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House Votes to Advance Sound GSE Regulatory Reform
With the support of the nation’s home builders, the U.S. House of Representatives on Oct. 26 passed legislation that would strengthen the regulation of government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac and the Federal Home Loan Banks while preserving their vital housing mission.
H.R. 1461, the Federal Housing Finance Reform Act of 2005, was approved by a strongly bipartisan vote of 331 to 90.
Jerry Howard, executive vice president and CEO of NAHB, said that the bill “offers a sound regulatory solution for our secondary market institutions. It would strengthen and safeguard the financial health of Fannie Mae and Freddie Mac while enabling them to continue to fulfill their mission of providing affordable housing credit for millions of working American families.”
Among its provisions, the legislation would:
- Call on the new regulator to incorporate a true housing focus by establishing a deputy director of mission oversight for all the housing GSEs.
- Enhance the affordable housing requirements for Fannie Mae and Freddie Mac. Tougher mortgage purchase goals and a new affordable housing fund to be tied to Hurricane Katrina relief efforts during the fund’s first two years would direct the housing finance entities to segments of the market that they previously had not reached.
- Require safety and soundness to be the determining factor for any minimum capital increase. The regulator would be required to periodically assess the minimum capital standards and be allowed to adjust levels based on such reviews.
- Stipulate that there be no specific portfolio caps or directive for the regulator to reduce the portfolios of Fannie Mae and Freddie Mac. Instead, the regulator would have the authority to address safety and soundness concerns unique to each individual housing enterprise.
- Ensure that program and activity approval processes are rigorous while allowing the GSEs reasonable flexibility for innovation.
In key votes for NAHB and an indication of strong sentiment among House members against proposals that would undermine the nation’s commitment to housing, three anti-housing amendments to the bill were defeated handily:
- Failing by a vote of 73 to 386 was an amendment offered by Rep. Ed Royce (R-Calif) to impose a new "systemic risk" test or trigger for reductions in the GSEs' portfolios. NAHB opposed this amendment because H.R. 1461 already allows the regulator to address safety and soundness concerns through risk-based capital, minimum capital and portfolio powers. Adding the responsibility to prevent "systemic risk" would arguably have made the GSE regulator a traffic cop for all segments of the financial services system, NAHB argued. Further, allowing the regulator to address unspecified global considerations beyond safety and soundness would probably have made it more difficult to develop products and programs addressing important housing needs.
- Failing by a vote of 47 to 371, an amendment by Rep. Ron Paul (R-Texas) to eliminate the GSEs' line-of-credit with the Department of Treasury would have undermined the “government-sponsored" status of the GSEs, NAHB said, which Congress specifically provided so that they can raise funds in the capital markets more cheaply than commercial banks and pass those savings along to home buyers through lower interest rates. Removing the line-of-credit would have undermined the intent of the Congress for the GSEs to support more affordable homeownership and rental housing opportunities.
- Failing by a vote of 36 to 378, an amendment by Rep. Jim Leach (R-Iowa) would have directed the regulator to significantly increase minimum capital levels. By adding criteria related to "ensuring long-term institutional viability and competitive equity in the market," NAHB said that this proposal would have inappropriately diluted the importance of "safety and soundness" concerns as a criterion for increasing GSE minimum capital requirements. The amendment also would have removed the distinction in the legislation between longer-term increases in minimum capital requirements, which must be undertaken through notice and comment, and "temporary” increases that may be implemented by order. These changes would have strongly directed the new regulator to promptly double the minimum capital requirements for Fannie Mae and Freddie Mac to the levels required for commercial banks, and that would have immediately had an adverse impact on the cost of mortgage credit.
“This legislation represents a key opportunity to advance GSE regulatory reform,” said Howard. “We urge all members of the Senate to pursue a compromise similar to H.R. 1461 that would address the nation’s housing concerns at the same time as it assures the soundness and safety of institutions that are indispensable to our housing finance system.”
At the time of the House vote, it did not appear likely that the Senate leadership would attempt to move their GSE bill this year.
To read the legislation, click here and enter H.R. 1461 in the box at the upper left.
For more information, e-mail Michael Strauss at NAHB, or call him at 800-368-5242 x8252.
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