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How Waters' Bill Could Shift GSE Debate

by Victoria Finkle, American Banker

WASHINGTON — Rep. Maxine Waters' plan to let banks control a sole entity to issue government-backed mortgage securities is dead-on-arrival, but her proposal still significantly alters the housing reform debate.

A different housing finance bill in the Senate — which envisions private-market competition for securitizing loans — has greater bipartisan support and is scheduled for a Banking Committee vote next month. But Waters' bill, which would create a single cooperative — in which banks have an equal vote, regardless of their size — to issue securities, may still influence liberal Democrats and other lawmakers skeptical of the Senate legislation but who are crucial to getting a final bill passed.

"She very much picks up the mantle of the anti-big-bank crowd with her one-entity, one-vote concept for the co-op," said Brandon Barford, a partner at Beacon Policy Advisors. "The ideas she has in there are going to be appealing to certain segments of both Republicans and Democrats in Congress and could potentially show up as part of an amendment to the Senate bill at the markup on [April] 29th."

Waters, the ranking member on the House Financial Services Committee, has virtually no chance of getting her bill to reform the government-sponsored enterprises through the Republican-run House. Rep. Jeb Hensarling, R-Texas, chairman of the financial services, has been pushing his own conservative plan to all but remove government support for housing finance. He is extremely unlikely to consider the Waters' proposal as he continues to push for his bill to be considered on the chamber floor.

But observers said her bill could play a significant role in the Senate debate over the leading GSE bill on Capitol Hill, authored by Banking Committee Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, the ranking member.

Both the Waters and Johnson-Crapo plans would preserve government backing, each creating a federal insurance fund to mitigate losses suffered by the private mortgage market. But whereas Johnson and Crapo would establish a regulated securitization platform utilized by competing entities, and also create a mutual system to help smaller institutions aggregate loans, Waters' proposed cooperative would be a more centralized structure to ensure that smaller banks can compete.

The Senate legislation, based on an earlier bill by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., has a bipartisan coalition of supporters. Yet it will still have to attract more votes, including from some of the Banking Committee's more liberal members, to emerge from the April 29 markup with enough momentum needed to spur a full Senate vote this year. That will require quelling ongoing concerns about the Johnson-Crapo framework, including whether it would allow the largest financial institutions to dominate the new market.

The fate of the Senate legislation, to some degree, is in the hands of the uncommitted Democrats including Jack Reed of Rhode Island, Charles Schumer of New York, Robert Menendez of New Jersey, Sherrod Brown of Ohio, Jeff Merkley of Oregon and Elizabeth Warren of Massachusetts.

"They now have a month to go through the Waters bill and see how it's done — and maybe lift some ideas to try and amend Johnson-Crapo," said Brian Gardner, a policy analyst at Keefe, Bruyette and Woods. "It's a tool that Senate Democrats can use, those who want to make changes to Johnson-Crapo. They clearly have a different approach here."

Waters' bill, the Housing Opportunities Move the Economy Forward Act, or HOME Forward Act, would create a regulator known as the National Mortgage Finance Administration to oversee the single issuer as well as a mortgage insurance fund financed by fees set by the NMFA. (Similarly, under Johnson-Crapo, the Federal Mortgage Insurance Corp. would regulate a new securitization platform.)

The Waters bill would also establish a special cash window through which small banks and credit unions can sell individual mortgages, and increase the government's burden for protecting mortgage market losses. While the Johnson-Crapo plan proposed a 10% first-loss capital requirement for private market participants, Waters' bill would require a lower 5% first-loss capital buffer.

Some observers said her legislation could even give some members of the Senate Banking Committee cover for opposing or delaying movement on the Johnson-Crapo bill by giving them an alternative to stand behind.

"In contrast to just being opposed to legislation, the liberal contingent can now point to Waters' contribution to the GSE reform debate as a meaningful alternative," said Isaac Boltansky, an analyst at Compass Point Research & Trading. "The bill lets the liberal contingent continue the debate, by examining the merits of alternative constructs."

The new bill could have an even more substantial impact if mortgage finance reform stalls in Congress over the next several years, and the Federal Housing Finance Agency — Fannie Mae and Freddie Mac's regulator — begins to implement some changes similar to those outlined in the Waters bill under its existing authority. The FHFA is currently led by Mel Watt, a former Democratic congressman from North Carolina who sat on the House committee alongside Waters for many years.

"If Johnson-Crapo doesn't get enacted, my view is that FHFA is going to do a lot to reform the system on its own, and you could see something like the Waters bill be enacted in 2018 or 2019 to essentially bless many of the reforms that the regulator would have accomplished on its own," said Jaret Seiberg, an analyst at Guggenheim Securities. "Republicans are going to realize that if they don't go with Johnson-Crapo now, they may very well face a future that is the HOME Act down the road."

Still, the immediate response to Waters' plan so far has been measured. Like the other GSE plans that have been released, the Waters discussion draft is seen as a work in progress, and so it could change through further negotiation over the design of a new housing finance system.

Industry trade groups and other advocates sounded generally encouraged over release of the plan, saying it provides additional momentum for housing finance reform. But they also pointed to areas of concern.

"It clearly shows that both parties and the leaders in both parties are trying to focus their efforts on something deliberate to reform the system and move on beyond the state of conservatorship," said David Stevens, chief executive and president of the Mortgage Bankers Association, who called the Waters proposal "very thoughtful."

But Stevens added that at least for now, the group is still "focusing most of our efforts on the Johnson-Crapo effort … because the Johnson-Crapo plan is bipartisan and it comes on the heels of Corker-Warner, which we've been able to look at for months and months."

Others raised preliminary concerns about the role the NMFA would play in the new system. The discussion draft affords the agency, which would be run by a single director, wide latitude in how it oversees the market.

"The bill puts a heavy reliance on the mortgage finance agency, and the agency is a single director agency, so we've got to look at that very hard," said Camden Fine, president and chief executive of the Independent Community Bankers of America. "We'd rather see an agency have a board."

Mitria Wilson, director of legislative and regulatory advocacy at the National Community Reinvestment Coalition, said that the bill also needs more specificity around its broad mandate to serve low-income and minority families, warning that the legislation provides too much flexibility to the agency in how it would fulfill that requirement.

"When it comes to access, the bill appears to fall short," she said. "Leaving all discretion to the regulators is problematic."

Moreover, analysts said the bill may not prove immune to concerns about "too big to fail," with some noting that the co-op construct itself could ultimately run into a similar problem.

"The issuer's component parts are diverse, but the entity itself would have tremendous power and could conceivably be subject to regulatory capture," said Barford. "Under other systems, multiple entities are competing for that market share."

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