October 31, 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 entitled “Housing Finance Reform:  Essential Elements of a Government Guarantee for Mortgage-Backed Securities:” 
"Thank you, Mr. Chairman.
"Today’s hearing is another important opportunity to discuss the role of private capital in the context of housing finance reform.
"Today, Fannie Mae, Freddie Mac and Ginnie Mae back nearly 100 percent of newly issued mortgage-backed securities.
"Additionally the Federal Reserve is supporting the housing market by purchasing $40 billion a month of mortgage-backed securities.
"Clearly, we need to move toward a more limited role for the federal government and bring private capital back into the housing market.
"Several members of this committee have supported an approach that provides for a limited, well-defined government housing backstop.
"During Tuesday’s hearing, I noted that if we are to consider housing reform options that include a government guarantee, we must ensure that the taxpayer is standing only behind mortgages that meet strong underwriting standards.
"Also, we must ensure that there is adequate private capital taking the first-loss at the security level if we are to avoid future taxpayer losses similar to the bailouts of Fannie and Freddie, which required nearly $190 billion from taxpayers.
"S. 1217 allows for the development of various private-sector risk-sharing mechanisms, including regulated Bond Guarantors, senior-subordinated deal structures and credit-linked note structures.
"Bond Guarantors would maintain 10 percent capital against their insured bonds and would become insolvent before the proposed Federal Mortgage Insurance Corporation insurance would step in to cover losses.
"This would mean that the full resources of the guarantor would be available before reaching the mortgage insurance fund.
"Capital markets transactions also would be an option to facilitate private sources of capital to absorb first losses on covered securities.
"In those transactions, the bill states that the first loss position must be at least 10 percent of the principal or face value of what is defined as a covered security for mortgage-backed securities transactions.
"I am interested in the thoughts of today’s witnesses on how these structures would interact with the to-be-announced, or TBA, market.
"The TBA market allows investors the ability to limit their mortgage lending exposure by relying on the certainty of forward pricing on interest rates for home mortgages.
"And the liquidity provided by those investors helps to drive down costs to homeowners. 
"While not all available financing products must be TBA-compatible, we should keep an eye on their interaction with the current TBA marketplace to ensure that enough options will be available which allow for this market to thrive.
"The Federal Housing Finance Agency (FHFA) has already begun work on developing options for transferring credit risk to the private sector.
"The FHFA’s 2013 Scorecard required that the government-sponsored enterprises (GSE) “demonstrate the viability of multiple types of risk transfer transactions.”
"The work of FHFA in this regard has been encouraging and shows the markets’ appetite for owning the first loss piece.
"The Freddie Mac STACR deal, and Fannie Mae’s NMI and C-Deals are important examples of how private capital can participate at a higher level in this market.
"In addition to the private capital that would be held to take losses on covered securities, S. 1217 would also create a privately-funded Mortgage Insurance Fund, modeled after the Federal Deposit Insurance Corporation’s (FDIC) Deposit Insurance Fund.
"I look forward to the witnesses’ testimony on whether these forms of private capital adequately protect the taxpayer.
"Are we doing enough to protect taxpayers from losses?
"Are there lessons we can learn from FHFA on how to bring private capital back into the market?
"What are the mileposts for building capital during the transition?
"I look forward to working with the Chairman and the other members of the Committee as we address these critical issues.
"Mr. Chairman, thank you."