WASHINGTON — The Federal Housing Finance Agency — the new regulator of Fannie Mae, Freddie Mac, and the Federal Home Loan banks — began life Wednesday with a substantial to-do list.
Chief among its challenges are integrating the two agencies that previously regulated the government-sponsored enterprises and promulgating a host of new rules.
Under the housing bill President Bush signed into law Wednesday, the new agency must establish standards governing internal controls, internal audit systems, interest rate risk management, market risk management, and liquidity adequacy, to name just a few.
Perhaps the most difficult task — and one that came with an explicit time line of six months — is writing rules governing the mortgage portfolios of Fannie and Freddie. The rules must ensure the portfolios are backed by enough capital and are consistent with the GSEs' mission and safe and sound operations.
The road ahead is liable to be bumpy, observers said.
"You have the substantive priorities, and then you have the bureaucratic priorities of taking two former agencies and making them into one," said Brian Gardner, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. The agency is "going to have to work through all that stuff, and it will be time-consuming, and at the same time they will be trying to create new capital rules."
Just figuring out the logistics could be problematic. Though House Financial Services Committee Chairman Barney Frank had wanted to delay the new regulator's creation for several months to allow for more transition time, the final bill created the regulator immediately.
As a result, the Federal Housing Finance Agency came into being Wednesday, but the Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, and the Federal Housing Finance Board, which supervises the Home Loan banks, continue to exist for one year in a limited capacity.
During that time, OFHEO and the Finance Board must transfer employees to the new agency, though it was unclear when that would happen.
Technically, the only employee of the Federal Housing Finance Agency right now is James Lockhart, the former director of OFHEO, who assumes control of the new agency immediately.
The Finance Agency must also absorb the GSE mission oversight duties, and certain personnel, of the Department of Housing and Urban Development.
The rapid combination of three agencies' bailiwicks was already raising questions and sparking confusion Wednesday.
For example, it was not immediately clear who was supposed to handle supervisory questions about the Home Loan banks. At the staff level, actions could continue to be taken by Steve Cross, the head of supervision of the Federal Housing Finance Board, who presumably would have those duties in the new agency. But if he had a concern, should he bring it to Ronald Rosenfeld, the chairman of the Finance Board, or Mr. Lockhart?
A source familiar with the matter said Mr. Lockhart is now in charge, though neither OFHEO nor the Finance Board would say for sure. Under the law, the five-member Finance Board's only power is to unwind the agency, not take supervisory actions, the source said.
There was at least one concrete sign that the situation had changed. After it was created, it took the Federal Housing Finance Agency only a few minutes to issue a press release. Mr. Lockhart said as the new director he is committed to using his expanded authorities "to ensure that the housing GSEs provide stability and liquidity to the mortgage market, support affordable housing, and operate safely and soundly."
Observers said Mr. Lockhart will clearly have his work cut out for him. In addition to merging agencies and creating portfolio rules, his new agency must also write capital requirements governing the Home Loan banks within six months.
The agency also must write new risk-based capital requirements for Fannie and Freddie, and it has the power to write rules establishing new minimum capital levels. Given that many on Wall Street argue that Fannie and Freddie should bulk up on capital, some observers said that could be at the top of Mr. Lockhart's agenda.
"I would think it's very high if not the top priority," Mr. Gardner said.
The portfolio rules are likely to be involve some of the most difficult work. The Federal Reserve Board — which the agency must consult on any new regulations until Dec. 31, 2009 — has argued for years that the portfolios pose a systemic risk and must be reduced. Under the new law, the agency has the power to cap the portfolios in regulation. "The new agency is going to have to walk a fine line between writing rules that rein in real risk taking in the retained mortgage portfolio without going so far that they trigger a backlash by congressional Democrats," said Jaret Seiberg, an analyst with Stanford Group Co.
