Administration May Get Involved In GSE Debate

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There were several signals last week that the White House will take a more active role in the reform of the secondary mortgage market this time around. The Bush administration was slow to weigh in during the last Congress on proposals to re-regulate government-sponsored enterprises Fannie Mae and Freddie Mac, but this time it appears things will be different.

Among the proposals being weighed by the administration are limits on the size, that is, the amount of assets, the two secondary mortgage market giants can hold. The main motive would be to limit any potential government bail out. The Administration is also supporting a proposal that would allow for a government takeover, generally referred to as receivership, in the case of a failure of either GSE. The White House is also expected to support proposals to combine a new Fannie and Freddie regulator with that of the Federal Home Loan Banks, which are playing increasing roles in the secondary market.

The White House overtures come just as Congress is beginning the legislative process on GSE reform with hearings and the introduction of bills. Previous administrations, including the first Bush White House, were reluctant to get involved because of the powerful lobbies represented by Fannie Mae and Freddie Mac and their broad constituencies that reach into every community in the nation. If Social Security reform was considered the third rail of politics-now broached-then GSE reform was also considered, for many years, untouchable. But the accounting scandals of the last few years that have engulfed both Fannie and Freddie have changed all that and made the subject more palatable for both Congress and the White House.

In addition, there are also some signs that White House policy on the issue is being increasingly driven by conservative and libertarian think tanks that are pushing the possibility of cutting the government apron strings to the two companies, including the guaranteed line of credit with the U.S. Treasury; exemptions from state and local taxes, and exemptions from Securities and Exchange Commission registration fees on the huge securities offerings regularly brought to market by the two companies.

Some advocates on the right are even pushing for the administration to back full privatization of the two quasi-government agencies, in much the same way that student loan giant Sallie Mae recently shed its government charter and was privatized.

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