WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
February 29, 2008
Procedural Vote on Housing Package Fails in Senate
The Senate failed to get the 60 votes required to move forward on legislation that would allow bankruptcy judges to modify residential mortgage loans in Chapter 13 bankruptcy proceedings. The Foreclosure Prevention Act (S.2636), introduced by Senate Majority Leader Harry Reid (D-NV), also includes a number of other housing-related provisions. SIFMA joined members of the Bankruptcy Coalition in a letter of opposition to the bankruptcy provisions included in S.2636.
Federal Reserve Chairman Ben Bernanke testified before the House Financial Services and Senate Banking Committees on the Federal Reserve’s Semi-Annual Monetary Policy Report.
The House approved a package of energy tax provisions this week by a vote of 236-182. The Renewable Energy and Energy Conservation Tax Act (H.R.5351) would authorize $5.6 billion in tax-credit bond programs.
SIFMA sent a letter to leaders of the House Financial Services and Senate Banking Committees regarding issues that have arisen from the implementation of the Economic Stimulus Act of 2008 pertaining to the increase in the government-sponsored enterprise (GSE) and the Federal Housing Administration (FHA) conforming loan limits.
During the House Appropriations Subcommittee on Financial Services and General Government hearing on consumer protection in the financial services industry, members expressed concern that problems in the subprime mortgage market are spilling into the credit card industry.
A new Government Accountability Office (GAO) report said hedge funds still pose systemic risk to investors and the economy.
Senate Procedural Vote on Housing Package Fails
A Senate procedural motion requiring 60 votes to begin consideration of the Foreclosure Prevention Act (S.2636) failed by a vote of 48-46. The bill, introduced by Senate Majority Leader Harry Reid (D-NV), would amend the bankruptcy code to allow bankruptcy judges to modify residential mortgage loans in bankruptcy proceedings. The bill would also allow the proceeds of qualified mortgage revenue bonds (MRBs) to be used for refinancings and multi-family housing. It would: provide an additional $10 billion in the private-activity bond volume cap for MRBs in 2008; would allow it to be carried over for two years; and would exempt MRBs issued after the date of enactment and before January 1, 2011 from the alternative minimum tax (AMT). The Foreclosure Prevention Act would also: provide additional funding for housing counseling and Community Block Development Grants (CBDG), authorize a five-year carryback of net-operating losses incurred in 2006, 2007 and 2008, and require lenders to give firm disclosures about the mortgage terms at least seven business days before closing. SIFMA joined a number of other financial trade associations in a letter of opposition to the bill’s bankruptcy provisions. A Statement of Administration Policy (SAP) this week threatened a veto of the bill in its current form. The administration expressed strong opposition to the bill’s bankruptcy provisions, warning amending the bankruptcy code in this way would undermine existing contracts, leading to contraction in mortgage credit availability and affordability.
In response, Senate Republicans released an alternative to S.2636, the Home Ownership, Manufacturing and Economic Growth (HOME) Act of 2008. The package would: make permanent the 2001 and 2003 tax cuts; extend 2007 and 2008 expiring tax cuts and alternative minimum tax (AMT) relief for two years; and reduce the top corporate marginal rate to 25 percent. The HOME Act also includes a number of competiveness provisions, including modernization of regulation of cross-border activities of broker-dealers and exchanges operating globally; a provision directing the Securities and Exchange Commission to hold a public hearing on the impact of excessive litigation; a provision directing the SEC to promulgate rules to speed the process of rulemaking for self-regulatory organizations (SRO); a provision directing the SEC to work quickly to achieve full conversion of the International Financial Reporting Standard (IFRS) or U.S. GAAP; and a requirement for the Treasury Department to report annually on the treatment of U.S. financial services by foreign countries. The package also includes $10 billion in additional mortgage revenue bonds for refinancing subprime mortgages.
Bernanke Repeats Call for FHA/GSE Reform
In two days of testimony on the Federal Reserve’s Semi-Annual Monetary Policy Report, Federal Reserve Chairman Ben Bernanke said the securitization market is good, but is currently dysfunctional and needs work at the point of origin to provide information and clarity on what is included in the securitization. Appearing before both the House Financial Services and Senate Banking Committees this week, Bernanke said the information on private sector loan modification efforts have been mixed, but efforts such as HOPE NOW provide a comprehensive and systematic means for collecting date. He said once evaluated by the Fed, the data will be valuable in preventing foreclosures and strengthening the overall system. Bernanke said proposals to allow bankruptcy judges to modify residential mortgages in bankruptcy proceedings may help some people, but could also lead to increased interest rates in the future. Chairman Bernanke said while he couldn’t concur with estimates that the bankruptcy proposals would add two percent to the cost of mortgages, he said the proposal could probably add something to the costs of mortgages because the collateral would be less secure. He repeated the Federal Housing Administration (FHA) could be a more flexible and productive means to refinance troubled mortgages. He urged Congress to act quickly on FHA modernization and government sponsored enterprise (GSE) reform legislation. Bernanke said it would take time for the GSEs to “gear up” for the temporary increase in the conforming loan limits. Bernanke pointed to SIFMA’s recommendation that loans with higher balances be incorporated into separate instruments and said the Fed is encouraging the GSEs to do more to raise capital and increase securitization.
Chairman Bernanke said the auction rate securities market will make necessary adjustments within a relatively short period of time. He predicted that liquidity will return to the market because most municipalities have a good credit rating. Discussing recent issues related to the credit rating agencies, Chairman Bernanke blamed both raters and investors for over-relying on the ratings not performing proper due diligence. He added that the Basel Committee is looking at how banks use credit ratings and he would encourage pension funds to ensure investors do proper due diligence and not just assume the rating is all they need to know. Chairman Bernanke said the recent investment of sovereign wealth funds (SWF) in major financial institutions has been constructive and has provided the firms with extra capital. Bernanke said if we are confident that investments are made for economic and not political reasons and there is no issue of national defense, then the inflow of investment is good for the economy. Bernanke said the U.S. has participated in international talks regarding sovereign wealth funds and the International Monetary Fund (IMF) and the Organization for Economic Development (OECD) are working on codes of conduct for both SWFs and host countries to adopt.
House Approves Energy Tax Bill
The House approved the Renewable Energy and Energy Conservation Tax Act (H.R.5351) by a vote of 236-182. The $18.1 billion bill, introduced by House Ways and Means Chairman Charles Rangel (D-NY), would extend and modify several energy-related tax provisions, including a three-year extension of the Section 45 production tax credit, would repeal several current-law tax incentives for oil and gas companies, and would require the Treasury Department to study which existing tax provisions contribute to carbon and greenhouse gas emissions. The Renewable Energy and Energy Conservation Tax Act authorizes $2 billion of new clean renewable energy bonds (CREBs) for public power providers and electric cooperatives to fund projects that generate electricity from wind, biomass, or other renewable sources. The bill authorizes $3.6 billion in energy conservation bonds—a new tax credit bond program—to finance qualified initiatives to reduce greenhouse gas emissions. Under the tax-credit bond programs included in the bill, project proceeds must be used within three years of issuance; the funds invested during the three-year spending period are not subject to the arbitrage restrictions under Section 148 during the first three years; the tax credit may be stripped from the bond, and Davis-Bacon prevailing wage laws would apply to eligible projects. The House approved similar energy tax provisions as part of its comprehensive energy bill in August. The Senate-approved comprehensive energy bill did not include energy tax provisions after a procedural vote on adding the tax provisions failed.
SIFMA Sends Letter Regarding Implementation of Increased Conforming Loan Limits
SIFMA sent a letter to leaders of the House Financial Services Committee and the Senate Banking Committee regarding the implementation of the increase in the government sponsored enterprise (GSE) and FHA conforming loan limits included in the Economic Stimulus Act of 2008. SIFMA applauded the Committees for their continued leadership on housing and mortgage finance issues and expressed support for the increase in the conforming loan limits. SIFMA undertook a thorough review of current Good Delivery Guidelines in order to facilitate timely market delivery of these higher loan limits. SIFMA members ultimately concluded that keeping the maximum TBA eligible original loan balance at current levels was the most expeditious and least disruptive option currently available. The TBA market is so liquid because the underlying loans are considered homogeneous and introducing a new product into this market which does not share similar performance characteristics would create uncertainty. SIFMA believes keeping the TBA market as is and securitizing the higher balance loans in specific pools or REMIC transactions will bring added liquidity and rate relief to higher loan borrowers while not imposing additional costs or impairing the liquidity for loans falling with the pre-existing loan limits. SIFMA continually evaluates existing market practices, including the re-examination of Good Delivery Guidelines if circumstances warrant and will continue to work with the Committee to ensure the functioning of stable and liquid secondary markets for mortgages.
House Approps Subcommittee Examines Consumer Protection in the Financial Services Industry
During the House Appropriations Subcommittee on Financial Services and General Government hearing on consumer protection in the financial services industry, Ranking Member Ralph Regula (R-OH) said bankruptcy proposals similar to the Senate legislation are a very dangerous precedent. Chris Stinebert, president and CEO, American Financial Services Association, agreed and said the bankruptcy proposals will create more expensive loans at higher rates since investors will shy away from investing in products which may not have the same value if contracts are changed by a judge. Chairman Jose Serrano (D-NY) noted the efforts of Treasury and the HOPE NOW Alliance to address foreclosures, but said he is concerned about the success of the efforts because the program is voluntary and many individuals are not eligible for the program. Serrano also expressed concern about the disproportionate share of subprime mortgages held by minorities. Donna Gambrell, director, Community Development Financial Institutions Fund, Treasury Department, said the HOPE Now alliance’s membership has grown and current outreach programs, including Project Lifeline and the alliance’s use of the American Securitization Forum (ASF) Framework to streamline refinancing and loan modifications for troubled homeowners, are helping. Gambrell said the Treasury Department is monitoring whether the credit crunch is spilling over into the credit card market. Lydia Parnes, director, Bureau of Consumer Protection, Federal Trade Commission (FTC), said the FTC has been working to educate students at the elementary, high school and college levels about financial literacy.
GAO Says Hedge Funds Remain a Source of Systemic Risk
A Government Accountability Office (GAO) report released this week found hedge funds have improved their risk-management and disclosure practices in recent years, but still pose systemic risk to investors and the economy. According to market participants included in the study, hedge fund advisers have improved disclosures and transparency about their operations, but not all investors have the capacity to analyze the information they receive from hedge funds. The GAO found that creditors and counterparties that partner with hedge funds are conducting better due diligence than in the past, but several factors—including the use of multiple brokers by hedge funds—may limit the effectiveness of their efforts to prevent systemic risk. The GAO said the efforts of the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and other members of the President’s Working Group on Financial Markets have been positive, but it is too soon to evaluate their effectiveness. The GAO is currently working on a separate report examining the scope of investment by public and private pension funds in hedge funds.
Bills Introduced This Week
Rep. John Murtha (D-PA) introduced the Kids IRA (K-IRA) Act of 2008 (H.R.5497), which would create tax-preferred savings accounts for individuals under the age of 26. The young savers accounts would be treated similarly to ROTH IRA accounts.
The Foreclosure Credit Forgiveness Act of 2008 (H.R.5500), introduced by Rep. Albert Wynn (D-MD), would prohibit credit reporting agencies from including information regarding a foreclosure on an individual’s credit report if the loan was a subprime mortgage.
The Week Ahead
- On Tuesday, March 4, Federal banking regulators will testify before the Senate Banking Committee on the state of the banking industry.
- SIFMA will be testifying at a House Ways and Means Subcommittee on Select Revenue Measures hearing on the tax treatment of derivatives on Wednesday, March 5.
- Also on March 5, the House Financial Services Subcommittee on Domestic and International Monetary Policy and the Subcommittee on Capital Markets will hold a joint hearing on foreign government investment in the United States.
- Treasury Secretary Henry Paulson will appear before the House Appropriations Subcommittee on Financial Services and General Government on the Treasury budget estimates on Wednesday, March 5.
- The Senate Appropriations Subcommittee on Financial Services and General Government will also hold a hearing on the proposed FY09 budget estimates for the Treasury Department on Wednesday, March 5.
- On Thursday, March 6, the Senate Banking Committee will hold a hearing on government-sponsored enterprise (GSE) reform.
- The Senate Judiciary Committee will markup a number of bills, including the Helping Families Save Their Homes in Bankruptcy Act of 2007 (S.2136) and the Home Owners Mortgage and Equity Savings Act (S.2133), on Thursday, March 6.
- On Friday, March 7, the House Oversight and Government Reform Committee will hold a hearing on the severance packages for CEOs of subprime lenders. The hearing was previously scheduled for Thursday, February 28.