Senate Offers Own Plan On GSE Oversight

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The Senate Banking Committee was expected to vote last week on a new regulatory scheme for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, the government-sponsored enterprises that dominate the secondary mortgage market.

The Senate bill would create an independent agency to oversee the three secondary market players.

This is a slightly different scheme than one proposed in the House that would simply move the current regulator from the Department of Housing and Urban Development (HUD) into the Treasury Department.

But the Senate measure would also add teeth to the new regulator by giving it authority to determine which products and services the giant mortgage companies could offer and how much capital they should maintain.

It would also require them to register their stock with the Securities and Exchange Commission, just like all other publicly owned entities, and set up a conservatorship, just in case of the unlikely scenario that one of the mortgage giants went bust.

Both Fannie and Freddie, which buy the vast majority of single-family mortgages on the secondary market, are semi-private entities that are owned by private shareholders and traded on their New York Stock Exchange, but maintain government charters that provides them with a host of financial benefits.

The Federal Home Loan Banks, which have become emerging players in the secondary market with their fledgling Mortgage Partnership Finance Program, are owned by federally insured financial institutions, including credit unions, commercial banks and thrifts, who own stock in one or more of the 12 regional banks.

Fannie and Freddie, which brought the legislative proposals on themselves by their careless and, in some cases, illegal, accounting, continue to fight the proposals, as benign as they may seem.

Among the reasons are the switch from a federal regulator in HUD, and the proposed conservatorship (receivership) scheme.

The opposition by the two entities, which employ some of the most powerful lobbyists on Capitol Hill, is expected to make it very difficult for any real reform to be passed this year, if ever.

While Fannie and Freddie retain large followings in Congress, it is clear their continued opposition to any reform is causing some enmity among traditional allies and could backfire in the end.

Credit unions, which are major partners with all three of the mortgage entities, are watching the issue closely but have not taken an active role in the legislation.

The credit union has a huge stake in any legislation that will reform the secondary mortgage market, first because credit unions sell as much as half of their mortgage loans to one of the three entities; and just as importantly, because credit unions hold more than $100 billion of securities issued by these companies.

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