In Secretary of Treasury John Snow's recent testimony to the House Financial Services Committee, Snow confirmed the Bush Administration's stance that the Federal Home Loan Banks, along with Freddie Mac and Fannie Mae, should be regulated under the new regulatory agency set to be formed under the Department of the Treasury.

This has been a welcome move for both the GSEs and the FHLBs because the Office of Federal Housing Enterprise Oversight (OFHEO) - which currently oversees Fannie and Freddie - and the Federal Housing Finance Board - which regulates the FHLBs - have not been considered very efficient regulators by the market, sources said.

"Strengthening the regulation of Fannie and Freddie is a great idea, particularly strengthening the mission oversight by giving it

adequate funding," said Steve Verdier, vice president and legisl tive counsel at America's Community Bankers (ACB). He also said that, "We certainly believe there is room for improvement in the regulator of the Federal Home Loan Banks."

He stated that ACB has created a new group just last Monday called the GSE Regulatory Reform Task Force, which would study the feasibility of putting Fannie and Freddie as well as the FHLB under one regulator.

Two of a kind

Verdier explained that the GSEs and the FHLB are really two different kinds of companies. Fannie and Freddie are publicly traded while the FHLBs are really a cooperative owned by their members. Putting these three entities under one regulator might mean trying to impose the same rules on two different kinds of entities.

He also explained that there are opportunities for regulatory arbitrage in having a combined system for these three entities. This might mean having a set of companies working within the same regulatory framework, but as competitors.

On the other hand, other sources said that since the FHLB competes with Fannie and Freddie in the secondary mortgage market, placing all under one regulator may level the playing field as the new regulator could choose to apply the same rules for all of the three entities. However, sources also argued the opposite, that the FHLB might be at a disadvantage because of Fannie's and Freddie's powerful political influence.

Furthermore, there are also the differences in the capital requirement that these two sets of companies have historically adhered to. Fannie's and Freddie's capital requirements were set by the Federal Housing Enterprises Financial Safety and Soundness Act, which was passed in 1992 to modernize the regulatory structure for Fannie Mae and Freddie Mac.

On the other hand, FHLB's capital requirements fall under the Gramm-Leach Bliley Act of 1999.

Affordable housing

Sources said that the two GSEs have a much different approach to affordable housing compared to the FHLB, a factor that may also be grounds for dissent if these entities are put under a single regulator. In terms of Fannie and Freddie, the two are required to maintain a certain percentage of their loans for moderate-income homebuyers. Though these mortgages were really meant to help out borrowers, the GSEs also have to make profits on these loans for the sake of the companies' shareholders.

The FHLB, on the other hand, is under a whole different regime. FHLBs are required to give away 10% of their net profits as grants for affordable housing and community development projects. In terms of the dollar value, FHLB has given significantly more compared to the Fannie Mae Foundation. For example, last year the FHLB gave away $239 million. In contrast, the Fannie Mae Foundation gave $32 million. In other words, the FHLB does not really make profit on the affordable housing activities that its members engage in.

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