WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
February 1, 2008
House Approves Economic Stimulus Package; Senate Finance Committee Approves Economic Stimulus Plan with MRB Reforms
Lawmakers in Washington continued their focus on an economic stimulus plan this week. By a vote of 385-35, the House approved the $145.9 billion stimulus package agreed to by the administration and House leadership last week. The Senate Finance Committee also approved its own economic stimulus package this week. Under the Senate Finance Committee plan, individuals with valid social security numbers who receive at least $3,000 in earned income, self-employment income, social security benefits or veterans’ disability income are eligible to receive a tax rebate. The Committee also adopted an amendment strongly supported by SIFMA that would allow the proceeds from mortgage revenue bonds (MRB) to be used to refinance mortgages and would also increase the volume cap for MRBs.
SIFMA submitted comments to the Treasury Department and the Internal Revenue Service (IRS) on proposed rules that would impose reporting requirements on transactions covered by a patent or a patent application for a tax planning method.
During the Senate Banking Committee hearing on foreclosure prevention, Senate Banking Committee Chairman Chris Dodd (D-CT) questioned whether loan modification efforts were moving quickly enough. Also during the hearing, Ranking Member Richard Shelby (R-AL) expressed concern with the potential effects of a downgrade in the ratings of bond insurers. The bond insurance industry will be the focus of a House Financial Services Subcommittee on Capital Markets hearing on February 14.
The House Judiciary Subcommittee on Commercial and Administrative Law held its third hearing on foreclosure prevention. The House Judiciary Committee approved the Emergency Home Ownership and Mortgage Equity Protection Act of 2007 (H.R.3609) in December.
The Senate Finance Committee considered the nomination of Douglas Shulman to be commissioner of the Internal Revenue Service (IRS).
House Approves Economic Stimulus Package
The House approved a $145.9 billion economic stimulus package by a vote of 385-35. The Recovery Rebates and Economic Stimulus for the American People Act of 2008 (H.R.5140), agreed to last week by Treasury Secretary Henry Paulson, Speaker of the House Nancy Pelosi (D-CA) and House Minority Leader John Boehner (R-OH), would provide tax rebates of up to $600 for individuals and up to $1,200 for married couples, as well as an additional $300 per child. The rebates are phased out for individuals with adjusted gross income (AGI) above $75,000 and married couples with AGI above $150,000. The plan includes a one-year increase in the conforming loan limits for the housing related government-sponsored enterprises (GSEs) from $417,000 to a maximum of 125 percent of the area median price or $729,750. H.R.5140 also includes a permanent increase in the Federal Housing Administration (FHA) loan limit to a maximum of $729,750. The Recovery Rebates and Economic Stimulus for the American People Act of 2008 would also provide for a fifty percent bonus depreciation deduction on purchases of new equipment in 2008 and would double the Internal Revenue Code Section 179 expensing limit to $250,000 for one year.
Senate Finance Committee Approves Economic Stimulus Package Including MRB Reforms
By a vote of 14-7, the Senate Finance Committee approved a roughly $157.2 billion economic stimulus package including reforms to the mortgage revenue bond (MRB) program. The package would provide tax rebates of $500 for individuals and $1,000 for married couples, plus $300 for each qualifying child. Under the Senate Finance Committee plan, individuals with valid Social Security numbers are eligible for the rebate if they have at least $3,000 of earned income, self-employment income, or receive social security benefits or veterans disability income. Rebates are reduced for individuals with adjusted gross income above $150,000 ($300,000 for joint filers). The plan also extends unemployment benefits by 13 weeks (26 weeks in high unemployment states). The plan allows businesses to elect any one of the following tax incentives: 1) expense up to $250,000 of new equipment or off-the-shelf software under Section 179; 2) additional 50 percent bonus depreciation deduction over two years; or 3) a five-year carryback of net-operating losses incurred in 2006, 2007 and 2008.
The chairman’s mark approved by the Committee also includes a $5.6 billion package of energy tax extenders, including a one-year extension of the Section 45 credit for electricity produced from renewable resources and a $400 million increase in clean renewable energy bond authority. The Committee also approved an amendment offered by Sen. John Kerry (D-MA) and Sen. Gordon Smith (R-OR), and advocated by SIFMA, that would allow the proceeds of qualified mortgage revenue bonds to be used for refinancings and for multi-family housing. It would also provide an additional $10 billion increase in the volume cap for 2008, and would allow it to be carried over for two years. The bill would exempt single family bonds after December 31, 2007 and before January 1, 2011 from the alternative minimum tax (AMT).
A procedural vote to bring the House-passed economic stimulus package to the Senate floor is scheduled for Monday, February 4.
SIFMA Submits Comments on Proposed Tax Patent Reporting Requirements
SIFMA submitted comments to the Treasury Department and the Internal Revenue Service (IRS) on proposed rules that would impose reporting requirements for transactions covered by a patent or a patent application for a tax planning method. Under the proposed regulations, both taxpayers participating in these transactions and material advisors to the transactions would be required to disclose the transactions to the IRS and would be exposed to the risk of penalties upon failure to do so. SIFMA said legislation rather than new IRS reporting requirements is the more direct and effective means of addressing concerns with the patenting of tax advice or tax strategies. SIFMA said, however, if there are to be new reporting requirements, any new rules should be developed in close coordination with legislators looking at the same issue and be better targeted to improve administrability, reduce market uncertainty, avoid unnecessary reporting obligations and eliminate unwarranted exposure to penalties.
Dodd Frustrated with Progress in Modifying Subprime Loans
During a hearing this week on foreclosure prevention, Senate Banking Committee Chairman Chris Dodd (D-CT) questioned whether loan modification efforts are moving quickly enough to have a significant impact on the number of mortgage foreclosures. Dodd cited a Moody’s report indicating that only 3.5 percent of all subprime ARMs were modified in the first eight months of 2007. Robert Steel, Treasury Under Secretary for Domestic Finance, said the American Securitization Forum (ASF) framework employed by the HOPE NOW Alliance has increased the speed and efficiency of moving troubled borrowers into affordable solutions. Steel said early data indicated identification and connection with at-risk borrowers is growing at an increasing rate since inception. Steel said the Treasury Department will begin to receive monthly results beginning in February to gauge the HOPE NOW Alliance’s progress and will then determine if improvements to the framework are required. Sheila Bair, chairwoman, Federal Deposit Insurance Corporation (FDIC), called for a “systematic” approach to subprime loan modifications, as opposed to the “case-by-case” approach used by the HOPE NOW Alliance. Bair said the issue of servicer liability was “overrated” but suggested Congress consider H.R. 4178, introduced by Rep. Mike Castle (R-DE), to clarify such liability.
Under Secretary Steel said a combination of creative solutions using existing platforms and new processes may provide the best solution to the rising number of foreclosures. Steel recommended: 1) allowing states to make adjustments and use mortgage-revenue bonds to target funds to areas most affected, 2) use of a modernized Federal Housing Administration (FHA), and 3) supporting the HOPE NOW Alliance. Bair and Steel said they were still reviewing Chairman Dodd’s proposal to create the Federal Homeownership Preservation Administration and did not yet have a position.
Ranking Member Richard Shelby (R-AL) was concerned about the impact on the availability of credit and the effect on bank capital levels if bond insurers lose their AAA ratings. Under Secretary Steel said bond insurers are mostly state-regulated and the state regulators are engaged and working with them. Steel said Treasury is closely monitoring the situation. Chairwoman Bair said the impact on the value of the securities held by banks would depend on whether the bonds were at full maturity. She said if they were in the trading book, it would have repercussions for bank capital, but the municipal bond market is different from the situation with collateralized debt obligations. Steel said seventy-five percent of municipal bonds are bonds of the highest quality.
Judiciary Subcommittee Holds its Third Hearing on Foreclosure Prevention
The House Judiciary Subcommittee on Commercial and Administrative Law held its third hearing on ways to prevent the increasing number of mortgage foreclosures. Subcommittee Chairwoman Linda Sanchez (D-CA) said the complexity of the problems in the mortgage market requires many solutions. She referred to efforts by HOPE NOW, mortgage lending reform legislation and the Emergency Home Ownership and Mortgage Equity Protection Act of 2007 (H.R.3609). House Judiciary Committee Ranking Member Lamar Smith (R-TX) warned H.R.3609 could undercut HOPE NOW's efforts, as well as the economic stimulus plan approved by the House. Rep. Mel Watt (D-NC) said HOPE NOW, FHA Secure and modernization of the Federal Housing Administration (FHA) are great tools to help prevent foreclosures. But, he is very worried about the borrowers who can not be helped by these solutions. He suggested trying to modify H.R.3609 so that it would help only those borrowers who could not be helped using other methods. Rep. Watt said he does not see why the lending community would not support bankruptcy as a last resort.
Mark Zandi, chief economist and co-founder, Moody's economy.com, predicted despite industry modification efforts, almost three million mortgage loans would default this year and next. Faith Schwartz said the number of borrowers facing default is daunting--but thanks to the American Securitization Forum's framework, a comfort letter from the SEC and the efforts of HOPE NOW, industry participants are helping an increasing number of borrowers. Initial results indicate that 370,000 homeowners were assisted in the second half of 2007. Schwartz said based on HOPE NOW's initial data, thirty-nine percent of delinquent subprime borrowers were assisted with loan modifications and repayment plans during the same time period. David Kittle, chairman-elect, Mortgage Bankers Association, said the industry has helped to modify 230,000 loans in the third quarter and there needs to be time to allow the market to correct itself and for HOPE NOW to help borrowers. He said the lending community can adequately handle the volume of loan modifications. Kittle warned H.R.3609 would increase interest rates significantly, dry up investor interest in mortgage-backed securities and impose significant losses on the mortgage industry and bondholders. He cautioned with demand for U.S. mortgages waning, it is ill-advised to pass legislation that would further disrupt the mortgage market.
Baucus Announces Plan to Hold Hearings on Tax Reform
During the Senate Finance Committee’s hearing to consider the nomination of Douglas Shulman to be commissioner of the Internal Revenue Service (IRS), Senate Finance Chairman Max Baucus (D-MT) announced his plan to hold a series of hearings on tax reform in the coming months. Baucus detailed the challenges he sees for the next IRS commissioner including: 1) addressing the tax gap; 2) improving IRS customer service; 3) modernizing IRS information technology; 4) keeping pace with a more global economy especially multinational companies, sophisticated financial products, and offshore tax schemes; 5) developing and retaining the IRS workforce; 6) helping formulate and implement any future tax reform; and 7) implementing IRS directives derived from the economic stimulus package. Douglas Shulman said his goal is to keep current with the financial industry’s growing innovations by including industry-experienced candidates in agency recruiting, and to engage the financial industry on a regular basis to learn about new and future products coming to the market. Sen. Charles Schumer (D-NY) expressed his concern over the high fees and interest rates for refund anticipation loans (RALs), and solicited Shulman’s cooperation to review any potential IRS rule-making authority to curb RAL abuses.
Bills Introduced This Week
The Conforming Loan Limit Temporary Adjustment Act of 2008 (H.R.5153), introduced by Rep. Paul Kanjorski (D-PA), would increase the conforming loan limits for the housing related government-sponsored enterprises (GSEs) from $417,000 to a maximum of 125 percent of the area median price or $729,750 for mortgages originated between July 1, 2007 and December 31, 2008.
Rep. Ron Kind (D-WI) and Rep. Kenny Hulshof (R-MO) introduced the Small Businesses Add Value for Employees (SAVE) Act of 2008 (H.R.5160), which increases the contribution limit on SIMPLE IRA plans to $15,500 so it is consistent with 401(k) plans. The bill also makes a number of other changes to provide SIMPLE sponsors more flexibility. Under H.R.5160, SIMPLE IRA participants would be eligible to rollover their retirement assets like other retirement plan participants. H.R.5160 also includes a new auto IRA with simplified reporting for employers who offer SIMPLE plans.
Sen. Hillary Clinton (D-NY) introduced legislation (S.2574) that would allow the use of qualified mortgage revenue bonds for refinancings. The bill would also provide a temporary increase in the volume cap for mortgage revenue bonds.
The Week Ahead
- The administration’s fiscal year 2009 budget will be released on Monday, February 4.
- The Senate Finance Committee will hold hearings to examine the FY09 budget on Tuesday, February 5, and Wednesday, February 6. Treasury Secretary Henry Paulson will appear at the hearing on Tuesday.
- Jim Nussle, director, Office of Management and Budget (OMB), will testify before the Senate Budget Committee on the FY09 budget on Tuesday, February 5. Treasury Secretary Henry Paulson will testify before the Committee on the budget proposal on Wednesday, February 6.
- Also on Wednesday, February 6, the Senate Environment and Public Works Committee will hold a hearing on future funding options for the highway trust fund.
- Treasury Secretary Henry Paulson will testify before the House Ways and Means Committee on Thursday, February 7 on the FY09 budget.
- The House Financial Services Subcommittee on Oversight and Investigations will hold a hearing on diversity in the financial services industry on Thursday, February 7.
- Also on February 7, the Senate Health, Education, Labor and Pensions Committee will hold a hearing entitled “Working Families and the Economy.”
- The Senate Banking Committee will hold a hearing on government-sponsored enterprise (GSE) reform on Thursday, February 7.
- The House Budget Committee will hold a hearing on the FY09 budget on Thursday, February 7. OMB Director Nussle will testify.
- The U.S.-China Economic and Security Review Commission will hold a daylong seminar on Chinese investment and national security on February 7.