WASHINGTON — Senate Banking Committee Chairman Chris Dodd and Sen. Richard Shelby, the panel's top Republican, have finalized their agreement on legislation to reform the government-sponsored enterprises and create a loan refinancing program designed to stem foreclosures, the lawmakers said Monday.
A committee vote scheduled for May 15 slipped several times but was ultimately delayed until today to give leaders time to craft legislative language that would spell out the terms of their agreement. The two sides agreed on the language Monday.
"This is great news. I'm very, very grateful to all my Senate colleagues, particularly Senator Shelby," Sen. Dodd said on a conference call.
"I'm proud to join Chairman Dodd in announcing this agreement," Sen. Shelby said. "My primary consideration during negotiations on this package has been to protect the American taxpayer, and I believe we've made significant progress toward that goal on each component."
The bipartisan deal would give GSE reform a chance at enactment this year. It has been stalled since July 2005. Sen. Dodd said the goal is to get the bill to the president's desk by July 4. The House passed similar legislation two weeks ago.
The bill would require a GSE-funded affordable-housing allocation to offset the costs of the loan refinancing program to be administered by the Federal Housing Administration. Under the FHA plan lenders and investors would have to write down the loan to at least 87% of current market value before letting borrowers refinance into cheaper loans backed by the FHA.
The FHA refinancing program could insure $300 billion worth in mortgages. Its estimated total cost of $500 million, according to Sen. Dodd, would be borne by the GSEs' affordable housing fund. The new Dodd-Shelby bill released by the committee late Monday would allocate the entire affordable housing fund — which would require the GSEs to set aside an amount equal to 4.2 basis points per dollar of each enterprises' unpaid principal of total new business purchases — to the FHA rescue program in 2009; 50% in 2010; and 25% in 2011.
The Connecticut Democrat said some tweaks were made to the FHA proposal so that it would expire a year earlier than originally planned on Sept. 30, 2011.
Those and other differences to the House bill — including a provision that prevents borrowers from earning reimbursements on their insurance premiums — were able to reduce the program's expected cost, a Sen. Dodd aide said. (Earlier estimates said the program could cost as much as $1.7 billion.)
"I think the estimates are in the range of $500 million," said Sen. Dodd. Through limiting its duration "and a couple of other things, we were able to reduce the costs pretty substantially."
The bill also says that any leftover funds from the GSEs would be redirected towards the affordable housing trust fund's "original purpose" in which 75% of the fund would benefit "extremely low income families" and the remaining 25% would benefit "very low-income families."
The Dodd-Shelby agreement also makes the trust fund permanent, but the House version would last only five years and diverts the first year towards recovery from the 2005 Gulf Coast hurricanes.
Sources last week said Sen. Dodd was able to garner Sen. Shelby's support by giving the GSE regulator broader power to increase capital requirements. "In my judgment, the new GSE regulator created under this legislation would be granted much needed authority and flexibility to regulate the GSEs appropriately," Sen. Shelby said in a press release.
But Sen. Dodd said that the bill would "absolutely not" give the new regulator unilateral power to curtail and control the GSEs.
"It's a strong regulator," Sen. Dodd said. "Two things it does not do: it does not give the regulator power to engage in systemic risk issues… and secondly you cannot force these GSEs to raise the capital for any reason whatsoever and there were those who wanted to go that route. It doesn't do that."
Sen. Dodd said instead the regulator has the ability under regulation "to raise capital but where safety and soundness is involved and even do so by order, but only so long as the problem exists and then the snapback provisions are included. And dealing with new product and portfolio issues as well there are changes that are needed here but they are relatively modest in change and the strong regulator is very much in place and that's been needed."
A Sen. Dodd aide said the latest Congressional Budget Office estimates predict the bill would not cost the government anything and "if it's different we may have to make appropriate adjustments."
A copy of the new Dodd-Shelby bill posted on the committee's website said the regulator would have power over the GSEs' portfolio holdings "to ensure that the holdings are backed by sufficient capital and consistent with the mission and the safe and sound operations of the enterprises." The bill also said the regulator "shall consider the ability of the enterprises to provide a liquid secondary market through securitization activities, the portfolio holdings in relation to the overall mortgage market, and adherence" to other standards.
The bill says that the regulator can revise minimum capital standards for the GSEs and the Federal Home Loan Banks to the extent needed to ensure that the regulated entities operate in a safe and sound manner.
The bill also allows the regulator flexibility to require temporary minimum capital increases for "a reasonable time frame" when "necessary" for "safe and sound operations… to support the risks that arise in the operations and management of a regulated entity."
Sources said that Sen. Elizabeth Dole, R-N.C., is not expected to offer an amendment that would block New York Andrew Cuomo from carrying out an appraisal agreement he reached with the GSEs, under the consent of the Office of Federal Housing Enterprise Oversight in March.
Her amendment would require such standards be set by federal regulation and has the support of several banking trade groups that viewed the Cuomo agreement as an unfair sidestepping of federal thrift and national bank preemption of state laws.
A similar issue for banks under the new Dodd-Shelby bill is the inclusion of an amendment offered by Sen. Mel Martinez, R-Fla., that would set up licensing and registration requirements for mortgage originators. The provision would not put additional burdens on banks but it would let states go further to set such standards, which banks oppose.
The bill orders a study on the extent to which loans and securities used as collateral to support the FHLB's advances are consistent with the interagency guidance on nontraditional mortgage products.
The bill also requires the Treasury Department to increase financial education programs covering counseling and homebuyer assistance.
