A bill that would combine the regulators of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks faces an uphill battle, despite endorsement from House Banking Committee Chairman Jim Leach and others.

Sponsored by Rep. Richard Baker, R-La., the legislation would combine the oversight duties of the Office of Federal Housing Enterprise Oversight, the Federal Housing Finance Board and some of the jurisdiction of the Department of Housing and Urban Development into an independent agency called the Housing Finance Oversight Board.

Currently, the Finance Board regulates the 12 Federal Home Loan banks; monitoring of Fannie and Freddie is split between the housing oversight office and HUD.

Rep. Baker said he believes the bill would strengthen regulation of all the housing government-sponsored enterprises. In particular, he said, it would increase oversight of Fannie and Freddie - two of the largest financial institutions in the nation - in the hopes of preventing another meltdown like the savings and loan crisis of the 1980s.

"Taxpayers can be put at risk during systemic downturns in economic activity," Rep. Baker said at a news conference Thursday, sponsored by a new coalition of activist groups called the Homeowners' Education Coalition. "We should have the regulatory capacity to protect against such an event."

Rep. Baker doesn't question the current health of the government-sponsored enterprises, but he is concerned about their growing size and their close ties to the government. Freddie Mac currently has a market capitalization of $26.4 billion, while Fannie Mae has a valuation of $50.9 billion. If either were to fail, taxpayers could face a potentially enormous liability, largely because of the government's implicit backing of their activities.

Under Rep. Baker's bill, the new regulator would fund itself by levying fees on Freddie, Fannie, and the Federal Home Loan banks.

Though HUD has some authority to approve new activities, the legislation would strengthen that clout as well as limit what types of mortgages Fannie and Freddie could buy and sell. The government originally established Fannie and Freddie to improve liquidity in the middle-class residential mortgage market, but critics say they may be pushing for more market share.

The bill would also eliminate a $2.25 billion Treasury Department line of credit open to Fannie and Freddie. The Federal Home Loan banks would lose their $4 billion line of credit with the Treasury, too.

Although Freddie or Fannie has never used the available line of credit, Rep. Baker said its mere availability sends a signal to the markets that the U.S. government would never allow Fannie and Freddie to fail, no matter how large they become or how recklessly they behave.

In addition, the Baker bill includes provisions to impose uniform risk-based capital requirements, to require annual credit ratings, and limit non-housing investments. The bill also calls for a study of the exposure of the deposit insurance funds to GSE failure.

Congressional opposition may be inevitable given the powerful lobby funded by Fannie and Freddie, several observers said. Even Rep. Baker seems lukewarm about the bill's future. After calling his proposal a "modest first step" at a news conference Thursday, he said that all points will be open for discussion at hearings to be held in the next few weeks.


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