The U.S. Senate banking committee today is set to mark up a draft bill that could give federal regulators the power to shut down Fannie Mac or Freddie Mac if either of them was in danger of insolvency.
The Republican-sponsored "Federal Housing Enterprise Regulatory Reform Act of 2004" would combine supervision of all so-called government-sponsored entities under one roof and make additional reforms in how Freddie Mac and Fannie Mae are regulated.
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But it’s the shutdown provision that has drawn the most fire from industry groups that already are lining up for and against the proposal.
Critics say regulatory power to shut down the corporations could make mortgages less available. At least one critic thinks the legislation would be the first step toward elimination of the GSEs special government benefits.
"It would lead to restricted access to our member banks, and beyond that we believe it would be anti-consumer and could very possibly drive interest rates and housing finance costs up for the consumers," said Camden Fine, CEO of Independent Community Bankers of America, a trade group.
The push for regulatory changes comes after an accounting scandal at Freddie Mac rattled investors last year. Federal Reserve Chairman Alan Greenspan has even told Congress it needs to take steps to improve the regulatory oversight of the two giant mortgage corporations.
Government oversight of Fannie Mae and Freddie Mac is crucial to the housing markets because the two corporations securitize and resell or own a substantial portion of the outstanding home mortgage debt in the United States. Both corporations receive a number of special perks from the federal government that aren’t available to other corporations.
Current law enables the Office of Federal Housing Enterprise Oversight, the firms’ financial regulator, to appoint a conservator if they get into financial trouble. The conservator’s job would be to protect corporate assets, and the conservator would need Congressional approval to liquidate any assets.
The proposed legislation would allow the new regulator to appoint a receiver who could liquidate assets to satisfy creditors without consent from Congress.
That drastic change would have a detrimental effect on the housing industry, said Jerry Howard, CEO of the National Association of Home Builders.
"The proposed receivership provision would unnerve Wall Street, and some bond rating agencies have already publicly stated they would likely downgrade the debt of Fannie Mae and Freddie Mac if this were to occur," Howard said in a statement. "A downgraded credit rating would raise their borrowing costs and put upward pressure on interest rates."
Fine said such a shift could limit access to the secondary mortgage market to only a few large banks and that could eventually make it more expensive to finance a home.
The Mortgage Bankers Association supports the bill, but has not taken a position on the receivership provision, said Kurt Pfotenhauer, MBA’s SVP for government affairs.
"We would hope that a reasonable compromise could be struck in the unlikely event a GSE would fail," he said.
Pfotenhauer said the mortgage bankers group believes the bill is a "significant step forward." It would provide an effective independent regulator and give the market confidence the GSEs were not only well run, but also well regulated, he said.
"There is a sense that they are not currently regulated as well as they should be," he said.
The draft calls for an independent agency to oversee Freddie Mac, Fannie Mae, the Federal Home Loan Banks and those entities’ housing missions and products.The new agency would replace the current regulators.
Fine said the community bankers group’s only major hang-up is with the receivership provision. The other provisions would provide needed oversight of such large public institutions and that would help ensure community bankers’ and borrowers’ continued access to mortgages.
The home builders group sees the issue differently. Howard said that while the group supports increasing the financial safety and soundness of the GSEs, the draft legislation would take capital out of the housing market, making it more difficult for Freddie and Fannie to expand mortgage funding. It also would hinder their ability to produce mortgage innovations, he said.
The National Association of Realtors has said little on where it stands on the specific proposed bill. The association issued a statement that said it applauds "efforts to begin fashioning a bill that addresses important issues affecting the housing government-sponsored enterprises’ safety and soundness oversight and housing finance system."
NAR spokesman Steve Cook said the group doesn’t have any comments on the draft because it is preliminary and will still be considered in committee.
"Realtors are reading the draft bill with an eye to determine how the GSE housing mission and home ownership opportunities may be affected," according to NAR’s statement.
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