Rep Proposes Putting All GSEs Under Treasury

A leading lawmaker proposed legislation this week to create a new regulator for the government sponsored enterprises, Freddie Mac and Fannie Mae, as well as the Federal Home Loan Bank System, under the U.S. Treasury Department. The proposal, introduced by Rep. Ed Royce (R-CA), a senior member of the House Financial Services Committee, differs from a recent proposal to create a new overseer for Fannie Mae and scandal-wracked Freddie Mac, as it would include the FHLBs, a network of 12 regional banks that provide low-cost funding for S&Ls, banks and credit unions to facilitate housing finance.

The FHLBs, which are currently overseen and regulated by the Federal Housing Finance Board, are becoming increasingly important for credit unions, more than 500 of which now claim membership in one of the regional banks.

Rep. Richard Baker (R-LA), author of the existing proposal, said he has no plans to draw the FHLBs into his bill to create a new Fannie and Freddie regulator. The proposals come on the heels of disclosures that Freddie may have understated profits by as much as $4.5 billion in order to "smooth out" its earnings.

Look for more regulatory proposals and hearings into the goings-on at Freddie Mac over the coming months. Most of the proposals will be like Baker's or Royce's and be limited to a new regulatory structure for the secondary mortgage giants. Don't look for any reforms to the actual structure of Freddie or Fannie, such as the elimination of the guaranteed line of credit with the Treasury, the so-called implied federal guarantee of their debt, which gives them enormous borrowing advantages in the credit markets.