Contradictions Abound On Secondary Market Bill

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A casual observer of politics may have thought the Democrats were controlling the congressional committees and therefore, drafting legislation to regulate the secondary mortgage markets.

Afterall, the bill introduced by Republican Richard Shelby of Alabama and being debated in the Senate Banking Committee last week would increase government regulation over the secondary mortgage market by creating another new government agency to oversee the operations of Fannie Mae and Freddie Mac, as well as their cousins in the secondary mortgage market, the 12 Federal Home Loan Banks.

Increased regulation and expanded government, of course, are two practices usually associated with the Democrats.

In the House, the Republican-controlled Financial Services Committee passed a bill by tacking on a multi-billion dollar affordable housing fund, some called a new tax, on the secondary market giants.

The fund would require the two companies, just as is required from the FHLBs, to set aside a portion of their annual profits to fund affordable housing projects.

The FHLBs disburse about $2 billion a year to their bank owners in affordable housing funding, with credit unions getting a tiny slice of it.

The House bill projects a renewable fund as big as $3 billion would be created from Fannie and Freddie.

A new tax on private enterprise called an affordable housing fund, of course, is something you might expect from the Democrats (in fact, the fund is being opposed by a number of Republicans, led by credit union champion Ed Royce of California, on the Financial Services Committee).

The Shelby bill would eventually set the groundwork for a whole new regulatory system for the secondary mortgage market, which has outgrown the Treasury market to become the largest bond market in the U.S.

Largely at the behest of Federal Reserve Chairman Alan Greenspan, the Shelby bill goes farther than a bill passed by the House Financial Services a couple of months ago by allowing the new government agency to actually set limits on portfolios Fannie Mae and Freddie Mac hold.

Greenspan told Congress he believes much of the $1.5 trillion in mortgage assets the two government sponsored entities hold are not needed to facilitate a secondary market for mortgages, the original mission of these pseudo government agencies.

Several studies have suggested recently that most of the profits earned by the GSEs accrues to their public stockholders, and not homeowners, as Congress intended when it created the separate companies.

Greenspan foresees the two companies' portfolios being cut back by as much as 90%, to something like $150 billion for each.

Under such a scenario, the two would be required to divest the vast majority of their portfolios, flooding tens of billions of dollars of mortgage securities into the market.

Lawmakers are not likely to adopt the Fed Chairman's recommendation, but under Shelby's bill would give the new regulator powers to eventually set portfolio limits.

Nobody knows what those limits would be.

The Shelby bill would also let the new government agency to set a so-called bright line to delineate between the originations portion of the mortgage market and the secondary market, the trading of mortgage paper.

The secondary market has become a vast source of credit union funding, with credit unions selling as many as half their mortgages to one of the two mortgage giants, then turning around and using the money buying and selling billions more of mortgage-backed securities, most of it issued by Fannie Mae or Freddie Mac.

But many in the mortgage industry worry that a scenario similar to one that played out in the student loan market could occur in the mortgage market.

In the student loan case, Sallie Mae, a government sponsored enterprise, was privatized, only to become the dominant player in the student loan market.

The credit union lobby, which is tightly bound to the two secondary market companies, is opposed to letting a new regulator setting bright line powers.

Both CUNA and NAFCU have written lawmakers opposing any kind of bright line test so as not to limit their abilities to offer new products and services to credit unions.

Each trade association also has a lucrative endorsement deal with one of the two companies, CUNA with Freddie Mac and NAFCU with Fannie Mae.

Democrats have come down opposed to the Shelby bill because they say they are opposed to more regulation. Senate Democrates support the affordable housing fund.

The Shelby bill was expected to pass the Senate Banking Committee last week, but only narrowly.

Narrow passage means the bill doesn't have enough support to be passed by the whole Senate. That means the bill will languish, along with the one passed by the House Financial Services Committee, for the rest of the year.

That pushes off resolution of this important legislation until next year.

Ed Roberts can be reached at eroberts cujournal.com.

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