New Oversight Proposals For Secondary Market

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After a brief flirtation last year, Congress began in earnest last week to tackle the issue of a new regulatory oversight for the secondary mortgage market.

The latest proposal, put forward by the powerful Senate Banking Committee Chairman Richard Shelby of Alabama, differs from the ones debated last year that would simply shift around the agency overseeing Fannie Mae and Freddie Mac. Shelby's proposal would create a new independent agency to oversee the two secondary mortgage market giants, as well as the 12 Federal Home Loan Banks, which are playing a growing role in the secondary market. The new agency, in turn, would be guided by a board of directors that would include representatives from the U.S. Treasury, the Department of Housing and Urban Development, and other relevant agencies, like the Federal Reserve.

The proposal by Shelby, who is known for holding his cards close to his vest, is an important one and exhibits much more thought than the ones put forward last year, which would simply move the Office of Federal Housing Enterprise Oversight from HUD to the Treasury. Those proposals would have HUD retain authority to set the permissible activities for Fannie and Freddie, despite moving ultimate oversight to another agency (Treasury). Shelby's proposal would have the new independent agency set capital standards and have oversight of new programs.

Shelby's proposal makes a lot of sense for several reasons. First, it brings oversight of the biggest players in the secondary market together for the first time under one roof, including, as it does the FHLBs. Second, it establishes a truly independent agency, separate from the potential political pressures of the Treasury or HUD.

The issue is shaping up as perhaps the biggest legislative battle of the year, pitting some of the most powerful lobbies against one another. Both Fannie Mae and Freddie Mac, and now the FHLBs, with their pseudo-government charters and their deep reach into the all-important housing market, are among the most influential forces on Capitol Hill. But the recent accounting problems at Fannie and Freddie have strengthened the hand of so-called FM Watch, a lobby comprised of some of the biggest financial institutions that wants to rein in the Fannie's and Freddie's powers to dominate the secondary mortgage market.

Meantime, other things continue to happen around the fringes, some of them chipping away at the benefits enjoyed by Fannie and Freddie. For one, the Federal Reserve announced its intention to stop allowing Fannie, Freddie and the FHLBs what amounts o a one-day float on securities cleared through the Fed system without first depositing so-called sterile reserves, like all banks and credit unions do. That move, which will be proposed for public comment, would cost Fannie and Freddie, now the largest non-government issuers of debt in the country, tens of millions of dollars a year.

And policymakers are still pushing for the three government sponsored enterprises to register their securities with the Securities and Exchange Commission, like all other issuers of publicly traded debt must do. This also would result in tens of millions of dollars of additional costs for the three entities.

The governing structure of the GSEs is also being tinkered with behind the scenes. For example, the Bush administration said the White House will no longer avail itself of the authority to name five directors to Fannie's 18-member board, a major voting block with which it could always exercise some influence. And independent authorities, including the Government Accounting Office, have begun calling for the separation of the chief executive officer's and chairman of the board's jobs for Fannie Mae, suggesting that one person (Franklin Raines), sharing the two jobs could pose a conflict of interest. Freddie Mac has already begun a move to separate the dual roles.

Shelby's representatives said last week the Banking Committee Chairman is expected to have a draft of his proposal ready for debate next month. In the interim, other issues are expected to be raised that could have major ramifications for both the GSEs and their customers. Among them are Fannie's and Freddie's guaranteed line of credit with the U.S. Treasury, which gives the two GSEs advantages on borrowing costs over their competitors in the secondary market.

Because this issue is so politically charged and involves so many powerful players, it is not clear how the legislation is going to shape up especially as we approach the campaign season when so many bills become hostage to political posturing. It is not even sure that we will see passage of a bill this year, considering all of the conflicting forces. But there is no question of the importance to credit unions, for which mortgage lending has become the main part of their business, now exceeding consumer lending. Any additional costs incurred by the GSEs, of course, would be passed on to their customers.

Watch for this legislation to dominate the financial services industry lobby for the remainder of the congressional calendar.

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