to return to the days of weak regulatory oversight of the secondary mortgage market, so Congress should be clear and explicit about the responsibilities and range of tools any new regulator should have.
“Today’s witnesses bring a wealth of experience to this important conversation. They will outline essential tools needed by the new regulator, as well as important lessons they have learned as regulators of the deposit insurance fund, insurance companies, and the secondary mortgage market.
“We are all aware that housing is a key part of our nation’s economy. A well-equipped, appropriately structured regulator will provide certainty to market participants and ensure a strong and stable housing finance system that provides mortgage credit to Americans across this country.”
Please click here to view the online statement.
CRAPO ON BEST STRUCTURE FOR A STRONG REGULATOR IN NEW HOUSING FINANCE MARKET
WASHINGTON – U.S. Senator Mike Crapo (R-Idaho), Ranking Member of the Senate Banking, Housing and Urban Affairs Committee, today delivered the following remarks during a Banking Committee hearing on how best to structure a strong and effective regulatory entity for taxpayer-guaranteed mortgages:
“Thank you, Mr. Chairman.
“Today, the Committee will discuss how best to structure a strong, independent regulator—with appropriate checks and balances—as part of the new housing finance system. We have a broad panel of witnesses and I thank you all for coming to testify.
“In past hearings, I have highlighted the mistakes of Fannie Mae and Freddie Mac before they were placed in conservatorship. Not only did they operate as undercapitalized companies, holding just 45 cents in capital for every 100 dollars in mortgages they guaranteed, but they acted like highly-leveraged hedge funds, purchasing nearly 40 percent of the private label subprime securities at the peak of the housing bubble.
“These forces culminated in a perfect storm whose clean-up cost taxpayers billions of dollars in bailouts, crushing our economy and undermining America’s international standing. We must learn from these mistakes.
“When considering reform we must address three pivotal issues about the new regulator: First, how can it appropriately balance its dual role as a regulator and a reinsurer in a highly complex market with diverse stakeholders? Second, what authorities and powers should be vested in the new agency to ensure it is effective without duplicating existing efforts? Third, how should we structure the governing board so that the agency is well equipped to carry out its responsibilities on day one?
“S. 1217 would create the Federal Mortgage Insurance Corporation, or FMIC, as the primary regulator for taxpayer-backed mortgages. The FMIC would provide catastrophic loss insurance funded by premiums and guarantee fees on eligible mortgage securitizations. As such, it would be a hybrid between the Federal Deposit Insurance Corporation and the Federal Housing Finance Authority.
“The FDIC was created as an independent federal agency in response to the bank failures in the 1920s and early 1930s. It is comprised of a five-person Board of Directors, with no more than three directors from the same political party. The FDIC has survived 80 years without depositors losing a single cent of insured funds, largely in part because its board is designed for long-term stability and continuity without sudden movements or extreme policy shifts.
“As the guaranteed mortgage industry will need similar stability and continuity, the new regulator should have a similar balance of views. In addition, the new regulator will serve as the principal line of defense for the taxpayers and should have a strong, clearly defined purpose.
“Its activities—and the activities of those it regulates—must result in strong underwriting standards and responsible homeownership. Any reinsurance fund, industry participant and ensuing mortgage or financial product must be well capitalized to insulate taxpayers from unwarranted risk. And, to adequately oversee a diverse industry and to coordinate with state and other regulators, the new agency will need superb technical expertise.
“In order to accomplish all these goals, we ought to reach consensus on key principles. The new regulator should be an independent agency—resolute in its mandate and unwavering to political winds. Its leadership has to be balanced out to ensure true political independence. Its safeguards and underwriting standards must be based upon qualifying standards to provide mortgages, but to protect taxpayers. Its finances must be frequently examined to ensure accountability and transparency including appropriate stress tests.
“Lastly, the agency cannot exist in a regulatory vacuum: it must coordinate with other agencies in a holistic approach to sensible regulation. Any new regulator must avoid regulatory duplication that leads to increased paperwork and regulatory burdens which increase the cost of credit while creating legal nightmares.
“Adopting these principles is crucial because the agency will be tested immediately upon it creation. Some of the immediate tasks it will have to undertake include: establish rules for the structure and use of a federally insured mortgage markets within perimeters set by Congress; determine approval criteria and guidelines for market participants; and set up a cooperative to ensure access for small participants in a manner that also maintains adequate taxpayer protections.
“Today’s hearing is a good platform to discuss how best to enable the new agency to succeed. Thank you, Mr. Chairman.”
Please click here to view the online statement.
Please click here for a related statement from the Federal Housing Finance Agency (FHFA).
Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders, and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally. Website: www.safeguardproperties.com.