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In GSE Regulatory Efforts, Congress Warned of Possible Harm to Home Finance System

As the debate over the regulatory restructuring of the housing industry’s government sponsored enterprises (GSEs) was heating up again in the Congress, the nation’s home builders on Feb. 10 called on lawmakers to focus on the vital role that Fannie Mae, Freddie Mac and the Federal Home Loan Banks have played in the nation’s housing finance system, one that has been essential to the housing sector’s ability in the past few years to create jobs and generate economic growth.

“Regulation of the GSEs involves two discrete, yet complementary aspects — enforcing compliance with financial safety and soundness principles and ensuring unwavering housing mission orientation,” NAHB President Bobby Rayburn, told members of the Senate Banking Committee.

NAHB would support transferring only the financial safety and soundness oversight of the GSEs to a strong and credible regulator that possesses adequate authority and resources, such as the Treasury Department. However, Rayburn said that it is imperative for the regulatory framework to reflect the differences inherent in the charters and operating structures of the GSEs.

The purpose of mission regulation is to ensure that the GSEs fulfill their congressional mandate to provide housing finance at the lowest possible cost and to operate within their charters. Reviewing new programs solely on the basis of safety and soundness, as envisioned by the Administration, would severely inhibit or delay the development and implementation of valuable new mortgage products and technological innovations, said Rayburn.

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“This is why NAHB maintains that the program oversight that is currently conducted by HUD should not be transferred to the Treasury Department,” he said. “NAHB believes that Fannie Mae’s and Freddie Mac’s ability to spur innovative solutions to increase homeownership will continue only if the mission of these corporations is regulated by an agency that also has a housing mission, expertise and experience.”

Noting that the Treasury Department has virtually no experience or expertise in evaluating the effectiveness and appropriateness of housing policies, Rayburn added that moving program oversight authority to the Treasury could reduce the capacity of Fannie Mae and Freddie Mac to provide the liquidity and stability needed to keep mortgage credit available at the lowest possible cost to home owners and rental housing providers.

On the issue of capital requirements, NAHB supports a strong capital system for the GSEs and agrees that the safety and soundness regulator should have the flexibility to adjust capital standards as necessary, but cautions against immediate changes in either the GSE risk-based or minimum capital standards.

Rayburn said that NAHB would be willing to explore the idea of a stand-alone independent regulator, which has been floated as a compromise on the key issues of program oversight and independence of the financial regulator.

“While this is not our first preference, NAHB would be open to the idea of Fannie Mae, Freddie Mac and the Federal Home Loan Banks under such a system,” he said. “Our primary concern in any regulatory scenario is that the mission regulator must have a housing focus and expertise, and that the safety and soundness regulator must have sufficient respect and authority to satisfy Congress and the capital markets.”

NAHB further recommends that such an entity be governed by a board of directors rather than by a single agency head. A HUD representative should serve on the board of directors in order to ensure that it possesses a housing-oriented focus and experience.

To recognize and accommodate the differences between Fannie Mae and Freddie Mac and the Federal Home Loan Banks, Rayburn suggested that such a system establish two divisions and maintain separate funding for the costs of regulation.

Photos by Herman Farrer

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