The government shouldn’t impose arbitrary caps on Fannie Mae and Freddie Mac’s lending portfolios, but should distance itself from some of the government-sponsored mortgage repurchasers’ debt obligations should they get into financial trouble.
That’s the view of a bipartisan bill introduced Friday to overhaul regulatory oversight of Fannie and Freddie and prevent a repeat of the management and accounting scandals of 2004.
The bill, HR 1427, is expected to generate about $500 million a year for an affordable-housing fund to address concerns that the government-sponsored entities have neglected the mission they were chartered by Congress to perform.
Backers of the bill from both parties hope it will resolve the long-running GSE reform debate. Although there has been general agreement about the need to create an independent oversight agency with powers similar to those of a bank regulator to oversee Fannie and Freddie, Democrats have opposed a Bush administration proposal to set limits on the GSE’s lending portfolios. The House passed a GSE reform bill last year that would have created an independent regulator, the Federal Housing Finance Agency, a companion bill stalled in the Senate over the issue of portfolio caps.
The new compromise legislation, HR 1427, would not establish an arbitrary cap on Fannie and Freddie’s debt. But it would strengthen the GSE’s minimum capital provisions, and allow the Federal Housing Finance Agency to establish rules for safety and soundness and revise product approval standards.
That means Fannie and Freddie will have to convince the newly created FHFA that it is not taking on more debt than it can handle. As a further crimp on Fannie and Freddie’s borrowing power, the legislation allows the GSEs to be placed into receivership if they are unable to pay their debts.
As it stands now, Federal Reserve Chairman Ben Bernanke complained in a March 6 speech, lenders are willing to extend almost limitless credit to Fannie and Freddie at bargain rates, “because of the belief among market participants that the U.S. government will back these institutions under almost any circumstances.”
Establishing procedures that would allow Fannie and Freddie to be placed under receivership would encourage creditors to reduce their exposure to the GSEs risk or charge more when they felt Fannie and Freddie were taking risks, Bernanke said.
By establishing procedures for placing the GSEs under mandatory receivership if they become critically undercapitalized, the reform bill would make it clear to creditors that Fannie and Freddie’s shareholders, not the government, are responsible for many of its debts.
“The provisions on safety and soundness, minimum capital requirements in particular, are quite strong, and we simply must make sure they are maintained through the legislative process,” said one of the bills sponsors, Rep. Richard Baker, R-La., in a statement.
Another sponsor, North Carolina Democrat Rep. Mel Watt, said it was time to “get the regulator and the GSEs out of limbo. The real benefit of this bill is that it will serve this purpose and provide a big stimulus for more affordable housing,”
Key provisions of the legislation, sponsored by Baker, Watt and Rep. Barney Frank, D-Mass., and Gary Miller, R-Calif., include:
- The establishment of an affordable-housing fund, which would draw contributions from Freddie and Fannie using a calculation based on the average total mortgage portfolio. Fannie and Freddie would contribute amounts equal to 1.2 basis points of outstanding mortgages — including those in portfolio and those securitized — which Frank has said would amount to about $500 million a year. For the first year of the program, the proceeds would go entirely to areas of Louisiana and Mississippi affected by Hurricanes Katrina and Rita
- The establishment of the Federal Housing Finance Agency (FHFA) as an independent agency to regulate Fannie Mae, Freddie Mac and Federal Home Loan Banks. FHFA would succeed the Office of Federal Housing Enterprise Oversight (OFHEO) and Federal Housing Finance Board (FHFB). Program and housing goal oversight for Fannie and Freddie would be transferred from the Department of Housing and Development (HUD) to FHFA, which would also have the authority to approve new loan products.
- The legislation sets the conforming loan limits and requires FHFA to adjust it according to the annual housing-price index maintained by the agency. An additional high-cost-area limit would be established for areas where the median home price exceeds the general conforming loan limit, up to the lower of 150 percent of the conforming loan limit or the median cost in that area. Loans in high-cost areas above the general conforming loan limit would have to be securitized. FHFA would conduct a study of whether the securitization requirement raises the cost of high-cost-area loans, and may terminate the requirement if it is found to raise costs.
- FHFA would establish housing goals and an annual home-purchase goal for Fannie and Freddie, and could take enforcement action against them for failing to meet them.
The House Financial Services Committee will hold two hearings on this legislation this week. The Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises will hold a hearing at 2 p.m. Monday, March 12, and the full Committee will discuss the bill and hear from witnesses at a 10 a.m. hearing Thursday, March 15, in room 2128 of the Rayburn House Office Building.