WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
April 25, 2008
The House Financial Services Committee moved on a number of housing bills this week. The Committee approved the Emergency Loan Modification Act of 2008 (H.R.5579) by voice vote. The Emergency Loan Modification Act would provide a safe harbor from legal liability for mortgage servicers who engage in qualified loan modifications and workout plans according to specific criteria. The Committee also approved the Neighborhood Stabilization Act of 2008 (H.R.5818), which would provide $15 billion in federal loans and grants to states under a Department of Housing and Urban Development program to help purchase and rehabilitate owner-vacated, foreclosed homes.
The House Financial Services Committee also began consideration of the FHA Housing Stabilization and Homeownership Retention Act of 2008 (H.R.5830). The bill would permit the Federal Housing Administration (FHA) to provide up to $300 billion in new guarantees to refinance at-risk borrowers into viable mortgages. The Committee is expected to continue work on H.R.5830 on Wednesday, April 30.
SIFMA joined the International Swaps and Derivatives Association (ISDA), the Futures Industry Association (FIA) and the Managed Funds Association (MFA) in a letter to members of the conference committee on the farm bill in support of the Commodity Futures Trading Commission (CFTC) reauthorization.
The Treasury Department and the Internal Revenue Service (IRS) withdrew proposed regulations, which would have modified the section 1221(a)(4) capital asset exclusion for accounts and notes receivable. SIFMA sent a letter in September 2007 warning the proposed rules would have serious ramifications for ordinary finance businesses and urging they be withdrawn.
House Financial Services Chairman Barney Frank (D-MA) and House Financial Services Subcommittee on Capital Markets Chairman Paul Kanjorski (D-PA) sent a letter to Securities and Exchange Commission (SEC) Chairman Christopher Cox regarding the loss of liquidity in the market for auction rate preferred securities.
In testimony before the Senate Banking Committee this week, SEC Chairman Cox said the SEC would soon propose rules seeking to improve accountability, transparency and competition in the credit rating industry.
Officials from the Securities and Exchange Commission and the Federal Reserve Board said the current regulatory framework for overseeing sovereign wealth funds is adequate and no additional legislation is needed.
HFSC Approves Servicer Safe Harbor Bill
The House Financial Services Committee approved the Emergency Loan Modification Act of 2008 (H.R.5579) by voice vote. H.R.5579, introduced by Rep. Paul Kanjorski (D-PA) and Rep. Mike Castle (R-DE), would provide a safe harbor from legal liability for mortgage servicers who engage in qualified loan modifications and workout plans according to specific criteria. H.R.5579 would apply only to owner-occupied residential mortgage loans and modification or workout plans initiated prior to January 1, 2011. Prior to approving the bill, the Committee adopted a manager's amendment, which would: 1) strike the word "specific" from the clause "absent specific contractual provisions to the contrary" in two places in the bill to make the safe harbor exclusion more general; 2) alter the language that compared maximization of net present value from a servicer's loss mitigation action to the amount realized by foreclosure to language that compares maximization of net present value from a servicer's loss mitigation action to a range of alternatives, including foreclosure; 3) provide a caveat in the safe harbor to forbidding modifications that result in negative amortization such that recapitalization of payments in arrears and related interest do not count toward negative amortization. The Committee also approved the Neighborhood Stabilization Act of 2008 (H.R.5818), which would provide $15 billion in federal loans and grants to states under a Department of Housing and Urban Development program to help purchase and rehabilitate owner-vacated, foreclosed homes by a vote of 38-26. H.R.5818 and the Emergency Loan Modification Act are expected to be combined with the FHA Housing Stabilization and Homeowner Retention Act of 2008 (H.R.5830), the Housing Assistance Tax Act (H.R.5720)—approved by the House Ways and Means Committee—and other bills into a housing stimulus package expected to be considered by the House the week of May 5.
HFSC Begins Consideration of Frank FHA Proposal
The House Financial Services Committee began consideration of the FHA Housing Stabilization and Homeownership Retention Act (H.R.5830), which would permit the Federal Housing Administration to provide up to $300 billion in new guarantees to help refinance at-risk borrowers into viable mortgages. During the first session of the markup, the Committee rejected a substitute amendment offered by Ranking Member Spencer Bachus (R-AL), Rep. Judy Biggert (R-IL) and Rep. Shelley Moore Capito (R-WV), which included national registration and licensing requirements for all mortgage originators, would require subprime mortgage borrowers have escrow accounts for tax and insurance, and added language from the Emergency Loan Modification Act. The substitute amendment also included modernization of the Federal Housing Administration (FHA) and government-sponsored enterprise (GSE) reform. The substitute amendment failed 23-34. The Committee rejected by a vote of 27-32 an amendment offered by Rep. Adam Putnam (R-FL), which would prevent borrowers with prior bankruptcy and foreclosure from participating in the program. The Committee rejected an amendment offered by Rep. Mel Watt (D-NC), which would provide funding for housing counseling and would provide funding for consumer attorneys for homeowners facing foreclosure or eviction. The amendment was defeated 28-34. Chairman Barney Frank (D-MA) voted against the amendment in order to move the amendment be reconsidered during next week's session.
The Financial Services Committee also adopted a number of amendments by voice vote, including an amendment offered by Chairman Barney Frank, which would limit a borrower's debt-to-income ratio to 50 percent. An amendment offered by Rep. Melissa Bean (D-IL), which would prohibit borrowers who provided false information on their loan application from participating in the program, was adopted by voice vote. A second amendment offered by Rep. Bean, which would prohibit a borrower from obtaining a second mortgage for at least five years, unless it is for home improvement and would require borrowers who sell the home or refinance the loan to pay from any profits the higher of 1) an ongoing exit fee equal to 3 percent of the original FHA loan balance or 2) a declining percentage of profits (100 percent in the first year; 80 percent in second year; 60 percent in the third year and 50 percent in the fourth year or thereafter), was also adopted by voice vote. The Committee also approved an amendment offered by Rep. Shelley Moore Capito (R-WV), which would increase the loan limits on mortgages guaranteed by the Veterans Affairs Department. An amendment offered by Rep. Gary Miller (R-CA) requiring the Federal Reserve Board to study the effects of mark-to-market accounting was approved by voice vote. In a letter this week, Roy Bernardi, deputy secretary, Department of Housing and Urban Development, raised objections to H.R.5830. Bernardi said the bill’s prescriptive changes to the FHA’s underwriting standards would force the agency and taxpayers to take on excessive risk and jeopardize its stability. The Committee is expected to continue work on The FHA Housing Stabilization and Homeownership Retention Act (H.R.5830) on Wednesday, April 30 at 9:30am.
SIFMA Joins Other Trades in Letter of Support for CFTC Reauthorization
SIFMA joined the International Swaps and Derivatives Association (ISDA), the Futures Industry Association (FIA) and the Managed Funds Association (MFA) in a letter to members of the conference committee on the farm bill (H.R.2419) in support of the Commodity Futures Trading Commission (CFTC) reauthorization. The organizations said they were hopeful the conference committee would complete its work expeditiously in order to allow the Commission to begin to implement the new powers in the legislation, including enhanced regulatory oversight of certain energy markets and enhanced enforcement powers for certain retail foreign currency (FX) transactions. The trade associations said, however, they oppose amendments which would extend CFTC jurisdiction to certain leveraged, margined or financed commodity (except FX) transactions with retail customers. While such efforts are well-intentioned, the organizations warn they risk changing the CFTC’s statutory mission dramatically and could create problems worse than those sought to be addressed.
Treasury Withdraws Proposed Regulations on Capital Asset Exclusion for Accounts and Notes Receivable
The Treasury Department and the Internal Revenue Service (IRS) withdrew proposed regulations, which would have modified the section 1221(a)(4) capital asset exclusion for accounts and notes receivables. SIFMA sent a letter in September 2007 warning the proposed rules would have very serious ramifications for ordinary finance businesses and would overturn decades of decisions and rulings and urging the proposed rules be withdrawn. The rules would have changed the tax characterization of many consumer loans, mortgages and other receivables from ordinary to capital, even though they were originated in, or acquired as part of an active lending trade or business. SIFMA said the rules would result in character mismatches on hedges and seriously impede the ability of many SIFMA members with active lending operations to hedge the various risk embedded in these loans on a tax-efficient basis. The IRS has indicated it will not challenge tax return reporting positions of taxpayers that are based on existing law and it may issue guidance in the future after further study of the issues.
Frank and Kanjorski Send Letter to SEC on Auction Rate Preferred Securities
In a letter to Securities and Exchange Commission (SEC) Chairman Christopher Cox on the loss of liquidity in the market for auction rate preferred securities, House Financial Services Committee Chairman Barney Frank (D-MA) and House Financial Services Subcommittee on Capital Markets Chairman Paul Kanjorski (D-PA) asked what the SEC thought about a proposed solution—allowing redemption of the preferred shares by the issuing funds. Frank and Kanjorski asked how the rights and standing of investors in the preferred shares of closed-end mutual funds compare with those of common shareholders. They urged the SEC to consider granting the mutual fund industry exemptive relief from the asset-coverage tests in order to allow them to redeem at least some of the currently illiquid securities. They also asked what the SEC was doing to determine if brokers who sold auction rate preferred securities did so using deceptive or misleading practices.
Cox Says SEC Will Propose Credit Rating Agency Rules Soon
Appearing before the Senate Banking Committee this week, Securities and Exchange Commission (SEC) Chairman Christopher Cox said the SEC will soon—possibly by the end of June—propose rules seeking to improve accountability, transparency and competition in the credit rating industry. Cox said the SEC has sufficient regulatory authority to provide credit rating agency oversight under the Securities Exchange Act of 1934 and the Credit Rating Agency Reform Act of 2006. Cox said the proposed rules will be based on information gathered from the SEC’s ongoing examinations of the nationally recognized statistical rating agencies (NRSROs), but exact details are unclear as of yet. He said under the proposed rules, the rating agencies may be required to disclose the information they use to rate structured finance products, so that market participants could reach their own conclusions about the creditworthiness of the products. Cox told Senate Banking Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL), the SEC has the authority to censure or revoke a rating agency’s registration for violating rules, but not for incorrectly rating instruments. He warned such an action would have to be based on areas such as lack of transparency and conflicts of interest and not because the ratings were “wrong.” He said evaluating rating consistency would depend on the subject rated, industry history and volatility. He said developing a one-size-fits-all approach to evaluating rating consistency would be impossible. Chairman Cox also said regardless of whether the NRSRO follows an “issuer pays” or a subscriber-based model, there are potential conflicts of interest.
Senate Banking Committee Examines SWFs
Chairman Christopher Dodd (D-CT) said the predicted growth and the increased investments by sovereign wealth funds (SWFs), especially in financial services, prompted the Committee to further investigate SWF investments, the process and the oversight involved. Dodd said he supports foreign investment in the U.S., but believes it requires a balance of openness and security in order to protect national interests. He is concerned the various agencies with authority may have poor communication to coordinate oversight, but he hopes a strengthened review of SWFs can be created similar to the recently improved Committee on Foreign Investment in the United States (CFIUS) process. Ranking Member Richard Shelby (R-AL) said he supports the examination of SWFs because legal remedies have become increasingly tied to market forces, which in turn impacts the U.S. economic growth and security. Sen. Robert Menendez (D-NJ) expressed concern the current system may provide weaknesses, which would allow SWFs to acquire controlling interests without notice. Sen. Charles Schumer (D-NY) said SWFs should be transparent and follow an internationally agreed code of conduct.
Ethiopis Tafara, director, Office of International Affairs, Securities and Exchange Commission (SEC), said the SEC has the tools in place to identify trading with non-public information by sovereign wealth funds. Scott Alvarez, general counsel, Federal Reserve Board, said many private and public investors invest amounts under thresholds which would trigger further detailed information and review. Alvarez said the U.S. decided to practice fair national treatment over reciprocity to maintain an open U.S. market and inspire other nations to open their markets to the U.S. Ranking Member Shelby said there are gray areas when describing “controlling influence” and potential future collusion, which need to be addressed. Alvarez said recent IMF and Organization for Economic Co-operation and Development (OECD) recommendations regarding SWFs are good guidelines. Tafara said the majority of the IMF and OECD guidelines mirror current U.S. regulatory structure, and demonstrate the U.S. regulatory regime is strong and ahead of the curve in regards to SWFs. Tafarai and Alvarez did not suggest any legislative changes at this time, but pledged their respective agencies would continue monitoring SWFs.
Bills Introduced This Week
House Financial Services Ranking Member Spencer Bachus (R-AL) introduced a housing stimulus bill, which would require national registration and licensing for all mortgage originators, improve mortgage disclosures and require subprime mortgage borrowers have escrow accounts for tax and insurance. H.R.5857 also includes Federal Housing Administration (FHA) modernization and government sponsored enterprise (GSE) reform legislation. The bill also includes a safe harbor for servicers for loan modifications and would allow Federal banking agencies to consider a bank’s record of moving borrowers into more affordable products when considering their Community Reinvestment Act (CRA) obligations. The bill was introduced as a substitute amendment during House Financial Services Committee consideration of the FHA Housing Stabilization and Homeownership Retention Act (H.R.5830).
The Encouraging Mortgage Modifications Act of 2008 (S.2901), introduced by Senate Judiciary Ranking Member Arlen Specter (R-PA), would provide servicers a safe harbor from lawsuits for performing loan modifications. S.2901 would clarify that, absent contractual provisions to the contrary, the duty of servicers is owed to the investor group as a whole and not to individual investors or classes of investors. The bill clarifies that the servicer satisfies their legal duty by ensuring the return from a mortgage, as modified, exceeds the return that would be expected from foreclosure. The bill applies to qualified residential loans originated on or after January 1, 2004 and would be in effect for the six months from the date of enactment.
The Week Ahead
- On Tuesday, April 29, the Senate Finance Committee will hold a hearing on oversight of the trade agencies.
- The Senate Commerce Subcommittee on Interstate Commerce, Trade and Tourism will examine consumer protections in subprime lending on Tuesday, April 29.
- The House Financial Services Committee will continue to markup the FHA Housing Stabilization and Homeownership Retention Act on Wednesday, April 30.
- Also on Wednesday, April 30, the House Judiciary Subcommittee on Immigration will hold a hearing on the growing backlog of visa applications.
- The Senate Banking Committee will hold a hearing on Thursday, May 1 on financial literacy for homebuyers.
- The House Ways and Means Subcommittee on Select Revenue Measures will hold a hearing on tax incentives for postsecondary education on Thursday, May 1.