WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
April 11, 2008
Housing Bills Advance
Housing stimulus legislation advanced in both the House and the Senate this week. The Senate approved its housing stimulus legislation, the Foreclosure Prevention Act of 2008 by a vote of 84-12. The bill includes modernization of the Federal Housing Administration (FHA), provides additional Community Development Block Grant (CDBG) funds, expands disclosure requirements and includes a roughly $18 billion package of housing-related tax provisions and energy tax extenders. The package also includes additional mortgage revenue bond authority which can be used to refinance certain subprime loans and finance low-income rental housing.
Also this week, the House Ways and Means Committee approved the Housing Assistance Tax Act of 2008 (H.R.5720) by a vote of 35-5. The bill includes several housing-related tax provisions and additional mortgage revenue bond authority. The bill also would temporarily allow municipal bonds guaranteed by Federal Home Loan Banks to be treated as tax-exempt.
SIFMA and the American Securitization Forum (ASF) sent a letter asking the Federal Reserve to extend the definition of program-eligible collateral to include triple-A rated student loan asset-backed securities (SLABS).
In comments submitted in response to the Federal Reserve Board of Governors Proposed Rules to amend the Home Mortgage Provisions of Regulation Z, SIFMA and the ASF urged the Board to expand the preemptive effect of its new regulations.
The House Education and Labor Committee approved the Ensuring Continued Access to Student Loans Act of 2008 (H.R.5715) by voice vote.
The administration announced a plan to expand the eligibility standards of the FHASecure program to give the Federal Housing Administration (FHA) greater flexibility to insure more mortgages.
In two days of testimony this week, the House Financial Services Committee heard from federal banking regulators, academics, and state and local officials on Chairman Barney Frank’s proposed FHA Housing Stabilization & Homeownership Retention Act. Frank announced the Committee will markup the bill on April 23 and 24.
During the Senate Banking Committee hearing this week on Chairman Chris Dodd’s HOPE for Homeowners proposal, Dodd said he is committed to hearing ideas and suggestions on ways to improve the proposal.
Senate Approves Housing Stimulus Package
The Senate approved housing stimulus legislation this week by a vote of 84-12. The Foreclosure Prevention Act of 2008 includes Federal Housing Administration (FHA) modernization language and an increase in the FHA loan limit from 95 percent to 110 percent of area median home prices or a maximum of 132% of the government-sponsored enterprise (GSE) conforming loan limit (currently $550,000). Under the agreement, downpayments of 3.5 percent will be required for any FHA loan. The Foreclosure Prevention Act would provide an additional $10.933 billion in the private-activity bond cap in 2008 for mortgage revenue bonds (MRBs) to be used to refinance subprime loans and finance low income rental properties. The MRBs would be exempt from the alternative minimum tax (AMT) through 2010. The Foreclosure Prevention Act also provides an additional $4 billion in Community Development Block Grant (CDBG) funds; requires lenders to wait nine months before initiating foreclosure proceedings against soldiers returning from service; and provides $100 million for housing counseling. The bill also expands the types of home loans subject to early disclosures under the Truth in Lending Act (within three days of application) for all extensions of credit backed by a home, including refinanced loans and would establish a new disclosure that informs consumers about their maximum monthly payments and increases the range of statutory damages for violations. The Foreclosure Prevention Act also provides a standard property tax deduction for non-itemizers of $500 for single filers and $1,000 for joint filers; authorizes a four-year carry back of net operating losses in 2008 and 2009; and creates a $7,000 tax credit for people who buy homes in foreclosure to be claimed over two years.
Prior to approving the bill, the Senate adopted a manager’s amendment, which included a real estate investment trust (REIT) modernization package offered by Sen. Orrin Hatch (R-UT) and an amendment offered by Sen. Olympia Snowe (R-ME) which would provide small and rural states with an increased share of the additional mortgage revenue bond (MRB) funding provided in the bill. The MRBs included in the bill are allocated only based on state populations—Snowe’s amendment provides an additional $933 million in MRBs to ensure smaller states also receive their share of the MRBs. The Senate also approved an amendment offered by Sen. John Ensign (R-NV) and Sen. Maria Cantwell (D-WA) which would extend for one year several renewable and clean energy production tax incentives by a vote of 88-8. The Ensign/Cantwell amendment includes $400 million in new clean renewable energy bonds (CREBs). The Senate defeated an amendment to the Ensign/Cantwell amendment offered by Sen. Lamar Alexander (R-TN), which would have extended the energy tax incentives for two years while reducing the size of the wind energy production tax credit.
Ways and Means Approves Housing Tax Bill
The House Ways and Means Committee approved the Housing Assistance Tax Act of 2008 (H.R.5720) by a vote of 35-5. H.R.5720 would expand the low-income housing tax credit, increase the state allocation limits and exempt the low-income housing tax credit from the alternative minimum tax (AMT). It would also create a temporary refundable tax credit for first-time homebuyers equal to 10 percent of the purchase price of the home (up to $7,500), which must be paid back to the government over 15 years. The credit is phased out for individuals with AGI above $70,000 ($140,000 for joint filers). H.R.5720 also provides an above-the-line deduction for State and local real property taxes in 2008 (up to $350 for single filers, $700 for joint filers). The approximately $11 billion bill also includes a number of tax-exempt bond provisions:
- Mortgage Revenue Bonds: H.R.5720 increases the private-activity bonds cap for mortgage revenue bonds (MRBs) by $10 billion in 2008. The bill also expands the allowable uses of MRB proceeds to include refinancing subprime mortgages.
- Tax-Exempt Housing Bond Simplification: Under current law, a state is required to separately count each issuance in a series of short-term bonds used to finance low-income housing projects against the annual limit on tax-exempt housing bond issuance. The bill provides that if a state issues a series of short-term tax-exempt housing bonds to finance low-income housing, the bonds will only be counted once against the limit.
- Exempt Costs Imposed on Housing from AMT: H.R.5720 permanently exempts interest from tax-exempt housing bonds (including MRBs) from the alternative minimum tax (AMT).
- Munis Guaranteed by FHLB Eligible for Tax-Exempt Treatment: The bill temporarily allows municipal bonds guaranteed by Federal Home Loan Banks (FHLBs) to be treated as tax-exempt, regardless of their use. The proposal is limited to only the banks that meet safety and soundness collateral requirements for guarantees.
The bill is fully paid for with offsetting revenue raisers, including a basis reporting provision and a reduction and one-year delay in the effective date of the worldwide interest allocation election. The basis reporting requirement requires brokers to report the adjusted basis of securities sold by their customers to the Internal Revenue Service. The provision would apply to stock acquired on or after January 1, 2010 and other types of financial instruments acquired after January 1, 2012. Finally, the bill would extend the filing deadline for 1099 statements from January 31 to February 15 effective in 2009. H.R.5720 is expected to be merged with a larger housing bill that is expected to be considered by the House Financial Services Committee on April 23 and 24. House consideration of the comprehensive housing bill is expected at the end of April.
SIFMA and ASF Encourage Fed to Make SLABS Eligible for the TSLF
In a letter to Federal Reserve Chairman Ben Bernanke and Federal Bank of New York President Timothy Geithner, SIFMA and the ASF encouraged the Fed to extend the definition of program-eligible collateral to include triple-A rated student loan asset-backed securities (SLABS). Allowing SLABs to be pledged as collateral to borrow from the Term Securities Lending Facility (TSLF) or a similar facility could help ensure that current market dislocations do not result in severe disruptions in the availability of educational finance options to students for the upcoming academic year. Recent turmoil in the credit markets has eliminated many of the smaller firms that had been active in the FFELP program and private student loan markets, increasing the concerns that without government sponsored relief efforts for FFELP and private student loans, some students will be unable to enter or return to their chosen educational institution in the fall. Given the limited credit risk inherent in triple-A rated government guaranteed and private SLABs, the proposal appropriately balances managing federal government risk exposure with meeting the need for additional sources of liquidity to help fund student loan originations.
SIFMA and ASF Urge Balanced Approach to Subprime Mortgage Finance Regulation
In comments submitted in response to the Federal Reserve Board of Governors Proposed Rule to Amend the Home Mortgage Provisions of Regulation Z, SIFMA and the American Securitization Forum (ASF) commended the Fed’s proposal for both balancing the interests of consumers and the mortgage finance industry and for recognizing the need for measured regulation that preserves the availability of subprime loans as a source of credit for underserved borrowers. SIFMA and ASF urged the Board to expand the preemptive effect of its new regulations. The two organizations called for one uniform national standard for subprime mortgage lending—particularly one that is robust yet well-considered and balanced—to provide better protection for consumers, but also to promote competition among mortgage providers in a greater number of markets, increasing availability and bringing down costs. SIFMA and the ASF also expressed strong support for enhanced borrower education and information. They called on the Board to use its authority to develop comprehensive disclosure reform. In addition, SIFMA and the ASF suggested the Fed make a number of changes to the proposed rules including: to allow the right to cure a violation that would currently result in cancellation of a contract under the proposal; to prohibit borrowers who obtain loans through fraud or deception from being awarded significant monetary damages for a violation of the rule’s requirements; and to not extend enhanced monetary damages under HOEPA violations to the newly-defined higher priced mortgage loans.
Ed and Labor Approves Student Loan Relief
The House Education and Labor Committee approved the Ensuring Continued Access to Student Loans Act of 2008 (H.R.5715) by voice vote. The bill would increase the loan limits on federal college loans by $2,000 per year for all students—increasing the limits for dependent undergraduates to borrow an aggregate total of $31,000, up from $23,000. The bill would allow parent borrowers to defer repayment on their federal PLUS college loans until six months after their child graduates from college and would extend PLUS loan eligibility to some parents who are 180 days delinquent on a mortgage. H.R.5715 clarifies that existing law gives the U.S. Education Secretary the authority to advance federal funds to guaranty agencies in the event they do not have sufficient capital to originate new loans. The bill also gives the Secretary of Education temporary authority to purchase loans from lenders in the federal guaranteed loan program. The Education Department would then service the loans through its Direct Loan program, ensuring lenders continue to have access to capital to originate new loans. The Education Department would be authorized to purchase only those loans that do not carry a net cost for the federal government. The bill also includes a Sense of Congress calling on federal financial institutions to consider using their current authorities to inject liquidity into the student loan market at no cost to the taxpayer. Prior to adopting the bill, the panel defeated an amendment offered by Rep. Tom Price (R-GA) that would have called for specific offsets of any costs to the government by a vote of 16-21. House Education and Labor Chairman George Miller (D-CA) said they were awaiting a score by the Congressional Budget Office and will make sure the bill is budget neutral.
Administration Announces FHA-Secure Expansion
The administration announced an expansion of the FHASecure program this week. The new plan would expand the eligibility standards of the FHASecure program to give the Federal Housing Administration (FHA) greater flexibility to insure more mortgages. Under the expanded FHASecure program, for borrowers with adjustable rate mortgages who were late on two consecutive monthly mortgage payments or at two different times over the previous 12 months, the FHA will require a 97 percent loan-to-value (LTV) ratio to refinance. For borrowers with adjustable rate mortgages who were late on three consecutive monthly mortgage payments or at three different times over the past 12 months, FHA will require a 90 percent LTV ratio to refinance. Lenders may voluntarily write-down the outstanding subprime mortgage principal balances to a 97 percent or 90 percent LTV ratio depending on the borrower’s circumstances. The refinanced loan amount backed by the FHA would be based upon a new appraisal, performed by an FHA-approved appraiser. Under the program, the FHA will also encourage lenders to make other arrangements, such as subordinate financing, to “fill the gap” between the existing loan balances and the FHA-insurable gap.
HFSC Holds Two Days of Hearings to Examine Frank FHA Proposal
The House Financial Services Committee held two days of hearings on Chairman Barney Frank’s (D-MA) proposed FHA Housing Stabilization & Homeownership Retention Act. During the first day of testimony, which focused on the federal banking regulators, Chairman Frank said servicers are hereby “put on notice,” if they do not cooperate through voluntary action or incentives to modify loans, they can expect tougher regulations in the future. Frank said while the House and the administration agree in general on the concept for servicers to write-down principal of loans, they differ on the degree of the requirement. Sheila Bair, chairman, Federal Deposit Insurance Corporation (FDIC), said Chairman Frank’s proposal has many positive features. Bair said, however, she has concerns about the draft bill including 1) resolving the issue of second liens on troubled mortgages, 2) the ability of the Federal Housing Administration (FHA) to serve the potential volume of program participants, 3) creating unintended consequences of promoting adverse selection, and 4) the lack of financial incentive for servicers to modify loans. John Dugan, comptroller, Office of the Comptroller of the Currency (OCC), suggested Frank’s proposal could be improved by addressing principal write-downs and fee waivers, state-by-state cost variations for foreclosure procedures, disposition of second mortgages, the auction facility and borrower eligibility and refinancing criteria.
Randall Kroszner, governor, Board of Governors of the Federal Reserve System, said principal write-downs could help reduce avoidable foreclosures. Kroszner recommended Congress move quickly to enact FHA modernization legislation. He said issues to consider when moving forward on Frank’s draft legislation are: 1) mitigating moral hazard, 2) mitigating adverse selection, 3) turning the FHA into a world-class mortgage insurer, 4) protecting the taxpayer, and 5) negotiating junior liens. He told Frank an auction mechanism would be useful because the auction moves a greater number of loans, and a loan-by-loan method would not be effective. Brian Montgomery, Assistant Secretary for Housing-Federal Housing Commissioner, Department of Housing and Urban Development (HUD) said he is concerned Title I of the draft legislation is not a target and mandates weak underwriting standards. He said HUD opposes Title II, which allows lenders and servicers to sell bad loans through an auction process or other wholesale mechanism, and Title III which provides for $10 billion in loans and grants for the purchase and rehabilitation of vacant, foreclosed homes.
During the second day of testimony focused on Title III of the draft legislation, Rep. Maxine Waters (D-CA) said her staff has been working with Frank’s staff to incorporate provisions from her legislation, the Neighborhood Rescue and Stabilization Act of 2008 (H.R.5678), into the draft bill. Waters said revisions have been made to increase the grant and loan amounts to $15 billion. Thomas Perez, Maryland’s Secretary of Labor, Licensing & Regulation, said servicers have been willing to work with Maryland legislators on new legislation, but they have not been as willing to renegotiate troubled loans. He said in 75 percent of foreclosure cases, the servicers have the ability to modify loans without breaching contracts. Adrian Fenty, mayor, the District of Columbia, and Thomas Menino, mayor, City of Boston, said the CDBG program would be best suited to distribute grants and loans because of their flexibility, and their ability to rapidly distribute funds directly to affected areas. O’Malley said any distribution formula would require flexibility and the ability to target the hardest hit areas. Doug Garver, executive director, Ohio Housing Finance Agency, said any formula for grant and loan distribution should consider the length of the crisis in a particular state. Chairman Barney Frank (D-MA) said the committee will markup the FHA Housing Stabilization and Homeownership Retention Act on April 23 and April 24, and then move the legislation to the House floor as quickly as possible.
Dodd Seeks Suggestions to Improve HOPE for Homeowners Proposal
During the Senate Banking Committee hearing on proposals to mitigate foreclosures, Chairman Chris Dodd (D-CT) said his HOPE for Homeowners proposal is a compilation of ideas aimed at avoiding the ripple effects of severe and widespread foreclosures. He is committed to hearing ideas and suggestions from members of the committee and others to improve the proposal. Sen. Robert Bennett (R-UT) noted there were differences in prices between locations and expressed concern with creating a nationwide solution. Sen. Jim Bunning (R-KY) also expressed skepticism that the HOPE for Homeowners proposal would adequately address the foreclosure problem. Dr. Lawrence Summers, Charles W. Eliot University Professor, Harvard University, urged lawmakers to give serious consideration to increasing the capital requirements for the GSEs so they may adequately help in the current housing situation. Dr. Dean Baker, co-director, Center for Economic and Policy Research, suggested policymakers focus on an own-to-rent program, which would give people facing foreclosure the opportunity to rent the property instead.
Ellen Harnick, senior policy counsel, Center for Responsible Lending, said the thirteen percent haircut included in the HOPE for Homeowners proposal is essential to ensure the sustainability of the program and to ensure taxpayers are not at risk. While she supported the idea of appreciation sharing included in the bill, she recommended capping the appreciation sharing at five years with three percent thereafter--similar to the Frank proposal. Douglas Elmendorf, senior fellow, Brookings Institution, said the proposals would encourage servicers to modify more loans by providing a safe harbor and facilitating the creation of new loans. A number of the witnesses said resolving the question of second liens was crucial to making the program work.
Bills Introduced This Week
House Financial Services Subcommittee on Capital Markets Chairman Paul Kanjorski (D-PA) introduced legislation (H.R.5723) that would allow Federal Home Loan Banks (FHLB) to invest their surplus funds in student loan-related securities. The Emergency Student Loan Market Liquidity Act also allows FHLBs to accept student loans and student loan-related securities as collateral and authorizes each FHLB to provide secured advances to its members to originate student loans or finance student loan-related securities. The emergency authorities are provided for a period beginning February 1, 2008 and ending two years after the date of enactment of the bill. FHLBs are allowed to hold outstanding investments in student loans and student loan-related securities until maturity.
The Week Ahead
- On Tuesday, April 15, the Senate Banking Committee will hold a hearing on the impact of the turmoil in the credit market on student loans.
- Also on Tuesday, April 15, the Senate Finance Committee will examine the fundamentals of tax change.
- The House Financial Services Committee will hold a hearing on financial literacy and education and the effectiveness of governmental and private sector initiatives on Tuesday, April 15.
- The House Financial Services Subcommittee on Capital Markets will hold a hearing on protection for mortgage servicers that modify loan terms on Tuesday, April 15.
- On Wednesday, April 16, the House Financial Services Subcommittee on Capital Markets will hold its third hearing on reforming the regulation of the insurance industry.
- The House Financial Services Subcommittee on Housing and Community Opportunity will hold a hearing on foreclosure prevention on Wednesday, April 16.
- Also on Wednesday, April 16, the House Education and Labor Committee will markup the 401(k) Fair Disclosure for Retirement Security Act (H.R.3185).
- The Senate Banking Committee will hear from the federal banking regulators on proposals to mitigate foreclosures and restore liquidity to the mortgage markets on Wednesday, April 16.
- Also on Wednesday, April 16, the Senate Banking Committee will hold a hearing on affordable housing and housing vouchers.
- The Senate Small Business and Entrepreneurship Committee will hold a hearing on the credit markets and entrepreneurship on Wednesday, April 16.