Thursday, March 24, 2011

House Financial Services Committee to Mark Up GSE Reform Legislation

After a hearing on GSE reform on March 31, the House Financial Services Committee will mark up a bill reforming Fannie Mae and Freddie Mac on April 5. The GSE Bailout Elimination and Taxpayer Protection Act, HR 1182, was introduced by Committee Vice Chairman Jeb Hensarling (R-TX) and is co-sponsored by Committee Chairman Spencer Bachus (R-ALA). The legislation sets a deadline for the Director of the Federal Housing Finance Agency (FHFA) to terminate the conservatorship of Fannie or Freddie upon a determination that it is financially viable to do so. The Director would be required to appoint the FHFA immediately as receiver of either enterprise if it is found not to be financially viable. Moreover, the legislation prescribes a deadline and procedures for the winding down of operations and dissolution of an enterprise. The legislation is very similar to the GSE Bailout Elimination and Taxpayer Protection Act (HR 4889) that Rep. Hensarling introduced in the 111th Congress.

The legislation 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.

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 under strict new rules. There will be 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. The legislation repeals the exemption allowing GSE securities to avoid full SEC registration. At the end of that 3 year period, Fannie and Freddie must conduct all new operations as fully private sector companies competing on a level playing field without any government advantages.