The other major piece of legislation effecting credit unions-the restructuring of the regulatory oversight of government sponsored enterprises Fannie Mae and Freddie Mac (and probably the Federal Home Loan Banks-is not likely to be completed this year.
But the longer the debate goes on, the more the GSEs expose themselves to risks that the bill will go beyond what they originally expected. That was simply the reshuffling of the regulatory deck by shifting the agency that oversees Fannie and Freddie from the Department of Housing and Urban Development (HUD) to the Treasury Department.
But now, witnesses testifying before Congress are suggesting far greater reforms to the system. The director of the well-respected Congressional Budget Office, for instance, suggested during testimony before the Senate Banking Committee on Oct. 23 that it may be time to cut the apron-strings, the so-called implied government guarantee, connecting the GSEs to the federal government.
Those apron strings, according to Douglas Holtz-Eakin, provide subsidies of more than $15 billion a year to Fannie, Freddie and the FHLBs. That figure is a 50% increase from a report issued just two years ago. Just what are those subsidies?
The principal benefit of having the status of a government sponsored enterprise, according to Holtz-Eakin, is the ability to borrow at lower rates of interest than any fully private firm holding the same amount of private equity capital and taking the same risks. Low-cost capital and easy access to the market is the direct result of an implied federal guarantee of the GSEs' obligations, he testified.
The implied federal guarantee, he said, is communicated to investors in several ways, including the guaranteed line of credit with the U.S. Treasury; exemption from Securities and Exchange Commission registration and disclosure requirements; exemption from state and local income taxes, and the appointment of some directors by the President of the U.S.
The value of the federal subsidy to the GSEs, said Holtz-Eakin, can be approximated by comparing the enterprises' actual funding costs with those they would face as private entities. Based on those estimations, the value of the annual subsidy is now greater than $15 billion, he said.
'Reliable Sources'
"GSE status and the benefits it conveys are no longer necessary to the functions that Fannie Mae, Freddie Mac and the Federal Home Loan Banks perform," Holtz-Eakin concluded. "Those purposes include ensuring a reliable source of funds to housing and increasing access to mortgage credit by low- and moderate-income borrowers so that more families can own their own homes."
Private institutions that lack GSE status, he noted, currently maintain a reliable link between the wholesale capital markets and retail lenders who originate home mortgages.
Though congressional leaders indicated they want to keep any GSE legislation simple in order to facilitate quick and easy passage, the longer the debate goes on, the more likely it will expand to areas such as this, which Fannie and Freddie would like to avoid.
If the issues stretch into next year, as appears likely, watch for these kinds of matters to be discussed in greater detail.
