San francisco - GSE regulation is a hot topic at this year's National Secondary Market Conference and Expo 2005 hosted here last week by the Mortgage Banker's Association, as representatives from both the GSEs and Senate debated the pros and cons of pending GSE legislation.

Speaking on a panel entitled A View from Washington and Legislative Update, sources reported that they expect mark-ups this month from both the Senate and the House of Representatives for the GSE reform bill.

Joe Cwiklinski, staff director at the Senate Banking Subcommittee on Securities and Investment, and legislative assistant to Senator Chuck Hagel (R.-Neb.), said that both sides are not that far apart, adding that it was in everyone's best interest to pass a bill this year. Adam Healy, legislative assistant to U.S. Senator Tim Johnson

(D.-S.D.), stated that the GSE portfolio size issue has yet to be resolved with varying indications from the administration.

While Federal Reserve Chairman Alan Greenspan advocates a strict hard cap, Treasury Secretary John Snow is espousing more flexibility, which is more along the lines of other regulators. Meanwhile, the Office of Federal Housing Enterprise Oversight Associate Director Peter Brereton reported that his department is calling for a new independent regulator funded outside the appropriations process to avoid being "highly political."

Meanwhile, at the GSE Executive Update panel, participants discussed what could be the "unintended consequences" of the pending GSE legislation. They said that although a strong regulator is needed, it should not prevent GSEs from extending liquidity and stability to the mortgage market. Fannie Mae Senior Vice President Thomas Lund said that his firm has been working closely with both Congress and trade groups regarding this issue, adding that market participants need to understand that the current environment - where liquidity is in abundance and people are chasing yield - is not the environment that "we'll always be in," noting that GSE guaranty business is a good funding source for the housing market.

William Batz, chief operating officer at the Federal Home Loan Bank of Pittsburgh, said he hopes the new GSE bill will not increase the cost of funding by pushing the GSEs out of the government's nexus. Other panelists added that the government guaranty allows GSEs to focus on their goals. Batz also said that any new regulator should have enough flexibility to allow the GSEs to adapt to changing market conditions while serving its mission with an eye to safety and soundness.

Freddie Mac Senior Vice President Don Bisenius said the GSEs need to focus on applying resources to target areas and that legislation must not "stifle innovation." Sometimes legislating out the bad has the effect of slipping out the good, Bisenius said, adding that liquidity, stability and affordability are three of the most important components in the market. With the mortgage market being relatively stable and liquidity in abundance right now, affordability is the bigger issue at the moment.

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