WASHINGTON House Financial Services Committee Chairman Barney Frank rejected calls last week by Freddie Mac to restrict the powers of a new proposed regulator for government-sponsored enterprises.
The 331-page bill introduced Friday largely codified the compromise Rep. Frank reached in December with Treasury Secretary Henry Paulson, with most of the changes centering on how contributions to an affordable housing fund would be calculated.
In doing so, Rep. Frank opted against following suggestions by Freddie that would have curbed the new regulator's control over capital, mortgage portfolios, and new products.
The bill sets up a likely conflict this week between Freddie and the Treasury Department, which are both expected to testify Thursday before the committee. Observers said they expect the Treasury, which has previously opposed the House GSE bill, to support it, while Freddie is likely to continue to recommend changes.
"This is a serious defeat for Fannie and Freddie in a place where they should reasonably have expected a sympathetic reception," said Peter Wallison, a fellow at the American Enterprise Institute and a frequent GSE critic. "It is still only a proposal, however, and I expect that the GSEs will work like demons between now and the markup to bring their troops on both sides of the aisle into line."
Some reform proponents said they were pleased to see any movement on a bill that has stalled multiple times over the past few years.
"It's a compromise between several parties from a variety of perspectives from the most hawkish to the most dovish," said Erick Gustafson, vice president of the Mortgage Bankers Association.
Rep. Frank's "effort is to keep this intact," Mr. Gustafson said. "The fact he rejected the changes is probably more of an effort to maintain the integrity of the compromise."
Spokespeople for Freddie and Fannie Mae declined to comment on the legislation. Both GSEs are expected to send their top executives to testify before the committee this week.
Rep. Frank introduced the bill with two Republican cosponsors, Rep. Richard Baker of Louisiana, who co-authored the House bill two years ago, and Rep. Gary Miller of California. The bill was also cosponsored by Rep. Mel Watt, D-N.C.
The panel likely will vote on it this month.
Rep. Baker warned against efforts by the GSEs and others to weaken certain measures in the bill.
"The provisions on safety and soundness, minimum capital requirements in particular, are quite strong, and we simply must make sure they are maintained through the legislative process," he said in a press release.
Though the Treasury and Rep. Frank have agreed on most of the issues, the bill continues to leave a gap between the two. It would allow the GSEs to purchase higher-priced mortgages in high-cost areas, and it would create an affordable housing fund based on the size of the GSEs' portfolios. Both issues were unresolved between the Treasury and Rep. Frank last year, and it is unclear if the Treasury will support either provision.
The new bill alters how Fannie and Freddie would contribute to an affordable housing fund. Under a plan being considered by Rep. Frank last year, Fannie and Freddie would have contributed 4.2 basis points for every dollar of profits they earned.
Under the new bill, the fund would be tied to the GSEs' mortgage portfolios. Fannie and Freddie would be required to divert 1.2 basis points of each dollar of the average total of their portfolios from the previous year.
The change was suggested by the Office of Federal Housing Enterprise Oversight, which determined that mortgage portfolios would be a more stable source of income for the fund than profits.
The fund has been a lightning rod for criticism from Republicans, who argue that it would amount to a tax on housing. Rep. Spencer Bachus of Alabama, the ranking minority member of the House Financial Services Committee, has said Republicans would vote against a bill that creates an affordable housing fund.
Rep. Baker said Friday that he would continue work with Rep. Frank on the issue.
Since Rep. Frank reached a tentative agreement with the Treasury in December, the agreement has drawn fire from the GSEs and some of their critics. Freddie began an aggressive lobbying campaign to make changes to the bill, including circulating a six-page document among lawmakers for how the bill should be changed. Richard Syron, Freddie's chairman and chief executive, also spoke publicly last month on how a restrictive bill could damage the housing market.
Freddie had suggested that lawmakers require a new regulator to reassess any temporary order raising minimum capital requirements every six months to determine if conditions remain unsafe and unsound "to the extent originally required to support the temporary increase." Critics argued that such language would force a new regulator to effectively prove every six months that a GSE had made no improvement in its situation.
Consistent with the original Treasury-Frank language, the bill requires the regulator to reassess the temporary capital increase every six months, but it does not force the regulator to determine if conditions exist "to the extent originally required to support the temporary increase."
GSE critics said they believed Rep. Frank's bill gave a new regulator sufficient flexibility.
"It might just be a drill you have to go through every six months," said Bert Ely, an independent consultant in Alexandria, Va., and frequent GSE critic. "I think it becomes kind of pro forma."
Mr. Ely said Rep. Frank's refusal to alter the language was "a message & to Freddie that you don't dictate to us."
The bill does not include provisions that would cap the mortgage portfolios of Fannie and Freddie a key issue that helped kill the bill in 2005 and 2006. Instead, it would require a new regulator to write new standards governing the portfolio that take into account several factors, including the size of the mortgage market and the companies' mission.
Rep. Frank rejected a call from Freddie to delete a provision that would allow a new regulator to consider "any additional factors" when supervising the companies' portfolios.
The National Association of Home Builders also objected to the provision last month, arguing that it would give a regulator too much power to tinker with the portfolios.
The provision "could be interpreted broadly by the new regulator to require massive portfolio cuts that would severely disrupt the mortgage markets and impede the enterprises' pursuit of their housing mission," Jerry Howard, the trade group's CEO, wrote in a letter to Rep. Frank
Mr. Howard said Friday that his group would continue to discuss the issue with lawmakers.
"We're going to talk to the principals during the next week," he said. "There has already been dialogue evolving around our letter. & We're just happy to see a bill out there again. We're on first base, but we have miles to go."
