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Home equity lending in the new marketplace

Sep 06, 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 job." 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 country. 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 Senate. For more information, visit
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