Tuesday, August 31, 2010

Dodd-Frank Legislative History Reveals Great Importance of Treasury Study of GSEs

A Dodd-Frank mandated Treasury study on Fannie Mae and Freddie Mac is almost certain to be the first step in federal legislation to reform government-sponsored enterprises and the secondary mortgage market. The study, which must be submitted to Congress by the end of January 2011, was mandated by an amendment offered by Senator Chris Dodd, Chair of the Banking Committee, codified as section 1074, as the Senate was beating back an amendment offered by Senator John McCain that would have either ended the conservatorship of Fannie and Freddie or disbanded them with no reasonable alternative offered.

All that being said, there is a growing consensus that the 112th Congress must pass legislation reforming the GSEs. Senator Dodd said that everyone agrees that Congress must make that reform, but there is concern about how we get from the current structure to future arrangements without disrupting the overall housing finance system. Fannie, Freddie and the FHA together account for 96.5 percent of mortgage funding today, said the Banking Chair. (Cong. Record, May 11, 2010, S3507).

This is a tough study, said Sen. Dodd, and it must not paint over the situation. The study demands a report and a roadmap on how specifically Congress can do this in a time certain. It is not perfect. There is no magical reform . Congress wants Treasury to set forth scenarios on how to wind down and liquidate Fannie and Freddie; how to privatizen the two GSEs; how to breakup the GSEs into small companies; and other options that may be available.

Senator Dodd said that we should keep in mind that Congress created a strong new regulatory regime for Fannie Mae and Freddie Mac in 2008. Their regulator is maintaining strong oversight of these enterprises, he noted, while they continue to provide crucial assistance to the housing market. Longer term reform of Fannie and Freddie requires a thoughtful reconsideration of the structure of the whole housing finance system. This will require hearings about exactly what structure Congress wants to put in place to finance housing in the US. This will require hearings with many stakeholders and others involved in the serious discussions to determine what that system ought to be.

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