The co-author of an important new bipartisan housing finance bill, Senator Bob Corker, talks about prospects for his legislation.
Mortgage Banking Magazine
By Robert Stowe England
Sen. Bob Corker (R-Tennessee) has forged a bipartisan consensus in the Senate on legislation to wind down Fannie Mae and Freddie Mac, and create a new mortgage finance system with a federal government reinsurance guarantee.
First elected in 2006, the former mayor of Chattanooga, Tennessee, joined the Senate Committee on Banking, Housing and Urban Affairs in January 2008 and is a member of the Subcommittee on Securities, Insurance and Investment.
Three years ago, Corker helped forge a bipartisan financial regulatory reform package with Sen. Mark Warner (D-Virginia), also a member of the Senate Banking Committee--only to see it abandoned by the Democratic leadership. Congress instead enacted into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Corker is again working with Warner to hammer out new legislation--the Housing Finance Reform and Taxpayer Protection Act (S. 1217). Under the bill, the federal government would offer reinsurance through a new entity to be known as the Federal Mortgage Insurance Corporation (FMIC). The guarantee would cover principal and interest payments for certain covered mortgage-backed securities (MBS). Claims would be paid out of a mortgage insurance fund capitalized by insurance premiums from market participants.
Private-sector financial institutions that want to offer the federal reinsurance guarantees would be required to hold capital equal to 10 percent of the face value or principal of the covered security. This cushion is designed to absorb initial losses ahead of any claims on the FMIC. The new system would require that loan amounts above 80 percent loan-to-value (LTV) would have private mortgage insurance. The system would insure loans with at least a 5 percent down payment.
A sunset clause in the bill provides that after eight years, the Government Accountability Office (GAO) would release a study on the feasibility of a making a transition to a fully private market and Congress would consider recommendations to wind down FMIC entirely.
Mortgage Banking caught up with Sen. Corker at his office on Capitol Hill recently to discuss his new legislation and its prospects.
Q: What prompted you to tackle the difficult issue of creating a legal framework for a new mortgage finance system, and why do you think that now is the time to act?
A: We spent a lot of time with the private sector and, as you remember, actually wrote a bill [in 2011] that wound down Fannie and Freddie and did not replace it with public guarantor reinsurance program. [W]e spent a lot of time, candidly, with all segments and last fall this was still, as we’ve said before, unfinished business. It has not been dealt with.
Our office is what I would call a very pragmatic office--that is, we want to solve problems. We want to move the ball down the field, and we just felt like the timing was such that this Congress was maybe our last opportunity to be able to deal with this. So we began having dinners last fall with [Sen.] Mark Warner and having people come in who are experts with various and sundry backgrounds. And we spent a lot of time writing what we believe is a very good piece of legislation.
Q: Do you think Congress will take up this issue and do you expect changes to your bill if it does?
A: Our legislation is a great starting point. We know every bill can be improved. And we hope this one is going to be improved. But we’re actually heartened right now because we see the House also moving a bill [on mortgage finance sponsored by House Banking Chairman Jeb Hensarling (R-Texas) that winds down Fannie and Freddie and sharply limits the federal government role in the industry]. We realize their bill is different. But [we are encouraged by] the fact they are advancing a piece of legislation, and the fact that [Senate Banking Committee Chairman] Tim Johnson [D-South Dakota] and [ranking minority member Sen.] Mike Crapo [R-Idaho] act like they want to address reform of [the Federal Housing Administration]. I think everyone understands that FHA and GSEs really need to be addressed in tandem, in conjunction with each other.
So, we’re heartened right now. We think that there’s a very good possibility that we will finally deal with Fannie and Freddie. During the Dodd-Frank debate, one of the big issues that Republicans kept bringing up was, “We’re not dealing with Fannie and Freddie; we’re not dealing with Fannie and Freddie.” And I do think most people realize that this is unfinished business.
And we believe now is the time to go ahead and deal with this issue, and deal with it an appropriate way that maintains liquidity in housing finance but also ensures that taxpayers will not be asked to step back in, [and] that we remove this model of private-sector gain and public-taxpayer losses. We believe we’ve done that with this piece of legislation. And, again, we know it can be improved and we know that it will be.
Q: Do you expect efforts to move the legislation forward anytime soon?
A: We hope there’s going to be a markup on this legislation early this fall.
Q: How did you go about building a bipartisan coalition and what was the bottom line of what Sen. Warner wanted in the bill?
A: That’s a great question. I’d say two things. No. 1: You had Republicans, like myself, who were willing to acknowledge that in order to move the ball down the field, in order to move away from the system that we have right now to one that’s more sustainable, [we had to be] willing to acknowledge a role for the federal government in that transition--[and that] was a big step.
On the other hand, what was very important to me was ensuring we had the 10 percent private capital buffer upfront. [That] to me advanced the ball down the field significantly because it meant you would have a very significant amount of private capital in advance of any taxpayer losses. [And that] would send all kind of market signals as we moved along and certainly very much bring the private sector in a very, very large way back into the housing segment. And I think over time it’s because of that 10 percent private capital component that I think you’re also going to see a robust private-sector-only market.
Q: What roles did Treasury or the White House play in putting together the consensus and the proposed legislation? Do you think the White House or Treasury will spend political capital to help advance the legislation?
A: As soon as we got to what I will call a general agreement on the big items, our office and [Warner’s], too, began working with Treasury, the Office of Management and Budget, the White House and spent some time with [the Department of Housing and Urban Development]. They obviously had a lot of technical expertise that was useful. It made no sense for us to try to advance [alone] an issue where there are a lot of strong feelings around it.
And it’s obviously an important issue. We have $5 trillion today when you combine the mortgages guaranteed by Fannie and Freddie. The housing industry is very important to our country. You want to make sure to the extent you can that you have a transition plan that works. So it was very important to us to get that technical expertise from Treasury, from OMB, from the White House.
Q: How involved did the administration get with crafting the new legal framework?
A: I would say that they have been very, very involved. I don’t know what kind of role they are going to play to try to actually pass legislation. But there’s no question they have been very open with us and they have shared with us [their technical expertise] as we moved ahead with crafting the legislation.
Q: What provisions in your bill do you see as must-have provisions? Was the 10 percent private-sector buffer one of them?
A: That was key, and stepping down the loan limits for Fannie and Freddie over the next five years certainly was a key provision for me. And having the GAO after the eighth year lay out a plan of how you could move to a totally private market. At least Congress will have that information and the ability to look at it at that time. It is done in such a way that it doesn’t create any kind of uncertainty in the market.
And [beyond these key provisions] there are all kinds of belts and suspenders. There’s a minimum 5 percent down payment. Anything over 80 percent loan-to-value [LTV ratio] has to have private mortgage insurance.
There’s a [mortgage insurance fund] that’s set up within FMIC that everyone who’s passing loans through FMIC pays into it. Again, it’s a catastrophic fund whose goal is to get to 2.5 percent [of the outstanding principal balance of securities covered by federal reinsurance], but also to have that belt and suspender in place where you’ve got a catastrophic fund at the bottom that’s available in the event there are any losses.
I will point out that if Fannie and Freddie had just 5 percent capital during this crisis, there would have been no taxpayer losses. So, again for me, a key provision was the 10 percent capital. For [Warner] the key provision was having a government reinsurance program.
There is [also] the issue of the Market Access Fund. For most people in Congress, one of the complaints about Fannie and Freddie was they had these imbedded social goals. All of those have been done away with. But there is an explicit program. It’s a Market Access Fund, where a few basis points off each loan is paid specifically into programs that help lower-income people with rental assistance. But these are explicit. People can see them.
Again, it turns something that was very opaque and people didn’t know necessarily what was occurring into something that’s explicit on both ends, both in the Market Access Fund but also the [government reinsurance] guarantee is explicit now, not implicit. But, again, [we will have] 10 percent capital in advance of that.
Q: The bill requires the FMIC director to be a technocrat with housing finance experience. What was the thinking behind this requirement?
A: Well, I mean, look--most of us who have gotten involved with Fannie and Freddie and housing finance in general, [we know that] it’s very, very complex. As a matter of fact, we probably used up more brain cells working on this bill than any that we’ve worked on in a long time. It’s very complicated and we want to get it right.
And the success of legislation is not just in how you pass it and what the legislation says, but it’s the person coming in behind who actually makes many of the judgments that have to be made to carry [out] the actual transitions that occur.
We just wanted to ensure that we didn’t have some political hack, if you will, overseeing FMIC and that we ended up with a technocrat--somebody that had experience--and that’s why the legislation is so specific in that regard. We want somebody that has a tremendous amount of background in this area and is going to shepherd this through in an appropriate way, because we want it to be successful.
Q: Sort of along the lines of the qualifications one would look for in someone chosen to be the chairman of the Federal Deposit Insurance Corporation [FDIC]?
A: That’s correct. In all of these types of positions you want somebody who has a foundation and a knowledge base, but also you want to have someone who has good judgment. You want people who have a wealth of experience in these areas to deal with regulatory issues like FMIC. The head of FMIC will be carrying out several roles, and you want them, again, to be someone of deep background and experience.
Q: How important is it that the legislation continue a federal guarantee for the multifamily housing sector?
A: It does include that. Our legislation actually carries the GSE's existing multifamily program over to FMIC. I went down to the national mortgage meeting in Atlanta several years ago and had a detailed meeting with people who were involved in multifamily housing. It was an important meeting. I understand some of the differences between it and single-family. But I think it’s important [to keep this program], and certainly we’ve taken that into account in this piece of legislation.
Q: The bill eliminates affordable-housing goals for the new system. How important is this and do you think that issue is settled?
A: I hope it is. I think most people would recognize, first of all, that Fannie and Freddie were built on a flawed model of private-sector gains and public losses. But also I think people would recognize that politicians helped destroy these two entities by continuing to apply pressure to them to do things that, candidly, people couldn’t get legislatively. So they would pressure Fannie and Freddie to do things that were not in the interest of the companies and certainly not in the interests of the public sector, as it’s turned out, with a huge injection of public-sector capital that has taken place.
Q: Have you received any indication from Sen. Johnson about how soon the committee might move on your legislation?
A: Well, we’re still working on it. [A] big step forward has been the fact that he and Sen. Crapo want to do FHA reform and they want to do it now. I know it’s been discussed for a very long time, and we see that as a positive sign. Both [Sen. Warner] and I have met with Sen. Johnson and Sen. Crapo. We continue to talk with their staffs.
We know there are going to be a lot of ideas regarding GSE reform. We understand that. We certainly don’t have a monopoly on good ideas. There are a lot of people in the Senate who have spent a lot of time on these kinds of issues. What we do hope, on the other hand, is that the construct of this bill is at least a good beginning point. We have 10 co-sponsors--five Rs and five Ds--all of them on the [Senate Banking] Committee.
Q: What do you think about the House bill--the Protecting American Taxpayers and Homeowners, or PATH Act--that’s come forward from Financial Services Committee Chairman Hensarling?
A: The House bill obviously does not have the government reinsurance. I think the fact the House is moving a piece of legislation dealing with the GSEs is a very strong positive, even though the characteristics of the two pieces of legislation are different. We’ve certainly talked with Chairman Hensarling. We’ve talked with his staff. We are encouraging them to move ahead with whatever piece of legislation they believe is appropriate to deal with the GSEs.
We understand that because the majority make-up of the two bodies--the Senate and the House--is different, we probably could end up having legislation [with] different characteristics. But I think if both bodies will pass legislation relative to the GSEs, it gives us a chance to conference. It gives us a chance to finally deal with an issue that, candidly, has been lingering for five years. My sense is that Congress understands the fallacies of an entity that has some implicit guarantee from the public sector, and hopefully is more than ready to move beyond what I would call a failed model.
Q: Have you considered the possible impact of the GSE shareholder lawsuits with the potential that a judge could rule against conservatorship and restore Fannie and Freddie to private-company status?
A: We get a lot of calls on this. People who own junior preferred [shares in the GSEs] have certainly talked with us. We [tell them] that’s why we have three branches of government, and they’re welcome to pursue their concerns with the judicial side. There are actually two distinct issues and maybe more. One is the “takings issue.” There are some people who have challenged the fact that the Treasury came in and took over the two entities. It’s kind of interesting to me that nobody was raising Cain in 2008, 2009 and 2010, begging the U.S. government to give them back their insolvent companies.
And I guess the second issue legally is the changing of the dividend structure to a sweep versus just a 10 percent coupon [on the senior preferred shares issued to Treasury in return for cash injections]. I think you will remember, at the time, the thought of [Treasury] having to give the companies the money to pay the government back its 10 percent interest was sort of a silly mechanism. And there’s a suit over that.
Again, people who have concerns can sue. That’s a constitutional right that people have. We say to them, whatever they wish to do, that’s their right. From the standpoint of the U.S. taxpayers, I certainly hope they are not successful. One thing I will point out is that there’s no way either one of these entities would be generating one dime’s worth of guarantee fees right now without the government standing behind them.
I actually think the suits are positive for us. So when people say, “Oh, don’t be concerned,” they don’t concern us at all. If anything, they build a lot of momentum toward passing some legislation that will do away with this flawed model. If these entities end up existing without any government support, they will obviously be very, very different entities. But again, that’s something for the court to decide. I want to move beyond that. I just don’t want us to have a model like that in the future. MB
Copyright © 2013 Mortgage Banking Magazine. Reprinted With Permission.