Battle Over GSE Oversight Is Turning Into Turf War

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Watching the growing legislative contest over the reform effort for Fannie Mae and Freddie Mac reminds me of an old joke about watching a hockey game: I went to the fights last night and a hockey game broke out.

What reminds me of the hockey joke is the apparent disconnect between hockey and fighting, though anyone who has ever watched an NHL game will dispute that.

So it is that legislation aimed at addressing accounting shortfalls at secondary mortgage market giant Freddie Mac appears to have broken out into a turf war between two government-sponsored enterprises, Freddie Mac and Fannie Mae, and a third, the Federal Home Loan Banks, which are vying to carve out a portion of the vast secondary market for mortgages.

The Batttle Has Shifted

Consequently, the focus of the GSE reform legislation has now shifted to the structure and oversight of the secondary mortgage market and the role of the government-sponsored enterprises in it.

The emerging turf war was brought into the open last week when efforts by Fannie Mae to lobby for new restrictions on the home loan banks' growing secondary mortgage program, known as Mortgage Partnership Finance, were brought to light.

A memo obtained by The Credit Union Journal and circulating on Capitol Hill shows that Fannie is urging lawmakers to impose federal income taxes on the home loan banks, to eliminate certain state and local tax exemptions, and limit the home loan banks' growing secondary market program, known as the Mortgage Partnership Finance, to loans conforming to those purchased by Fannie Mae and Freddie Mac.

The memo also calls for the restriction of the MPF program to bank and credit union members of the 12 regional home loan banks.

Representatives of Freddie Mac, who have been keeping a low profile since the outbreak of the accounting scandal surrounding the company, are reported to support the greater restrictions on the FHLBs, which have been making inroads in the secondary market since the inception of the MPF four years ago.

Since that time the home loan banks have bought more than $150-billion in mortgage loans, a growing figure, but still just a dent in the multi-trillion dollar mortgage market still dominated by Fannie Mae and Freddie Mac.

The new lobbying comes as growing numbers of lawmakers want the home loan banks, which are currently regulated by the Federal Housing Finance Board, an office in the Treasury, to be included in any new regulatory scheme created for Fannie and Freddie.

In some ways it makes sense because all three entities were created by the federal government to facilitate mortgage lending and to help stabilize the mortgage market.

But the FHLBs are different animals than Fannie or Freddie because they are owned by their member S&Ls, banks and credit unions, while Fannie and Freddie are quasi-public corporations, enjoying many government benefits, like local tax exemptions, but owned by stockholders.

Recent travails of FHLBs themselves, including losses reported by the New York and Pittsburgh banks, have fueled the debate over putting the banks under the new regulator.

Until recently, Congressional leaders said they wanted a simple bill to move the current Fannie and Freddie regulator, known as the Office of Federal Housing Enterprise Oversight or OFHEO, from the Department of Housing and Urban Development (HUD) into the Treasury Department. The simpler the bill, the easier it will be for passage, they figured.

Interestingly enough, the new lobbying effort by Fannie Mae comes as the company has stepped up its attacks on opponents who would rein in Fannie and Freddie to carve out a greater portion of the mortgage market.

In remarks before NAFCU's annual Congressional Caucus last month, Franklin Raines, chief executive of Fannie Mae, belittled the group, which he referred to as the "Coalition for Higher Mortgage Costs."

But now Fannie Mae wants to rein in one of its competitors, the home loan banks, by lobbying Congress to enact new restrictions and costs on the system.

An Innocent Bystander

Fannie, which was just an innocent bystander as Congress moved to react to the accounting scandal at Freddie Mac, now sees a major opportunity as the debate on the bill shifts to the role of the FHLBs.

While it may escape many credit unions, this growing battle has enormous ramifications for the credit union movement.

First off, Fannie and Freddie are not only major sources of funding because they buy as much as half of the conforming mortgages originated by credit unions, but billions of those dollars are reinvested by credit unions back into both corporate debt and mortgage- backed securities issued by one of the two companies.

The 12 regional home loan banks are also becoming major sources of liquidity for credit unions, with more than 600 credit unions now tapping the system for liquidity to help fund mortgage programs or selling of some of their loans to the MPF.

This contest, which now pits government- sponsored enterprise against government-sponsored enterprise, each of which has become a powerful Washington lobby it its own right, promises to be one worth watching.

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