WASHINGTON - Lawmakers and regulators sparred Wednesday over legislation that would merge the federal agencies that supervise Fannie Mae, Freddie Mac, and the Federal Home Loan banks.

Democrats insisted during a House Banking capital markets subcommittee hearing that there is no reason to act quickly on a bill introduced by Rep. Richard H. Baker, R-La., that would consolidate the regulators of these quasi-governmental enterprises that serve the housing markets, and impose other reforms.

"There is no pressing need for reform at this time," said Rep. Paul E. Kanjorski of Pennsylvania, the subcommittee's ranking Democrat. He and others emphasized that the housing markets are healthy and that the existing regulators are busy crafting long-overdue capital standards for Fannie and Freddie and developing regulations mandated by the Gramm-Leach-Bliley Act.

"The creation of a single regulator at this time could delay all of these important activities," Rep. Kanjorski said.

Rep. Marge Roukema of New Jersey, who along with Rep. Baker is among the Republican contenders for House Banking Committee chairman next year, said consolidation should be considered, but she agreed with Democrats that lawmakers must move "slowly and carefully" to avoid any "unintended consequences."

House Banking Chairman Jim Leach and Gary Gensler, the Treasury Department's under secretary for domestic finance, endorsed the bill. "The economy and the financial markets are strong," Mr. Gensler testified. "With no particular problems on the horizon, this is an ideal time to review the supervision and regulation of the GSEs."

These enterprises enjoy advantages over other private companies because investors believe the government will rescue them if they become troubled, Mr. Gensler said. As a result, they can borrow money at interest rates as much as 40 basis points below those of rivals, he said. Fannie Mae, Freddie Mac, and the 12 Home Loan banks carry far less capital than competitors, he said, and they save money from other perks such as exemptions from state and local taxes and federal securities registration requirements.

As a result, Mr. Gensler said, the Treasury supports provisions in the Baker bill that are designed to impose more market discipline. These provisions include the elimination of the $2.25 billion Treasury line of credit that is open to Fannie and Freddie and the $4 billion line for the Home Loan banks, increased disclosure requirements, and tougher reviews of new activities.

Mr. Gensler also strongly recommended that national banks be barred from investing more than 10% or 15% of their capital in GSE debt securities. The banks are currently exempt from such limits. Regulators have not done a case-by-case study, Mr. Gensler told reporters later, but they fear some banks may be overexposed, because one-third of total bank capital was held in GSE debt as of mid-1999.

However, Mr. Gensler tiptoed around the most problematic issue in the bill: how to structure a new regulatory agency.

Rep. Baker has proposed combining 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.

HUD opposes that, according to William C. Apgar, the agency's assistant secretary for housing. "It is our general feeling the existing structure works well," he said, noting that HUD has proposed substantial increases in Fannie and Freddie's affordable housing commitments, is conducting a fair-lending review of their automated loan underwriting systems, and has increased its oversight of their nonmortgage investments.

But Finance Board Chairman Bruce Morrison testified that he has long favored combining the GSE regulators, who have conflicting priorities. "Safety and soundness has to come first," he said, "and mission regulation has to always be consistent with safe and sound regulation. … The stronger the regulation, the more respected by the Congress and by the regulated entities, the better we will do at that hard job."

Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, generally supported the bill, particularly its plan to finance the new agencies by assessing fees on the GSEs, but he split the difference between Mr. Apgar and Mr. Morrison. Mr. Falcon said it makes sense to merge his office and the Finance Board but is not necessary to take away from HUD the job of ensuring the GSEs are fulfilling their mission of providing liquidity to the housing market.

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