CRAPO ON BEST STRUCTURE FOR A STRONG REGULATOR IN NEW HOUSING FINANCE MARKET
November 21, 2013
WASHINGTON – U.S. Senator Mike Crapo (R-Idaho), Ranking Member of the Senate Banking, Housing and Urban Affairs Committee, today delivered the following remarks during a Banking Committee hearing on how best to structure a strong and effective regulatory entity for taxpayer-guaranteed mortgages:
"Thank you, Mr. Chairman.
"Today, the Committee will discuss how best to structure a strong, independent regulator—with appropriate checks and balances—as part of the new housing finance system. We have a broad panel of witnesses and I thank you all for coming to testify.
"In past hearings, I have highlighted the mistakes of Fannie Mae and Freddie Mac before they were placed in conservatorship. Not only did they operate as undercapitalized companies, holding just 45 cents in capital for every 100 dollars in mortgages they guaranteed, but they acted like highly-leveraged hedge funds, purchasing nearly 40 percent of the private label subprime securities at the peak of the housing bubble.
"These forces culminated in a perfect storm whose clean-up cost taxpayers billions of dollars in bailouts, crushing our economy and undermining America’s international standing. We must learn from these mistakes.
"When considering reform we must address three pivotal issues about the new regulator: First, how can it appropriately balance its dual role as a regulator and a reinsurer in a highly complex market with diverse stakeholders? Second, what authorities and powers should be vested in the new agency to ensure it is effective without duplicating existing efforts? Third, how should we structure the governing board so that the agency is well equipped to carry out its responsibilities on day one?
"S. 1217 would create the Federal Mortgage Insurance Corporation, or FMIC, as the primary regulator for taxpayer-backed mortgages. The FMIC would provide catastrophic loss insurance funded by premiums and guarantee fees on eligible mortgage securitizations. As such, it would be a hybrid between the Federal Deposit Insurance Corporation and the Federal Housing Finance Authority.
"The FDIC was created as an independent federal agency in response to the bank failures in the 1920s and early 1930s. It is comprised of a five-person Board of Directors, with no more than three directors from the same political party. The FDIC has survived 80 years without depositors losing a single cent of insured funds, largely in part because its board is designed for long-term stability and continuity without sudden movements or extreme policy shifts.
"As the guaranteed mortgage industry will need similar stability and continuity, the new regulator should have a similar balance of views. In addition, the new regulator will serve as the principal line of defense for the taxpayers and should have a strong, clearly defined purpose.
"Its activities—and the activities of those it regulates—must result in strong underwriting standards and responsible homeownership. Any reinsurance fund, industry participant and ensuing mortgage or financial product must be well capitalized to insulate taxpayers from unwarranted risk. And, to adequately oversee a diverse industry and to coordinate with state and other regulators, the new agency will need superb technical expertise.
"In order to accomplish all these goals, we ought to reach consensus on key principles. The new regulator should be an independent agency—resolute in its mandate and unwavering to political winds. Its leadership has to be balanced out to ensure true political independence. Its safeguards and underwriting standards must be based upon qualifying standards to provide mortgages, but to protect taxpayers. Its finances must be frequently examined to ensure accountability and transparency including appropriate stress tests.
"Lastly, the agency cannot exist in a regulatory vacuum: it must coordinate with other agencies in a holistic approach to sensible regulation. Any new regulator must avoid regulatory duplication that leads to increased paperwork and regulatory burdens which increase the cost of credit while creating legal nightmares.
"Adopting these principles is crucial because the agency will be tested immediately upon it creation. Some of the immediate tasks it will have to undertake include: establish rules for the structure and use of a federally insured mortgage markets within perimeters set by Congress; determine approval criteria and guidelines for market participants; and set up a cooperative to ensure access for small participants in a manner that also maintains adequate taxpayer protections.
"Today’s hearing is a good platform to discuss how best to enable the new agency to succeed. Thank you, Mr. Chairman."