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Legislative Updates

October 27, 2005

I. House Passage of H.R. 1461

On October 26, the House passed H.R. 1461, the Federal Housing Finance Reform Act, by a strong bipartisan vote of 331-90.

H.R. 1461 passed out of the House Financial Services Committee in May by an overwhelming bipartisan vote of 65-5. This would have suggested smooth sailing on the House floor, but there was a partisan fight for much of yesterday's floor debate over the new Affordable Housing Fund (AHF) funded out of a percentage of profits of Fannie Mae and Freddie Mac. The conservative wing of the House Republican party, the Republican Study Committee (RSC), was very opposed to the provision and worked out a compromise with the House leadership.

The most controversial RSC-driven change to the AHF will preclude groups that engage in voter registration and other election-related activities (including driving tenants to the polls) from receiving these funds. A wide range of faith-based groups opposed this measure with strong Democratic support. In the end, this provision prevailed, although a number of Republicans did join almost all Democrats on one of the votes to strip the restriction.

In the end, most Democrats supported the legislation. In addition to the Royce amendment and the restrictions to the AHF, a number of other amendments were considered. The most significant amendments follow:

Royce Portfolio Amendment: An amendment offered by Rep. Ed Royce (R-CA) that addressed the white-hot issue of portfolio growth at Fannie Mae and Freddie Mac attempted to seek a middle ground between the position laid out in H.R. 1461 (the regulator may control portfolio growth as it relates to safety and soundness) and the Senate bill (S. 901)/White House/Fed version (which requires shrinkage of the portfolio to only those activities necessary to support their mission) by authorizing the regulator to curtail portfolio growth for consideration relating to "systemic risk." The Royce amendment was defeated by a significant margin (73-346).

Kanjorski Director Amendment: An amendment offered by Rep. Paul Kanjorski (D-PA) to reinstate administration appointments of directors of Fannie Mae and Freddie Mac and regulator appointments of FHLBank directors was accepted by voice vote. The Kanjorski amendment provides that the independent directors would remain two-fifths of the boards rather than the one-third in H.R. 1461. Independent directors would be appointed by the new director of the Federal Housing Finance Agency (FHFA) from a list of individuals recommended by the new Housing Finance Oversight Board. Additionally, the amendment expands the statutory criteria for the two required public interest directors to include community development and economic development and allows appointed directors to continue to serve until their successors assume their vacated office.

Paul GSE Line of Credit Elimination: Rep. Ron Paul (R-TX) offered an amendment that would have eliminated the GSEs' lines of credit with the Treasury. The amendment was defeated by a vote of 47-371.

Garrett Conforming mortgage limit amendment: Rep. Scott Garrett (R-NJ) offered an unsuccessful amendment (57-358) to strip out the section of the bill increasing the conforming loan limits for Fannie Mae and Freddie Mac.

Statement of Administration Policy (SAP): The House passage of H.R. 1461 by such a strong margin flew in the face of a very strong SAP issued by the Office of Management and Budget earlier in the day. The SAP is silent on FHLBanks. The key messages of the SAP are:

• The administration opposes the bill.
• The bill does not give the new regulator sufficient power over Fannie Mae and Freddie Mac to set capital levels, to approve new activities and to control portfolio growth.
• The bill should not raise conforming loan limits.
• While not directly mentioning the AHF, the SAP says, "provisions that divert profits will lead to increased risk-taking and decreased market discipline."

Key FHLBank Provisions in H.R. 1461 as Passed by the House

For more information, please call Peter Knight at 202-347-2666.

New Regulator: The Federal Housing Finance Board would be abolished six months after the passage of the legislation and folded into the new regulator, the FHFA. The agency is given broad authority to set capital standards for the FHLBanks, enforce those standards through orders under a "prompt corrective action" system modeled on the banking laws, and take a wide range of enforcement actions in a manner similar to the Federal banking agencies.

• The FHFA would have a presidentially appointed director confirmed by the Senate.
• Three deputies would serve under the regulator: one responsible for the safety and soundness of Fannie Mae and Freddie Mac, one for FHLBanks and one for housing. The deputy for housing will be responsible for oversight over Fannie Mae and Freddie Mac's "housing mission and goals" and oversight over "the housing mission" of the FHLBanks.
• The FHFA would have an advisory board consisting of:
  
  • the director of the new FHFA;
  • Treasury secretary;
  • HUD secretary;
  • a presidentially appointed individual with capital markets, secondary mortgage market and mortgage-backed securities expertise and
  • a presidentially appointed individual with mortgage finance, affordable housing and economic development/revitalization expertise.
• The advisory board has no executive powers, but the amended bill adds a provision that would permit the board to provide policy and strategy guidance to the director on its own initiative. In the previous version of the bill, the advisory board could not act until requested by the director.

FHLBank Boards of Directors: FHLBank governance was one of the provisions amended during full House consideration of the legislation. Under the bill as amended by the full House:

• The management of each FHLBank is vested in a 13-member board, or a board of a different number as determined by the director of the new FHFA.
• Under the amendment, the independent directors would remain two-fifths of the boards (the original bill had proposed one-third) and would continue to be regulatory appointments.
• Independent directors are to be appointed by the new director of the FHFA from a list of individuals recommended by the new Housing Finance Oversight Board.
• The statutory criteria for the two required public interest directors is expanded to include community development and economic development and allows appointed directors to continue to serve until their successors assume their vacated office.
• The bill requires independent directors to have demonstrated knowledge of or experience in financial management, accounting, risk management, derivatives, project development or organizational management, or such other expertise as the regulator may provide.
• Compensation caps are lifted and director terms are extended to four years, as in earlier versions of the bill.
• Any member of a board of directors serving on the effective date (one year after date of enactment) may continue to serve for the remainder of his or her three-year term.
• The 1960 grandfather of state representation on FHLBank boards of directors is removed.

Receiverships and Voluntary Mergers: These provisions were approved by the Board in March and subsequently presented to the other FHLBanks, member trade associations, and House and Senate banking committee staff.

• The bill broadens the receivership and conservatorship provisions in H.R. 1461 to apply a statutory receivership scheme to FHLBanks similar to the bank receivership approach proposed for Fannie Mae and Freddie Mac. This will provide due process and a set of clear rules for the conservatorship or receivership of a failing FHLBank with clearly enunciated rights for various parties including members, counterparties and unsecured creditors. This will ensure that a weakened FHLBank will continue to have access to the broad range of capital market tools necessary to hedge risks and manage their balance sheets by clearly establishing the rights of counterparties in derivatives transactions, repo's and other capital markets transactions, similar to those for FDIC-insured institutions.
• The bill creates a statutory framework for voluntary mergers between healthy FHLBanks. Such mergers could take place only if they were approved by the boards of both banks and the regulator. The regulator is tasked with developing rules to promulgate this provision that will also provide for the approval of the members of all affected banks.
• The bill would not change existing law that allows the regulator to merge banks based on "efficiency or economical accomplishment" without regard to safety and soundness concerns or the approval of the banks involved.

Community Financial Institutions (CFIs): The bill increases the asset definition of a CFI to $1 billion in assets with an expansion of acceptable advance collateral to include "community development activities."

SEC Registration: The bill requires that FHLBanks register with the SEC under the 1934 Act within one year of the bill's enactment. As in earlier bills, the Banks and their members are exempted from several specific provisions of the 1934 Act to reflect the cooperative nature of the system. In addition, the government securities and exempted status of FHLBank securities are confirmed.

When issuing final regulations, the SEC is required to consider the distinctive characteristics of the FHLBanks when considering the accounting treatment of REFCORP payments, combined financial statements, the accounting of redeemable capital stock, and joint and several liability.

Joint Activities of FHLBanks: The bill authorizes any two or more FHLBanks to establish a joint office for the purpose of performing functions for, or providing services to, the Banks on a common or collective basis, or may require the Office of Finance to perform such functions or services. This authority is subject to the regulation of the director.

Office of Finance: The bill keeps the Office of Finance as it is currently structured.

Greater Information Sharing Among FHLBanks: The regulator is to prescribe regulations to ensure that each Bank has access to information that the Bank needs to determine the nature and extent of its joint liability. Providing information under these regulations will not constitute a waiver of any privilege.

Study of Advance Pricing: The bill directs the General Accounting Office to conduct a study of Fannie Mae's and Freddie Mac's guarantee fees and advance pricing practices of the FHLBanks.

Reports on Fraudulent Financial Transactions: The GSEs must file a report upon discovery that they have purchased or sold a fraudulent loan or financial instrument, or suspect a possible fraud relating to the purchase or sale of any loan or financial instrument. The entities must establish and maintain procedures designed to catch such loans. Any entity or affiliated party that makes such a report in good faith is granted immunity from liability for the report.

II. House Conservatives raise GSE debt fee to cover Katrina/Iraq
    Expenses

Amid a growing concern in Congress over rising levels of federal spending precipitated by funding of Hurricane Katrina relief and Iraq-related expenses, the House and Senate leadership are pledging to make efforts to find offsets or reductions in spending programs to mitigate effects of this spending on deficits. The challenge is that once entitlements such as Social Security and Medicare are taken off the table along with expenditures for national security, there is very little left in so-called discretionary spending to reach the necessary cuts. The Senate is attempting to gather $36 billion in cuts and the House is more ambitious at $50 billion. Both sides are finding it a difficult task.

Within this effort, the RSC has put a comprehensive list of spending cuts on the table. Included in this list are the following GSE-related items:

• A fee on GSE investment portfolios: A ten-basis-point fee would be applied to the GSEs' average daily investment portfolio. The RSC estimates this would raise $19.9 billion over ten years.
• SEC 33 Act registration: The GSEs would be required to register their debt with the SEC under the Securities Act of 1933. The RSC estimates this would raise $2.7 billion over ten years.

As the House struggles to find spending offsets, these proposals do not appear to be under serious consideration.