DEC 3, 2013 4:54pm ET

The FDIC’s Surprising Role in Shaping the GSE Reform Debate


In the battle over housing finance reform, Federal Deposit Insurance Corp. officials have kept a low profile, offering technical advice to Senate lawmakers but otherwise staying out of the fray.

And yet the agency's history, structure and effectiveness have helped guide the debate, as Senate lawmakers lean toward creating a FDIC-like system for the mortgage industry. The proposed Federal Mortgage Insurance Corp., which under a Senate bill would reinsure private mortgage securities, is very similar to the FDIC, which could help build bipartisan political support.

"They're changing the 'D' to an 'M,'" said Edward Mills, policy analyst at FBR Capital Markets. "From a political perspective, it's more helpful for them to model it after the FDIC than anything else in town because we've just come through a crisis and it performed well."

Although it would serve different beneficiaries, much of the FMIC's mission would mirror what the FDIC does for bank depositors. The agency—proposed in the bill authored by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va.—would control a "Mortgage Insurance Fund" financed by premiums from mortgage securitizers. The fund, closely resembling the FDIC's Deposit Insurance Fund, would stand behind private-market guarantors to cover losses up to 90% of a security's value.

"It would make sense that if Congress is setting up an insurance program, it would want to look at other analogous federal insurance programs like that," said Michael Krimminger, a former general counsel at the FDIC and now a private attorney at Cleary Gottlieb Steen & Hamilton. "The FDIC would be the most obvious example."

The FDIC has had only a limited role in weighing in on the legislation, as a top official testified on Capitol Hill last month on the proposed structure of a new agency. But that could change quickly if Senate Banking Committee Chairman Tim Johnson and Sen. Mike Crapo, the top panel Republican, embrace a set-up similar to the Corker-Warner bill.

The agency also has experience in helping the government to handle Fannie Mae and Freddie Mac. It detailed personnel in 2008 to assist in the early days of the government-sponsored enterprises' convservatorships. Observers said FDIC officials could play a similar advisory role again if Congress opts to create a federal mortgage insurer.

"It makes a lot of sense to me that you'd want the FDIC participating in the process," said Mark Zandi, chief economist of Moody's Analytics. "The FMIC is…in fact the analogue to the FDIC but for the mortgage market. It's fashioned right after the FDIC."

Yet the fight over how or even whether to replace the system dominated by Fannie and Freddie is just beginning. The ideas in Corker-Warner, which are likely to form the basis of the eventual Johnson-Crapo bill, are in contrast to House legislation championed by Financial Services Committee Chairman Jeb Hensarling. His bill omits any new federal backstop, putting housing finance exclusively in the private market's hands.

But some observers said Senate lawmakers stand to gain more support for their approach by comparing the FMIC to the FDIC, giving the proposed agency more credibility. For example, drawing attention to its similarities with the FDIC could challenge the notion that the FMIC—which under the Corker-Warner bill would also develop common securitization standards for participants—would be prone to use its insurance resources too liberally.

"The FDIC combines a regulator, supervisor and the insurer. Sometimes people say those should be separate—you don't want the insurer to be captured. But the FDIC does it well. Their incentives are the right ones, caring a lot about their insurance fund," said Phillip L. Swagel, a former Treasury official in the Bush administration who is now a professor at University of Maryland School of Public Policy. "They really don't want to pay out from their insurance fund. That seems like the opposite of regulatory capture."

Two Senate Banking Committee hearings last month included testimony from witnesses about how the experiences of both the FDIC and the temporary Resolution Trust Corp., which cleaned up hundreds of failed thrifts in the eighties and nineties, could help guide the legislative design of a mortgage insurance agency.

"I believe there is much of value in the FDIC's and the RTC's experience that can be helpful to the committee as it determines the best path forward for housing finance reform," said John Bovenzi, a former senior official at both the FDIC and RTC and now a partner at Oliver Wyman, on Nov. 22.

Both Bovenzi, and Diane Ellis, the FDIC's current head of insurance, who testified a day earlier, recommended that a mortgage insurer have flexibility in determining the size of its insurance fund, and be granted enforcement and examination authority for institutions benefiting from the insurer's support. The Corker-Warner bill would allow the FMIC to issue civil money penalties against—and revoke insurance of—participants in the new mortgage finance system. But both Bovenzi and Ellis said that was not enough.

"While they are valuable supervisory tools in certain circumstances, provisions for suspension or revocation of the approved status of participants or the ability to impose CMPs are not sufficient alone as tools for effective risk management," Ellis said. "Providing monitoring authority and authorizing a broader array of informal and formal corrective actions would enhance the mortgage insurer's ability to take corrective actions prior to losses being incurred."

Senate sources agreed that the FDIC provides an example of how a federal backstop for the mortgage sphere could work.

"There are a lot of comparisons to the FDIC but that's largely because there aren't a lot of other insurance funds out there that have had a successful track record," said a Democratic Senate aide, who spoke on the condition of anonymity.

Yet the aide cautioned that the comparison has pragmatic rather than political purposes.

"It's more that it's a model that has existed and has been successful, not that it's an attractive model because people like the FDIC," the aide said.

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