A GSE makeover: congress is once again taking steps to tackle regulatory reform of the government-sponsored enterprises (GSEs). This year, the effort has taken on new urgency.

Author:Voyles, Bennett

FOR THE PAST FEW YEARS NOW, FANNIE MAE AND Freddie Mac have been mired in bad news. First, accounting irregularities resulted in a surprise ouster of long-standing top executives at Freddie Mac. Now, investigations by the Office of Federal Housing Enterprise Oversight (OFHEO) and the Securities and Exchange Commission (SEC) have prompted a reshuffling at the top for Fannie Mae as well.

What's next for Fannie and Freddie? At conventional companies, throwing the responsible executives out might well be the end of the story. But Fannie Mae and Freddie Mac have between them $1.5 trillion of U.S. mortgages on their balance sheet, according to the companies' latest figures. What's more, their special status as government-sponsored enterprises (GSEs) means, arguably, that the taxpayer is essentially a co-signer on much of that paper, even if there is no direct guarantee from the government on GSE securities.

As a result, Congress and the administration are very eager to make sure things run more smoothly at Fannie and Freddie from now on--yet perhaps almost as anxious to avoid the political risks involved in re-engineering the two largest players in the secondary residential mortgage market.

Last year legislation was introduced and passed in the Senate Banking Committee, but never enacted. Both Fannie and Freddie field powerful lobbies, and they were able to help muster support to sideline the bills due to conflict over various provisions.

Even the White House was said to have pulled back its support from legislation due to concern that the measures weren't tough enough. But with the start of a new Congress, the field is wide open for the legislative process to begin anew.

As of press time, the White House had not made known its position on what it wants in GSE reform legislation. "Last year, the White House effectively vetoed the bill Chairman [Richard] Shelby moved by signaling no support. This year, the administration's views will again have a strong influence," says Kurt Pfotenhauer, senior vice president of government affairs for the Mortgage Bankers Association (MBA).

Already, a bill similar to the one that failed last year has been reintroduced in the Senate. Filed on Jan. 26 by Sens. Chuck Hagel (R-Nebraska), John Sununu (R-New Hampshire) and Elizabeth Dole (R-North Carolina), the bill would:

* Create an independent, world-class regulator to oversee safety and soundness of Fannie Mae and Freddie Mac;

* Give the regulator the authority to shut down a failing GSE and protect against a taxpayer-funded bailout;

* Give the regulator greater decision-making in raising capital standards;

* Direct the regulator to draw a "bright line" separating the primary and secondary mortgage markets;

* Give the new regulator flexible approval power over new programs and activities;

* Require annual audits of affordable-housing programs to ensure compliance with the mission; and

* End presidential appointments to the boards of the GSEs.

In reintroducing the legislation, Hagel said, "Since we first introduced this legislation in 2003, the gross mismanagement of GSEs Fannie Mae and Freddie Mac has become glaringly apparent and dangerous. The need for a world-class regulator to increase the safety and soundness of the GSEs has never been clearer."

Sununu said, "Given the current climate, we must seize the opportunity to pass legislation this year to produce a credible and capable regulator so that the GSEs operate in a safe and sound manner."

Finally, Dole added, "We know the problems within these organizations are not isolated, but systemic and require a world-class regulator with the authority to oversee their operations."

Over on the House side

House members have also been considering what to do with the GSEs. A Feb. 9 hearing before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises heard testimony from Donald Nicolaisen, chief accountant, SEC. The hearing followed a decision by the SEC's chief accountant in December 2004 that "certain accounting practices of the Federal National Mortgage Association [Fannie Mae] did not comply in material respects with specific provisions within generally accepted accounting principles (GAAP)."

In his testimony, Nicolaisen cited a Dec. 15 SEC press release that noted "the SEC accounting staff indicated that, based upon our review of the information provided by Fannie Mae and OFHEO, during the period from 2001 to mid-2004 Fannie Mae's accounting practices did not comply in material respects with the [Financial Accounting Standards Board's] accounting requirements in Statement Nos. 91 and 133."

Although the SEC's latest findings and the resignation of top executives at Fannie Mae seems likely to lead even diehard GSE loyalists to support tightening GSE oversight, the opening statements at the February hearing by three Democratic members of the House Financial Services Committee suggests that positions may not have shifted all that much from last year.

The ranking minority member of the subcommittee holding the hearing, Rep. Paul Kanjorski (D-Pennsylvania), chided the Bush administration for derailing a bill that last year won bipartisan support in the House Financial Services Committee. At the hearing, Kanjorski said, "Like many of my colleagues, I was greatly disappointed in the last Congress when the Bush administration rejected our bipartisan efforts to create an independent regulator. Politics, in my view, should play no role in financial regulation."

Rep. Ruben Hinojosa (D-Texas) was more noncommital about whether reform was needed. He said, "It will be interesting...

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