No Longer on Hot Seat in Congress, Banks Still Likely to Feel Some Heat

WASHINGTON — While financial services issues are no longer on the front burner on Capitol Hill, several high profile topics this fall are likely to impact banks, especially any efforts to revitalize the housing market.

The industry is also lobbying to extend higher conforming loan limits and carefully watching key nominations for top regulatory jobs.

Like most other business groups, bankers will also be keeping a close eye on the debt super committee, whose actions are hard to predict, but which could have ramifications on the financial sector.

"Whatever the debt commission is going to come up with is so going to blow everything else out of the water," said Mark Calabria, director of financial regulation studies at the Cato Institute.

Housing market revitalization. While Congress kicked off its fall season officially on Tuesday, the biggest event this week is undoubtedly President Obama's address to Congress on a new jobs and economic package.

The president's address on Thursday is likely to offer a plan to help the still-struggling housing market, including a possible effort to boost refinancings for underwater borrowers whose loans are backed by Fannie Mae and Freddie Mac. Obama may also offer a proposal to turn foreclosed properties into rental housing.

Because Fannie and Freddie are under the government's watch, the administration may be able to bypass Congress in implementing a housing fix. But depending on the proposal, it is also possible that congressional approval will be necessary.

Earlier this week, Josh Earnest, a White House spokesman, declined to say whether the president's speech would include a housing plan, but he did tell reporters that the housing situation is "a very difficult policy problem, and it's one that the president and his advisors are working on."

A key part of the issue may come down to whether to extend the higher conforming loan limits. Unless Congress acts before Oct. 1, the loan limits currently used by Fannie, Freddie and the Federal Housing Administration, which were raised temporarily during the financial crisis, will decline to earlier levels.

Industry lobbyists have begun a campaign aimed at extending the higher loan limits, perhaps through late 2012. Such a measure could be attached to another piece of legislation, such as a budget bill, that is expected to pass.

The extension of higher loan limits faces opposition from many who want to reduce the federal government's role in housing. But industry advocates say that continuing signs of weakness in housing markets underscore the need for a temporary extension.

"Given this renewed softness, this is not the time to be pulling back," David Stevens, president of the Mortgage Bankers Association, said in a recent interview.

The key question will be whether Republicans in the House, where the leadership of the Financial Services Committee is on the record as opposing an extension, go along with the idea.

Also unclear is what the Obama administration wants to do. It has repeatedly said it would like the conforming loan limit to return to its previous level of $629,000, but the industry is hopeful it will reverse course.

Super committee. The wild card this fall is the debt-reduction "super committee," whose work has the potential to overshadow everything else that happens on Capitol Hill between now and January.

While the health care and defense industries are most likely to be affected, the debt-reduction negotiations, and particularly any potential effort to generate more revenue, could also affect the financial-services sector.

The mortgage interest deduction, for example, was mined for potential savings by President Obama's debt-reduction commission, co-chaired by Erskine Bowles and Alan Simpson.

Eric Toder, a fellow at the Urban Institute, said that he believes the super committee is unlikely to tackle the mortgage interest deduction directly, but said taxpayers who use the deduction could take an indirect hit as part of a general limit on tax expenditures.

"Given that the Republican members have pledged not to raise taxes, I think a limit on tax expenditures is unlikely also, unless they change their position," Toder said in an email.

Even if the probability of such a change is low, industry players will be watching closely, since any curtailment of the mortgage interest deduction would have significant implications for banks, in addition to realtors, home builders, and scores of other industry players.

Nominations. The Senate Banking Committee is juggling numerous nominations for financial regulatory posts. Two nominees for the Securities and Exchange Commission — Democrat Luis Aguilar and Republican Daniel Gallagher — appear to be on track for committee approval later this week.

The full Senate may vote as soon as this week on the nomination of Democrat Mark Wetjen to the Commodity Futures Trading Commission.

But certain other nominees face a more treacherous road. At the top of that list is Richard Cordray, the nominee to head the Consumer Financial Protection Bureau. Unless Democrats agree to a number of changes to the bureau's structure, Cordray faces entrenched Republican opposition.

Speaking of the bypass between Republicans and Democrats over the CFPB, Cornelius Hurley, director of the Morin Center for Banking and Financial Law at the Boston University, said, "That's kind of symbolic of the Mexican standoff that's going on."

It seems more likely that Martin Gruenberg, the president's nominee to chair the Federal Deposit Insurance Corp., and Thomas Curry, the nominee for Comptroller of the Currency, will eventually be approved, but the timing remains up in the air. The Senate usually approves those spots as a package of other nominees, and Republicans have yet to suggest candidates for the two other open spots on the FDIC's board.

Disputes over funding for financial regulators. Partisan disputes over funding for the SEC and the CFTC seem likely to pop up again this fall. The stakes are high because those two agencies are responsible for implementing the new regulations for derivatives under the Dodd-Frank Act.

Michael Greenberger, a law professor at the University of Maryland, said that Republican efforts to maintain the current level of funding for the SEC and to cut funding for the CFTC at a time when both agencies have substantial new responsibilities amounts to an attempt to veto parts of Dodd-Frank by means of the appropriations process.

"I think that under the Republican numbers, both agencies could finish the rule-making process," said Greenberger, an official at the CTFC during the Clinton administration, "but it would be next to impossible to implement or enforce Dodd-Frank."

Congressional insiders believe that Congress will pass a short-term budget extension for the entire federal government before Oct. 1. Banks with large derivatives businesses will be closely monitoring the budgetary impact at the SEC and CFTC.

Dodd-Frank implementation. Congress is on the sidelines this fall for what is perhaps the most important game in financial regulation — the Dodd-Frank rule-writing process.

Key regulations expected to be released this fall include several that will impact the largest U.S. banks: rules on proprietary trading, on the regulation of large, interconnected financial institutions, and on the wind-down of failing, systemically important firms.

Despite their somewhat marginal role in the rule-writing process, members of Congress will hold hearings and use their bully pulpits in an effort to influence outcomes at the agencies.

"I think we'll have hearings on all the major Dodd-Frank implementation topics," said Scott Talbott, senior vice president for governmental affairs at the Financial Services Roundtable.

Housing finance reform. Long-term reform to the housing finance system is the one major area of financial regulation that was left largely untouched by the Dodd-Frank Act.

That seems unlikely to change this fall, with no signs that either the Obama administration or the House Republicans are ready to begin a big legislative push for a specific reform plan for Fannie or Freddie.

Still, both the House and Senate will continue to hold hearings on the issue. This week alone, two House subcommittees are holding hearings on housing finance — one will look at investor demand for housing bonds in the context of a system that does not have a government guarantee, while the other will focus on the FHA and Ginnie Mae.

Fallout from Standard & Poor's downgrade of U.S. sovereign debt. Shortly after S&P downgraded the United States in early August, the Senate Banking Committee opened an inquiry into the credit rating agency's decision.

At this stage, it is not at all clear whether anything will come of the inquiry. But if the Banking Committee holds a hearing that casts S&P in a negative light, it could re-open the post-financial crisis debate over the proper role of credit rating agencies.

 

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