DSNews delivers stories, ideas, links, companies, people, events, and videos impacting the mortgage default servicing industry.
Issue link: http://digital.dsnews.com/i/441572
52 Legal Industry Update National Focus A CURIOUS COMFORT WITH THE STATUS QUO Perhaps the most salient feature of the November elections was the absence of the moderate middle. Fewer than 40 percent of eligible voters cast their ballot. No surprise, then, that each party continues to play to the base that elected them—a base that is less temperate and more uncompromising than the last. is fundamental political reality underlies much of the explanation for gridlock in the housing finance debate. REPUBLICANS For conservative Republicans, aversion for the government's role in the mortgage market is almost doctrinal. In 2013, the chair of the House of Representatives Financial Services Committee, Rep. Jeb Hensarling (R-Texas), developed and pushed through the committee the "PATH Act," which dissolved the GSEs and eliminated the federal guarantee in favor of a fully privatized system operating from a common securitization utility. Unfortunately for Hensarling, this approach was not shared by a majority of House Republicans; there was also precious little industry support, and leadership refused to bring the bill to the House floor for a vote. Yet Hensarling has given no indication that he plans to moderate his view in the 114th Congress. Indeed, the conservative view will likely gain new prominence because Sen. Richard Shelby (R-Alabama) is assuming the helm of the Senate Banking Committee. Like Hensarling, he does not believe in a federal guarantee. While this view is more conservative than many other Republicans on the committee (and in the Senate generally), Shelby may not move forward with a bill that provides any federal backstop. e two chairmen also may feel that they do not need to pass housing finance reform legislation to show that they can govern. In the 113th Congress, 23 bills that changed Dodd-Frank Act provisions passed the House with bipartisan support. Nearly all of these bills were bottled up in the Senate because Majority Leader Harry Reid (D-Nevada) and Senate Banking Committee Chairman Tim Johnson (D-South Dakota) were afraid of opening the floodgates to changes to the landmark bill. Not so in the in the 114th Congress. We expect these bills to be reintroduced and passed under the guise of "regulation relief." If the bills can gather as much Democratic support as their previous iterations, the odds are that President Obama will sign most of them. THERE IS NO CURRENT CRISIS TO COMPEL LEGISLATIVE ACTION. Republicans see the cash that the GSEs have returned to the U.S. Treasury Department as signs that the GSEs pose less threat to the U.S. taxpayer and may have returned to profitability. At this point, each has deposited more into the Treasury than the combined $187.3 billion they drew. In fact, Freddie has deposited $19.1 billion more than it drew and Fannie nearly $22.5 billion more. Moreover, under the terms of the third amendment to the GSEs' senior preferred stock purchase agreements with Treasury, they are required to reduce their capital reserves by $600 million each year, which brings them to zero in reserves by January 1, 2018. is means that by the end of 2017, the GSEs will be essentially turning over 100 percent of their net profits to the Treasury and operating with no cushion to absorb unforeseen, or even foreseen, losses. Given the continued fragility of the housing system, the lack of consensus on the federal guarantee, and the absence of compelling financial need, we do not think the two chairmen are likely to move forward with comprehensive GSE reform. Instead, they are likely to support a gradual reform approach that relies on a large-scale expansion of the private label securitization market to reduce the market's reliance on the GSEs. ey hope to accomplish this by supporting higher GSE guarantee fees and lowering loan limits in order to make the government guarantee economically unviable for most homeowners. DEMOCRATS A bipartisan housing finance reform bill, the Johnson-Crapo bill (S. 1217), was reported out of the Senate Banking Committee in May 2014 with a 13-9 vote. e bill sought to unwind Fannie Mae and Freddie Mac and replace them with an FDIC-like mortgage insurance fund that was fully backstopped by the federal government. However, Reid was not persuaded to bring it before the full Senate because it was supported by only six Democrats. A vocal contingent of Democrats, led by Sens. Elizabeth Warren (D-Massachusetts), Sherrod Brown (D-Ohio), and Jeff Merkley (D-Oregon), argued that the bill failed to do enough to promote access to affordable mortgage credit for low-, moderate- and middle-income borrowers. e complexity of the system Johnson-Crapo proposed also contributed to its undoing. Some senators were simply unwilling to gamble on a poorly understood proposal when nearly 20 percent of the nation's GDP depends on it. Brown is now the ranking Democrat on the Banking Committee. When asked in late 2014, he said that he is predisposed to taking a fresh approach that would not use his colleagues' previous draft as a template. Importantly, many (mostly progressive) Democrats believe that Director Mel Watt's leadership of the Federal Housing Finance "Given the continued fragility of the housing system, the lack of consensus on the federal guarantee, and the absence of compelling financial need, we do not think the two chairmen are likely to move forward with comprehensive GSE reform."