Tuesday, March 29, 2011

House Committee Unveils Eight Pieces of Legislation to Reform GSEs

As part of its plan to reform the secondary market for mortgage-backed securities, the House Financial Services Committee unveiled eight pieces of legislation reforming government-sponsored enterprises such as Fannie Mae and Freddie Mac. This legislation is in addition to the main reform vehicle introduced earlier by Committee Vice-Chair Jeb Hensarling (R-TX), the GSE Bailout Elimination and Taxpayer Protection Act (HR 4889), that applies only to Fannie Mae and Freddie Mac and establishes a finite end to the GSEs’ conservatorship 2 years from the date of enactment. Upon the end of the conservatorship, FHFA must evaluate the financial viability of each GSE. If it is determined not to be viable, 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.

Rep. Scott Garrett (R-NJ), Chair of the Capital Markets Subcommittee. is the lead sponsor of legislation to prohibit the exemption of GSE securities from the risk-retention requirements of Dodd-Frank. The GSE Credit Risk Equitable Treatment Act would clarify that Fannie Mae and Freddie Mac will be held to the same standards as any other secondary mortgage market participants. Under Dodd-Frank, Fannie and Freddie would still be able to purchase a mortgage from a financial institution that falls outside of the Qualified Residential Mortgage (QRM) definition and issue asset-backed securities backed by non-QRM assets.
The Garrett legislation would clarify that a GSE loan purchase or asset-backed security issuance would not affect the status of the underlying assets. If the GSEs purchase a non-QRM loan, all lender risk-retention requirements will still apply, and if the GSEs issue a non-QRM security, all securitization risk retention rules will still apply.

Regulations proposed by the SEC and the banking agencies would provide that Fannie Mae and Freddie Mac will be able to satisfy the risk retention requirement through their guarantees (which cover 100% of principal and interest) as long as they continue to operate under the conservatorship or receivership of the FHFA and with direct government support through the Treasury Department’s Senior Preferred Stock Purchase Agreement.

Introduced by Committee Chair Spencer Bachus (R-AL), the Equity in Government Compensation Act would establish a compensation system for employees of Fannie Mae and Freddie Mac that is consistent with other federal government employees. The legislation would suspend the current compensation packages for all employees at Fannie Mae and Freddie Mac and establishes a compensation system that is consistent with that of the Executive Schedule and the Senior Executive Service of the Federal Government. Now that Fannie and Freddie are owned by the government, reasoned the Committee, there is no reason that employees of Fannie and Freddie should not be paid like government employees. In addition, the bill expresses the sense of the Congress that the 2010 pay packages for Fannie and Freddie senior executives were excessive and that the money should be returned to taxpayers.

Rep. Ed Royce (R-CA) is the lead sponsor of legislation to permanently abolish the affordable housing goals of Fannie Mae and Freddie Mac. The GSE Mission Improvement Act permanently abolishes the GSEs’ affordable housing goals, which the Committee believes were a central cause behind the collapse of the GSEs. The ongoing goal of the GSEs should be to reduce risk to taxpayers, not expose them to further losses. By eliminating these requirements and ending the mandate that Fannie and Freddie buy riskier loans in the name of affordable housing in the United States, the bill is designed to protect American taxpayers going forward.
According to Rep. Royce, the passage of legislation in the early nineties required the government-sponsored enterprises to devote a significant portion of their business to specific affordable housing goals. To meet these goals, the GSEs purchased more than $1 trillion in ‘junk loans, which ccounted for a large portion of the mortgage giants’ losses.

Legislation sponsored by Rep. Judy Biggert (R-IL), Chair of the Housing Subcommittee, would ramp up oversight of Fannie Mae and Freddie Mac by establishing in statute an Inspector General within FHFA and providing the IG with additional law enforcement and personnel-hiring authority. The Fannie Mae and Freddie Mac Accountability and Transparency for Taxpayers Act would also require the GSE Inspector General to submit regular reports to Congress outlining taxpayer liabilities, investment decisions, and management details of Fannie and Freddie. Finally, the bill requires that these reports, along with a system to report waste, fraud, or abuse, be made publically available.

Rep. Randy Neugebauer (R-TX), Chair of the Oversight Subcommittee is the lead sponsor of legislation to direct the Federal Housing Finance Agency (FHFA) to increase the guarantee fees. The GSE Subsidy Elimination Act directs the FHFA to phase in an increase of the guarantee fees over two years so Fannie Mae and Freddie Mac price their guarantees as if they were held to the same capital standards as private banks or financial institutions. By gradually increasing their guarantee fees, the Committee believers that the playing field will be leveled so that private capital can re-emerge and thus decrease the government’s exposure to the housing market.

Vice Chairman Hensarling is the lead sponsor of legislation to cap the current portfolios of Fannie Mae and Freddie Mac and increase their annual attrition rate. The GSE Portfolio Reduction Act accelerates and formalizes the reductions in the size of the GSEs’ portfolios by setting annual limits on the maximum size of each GSE’s retained portfolio and ratcheting the limits down over five years until they have reached a sustainable level. In the first year, the GSEs would have their portfolios capped at no more than $700 billion, declining to $600 billion for year two, $475 billion for year three, $350 billion for year four, and finally $250 billion in year five.

Rep. David Schweikert (R-AZ) is the lead sponsor of legislation to prohibit Fannie Mae and Freddie Mac from engaging in any new activities or businesses. The GSE Risk and Activities Limitation Act bill prohibits Fannie and Freddie from engaging in any new activities or businesses. Currently, FHFA is preventing the entities from engaging in new activities, and Congress wants to ensure that stays that way by codifying that current practice. The legislation is intended to prevent taxpayers from taking on additional risk and allowing the GSEs to spread into other areas.

Rep. Steve Pearce (R-NM) is the lead sponsor of legislation to require formal approval by the Department of Treasury for any new debt issuance by the GSEs. The GSE Debt Issuance Approval Act requires the Department of Treasury to formally sign off on any new debt issuance by the GSEs. The legislation would require the formal legal authority of U.S. debt issuance to approve the issuing of agency debt, which is roughly the same as U.S. debt.

The Committee intends to conduct a markup of the legislation on April 5.