WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
May 23, 2008
In testimony before the House Financial Services Committee this week, SIFMA said the new operational requirements of jumbo loan purchasing programs have been the main factor for the delay in implementation of the programs following enactment of the Economic Stimulus Act of 2008. Thomas Hamilton, managing director, Barclays Capital, testifying on behalf of SIFMA, said SIFMA’s members voted to exclude the higher loan limits from the to-be-announced (TBA) market because the inclusion of jumbo loans in TBA-eligible pools would harm traditional conforming borrowers.
The House and Senate voted to override the president’s veto of the Food, Conservation and Energy Act of 2008 (H.R.2419). However, a clerical error led to confusion as to whether the farm bill is now law.
The House and Senate approved legislation (H.R.6081) providing tax relief and economic incentives for members of the military.
The Renewable Energy and Jobs Creation Act of 2008 (H.R.6049), approved by the House this week, extends tax incentives for investment in renewable energy, energy efficiency and conservation and extends a number of tax provisions which expired at the end of 2007 or will expire at the end of 2008.
After two weeks of negotiations between Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL), the Senate Banking Committee approved legislation creating a new regulatory scheme for the government-sponsored enterprises (GSEs) and the Federal Home Loan Banks. The bill also establishes a new program that would allow the Federal Housing Administration (FHA) to insure up to $300 billion worth of refinanced mortgages for borrowers facing foreclosure.
The House Foreign Affairs Committee examined the impact of the rise of sovereign wealth funds (SWFs) on U.S. foreign policy and economic interests.
Senate Committee on Homeland Security and Governmental Affairs Chairman Joe Lieberman (I-CT) said index speculators are responsible for a significant part of commodity price increases.
SIFMA Says Including Jumbo Loans in TBA-Eligible Pools Will Increase Costs for Traditional Borrowers
Testifying before the House Financial Services Committee, SIFMA said the inclusion of jumbo loans in the to-be-announced (TBA) mortgage-backed securities market would harm borrowers of lower balance, previously “conforming” mortgages. The Economic Stimulus Act of 2008 temporarily increased the dollar size limits of loans which the Agencies may purchase to the lower of 125% of the area median price of a home or $729,750 (with higher amounts allowed in Alaska, Hawaii, Guam and the U.S. Virgin Islands). Thomas Hamilton, managing director, Barclays Capital, testifying on behalf of SIFMA, explained SIFMA’s members voted to exclude the higher loan limits from TBA trading because the TBA market depends on the perceptions of homogeneity and the introduction of jumbo loans, which have significantly different prepayment characteristics than TBA eligible pools, would have reduced the perceived homogeneity in the market and because of the temporary nature of the increase in the loan limits. He said SIFMA believes the correct decision was reached regarding the TBA eligibility of jumbo mortgages. He added the decision strikes the correct balance between providing increased liquidity and relief to jumbo borrowers, while preserving the liquidity of the TBA market that provides lower rates to conforming borrowers. SIFMA believes the new operational requirements of the jumbo loan purchasing programs—most significantly the issue of the calculation of loan limits for a given area—have been the main factor for the delay in implementation.
Patricia Cook, executive vice president and chief business officer, Freddie Mac, and Tom Lund, executive vice president, Fannie Mae, said the temporary increase in the conforming loan limits is starting to show benefits and lower rates on jumbo loans. Lund said the temporary nature of the law is a major hindrance to the development of an efficient, liquid market for jumbo-conforming loans. He called for a permanent high-cost area loan limit. Cook said the conforming loan limit of $550,000 included in the government-sponsored enterprise (GSE) bill approved by the Senate Banking Committee would create short-run uncertainty in the marketplace because the limit would be lower than the temporary levels included in the Economic Stimulus Act of 2008. Chairman Barney Frank (D-MA) said he believes required securitization of increased conforming loan limits would further complicate the market. He said a voluntary securitization option would be more efficient. Frank said he is confident the House and Senate can resolve the differences between the conforming loan limits during the conference negotiations on a comprehensive housing package. He predicted housing legislation will be signed into law by July 4.
House and Senate Override Veto on Farm Bill, but Clerical Error Causes Delay
The House and Senate voted to override the president’s veto of the Food, Conservation and Energy Act of 2008 (H.R.2419). The Senate voted 82-13 to override the president’s veto of the farm bill. The House voted 316-108 to override the veto. However, a clerical error led to confusion over whether the farm bill is now law. One of the titles of the bill—the trade-related title—was omitted from the copy of the bill vetoed by the president. Leaders of the House and Senate Agriculture Committees said they believe fourteen of the fifteen titles are now law, including a $1.7 billion tax package and reauthorization of the Commodity Futures Trading Commission (CFTC). However, after the confusion, the House approved the entire text as a new bill (H.R.6124) by a vote of 306-110. At this point it is unclear if the Senate will approve the full farm bill again or vote on just the missing title when it returns in June.
The Food, Conservation and Energy Act of 2008 includes a number of energy and conservation tax incentives—including $500 million in tax-credit timber conservation bonds to be issued by qualified non-profit organizations and for the acquisition of qualified forest and forest lands. The Food, Conservation and Energy Act also updates the Agricultural (Aggie) Bond program, which authorizes state and local governments to issue tax-exempt bonds to provide low interest loans for first-time ranchers and farmers. The Food, Conservation and Energy Act would also reauthorize the Commodity Futures Trading Commission for five years through 2013. The bill also includes a number of provisions recommended by the President’s Working Group on Financial Markets (PWG), which clarify the CFTC’s authority over certain retail foreign currency transactions, the CFTC’s anti-fraud authority over principal-to-principal transactions, and the CFTC’s enforcement powers.
House and Senate Approve Military Tax Relief Bill
The House and Senate approved legislation (H.R.6081) providing tax relief and economic incentives for members of the U.S. military. The House approved the bill by a vote of 403-0. The Senate approved the bill by unanimous consent. The Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008 would make permanent the ability of active duty reservists to make penalty-free withdrawals from retirement plans. The $1.3 billion tax bill would also modify the Uniformed Services Employment and Re-Employment Rights Act (USERRA) to allow the day prior to the date of death to be treated as the date the employee returned to work for purposes of triggering payment of benefits under a qualified plan. The HEART Act also permits an employer to make certain contributions to a qualified pension plan on behalf of an employee who is killed or becomes disabled in combat. It would allow state housing agencies to issue tax-exempt mortgage revenue bonds and use the proceeds to finance lower-rate mortgages for veterans on a permanent basis and would quadruple the amount of qualified mortgage bonds that Alaska, Oregon and Wisconsin could each issue to help veterans purchase homes to $100 million per year. Under the bill, members of the reserves who are called to active duty for at least six months would be able to withdraw funds held in a Flexible Spending Account (FSA) without penalty. Recipients of military death benefit gratuities would be permitted to roll over the amounts received, tax-free to a Roth IRA or an Education Savings Account. The bill also clarifies that active military who file a joint tax return would be eligible for the stimulus rebate payment even if the spouse does not have a Social Security number.
The HEART Act is fully offset by a provision which would subject those who relinquish their U.S. citizenship and certain residents who terminate their U.S. residency, to income tax on the net unrealized gain in their property as if it had been sold for fair market value on the day before the expatriation or residency termination and a provision which imposes employment tax for wages paid for services performed by employees of foreign subsidiaries of domestic parent companies under a government contract.
House Approves Tax Extenders Bill
The House approved the Renewable Energy and Jobs Creation Act of 2008 (H.R.6049) by a vote of 263-160. The $55 billion bill extends tax incentives for investment in renewable energy, energy efficiency and conservation and extends a number of provisions which expired at the end of 2007 or will expire at the end of 2008.
- Extend Active Financing Exception Under Subpart F: H.R.6049 would extend the active financing exception under Subpart F, which is currently scheduled to expire in December 2008, for one year.
- CREBS: The bill would authorize $2 billion in clean renewable energy bonds (CREBs) to finance facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, and landfill gas among others. The bill also imposes Davis-Bacon prevailing wage requirements on projects financed with CREBs.
- Qualified Energy Conservation Bonds: The bill would authorize $3 million in tax-credit bonds to finance State and local government programs and initiatives designed to reduce greenhouse gas emissions.
- Qualified Green Building and Sustainable Design Project Bonds: The Renewable Energy and Jobs Creation Act would extend the authority to issue qualified green building and sustainable design project bonds through the end of 2012.
- QZABs: The bill also allows an additional $400M in qualified zone academy bonds (QZABs) to be used to finance renovations, equipment purchases, developing course material and training teachers and personnel at a qualified zone academy. The bill modifies the current law arbitrage restrictions for QZABs.
- Veterans MRBs: H.R.6049 would also extend for one year (through 2008) the special rules that allow veterans to qualify for State-operated, tax-exempt mortgage revenue bond programs without regard for the first-time home buyer requirements.
- GO Zone Bonds: The bill would expand the GO Zone bond program to allow two additional counties in Alabama to qualify for tax-exempt bond financing.
The Renewable Energy and Jobs Creation Act of 2008 is fully offset with three provisions: a provision that would delay for ten years the effective date of the worldwide interest allocation election that would otherwise take effect next year; a provision that would impose current taxation on deferred compensation plans in countries in which the U.S. does not have a tax treaty and an extension of coal excise taxes. Prior to approving the bill, the House rejected a motion to recommit that would have extended all of the expiring tax provisions through 2013 and provided relief from the alternative minimum tax (AMT) patch for one year, without offsets. SIFMA sent a letter to House Ways and Means Chairman Charles Rangel (D-NY) supporting House passage of the Renewable Energy and Jobs Creation Act of 2008. SIFMA also commended the Ways and Means Committee for taking a positive step toward clarifying that non-qualified foreign corporations can rely on previously-negotiated income tax treaties with relation to the operation of their employee benefit programs.
The administration issued a Statement of Administration Policy (SAP) this week recommending the president veto the bill. The administration said it does not believe efforts to avoid tax increases need to be coupled with provisions to increase revenue. Specifically the administration opposed 1) delaying the effective date of the worldwide interest allocation election, 2) changing the tax treatment of offshore deferred compensation plans, 3) the creation of a new standard deduction for state and local property taxes and 4) reinstatement of the tax exclusion for qualified group legal services plans. The administration called for inclusion of AMT relief for 2008. In addition, the administration strongly opposed a provision that would apply Davis-Bacon Act prevailing wage requirements to projects financed with CREBs. The Senate is expected to consider energy tax incentives and extender legislation after the Memorial Day recess. The Senate bill is expected to include a one-year extension of the AMT patch.
Senate Banking Committee Approves GSE/FHA Expansion Bill
The Senate Banking Committee approved the Federal Housing Finance Regulatory Reform Act of 2008 by a vote of 19-2. Committee action came after Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) were able to reach an agreement on provisions in the bill. The bill establishes a new program that would allow the Federal Housing Administration (FHA) to insure up to $300 billion worth of refinanced mortgages for borrowers facing foreclosure. In order to refinance, the lender and servicer would have to agree to write down the principal to 90 percent of the current appraised value of the property. In order to qualify for the FHA loan, borrowers would need to occupy their homes, meet DTI requirements and prove they can make monthly payments of the FHA loan. Borrowers would be required to certify, under penalty of law, they have not intentionally defaulted on any debt. The government-sponsored enterprises (GSEs) would fund the new FHA insurance program with money diverted from an affordable housing trust fund included in the bill. All of the trust fund money would go toward the program in its first year, 50 percent in the second year and 25 percent in the third year.
The bill would create a new regulator for the GSEs and the Federal Home Loan Banks. The new regulator would be required to issue regulations establishing criteria governing the portfolio holdings of the GSEs to ensure the holdings are backed by sufficient capital and are consistent with the mission and the safety and soundness of the GSEs; and would allow the regulator to temporarily increase the minimum capital levels of the GSEs if the regulator determines necessary and consistent with the safety and soundness of the enterprise. The Federal Housing Finance Regulatory Reform Act would also set the high cost loan limit for the loans the GSEs can purchase to 132 percent of the conforming loan limit (currently $550,000). It prohibits the GSEs from holding loans higher than the normal conforming loan limit in their portfolios, either as whole loans or mortgage-backed securities. The loans may be held for the purposes of securitization.
During the markup, Sen. Charles Schumer (D-NY) expressed concern with the conforming limit included in the bill, as well as the GSEs only being able to securitize the higher balanced loans and not hold them in portfolio. Sen. Mel Martinez (R-FL) agreed with Schumer’s concerns related to jumbo loans. Chairman Dodd said the bill could be brought to the Senate floor after the Memorial Day recess. Dodd also indicated FHA Modernization legislation would become part of the House/Senate negotiations when finalizing a comprehensive housing package.
House Foreign Affairs Committee Examines SWFs
During the House Foreign Affairs Committee hearing on the impact of the rise of sovereign wealth funds (SWFs) on U.S. foreign policy and economic interests, Chairman Howard Berman (D-CA) supported a balanced approach to the treatment of sovereign wealth funds, and advocated greater transparency, accountability and consistency in the administration of SWFs. He said any potential new regulation in the area should be dealt with judiciously. Rep. Donald Manzullo (R-IL) said SWFs and other forms of foreign investment have been a boom to the U.S. economy and recommended the U.S. continue to closely monitor SWFs. Rep. Brad Sherman (D-CA) expressed concern foreign governments may unduly influence corporations or access a company’s intellectual property to enhance the foreign government’s political policies. Edwin Truman, Ph.D., senior fellow, Peterson Institute for International Economics, said SWFs do not pose a significant threat to U.S. security or economic interests. Truman recommended the U.S. press sovereign wealth fund countries to adopt SWF best practices and enhance accountability to their respective constituencies. Gerard Lyons, Ph.D., chief economist, Standard Chartered Bank, recommended the creation and adoption of a collaborative SWF code of conduct.
Lieberman Says Index Speculators Responsible for Increase in Commodity Prices
Senate Committee on Homeland Security and Governmental Affairs Chairman Joe Lieberman (I-CT) said index speculators are responsible for a significant part of commodity price increases and the Committee should see if there is something that can be done. During the Committee’s hearing on financial speculation in the commodity markets, Lieberman said he would consider drafting legislation that would limit the role of institutional investors in the commodity markets and to prohibit large investors from circumventing commodity position limits. The two provisions were recommended during the hearing by Michael Masters, Managing Member and Portfolio Manager, Masters Capital Management, LLC. Masters said the recent migration of investments from other asset groups are driving commodity prices higher and are essentially causing a disservice to the public in the short-term. He recommended Congress modify ERISA regulations to prohibit commodity index replication strategies as unsuitable pension investments. Jeffrey Harris, chief economist, Commodity Futures Trading Commission (CFTC), said the CFTC has the statutory authority to monitor and if necessary take enforcement action against speculation. Benn Steil, director of international economics, Council on Foreign Relations, said there was little evidence that speculation was having a manipulative effect on futures markets. Lieberman said the Committee would hold another hearing on the issue and would invite the Chairman of the CFTC and members of the administration’s economic policy team.
The Week Ahead
- The House and Senate are not in session next week due to the week-long Memorial Day recess. The SIFMA Washington Weekly will resume publication on Friday, June 6.