Plenty of Support, Opposition to Fannie/Freddie Bill

U.S. Senator Richard Shelby’s bill, S. 190, was approved Thursday by the Senate Banking Committee on a party-line vote of 11 to 9.

The GSE reform bill, or the Federal Housing Enterprise Regulatory Reform Act of 2005, would form a new regulator for Fannie, Freddie and the Federal Home Loan Bank system, according to a prepared statement by Shelby. The regulator would have enforcement authority like that of banking agencies, and the authority to set capital standards, approve new business activities and unwind the companies if failing or insolvent.

The legislation would also restrict the assets the government sponsored enterprises can keep in their portfolios.

“The bill includes clear direction on portfolio review for compliance with safety and soundness, mission and systemic risk,” Shelby said. “Under this proposal, the enterprises are permitted to hold those assets which promote the enterprises’ mission in the housing market.”

Freddie reports its total mortgage portfolio at the end of June was $1.6 trillion, while Fannie’s book of business was reported at $2.3 trillion at the end of May.

McLean, Va.-based Freddie believes the S. 190 “goes well beyond regulatory reform and unnecessarily risks compromising the nation’s housing finance system,” spokeswoman Sharon McHale said.

Limiting the assets in Freddie’s portfolio to only mortgage securitizations “would dramatically alter our ability to meet the housing mission…by essentially shutting down a major business line,” and “would jeopardize capital investments around the world at a time when its availability is what’s allowing more people of modest means to become homeowners.”

McHale added that “requiring the GSEs to hold capital apart from safety and soundness reasons would unnecessarily constrict funds” that support housing and that “overburdening the development of new products with excessive regulation could erode our ability to innovate for the benefit of homebuyers and lenders.”

Washington, D.C.-based Fannie said it supports legislation that provides stronger safety and soundness oversight, but also indicated that GSE safety and soundness risks should be the basis for portfolio holding limitations, according to a written statement by Chuck Greener, Fannie senior vice president of communication.

“We are hopeful that a bipartisan consensus will emerge that gives a new regulator full authority to oversee our portfolio operations to ensure they are conducted in a safe and sound manner,” Greener said. “Like bank regulators, a new regulator should have the ability to address ongoing mortgage portfolio activities, including the ability to limit portfolio holdings in response to a clearly identified and quantifiable safety and soundness risk, taking into account the enterprises’ obligation to provide liquidity to the market and achieve our affordable housing mission.”

The legislative piece follows accounting scandals at both Fannie and Freddie that have had what seems endless consequences ranging from financial restatements to executive exits and stronger oversight by their current regulator the Office of Federal Housing Enterprise and Oversight.

The Mortgage Bankers Association commended the bill.

The “legislation represents a clear understanding of the need to improve oversight of the GSEs relative to safety and soundness, systemic risk, and to ensure that Fannie Mae and Freddie Mac do not deviate from their Congressionally chartered purposes,” MBA chairman Mike Petrie said in a written statement. The “bill’s product-approval and activity review language is consistent with the spirit of MBA’s longstanding policy that the regulator ought to establish a ‘bright line’ to ensure the GSEs remain focused on their secondary-market purposes.”

The National Association of Home Builders, however, said the bill will impair the housing finance system.

“The bill to overhaul the housing government-sponsored enterprises that was narrowly passed today along party lines by the Senate Banking Committee represents a missed opportunity to achieve a meaningful regulatory framework that strengthens and safeguards the financial health of the GSEs while preserving their vital housing mission,” said NAHB CEO Jerry Howard in an announcement.