WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
December 7, 2007
Policymakers Continue Focus on Mortgage Market
Policymakers in Washington continued to focus their attention on current issues in the housing market. President Bush announced a private sector plan to assist subprime borrowers with adjustable rate mortgages (ARM) who can afford the current starter rate on their loan, but cannot afford the higher payments once the interest rate increases. In conjunction with the announcement, the American Securitization Forum (ASF), an affiliate of SIFMA, released its Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans.
Also this week, SIFMA and the ASF testified on mortgage reform proposals, which arose during House consideration of the Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R.3915) last month.
The Senate approved a one-year alternative minimum tax (AMT) patch without any revenue offsets by a vote of 88-5.
The House approved comprehensive energy reform legislation (H.R.6), including a $21 billion tax package, by a vote of 235-181. A failed procedural motion prevented the Senate from debating the bill.
SIFMA sent a letter to Speaker of the House Nancy Pelosi (D-CA) in opposition to the basis reporting proposal included in H.R.6.
The House approved a bill giving the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) authority to write rules to identify and prohibit unfair and deceptive practices.
The House Rules Committee voted to bring a revised Terrorism Risk Insurance Act (TRIA) extension bill to the House floor next week.
The Senate Judiciary Committee examined proposals to allow bankruptcy judges to modify a debtor’s mortgage on a primary residence during Chapter 13 bankruptcy proceedings.
House Financial Services Committee Chairman Barney Frank (D-MA) and Ranking Member Spencer Bachus (R-AL) sent a letter to Treasury Secretary Henry Paulson urging him to make financial services market access and reform a high priority during discussions with Chinese officials during next week’s Strategic Economic Dialogue (SED).
Administration and ASF Announce Mortgage Plan
This week, President Bush announced a private sector plan to assist subprime borrowers with adjustable rate mortgages (ARM) who can afford the current starter rate on their loan, but cannot afford the higher payments once the interest rate increases. Under the plan, borrowers may 1) refinance an existing loan into a new private mortgage; 2) move into an FHASecure loan or 3) freeze their current interest rates for five years. Using individual borrower criteria, servicers can use the American Securitization Forum’s (ASF) recently announced Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans to help streamline evaluation of their subprime ARM portfolios and fast-track borrowers more efficiently into appropriate solutions. The ASF guidance explicitly says that servicers will not take any action prohibited by the agreements which govern securitized loans. The streamlined framework applies to all first lien subprime residential ARM loans that have an initial fixed-rate period of thirty-six months or less that were originated between January 1, 2005 and July 31, 2007; are included in securitized pools; and have an initial interest rate reset between January 1, 2008 and July 31, 2010. Under the framework, subprime borrowers who need assistance are divided into three segments:
- Borrowers who are current on their loan payments, meet credit score thresholds and the amount of equity in their homes indicate they are likely to be eligible for refinancing opportunities—ASF recommends servicers take all reasonable steps to encourage or facilitate refinancing for these borrowers.
- Borrowers who are current on their loans, but are ineligible to refinance into any available mortgage product, because of poor credit scores, low or no equity in their homes or a history of delinquent payments—borrowers in this category could be offered a loan modification freezing the interest rate at the introductory rate for five years.
- Borrowers who are not current on loan payments at the existing introductory rate and do not qualify to refinance into any available mortgage product—servicers will work with these borrowers on a loan-by-loan basis to determine the best loss mitigation approach.
The ASF also issued recommended standards for loan servicers and trust administrators to use when reporting loan modification activity to investors in securitized residential mortgage loans.
The president also highlighted a plan announced earlier this week by Treasury Secretary Henry Paulson. During his speech before the Office of Thrift Supervision’s National Housing Forum, Paulson announced a proposal to allow state and local governments to temporarily broaden their tax-exempt bond program to include mortgage refinancing. Currently the proceeds of mortgage revenue bonds can only be used to finance low-cost mortgages for first-time homebuyers. Paulson recommended Congress temporarily modify current law to allow tax-exempt bond financing to refinance existing loans. While the exact language of the plan has not been worked out, it is expected to include a temporary increase in the annual private-activity bond volume cap to accommodate the expanded mortgage revenue bond issuance. SIFMA issued a statement commending Secretary Paulson for coordinating the efforts of federal regulators and market participants to develop more streamlined solutions to efficiently reach borrowers in need and to address the subprime crisis. SIFMA also offered its strong support for the mortgage revenue bond proposal.
SIFMA and ASF Testify on New Mortgage Reform Proposals
The House Financial Services Committee held a hearing this week to consider two proposals which arose during consideration of the Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R.3915) in November. During the hearing, testifying on behalf of SIFMA, Laurence E. Platt, partner, K&L Gates, warned a proposal to allow regulators to impose significant monetary penalties on creditors and assignees that exhibit a pattern and practice of certain violations, will have the unintended effect of prohibiting residential mortgage loans that do not qualify for the safe harbors provided in Title II of H.R.3915. Platt said the proposal would go beyond making assignees liable for the legal violations of creditors and would seek to impose direct liability on assignees and securitizers, thereby “setting themselves up for piggy back claims under other laws.” SIFMA believes the remedies already included in Title II of H.R.3915 are more than sufficient to discourage the behavior the proposal seeks to curtail and should be given a chance to work before declaring them ineffective.
Testifying on the “Emergency Mortgage Loan Modification Act” (H.R. 4178), introduced by Rep. Mike Castle (R-DE), Tom Deutsch, Deputy Executive Director, American Securitization Forum (ASF), said most servicers have developed and are implementing procedures to reach out to hybrid adjustable rate mortgage (ARM) borrowers well in advance of an interest rate reset in an effort to identify and prevent potential payment problems before they occur. ASF offered to work with the Committee to determine if additional steps may be necessary or helpful to address any legal, regulatory, accounting or other obstacles to the delivery of loan modifications and other loss mitigation relief to borrowers pursuant to industry-developed frameworks, including the streamlined approach.
Chairman Barney Frank (D-MA) said the Committee will continue to work on the issue of mortgage reform and will work on additional proposals to include in a conference on mortgage reform legislation once the Senate completes action on a mortgage reform bill. In her written testimony, Sheila Bair, Chairman, Federal Deposit Insurance Corporation (FDIC), said the FDIC would suggest alternative language for H.R.4178 including a provision stating that absent specific contract language to the contrary 1) servicers have a duty to maximize the net present value of a loan pool for all investors and parties having an interest in the pool, not to any individual party or group or parties and 2) servicers act in the best interest of all parties if they agree to or implement a modification or workout plan for a resident mortgage loan, or a class of residential mortgage loans, that meet specified criteria. Bair added that H.R.4178 would clarify what the FDIC believes to be current law. Scott Polakoff, senior deputy director and chief operating officer, Office of Thrift Supervision (OTS), said the OTS supports the objectives of the Castle bill, but believes servicers already have adequate flexibility to address the issues in the bill. Polakoff also said the policies and practices amendment is unnecessary, because federal banking agencies already have sufficient authority. Chairman Frank said the Committee will be taking further action on loan modifications, possibly with a subsequent markup.
Senate Approves AMT Patch without Offsets
The Senate this week approved a one-year extension of the alternative minimum tax (AMT) patch without any revenue offsets by a vote of 88-5. Earlier in the day, a procedural motion to vote on the House-approved AMT bill (H.R.3996) failed to receive the sixty votes needed for passage (the cloture vote failed by a vote of 46-48). The Temporary Tax Relief Act of 2007 (H.R.3996), approved by the House in November by a vote of 216-193, would extend the AMT patch and a number of annual expiring tax provisions for one year. The bill was fully paid for with several revenue raisers, including higher taxes on carried interest and on deferred compensation, basis reporting requirements and an eight-year delay in the effective date of the worldwide interest allocation election. The Senate AMT patch does not address the expiring tax provisions. It must now go back to the House. It is unclear whether the House will pass the Senate bill or further amend it, sending it back to the Senate. In a statement after the Senate’s action, House Ways and Means Chairman Charles Rangel (D-NY) said he is working on a revised AMT bill including less controversial offsets.
Comprehensive Energy Legislation Moves Forward
The House approved a new version of comprehensive energy legislation (H.R.6) this week by a vote of 235-181. The Energy Independence and Security Act of 2007, which seeks to promote the production of alternative energy, also includes a $21 billion tax package. The bill, which is largely paid for by a repeal of tax incentives for the oil and gas industry, also includes an extension of the Federal Unemployment Tax Act (FUTA) and basis reporting requirements for broker-dealers. Under the basis reporting provision, broker-dealers would be required to report the adjusted basis of securities sold by their customers and report this information to the Internal Revenue Service. Although SIFMA supported an earlier version of this proposal, SIFMA opposed the provision in H.R.6 because of a new requirement to report gross proceeds to customers that are S corporations. SIFMA sent a letter to Speaker of the House Nancy Pelosi (D-CA) in opposition to the basis reporting provision. (See story below.)
The Energy Independence and Security Act of 2007 (H.R.6) authorizes issuance of a number of a tax credit bond programs, including:
- Clean Renewable Energy Bonds: The bill authorizes $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, landfill gas, marine renewable and trash combustion facilities. The authorization is divided into thirds: 1/3 for qualifying projects of state/local/tribal governments; 1/3 for qualifying projects of public power providers; and 1/3 for qualifying projects of electric cooperatives. (This proposal is estimated to cost $550 million over 10 years.)
- Qualified Energy Conservation Bonds: The bill creates a new category of tax credit bonds to finance green community programs and initiatives designed to reduce greenhouse gas emissions. There is a national limitation of $3 billion, which can be allocated to States and municipalities. (This proposal is estimated to cost $864 million over 10 years.)
- Qualified Forestry Conservation Bonds: The bill also creates a new category of tax credit bonds for qualified forestry projects designed to acquire land subject to native fish habitat conservation plans for conservation purposes. (This proposal is estimated to cost $161 million over 10 years.)
- Restructuring of Liberty Zone Tax Credits: In addition to these energy-related tax credit bond programs, the bill also authorizes the issuance of new Liberty Zone tax credit bonds. The bonds can be used to finance any qualifying transportation infrastructure project (as designated by the Governor and Mayor). The governmental unit receives the benefit of the tax credit by retaining employee tax withholding that would otherwise be sent to the Federal Treasury. (This proposal is estimated to cost $1.1 billion over 10 years.)
A procedural vote this week in the Senate failed to receive the sixty votes necessary to advance the bill. The cloture vote failed 53-42. The Senate is expected to work on revisions and bring the bill up for another vote prior to adjourning for the year. In a Statement of Administration Policy (SAP) this week, the administration said it would veto H.R.6 in its current form.
SIFMA Opposes Basis Reporting Provision in Energy Bill
SIFMA sent a letter to Speaker of the House Nancy Pelosi (D-CA) opposing the basis reporting provision included in the tax title of the Energy Independence and Security Act of 2007 (H.R.6). SIFMA noted while it worked cooperatively with Hill staff over the past two years to develop new basis reporting requirements that were included in the Temporary Tax Relief Act of 2007 (H.R.3996), it cannot support the revised provision in H.R.6, because of two changes made to the original provision. First, H.R.6 would require brokers to send 1099 statements to customers that are S corporations. SIFMA said brokers should be allowed to focus their time and resources on implementing the new basis reporting requirements, rather than diverting these resources to new reporting requirements, which would have a minimal effect on tax compliance. Second, H.R.6 would also delay for two years the effective date of the two-week extension of the filing deadline for most 1099 statements. SIFMA noted the extension in the filing deadline should take effect with the general basis reporting requirements because corrections are expected to be highest in the first few years the requirements are in effect. SIFMA said its members are willing to expend the necessary resources on basis reporting requirements that will simplify tax filing for customers and reduce the tax gap, however, it cannot support burdensome mandates where the costs far outweigh any possible gains in tax compliance.
House Approves Bill Giving FDIC, OCC Power to Write UDAP Rules
The House approved by unanimous consent legislation (H.R.3526) that would give the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) authority to write rules to identify and prohibit unfair and deceptive practices. The bill, introduced by House Financial Services Committee Chairman Barney Frank (D-MA), would give the agencies rule-writing authority under the Federal Trade Commission Act. Currently only the Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration have that authority. The bill was previously approved by the House Financial Services Committee and the House Energy and Commerce Committee by voice vote. Sen. Robert Menendez (D-NJ) introduced companion legislation (S.2397) on November 19.
House to Consider Revised TRIA Bill
The House Rules Committee voted to bring a revised terrorism risk insurance extension bill to the House floor next week. The Terrorism Risk Insurance Act (TRIA) is currently scheduled to expire at the end of the year. In September, the House approved a fifteen-year extension (H.R.2761) by a vote of 312-110. Prior to the Thanksgiving recess, the Senate approved legislation to extend the terrorism risk insurance program for seven years by unanimous consent. The revised House bill would extend TRIA for seven years and would amend the Senate-approved bill to lower the threshold at which the government is obligated to help pay for losses from terrorist attacks from $100 million to $50 million. It also includes a provision to broaden TRIA to include group life insurance, but does not include a provision to expand the program to include coverage for nuclear, biological, chemical and radiological attacks.
Senate Judiciary Examines Loan Modification During Bankruptcy
During the Senate Judiciary Committee hearing entitled, "The Looming Foreclosure Crisis: How to Help Families Save Their Homes," Sen. Richard Durbin (D-IL), who chaired the hearing, said he hopes lawmakers can do something to deal with the increasing number of foreclosures facing homeowners. In October, Sen. Durbin introduced the Helping Families Save Their Homes in Bankruptcy Act (S.2136), which would authorize a bankruptcy judge to modify a debtor's principal mortgage during Chapter 13 bankruptcy proceedings. Also in October, Judiciary Committee Ranking Member Arlen Specter introduced the Home Owners’ Mortgage and Equity Savings (HOME) Act (S.2133), which would require the consent of the mortgage holder before a Chapter 13 plan could reduce the amount of the mortgage. Mark Scarberry, resident scholar, American Bankruptcy Institute, said allowing the cram-down of a home mortgage in Chapter 13 would cause difficulties in the secondary mortgage market, cause unjustified harm to the holders of home mortgages and mortgage-backed securities and harm investors, including investors of modest means. Joseph Mason, professor, Drexel University, said proposals to modify mortgages will cause uncertainty to the market and will increase the cost of mortgage credit, increase interest rates and increase transactions costs. Mark Zandi, chief economist, Moody's Economy.com, said there is no evidence the secondary mortgage markets will be materially impacted because other consumer loans which have similar protection under Chapter 13 have well-functioning secondary markets. Henry Sommer, president, National Association of Consumer Bankruptcy Attorneys, said there is no certainty that allowing a cram-down of mortgages would effect the market or increase interest rates--as evidenced by the fact that interest rates did not rise after cram-downs were allowed for car loans in 1978, and that interest rates did increase on farm loans after the Family Farm Act.
Frank and Bachus Call on Treasury to make Market Access Priority During SED Meetings
In a letter this week, House Financial Services Committee Chairman Barney Frank (D-MA) and Ranking Member Spencer Bachus (R-AL) urged Treasury Secretary Henry Paulson to continue to make financial services market access and reform a high priority during talks with Chinese officials during next week’s Strategic Economic Dialogue (SED). Frank and Bachus said a commitment by the Chinese to raise and ultimately eliminate investment caps in securities, insurance and banking is a critical step toward establishing fair treatment for U.S. firms in China. They warned the continued openness of U.S. markets to Chinese goods, services and investments would be jeopardized politically in the U.S. if there was a lack of progress toward market opening in China during next week’s SED meetings.
Bills Introduced This Week
During the Thanksgiving recess, Senate Banking Committee Chairman Chris Dodd (D-CT) released a discussion draft of legislation that would strengthen the regulation and supervision of industrial loan companies (ILCs). The Industrial Bank Holding Company Act of 2007 would prohibit commercial companies—except automakers—from owning industrial banks; would ban current commercially-owned ILCs from interstate branching and would require current commercially-owned ILCs from expanding activities without the approval of the Federal Deposit Insurance Corporation (FDIC). The discussion draft defines a company as commercial if it engages in any activity not considered financial in nature under provisions of the Gramm-Leach-Bliley Act, Section 4 of the Bank Holding Company Act, or Section 10 of the Home Owners Loan Act. Under the draft, foreign banks are required to obtain a determination from the Federal Reserve that it is subject to consolidated comprehensive supervision in its home country before it can acquire an ILC. The discussion draft exempts industrial bank holding companies, which are already subject to consolidated supervision by the Federal Reserve Board (FRB), Office of Thrift Supervision (OTS) or the Securities and Exchange Commission (SEC), from FDIC oversight.
The Week Ahead
- The Senate Judiciary Committee will hold a hearing on the Arbitration Fairness Act of 2007 (S.1782) on Wednesday, December 12.
- Also on Wednesday, December 12, the House Energy and Commerce Subcommittee on Oversight and Investigations will examine energy speculation and price manipulation.
- The Senate Special Committee on Aging will examine reverse mortgages and the elderly on Wednesday, December 12.
- On Thursday, December 13, the Senate Finance Committee will hold a hearing to examine the recent declines in the housing market.