Thursday, March 31, 2011

Companion Legislation to Reform GSEs Introduced in the Senate

Senators Orrin Hatch (R-Utah) and John McCain (R-Ariz.) have introduced a companion bill to the House bill to reform the government-sponsored enterprises. Based on the House bill introduced by Rep. Jeb Hensarling (R-Texas), and other House GSE reform bills, the legislation would permanently end government support for Fannie Mae and Freddie Mac, the two heavily-indebted government-sponsored enterprises that were a major cause of the financial crisis over two years ago. The GSE Bailout Elimination and Taxpayer Protection Act, would put an end to Fannie Mae and Freddie Mac’s conservatorship in two years, while enacting several fundamental reforms to protect taxpayers. The House bill is co-sponsored by Financial Services Committee Chair Spencer Bachus (R-Ala).

The legislation would repeal of the exemption allowing GSE securities to avoid full SEC registration. There would also be a repeal of the GSEs’ exemption from having to pay state and local taxes, to remove one of the distinct advantages of being a GSE.

The bill would repeal the GSEs’ affordable housing goals mandate and the Affordable Housing Trust Fund. The legislation would start shrinking the size of the GSEs by capping their maximum portfolio size at $700 billion and gradually reducing that cap to $250 billion over five years. The Senate bill would reduces the GSEs’ market share by returning the conforming loan limit to its pre-housing crisis standard limit of $417,000. The guarantee fees would be increased to eliminate the GSEs’ competitive advantage and bring more private capital into the market.

The legislation includes a prohibition on any reduction to the senior preferred stock dividends the GSEs contractually agreed to pay taxpayers under their conservatorship. Upon the end of the conservatorship, the Federal Housing Finance Agency (FHFA) must evaluate the financial viability of each GSE. If it is determined not to be viable, the FHFA would follow the procedure laid out by the Housing and Economic Recovery Act of 2008 (P.L. 110-289) for placing that GSE into receivership.

If determined to be viable, the GSE would be allowed to resume limited market operations under its own control for a maximum of three years, with the following new rules: The enhanced authority for FHFA to adjust the minimum capital requirements for the GSEs as appropriate, mirroring the existing capital adequacy requirements other regulators already have in place for banks (12 U.S.C. 3907);

At the end of that 3 year period, each GSE’s charter expires. At that point, Fannie and Freddie must conduct all new operations as fully private sector companies competing on a level playing field without any government advantages. It would also provide for the orderly wind down of any legacy business commitments post-charter expiration over a 10 year period following the model successfully used in the Sallie Mae transition from GSE to a private company (P.L. 104-208)

No comments: