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Legislative Updates

July 15, 2005

I. GSE Reform Update

With Congress set to go on a month-long recess in two weeks, the momentum for passage of government-sponsored enterprise (GSE) regulatory reform legislation has recently slowed. The bill appeared to be cruising through the House after the House Financial Services Committee reported out H.R. 1461, the Federal Housing Finance Reform Act of 2005, by a vote of 65-5 on May 25. Then the bill hit some turbulence, both expected and surprising.

While all the major players — the administration, Fannie Mae, Freddie Mac and congressional leaders of both parties — continue to say publicly that legislation is needed, there is no consensus on what needs to be in the bill. Major differences have emerged over the establishment of strict limits on the size of the investment portfolios of Fannie Mae and Freddie Mac and the creation of an affordable housing fund built from a percentage of the profits of Fannie Mae and Freddie Mac.

House Status: H.R. 1461 is not as strong as the White House and Federal Reserve would have hoped in two significant areas: the establishment of statutory limitations on the size of the portfolios of Fannie Mae and Freddie Mac, and restrictions on the flexibility of Fannie Mae and Freddie Mac to enter into new businesses (including those that could be construed as primary, not secondary, markets functions).

Chairman Michael Oxley (R-OH) hopes to file the committee report in the near future. This is the formal process that brings the bill to the leadership so that it can go to the Rules Committee and then the floor. It is possible that the bill may be referred to the Judiciary Committee that could delay the bill's consideration.

While Chairman Oxley got the bill out of committee on a strong bipartisan vote, House Republican conservatives not on the committee have sent letters to House leadership expressing strong opposition to the affordable housing program that helped garner so much Democratic support. This opposition was strengthened by a Congressional Budget Office (CBO) analysis that stated the fund would result in a reduction in federal revenues of $600 million over five years.

Chairmen Oxley has argued that the new regulator would have sufficient authority to deal with issues relating to the portfolio and new product authority. He has also tweaked the affordable housing program to address the concerns of those who wrote the leadership as well as the budget concerns of CBO. He has apparently restructured the program to make it revenue-neutral from a CBO perspective but will face a tougher challenge in meeting the concerns of the conservative Republicans.

Without an affordable housing fund, the bill loses the vast majority of Democratic support. On legislation such as this, if it becomes viewed as a partisan bill, its chances of final passage decrease significantly.

Senate Status: The affordable housing fund controversy spawned in the House has spilled over to the Senate. Senate Banking Committee Chairman Richard Shelby (R-AL), whose committee reported out a bill last year that included language for such a fund, has now expressed concerns that this could enhance the incentive for the GSEs to take risks to increase offsetting profits.

Chairman Shelby has also said he intends to get tougher on the portfolio question. In a private meeting with Republican senators, he stated his intention to move a GSE bill in July that includes strong direction to the new regulator to limit the portfolios of Fannie Mae and Freddie Mac to those assets that cannot be readily securitized. Chairman Shelby has also said he intends to apply the Securities Act of 1933 to Fannie Mae and Freddie Mac.

The broad outline of a bill as described by Chairman Shelby may not garner the support of all Republicans on the committee, particularly Sen. Robert Bennett (R-UT). Treasury Secretary John Snow and National Economic Council Director Allan Hubbard are meeting with Republican senators in an effort to get support for Chairman Shelby's efforts. While they may help a bill get out (the margin in committee is eleven Republicans and nine Democrats), a partisan vote virtually guarantees no floor time for the legislation unless it is subsequently revised.

It is expected that the Shelby language will be released next week with a committee markup widely rumored to be July 26.

II. SEC 33 Act Registration for GSEs is in Play

Should Chairman Shelby be successful in applying registration under the Securities Act of 1933 to Fannie Mae and Freddie Mac, some in Congress will inevitably suggest similar treatment for FHLBanks. Since the SEC and the Treasury have been on record in the recent past in opposing the application of the 33 Act of the GSEs, and because all the GSE stakeholders can be expected to fight this vigorously, it is doubtful that the chairman could succeed in full-blown 33 Act coverage. However, he may be considering a more limited approach that would nonetheless be very controversial.

III. GR Activities Since May 27, 2005

• June 3: Organized and co-hosted a forum on the New Markets Tax Credit (NMTC) with the National Association of Affordable Housing Lenders. Rep. Paul Kanjorski (D-PA) attended and spoke at the event held in Wilkes-Barre, PA. Rep. Kanjorski is one of the architects of the program. Attendees included local member banks, economic development officials and local officials.
  
  
• July 6: Organized a forum on housing and development in Lebanon County, PA, featuring Sen. Rick Santorum (R-PA). Sen. Santorum spent considerable time discussing the pending GSE regulatory reform legislation and his support for affordable housing. More than 60 attendees included Brian Hudson, executive director of the Pennsylvania Housing Finance Agency; local executives of several county housing agencies in southcentral Pennsylvania; Frank Pinto, president of the Pennsylvania Association of Community Bankers; and Dave Martin, executive vice president of the Pennsylvania Builders Association.