In a turn of events, U.S. Rep. Richard Baker (R., La.), sponsor of a bill to dramatically overhaul the regulation of Fannie Mae, Freddie Mac and the Federal Home Loan Bank System, said that he intends to go forward with his legislation this year. A vote could be possible this fall.

"Congress will be asked to make a decision," he said at a conference sponsored by the American Enterprise Institute for Public Policy Research last Tuesday. This announcement comes one week after a hearing in which members of the House Capital Markets Subcommittee told Baker that they did not want this legislation to be voted on during this Congressional session.

They stated that additional hearings must be held, but the legislation should be dealt with cautiously.

The legislation, HR 3703, has also been critiqued by all three government sponsored enterprises, saying that some things need to be changed in the legislation, which would combine the regulators of the three GSEs, remove their lines of credit to the U.S. Treasury and require public comment on all new product ventures.

Baker's announcement comes on the heels of a letter submitted to him by Federal Reserve Chairman Alan Greenspan. In Greenspan's letter, which Baker had asked him to write, the chairman stated that he generally does not comment on systemic risk pertaining to any institution or group of institutions.

However, he did state, "The lower borrowing costs of these institutions, of course, reflect the belief of purchasers of their debt that the government is unlikely to let a GSE fail. In part this perception results from these housing-related GSEs initially being established as federal government entities to carry out specific government policies, and that, despite their subsequent privatization, these institutions continue to have government missions, which confer upon them a special status in the eyes of many investors."

He then added that the GSEs succeeded many years ago in accomplishing their goal of "smoothing our regional imbalances in mortgage supply and integrating regional mortgage markets into the national capital markets."

Baker, in his speech, said that Greenspan's words must be approached with caution when trying to decipher them. "It would be both unwise and inappropriate for me to overly interpret his words or to claim that he says anything that he intentionally has not said," the congressman said.

David Jeffers, vice president of corporate relations for Fannie Mae and John von Seggern, president of the Council of the Federal Home Loan Banks, both issued formal statements in response to Greenspan's remarks.

"The comments are nothing new or surprising," Jeffers said. "Indeed, Chairman Greenspan's comments in this letter are consistent with the views he has stated publicly with regard to other federally-chartered entities and the impact on the economy of the benefits those entities derive from their charters and the federal deposit safety net."

"There's a very important fact that often gets lost in the debate over the housing GSE regulation: Federal Home Loan Banks are the nation's only wholesale source of funding for community lending," stated von Seggern. "As the discussion over GSE regulatory overhaul progresses, we encourage participants to remember that Federal Home Loan Banks fulfill a unique mission that has become a lifeline for our 7,500 owners - hometown banks and thrifts - and the communities they serve."

The market quickly responded to Greenspan's comments, but regained strength shortly after. At one point, Fannie Mae 8s were four basis points wider versus 10-year Treasurys. By the end of the day Tuesday, Fannie Mae 8s were slightly stronger than Treasurys. Despite the rebound, Ginnie Mae 30-year securities still outperformed Fannie Mae 8s by 2/32.

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