WASHINGTON, D.C. – In advance of next week’s markup of legislation to reform the housing finance system, U.S. Sens. Sherrod Brown (D-OH) and David Vitter (R-LA) introduced nine amendments aimed at ending “Too Big to Fail” and preventing future bailouts.
“If we’re going to rely on private companies to insure mortgage-backed securities, we should create a wall to ensure that the same institutions are not also originating, aggregating, or servicing the mortgages," Brown said. "We know that excessive integration triggered the need for previous bailouts. Housing finance reform should help prevent future bailouts, not expose our financial system to more risk.”
Under the Johnson-Crapo federal housing finance reform bill, a newly-created Federal Mortgage Insurance Corporation (FMIC) would allow private companies to serve as bond guarantors and insure losses on mortgage-backed securities (MBS). Under the current bill, these guarantors could be standalone insurance companies or could be affiliates of larger entities, but not insured depository institutions (IDIs) or contained within a bank holding company (BHC) structure. Under the current bill, while the guarantors could not offer support to any affiliates, their affiliates could offer support to them – triggering the potential for an ultimate bailout from the Federal Reserve.
The Brown-Vitter amendments would limit integration among originators, bank holding companies (BHCs), insured depository institutions (IDIs), and aggregators with the private entities that would be authorized to guarantee mortgage-banks securities under the bill.
Under the Johnson-Crapo bill, bond guarantors would be required to have 10 percent capital relative to the value of the MBS that they insure, but this minimum would not have to be pure equity. Instead, it could include unspecified amounts of “risk-sharing arrangements,” including derivatives, repurchase agreements (repos), or securities lending transactions. Additionally, Johnson-Crapo does not place limitations on the share of the market any one issuer of government-insured mortgage securities can control. Instead, FMIC would be tasked with issuing rules to address concentration.
The Vitter-Brown amendments would create an Office of Taxpayer protection inside of FMIC and establish a minimum solvency level for approved guarantors of 6 percent equity capital and a market concentration limit of 10 percent on approved aggregators and guarantors.
Brown and Vitter filed the following amendments:
- #21: Prohibits guarantors from affiliating with originators;
- #22:Prohibits guarantors from affiliating with BHCs or IDIs;
- #23: Prohibits guarantors from affiliating with aggregators; and
- #24: Prohibits FMIC, Treasury, the Fed, and FDIC from bailing out guarantors.
- #78: Designates one of the non-Chair or non-Vice Chair members of the Board of Directors as the Director of Taxpayer Protection, which shall head an Office of Taxpayer Protection;
- #79: Creates an Office of Taxpayer protection inside of FMIC;
- #80: Establishes a minimum solvency level for approved guarantors of 6 percent equity capital;
- #81: Provides a market concentration limit of 10 percent on approved aggregators; and
- #82: Provides a market concentration limit of 10 percent on approved guarantors.
Currently, the nation’s largest Wall Street banks enjoy an implicit guarantee—funded by taxpayers and awarded by virtue of their size—as the market knows that these institutions have been deemed “too big to fail.” This allows the nation’s largest megabanks to borrow at a lower rate than regional banks, community banks, and credit unions. This funding advantage, which has been confirmed by three independent studies in the last year, is estimated to be as high as $83 billion per year. Together, Brown and Vitter have successfully pressed the Government Accountability Office (GAO) to conduct a study of the economic benefits that the “too big to fail” megabanks receive as a result of actual or perceived taxpayer funded support.
Brown-Vitter, or the Terminating Bailouts for Taxpayer Fairness Act (TBTF Act), would ensure that financial institutions have adequate capital to protect against losses