GSE Reform Put In Jeopardy By Congress
The effort to reconfigure federal oversight over the secondary mortgage market was put in turmoil last week when Congress abruptly cancelled a key vote in the face of new opposition by competing constituencies.
The House Financial Services Committee called off a vote on a proposed bill to reform the oversight over Fannie Mae and Freddie Mac after the Bush administration issued its opposition to a watered-down version of its proposal to shift oversight to the Treasury Department from the Department of Housing and Urban Development, or HUD.
The Bush administration's opposition came just days after Fannie Mae, one of the most powerful lobbies on Capitol Hill, had reversed its support for the Treasury proposal, prompting lawmakers to rewrite the bill.
And bad news issued from two Federal Home Loan Banks in Atlanta and Pittsburgh, each of which reported third-quarter losses, raised support for a budding proposal to include the 12 regional home loan banks in any new regulatory scheme for government-sponsored enterprises that dominate the huge secondary mortgage market.
"It's one of those issues where a lot of people have a lot of different ideas on it and they're all trying to get on the same page. So far it hasn't been successful," said Brad Thaler, a NAFCU lobbyist.
The reform over the GSEs has tremendous implications for credit unions, which rely on Fannie Mae and Freddie Mac to not only buy as much as half of their conforming mortgage loans, but also to issue them billions of dollars in investments, either in corporate debt or mortgage backed securities.
Yet Another Credit Union Difference
The CU relationship with the home loan banks is a little different, with more than 600 credit unions owning stock in one or more regional bank that gives them the ability to tap the bank for low-cost mortgage funding or to sell mortgages into the FHLBs' fledgling secondary market program, Mortgage Partnership Finance.
"Our biggest concern is that the successful relationship credit unions have with the GSEs is not harmed in any way," said Thaler.
The Financial Services Committee was scheduled to vote last week on a bill that would move the oversight of Fannie and Freddie from the Office of Federal Housing Enterprises Oversight, which is currently housed inside HUD, and create a new agency under the Treasury Department. However, in a compromise lobbied for by Fannie and Freddie, HUD would retain the power to approve any new products or services to be offered by one of the two secondary mortgage market giants.
Treasury balked at the compromise proposal, saying it was not a credible alternative and did not represent meaningful reform, prompting the House to cancel the vote at the last minute.
Brian McDonnell, president of Navy FCU, the largest mortgage lender among CUs and a close customer of Fannie Mae's, said he supports the compromise proposal because it leaves the decision-making authority over new products and services in HUD, which is the key housing administrator in the federal government. To move that decision-making authority to Treasury, he suggested, would open it up to political interference. This would invite increased pressure from a powerful lobby led by big banks to rein in Fannie and Freddie to help them carve a greater niche in the mortgage market, said McDonnell. "There's been a lot of rhetoric over concerns about Fannie and Freddie that's been generated by the big banks," he said.
Last week's news by the FHLBs of Atlanta and Pittsburgh complicates the matter even further. On the same day, the Atlanta bank, which has 1,194 members, including 110 credit unions, reported that a write-down of its mortgage hedging portfolio caused it to book a $9.1- million loss for the third quarter, and the FHLB of Pittsburgh, with 352 members, including 17 credit unions, said that losses on its investments will push it into the red to the tune of $6.5 million for the third quarter. The news came just weeks after the FHLB of New York reported that a $193-million loss on its investments caused it to halt dividends for the third quarter.
The negative news is sure to fuel efforts by some lawmakers to include the FHLBs in any new regulatory scheme designed for the Fannie Mae and Freddie Mac housing GSEs. Following last week's reports by the Atlanta and Pittsburgh banks, a top Treasury Department official said it may be prudent to include the home loan banks in a GSE reform package.