Mortgage Market Reform: The PATH between Symbolic Act and Reform Narrows
The legislative calendar in Washington is entering that biannual phase wherein legislation is introduced regardless of its ultimate futility. But this is the beginning of campaign season, a time when senseless and symbolic acts take precedence, and substantive efforts, few as there are, take a backseat. What might seem futile to normal people may provide political cover for at-risk legislators.
Sadly much-needed and much-delayed mortgage market reform is headed directly into this maelstrom. This despite the rare burst of Senate bipartisanship that produced Corker-Warner, a bill with as many as 12 co-sponsors from both sides of the aisle, to finally address the systemic problems in that mortgage finance market. Regardless of its bountiful support, though, the bill has become the equivalent of a senseless, symbolic act — though it was hardly intended as such when introduced last summer — as the ultimate form of reform rests entirely with leadership of the Senate Banking Committee.
Reform of the mortgage-backed securities markets is something that many CFA Institute members said was needed immediately after the market crash in 2009 and again following passage of Dodd-Frank in 2010. They expressed disdain for the bloated and distorted market, thanks in large part to the implied — and ultimately realized — government guarantees supporting it and nearly every institution up and down the food chain. It was the one piece of reform that members wanted at the time, and the only piece of financial market reform ignored by Dodd-Frank.
Based on member responses to a recent survey about reform of the MBS market, CFA Institute prefers a structure that eliminates the federal guarantees on such securities. We also have advocated for ensuring that the institutions responsible for origination and/or securitization of these instruments are on the hook for at least half of that first-loss position. While that would put the capital of institutions at greater risk of loss, the expectation is that these firms would engage in more robust underwriting in the first place, thus making the system safer, overall.
House Bill Dead in the Water
But doing away with those guarantees is easier said than done. Take the example of the Protecting American Taxpayers and Homeowners, or PATH Act. This bill rids the system of Fannie Mae and Freddie Mac, eliminates the federal guarantee in short order, and replaces it with a federally chartered utility to set underwriting standards and to operate the MBS market structure.
The House Financial Services Committee passed the PATH Act last autumn, but has had little success getting it to a vote on the House floor, even though many Republican members ideologically agree with its approach. The reason is that PATH won’t see the light of day in the Senate. Consequently, taking it to the floor in the House would be the equivalent of — you guessed it — a senseless, symbolic vote that is used against every member who votes for it.
So all eyes now turn to the Senate.
What Path Will the Senate Take?
The problem is that no one knows what to expect from the Senate, not even insiders. Corker-Warner is a known quantity that doesn’t expressly eliminate federal guarantees but calls for the Government Accountability Office to determine in seven years whether the market can survive in a fully privatized arrangement. It also seeks to limit the call on the taxpayers by requiring private parties to own the first 10% of losses, though not specifically putting that burden on the lenders who originate the loans, or the firms that package and securitize them ex post. CFA Institute has strongly advocated for those engaged in creation of the loans and securities to have skin in the game, though the banks have balked.
If the Senate Banking Committee (SBC) version looks a lot like Corker-Warner, then mortgage market reform is likely on the fast track for passage before June. It would have to take a brief foray in the House sometime in early spring, and then go through a conference committee to produce a final bill on which both houses would vote. Whatever emerges from this process would likely look more like the original Senate offering than what the House has in mind.
If the SBC takes a route different from Corker-Warner, however, the prospects for passage of mortgage market reform dim substantially. In that scenario, the SBC would have to reconcile with the Corker-Warner faction, a process likely to consume enough time to push the bill into the summer. By then, everyone in the House and a third of the Senate will be getting into re-election mode, a frame of mind hardly conducive to bipartisan support for dealing with a complicated issue like mortgage reform.
At which point, the whole process begins to look senseless and symbolic.
Photo credit: iStockphoto.com/MiguelMalo
