A long-debated bill intended to overhaul oversight of Fannie Mae and Freddie Mac could become bogged down again in Congress this year because of an amendment that sets aside a compromise with the Bush administration over how much authority the government will have to set limits on the mortgage repurchasers’ loan portfolios.
The bill, HR 1427, is intended to prevent a repeat of the management and accounting scandals that forced Fannie and Freddie to restate their earnings and fire top executives.
To increase oversight of the government-sponsored entities (GSEs), HR 1427 would create a new regulator, the Federal Housing Finance Agency (FHFA), which would be authorized to set limits on their lending portfolios.
Bush administration officials and many Republican lawmakers want to limit Fannie and Freddie’s loan portfolios, which total about $1.4 trillion, saying the private companies have used the perception that their debt is backed to the government to take on more risk than is prudent. The GSEs pose a “systemic risk” to financial markets and institutions, critics say.
Many Democrats oppose strict limits on the GSEs’ portfolios, saying they help lower the cost of borrowing for average families, and the debate over limits on Fannie and Freddie’s portfolios held up GSE reform legislation last year.
Instead of imposing predetermined limits on Fannie and Freddie’s loan portfolios, compromise language worked out by the Treasury Department and Rep. Barney Frank, D-Mass., would have instead given the FHFA the authority to determine limits based on the assets the GSEs kept on hand to cover potential losses. Regulators would have been permitted to limit Fannie or Freddie’s portfolios if they determined the companies posed a potential systemic risk to the banking and finance system.
At a hearing in March, Freddie Mac Chief Executive Officer Richard Syron complained that the proposed compromise language would give FHFA too much discretion over the GSEs’ loan portfolios.
Although some interpreted the compromise language to mean that regulators would not impose “drastic reductions in our portfolio called for by our critics,” Syron said, it would in fact give FHFA “very broad authority to limit or substantially reduce the size of GSE portfolios, if they choose to do so … The high degree of discretion has cheered some GSE critics — and that worries us.”
An amendment introduced by Rep. Melissa Bean, D-Ill., and Randy Negebauer, R-Texas, addresses those concerns by narrowing the FHFA’s authority over Fannie and Freddie’s loan portfolios.
Instead of instructing FHFA to evaluate the safety and soundness of the GSEs’ holdings based on systemic risk, the amendment would have regulators judge only the risk they pose to Fannie and Freddie themselves. That would make it harder for FHFA to justify tighter limits on the GSE’s portfolios, critics say.
Although Frank opposed the amendment, he was unable to defeat it, and it is expected to be part of HR 1427 when the House votes on the bill this week.
Earlier this month, Rep. Richard Baker, R-La., urged the Treasury Department to withdraw its support of the GSE reform bill if regulators’ authority to limit Fannie and Freddie’s portfolios was weakened.
“The new regulator of the enterprises must be fully vested with authority to take action on any risks associated with the enterprises’ portfolio holdings,” Baker said in the May 10 letter. “I strongly encourage the administration to oppose any degradation of the regulatory authority currently provided in HR 1427.”
Although the amendment was easily approved by the House, it could pose an obstacle to the passage of GSE reform legislation in the Senate, where Republicans are not as heavily outnumbered.
Those who favor a stronger role for Fannie and Freddie, including the National Alliance of Independent Mortgage Bankers, have urged Congress not to pass a GSE reform bill that creates a regulator with arbitrary authority to restrict their portfolios.
“Our position is born from the fact that as retail originators, we look at Fannie and Freddie as objective, reliable sources of capital who also help us with technology, product innovation and support,” said Scott Stern, NAIMB chairman and chief executive officer. “We sell loans to Countrywide, Morgan Chase and Citi, but Fannie and Freddie are partners of ours who, in our minds, also have the added benefit of not being competitors.”
Stern, who spoke to Inman News before the amendment to HR 1427 was approved, said NAIMB favors giving a regulator authority to monitor safety and soundness.
But, Stern said, there “shouldn’t be a systemic-risk provision, because that’s subjective. Someone with a political goal could impact Fannie and Freddie’s participation in the marketplace for any reason they see fit. We think that barrier would be too low.”
The House is expected to vote on HR 1427 Tuesday, after resolving debates over other amendments to the bill.
Some Republicans are also opposed to the bill’s proposal to establish an affordable-housing fund funded by Fannie and Freddie, to the tune of about $500 million a year. Fannie and Freddie would be required to contribute an amount equal to 1.2 basis points of their outstanding mortgages to the fund. Past attempts to amend the bill to remove the requirement have failed.
