House GOP Makes the Next Move on GSE Reform

The Obama administration’s February report that outlined a series of near-term and long-term proposals for reforming Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac provided a starting point for Congressional debate—and now House Republicans appear ready to act.

This afternoon, Republicans on the House Financial Services Committee held a press conference to unveil eight separate proposals for providing near-term reforms to Fannie and Freddie. Several of the GOP proposals mirror those made by the Obama administration, including an increase in Fannie and Freddie’s guarantee fees and a winding down of both GSE’s investment portfolios, which currently hover around $1 trillion. Of particular significance, however, is the GOP’s omission of a long-term proposal for replacing Fannie and Freddie, highlighting the difficulty in significantly decreasing the GSE’s outsized role in the U.S. housing finance market.

Below is a summary of each GOP proposal: 

Executive Compensation—Introduced by Chairman Spencer Bachus (R-AL), the Equity in Government Compensation Act of 2011 would suspend current compensation packages for Fannie and Freddie’s senior executives and replace them with compensation packages on par with current pay rates for senior employees in the Executive Branch of the Federal Government.

Congressional Oversight—Introduced by Rep. Judy Biggert (R-IL), the Fannie Mae and Freddie Mac Accountability and Transparency for Taxpayers Act of 2011 would require the Inspector General of the Federal Housing Finance Agency to submit quarterly reports to the Congress during the conservatorship of Fannie and Freddie.

Risk Retention—Introduced by Rep. Scott Garrett (R-NJ), the GSE Credit Risk Equitable Treatment Act of 2011 would prohibit mortgages held or securitized by Fannie or Freddie from being exempted from the risk retention rules established under Dodd-Frank and currently being proposed by the FDIC.

Investment Portfolio—Introduced by Rep. Jeb Hensarling (R-TX), the GSE Portfolio Risk Reduction Act of 2011 would incrementally impose caps on Fannie and Freddie’s investment portfolios so that it reaches $250 billion after five years.

Guarantee Fees—Introduced by Rep. Randy Neugebauer (R-TX), the GSE Subsidy Elimination Act of 2011 would increase the guarantee fees over two years that Fannie and Freddie charge investors in exchange for a guarantee of the timely payment of interest and principal on Mortgage Backed Securities (MBS).

Debt Issuance—Introduced by Rep. Steve Pearce (R-NM), the GSE Debt Issuance Approval Act of 2011 would prohibit Fannie or Freddie from issuing any new debt without approval from the Secretary of the Treasury.

Affordable Housing—Introduced by Rep. Ed Royce (R-CA), the GSE Mission Improvement Act of 2011 would repeal Fannie and Freddie’s congressionally-mandated affordable housing goals.

Lending Markets—Introduced by Freshmen Rep. David Schweikert (R-AZ), the GSE Risk and Activities Limitation Act of 2011 would prohibit Fannie and Freddie from approving any new financial products while in conservatorship or receivership.

The House Financial Services Subcommittee on Capital Markets & Government Sponsored Enterprises will consider the eight GOP proposals during a hearing on Thursday, as Federal Housing Finance Agency Acting Director Edward DeMarco is slated to testify.

The piecemeal approach to GSE reform is a continuation of House Republicans’ legislative strategy in the 112th Congress, aimed at avoiding comprehensive proposals that are more liable to political attack and getting bogged down in the legislative process.

The fast-track approach, however, will only go so far in the Senate. During a GSE reform hearing on Tuesday, Banking, Housing and Urban Affairs Committee Ranking Member Richard Shelby (R-AL) made clear in his opening statement that housing finance reform will require a long and protracted congressional debate that may last beyond 2012.

“Before Congress can consider legislation, this Committee needs to do its homework,” said Shelby. “The Committee needs to thoroughly examine Federal housing policy and identify the problems with our current system. Accordingly, I believe this hearing is premature.”

Shelby, one of the leading critics of Dodd-Frank, warned his colleagues that hastily crafted GSE reform legislation would lead to “unintended consequences,” citing the financial reform legislation as an example.

The Obama Administration's Plan for Winding Down Fannie Mae and Freddie Mac

On February 11, 2011 the Obama Administration delivered a report to Congress that provides a path forward for reforming America’s housing market. The Administration set forth a plan to wind down Fannie Mae and Freddie Mac in order to shrink the government’s current role in housing finance in a timely matter. The Administration’s plan focuses on bringing private capital back to the market through a number of different measures including:

  • Phasing in increased pricing at Fannie Mae and Freddie Mac to make room for private capital
  • Reducing conforming loan limits
  • Phasing in a 10 percent down payment requirement
  • Winding down Fannie Mae and Freddie Mac’s investment portfolios
  • Returning the Federal Housing Administration (FHA) to its traditional role to ensure that the private sector, so that when Fannie Mae and Freddie Mac’s presence in the market shrinks, the private sector, not FHA, picks up the new market share.

The Administration also proposed three possible courses for long-term reform:

Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers.

Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis.

Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital.

Click here to read the full report or the Treasury press statement.

Reforming America's Housing Finance Market: A Report to Congress (PDF)

The View from November 3rd

The results of the 2010 mid-term elections are now in, meaning it’s time to begin analyzing what a new Republican House majority and a more narrowly divided Democratic Senate majority will represent for financial reform efforts in the 112th Congress.

Speaking to reporters this morning, House Minority Leader and likely the next Speaker of the House, John Boehner (R-OH), appeared to tone down previous calls by him and fellow GOP colleagues for a repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act, instead expressing his caucus’s intention to begin closely scrutinizing the implementation of the sweeping financial reform legislation through aggressive oversight. The GOP is expected to focus its sights on the following—the newly-created Consumer Financial Protection Bureau (CFPB); FDIC resolution authority that allows the agency to wind down failing financial institutions; and new rules governing financial derivatives. Republican gains in both the House and Senate will almost assuredly nix President Obama’s ability to usher through the Senate a potential nomination of Elizabeth Warren as a permanent director of the CFPB.

Despite the GOP’s renewed focus on overseeing and potentially repealing certain provisions of Dodd-Frank, a Democratic-controlled White House and Senate will still significantly hamper Republicans’ ability to pass any broad or sweeping changes. The most viable tool at Republicans’ disposal will be the power of the purse, as attempts could be made to prevent Dodd-Frank’s implementation through the withholding of federal appropriations to certain agencies. However, from a political standpoint, it remains to be seen whether the new House majority will risk being viewed by the electorate as proponents of Wall Street deregulation when looking ahead to 2012.

In addition to the oversight of Dodd-Frank, the looming congressional battle and the top legislative priority for the House Financial Services and Senate Banking Committees will be the reform of the U.S. housing finance system, particularly the Government Sponsored Enterprises (GSE), Fannie Mae and Freddie Mac.

In terms of key committee leadership posts, the top contender for the chairmanship of the House Financial Services Committee appears to be current ranking member Spencer Bachus (R-AL), who has served as the committee’s ranking Republican since beating out Howard Baker (R-LA) in 2006. Bachus possesses a conservative voting record and has stated his intention to make GSE reform and the reexamination of the Dodd-Frank bill—particularly the provisions related to the CFPB and derivatives regulation—his top priorities. The other potential contenders for the chairmanship include Ed Royce (R-CA) and Scott Garrett (R-NJ), although Garrett told reporters today that he expects Bachus to be chairman. Top Democrat Barney Frank (D-MA) is also expected to reassume the role of ranking member, a position he last held in 2006.

Aside from the transition in leadership, the committee will also lose at least 16 of its members due to reelection losses or retirements (13 Democrats and 3 Republicans). Of those 16, the most prominent committee member that will not be returning in January is the chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, Paul Kanjorski (D-PA), who lost his bid for a 14th term on Tuesday. Currently, Gary Ackerman (D-NY) is next in line to assume the ranking member position on the subcommittee, which will play an outsized role in the pending GSE debate. Garrett—a vocal critic of the GSEs in their current form—is next in line to chair the subcommittee.

Joining Kanjorski, the following Democratic committee members also lost their races for reelection: Ron Klein (FL), Charlie Wilson (OH), Bill Foster (IL), Travis Childers (MS), Walt Minnick (ID), John Adler (NJ), Mary Jo Kilroy (OH), Steve Driehaus (OH), Suzanne Kosmas (FL) and Alan Grayson (FL).

Over in the Senate, three members of the Senate Banking Committee will be retiring at the end of 2010, including committee Chairman Christopher Dodd (D-CT), subcommittee chairman Evan Bayh (D-IN) and subcommittee ranking member Jim Bunning (R-KY). In addition, Robert Bennett (R-UT) lost his Republican primary for reelection in May. With Dodd’s pending departure, Tim Johnson (D-SD) appears slated to assume the chairmanship, with Richard Shelby (R-AL) retaining the ranking member post. Although Johnson’s chairmanship in the Senate appears secure, senior committee member Jack Reed (D-RI) has also been named as a potential contender. The narrowed Democratic majority of one or two seats on the committee will heighten the need for bipartisanship and ultimately grant moderate members such as Mark Warner (D-VA) and Bob Corker (R-TN) with greater influence moving forward.

Stay tuned in the days ahead as Financial Reform Watch continues to make sense of Tuesday’s historic election results.

Federal Reserve Announces Two New Programs to Spur Lending

The Federal Reserve announced two new programs today, committing an additional $800 billion in order to spur lending. U.S. Treasury Secretary Hank Paulson also announced that $20 billion from the Troubled Asset Relief Program (TARP) would be used to support one of the programs. The first, worth $600 billion, is aimed at helping the housing market; and the second Fed program, worth $200 billion, is directed at thawing the frozen consumer credit markets.

The Fed announced this morning that it will "initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae." The Fed will work with "primary dealers through a series of competitive auctions" for purchases of up to $100 billion in "GSE direct obligations" beginning next week. For purchases of up to $500 billion in MBS, the Fed will select asset-managers through a competitive process and plans to start these purchases before the end of the year. The Fed said in a release that it will provide operational details after "consultation with market participants," and added that "Purchases of both direct obligations and MBS are expected to take place over several quarters."

The second program, targeted at consumer credit, also involves the TARP. The Federal Reserve Bank of New York will establish the Term Asset-Backed Securities Loan Facility (TALF) that will "lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS [asset-backed securities] backed by newly and recently originated consumer and small business loans." The TALF will support the "issuance of asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the U.S. Small Business Administration." The Treasury Secretary committed $20 billion from the TARP to back the TALF. The TARP funds will be used to "purchase subordinated debt" issued by a New York Fed special purpose vehicle "to finance the first $20 billion of asset purchases." The New York Fed’s special purpose vehicle will be used to purchase and manage assets connected to the TALF loans.


Federal Reserve TALF Term Sheet (PDF)

TARP CPP Transactions as of 25 November 2008 (PDF)