Watch for Stronger Regulation of Fannie Mae, Freddie Mac by Summer

Mortgage Wire

Brian Collins

January 14, 2004

As the new year begins, it looks as if Congress will try to pass legislation that strengthens the regulation of Fannie Mae and Freddie Mac before August.

The Freddie Mac accounting scandal and management failures have finally put the overhaul of the regulatory structure that oversees the two government-sponsored enterprises squarely on the agenda of the House and Senate banking committees.

Senate Banking Committee chairman Richard Shelby, R-Ala., is expected to take the lead in holding hearings shortly after Congress returns on Jan. 20.

"We are working on putting together legislation right now," committee spokesman Andrew Gray said. But he would not speculate on when chairman Shelby would be ready to unveil a GSE bill.

Last fall, House Financial Services Committee chairman Michael Oxley, R-Ohio, took the lead. But he got caught in crossfire between the GSEs and the Treasury Department when he tried to draft a GSE bill that could be supported by Republicans and Democrats.

Treasury assistant secretary Wayne Abernathy called the committee draft too weak, forcing Rep. Oxley to cancel a markup of the GSE bill.

Since then, Treasury and Fannie have been snipping at each other, while Sen. Paul Sarbanes, D-Md., and chairman Shelby have been trying to work through the issues.

Kurt Pfotenhauer, the Mortgage Bankers Association's top lobbyist, believes chairmen Shelby and Oxley really want to move a bill. "Reports of gridlock are premature," he said.

One of Fannie's staunchest allies, the National Association of Home Builders, wants a new GSE regulator to replace the Office of Federal Housing Enterprise Oversight. But NAHB executive vice president Jerry Howard believes the Bush administration will have to bend to get a bill.

"We would encourage the Bush administration to come to the table and abandon their 'my way or the highway' approach and work with Shelby and Sarbanes," Mr. Howard said.

While Treasury and White House officials claim the GSE regulatory reform bill is a priority, they seem to act as if time is on their side. With the elections approaching, President George Bush looks very strong and Republicans are expecting to gain seats in the House and Senate. Five Democratic senators from the South are retiring.

Meanwhile, the price of Fannie and Freddie's stock has been flat for years, the refinancing boom is petering out, and the falling dollar could make GSE debt less appealing to foreign investors.

Assistant secretary Abernathy is not shy about calling the current regulators of Fannie, Freddie and the Federal Home Loan Banks "crippled" agencies.

And the president's economic advisor claims a government pullback of some of the subsidies Fannie and Freddie enjoy, such as their line of credit to the U.S. Treasury, would have little impact on the housing market.

"All indications are that if the housing GSEs were to lose some of their implicit subsidy, private financial institutions would eagerly step in," Gregory Mankiw, chairman of the President's Council of Economic Advisers said in a recent speech. "Worries about the supply of funds for mortgages are also unfounded."

In the upcoming legislative negotiations, top executives at Fannie and Freddie will have to remember that a hostile administration is likely to control the executive branch for the next four years. It may be better to make their peace with the Bush administration now.

The Federal Home Loans Banks seem resigned to be included in the GSE legislation, which would place them under the same regulator as Fannie and Freddie. Their primary concern, however, is registration with the Securities and Exchange Commission.

The Bush administration has been pressuring the FHLBanks to follow Fannie's example and register their stock. And their regulator, the Federal Housing Finance Board, has published a rule that would require the FHLBanks to register. But the FHLBanks are dragging their feet as they try to get the SEC to provide special rulings that recognize the FHLBanks capital structure and other unique features.

Besides GSE reform, the legislative agenda for housing appears to be light. The table is set for Congress to consider a flood insurance reform that could include a permanent extension of the National Flood Insurance Program.

The mortgage industry will be supporting Rep. Bob Ney's attempts to move his predatory lending bill through the House Financial Services Committee.

The Ohio Republican who chairs the housing subcommittee held the first hearing on the bill (H.R. 833) in the fall.

But the subcommittee hearing showed that industry and consumer groups are far apart when it comes to setting a national lending standard that would pre-empt state predatory lending laws.

At the same time, state attorneys general, legislators and banking commissioners are up in arms about the Comptroller of the Currency's efforts to shield national banks and their mortgage subsidiaries from compliance with state consumer protection laws - particularly state predatory lending laws.

Comptroller John Hawke is expected to finalize a rule soon that could grant national banks a blanket exemption from most predatory lending laws. New York attorney general Elliot Spitzer has threatened to sue the comptroller if he does.

Congress may also get in the act and hold hearings.

In a test of OCC's legal interpretations, Wachovia Mortgage has sued Connecticut banking commissioner John Burke, claiming it does not have to submit to state licensing, enforcement or consumer protection laws. A Dec. 18 hearing in the case (Wachovia v. John Burke) was postponed.

The regulatory agenda for 2004 is expected to be busy as the Federal Reserve Board and Federal Trade Commission start the rulemaking process for the recently passed Fair Credit Reporting Act extension bill. The two regulators plan to finalize the rules by December 2004.

The Basel II capital negotiations also will be at the forefront of the financial news, as U.S. and international bank regulators hammer out a new risk-based capital standard this spring.

Disagreements among U.S. regulators are already making adoption of the Basel II accord iffy. The results of an economic impact study the U.S. regulators plan to conduct in the third quarter could be a deciding factor.

Congress and others are concerned that preliminary studies show the large U.S. banks that adopt the Basel II RBC proposal would have much lower capital requirements on residential mortgages, consumer loans and credit card receivables than other domestic banks and thrifts.

Fed governor Roger Ferguson Jr. has conceded that the current RBC rules may have to be changed to make sure community banks and thrifts are not placed at a competitive disadvantage.

The controversy over Real Estate Settlement Procedures Act reform will intensify if the Department of Housing and Urban Development follows through on its decision to issue a final rule. o one is quite sure what is in the RESPA rule. So the trade groups are not sure if they will like it, whether they need to sue HUD or get Congress to block its implementation (see related story). Stayed turned.

Jan. 1 marks the start of a whole new Home Mortgage Disclosure Act reporting regime in which lenders will have to record the pricing of subprime loans for the first time.

"HMDA reporters are really going to have to pay attention to what they are doing," said Charlotte Bahin, director of regulatory affairs at America's Community Bankers.

When the HMDA data are released publicly in August 2005, "they are going to have to be prepared to explain the results," she said.

At the same time, subprime servicing shops have to be on the lookout for the Federal Trade Commission, which recently concluded an investigation of Fairbanks Capital Corp. The FTC found abusive servicing practices and the Salt Lake City-based servicing company agreed to pay $40 million in restitution and to adopt best practices that are spelled out in the settlement.

The FTC does not think Fairbanks is an isolated case and more investigations can be expected.

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