Fannie Mae's public criticism of Representative Richard Baker's efforts to draft a GSE Reform Bill finally drew a response from Rep. Baker last week.

In a statement issued last Wednesday, Rep. Baker (R-La.) noted that for over a month, he had been involved in active negotiations with Fannie Mae to find "common ground toward establishment of some more effective safety-and soundness oversight body than currently exists."

He has come to the conclusion, however, that "after several fruitless private sessions" and "inflammatory public oratory" by Fannie Mae's chairman, Franklin Raines, that Fannie Mae does not believe in the need for any reform.

So now, Rep. Baker has decided that his reform bill has been "too modest" and he intends to draft legislation to include new regulatory tools that are stronger than in his current proposal.

He said he will include the following additional provisions: (1) the need for more bank-like regulation of the GSEs; (2) the need to link the GSEs' favorable government status with adequate mission compliance; and (3) the need to adequately gauge the nature and size of the GSE subsidy and the relative benefits it affords for the American people.

Baker says he plans to come back next year with a stronger bill to improve the regulation and supervision of Fannie Mae and Freddie Mac.

"Despite the reform consensus among market participants, representatives of the administration, and impartial government officials, I am convinced that Fannie...does not and never has believed in the need for even the smallest measure of reform," Rep. Baker said.

The chairman of the House Banking subcommittee on capital markets, securities and GSEs pledged to keep all the provisions of the current government-sponsored enterprise bill (H.R. 3703), including one that would cut the GSEs' lines of credit to the U.S. Treasury.

Fannie Mae will continue to work with Rep. Baker, but his bill "harmed homebuyers and harmed our ability to serve our housing mission," spokesman David Jeffers said. "We were absolutely, totally up front on that ."

To strengthen his bill, Rep. Baker said he wants to create a bank-like regulator that would have the authority to take prompt corrective action and stop a GSE from growing if it becomes undercapitalized.

On Friday, Sept. 29, the Office of Federal Housing Enterprise Oversight sent to Congress its 5-year Strategic Plan for regulating Fannie Mae and Freddie Mac.

The OFHEO's main goal is to ensure that the GSEs remain safe and sound through efficient and effective regulation, and adequate capitalization.

The step-up in its role as regulator for the GSEs is seen by some as protecting its turf which has become threatened by the recent GSE Reform talk which has focused on a single regulator.

In other regulatory news, swaps talks are moving forward, according to House Majority Leader Richard Armey. Last week, he told reporters that it would likely pass the House by this week.

Negotiations have focused on establishing the tax treatment of single-stock futures, and assuring that swaps contracts will not be subject to regulation by the CFTC or the SEC. - IFR MortgageData

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