March 26, 2014 Newsletter
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March 26, 2014
 

SFIG News

SFIG Calendar

Advocacy Outlook

Issue Spotlight

Recent Developments

Next Week in Washington

 
SFIG NEWS
SFIG SUBMITS COMMENTS TO THE BASEL COMMITTEE
SFIG joined the Commercial Real Estate Finance Council, Global Financial Markets Association, Institute for International Finance, International Association of Credit Portfolio Managers, International Swaps and Derivatives Association and Securitization Forum of Japan (together, the Joint Trade Associations) in submitting comments to the Basel Committee on Banking Supervision (BCBS) on revisions to the securitization framework proposed in its Second Consultative Document (CD). The CD sets forth a hierarchy of approaches that banks acting as issuers, investors or originators must use to calculate their capital requirements. It also addresses risk weight floors, caps on capital requirements and provisions on derivative contracts other than credit derivatives.

As stated in the letter submitted on March 24, 2014, the Joint Trade Associations believe that the proposed capital requirements for securitization exposures remain much higher than justified by historical loss incidence in most asset classes, by comparison with other methods of finance, or in relation to the capital requirements of the underlying asset pools. Included in the recommendations to the BCBS are specific changes that should be made to certain modeling assumptions and parameters used in formulating and calibrating the approaches, as well as changes to the operating conditions for certain approaches and to the risk weight floor and capital cap provisions. SFIG and the other organizations believe incorporating these changes will fulfill the goals of the revisions by resulting in a simpler, more transparent framework, while better aligning securitization risk weights with empirical data, competing products and underlying risks. A significant amount of data was submitted along with the comments in order to demonstrate to the BCBS how the Joint Trade Associations developed our recommendations and how the revisions would impact the industry.

The group will continue its work ahead of its meeting with BCBS representatives scheduled for April 9th. During that meeting, we look forward to their feedback and addressing any subsequent questions the BCBS may have. This initiative is being undertaken through SFIG’s Regulatory Capital and Liquidity Committee and members interested in learning more about these efforts should contact Sairah.Burki@sfindustry.org or Amanda.Bateman@sfindustry.org.

 
SFIG MEETS WITH CONGRESS TO DISCUSS LIQUIDITY COVERAGE RATIO
Today through Friday, SFIG staff will hold a series of meetings with both Members and staff of the House Financial Services and Senate Banking, Housing and Urban Affairs Committees to discuss the effects that the proposed changes to the Basel liquidity coverage ratio (LCR) will have on the securitization market. Two areas of importance to SFIG members are both the numerator and denominator. For bank customer securitization facilities, the amount of high-quality liquid assets (HQLA) that must be held increases from 10 percent to 100 percent. As such, SFIG, along with Securities Industry and Financial Markets Association (SIFMA), proposed a “look through” treatment for bank customer securitization facilities in a January 2014 comment letter. The “look through” treatment proposed in the comment letter reflects treatment approved in the final European Union LCR rules. For the numerator, the proposed rules would not count Fannie Mae and Freddie Mac securities as HQLA, effectively making them illiquid. ABS also is not designed as HQLA, despite the strong performance of many asset classes through the financial crisis.

Over 50 companies wrote a letter to the agencies last month in support of SFIG and SIFMA’s recommendation to provide “look through” treatment. The letter encourages the regulators to adopt this approach, and states: “We are concerned that applying a 100 percent outflow amount to undrawn credit commitments under bank customer securitization credit facilities could impact the availability or pricing of these facilities, thus curtailing our ability to provide cost effective financing to our customers and negatively impacting our ability to diversify the funding of our daily business, invest in new growth initiatives and create jobs.”

As such, SFIG will use its time on Capitol Hill to educate staff and lawmakers about the effects that the proposed LCR changes could have on housing finance, consumer credit and growth.

 
SFIG CONTINUES CONGRESSIONAL AND REGULATORY CLO ADVOCACY EFFORTS
Last week, SFIG, along with its association partners Loan Syndication and Trading Association, Securities Industry and Financial Markets Association, Financial Services Roundtable and American Banker Association; continued their advocacy efforts on Capitol Hill to educate legislators that the Final Volcker Rule, issued on December 10, 2013, inadvertently captures CLOs that contain any securities as “covered funds.”

Most CLOs issued prior to the final rule either contain a small number of securities or have the ability to purchase securities, and are thus considered “covered funds.” One of the primary consequences of a CLO being treated as a covered fund under the Volcker Rule is that banks are not permitted to acquire or hold an “ownership interest” in that CLO. CLOs provide the holders of debt securities with a number of creditor rights designed to protect their interests. The most notable of these rights is the ability to participate in the removal and replacement of the CLO manager “for cause,” such as breach of contract, fraud or criminal activities.

Under the Volcker Rule, however, such a right might be considered an “ownership interest,” which converts CLO debt securities into equity securities. Given that banks are not allowed to have ownership interests in “covered funds” under the Volcker Rule, they would have to divest roughly $80 billion in CLO holdings prior to July 2015.

On March 13th, the House Financial Services Committee passed H.R. 4167, the Restoring Proven Financing for American Employers Act, by a strong bipartisan vote of 55-3. H.R. 4167 aims to permit banks to maintain their investments in CLOs that both contain securities baskets and were issued prior to publication of the final Volcker Rule. Prior to passage, the bill was amended to extend the conformance period to the Volcker rule by two years to 2017. This bill would likely help CLO 1.0’s, but CLO 2.0’s or those issued post crisis would likely still be at risk of divestiture. However, both parties recognized that while the bill is not perfect, it maintained necessary bipartisan support to help regulators find a quick solution.

Additionally, SFIG and its association partners also met with the Federal Reserve Board, Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission to further discuss grandfathering options for CLOs.

As such, SFIG continues to educate lawmakers on the need to ensure that any fix captures both CLO 1.0 and 2.0's issued prior to the final Volcker Rule.

 
SFIG TO HOLD CANADIAN SYMPOSIUM
SFIG will hold its first Canadian Symposium on Tuesday, April 15, 2014.  The event will be hosted byMcCarthy Tétrault LLP at their Toronto offices and will provide the opportunity for SFIG members and other individuals and organizations from the securitization industry to become familiar with structured finance issues in and impacting the Canadian market.  The event will feature Winnie Sanjoto, Sr. Legal Counsel, Corporate Finance Branch, Ontario Securities Commission, who will discuss the Proposed Amendments to National Instrument 45-106 Prospectus and Registration Exemptions relating to the Proposed Securitized Products Amendments.  Registration for the Canadian Symposium is now open, and members and non-members are encouraged to attend.  Details on the Canadian Symposium are listed below.

TUESDAY, April 15, 2014      
4:00 p.m. – 6:00 p.m. (EST)
McCarthy Tétrault LLP
66 Wellington Street West, Suite 5300
Toronto Dominion Bank Tower
Toronto, Ontario
M4K 1E6
Full agenda TBA

To register for the Canadian Symposium please click here.

To learn more about SFIG’s efforts regarding the Canadian securitization environment, including our Working Group on the Proposed Amendment to National Instrument 45-106,  please contact Mary.Robinson@sfindustry.org.

 
SFIG CALENDAR
REGULATION AB II TASK FORCE CALL
WEDNESDAY, March 26, 2014
2:00 p.m. (EST)
 
 
CANADIAN CSA ABCP COMMENT LETTER WORKING GROUP KICK-OFF CALL
WEDNESDAY, March 26, 2014
4:00 p.m. (EST)
 
 
SFIG CONGRESSIONAL LCR ADVOCACY MEETINGS
WEDNESDAY, March 26, 2014 – FRIDAY, March 28, 2014
9:00 a.m. – 4:00 p.m. (EST)
 
 
SFIG AND U.S. TREASURY MEETING
WEDNESDAY, April 2, 2014
1:30 p.m. – 2:30 p.m. (EST)
U.S. Department of Treasury
Note: Closed Meeting to discuss return of private capital in the mortgage market
 
 
PROJECT RMBS 3.0 DUE DILIGENCE, DATA AND DISCLOSURE WORKING GROUP CALL (WEEKLY)
WEDNESDAY, April 2, 2014
4:00 p.m. (EST)
 
 
PROJECT RMBS 3.0 REPRESENTATIONS, WARRANTIES AND REPUCHASE ENFORCEMENT WORKING GROUP CALL (WEEKLY)
THURSDAY, April 3, 2014
4:00 p.m. (EST)
 
 
FDIC EDUCATION DAY
MONDAY, April 7, 2014
10:00 a.m. – 4:00 p.m. (EST)
Arlington, VA
Note: Closed Meeting
 
 
PROJECT RMBS 3.0 ROLE OF TRUSTEE/BONDHOLDER COMMUNICATION WORKING GROUP MEETING
THURSDAY, April 10, 2014
Additional Details TBA
 
 
CANADIAN SYMPOSIUM
TUESDAY, April 15, 2014
4:00 p.m. – 6:00 p.m. (EST)
McCarthy Tétrault LLP
66 Wellington Street West #5300
Toronto, ON M5K 1E6
Note: Closed to Press
 
 
SFIG AND FHFA MEETING
WEDNESDAY, April 16, 2014
4:00 p.m. – 5:00 p.m. (EST)
Federal Housing Finance Agency
Note: Closed Meeting to discuss return of private capital in the mortgage market
 
 
IMN’s INVESTOR’S CONFERENCE ON CLOS AND LEVERAGED LOANS
TUESDAY, April 22, 2014 - WEDNESDAY, April 23, 2014
Marriott Marquis
1535 Broadway
New York, NY 10036
 
 
SFIG SPRING SYMPOSIUM
WEDNESDAY, May 14, 2014
Time and Agenda to be announced
Société Générale
245 Park Avenue, New York, NY
 
 
IMN's 2014 GLOBAL ABS CONFERENCE
TUESDAY, June 10, 2014 – THURSDAY, June 12, 2014
Barcelona International Convention Centre
Barcelona, Spain
 
 
ADVOCACY OUTLOOK
If you would like to participate in the work SFIG is undertaking through our committees as highlighted below, please e-mail Committees@sfindustry.org. For specific inquiries on any of SFIG’s advocacy efforts, please contact the staff member listed for the related project.

Regulation AB II SFIG continues to develop a response to the proposal on asset-level disclosures issued by the Securities and Exchange Commission (SEC) on February 25, 2014. (For additional details on this approach please see the staff memorandum included in the public comment file.) Given that comments are due on March 28, 2014, SFIG will be holding calls this week to finalize the key arguments included in the letter. SFIG, as well as a few member institutions, submitted a request to the SEC for an extension to the comment deadline. Please contact Alyssa.Acevedo@sfindustry.org with any questions.

Project RMBS 3.0 Working Groups have begun meeting via conference call. The Working Groups are addressing issues specific to private label mortgage securities in the following categories: 1) Representations, Warranties and Repurchase Enforcement; 2) Due Diligence/Loan Review, Data and Disclosure; and 3) Role of Trustees and Bondholder Communications. We encourage members to participate in any or all of the Working Groups to contribute towards the mission of Project RMBS 3.0. Please contact Mary.Robinson@sfindustry.org to join a Working Group or with any additional questions on Project RMBS 3.0.

SFIG’s GSE Reform Task Force has formulated policy recommendations that it is reviewing within SFIG. The GSE Reform Task force held two calls recently to analyze the differences between the proposed Johnson-Crapo legislation and the draft positions established by the GSE Reform Task Force. These differences will form the basis of SFIG’s Advocacy efforts with members of the Senate Committee on Banking, Housing, and Urban Affairs. If you would like to learn more about SFIG’s activities with respect to GSE Reform, please contact Amanda.Bateman@sfindustry.org.

SFIG’s Mortgage Loan-Level Disclosure Subcommittee has reviewed and developed additional data elements for potential disclosure. SFIG will use this work as a basis of discussions and correspondence with the Securities and Exchange Commission on the mortgage aspects of Regulation AB II. SFIG continues to have weekly Mortgage Industry Standards Maintenance Organization calls to go through data elements that lenders should deliver in securitizations. Please contact Alyssa.Acevedo@sfindustry.org for additional information on SFIG’s work on this topic.

SFIG’s Working Group on the Canadian Proposed ABCP Disclosure Requirements will begin meeting this week via conference call to develop a comment letter in response to the Canadian Securities Administrators’ (CSA) related proposed amendments. The CSA’s proposed New Prospectus Exemption would require that short-term securitized products comply with a number of new conditions and disclosure requirements, including extensive disclosure of Asset Backed Commercial Paper transactions. For more information, or to participate on this working group, please contact Mary.Robinson@sfindustry.org.

SFIG is planning meetings on Capitol Hill next week to discuss the LCR numerator and denominator in order to continue its advocacy efforts regarding the Liquidity Coverage Ratio proposal. Please contact Alyssa.Acevedo@sfindustry.org with your questions or comments.

The Volcker Task Force is working with the asset class committees to determine key issues and need for interpretative guidance regarding the Volcker Rule. Please contact Amanda.Bateman@sfindustry.org for additional information on the Volcker Task Force.

The Net Stable Funding Ratio (NSFR) Working Group is meeting via weekly conference call to develop a comment letter in response to the Basel Net Stable Funding Ratio proposal. The proposed NSFR seeks to ensure banks have a fortified balance sheet (in particular, one that is not overly reliant on short-term funding). The Working Group will develop comment letters to reflect the concerns and positions of SFIG members regarding the proposed revisions to the NSFR, as well as letters to U.S. and European regulators regarding implementation of the Basel leverage ratio. Comments are due April 11, 2014. Please see the SFIG Calendar for additional information on the NSFR Working group call, and email Mary.Robinson@sfindustry.org with any questions on the NSFR proposal or Working Group.

The Risk Retention Committee is continuing to follow up with regulators on risk retention questions across asset classes. Topics currently under discussion include participations, representative sample and the simplified approach. Please email Alyssa.Acevedo@sfindustry.org with any questions.

SFIG is continuing to build membership for its Chinese Market Committee among its members and is currently looking to establish committee chairs as well. If you would like more information on SFIG’s work with respect to Chinese securitization, please contact Alyssa.Acevedo@sfindustry.org.

SFIG has launched its initiative to provide critically needed input for the Financial Stability Board’s “Shadow Banking” project. For more information on SFIG’s work on Shadow Banking, please contact Amanda.Bateman@sfindustry.org.

 
ISSUE SPOTLIGHT
JOHNSON-CRAPO REVEALED: A HEAD-TO-HEAD COMPARISON
On March 11, 2014, Senators Tim Johnson (D-SD) and Mike Crapo (R-ID) released Amendment to S. 1217 Housing Finance Reform and Tax Payer Protection Act of 2014 (Johnson-Crapo). SFIG developed the following side-by-side to provide our members with a clear picture of how Johnson-Crapo builds upon Corker-Warner and compares with the leading bill to reform housing finance in the House, H.R. 2767 the Protecting American Taxpayers and Homeowners Act of 2013 (PATH Act). The side-by-side gives SFIG members a quick break-down of each bill and the provisions that are of greatest interest to the securitization industry.

Senators Johnson and Crapo are likely to hold a mark-up of their bill in the Senate Committee on Banking, Housing, and Urban Affairs in the coming weeks. Expectations are that the mark-up will occur sometime after the Easter Recess. SFIG will continue to keep its members updated on all developments relating to Johnson-Crapo. For additional information on the side-by-side, bill, or with general inquiries relating to GSE Reform, please contact Amanda.Bateman@sfindustry.org.

 

 

PATH Act

Corker-Warner Bill

Johnson-Crapo Bill

TITLE

H.R.2767 Protecting American Taxpayers and Homeowners Act of 2013 (PATH Act)

S.1217 Housing Finance Reform and Tax Payer Protection Act of 2013

Amendment to S. 1217 Housing Finance Reform and Tax Payer Protection Act of 2014

GENERAL OVERVIEW

On July 11, 2013 Financial Services Committee Chairman Jeb Hensarling (R-TX) and other committee leaders announced the Protecting American Taxpayers and Homeowners Act (PATH Act) in order to create a sustainable housing finance system.

 

H.R. 2767, the PATH Act: ends the taxpayer-funded bailout of the GSEs by phasing out the enterprises within five years, increases competition by ending federal control of the mortgage finance system and grants more options to consumers when selecting mortgage products.

 

The FHFA remains in existence and oversees mandatory risk sharing programs, establishes a National Mortgage Market Utility (Utility) and acts as the regulator for RHS and FHA.

On June 25, 2013 Senators Mark Warner (D-VA) and Bob Corker (R-TN) introduced a comprehensive piece of legislation designed to overhaul Fannie Mae and Freddie Mac.

 

S.1217, the Housing Finance Reform and Tax Payer Act sets the agenda to unwind the two government-sponsored enterprises (GSEs) involvement in the secondary mortgage market, expand the role of private mortgage insurance, and create a single government backstop through the Federal Mortgage Insurance Corporation (FMIC) to provide for common securitization platform and catastrophic mortgage insurance for qualified mortgage backed securities.

On March 11, 2014, Chairman Tim Johnson (D-SD) and Senator Mike Crapo (R-ID) announced an agreement on housing finance reform which would amend S. 1217 (Corker-Warner).

 

While the legislation is based on Corker-Warner, slight nuances exist with Johnson-Crapo.

 

Similar to Corker-Warner, the legislation would create the FMIC, wind down the GSEs, and provide a smooth and orderly transition to a new housing finance structure.

 

GOALS AND PURPOSE

The PATH Act primarily depends upon the private capital market and includes four essential goals for the development of a free market. First, the role of government will be distinctly defined and limited. Second, artificial barriers to private capital will be removed to attract investment and encourage innovation. Third, market participants are given clear, transparent, and enforceable rules for transactions to advance competition. Fourth, consumers given informed choice to help determine which mortgage products best suit their particular needs.

 

The Utility is established and operates as a non-for-profit entity that develops standards relating to servicing, pooling and securitizing residential mortgage loans.

At the core of Corker-Warner is the creation of a single government owned independent corporation called the Federal Mortgage Insurance Corporation (FMIC).

 

The purpose of the FMIC would be to “(1) provide liquidity, transparency, and access to mortgage credit by supporting a robust secondary mortgage market and the production of residential mortgage-backed securities; and (2) protect the taxpayer from having to absorb losses incurred in the secondary mortgage market during periods of economic stress.” The bill contains a blanket prohibition against any FMIC involvement in mortgage origination.

One of the key purposes is to facilitate broad availability of credit for eligible single family and multifamily borrowers.

 

The bill also focuses on monitoring consumer and market access to credit.

 

The bill calls for a structure that maintains broad liquidity for TBA Market and take into account impact of new products on the TBA Market.

REGULATORY LEADERSHIP

The PATH Act maintains the Federal Housing Finance Agency (FHFA) as the primary regulator.

SECTION 102-103 FMIC would have a five member Board of Directors, led by a Director appointed by the President for a term of five years. The Director shall have demonstrated technical expertise in the fields of mortgage securities and housing finance. The bill prohibits individuals from concurrently serving as FMIC Director and Director of FHA. This bill also excludes any individual who previously served as FHA Director from the FMIC Director position.

SECTION 201 FMIC would have a five member Board of Directors, led by a Director appointed by the President for a term of five years. The Director shall have demonstrated technical expertise in the fields of mortgage securities and housing finance. The bill prohibits more than three members from being from the same political party.

 

SECTION 203 FMIC shall establish an Advisory Committee (composed of 9 members) for the purpose of advising an Office of Consumer and Market Access on developments in the primary and secondary mortgage markets.

REGULATORY AUTHORITY & DUTIES

SECTION 103 The FHFA Director is appointed to act a receiver for each Enterprise and carry out receivership authority.

 

SECTION 106 FHFA shall require each enterprise to undertake a risk sharing program (see risk sharing below).

 

SECTION 109 FHFA is authorized to create a receivership to carry out the terms of the receivership of the Enterprises mandated in Section 103 addressing the termination of conservatorship.

 

SECTION 259 FHFA is required to establish a capital reserve fund for the FHA’s multifamily insurance program and other programs under FHA and RHS.

 

SECTION 315 FHFA is granted supervisory authority over the National Mortgage Market Utility, which is authorized to set standards for the securitization of residential mortgages and operate a securitization platform.

SECTION 201 FMIC shall develop standard form risk sharing mechanisms; provide insurance on covered securities; ensure access to credit in all geographic areas; charge fees in exchange for providing insurance; develop and maintain the Mortgage Insurance Fund; facilitate securitization for entities without securitization capabilities; set standards for approved market participants; oversee a database detailing market loan level information; establish standard uniform securitization agreements; develop and maintain an electronic registry system for eligible mortgages; oversee and supervise the Common Securitization Platform; and ensure credit unions and community and mid-sized banks access to the Common Securitization Platform.

SECTION 301 Among the principal duties of the FMIC are facilitating access to the secondary mortgage market for small lenders, which shall include the establishment of small lender mutuals; monitoring safety and soundness of regulated entities; ensure approved entities meet certain requirements; promote the standardization of the market through uniform securitization agreements, servicing documents and the Common Securitization Platform; and maintain a national mortgage loan database.

CREDIT-RISK SHARING

SECTION 233 A new risk-sharing pilot program must be created and FHA has two years to set its parameters. FHA would be required to enter into risk-sharing agreements on 10 percent of its business. FHFA would have to report on the effectiveness of the program to determine if FHA should expand the program.

SECTION 202 Within five years of enactment, FMIC will examine various credit-risk sharing structures and develop a standard form credit-risk sharing mechanism that requires private market holders to take a first loss position that is not less than 10 percent. FMIC will report to Congress within one year and upon relevant policy changes about these finds and how it made its determinations.

SECTION 302 FMIC shall create standards for first loss credit risk-sharing which is not less than 10 percent of the principal of the single family covered security. FMIC can consider a variety of options including the current credit risk transfer provisions set forth by the GSEs. Such structures should not disrupt the TBA market. Note exemptions exist for commodities and securities laws.

GOVERNMENT INSURANCE

There is no equivalent to the Mortgage Insurance Fund (MIF) in the PATH Act.

 

SECTION 234 FHA’s guarantee on individual mortgages shall be lowered to 50 percent of the original principal obligations over a period of five year. There will be a 10 percent annual reduction until it reaches 50 percent in year five.

 

SECTION 235 FHA shall collect premiums, the amount of which must be sufficient enough to cover the costs of providing mortgage insurance and the costs for administration, operations, management and technology for the FHA.

 

SECTION 220 Funding for the FHA is hereby authorized, the cost of which cannot exceed the total amount of revenue it generates through premiums, etc.

 

SECTION 255 FHFA shall assess and collect fees from the FHA and RHS in order to be reimbursed for its services. SECTION 256 For the purpose of determining the capital reserve ratio, separate accounts are established in the Mutual Mortgage Insurance Fund (MMIF) for FHA’s new business (loans insured after enactment of the Act) and for its existing business. Independent FHA must maintain a capital reserve ratio of 4 percent for its new business.

SECTION 203 FMIC will administer the Mortgage Insurance Fund (MIF) which will be used to cover losses on covered securities when those losses exceed the first position losses absorbed by private market holders. MIF will be funded by guarantee fees and endeavor to achieve a reserve balance of 1.25 percent of the sum of the outstanding principal balance of covered securities within five years of the certification date and 2.5 percent within ten years. Fees may not vary by geographic location or by the size of the institution to which the fee is charged.

 

SECTION 204 FMIC will insure principal and interest on covered securities. The full faith and credit of the U.S. is pledged to the payment of all amounts which may be required to be paid under any insurance provided under this section.

SECTION 303 This section establishes a Mortgage Insurance Fund (MIF) which will fund insurance claims on the principal and interest of the FMIC-backed securities if losses exceed the private market first loss position. The MIF will be funded by assessments on Fannie Mae and Freddie Mac initially and sustained in the future by fees on the FMIC-backed securities. The target for the MIF reserve ratio is 1.25 percent of the securities guaranteed. By year 10, that ratio should be 2.50 percent. FMIC shall determine a fee and shall take into account operating expenses of the MIF, risk or credit sharing structure of a pool, operating expenses, economic conditions, reserve ratio goals, and any other factors the FMIC deems important. Full faith and credit of the United States is pledged to support the fund.

AUTHORITY FOR EXIGENT MARKET CONDITIONS

SECTION 260 FHFA Director is authorized to suspend the operation of the capital classification regime established in Section 257 upon a joint determination with the FHA Chief Risk Officer that: 1) the amount of available credit has significantly, 2) housing prices have declined significantly, or 3) other negative economic conditions exist that impact the availability of capital in the housing finance markets.

SECTION 205 FMIC is authorized to protect taxpayers in unusual and exigent market conditions. If the FMIC, in conjunction with the Federal Reserve Board, Secretary of the Treasury, and in consultation with the Secretary of Housing and Urban Development determines that “unusual and exigent circumstances” that threaten the availability of mortgage credit within the housing market, the FMIC may for a period of not more than 6 months provide insurance on mortgage securities without the private capital first-loss risk sharing mechanism. This authority may not be exercised more than once in any given 3-year period.

SECTION 305 FMIC has power to insure securities that do not have a 10 percent first loss position in terms of exigent circumstances. Initially, this is for six months and for two additional nine month periods within any three-year period. Need the Corporation, Federal Reserve Chairman, HUD and Treasury Secretaries to agree. This aid cannot go to an entity that is in bankruptcy. After any exercise of such authority, FMIC would establish a normalization timeline for approved entities to meet regular standards and establish a first lost position to the private market to minimize losses to the MIF.

REGULATORY EXEMPTIONS

SECTION 343 Qualified Securities shall be exempt from Section 3(a) of the Securities Act of 1933 and its provisions on Credit Risk Retention shall be removed (repealed under Section 407).

SECTION 207 All FMIC-covered securities will be exempt securities under the SEC insofar as securities guaranteed by the U.S. government are considered exempt (including shelf requirements) and from Qualified Residential Mortgage requirements.

SECTION 307 Exempts FMIC-backed securities from SEC registration, credit risk retention, and the definition of a commodity pool.

REGULATORY REPORTING

SECTION 219 The FHFA Director shall submit a report to the President and Congress testifying as to whether or not the Act gives sufficient authority to the FHA.

 

SECTION 254 FHFA is given authority to conduct examinations in order to evaluate the safety and soundness of FHA’s operations. FHFA shall require FHA and RHS to submit any data or other information to make this determination.

SECTION 106 FMIC shall submit annual reports to the Senate Banking and House Financial Services Committees detailing the activities of the corporation as well as the operating status of the Mortgage Insurance Fund (MIF), a fund established to handle incoming claims and backed by the full faith and credit of the U.S. government. Reports would include the disclosure of the financial condition of the MIF including exposure to economic factors with potential to impact the MIF.

 

SECTION 603 Not later than 8 years after the enactment of the Act, the GAO will submit a report to the Senate Banking and House Financial Services Committees on the feasibility of maintaining the secondary mortgage market and provide its recommendations. Six months after the report, FMIC will submit a plan to Congress detailing steps to carry out a transition to a fully privatized secondary mortgage market and how to dissolve FMIC and the insurance model.

SECTION 206 FMIC shall submit annual reports detailing the activities of the corporation as well as the operating status of the Mortgage Insurance Fund (MIF), a fund established to handle incoming claims and backed by the full faith and credit of the U.S. government. Report would also include status of private-label market, actions by state attorneys general, and access to consumer credit.

 

SECTION 609 Not later than 8 years after the enactment of the Act, the GAO will submit a report to the Senate Banking and House Financial Services Committees on the feasibility of maintaining the secondary mortgage market and provide its recommendations. Six months after the report, FMIC will submit a plan to Congress detailing steps to carry out a transition to a fully privatized secondary mortgage market and how to dissolve FMIC and the insurance model.

ELIGIBLE MORTGAGE

SECTION 232 Eligible single family mortgages 1) cannot exceed 100 percent the appraised value of the property and 115 percent of the Area Median Home Price or 150 percent of the GSE single family loan limit for high-cost areas (maximum $625,500), whichever is lower; and 2) can never go below $100,000; and 3) Require a 5 percent down payment or 3.5 percent down payment for first time homebuyers.

SECTION 2 Eligible mortgage is defined as a mortgage meeting the standards established by the CFPB’s Qualified Mortgage and Ability to Repay rules; the conforming loan limit (SECTION 504); and FMIC standards, which include a minimum five percent down payment and maximum LTV of 80 percent.

An eligible mortgage loan 1) must have an 80 percent LTV; 2) can have credit enhancement including mortgage insurance; and 3) require a 5 percent down payment (gradually escalates to 5 percent) with 3.5 percent for first time homebuyers.

CONFORMING LOAN LIMITS

SECTION 105 The current statutory limit for conforming loans is maintained at $417,000, while future drops in the housing price index may decrease the loan limit. Furthermore, the conforming loan limit is amended to prevent future increases in high cost areas and allow annual adjustments to reflect recent changes in house prices. The maximum mortgage available for purchase by the GSEs shall drop by $20,000 each year for five years.

SECTION 504 Beginning on the enactment of the Act, the limitations on the maximum obligations that may be purchased by the GSEs will need exceed $417,000 for the mortgage of a single-family residence. The loan limit will be adjusted each year to reflect the net change in the HPI index. Section Includes exceptions for high-cost areas.

SECTION 304 Conforming Loan Limits stay same as they are now. No reduction as contemplated by Corker-Warner and FMIC cannot reduce these limits.

SECURITIZATION PLATFORM

SECTION 311 The FHFA Director is required to issue a charter for a National Mortgage Market Utility (Utility) not later than two years after enactment. The Utility shall be organized as a not-for-profit entity and operate the securitization infrastructure platform in an open-access manner that does not discriminate against eligible loan originators, aggregators or qualified issuers. Utility shall not be a government entity but will be subject to the exclusive supervision of the FHFA.

 

SECTION 312; 322 Securities issued through the Platform run by the Utility must be “qualified securities” which are 1) collateralized by one or more classes of residential mortgages defined by the Utility of the basis of credit risk characteristics and loan terms, 2) issued in accordance with a standard form securitization agreement establish by the Utility, 3) issued by an issuer that meets qualification standards set by the utility and 4) issued through the securitization platform run by the Utility.

 

The Utility would be governed by 10 members. These members would include 2 with experience in mortgages, 2 from large banks, 2 from small banks, 2 with electronic document experience, and 2 with RMBS investment experience.

 

Initial funding for the Utility would be provided by an appropriation of $150 million which must be repaid within 10 years. Ongoing funding would come from fees charged by the Utility. Fees may differentiate on basis classes or types of services, operations, and users of services or operations, but may not differentiate based on size or loan volume. The Utility would be a not-for-profit entity that could take any organizational form it chooses (mutual, corporation, etc).

SECTION 232 The Office of Securitization within the FMIC will oversee and supervise the common securitization platform. The CSP shall be announced by FHFA and established by the enterprises. Act will require platform has system capabilities to permit the issuance of multi-lender covered securities. Office shall ensure credit unions, community and mid-sized banks and small non-depository lenders have equitable access to the platform and include options for multi-lender pools of eligible mortgages to be securitized and issued as covered securities via the platform. Office shall coordinate with Federal Home Loan Bank System with respect to establishing a platform that addresses the needs of its members.

SECTION 325 This section provides the general purposes, powers and functions of the platform including issuing a covered security, developing standardized documents for securitization, standardized servicing and loss mitigation documents, verifying that the mortgages are eligible for purchase, performing bond administration functions, data validation and reporting. SECTION 321 FMIC would establish a securitization platform owned and operated for the benefit of its members that may be a cooperative or a nonprofit. FHFA can transfer GSE development on a platform to the new entity. SECTION 322 FMIC Board of Directors shall appoint 5 initial platform directors to carry out the functions of the platform. After 1 year (unless extended by the FMIC) an elected board consisting of 9 board members shall administer it.

 

SECTION 323 Platform directors shall establish membership standards for approved entities.

 

SECTION 324 Platform directors shall establish, assess, and collect fees to operate the Platform. They may uses tiered usage fees.

UNIFORM SECURITIZATION AGREEMENTS

SECTION 322 Utility must develop standard and uniform securitization agreements for qualified securities, including pooling and servicing, purchase and sale, representations and warranties, indemnification and remedies, and the qualification, responsibilities, and duties of trustees. All securities issued via the platform must adhere to the Utility’s standards.

SECTION 223 FMIC shall develop standard uniform securitization agreements for covered securities. Agreement will include terms relating to pooling and servicing; representations and warranties; indemnification and remedies; and the qualification, responsibilities, and duties of trustees.

SECTION 326 The Platform should develop standard uniform securitization agreements for all covered securities including addressing issues such as pooling, servicing, loss mitigation, representations and warranties, indemnification and remedies, and others.

APPROVED GUARANTORS

PATH Act does not include definitions for approved guarantors.

SECTION 214 FMIC shall establish standards for approved bond Guarantors who guarantee timely payment of principal and interest on securities that are collateralized by eligible mortgages and insured by the FMIC. Guarantors must maintain minimum capital of not less than 10 percent of the unpaid principal balance net of any risk-sharing transactions. Includes requirement that Guarantors submit audited financial statements to Director and meet minimum tangible equity level or other threshold established by FMIC.

SECTION 311 FMIC must issue approval and prudential standards for the ongoing operation of approved guarantors and may require reports from and conduct on-site examinations. For a critically undercapitalized approved guarantor, FMIC will have resolution authority. It can take enforcement actions and function as the FDIC does. FMIC is also required include in its capital and solvency standards that approved guarantors hold 10 percent capital as a protection against losses. Guarantors with over $10 billion in assets will be subject to stress tests.

APPROVED ISSUERS

SECTION 322 Utility shall develop, adopt and publish standards for an issuer to be a qualified issuer. Standards may only include 1) the experience, financial resources and integrity of the issuer and its principals; 2) the issuer’s adequacy of insurance and fidelity of coverage; and 3) a requirement that issuers submit audited financial statements to the Utility which must be made publically available on its website. Utility shall establish application process for approval, approve applications meeting the adopted standards and publish a list of newly approved issuers in the Federal Register. Utility may review issuers if a claim is made that the issuer is in violation of any contractual term in its securitization documents. Utility may revoke approved status upon determination that issuer no longer meets the standards for qualification.

SECTION 213 FMIC shall establish standards for approving issuers of FMIC-covered securities. FMIC will limit issuers to 15 percent of the total market as measured by the total outstanding principal balance at origination, with the exception of issuers which only securitize loans originated by the issuer or an affiliate. Includes provision stating issuer may, for a period not to exceed 6 months, hold eligible loan on balance sheet and first lost position for purpose of obtaining insurance under Title II.

 

APPROVED AGGREGATORS

SECTION 322 The Utility may develop standards for the aggregation of eligible collateral by entities other than an issuer. Furthermore, the FHLB's may act as aggregators for members, subject to FHFA regulation.

 

SECTION 312 FMIC shall approve standards for aggregators. Some of these institutions may be FDIC regulated already. FMIC may require reports on conduct examinations of such aggregators. Like Guarantors having over $10 billion in assets, they will be subject to stress tests and it can act as receiver or conservator for an entity not regulated by the FDIC.

APPROVED SERVICERS

SECTION 322 Utility must develop, adopt and publish servicing standards including those related to loan modification, restructuring or work out of any mortgage that serves as collateral for a qualified security; a servicer succession plan; and standards for the reporting obligations of servicers. The Utility must also develop servicer succession plans for replacing an existing servicer if the performance of the mortgage pool deteriorates to specified levels.

SECTION 212 FMIC shall establish standards for the approval of servicers to administer eligible mortgages. FMIC shall coordinate with the CFPB and, to whatever extent necessary, the other Federal banking agencies. The application process may not discriminate against or otherwise disadvantage small servicers.

SECTION 314 FMIC shall establish approval standards for servicers of eligible mortgage loans and the approval process shall not disadvantage small servicers. FMIC must conduct an on-site examination every two years. FMIC can require that servicers not meeting servicing standards transfer servicing. Fannie Mae and Freddie Mac approved servicers are grandfathered. This section also raises the small servicer exemption threshold for both CFPB and FMIC servicer standards and requires FMIC to conduct a study on servicer compensation standards for non-performing single family mortgage loans.

APPROVED PRIVATE MORTGAGE INSURERS

There is no similar provision within the PATH Act

SECTION 211 FMIC shall develop, adopt and publish standards for the approval of private mortgage insurers to provide private mortgage insurance on eligible mortgages.

SECTION 313 FMIC shall approve and issue standards for private mortgage insurers (PMI) who guarantee eligible mortgage loans and conduct an on-site examination every two years.

SMALL LENDER SECURITIZATION

 

SECTION 215 FMIC Mutual Securitization Company is established to facilitate the securitization of eligible mortgages originated by credit unions, community and mid-size banks (having up to $15 billion in total consolidated assets) and non-depository mortgage originators (having more than $2.5 million net worth). The Mutual will purchase eligible mortgage loans from member participants to securitize in a covered security. Entity shall be an approved issuer as defined by Section 213. The Mutual Securitization Company shall be funded by membership fees as determined by the FMIC.

SECTION 315 FMIC shall establish and capitalize a mutually-owned company to facilitate access to the secondary market by smaller lenders. The small lender mutual will provide a cash window for originators to sell individual loans or pools of loans and shall be an approved aggregator. Membership is limited to entities with less than $500 billion in total assets, non-depository institutions with assets that exceed $2.5 billion and that originate less than $100 billion in loans annually, Federal Home Loan Banks, and other smaller lenders and other smaller lenders that satisfy the mutual’s requirements.

CFPB ABILITY TO REPAY

Mortgages securitized through the Utility platform are not subject to the ability to repay standard

 

SECTION 336 FMIC shall coordinate with CFPB that eligible mortgage loans match ability to repay standards set forth by the CFPB.

COLLATERAL RISK MANAGERS

There is no similar provision within the PATH Act.

There is no similar provision with in Corker-Warner.

SECTION 327 FMIC will develop standards for collateral risk managers to manage troubled mortgages.

DISCLOSURE, DATABASE AND REGISTRY

SECTION 322 Utility shall establish data definitions and disclosure requirements.

 

SECTION 331 Utility shall organize and operate a national mortgage data repository.

SECTION 224 FMIC will establish and maintain a database of uniform loan level information on eligible mortgages.

 

SECTION 225 FMIC will have an electronic registry system for eligible mortgages to improve the process of tracking changes to servicing rights and beneficial ownership interest.

SECTION 333 FMIC will establish and maintain a database of uniform loan level information on eligible mortgages.

 

SECTION 331 FMIC along with the SEC will issue a rule that will enable private market investor, in connection the first loss position on a covered security, to have access to documents relating to mortgages backing the covered security, as well as servicing reports. Market participants shall also be required to disclose material information.

LIABILITY EXEMPTIONS

There is no similar provision within the PATH Act.

SECTION 222 Any private market investor that has invested in a covered security will have immunity and protection from civil liability with respect to whether eligible mortgages that collateralize a FMIC-covered security have complied with the requirements of this Act.

SECTION 332 gives such market participants immunity from liability for underwriting, representations and warranties, for terms of a uniform securitization agreement.

REGULATORY OVERSIGHT

SECTION 254 FHFA is given authority to conduct examinations in order to evaluate the safety and soundness of FHA’s operations. FHFA shall require FHA and RHS to submit any data or other information to make this determination.

SECTIONS 211-214 FMIC may review approved private mortgage insurers, servicers, issuers and bond guarantors if it is notified or becomes aware of any violation to the Act. If found in violation, FMIC may revoke approved status. FMIC may also impose a civil money penalty on any approved market participant found in violation of the Act (Section 217). SECTION 216 FMIC may develop, publish and adopt any additional standards or requirements for market participants to ensure competition, competitive pricing and liquidity, transparency and access to credit in the secondary mortgage market.

FMIC will develop and publish standards to regulate approval of private mortgage insurers, servicers and issuers. The approval of private market participants is subject to review of the FMIC if the Corporation becomes aware of potential violations of the Act by the participant. See above for details.

AFFORDABLE HOUSING GOALS

SECTION 1369E Mandatory GSE Affordable Housing goals and the Housing Trust Fund are hereby repealed.

SECTION 401 FMIC shall collect a fee of five to ten basis points on outstanding principal balance of eligible mortgages collateralizing covered securities. Eighty percent shall go to the National Housing Trust Fund and twenty shall go to the Capital Management Fund.

 

SECTION 402 National Housing Trust Fund activities are expanded to include research and developments that support affordable housing goals.

SECTION 501 This section establishes an initial and incentive-based fee structure to support the Housing Trust Fund, the Capital Magnet Fund, and a newly created Market Access fund. The fee shall average 10 basis points across all outstanding securities.

 

SECTION 208 FMIC creates an Office of Consumer and Market Access which would administer a Market Access Fund, monitor markets to identify underserved markets, and produce an annual report assessing the covered securities market.

 

SECTION 210 FMIC shall support the primary mortgage market to help ensure that all eligible borrowers have equitable access to mortgage loan credit, including underserved segments of the primary mortgage market. To accomplish this, FMIC must issue regulations to identify and define underserved primary mortgage market segments in which lenders and borrowers lack equitable access to the secondary mortgage market.

MULTIFAMILY

SECTION 237 Occupancy and rent limitations for Multifamily Mortgage Insurance would be issued. The FHFA Director will be required to establish a capital reserve fund for these multifamily insurance programs. The targeted multifamily individuals are those with low to moderate incomes.

SECTION 601 Multi-family mortgage lending programs would remain under the purview of the FMIC. Multi-family business would transfer from Fannie Mae and Freddie Mac in accordance with the wind-down and transfer timelines. FMIC provides guarantee for any multi-family mortgage purchases.

SECTION 209 Creates an Office of Multifamily Housing that publishes eligibility criteria to make multifamily securities covered by a guarantee.

 

SECTIONS 701-707 GSE shall establish multifamily subsidiaries. FMIC may sell these businesses of the GSEs. A study will be conducted on the necessity of a multifamily platform.

REGULATORY TRANSITION & GSE WIND DOWN

SECTION 110 The GSEs’ charters are repealed. The transition period for an independent FHA begins on the Act enactment date and ends either at the FHFA Director’s discretion or at the expiration of the five year period beginning on the date of enactment.

 

SECTION 283 The Secretary of HUD will establish an advisory board during the FHA transition period to provide advice to the new Board of Directors of the FHA. The responsibilities of HUD regarding the old FHA’s loan insurance programs to the will be transferred to the new independent FHA. The rights and employment of old HUD employees will be transferred to the independent FHA as well.

 

SECTION 106 FHFA shall require each GSE to develop and undertake a risk sharing program of at least 10 percent of their annual business where private market participants share or assume the credit risk associated with mortgage securities. Acceptable transactions include increased MI requirements; credit-linked notes and securities; senior and subordinated security structures; and other mechanisms as deemed appropriate by the FHFA Director.

 

SECTION 107 The GSEs are prohibited from purchasing or guaranteeing mortgages other than a “Qualified Mortgage” as defined by the Dodd-Frank Act.

SECTION 502 The implementation of all mechanisms, products, structures, contracts and other security agreements shall be complete within five years of the enactment of the Act. Any proceeds from the wind down will be paid first to the senior preferred shareholders, then preferred shareholders, then to common shareholders. The Director of the FMIC, in consultation with the Treasury Secretary, shall establish the process to wind down the GSEs. Upon enactment, the charter of Fannie & Freddie will be released and the GSE can conduct no new business. The wind-down process enacts immediate reductions in conforming loan limits. Single family mortgage securities will be sold to the private sector to further the goal of maximizing returns to the taxpayer. The wind down process will also serve to provide recoupment by senior preferred shareholders, and maxim return to shareholders, of the GSEs.

 

SECTION 233 Office of Federal Home Loan Bank Supervision shall coordinate with Federal Home Loan Bank System to transfer authorities to FMIC.

 

SECTION 301 All FHFA’s functions relating to the supervision of the FHLB system are transferred to FMIC.

 

SECTION 302- 304 All personnel and property of FHFA is transferred to FMIC.

 

SECTION 303 FHFA and its Director are abolished as of the FMIC certification date.

 

SECTION 501 On the certification date, the GSEs charters will be repealed, except that provisions of the charters will continue to apply with respect to MBS guaranteed by the GSEs, as well as outstanding debt obligations, bonds, debentures, notes, capital lease obligations, letters of credit, bankers’ acceptances and other similar instruments. For those obligations, the full faith and credit of the U.S. is pledged.

 

SECTION 504 Conforming loan limit is reduced (see above). SECTION 505 Each enterprise MAY not own mortgage assets in excess of $552.5 billion as of December 31, 2013. Each subsequent year until the certification date, those assets cannot exceed 85 percent of the year before. FMIC will establish an allowable amount of assets that may be retained only to allow the wind down or appropriate loss mitigation measures on legacy guarantees.

SECTION 402 FHFA shall become an independent office within FMIC.

 

SECTION 404 This section establishes a transition committee to develop a comprehensive plan for transition to a new housing finance system as well as to advise the FMIC.

 

SECTION 601 GSEs would not engage in new business once FMIC Board of Directors certifies that FMIC is able to undertake its duties AND certain minimum housing finance system criteria have been satisfied: one small lender mutual is operational, sufficient number of guarantors, approved aggregators, approved PMI, and approved servicers exist to assume first loss positions, and multiple multifamily guarantors exist. This certification must come within 5 years after enactment which can be extended.

 

SECTION 602 Transition Committee must develop a comprehensive transition plan within 12 months of enactment. Transition plan must include estimated timeframes by which to achieve the minimum housing finance system criteria within five years of enactment; detailed actions that FMIC will take to achieve the minimum housing finance system criteria; estimated timeframes and detailed actions that FMIC and FHFA will take to provide an orderly wind down of the GSEs; detailed plans for utilizing infrastructure; updates on FMIC; updates on multifamily; updates on the platform; and plans to increase credit risk sharing.

 

SECTION 604 Provides full faith and credit for both GSE legacy debt and legacy MBS.

FHA

SECTION 211 FHA is established as an independent agency which shall be structured as an independent government corporation.

 

SECTION 214 The independent FHA shall have a Board of Directors consisting of 9 members including the Secretary of Housing and Urban Development (HUD) (chair), Secretary of Agriculture, 5 individuals with expertise in mortgage finance and 2 individuals with expertise in affordable housing.

 

SECTION 212 FHA is to provide single-family homeownership to first-time homebuyers, low- and moderate-income homebuyers, and homebuyers in areas subject to counter-cyclical markets or Presidentially-declared disasters. FHA must also provide affordable rental housing opportunities for low- and moderate-income Americans.

 

SECTION 213 FHA may use its corporate seal; insure mortgages and provide credit enhancement; acquire, hold, use, improve or dispose of real property; take any action to manage its assets and obligations; assess fees for its insurance products; qualify any person or entity to engage in business with the FHA; and invest in systems and technology to carry out its activities.

 

 

COVERED BONDS

SECTION 352 The PATH Act also establishes rules and regulations for a U.S. covered bond market place.

 

 

 
 
RECENT DEVELOPMENTS
HAMP BORROWERS FACE RATE INCREASES OVER THE COMING MONTHS
In 2009, the Obama Administration launched the Home Affordable Modification Program (HAMP) to help at risk borrowers avoid default by modifying the terms of their mortgage loans. Nearly 783,000 homeowners whose mortgage rates were reduced under the government's program HAMP are going to see their rates increase over the next few years, which will likely lead some borrowers to re-default, the Special Inspector General stated in a report to Congress. Modifications under the program remained fixed for only five years and starting the next several months, the earliest borrowers in the program will begin seeing their rates climb by 1 percent a year to a high of 5.4 percent, the Special Inspector General's report on the Troubled Asset Relief Program (TARP) said. As a result, some 33,000 borrowers are expected to see their rates increase this year, with payments climbing by an average of almost $200 a month, the Special Inspector General stated. A Treasury Department spokeswoman notes that the resets don't actually begin until five years after the modifications become permanent, which, in most cases is five years and three months after they were initially granted. That reduces the number of resets expected this year to about 18,000. "We're already seeing alarming re-default rates and are really worried that this could lead to more," said special inspector general Christy Romero. "It will be a real challenge for people to pay the higher amounts." As of November 31, 2013, 359,000, or 28 percent, of borrowers with HAMP-modified mortgages had already re-defaulted on their mortgages and nearly 100,000 more were deemed "at risk" of default, the Special Inspector General reported. Four states, including California, Florida, New York and Illinois, accounted for half of all of the HAMP modifications that are expected to see rates climb. Some borrowers, particularly in expensive coastal markets, could see their mortgage payments climb by as much as $1,700 a month. The rate increases will begin this year and run through 2021.

 
OFFICE OF THE COMPTROLLER OF THE CURRENCY ESTIMATES COST OF IMPLEMENTING VOLCKER RULE WILL TOP FOUR BILLION DOLLARS
The Office of the Comptroller of the Currency (OCC) has estimated that implementing the Volcker Rule will cost banks up to $4.3 billion. The OCC states in its report: "Because we estimate the costs associated with the final rule range from $412 million to $4.3 billion, we believe the rule is a “major rule” under the CRA [Congressional Review Act]. Our estimate does not capture some costs that are quantifiable but difficult to estimate, such as indirect costs due to decreased market liquidity and the impact this decrease in liquidity may have on the market value of some assets and the cost to corporations of issuing debt. Additionally, certain benefits of the regulation can be difficult to quantify including the value of enhanced economic stability and benefits associated with reduced risk. Because we estimate that banks’ UMRA [Unfunded Mandates Reform Act] expenditures would exceed $100 million in at least one year, the overall cost of the final rule will exceed the thresholds for a 'significant regulatory action.'"

More specifically, the OCC stated: “The range of our cost estimate primarily reflects the uncertainty of the final rule’s impact on the market value of banks’ investments in impermissible covered funds. A decrease in demand may follow the imposition of the restriction on banks holding collateralized debt obligations and collateralized loan obligation assets, and we estimate the market value of this impact to be between zero and $3.6 billion.”

The OCC's full analysis of the Volcker Rule can be found here.

 
OCC INDICATES LEVERAGED LENDING GUIDANCE HAS STRICT STANDARDS FOR CORPORATE ACQIUSITION FUNDING
The Office of the Comptroller of the Currency (OCC) is asserting, in accordance with the Interagency Guidance on Leveraged Lending released in March 2013, that there is no flexibility to allow for banks to fund corporate acquisitions with a leverage ratio greater than six times EBITDA. Thirty percent of 2014 corporate acquisition funding has been financed at an EBITDA ratio greater than six times, down from over 50 percent in 2007. The OCC’s increasingly stringent assertion on the guidance dovetails with similar crackdowns from local examiners. The lack of clarity with respect to the implementation of the 2013 guidance led to confusion and differing interpretation and underwriting standards, and present serious questions on the application of the guidance to securitization. Banks are required to file leveraged lending exposures no later than May 31, 2014, after which regulators will review loan portfolios and test compliance with the guidelines.
 
 
FEDERAL RESERVE RELEASES BANK STRESS TEST RESULTS SHOWING IMPROVEMENT IN COLLECTIVE LENDING ABILITY AND FINANCIAL STABILITY
U.S. big banks can withstand a drastic economic downturn, the Federal Reserve said on Thursday, announcing that 29 out of 30 major banks met the minimum hurdle in its annual stress check. (On March 24, 2014, the Federal Reserve issued full corrected results for the 2014 Dodd-Frank Act stress test. It adjusted the stress test results to address inconsistencies in the treatment of the fourth quarter 2013 actual capital actions and assumptions about preferred and employee compensation-related issuance over the course of the planning horizon.)

According to the summary results of bank stress tests announced by the Federal Reserve on Thursday, the largest banking institutions in the United States are collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago. This result reflects continued broad improvement in their capital positions since the financial crisis. Reflecting the severity of the most extreme stress scenario – which features a deep recession with a sharp rise in the unemployment rate, a drop in equity prices of nearly 50 percent, and a decline in house prices to levels last seen in 2001 – projected loan losses at the 30 bank holding companies in the latest stress tests would total $366 billion during the nine quarters of the hypothetical stress scenario. The aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.5 percent in the third quarter of 2013 to the minimum level of 7.6 percent in the hypothetical stress scenario. That minimum post-stress number is significantly higher than the 30 firms' actual tier 1 common ratio of 5.5 percent measured in the beginning of 2009.

This is the fourth round of stress tests led by the Federal Reserve since the tests in 2009 and is the second year that the Federal Reserve has conducted stress tests pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The changes to the tests this year are as follows:

  • In addition to the 18 institutions that have been part of the stress tests since 2009, an additional 12 firms with assets greater than $50 billion were included this year;
  • The Federal Reserve used independent projections of balance sheet and risk-weighted asset growth rather than depending on the firms' calculation for these categories as was done in prior years, improving the comparability and robustness of the results;
  • The tests included an estimate of losses that could result if a financial institution's largest counterparty were to default unexpectedly. This scenario was applied to eight firms with substantial trading or custodial operations. The counterparty default scenario is part of the global trading shock, which is applied to six firms with large trading operations; and
  • The Federal Reserve in this year's test began to phase in the revised capital framework approved by the Board in July 2013. The Federal Reserve calculated each firm's capital ratios in accordance with the capital requirements that will be in effect during each projected quarter.

In addition to releasing results under the severely adverse hypothetical scenario, the Federal Reserve also on Thursday released results from the adverse scenario, which features a more moderate recession than that seen in the severely adverse scenario, but includes a steep rise in long-term interest rates. In the adverse scenario, the aggregate tier 1 common capital ratio would fall from an actual 11.5 percent in the third quarter of 2013 to the minimum level of 9.7 percent in the hypothetical stress scenario.

The quantitative results from both the adverse and the severely adverse scenarios in the supervisory stress tests are only one component in the Federal Reserve's analysis during the Comprehensive Capital Analysis and Review (CCAR). CCAR is an annual exercise in which the Federal Reserve evaluates the capital planning processes and capital adequacy at the largest financial institutions. It is important to note that capital plans of firms in CCAR have been objected to on qualitative grounds even when capital ratios have exceeded all minimum post-stress capital requirements.

 
GSEs AND FHFA LAUNCH "SERVICING DATA AND TECHNOLOGY INITIATIVE"
In order to identify gaps and inadequacies in servicing data standards, the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac (GSEs) are launching the “Service Data and Technology Initiative.” This fact-finding exercise will pinpoint broader data standardization needs in the servicing industry and will likely incorporate its Uniform Mortgage Data Program into this new initiative. Regulators have recently criticized the lack of servicing data standards, specifically servicer difficulty with managing the transfer of documents and dealing with distressed borrowers. GSE’s staff have been working to create over 1,000 servicing-related changes or additions to the Mortgage Industry Standards Maintenance Organization reference model. The FHFA has begun identifying additional data elements that could be incorporated into the industry standards as well and states it will ultimately make recommendations as to how to move forward.

 
HUD GRANTED ADDITIONAL TIME TO ADDRESS REVERSE MORTGAGE FORECLOSURES
The U.S. District Court for the District of Columbia granted a preliminary injunction that will halt the foreclosures on four widow/widowers who were not listed as borrowers. This highlights the need for the U.S. Department of Housing and Urban Development (HUD) to produce a more substantial policy solution for the spouses of sole signers on Home Equity Conversion Mortgages (HECM), the vast majority of which compose the reverse mortgage market. Widows who are deemed “squatters” face being foreclosure after a 30-day notice from servicers while lenders/servicers face costs associated with those spouses who cannot be foreclosed on.

This past October, a judge ruled that HUD is contradicting federal laws by not protecting certain surviving spouses from foreclosure. HUD initially appealed the ruling, which attempts to shield the spouses from foreclosure, but later withdrew it. The U.S. District Court says they still have not received information on how many households may be affected by this HECM issue or its economic implications.

 
HOUSING ADVOCACY GROUPS OPPOSE JOHNSON-CRAPO HOUSING FINANCE REFORM LEGISLATION; SENATOR SAYS FLOOR VOTE POSSIBLE THIS YEAR
In a press release on Friday, March 21, 2014, several consumer groups announced their opposition to the draft legislation to reform the existing house finance system entitled the Housing Finance Reform and Taxpayer Act of 2014 and sponsored by Chairman of the Senate Committee on Banking, Housing, and Urban Affairs (Committee) Senator Tim Johnson (D-SD) and the Committee’s Ranking Member Senator Mike Crapo (R-ID). The Leadership Conference on Civil and Human Rights, National Association for the Advancement of Colored People, National Coalition for Asian Pacific American Community Development, National