A bill aimed at strengthening oversight of government-sponsored mortgage purchasers Freddie Mac and Fannie Mae is not expected to emerge from Congress before the November elections, and could be stripped of provisions that would require the lenders to cut their portfolios if Democrats regain control of the Senate.
James Lockhart, director of the Office of Federal Housing Enterprise Oversight, has been stumping for the bill this summer. Lockhart wants Congress to grant OFHEO — or a new, independent oversight agency that would succeed it — powers like those given to bank regulators. OFHEO or its successor needs such powers, he says, to prevent a recurrence of accounting and management scandals that led Freddie and Fannie to restate a combined $16 billion in earnings and pay more than $500 million in fines.
Lockhart, who earlier this month said Freddie and Fannie still pose a “substantial systemic risk” to the U.S. banking system, wants Congress to grant OFHEO the authority to limit the companies’ mortgage portfolios.
The portfolios, which total $1.4 trillion, have grown “at annual rates that far outstrip residential mortgage market growth,” Lockhart said in a draft Strategic Plan released Thursday detailing OFHEO’s priorities for the next five years.
OFHEO (or its successor) “needs explicit authority and Congressional guidance to limit portfolio growth of the Enterprises,” Lockhart said in the report. “This tool will ensure that (Fannie and Freddie) are appropriately focused on their mission and proper risk management, and do not contribute to the possibility of systemic disruption in the financial sector through unconstrained growth.”
Fannie Mae’s portfolio grew at a rate of 13 percent a year beginning in 1990, to $727 billion, while Freddie Mac’s grew at an annual rate of 26 percent, to $710 billion. Over the same period, the residential mortgage market grew at a more modest 8.5 percent.
Freddie and Fannie have placed voluntary caps on their portfolios as they continue to put their books in order. The debate over cutting the company’s portfolios is falling along party lines, with Republicans generally supporting such a move, and Democrats opposed. The outcome of the debate could hinge on which party emerges with the majority of votes in the Senate after the November election, Reuters reports.
Democrats, led by Sen. Paul Sarbanes, D-Md., oppose cutting the portfolios because that could make it more expensive for home buyers to borrow money at a time when the housing market is in a slowdown.
The National Association of Home Builders also opposes cuts proposed by Sen. Richard Shelby, R-Ala., the chair of the Senate Banking Committee, which Fannie Mae has estimated would force it to drastically reduce its portfolio to between $10 billion and $100 billion, Dow Jones Newswires reports.
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