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Legislative Updates

May 26, 2004

Government-sponsored Enterprise (GSE) Policy Outlook

Last month's partisan passage of the Federal Housing Enterprise Regulatory Reform Act of 2004 by the Senate Banking Committee means that reform legislation will not be enacted this year. It remains in doubt whether the next Congress will be more successful than this one in crafting legislation that can traverse the policy gauntlet that doomed this year's bill. In any case, it will be virtually impossible for legislation to be enacted before the end of next summer if at all. As always, additional serious problems at Fannie Mae or Freddie Mac would put GSE reform on a fast track.

This means that for the foreseeable future the existing regulatory structure will remain unchanged. It is likely that the GSE regulators will make every effort to counter their critics in Congress by working on a regulatory agenda that proves they are up to the task.

In addition to the regulators being given a second chance, the Administration will proceed with several agendas. The first will be to encourage a number of aggressive regulatory efforts to protect against charges of regulatory laxity should future problems arise. The second will be to demonstrate to Fannie Mae and Freddie Mac that the statutory status quo is not necessarily the optimal situation for their stockholders.

In fact, the Administration may not really want a bill at all. At last week's House Financial Services Committee hearing on HUD's 2005 budget proposal, Chairman Mike Oxley (R-OH) observed, "It seems the Administration does not want a viable legislative product that can move through the House and Senate, but would rather attempt to enforce discipline on the GSEs through regulation."

It has been suggested that the Administration is attempting to peel back several of the indicia that markets use to bestow GSE status. These include presidentially appointed directors, the Treasury line of credit and an exemption from Securities and Exchange Commission (SEC) registration, to name a few. While some of these require legislation, others do not. In fact, a Standard & Poor's official recently said that it no longer assumes that the government would bail out Fannie, Freddie or the Federal Home Loan Banks (FHLBanks), and that future S&P debt ratings would rely more on a GSE's financial condition. Moody's and Fitch's have not made similar statements.

The following is a quick review of the statements and regulatory actions of key GSE policy players:

     Treasury Department:

• Brian C. Roseboro, undersSecretary for Domestic Finance, has stated on several occasions that Treasury intends to limit GSE debt issuance.

     Housing and Urban Development (HUD):

• HUD has proposed toughening affordable housing goals for Fannie Mae and Freddie Mac by requiring that by 2008, 57 percent of the dwellings that the two GSEs finance should house people of low or moderate income. The current figure is 50 percent. Fannie Mae has responded that, to meet this goal, it would have to reduce middle-income business activity and may unilaterally lower the conforming loan limit.
• The administration is seeking an extra $6.25 million in funds to strengthen enforcement of Fannie Mae's and Freddie Mac's affordable housing goals.

     Office of Federal Housing Enterprise Oversight (OFHEO):

• While the Shelby bill failed in large part over the inclusion of receivership authority for the new safety and soundness regulator of Fannie Mae and Freddie Mac, OFHEO is looking to strengthen its existing conservatorship authority by creating a "liquidating conservatorship."
• OFHEO has directed Fannie Mae to restate its financials due to its accounting method in valuing about $8 billion of securities backed by manufactured-housing loans. Even though the SEC had initially approved Fannie Mae's approach, the OFHEO method will prevail. Fannie Mae expects the new practice to lead to a write-down of around $250 million on a pretax basis in the current quarter.
• The Administration is seeking an extra $15 million to beef up OFHEO's supervision and enforcement capacity.

     The Federal Reserve:

• St. Louis Federal Reserve Bank President William Poole called for the elimination of the Treasury line of credit for Fannie Mae and Freddie Mac.

Finance Board Pressing Ahead on SEC Registration/ Considering Affordable Housing Goals for Mortgage Purchase Programs

In a recent statement, Federal Housing Finance Board Director Allan Mendelowitz said that the Finance Board will be giving further consideration to regulations requiring voluntary SEC registration by FHLBanks, although he did not give a timetable for action.

In addition, Mendelowitz indicated the Finance Board would be looking at the application of affordable housing goals to FHLBank mortgage purchase programs.

Treasury FHLBank Study

The staff of the Treasury Department is close to completing a study on the changes to the FHLBank System wrought by the Gramm-Leach-Bliley Act. The timing of the report's release is not clear.

Greenspan Criticizes AHP
Federal Reserve Chairman Allan Greenspan responded to a question for the record from Sen. Jack Reed (D-RI) on the advisability of employing an approach for Fannie Mae and Freddie Mac that is similar to the 10 percent earnings set-aside of the FHLBanks' Affordable Housing Program. "Encouraging GSEs to subsidize affordable housing through contributions from income can lead to unintended consequences. ... Taxing their income to support affordable housing will encourage them to expand their portfolios all the more," Greenspan said. He also expressed concern that this would increase "concerns about systemic risk."