Democrats on the House Financial Services Committee strongly opposed a Republican GSE reform discussion draft in a hearing yesterday (Thursday), with covered bonds in the line of fire despite having won support from both sides of the house in a previous legislative initiative.

Representative Waters

Opening the hearing, committee chairman Jeb Hensarling said that “the PATH Act tears down barriers to private capital”.

However, Democrat ranking member Maxine Waters quickly made it clear that the committee would be deeply divided over the Protecting American Taxpayers & Homeowners (PATH) Act.

“While I am appreciative that you are holding this discussion today,” she said, “I am deeply disappointed in the radical and unworkable discussion draft that is before us today as well as the lack of interesting in making this a bipartisan effort. Mr Chairman, it did not have to be this way.”

She pointed to a bipartisan GSE reform bill in the Senate (the Housing Finance Reform & Taxpayer Protection Act), contrasting this with the PATH Act. She said the House bill had “zero input” from Democrats, was “obviously a non-starter”, and would be “a disaster for the American housing market”.

Among criticisms of the draft, Waters said that its covered bond element would be disadvantageous for community banks and credit unions.

“The proposal also leaves them in the dust with the big bank-centric covered bond proposal that requires them to pick up the tab if those bonds bankrupt the Deposit Insurance Fund,” she said.

Witnesses including American Securitization Forum executive director Tom Deutsch and Moody’s Analytics chief economist Mark Zandi had argued in favour of covered bonds in written testimony ahead of the hearing, but opposition came from Adam Levitin, professor of law at Georgetown University Law Center.

He said that the PATH Act recreates the too big to fail problem with covered bonds, arguing that the aims of bank bail-outs and support packages in Europe included guaranteeing covered bonds, and that big banks are likely to benefit more because they are more likely to be bailed out.

The House bill, which is in the form of a discussion draft, includes a section dedicated to covered bonds similar to the United States Covered Bond Act of 2011, which was passed by the House Financial Services Committee with bipartisan support. Hensarling noted that the chief author of the PATH Act is Representative Scott Garrett. He has been behind House efforts to introduce covered bond legislation since 2008.

Hensarling said that he aims to mark up the act before the house adjourns in August and a markup has been scheduled for Tuesday (23 July). The bill could then be reported to the Republican controlled House.