House Panel Head: Stop the 'Crazy' Loan Mod Initiatives

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WASHINGTON — Rep. Randy Neugebauer, the chairman of the House Financial Services Oversight Subcommittee, said it is time for the government to admit its foreclosure-prevention efforts are a failure and should be shut down.

In a recent interview, the Texas Republican called such programs counterproductive and said they are preventing the housing market from bottoming out, which is necessary before recovery can begin.

"We are going to have to let the market do what markets do," Neugebauer said. "They are not kind, but they are efficient. I really, truly believe that if we will go ahead and quit trying to throw Band-Aids on this housing market … this limbo-like state is prolonging the recovery of the housing market."

Neugebauer acknowledged that his message isn't popular. But he said the Treasury Department's Home Affordable Modification Program and other government-supported modification efforts have failed to help many consumers, and only appear to be making the situation worse.

"A lot of people don't want to hear that and they say, 'What about the folks who are out there who are going to lose their homes?' " Neugebauer said. "My perception is right now that most of the people that can keep their homes can keep them, but we are probably postponing the people that long-term aren't going to be able to keep them. … Some of these crazy programs that we've dreamed up, I think we may have to pull the plug on them: Hamp — no more government modifications."

During the interview, Neugebauer talked broadly about his agenda, saying he wants to focus this year on limiting the power of the Consumer Financial Protection Bureau and peeling back the debit interchange fee restrictions placed into the recently enacted Dodd-Frank Act.

Like other key members of the House Financial Services Committee, he also wants to privatize the government-sponsored enterprises and revisit the reform law.

The toughest challenge, Neugebauer said, is figuring out where to focus first. "The question is not what are some things we can look at," he said. "It's really more of what are going to be our priorities, because there are so many things to look at."

Two early goals are to revamp the consumer bureau either by weakening its power or getting rid of it, and to identify which rulemakings in Dodd-Frank require immediate attention, either in oversight hearings or by drawing out their implementation.

Neugebauer said he is busy with a bill to bolster congressional oversight of the CFPB and plans to entertain a full debate on whether such a bureau is necessary in the first place. "We are working on that piece of it and what we are trying to do is before we move the bill see what are some other issues that we might need to address as we do that," he said.

If lawmakers decide to keep the bureau, Neugebauer said it should at least be separated from the Federal Reserve Board (the CFPB is housed under the Fed, but the central bank has no power over it). He also said the Fed should not fund the bureau, but it instead must be subject to the appropriations process. Neugebauer also argued the CFPB should be run by a board or a commission, not a single director.

"If you do keep it, there at least ought to be some structure of the person who is heading that operation to answer to a commission or a board," he said. "Have some organizational structure that doesn't just give one person authority to really regulate the whole financial products market."

Another issue is whether to stall parts or all of Dodd-Frank implementation, considering the financial industry wants certainty, but also argues that some of the provisions are unworkable.

"Republicans are very focused on certainty, so what we are struggling with here, is that probably with some of these rules that industry would rather have them sooner rather than later," Neugebauer said. "I'm trying to make sure that I'm not part of the problem. I'd like to be part of the solution and so we're kind of looking at that now, and we'll have to make some decisions moving forward if we do targeted extensions or if we do a more broad extension."

One glaring issue to Neugebauer is a provision in Dodd-Frank by Sen. Dick Durbin that would let the Fed limit profits on debit interchange fees. Neugebauer said the Fed needs to rethink its proposed 12-cent cap or Congress needs to rewrite the provision so that such prices can be set by the market in a fair way.

"I don't think government ought to be determining people's profit, but I also don't think government ought to be setting prices of financial products, so I think we need to rethink this process because it has some unintended consequences," he said.

Intervention might be necessary, Neugebauer said.

"What we are trying to do now is get a handle on how the Fed came to its conclusion and do they have the flexibility to address this or do they need some additional flexibility?" he said. "Or do we need to hit the pause button here and possibly have the [Government Accountability Office] or somebody like that do an economic analysis to see if in fact this thing is going to have some unintended consequences that we haven't thought about."

Still, like most Republican lawmakers, Neugebauer said a critical unresolved issue is the fate of Fannie Mae and Freddie Mac.

"Somebody asked me what would be the one thing by the end of 112th Congress that would be the most important thing to get done," he said. "I'd have to put getting the mortgage market back on track again and having an overall plan of how we are going to get the taxpayers out of that business."

Neugebauer said his preference is still to privatize the government-sponsored enterprises and remove any government guarantee from the mortgage market.

"Private securitization is happening at the jumbo level," he said. "And it did happen at almost every level for a while. It went sour. So I'm still holding the outlook that we can build a market that doesn't have to have a federal backstop."

But Neugebauer acknowledged that it is unclear exactly how to transition from the current system to a fully privatized one.

"That's the reason this isn't easy. It's how do we do that," he said. "Making sure we don't have the GSEs and FHA competing with private securitization, because if I can get a government guarantee for just a little bit less risk of interest rate, I'm going to take that. But if there is a premium that I have to pay for that guarantee, then I may decide to take the additional yield. … So instead of the government setting that spread, let the marketplace set that spread."

Neugebauer said he supports getting started on the issue at once, reducing the maximum-size loans that can be backed by the GSEs or the Federal Housing Administration, and taking other steps to reduce taxpayer liability.

"How do we incrementally phase that in, whether that's beginning to lower some of the loan limits at the GSEs, letting the FHA loan limits kind of back off a little bit and not overwhelming the market all at one time," he said.

Neugebauer is particularly concerned about the FHA.

"Are we doing everything that we possibly can to limit any additional taxpayer exposure?" he asked. "In other words, are we charging the right risk premium? What things are we doing to minimize portfolio losses? Are we running a lean, mean machine over there? What is some of the exposure of some of the actions that have been brought against the GSEs? And so I think that's kind of job No. 1, because it's something we can go do right now."

Neugebauer said he does not support a concept of guaranteeing mortgage-backed securities by setting up a risk-based insurance program similar to deposit insurance. "I make it very clear that that is not my first choice … because quite honestly it changes the market discipline when somebody else is picking up the tab," he said. "You know it just does. It's just a different mind-set."

While some critics argue Republicans should not push GSE privatization when the housing market is so fragile, Neugebauer said that if lawmakers don't take advantage of the current turmoil, there will never be another chance to do so.

He compared it to fixing only the essential parts on a car after a wreck and then neglecting the smaller stuff.

"It is very difficult; very complicated," he said. "Some would say, and this is an argument, 'Oh gosh, don't mess with them right now because the housing market is [shaky].'… So what I say is gosh, we are trying to bottom out here, and let's. The worst thing to do is let the market try to be almost coming back and then we'll throw a bunch of new things at the market. Why not get all of this settled now?"

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