WASHINGTON — Sen. Tim Johnson, who is expected to take the gavel of the Senate Banking Committee next year, said he plans to move cautiously, not quickly, to reform the housing finance system.
In an interview with American Banker this week about his priorities for next year, the South Dakota Democrat stressed the importance of conducting a thoughtful and exhaustive examination of mortgage finance models and seemed resistant to rushing forward for fear it could disrupt the housing market.
"Because the housing markets have seen such volatility and they are so fragile, we must be deliberate about their performance," said Johnson, who is next in line behind retiring Chairman Chris Dodd to lead the committee if Democrats maintain control of the Senate. "I would rather take time to explore the options and their consequences than push through legislation that could further destabilize house markets or make homeownership unaffordable for the majority of Americans."
Although the Obama administration has promised a housing finance plan by early next year, Johnson said he would not be pinned down by any kind of timetable.
"I do not think an arbitrary time line would be helpful because this reform will greatly impact the availability of mortgages," Johnson said. "I would rather get it right than just get it done. A fresh set of recommendations will be released early next year [by the administration] and that will generate discussions that will help move the debate along."
He plans a series of hearings looking at different housing finance models in other countries with an eye to perhaps adopting some of the best practices elsewhere. But he acknowledged that any legislation would need wide consensus to pass, a process that could take some time.
"It will be difficult. … I will work hard to find consensus where it exists, recognizing it will be more difficult to find it in some areas than others," Johnson said. "The U.S. and Denmark are the only countries with a 30-year fixed mortgage rate product and there may be lessons we can take from other countries' housing markets. At this point, I haven't seen a compelling argument for eliminating the long-term fixed-rate mortgage product that also maintains access to mortgages. That would be an example of one thing I think we should take up."
Overall, Johnson is expected to take a more moderate approach than Dodd, in part because he hails from a state where financial services matters and banking jobs are crucial. South Dakota has a significant collection of community banks, and is also home to Citigroup Inc.'s credit card operations.
Likely as a result, Johnson was one of only five senators — and the only Democrat — to vote against last year's sweeping credit card reform. He also backed Sen. Tom Carper's amendment to strengthen federal preemption for national banks in the Dodd-Frank financial reform act.
"South Dakota is unique in that it has large banks, community banks, credit unions and other types of financial services," Johnson said. "It also has the largest percentage of working moms in the country and a large underserved community including Native Americans that gives me a wide perspective on a range of issues that I think has and will continue to be helpful to me on the committee."
Johnson's most high-profile banking accomplishment to date was serving as co-author on deposit insurance reform that culminated in the 2005 Safe and Fair Deposit Insurance Act. The law allowed the Federal Deposit Insurance Corp. leeway to charge banks risk-based premiums, build up additional capital buffers in strong economic times and insure retirement accounts up to $250,000. (The Dodd-Frank law permanently increased the general coverage limit to that amount this year.)
Johnson has also long been an advocate of protecting the separation between banking and commerce, and successfully amended the Gramm-Leach-Bliley Act to stop commercial companies from buying unitary thrifts. He also backed the community bank position and sought to keep Wal-Mart Stores Inc. from buying an industrial loan company in Utah and ban commercial ownership of such companies.
Johnson was instrumental in passing Check 21, which lets banks exchange checks electronically, and offered legislation in 2006 with former Republican Sen. John Sununu of New Hampshire to establish an optional federal insurance charter.
In December 2006, Johnson suffered a brain aneurysm that caused stroke-like impairments to his speech. Since he returned to the Senate in September 2007, however, his speech and maneuverability have steadily improved.
"I'm feeling great. I have driven my car in and out of the office all year, so I feel great," he said in the interview.
Aside from housing finance, Johnson said oversight of the implementation of the Dodd-Frank law will occupy much of his agenda next year.
"As we continue to come out of the worst recession since the Great Depression, continuing our nation's economic recovery will be a top priority," he said. "From the perspective of the Banking Committee this will include overseeing implementation of the Dodd-Frank Wall Street reform and continuing mortgage reform, also key to a stable economy."
Johnson noted lawmakers have already begun taking steps to change the law.
Congress passed legislation before it adjourned to address concerns over a provision in Dodd-Frank that would have provided some exemptions to the Securities and Exchange Commission from the Freedom of Information Act.
Dodd is trying to pass some tweaks to the Federal Credit Union Act to ensure that its share insurance fund and temporary corporate credit union stabilization fund work effectively, which the National Credit Union Administration wanted in Dodd-Frank.
Johnson, meanwhile, is co-sponsoring a bill led by Sen. Jeff Merkley, D-Ore., to extend the Transaction Account Guarantee program to include Interest on Lawyers' Trust Accounts, which goes to support civil legal assistance for poor people.
Johnson said it was too early to tell what areas he might specifically focus on. "There are several issues that will have to be addressed," Johnson said. "We haven't even seen the rules in many areas yet. It is probably too early to tell which specifics in the bill may need to be revisited."
At a recent Banking Committee hearing with regulators, lawmakers questioned the extent to which the Consumer Financial Protection Bureau can promulgate rules until a permanent director is confirmed. (It is currently being run by Elizabeth Warren, but exactly how much power she has to write new regulations is unclear.)
Johnson said that the committee will need to oversee the bureau's rulemaking process. "It is very important that the CFPB is set up well and that Congress exercises its oversight role on the rules of the bureau," he said. "Elizabeth Warren is setting up the framework. … She's doing a good job of reaching out to a lot of the interested stakeholders as she sets up the CFPB. I don't know if she will be the president's nominee as director of the agency but I think it's critically important that this agency has a strong start with a good director with bipartisan support to allow this agency to achieve its objective as a strong consumer watchdog."
When pressed on whether Warren had the right to begin rulemaking without Senate confirmation of an agency director, Johnson gently suggested the bureau wait to implement rules. "I think it would be wise to hold off on the implementation until the structure is established," he said.
Currently split 13 to 10 between Democrats and Republicans on the committee, and 59 to 41 in the full Senate, Dodd has had the luxury of a strong Democratic majority to advance his agenda.
Rather than bemoaning expectations Democrats will lose seats in the elections and potentially control of the House, Johnson sounds ready to embrace working across the aisle.
No matter how the elections play out, Johnson said he plans to seek bipartisan consensus. He emphasized that he enjoys a strong relationship with Sen. Richard Shelby of Alabama, the committee's senior Republican with whom he also serves on the Appropriations Committee.
"My relationship with ranking member Shelby is a good one," Johnson said. "We have worked well together in the past and I anticipate we will work together well on the Banking Committee. I think the Senate operates best with consensus. I anticipate closer margins next year in the Senate, which will make it even more important."
Johnson acknowledged that any legislation would have to have wide support to pass. "Regardless of what happens in the House, it will take strong bipartisan consensus to get banking legislation out of the Senate," he said. "Without the willingness to compromise, both within the Senate and between the House and Senate, there will be gridlock."