Washington - In a second hearing on a bill that would strengthen the oversight of the government-sponsored enterprises, the heads of Fannie Mae and Freddie Mac, and the chairman of the Council of the Federal Home Loan Banks offered some friendly advice to the Capital Markets Subcommittee of the House Banking Committee: Tread cautiously.

The executives urged the subcommittee to avoid the market volatility that occurred following the first hearing on the bill, HR 3703, back in March. GSE spreads to the 10-year Treasury widened by 14 points after that hearing, in which Treasury Undersecretary Gary Gensler and Assistant Secretary for the Department of Housing and Urban Development William Apgar provided testimony on the bill.

The bill, sponsored by committee chairman Richard Baker (R., La.) would strengthen the oversight of the GSEs by placing Fannie Mae, Freddie Mac and the Federal Home Loan Banks under one regulator and strip their lines of credit to the U.S. Treasury. It is the first bill to alter the charters of the GSEs since the Office of Federal Housing Enterprise Oversight was created in 1992 to oversee Fannie Mae and Freddie Mac.

Noting that even though the mortgage market is "far from perfect," Rep. Carolyn Maloney (D. N.Y.) urged her committee to "not make changes that generate unintended consequences."

"It's critical that we don't intentionally or inadvertently harm our successful mortgage market," added Rep. John LaFalce (D., N.Y.).

Of concern was the growth the GSEs have encountered over the past few years because of a sustained robust economy, but some wondered if the GSEs were growing too fast and working too well.

"GSEs were established to serve and complement the market, not become the market," said Rep. James Leach, (R., Iowa).

"Could [the GSEs] be performing too well that other banks and thrifts feel you are encroaching on them?" added Rep. Frank Mascara (D., Pa.)

It was recommended throughout opening statements that the legislation should be given careful consideration, and to not be enacted during the current legislative session. However, hearings should continue to be held.

Rep. Walter Jones, (R., N.C.) noted that the 1992 law mandated that Fannie Mae and Freddie Mac lead the mortgage finance industry, and said that the companies are "fulfilling their mission."

What's Wrong With the Bill?

As the GSEs proceeded with their testimonies, it became clear that they do not pose any financial risk to the economy, and Leland Brendsel, chairman and chief executive officer at Freddie Mac, even said that the thrift industry would have to triple its capital to meet risk-based standards imposed on the company.

In written statements handed out at the hearing, Brendsel stated that no action should be taken until OFHEO implements its new risk-based capital rule. OFHEO is currently finalizing that rule.

Both Brendsel and Franklin Raines, chairman and CEO of Fannie Mae, agreed that the bill would stifle innovation, citing a clause that would require board approval and a public comment period of all new products.

"Such a process would be excessively slow, reveal to our competitors - and our lenders competitors - our proprietary product development efforts, and be unpredictable in result," said Raines in his written statement.

"Who'd want to work with Freddie Mac with a lengthy approval procedure?" Brendsel said when asked about the matter, adding that the approval process would add to costs and create an "endless delay" in bringing forth new products.

Another issue of concern was the repeal of the lines of credit to the U.S. Treasury, which currently stand at $4 billion for the Federal Home Loan Banks, and $2.25 billion each for Fannie Mae and Freddie Mac.

"My role is to ensure the market is not having its vision skewed by the implicit guarantee," Baker said. He added that by removing the lines of credit, which never have been used, would eliminate the view by investors' that GSE debt has no risk.

Officials at the GSEs pointed out that because their offerings and their charter specifically state that their debt is not backed by the U.S government, removing the credit lines would be largely symbolic and unnecessary. They added that even though the lines of credit are symbolic, that line makes debt securities look attractive to foreign investors, whose financial systems are set up completely different from that of the U.S.

Lobbying Efforts

Rep. Maxine Waters (D., Calif.) said she was agitated by the hearing and she doesn't "take kindly to being used in a market share war." She said that while she a harsh critic of the GSEs, that there was nothing wrong with the current situation, and nothing needed fixing.

Waters said the committee should not be entertaining remarks of FM Watch, a GSE watchdog group, "who are composed of subprime lenders who do not wish to compete with Fannie Mae and Freddie Mac."

Rep. Donald Manzullo, (R. Ill.) lashed out at Fannie Mae for its lobbying effort to shoot down the bill. He told Raines that his office received more than 2,000 letters by his constituencies to tell Congress to help reduce the cost of homeownership by a company called the Coalition for Homeownership, a group formed by Fannie Mae.

"I am upset that their good names have been used," he scolded at Raines. He said that he later called the supposed writers of the letters and that they did not give Fannie Mae authorization to use their names in the letters, which Manzullo went on to call "bogus lobbying."

Raines replied that he authorized phone calls to the constituents to get permission to use their names. "We will ask for support to get support for the secondary market," he said.

Kiddie Mac?

Perhaps the most unrelated piece of the hearing was a topic brought up by Rep. Maloney, who said that child care has been failed by private markets. She would like Fannie Mae and Freddie Mac to establish what she referred to as "Kiddie Mac," that is being able to purchase child care facility mortgages.

Originally thought to fall into the commercial mortgage area, Maloney wants to create a class for child care loans all their own. She said that because they've done a wonderful job with home mortgages, that they could do the same with child care.

However, the GSEs were not able to respond due to time constraints of the hearing, and were asked to submit responses in writing to all interested parties in the subcommittee.

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