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WHITE HOUSE SEEKS TOUGHER BILL IN PUSH TO REIN IN FANNIE, FREDDIE
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| by John D. McKinnon; Dawn Kopecki; James R. Hagerty |
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Jun 15, 2005 - Wall Street Journal - The Bush administration and some Republican leaders in Congress are scrambling to beef up legislation regulating mortgage giants Fannie Mae and Freddie Mac that they see as too easy on the scandal-scarred companies.
The White House, which has long sought to rein in Fannie and Freddie, has told House Speaker Dennis Hastert that a bill which last month sailed through the House Financial Services Committee on a bipartisan 65-5 vote failed to meet many of its key goals, according to a senior administration official. The administration and some Republican allies are seeking to prevent it from going to the House floor for a vote in its current form.
Officials also are hoping for tougher legislation to emerge from the Senate. Sen. Richard Shelby (R., Ala.), chairman of the Senate Banking Committee, said in an interview late yesterday that he aims to bring his own version of the legislation before his panel next month and promised it would lead to tougher regulation of the companies. "To do less than that, I think, would be shameful," he said.
The dispute is slowing the administration's efforts to shrink the size of the mortgage giants and increase their regulatory oversight. Both the White House and Federal Reserve Chairman Alan Greenspan argue that the two companies, which are involved in financing nearly half of U.S. home mortgages, have gotten too big, mainly by borrowing at lower interest rates than other companies since investors implicitly assume their debt is backed by the U.S. Treasury. The concern is that they pose a broader risk to financial markets if they fail to hedge their portfolios properly.
Fannie and Freddie originally were chartered as agencies by Congress to help boost home ownership, but have evolved into publicly traded companies.
The House committee's bill, approved May 25, rejected a White House call to require the two companies to reduce their portfolios of mortgages and related securities, which together are valued at $1.5 trillion. The vote, which caused the companies' stock prices to jump, also included a controversial provision to create "affordable housing funds" to support housing programs for low-income people, which could give the companies an avenue to curry favor with lawmakers by steering funds to their districts. Proponents say the provision would force the companies to spend more on affordable housing.
But it has become a lightning rod for House conservatives who deride it as a "slush fund," including Rep. Mike Pence, an Indiana Republican who is leading an effort to delete it. The White House and its congressional allies have been fighting a rear-guard action to remove that provision and add others.
The bill approved by the House committee would create a new regulatory agency with powers to raise minimum capital requirements for the companies in certain circumstances and to block them from diversifying away from their original missions.
Peggy Peterson, a spokeswoman for the committee, said the bill is "on track," adding, "We have good support from the House leadership for accomplishing this goal." The spokeswoman noted that the bill "creates a strong, robust regulator" and marks the first time a House panel has voted to give a regulator power over such important issues as minimum capital and receivership.
Still, the House committee's refusal to accept the administration's terms illustrates that the two companies retain plenty of strong allies in Congress, despite their accounting scandals.
In the current debate, the two seem to be benefiting from politicians' fear of taking steps that might be seen as hurting the housing market at a time when there is increasing concern about a housing-price bubble. Partly because of Fannie and Freddie, "we have the strongest, most dynamic housing market in the world," Sen. Debbie Stabenow, a Michigan Democrat, said at a Senate Banking Committee hearing in April. "Even at times when our economy has been challenged and struggling, it's the housing market that has kept us going," she added.
In response, administration officials are encouraging lawmakers to take their time, hoping that a slower pace will allow the emergence of a bill in the Senate that is more to the White House's liking. The maneuvering has robbed Fannie and Freddie of a quick political victory, but raises the prospect that no new regulatory plan for the mortgage giants will be put in place this year.
The scuttling of the legislation would leave the companies' oversight in the hands of their current regulator, the Office of Federal Housing Enterprise Oversight, which is widely regarded by critics as underpowered for the task. Ofheo's longtime director, Armando Falcon Jr., who significantly strengthened it, stepped down in May, and the agency is currently led by an acting director.
Especially heated is the debate over the provision that would require Fannie and Freddie eventually to devote 5% of their aftertax profits to affordable housing funds -- which would have amounted to more than $600 million in 2003. A letter circulated by Rep. Pence, for example, condemns the housing fund as "a damaging course of action" because it violates free-market principles and raises the possibility that the money from the fund could be used to finance political advocacy groups. The letter, which has attracted 26 signatures so far, seeks a delay in floor action until the concern is addressed.
Other White House concerns aren't getting much traction in the House so far. A House Republican leadership aide said that once the housing-fund issue is solved, the bill is likely to proceed to a floor vote before the August break.
But another House Republican leadership aide said the problem of sorting out the housing fund "can get pretty complicated." And some Fannie and Freddie allies say privately that they fear the House bill has lost momentum because of the tension between the administration and Congress.
The White House may get a more favorable reception from the Senate Banking Committee, chaired by Sen. Shelby, who has been skeptical of some of Fannie and Freddie's arguments in the past. In the interview, Sen. Shelby rejected the idea of creating affordable housing funds, saying it smacked of "earmarking earnings for a political reason."
He also said the Federal Reserve, the administration and others have made a strong case that large mortgage portfolios create risk, adding: "We plan to address that." But Mr. Shelby's committee is deeply split between strong supporters of Fannie and Freddie, such as Sen. Charles Schumer, a New York Democrat, and tough critics like Sen. Elizabeth Dole, a North Carolina Republican.
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