December 10, 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 held to examine the fundamentals of transferring credit risk in a future housing finance system:
Thank you, Mr. Chairman.
            As the Committee continues to consider broad reform of the housing finance system, I am encouraged by the progress we have made over the last few months.  Since August 2013, the Committee has held nine hearings on specific components that could make up a new housing finance system.  I appreciate the Chairman’s initiative and thoughtfulness in working through these complex matters, and remain strongly committed to working with him and all of my colleagues toward a bipartisan solution in the near term.
During a prior hearing, the Committee examined the construct for a potential government guarantee of certain mortgage-backed securities.  Today, the Committee will take a closer look into the mechanics of allocating private capital ahead of such a properly tailored government guarantee.
As in prior hearings, I will reinforce that if we consider housing reform options that include a government guarantee, we must ensure that there is robust private capital taking the first-loss position.  We must also ensure that the first-loss positions are in front of mortgages with high quality underwriting.  If there is not proper underwriting and allocation of private capital ahead of the government guarantee, we could find ourselves in another taxpayer bailout scenario.  That would be unacceptable.
I welcome the perspective our witnesses have on potential risk transfer options that could be used to attract private capital to take this first loss position, including the benefits and tradeoffs of each option.  In particular, I am interested to hear your views on which risk transfer mechanisms could bring in an appropriate amount of private capital, while prioritizing taxpayer protection to the fullest extent possible. 
S. 1217 contemplates several mechanisms for the security level risk transfer --  Bond Guarantors, one of two capital markets approaches, as well as any risk-sharing agreements undertaken by the Federal Housing Finance Agency (FHFA).  The bill provides that Bond Guarantors would be approved by the government to hold a 10 percent first loss position against the covered mortgage-backed securities they guarantee.
To ensure that we have responsible, sustainable mortgage-backed securities products, the Bond Guarantor should stand behind 100 percent of the principal value of the security.  This means the Bond Guarantor must exhaust all of its financial resources and become insolvent prior to the triggering of a government guarantee.  How, if at all, should legislation address allowing a Bond Guarantor to engage in risk sharing transactions for the risk it takes on in absorbing the 10 percent?
With respect to capital market transactions, one option is the creation of a senior-subordinated first-loss piece.  Under this capital markets approach, S. 1217 provides that the government backstop would attach once the 10 percent subordinated piece is exhausted. 
Some have expressed concern regarding how the senior-subordinated structure contemplated in S. 1217 would interact with the current to-be-announced (TBA) market structure.  Could this senior-subordinated structure become TBA deliverable if both pieces are made up of standardized loans?
A second capital markets option contemplated in S. 1217 is a credit-linked note structure, which allows investors to receive payment based on a pool’s losses.  Are there tradeoffs to the credit-linked note structure that could make it more or less attractive to private investors?  
I look forward to the witnesses’ views on whether these three options could co-exist in the marketplace, as well as other options that could be attractive to private sector capital. The FHFA has started to experiment with risk transfer mechanisms this year.  The Freddie Mac STACR deal and Fannie Mae’s NMI and C-Deals are a starting point for gauging investor appetite in taking the first loss position.  Can these deals be replicated in the future?  How quickly and to what extent can these transactions be developed?  What lessons can we look to as we try to duplicate these risk sharing transactions?
I am also interested to hear from the experts before us today on how future risk sharing transactions could work with a common utility for the securitization of covered mortgage-backed securities.  

The hearings we have held over the past several months have allowed us to gather all relevant viewpoints and develop a strong factual record.  Mr. Chairman, thank you again for your leadership as we seek to move forward on housing finance reform.