Friday, March 18, 2011

House Leaders Introduce GSE Reform Legislation Ending Fannie and Freddie Conservatorship

Legislation reforming the government sponsored enterprises, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), has been introduced by House Financial Services Committee Chairman Spencer Bachus (R-Ala) and Vice Chairman Jeb Hensarling (R-TX). 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 would also amend the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 to repeal its housing goals if the Director determines that an enterprise is financially viable, as well as the new housing price index. The Housing and Community Development Act of 1992 would be amended to restrict the authority of an enterprise to acquire mortgage assets following its emergence from conservatorship.

Under the legislation, the minimum capital level required for each enterprise would be increased. Also, the Director would be instructed to establish minimum levels of capital for the enterprises. The failure of an enterprise to maintain revised minimum capital levels would be deemed to constitute an unsafe and unsound condition.
According to the House leaders, Fannie and Freddie remain critically undercapitalized. Currently, there are no capital requirements for Fannie and Freddie. They were suspended by FHFA for the duration of the conservatorship. The GSEs are only required to maintain a positive net worth. Excessive leverage led to the downfall of Fannie and Freddie, notes a Committee white paper, and the suspension of even minimum capital requirements puts taxpayers at significant risk of incurring even greater losses while the GSEs are in conservatorship.

The legislation would also amend the American Recovery and Reinvestment Act of 2009, and the Economic Stimulus Act of 2009 to repeal temporary increases to conforming loan limits.

The Federal National Mortgage Association Charter Act and the Federal Home Loan Mortgage Corporation Act would be amended to repeal provisions governing enterprise authority to purchase and sell certain insured and conventional mortgages and to engage in certain lending activities.

The bill would amend the Housing and Economic Recovery Act of 2008 to repeal its conforming loan limits and would prescribe conforming loan limits for conventional mortgages that may be purchased by the enterprises.

Both the Federal National Mortgage Association Charter Act and the Federal Home Loan Mortgage Corporation Act would be amended to prohibit the enterprises from purchasing mortgages that exceed the median area price for the affected property and prohibit them from purchasing mortgages if the mortgagor has paid less than the specified minimum down payment.

The Director is instructed to assess each enterprise for the amount necessary to recoup to the federal government the full value of the benefit received from the federal guarantee of its obligations and financial viability.

Finally, the Comptroller General is directed to study and report to Congress on a risk-based pricing mechanism to determine accurately the value of the benefit the enterprises receive from the federal guarantee of their obligations and financial viability.