House Passes Broad Overhaul of Regulation of Fannie Mae and Freddie Mac; SEC Has Role

Acting on a broad consensus that government sponsored enterprises need a strong well-funded and independent federal regulator, the massive housing bill (HR 3221) overhauls the regulatory oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The Act would create a new, independent regulator of the GSEs with broad powers analogous to current banking regulators. The measure has passed the House and is heading for Senate passage.

The housing GSEs are uncommon institutions with a unique set of duties and stakeholders. They are chartered by Congress, limited in scope, and are subject to congressional mandates, yet they are publicly traded companies with all the earnings pressure the markets can apply. They are also among the largest US financial institutions, and are among the largest issuers of debt in the world.

The new regulator for the GSEs will have enhanced authority to raise capital standards, set strict prudential standards, including internal controls, audits, and to enforce these new standards and promptly take corrective action. The new regulator will oversee, and can directly restrict, executive compensation at Fannie Mae and Freddie Mac.

The Act establishes the Federal Housing Finance Agency (FHFA), an independent agency, to oversee Fannie Mae, Freddie Mac and the Federal Home Loan Banks. FHFA is empowered with broad regulatory powers over the operations, activities, corporate governance, safety and soundness, and mission of the GSEs. The measure provides new and more flexible authority to establish minimum and risk-based capital requirements.

FHFA is given clear enforcement authority, including cease and desist, removal, subpoena and civil money penalty authority.

The Federal Housing Finance Agency would be headed by a Director, appointed by the President and confirmed by the Senate for a 5-year term.

The Act creates an oversight board to advise the Director on strategy and policy with regard to carrying out his or her statutory duties. The measure mandates a board of four members composed of the Director, the Treasury Secretary, the HUD Secretary and the SEC Chair. Any member of the board may require a special meeting of the board. Otherwise, the board will meet quarterly. The board must testify annually before Congress on a number of matters involving the GSEs, including their safety and soundness and any material deficiencies in their operation.

The Act requires the GSEs to register at least one class of capital stock with the SEC under Exchange Act reporting requirements. Also, the GSEs will be subject to SEC proxy and insider reporting provisions. Thus, their directors and policymaking officers will have to comply with the reporting requirements of Section 16(a).