Utah bankers'association president briefs Senate on Treasury's mortgage-asset swap, calls it an "asset swap," not a bailout

Howard Headley, president of the Utah Bankers Association, briefed the Utah State Senate during a Committee of the Whole session on the Treasury Department's plan to address the mortgage market turmoil.

22My name is Howard Headley. I'm the president of Utah Bankers Association,22 Headley said, and he distributed written materials to senators before explaining the proposal.

Headley said the core problem is that mortgages had been packaged into mortgage-backed securities and traded as liquid assets. When a small share of those mortgages proved to be "toxic" 'performing only if home prices continued rising'investors stopped buying the securities and the secondary market effectively dried up. Firms holding those securities were forced by accounting rules to mark them to market even when no market existed, producing large write-downs of capital.

Under the Treasury proposal, Headley said, the federal government would offer up to $700,000,000,000 in short-term treasuries and swap them for the long-term mortgage-backed securities at a discount to compensate for long-term risk. 22I don't think it's a bailout,22 Headley said. 22It's an asset swap with a discount to compensate for risk.22

He described the mechanics the Senate had been hearing about: the Treasury would run a reverse auction (one buyer, multiple sellers) in which financial firms submit bids showing the discount they will accept. Treasury could then buy tranches at the most favorable discounts and, over time, hold assets to maturity or sell them back into a revived secondary market.

Senator Hickman pressed Headley on short-term liquidity concerns: if Treasury swaps longer-term mortgage assets for short-term treasuries, what happens when the treasuries mature? Headley acknowledged that the $700 billion authorization carries both risk and potential reward. He said Treasury's plan anticipates reinvestment and gradual paydown, and that the reverse-auction and market confidence could encourage private buyers to return before the government must hold assets to maturity.

Headley also told the Senate that the most aggressive, loose underwriting practices that had driven much of the toxic paper were largely originated by non-bank mortgage originators selling into the secondary market. He said FDIC-insured banks and credit unions generally maintained underwriting standards and that most Utah banks did not hold the problem securities on their balance sheets, so "for the most part in this state the banks will not even participate in this program." He added that Congress had enacted measures to require national standards and a database to track mortgage originators.

Headley cautioned that underwriting standards would tighten going forward and that housing market activity would likely be lower than during the boom years, noting the average life of a home mortgage is about 7 to 7.5 years and many loans will be refinanced over time.

The Committee dissolved after the briefing; senators thanked Headley for the explanation and returned to floor business.