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: Jim Hamilton's World of Securities Regulation

By Jim Hamilton

Bill Would Give Treasury Unparalled Authority to Purchase up to $700 Billion in Mortgage-Backed Securities

A bill being readied by the Bush Administration would give the Treasury Secretary extraordinary and unreviewable discretion to purchase up to $700 billion of mortgage-backed securities and other mortgage-related assets from any US financial institution. The purchasing authorization would be on the Secretary?s terms and conditions. Also, the Secretary would have unlimited authority to appoint employees and enter into contracts to help carry out the transactions. The bill also provides that decisions by the Secretary taken pursuant to the Act could not be reviewed by any court or any administrative agency.

The measure also authorizes the Secretary to designate financial institutions as federal financial agents to perform reasonable duties related to the purchase of the asset-backed securities. Similarly, the Secretary could establish vehicles to purchase mortgage-related assets and issue obligations. The Treasury is also empowered to issues guidance and regulations to carry out the purposes of the legislation.

One legislative check on the Secretary?s broad authority is the mandate that the Secretary must consider how to provide stability or prevent disruption to the financial markets and the banking system, as well protect the taxpayer, when exercising the powers given by the Act. Also, within three months of first exercising these new powers, and semiannually thereafter, the Secretary must report to Congress with respect to the authorities exercised under the Act and the considerations required by it.

Once the mortgage-backed securities are purchased with the funds authorized by the Act, the Secretary may exercise any rights received in connection with the securities. The Secretary must also manage the purchased mortgage-related assets. Also, at prices that he or she determines, the Secretary may sell the mortgage-backed securities, or enter into securities loans, or repurchase transactions.

A mortgage-backed security is generally one that represents an undivided interest in a group of mortgages. Investors in mortgage-backed securities receive pro rata shares of principal and interest payments on the loans backing the securities. There are different types of mortgage-backed securities. Residential or private label mortgage-backed securities are those issued by a private entity, other than Fannie Mae or Freddie Mac. A mortgage-backed security representing an undivided interest in mortgages made to finance retail, office, industrial, hotel and resort, or multi-family properties is a commercial mortgage-backed security. See OFHEO, Mortgage Market Note 07-1,Portfolio Caps and Conforming Loan Limits, 9-06-07. According to Senator Olympia Snowe, in hindsight, it appears that it was the inability to gauge risk in mortgage-backed securities that caused much of this financial turmoil.

Full post as published by Jim Hamilton's World of Securities Regulation on September 20, 2008 (boomark / email).