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Legislative Updates

July 24, 2006

I. Congressional Calendar

The House is in session for one week before the August recess and the Senate is in for two. Congress comes back in September for a scant 14 legislative days in the House and a few more than that in the Senate before the target adjournment of October 6. The outlook for a lame-duck session is virtually assured with Senate leaders stating that some sort of omnibus appropriations bill will be considered after the election.

The acknowledgment of a lame-duck session means that the pressure on Congress to stay any longer than most members want is all but gone. Members in the majority will want to get back to campaign full-time in order to steer the election in a local direction rather than the national direction that is abetted by their continued presence in Washington.

The impact of this is that the precious commodity of legislative days has gone up in value, the ability of opponents to disrupt legislative action has been enhanced, and the uphill climb of legislative success became even steeper. In order to pass, legislation with any degree of controversy must have 60 votes in the Senate and almost total House Republican support.

II. GSE Legislative Outlook

In an effort to break the logjam blocking passage of the GSE regulatory reform bill, the orchestration over the past few weeks of pressure to both threaten and encourage opponents of the Senate bill and its tough language on the investment portfolios of Fannie Mae and Freddie Mac has been masterful.

On the positive side, statements, albeit unspecific, from James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), and various Treasury officials have indicated a willingness to consider modifying the Senate portfolio language and give the new regulator more discretion. Sen. John Sununu’s (R-NH) announcement that he would accept some sort of affordable housing program (a change from his earlier staunch opposition) was a positive sign of encouragement to affordable housing advocates that hundreds of millions of additional dollars for housing could be on the way.

On the negative side was a drumbeat of threats delivered by Treasury Undersecretary for Domestic Finance Randy Quarles and Assistant Treasury Secretary Emil Henry that the Treasury Department would exercise its unused authority to limit the issuance of the debt of Fannie Mae and Freddie Mac if legislation is not enacted. As is so often the case, these challenges to Fannie Mae and Freddie Mac have included FHLBanks. After initially referring only to Fannie and Freddie, Treasury officials indicated their review of restricting GSE debt would include FHLBanks as well. In order to increase the pressure beyond the public statements, Treasury scheduled meetings with Fannie, Freddie and the FHLBanks to consider issues of debt restriction implementation. Treasury notified the press of the meetings.

These developments have served to keep GSE legislation front and center in an environment that would otherwise suggest the bill is on life support. Currently no discussions are being held by the key players in Congress but all that could change quickly.

III. Deposit Insurance Reform

The Federal Deposit Insurance Corporation (FDIC) has issued a notice of proposed rulemaking (NPR) to implement deposit insurance reform legislation and establish a new risk-based deposit insurance premium system. The NPR does not directly impact the use of FHLBank advances by member institutions. However, the proposal does raise the question and gives some insight to why action affecting advances was not included in the NPR.

Among the input sought by the proposal is the advisability of “including Federal Home Loan Bank advances in the definition of volatile liabilities or, alternatively, charging higher assessment rates to institutions that have significant amounts of secured liabilities.” The NPR notes: “Volatile liabilities do not include other borrowed money, which primarily consists of Federal Home Loan Bank (FHLB) advances, in order to avoid penalizing those institutions (particularly savings institutions) that have traditionally relied on advances.” The proposal defines volatile liabilities as foreign office deposits, federal funds purchased and securities sold under agreements to repurchase, and time deposits $100,000 or more held in domestic offices divided by gross assets.

The comment period on the proposal closes September 22. The law requires that the final rule must be approved by November 5.

IV. Oxley/Frank Send Letter to Finance Board regarding Retained Earnings – Possible House Hearings

On June 30, House Financial Service Chair Mike Oxley (R-OH) and Ranking Member Barney Frank (D-MA) sent a letter to the Federal Housing Finance Board (FHFB) regarding the proposed rule dealing with retained earnings and excess stock. The letter expressed concern that “the proposed changes may go too far and actually harm the Bank system more than protect it.”

While a July 11 hearing had been planned for the matter, the hearing was delayed and a possible hearing in the Capital Markets Subcommittee chaired by Rep. Richard Baker (R-LA) yet has not been scheduled for what will be a very busy month of September.

The Finance Board continues to assess the more than 1,000 comment letters, most of which call for a withdrawal of the regulation. The Board has given every indication that it will reject calls for withdrawal, consider input, amend the proposal and issue a final rule. No timeframe for final action on the rule has been given.

V. Section 149 Legislation Introduced in the Senate

On July 14, Sen. Rick Santorum (R-PA), a member of the Senate Finance Committee, introduced S. 3657, legislation to allow FHLBanks to provide credit support for non-housing tax-exempt bonds. The bill is identical to legislation introduced in the House by Rep. Phil English (R-PA), H.R. 5177.

VI. New FHFB Director’s Nomination Reported Out of the Senate Banking Committee

Geoff Bacino's nomination to succeed Franz Leichter was voted out of the Senate Banking Committee on July 19. The full Senate is expected to approve the nomination this week.