Armando Falcon models himself after a maverick, former Rep. Henry B. Gonzalez, a populist crusader who is well remembered in banking circles for his combative tenure as chairman of the House Banking Committee from 1989 through 1994.

Mr. Falcon, who grew up in Rep. Gonzalez's hometown of San Antonio, and later worked for him as a member of the committee staff, said the importance of standing his ground was drilled into him at an early age by his parents and grandparents.

"If you know you're right," he recalls them saying, "don't back down. People can break your bones, but they can't break your will."

As director of the Office of Federal Housing Enterprise Oversight, Mr. Falcon's resolve will be tested as never before.

The agency is responsible for overseeing Fannie Mae and Freddie Mac, but has done little of note since its creation in 1992. For instance, it took the oversight office five years to conduct its first comprehensive exams of Fannie and Freddie.

It falls to Mr. Falcon to finally give the agency some teeth.

The 40-year-old regulator's first goal: finalizing tough capital rules that the two government-sponsored enterprises have resisted for years. Congress told the agency to have the rules in place by January 1995. But the oversight office did not even issue a proposal until February 1999. After two extensions, the agency just recently closed the deadline for comments.

As expected, Fannie and Freddie filed comments opposing the capital rules, arguing that the rules would require them to hold too much capital. Freddie Mac said the oversight agency lacks the necessary data base, cash flow, and accounting systems, and offered to do the job itself. Fannie said the agency's model does not reflect new techniques for loss avoidance and borrower behavior predictions, and developments such as automated underwriting systems.

In an interview, Mr. Falcon refused to say when the rules would be finalized.

A spokesperson from the organization said, "We are going through comments now. Once we are done we will have a better idea of when the rule will be finalized, but the important thing is to get it right. This is our top priority."

Mr. Falcon said that after the capital rules are implemented, he wants to expand the agency's oversight by studying the implications of the GSEs' enormous growth in the last few years, their inroads into home equity and subprime lending, and the accuracy of their automated underwriting systems.

To gain more independence, Mr. Falcon has asked Congress to remove his agency from the budget appropriations process. He is asking for $26.8 million next year, a 37.4% increase. The extra funds would be used, in part, to boost the agency's staff by a third, to 124 people, and to build a prototype of an examination workstation computer program.

Mr. Falcon argues that the agency does not have "the flexibility to respond quickly to changing conditions, especially a deteriorating one, of the enterprises or the market." He notes that his agency's $19.5 million budget limits its ability to regulate Fannie and Freddie, which, combined, had $961.7 billion of assets as of yearend 1999.

Six months into the job, Mr. Falcon is winning kudos from Fannie and Freddie.

"Since Mr. Falcon has been at OFHEO, we have had improved communication with them," Fannie Mae chairman Franklin Raines said Thursday. "I think we're on a good track to getting the capital rule put in place."

Still, he disagreed with Mr. Falcon about removing the agency's budget from the appropriations process. "We are not convinced that there is sufficient protection if no one is reviewing OFHEO's budget proposals," Mr. Raines said.

Mr. Falcon was born a year before his political role model was elected to Congress and began a 37-year crusade for desegregation and strong regulation of the banking system, among other sometimes unpopular causes.

"Growing up in San Antonio, Henry B. Gonzalez was a living legend," Mr. Falcon said. "Seeing Henry B. stand his ground, and just fight for what he thought was right in the face of immense criticism at times, he was quite a role model."

In December 1989, Mr. Falcon, recently graduated from the University of Texas Law School, took a job with Rep. Gonzalez as a counsel to the House Banking Committee.

Mr. Falcon worked for Rep. Gonzalez until the chairman stepped down in 1997, citing ill health. Mr. Falcon was promoted to deputy general counsel of House Banking in 1991 and to general counsel in 1995.

By all accounts, he is the type of person who hits the ground running. Early in his Banking Committee career, Mr. Falcon became convinced that the costs of bank bailouts were too high. He recommended that Rep. Gonzalez support restrictions on discount-window lending to ailing banks, a cause the lawmaker vigorously pursued in the face of heated opposition from the Federal Reserve.

A compromise was eventually reached after a report by Mr. Falcon swayed voting on the committee in favor of Rep. Gonzalez's motion. Some of the recommended restrictions were adopted in the Federal Deposit Insurance Corp. Improvement Act of 1991.

According to Kelsay Meek, the Banking Committee's staff director from 1989 to 1994, the battle had important consequences. He said it led the Fed to pay far more attention to the costs of bank bailouts, and it provided Mr. Falcon with an opportunity to show his willingness to take on a big, powerful adversary.

Though Mr. Falcon admires Rep. Gonzalez's grit, his own style diverges sharply from that of his mentor.

Rep. Gonzalez was known for his fiery temper. The former Golden Gloves boxer once decked a man in a restaurant who called him a "Communist." But Mr. Falcon epitomizes diplomacy.

"One of Armando's strengths was that he got along with everybody - Democrats and Republicans - which is sometimes difficult to do," observed Jake Lewis, a consumer advocate who was also a Banking Committee staff member under Rep. Gonzalez.

Party affiliations don't mean much at the oversight office. Alan Brubaker, the agency's associate director for external relations, left a post as staff director for Sen. Rod Grams, a Minnesota Republican, in January to join Mr. Falcon. Mr. Brubaker remembered Mr. Falcon from their days on opposite sides of the House Banking Committee, and didn't think twice about working for him.

"What you see is what you get with Armando," Mr. Brubaker said. "He would say 'I'm going to fight you' on something, and you knew he was going to fight and fight hard, but there was none of the gamesmanship you see so often."

Mr. Falcon said he hopes his ability to work with people will contribute to his mission.

But the agency faces an uphill battle. Fannie Mae and Freddie Mac are among the most politically powerful forces in Washington. The two companies have close ties to key leaders in Congress and the Clinton administration.

The oversight office also must keep an eye on Rep. Richard Baker. The Louisiana Republican is pushing legislation that would replace Mr. Falcon's agency with a new entity that would also supervise the Federal Home Loan Bank System. (Currently, the 12 home loan banks are overseen by the Federal Housing Finance Board.)

In an interview this week, Rep. Baker praised Mr. Falcon.

"He has done good work with the resources available to him. He has been very supportive of my efforts for reform in the banking system and in enhanced regulatory efforts."

Rep. Baker emphasized the need to fund the oversight office through fees on Fannie and Freddie.

"They are the only federal regulatory agency that is relying on appropriations instead of on assessments," he said. "If it doesn't get an independent revenue source to provide for its tools and staffing, it will always be impaired."

As Mr. Falcon found out with the Fed, regulatory oversight disputes can be a bitter business. But he seems unfazed by the battle ahead.

"The issue is, can anyone regulate these two companies effectively? I'm here to say OFHEO, given the resources and given the will to fulfill our obligations and to do the right thing, can and will work as an agency, and I am going to demonstrate that in my first year here."

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