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.

"Fannie and Freddie are public companies with shareholders, and their boards have a fiduciary responsibility to those shareholders. But Congress did not create GSEs to enrich share-holders and executives," said Hagel. "They were created to provide stability and capital in the secondary housing finance market."

The committee also rejected an amendment by Sen. Jack Reed (D-Rhode Island) that would have directed the GSEs to contribute a percentage of their earnings to an affordable-housing trust fund. But the committee approved an amendment by Sen. Rick Santorum (R-Pennsylvania) to rewrite Fannie and Freddie's affordable-housing goals. Both measures were rejected and adopted, respectively, along party-line votes.

In a letter to Shelby, Mortgage Bankers Association (MBA) Chairman Michael Petrie, CMB, noted that MBA was pleased the bill that cleared committee included language that delineated a clear "bright line" between the primary and secondary markets.

"Your legislation represents a clear understanding of the need to improve oversight of the GSEs relative to safety and soundness, systemic risk and to ensure that Fannie Mae and Freddie Mac do not deviate from their congressionally chartered purposes," Petrie wrote to Shelby. "Your bill's product-approval and activity-review language is consistent with MBA's long-standing policy that the regulator ought to establish a 'bright line' to ensure the GSEs remain focused on their secondary-market purpose."

Despite having some "problems" with the portfolio language in the bill, Sen. Jim Bunning (R-Kentucky) urged the committee members to move the bill to the floor, where it would hopefully be passed and the measure would move to conference where, in the process of reconciling S. 190 with its House counterpart, H.R. 1461, "we can craft a bill that does what needs to be done."

However, even before the vote, Bunning and other committee members both Republican and Democrat noted that S. 190's lack of bipartisan support will make the bill's movement an uphill battle.

"We came to this point last year, and we could not get a bipartisan consensus and no bill was put forward," said Bunning. "Unfortunately, I believe we will have the same result. I believe we will move a bill out of committee, but without bipartisan consensus the bill will again go nowhere, and we will not have the world-class regulator we need."--C.W.