GSE reform bill clears Senate Committee along party-line vote.

BOTH REPUBLICAN AND DEMOCRATIC members of the Senate Banking, Housing and Urban Affairs Committee agreed about the need for a stronger, more powerful regulator for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. But when it came time to vote on the GSE reform bill, members

The Federal Housing Enterprise Regulatory Reform Act of 2005 (S. 190) would create and establish the Federal Housing Finance Agency as an independent agency. The legislation would give the new agency broad power to issue regulations and guide-lines, strong authority to better define and enforce charter acts, and flexible authority to set capital requirements over Fannie and Freddie and the Federal Home Loan Banks.

Throughout the bill's mark-up in committee, members from both parties repeatedly expressed how "close" each side was in its desire to move the bill. However, the devil in the details was Fannie and Freddie's $1.5 trillion mortgage portfolio investment holdings.

The Republican-backed measure would require Fannie Mae and Freddie Mac to sell portfolio assets unrelated to their mortgage securities businesses. A Democratic alternative would have permitted the regulator to reduce the GSEs' portfolio without requiring such cuts.

During deliberations, Senate Banking Committee Chairman Sen. Richard Shelby (R-Alabama) dismissed the alternative submitted by ranking member Sen. Paul Sarbanes (D-Maryland), noting it did not give enough portfolio guidance to the regulator and had safety and soundness limits that were "not sufficient."

In opposing portfolio caps, Democrats expressed concern that such restrictions would harm Fannie and Freddie's ability to ensure the mortgage market liquidity needed to foster affordable housing.

"There seems to be an expectation on the part of some that if Fannie and Freddie stop holding the assets in their portfolios, that the rest of the market will somehow instantaneously fill the void and that prices will not be affected," said Sen. Jon Corzine (D-New Jersey). "I do not believe that is a reasonable expectation."

S. 190 co-sponsor Sen. Chuck Hagel (R-Nebraska) countered that the GSEs' portfolios are profitable for Fannie Mae and Freddie Mac shareholders, but do little to advance their housing mission.