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Legislative Updates

August 15, 2005

GSE Reform Update

When Congress returns to Washington from its summer recess in early September, it will re-engage in work on GSE legislation, with chances of enactment this year being slim. A number of events following the House Financial Services Committee passage of H.R. 1461, the Federal Housing Finance Reform Act of 2005, on May 25 and events leading up to and following the Senate Banking Committee's consideration of the Senate version of the legislation, S. 190, have resulted in significant policy differences on two major issues.

Like the legislation adopted last year by the Senate Banking Committee, both bills establish a single regulator with bank-like regulatory powers over Fannie Mae, Freddie Mac and the Federal Home Loan Banks. However, major differences have emerged over the matter of establishing strict limits on the size of the investment portfolios of Fannie Mae and Freddie Mac and the establishment of an Affordable Housing Fund (AHF) built from a percentage of the profits of Fannie Mae and Freddie Mac.

The easier of these two issues to resolve is whether or not Fannie Mae and Freddie Mac should develop an AHF based on the FHLBank Affordable Housing Program (AHP). This will likely be accomplished by developing a lengthy list of operating strictures for the AHF. These statutory restrictions may well spill over to the operations of the FHLBanks' AHP.

The more challenging issue is how much explicit direction the Congress should give the new regulator to monitor or even shrink the portfolios of Fannie Mae and Freddie Mac. Added to these policy differences is the emergence of partisanship rarely seen in financial services policy debates.

House Status

Immediately following the committee's strong bipartisan vote, many observers predicted quick House floor action. Sharp criticism of the bill emerged from a number of quarters including the administration, the Federal Reserve and a large number of House conservatives, which put the bill on a decidedly slower track in the House and sent a message of caution to Senate Banking Committee Chairman Richard Shelby (R-AL).

A contingent of 53 House Republican conservatives wrote the leadership opposing the Affordable Housing Fund that would be funded with earnings from Fannie Mae and Freddie Mac. The principal opposition of the letter's signers was based on Fannie Mae's and Freddie Mac's cynical manipulation in a blatantly political manner of their charitable foundations' housing grants over the years. The letter expressed the concern that this new AHF could be a "slush fund" of sorts.

A few weeks later, in an unrelated appearance before the House Financial Services Committee (on the eve of the Senate Banking Committee markup of S. 190), Fed Chairman Alan Greenspan said of H.R. 1461, "We would be better off with no bill."

Senate Status

Heeding the serious levels of opposition in the administration and the Federal Reserve, Chairman Shelby announced that he would draft legislation with very stringent portfolio limits (indeed a requirement to shrink) and no AHF.

Ranking Democrat Paul Sarbanes (D-MD) offered a comprehensive substitute that was based in large part on H.R. 1461, but the outcome was certain before the amendment was offered. The Sarbanes substitute was defeated on a partisan vote that was the mirror image of the margin of passage of the bill out of committee 11-9.

Major Provisions of Interest in S. 190 as Passed by the Senate Banking Committee

FHLBank Directors

• Each FHLBank will be governed by 13 elected directors (or other number as the regulator determines appropriate).
• At least one-third of the directors must be independent (nonmember) directors.
• At least two must represent the "public interest."
• All directors are to be elected for four-year terms.
• Cap on director compensation is lifted. Each Bank may pay reasonable compensation in accordance with the resolutions adopted by the directors and subject to the approval of the board.
• Retention of number of directors per state as of December. 31, 1960, is repealed.
• Independent directors are nominated by each Bank's board.

Office of Finance

• Establishes the "finance facility" to issue and service consolidated debt and perform all other functions of the Office of Finance.
• Management is vested in a board composed of the presidents of each of the Banks.
• For purposes of other laws, the facility is treated like an FHLBank, except it does not have to register a class of capital stock with the SEC.
• The facility may be a corporation, partnership, limited-liability company or joint venture of the Banks.

Joint FHLBank Offices

The Senate bill does not include this provision that was in H.R. 1461.

Conservatorship and Receivership Authority

• The regulator may place a GSE into a conservatorship or receivership, and provide the conservator or receiver with the powers and responsibilities similar to those given to the FDIC when it acts in a similar capacity for insured banks.
• Unlike the House bill, the Senate bill states a receiver must be appointed if the regulator determines that the assets of a regulated entity have been less than its obligations for 30 days, or the entity has not been paying its debts when due for a period of 30 days.

Authority to Liquidate or Reorganize an FHLBank for Efficiency

• The authority of the regulator under Section 26 of the FHLBank Act to liquidate or reorganize an FHLBank based on the efficient and economical accomplishment of the purposes of the FHLBank Act is retained. The House bill repeals this authority as it relates to liquidation but not reorganization.

Voluntary Mergers of FHLBanks

• The Senate bill authorizes the voluntary merger of two Banks with the approval of the director and the Banks' boards.
• The director is to issue regulations regarding the conditions and procedures but, unlike the House bill, does not explicitly require the regulator to include procedures for Bank member approval.

Reduction in Number of FHLBanks

• The number of FHLBank districts may be reduced to less than eight (the current statute requires at least eight and no more than twelve FHLBanks) pursuant to a voluntary merger or a liquidation under the receivership provisions.

Capital

• The bill enhances the authority of the regulator director to establish risk-based and minimum capital levels for the FHLBanks and enterprises. The Senate bill only permits the director to raise the current statutory minimum capital levels; the House bill refers to adjustments in capital.

Studies

• The regulator, the SEC and the Treasury are to study and report on feasibility and benefits of requiring registration under the Securities Act of 1933.
• The Fed is to study and report on Basel II capital and the capital classification that should be assigned to the obligations of the Banks and enterprises. The regulator, Treasury and banking agencies are to study and report on the total holding of FHLBank and enterprise obligations by insured banks and thrifts.
• The regulator is to report each quarter on the risk-based and minimum capital levels of the regulated entities.