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SHELBY SEEKS REGULATOR WITH MORE POWER TO LIMIT MORTGAGE GIANTS
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| by Annys Shin |
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Jun 24, 2005 - Washington Post - Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) wants a new regulator for mortgage giants Fannie Mae and Freddie Mac to be able to move aggressively to scale back the size of the two companies, a strict stand at odds with legislation moving through the House of Representatives.
In a meeting yesterday with other committee members, Shelby outlined his proposal for tightening regulation of the two housing finance companies, whose multibillion-dollar accounting scandals have convinced government officials that they are too loosely controlled and too large.
Shelby said he wants a new regulator for Fannie and Freddie to take a broad look at the investment holdings of the two companies and to scale them back if they are found inconsistent with their mission of keeping the nation's housing markets adequately supplied with cash, according to accounts of yesterday's meeting provided by sources who were in attendance or had been briefed by people who were. Shelby's committee is slated to take up a bill to improve oversight of Fannie and Freddie in mid-July.
Legislation approved by the House Financial Services Committee in May took a less strict approach, giving a new regulator authority to limit the size of the companies only if they seemed to be in financial trouble.
Shelby's stance sets him midway between the House committee proposal and demands by the White House for an even tougher approach that would require the companies to reduce their portfolios.
Shelby is already facing a showdown with Senate Democrats over a proposal to divert a portion of Fannie and Freddie's profit to fund affordable housing. Shelby opposes such a fund, saying it would encourage them to make risky investments to make up for lost profit. He is considering other ways to fund low-income housing, a committee spokesman said.
The House committee approved a low-income-housing fund as part of its legislation. Though critical to securing Democratic support on the committee, the fund is opposed by a group of conservative Republicans who fear it will go to liberal advocacy groups.
In an effort to save the fund, House Financial Services Committee Chairman Michael G. Oxley (R-Ohio) last night began circulating a package of measures designed to address their concerns, according to a copy of the proposals. For example, he is proposing more explicit restrictions on use of the funds and letting the fund expire after five years.
Sen. Chuck Hagel (R-Neb.), who attended the meeting with Shelby, said the Banking Committee chairman will probably address affordable housing in some fashion in his bill, which is still being drafted.
"There is a consensus that we need to address that issue because, after all, this is about housing, not how much Fannie and Freddie pay their executives in bonuses," Hagel said.
Critics of Fannie and Freddie, including Federal Reserve Chairman Alan Greenspan, say that the companies have grown too large and that their strategy in recent years of holding mortgages and mortgage-backed securities in their portfolios is risky because it makes them more vulnerable to swings in interest rates.
Earlier this week, Treasury Secretary John W. Snow and other administration officials trekked to Capitol Hill to lobby senators, including Shelby, to toughen the Fannie legislation.
Fannie and Freddie's investment strategies played a role in their recent accounting scandals. A new regulator would replace the Office of Federal Housing Enterprise Oversight, which last year found that Fannie executives misapplied accounting rules to boost earnings, triggering multimillion-dollar bonuses. OFHEO spokeswoman Stefanie Mullin said yesterday that the agency will issue another report when it concludes its examination of Fannie Mae. She did not offer a date.
Shelby opened a new front yesterday by reviving a proposal pushed by the White House three years ago to require Fannie and Freddie to register their mortgage-backed securities and their debt under the Securities Act of 1933, according to sources familiar with his remarks. The two companies are exempt from complying with the law, saving them millions of dollars annually. Fannie and Freddie, however, recently volunteered to turn in quarterly and annual reports, among other filings, to the Securities and Exchange Commission.
Fannie spokesman Charles V. Greener and Freddie spokeswoman Sharon McHale declined to comment on the proposal.
Large financial services companies, which have to register their securities, support Shelby's proposal because they say it would improve disclosure. But critics of the proposal, including smaller community banks, said that the companies already disclose much of the information required by the act and that consumers would ultimately bear the increased costs and hassle. Requiring registration, said Sen. Jon S. Corzine (D-N.J.), could have "a disruptive effect" on the housing market and "constitute a 'housing tax' on homeowners and aspiring homeowners."
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