Market participants view the passage of the Baker-Oxley Bill (H.R. 1461), the House of Representative's version of the GSE Reform Bill, as a positive step towards enacting GSE legislation by this year.

The bill is seen as GSE-friendly as it excludes caps of any kind on portfolio growth.

It also created a new regulator to be known as the Federal Housing Finance Agency with the ability to approve new lines of business as well as set both minimum and risk-based capital requirements. The new regulator could, however, limit the size of Fannie Mae and Freddie Mac MBS portfolios in cases relating to safety and soundness considerations.

Art Frank, head of mortgage research at Nomura Securities, said that two events in the past two weeks have made it more likely for GSE legislation to be passed this year. The first is the Democrats and Republicans agreeing to compromise on filibusters of judicial nominations, avoiding the disruption of Senate proceedings, as well as Committee passage of the Baker-Oxley Bill. Frank added that he expects the final bill to be passed by October. He added the House version is "fairly friendly to Freddie Mac and Fannie Mae." Although this version of the bill requires the two GSEs to give 5% of their net profits to support affordable housing grants for low income borrowers, Frank said that this would give urban constituencies a stake in Fannie's and Freddie portfolio size, thus giving the GSEs more leeway with portfolio growth. Frank added that even if the House bill also allows the new regulator to put the GSEs in receivership, this does not threaten their triple-A rating, noting that the Federal Home Loan Banks regulator has the same authority with no impact to member bank ratings.

The next step is for Sen. Richard Shelby, (R., Ala.), to propose a bill that can be marked up by the Senate Banking Committee, which is expected by late June. Merrill Lynch analysts said that Senator Shelby could put aside the Bush administration's concerns about the lack of portfolio limits just to receive bipartisan support for the bill. Merrill Lynch also stated that if the Senate passes bipartisan legislation like that of the House Bill, the administration would probably simply accept what critics view as a "weak Bill," although still seen as an improvement over the current GSE regulatory paradigm.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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