WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
May 9, 2008
The House approved an omnibus housing package (H.R.3221) this week. The bill would provide up to $300 billion in new guarantees to help refinance at-risk borrowers into viable mortgages. The bill 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.3221 includes the House-approved Federal Housing Administration (FHA) modernization bill and the House-approved government sponsored enterprise (GSE) regulatory reform bill. The package also includes the Housing Assistance Tax Act of 2008 (H.R.5720), which would expand the low-income housing tax credit, expand the mortgage revenue bond (MRB) program, and would temporarily allow municipal bonds guaranteed by the Federal Home Loan Banks (FHLBs) to be treated as tax-exempt.
The president signed the Ensuring Continued Access to Student Loans Act (H.R.5715) into law.
During a Senate Banking Subcommittee hearing on investment bank oversight, Erik Sirri, director, Division of Market Regulation, Securities and Exchange Commission (SEC), recommended Congress act to clarify and add certainty to the SEC’s authority to examine consolidated supervised entities (CSEs).
SEC Chairman Christopher Cox said the SEC will soon propose additional rules for the credit rating industry based on lessons learned from the recent subprime mortgage turmoil.
During a hearing this week on the high fees for homeowners in bankruptcy, Sen. Charles Schumer (D-NY) said legislation was needed to clear up ambiguities in bankruptcy law about the documents creditors must supply when submitting fee-related claims and petitions to the court.
House Approves Omnibus Housing Package
The House approved the American Housing Rescue and Foreclosure Prevention Act (H.R.3221) this week. The omnibus housing package was approved as three amendments to the Senate-approved housing bill. The House voted 266-154 to include an amendment offered by House Financial Services Committee Chairman Barney Frank (D-MA), which included the FHA Housing Stabilization and Homeownership Retention Act (H.R.5830), the Emergency Loan Modification Act (H.R.5579), the House-approved government sponsored enterprise (GSE) reform legislation (H.R.1427) and the House-approved Federal Housing Administration (FHA) modernization bill (H.R.1852). The bill would permit the Federal Housing Administration (FHA) to provide up to $300 billion in new guarantees to help refinance at-risk borrowers into viable mortgages. As part of the program, approved by the House Financial Services Committee last week by a vote of 46-21, in exchange for the acceptance of a substantial write-down of principal, the existing lender or mortgage holder would be paid from proceeds of the new FHA loan in an amount based on the current value of the house. Only mortgages on owner-occupied principal residences meeting certain criteria are eligible for the program. The amendment also included the Emergency Loan Modification Act (H.R.5579), which 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 safe harbor would apply only to owner-occupied residential mortgage loans and modification or workout plans initiated prior to January 1, 2011.
The House voted 322-94 to include the Housing Assistance Tax Act of 2008 (H.R.5720), which was approved by the House Ways and Means Committee in April. The bill would expand the low-income housing tax credit by increasing the state allocation limits and exempting the low-income housing tax credit from the alternative minimum tax (AMT). The bill would 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). The credit must be paid back to the government over 15 years. The tax title also increases the private-activity bond volume cap for mortgage revenue bonds (MRBs) by $10 billion in 2008 and expands the allowable uses of MRB proceeds to include refinancing subprime mortgages. The bill clarifies 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 and permanently exempts interest from tax-exempt housing bonds (including MRBs) from the alternative minimum tax (AMT). In addition, the tax title temporarily allows municipal bonds guaranteed by Federal Home Loan Banks (FHLBs) to be treated as tax-exempt, regardless of their use. The tax title is fully paid for with offsetting revenue raisers, including basis reporting requirements for brokers 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. The bill would extend the filing deadline for 1099 statements from January 31 to February 15 effective in 2009.
The House also approved by a vote of 256-160 an amendment offered by Rep. Brad Miller (D-NC) and Rep. Steven LaTourette (R-OH), which would clarify the American Housing Rescue and Foreclosure Prevention Act, the National Bank Act and the Home Owner's Loan Act do not preempt state laws regulating the foreclosure of residential real property or the treatment of foreclosed property. SIFMA joined a number of financial services trade associations in a letter in opposition to the amendment. The groups said the amendment threatens to overturn decades of established law governing banking operations and would create new risks to the safety and soundness of banks. The trade associations said the amendment takes an overly broad approach in attempting to solve a problem, which has not been a problem with respect to existing law. House Financial Services Chairman Barney Frank (D-MA) agreed to make wording changes to the amendment, but the House failed to grant the unanimous consent necessary to adopt the changes. Frank said he would work with conferees to ensure the wording changes are included in the final bill.
In a Statement of Administration Policy (SAP) released this week, the administration said the president would veto The American Housing Rescue and Foreclosure Prevention Act in its current form. The SAP said unlike the administration’s recent administrative efforts to broaden FHA eligibility, H.R.3221 is overly burdensome and prescriptive. The administration said the $1.7 billion cost of the bill would be passed on to taxpayers not participating in the new FHA program. In the SAP, the administration also opposed the Emergency Loan Modification Act, saying it would create a bias in favor of certain loan modifications and against other work-outs that might have been pursued under existing pooling and servicing agreements. The SAP also expressed opposition to the homebuyer tax credit and the tax-exempt treatment of bonds guaranteed by the Federal Home Loan Banks. The House and Senate must now work to reconcile the differences between their two housing bills. The Senate approved a smaller package in April.
President Signs Student Loan Bill
The president signed the Ensuring Continued Access to Student Loans Act of 2008 (H.R.5715) into law this week. The bill would increase the loan limits on federal college loans by $2,000 per year for all students. H.R.5715 would grant the Secretary of Education the authority to purchase outstanding federal loans in order to provide lenders with the capital needed to make new loans through the end of the 2008-2009 school year. Under the Act, the Department of Education is also authorized to serve as the secondary market of last resort for loans originated through the FFEL program. The Senate approved the bill by unanimous consent last week. The House approved the bill last week by a vote of 388-21.
SEC Calls on Congress to Formalize CSE Regime
Testifying before the Senate Banking Subcommittee on Securities, Insurance and Investment, Erik Sirri, director, Division of Market Regulation, Securities and Exchange Commission (SEC) called for legislation to clarify and add certainty to the SEC’s authority to examine consolidated supervised entities (CSEs). Sirri said the rules-based oversight currently performed could be enhanced by giving the SEC examination authority, capital setting powers and authority to require risk controls. He said making the CSE program mandatory would enable the SEC to do more to compel CSEs to raise liquidity standards at the holding company level. Sirri explained the CSE regime was formed in response to the desire for holding companies to get involved in European markets. The European Union (EU) through their Financial Conglomerate Directive (FCD) required a single supervisory entity to look at risk controls at the firm and the holding company level. Sirri said the CSE model is broadly consistent with the oversight conducted by European regulators and while the accounting standards can vary between countries, the market-to-market basis is independent of accounting differences. Sirri said U.S. and European regulators are currently looking further into liquidity and supervision of risk management. Sirri said the SEC is internally developing a draft memorandum of understanding (MOU) with the Federal Reserve Board to identify responses in situations similar to Bear Stearns and generally define the relationship between the SEC and the Fed. David Ruder, former SEC chairman, recommended granting the SEC more power to view the systemic risk at the holding company level and to confer with the Fed to develop systemic risk procedures. He stressed the SEC must remain independent. Arthur Levitt, former SEC chairman, said the principles-based regulatory scheme is not working well in the U.S. or the United Kingdom. He said, however, it would be premature to move to one single regulator—as recommended in the Treasury Department’s Blueprint for Financial Regulatory Reform—and recommended first performing a thorough examination and analysis of recent market events.
Cox and Lukken Testify on 2009 Budget Requests
Appearing before the Senate Appropriations Subcommittee on Financial Services and General Government, Securities and Exchange Commission (SEC) Chairman Christopher Cox said the SEC will soon propose additional rules for the credit rating industry based on the lessons learned from the recent subprime mortgage turmoil. He said neither the SEC’s credit rating nor consolidated supervised entities (CSE) programs receive dedicated funding from Congress and suggested dedicated funding would help formalize and strengthen the two programs. Subcommittee Chairman Richard Durbin (D-IL) suggested the consolidated supervised entities pay a fee to help fund the SEC's CSE regime. Chairman Cox said the SEC is also exploring mutual recognition and is continuing to integrate between U.S. accounting standards and the International Financial Reporting Standards (IFRS). Cox said the SEC has not yet held the roundtables on securities litigation reform suggested by academics, because Cox thought it was best to wait and hold the roundtables when the vacant SEC Commissioner positions were filled to ensure the topic was taken up in a bipartisan way. Also appearing before the Subcommittee to testify on the 2009 Budget request for the Commodity Futures Trading Commission (CFTC), Acting CFTC Chairman Walter Lukken, said to date CFTC staff analysis indicates the current higher futures prices generally are not a result of manipulative forces. Lukken noted the recommendations included in the CFTC's Report to Congress for additional authority in overseeing exempt energy trading were part of the CFTC reauthorization legislation contained in the Farm Bill conference report. Lukken said the enactment of the legislation will improve oversight of the energy markets.
Senate Judiciary Subcommittee Examines Treatment of Borrowers in Bankruptcy
During the Senate Judiciary Subcommittee on Administrative Oversight and the Courts hearing this week, Chairman Charles Schumer (D-NY) said legislation was needed to clear up ambiguities in bankruptcy law about the documents creditors must supply when submitting fee-related claims and petitions to the court. Schumer said Congress would thoroughly review the practices of the loan servicer industry to determine if further laws are necessary to address deterrence, penalties and disclosure in order to curb bad practices. He said some firms have “piled on” dubious and undocumented fees, which were inflationary, duplicative, undocumented, undisclosed or unlawful. Ranking Member Jeff Sessions (R-AL) said he hopes actions by Congress will encourage debtors to protect themselves, trustees to be more aggressive, and bankruptcy court judges to be more clear and consistent with their rulings to demonstrate the violators of loan servicer industry best practices will be disciplined. Katherine M. Porter, associate professor, University of Iowa College of Law, said she believes mortgage servicers have financial incentives to charge additional fees to consumers, either for the firm’s profits or the benefit of investors. Porter recommended Congress enact language similar to the Foreclosure Prevention and Sound Mortgage Servicing Act of 2008 (H.R. 5679) to clarify the scope that servicers must provide to receive and answer qualified written requests from borrowers. Debra Miller, Standing Chapter 13 Trustee, Northern District of Indiana, testifying on behalf of National Association of Chapter 13 Trustees (NCATT), said the NCATT Best Practices suggest procedures for portions of the bankruptcy process including: proof of claims, payment application, post-petition costs and claims, communication and education. Steve Bailey, senior managing director, Loan Administration, Countrywide Financial Corporation, recommended the industry, NCATT and bankruptcy jurisdictions create uniform processes and procedures to make the system more efficient and more accurate.
Bills Introduced This Week
Rep. Allyson Schwartz (D-PA) introduced the Police and Fire Station Modernization Act (H.R.5952), which authorizes up to $3 billion of tax credit bonds to be issued by state and local governments to finance capital improvements to police and fire stations. The bonds would be allocated to states each year based on population. Governments must either spend all bond proceeds within three years of issuance or redeem the bonds within 90 days from the end of the three year period. The tax credit is strippable and Davis Bacon requirements apply to projects financed using the bonds.
The Affordable Housing Expansion Act (H.R.5967), introduced by Rep. Anthony Weiner (D-NY) would allow states to carry over unallocated private-activity bond volume cap beyond the current three-year limit. The bill would apply to bonds issued after December 31, 2008.
The Week Ahead
- The House Ways and Means Committee is expected to mark up a bill that would extend some expired and expiring tax provisions during the week of May 12.
- On Tuesday, May 13, the Senate Finance Committee will hold the second in a series of hearings this year on tax reform.
- The House Ways and Means Subcommittee on Health will hold a hearing on health savings accounts (HSAs) on Wednesday, May 14.
- On Thursday, May 15, the Senate Banking Committee will hear from the Mayors of New York and Minneapolis on the condition of the nation’s infrastructure.