Home equity lending in the new marketplace

Home equity lending in the new marketplace

September 6, 2005

House panel approves mortgage giants billPress ReleaseGSE, government sponsored enterprise, Fannie Mae, Freddie Mac
On May 25, the House Committee on Financial Services held a
markup of the Federal Housing Finance Reform Act of 2005 (HR 1461),
also known as the Baker bill. The Baker bill aims to improve
supervisory authority over Fannie Mae, Freddie Mac and the Federal
Home Loan Banks (government-sponsored enterprises [GSEs]).
The bill, approved 65-5 by the committee, falls short of the Bush
administration's proposal to reduce the companies' multi-billion
dollar holdings. Republicans are pushing to rein in the two
powerful GSEs that have been beset by accounting scandals. Fannie
Mae, the number one U.S. mortgage financier and the second largest
financial institution after Citigroup Inc., is facing a likely $11
billion restatement of earnings after regulators accused it last
fall of serious accounting manipulations. In June 2003, number two
Freddie Mac disclosed that it had misstated earnings, mostly
underreporting them, by $5 billion for 2000-2002.
The administration wants Congress to establish a new regulatory
agency with the power to limit the companies' mortgage portfolios,
which total $1.5 trillion.
After the vote, Treasury Secretary John Snow said the
administration will work with lawmakers "to ensure that the bill is
strengthened so that the final product provides for a strong,
independent regulator which has all the necessary tools to do the
Snow said in a statement that limiting the companies' mortgage
portfolios "is a critical element of reform." Under the House bill,
the regulator could require the companies to buy or sell portfolio
holdings so they are financially sound.
The chief executives of Fannie Mae and Freddie Mac told Congress
in April that substantially reducing the portfolios could hurt the
U.S. housing finance market and cut off billions of dollars from
foreign investors who help make housing more affordable for
moderate-income Americans.
Among some of the amendments passed by the committee was a
manager's amendment offered by Committee Chairman Michael Oxley.
This amendment adds a materiality test to the business activities
that the director of the new agency (the Federal Housing Finance
Agency [FHFA]) may approve. In other words, the director of FHFA
has the authority to approve or disapprove new material business
activities of the GSEs rather than requiring the GSEs to receive
approval before undertaking any and all new activities. An
amendment was also passed that requires the FHFA director to define
the secondary market and loan origination. Education and
underwriting are specifically exempt from the definition so that
the GSEs may continue to offer educational programs to consumers
and provide their loan underwriting systems to lenders across the
Under the new legislation, FHFA will be independently funded by
assessments on the GSEs that will occur outside the congressional
appropriations process. FHFA will be responsible for overseeing
compliance with the GSEs' housing mission, as well as for their
safety and soundness. FHFA will have powers on par with those of
the banking regulators.
The new legislation also includes a mandate for the GSEs to focus
on affordable housing. To accomplish this mandate, the GSEs will
contribute five percent of their after-tax earnings to a fund
created to provide housing to low-income families.
Regarding passage of the bill, Rep. Baker said, "[T]he committee
took a significant step toward fulfilling a goal I have championed
for quite some time—the creation of a professional financial
regulator with full powers to oversee a huge and important part of
our financial system. … [W]hen I consider that this bill is
as strong as, and in some ways stronger than, any of the others
I've introduced in the last five years, I am even more determined
than ever to seeing that we get this job done."
Similar legislation is expected to be considered in the
For more information, visit http://financialservices.house.gov.