2013-11-13 Comments - Crapo Johnson Key Issues

This
bill is all politics and has nothing to do with sound finance. At every turn there
is one more item demonstrating that.

You need to ask

1 Is it an improvement?
- Protect the public?
- Improve market function?

2- Does it do what it claims to do?

3- Clearly the answer is no.

ONE first loss isnt real, cant be enough private capital under this structure

To replace the GSEs (roughly $5 trillion and get a 10% first loss) we will need to
attract $500 billion before risk weighting). In an overly generous environment they
will get to $100 billion of first loss and then it will dry up (over the past 5 years
there was $15 billion of first loss on the crme de la crme of cherry-picked loans)
that is nothing relative to the needed funds to support housing in a crisis.

TWO problems with structure of regulator no internal competency

P72 MONITORING, COORDINATING, AND FACILITATING THE NEEDS OF
UNDERSERVED MARKETS.

P51 The comingling of an affordability mission, consumer protection and
safety/soundness is a recipe for political gaming safety and soundness should be
separate and primary. Otherwise legislators and regulated entities will be able to
use affordability goals as a way to push back against the regulators attempts to
ensure safety and soundness.

P39 Federal Status: A new federal regulator like OFHEO but overseeing mission,
consumer protection and safety and soundness of even greater complexity
(aggregators, insurers, platform) than OFHEO (and HUD) or FHFA were required to
do and failed at.

P77 UNDERSERVED MARKET SEGMENTS. The Corporation shall, by regulation,
identify and define not more than 8 segments of the primary mortgage market in
which lenders and eligible borrowers have been determined to lack equitable access
to the housing finance system facilitated by the Corporation. Without a strict
definition of an eligible borrower this creates the opportunity for lenders to take
advantage of the weakest borrowers by pushing the regulator to allow them to
reduce underwriting standards to exploit those markets. 1) leaving it to regulators
opens the definition to ongoing easing as we saw in the last crisis through housing
goals 2) any such focus on underserved should be done through explicit
government programs like FHA 3) Delivering subsidies through private markets
only leads to arbitrage, rent seeking and distortions and conflicts between
public/private incentives.

THREE unmanageable complexity

P83 CONSIDERATIONS FOR APPROVAL OF VARIOUS MECHANISMS In approving
credit risk-sharing mechanisms There is no requirement of uniformity? Will the
regulators have the ability to follow and understand all of the developments in the
market? The ability to approve or disapprove (is there deeming language?) on a
timely basis and the ability to properly inform investors of the various and non-
standard mechanisms? This is an open door to sophisticated market participants
overwhelming the capacity of the regulator. We have seen this with the GSEs when
their regulators task was much simpler.

FOUR weak disclosures

P92 EXEMPTION FROM SECTION 27B OF THE SECURITIES ACT OF 1933 What is
the rationale behind this? They are exempting the 10% first-loss piece from
registration. This has the potential to create disclosure issues and the avoidance of
Reg AB allows the sale of toxic bad first loss securities (seen this movie before)
without disclosures adequate enough to prevent investors from running for the
door as collateral or economy deteriorates. Also would allow the acquisition of large
and concentrated unregistered and risky first loss positions that will engender
systemic risk. This is dangerous.

FIVE first loss is unworkable and inadequate replacement for capital

P108 AUTHORITY TO PROTECT TAXPAYERS IN UNUSUAL AND EXIGENT MARKET
CONDITIONS. The notion of a first-loss requirement that can be waved as liquidity is
reduced demonstrates that this is not first loss at all. In other words, first-loss is only
first loss in times in which it is least needed. Does this make sense? No. In fact, at
precisely the time that markets begin to become concerned about the functioning of
the market they will have an increased incentive to pull back and exacerbate a
liquidity crisis to relieve themselves of the first loss obligation and to ensure the
government is on the hook. Moreover, by leaving this trigger to regulators there is
even more likelihood that it will be exercised. Think about it; during the crisis our
regulators had no qualms about ignoring explicitly clear legal requirements about
prompt corrective action. Why would we assume they would not be pushed into
action to suspend first-loss in a difficult environment given the less clear direction in
this bill?

P110 The ability of regulators to waive private first loss in an adverse economic
environment, without any congressional direction before exercising that decision -
requiring that the regulator only provide notice to congress after the fact - creates a
TARP like situation without the requirement for congressional authorization. If there
is insufficient private capital in the Fund (as is almost certain) this is merely a pre-
approval of undefined amounts of government first-loss without legislative pre-
approval. Is this even legal?

P101 FULL FAITH AND CREDIT. The full faith and credit of the United States
is pledged to the payment of all amounts from the Mortgage Insurance Fund
which may be required to be paid under any insurance provided under this
title. We have added a new systemic risk given that the FMIC can become a
government obligation if they misprice risk as a result of being incented to ensure
liquidity in mortgage credit is a primary goal (leading to underpricing)

SIX New GSEs

P38 In general: These are new GSEs and there will be more than just two.
This will reduce the liquidity of each as witnessed by FREs relatively worse
liquidity than Fannie.

SEVEN Concentration of market will harm small lenders

P71 if the small lender aggregator allows small lender loans to be loans be pooled
separately from other aggregators loans it will result in less volume and lower loan
diversity. In turn this will lead to worse execution prices and thus, over time, drive
volume away from the smaller lenders. The result will be increased concentration of
the industry in the hands of the largest and most systemically interconnected firms.

EIGHT No chance of a fully private market even at a point when capital may
be there

P78 The Corporation shall require that each approved guarantor and approved
aggregator engaged in a covered guarantee transaction or in a covered market-
based risk-sharing transaction submit on annual basis a public report describing the
actions taken by such approved guarantor or approved aggregator during the year,
consistent with its business judgment, to provide credit to the underserved market
segments identified and defined by the Corporation pursuant to this subsection,
including corporate practices designed to serve such identified market segments.

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