Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., on Friday proposed amending pending housing finance reform legislation to prevent the biggest firms from dominating a new mortgage system.
The Senate Banking Committee is scheduled on Tuesday to consider the legislation, drafted by Sens. Tim Johnson, D-S.D., chairman of the banking panel, and Mike Crapo, R-Idaho, the ranking member, to replace the current government-sponsored enterprises with a new framework. But ahead of the markup, Brown and Vitter released nine amendments to the bill aimed at concerns about the role institutions considered "too big to fail" would play in the new structure.
"If we’re going to rely on private companies to insure mortgage-backed securities, we should create a wall to ensure that the same institutions are not also originating, aggregating, or servicing the mortgages," said Brown in a press release. "We know that excessive integration triggered the need for previous bailouts. Housing finance reform should help prevent future bailouts, not expose our financial system to more risk."
The bipartisan duo of Brown and Vitter has previously teamed up on proposals to eliminate "too big to fail," introducing legislation last spring, for example, to break up the big banks.
The Johnson-Crapo bill would unwind Fannie Mae and Freddie Mac and establish a new secondary mortgage market backed by a government guarantee in the event of catastrophic losses. Private companies would be mandated to put up 10% first-loss capital, though that requirement could be met through a variety of mechanisms, including risk-sharing agreements. The system would be overseen by a new regulator, the Federal Mortgage Insurance Corp.
Brown and Vitter's proposed amendments would limit the overlap between mortgage originators, aggregators, bank holding companies and insured depository institutions on one side and the guarantors that would back new mortgage securities on the other side. Several housing and banking groups have raised similar concerns that the biggest banks could come to dominate the market and create systemic risk if they are heavily involved in all of the various system functions.
The Brown-Vitter amendments would also require guarantors to hold at least 6% equity capital in addition to meeting the more flexible 10% first-loss capital requirement, and would limit the market concentration of both aggregators and guarantors to 10%. In addition they would also create a new Office of Taxpayer Protection inside the FMIC and would prohibit regulators from bailing out guarantors.
Brown separately introduced two additional amendments to the legislation on Friday that would impose a fiduciary duty on trustees overseeing private-label securities in order to establish legal liability for fraud and other errors.
"This is a win-win proposal," Brown said in another press release. "If mortgage servicers and trustees have a stake in preventing defaults, more Americans will stay in their homes rather than face abuses while trying to modify their mortgages or avoid foreclosure. Meanwhile, investors like pension funds will be protected and we can attract more private capital back into the market."