The Senate Banking Committee today took up housing reform, hearing from Secretaries Geithner and Donovan on the Administration’s reform proposal (see Client Report GSE119). Given world events, several Senators pressed the Treasury Secretary on the impact of the Japanese disaster on financial markets, but Mr. Geithner refused to rattle markets by conceding that developments pose risk to financial markets.  Questioning suggested growing interest in the third reform option outlined in the Administration plan:  private MBS guarantors who would be backed by catastrophic reinsurance from the U.S. Government.  Senators pressed the Cabinet Secretaries on how this reinsurance could be priced and whether the option would exclude small banks from the mortgage secondary market.  Questioning also focused on the pending rule to define a “qualified residential mortgage” under the Dodd-Frank risk-retention requirement (see FSM Report ABS17), with Mr. Geithner indicating that the proposal remained in dispute among regulators on issues such as whether there should be a mandatory downpaymnent or a servicing requirement.  Chairman Johnson (D-SD) indicated that this hearing will be part of a deliberative process, although Mr. Geithner again asked for legislation in this Congress.  Sen. Schumer (D-NY) indicated that he is considering introducing legislation to promote covered bonds, eliciting support from Mr. Geithner on the general proposition that covered bonds could be offered without undue threat to the FDIC or taxpayers.  This report analyzes the hearing, which also addresses matters such as FHA reform, bank capital standard, and the CFPB’s role in pending mortgage-settlement negotiations.

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