While most secondary market participants agree the industry is far from perfect, last week's fourth hearing on a bill designed to exert greater control over the government sponsored enterprises reflected the great diversity of opinion out there on how to most effectively assuage the market's problems.
Groups who deal directly with the GSEs spoke at the House subcommittee on capital markets hearing last Thursday. According to Rep. Richard Baker (R., La.), sponsor of the bill and chairman of the subcommittee, the hearings have achieved the goal of serving as a springboard to discuss reform in regard to systemic risk, GSE status and mission and regulatory oversight.
Those present at the hearing were representatives from America's Community Bankers, Financial Services Roundtable, the National Association of Realtors, the National Association of Homebuilders and the Mortgage Bankers Association. All have suggested ways that HR 3703, the Housing Finance Regulatory Improvement Act, be modified to best serve the secondary market.
A main purpose of the bill is to quell "mission creep" fears of competitors of Fannie Mae and Freddie Mac. "ACB is specifically concerned about mission creep that is driven by stockholder expectations," said David Bochmowski, vice chairman of America's Community Bankers. He suggested that the GSEs not be involved in moving into home-equity loans, because "borrowers seeking this type of junior financing have already achieved homeownership."
However, the Bruce Smith, a spokesman for the National Association of Homebuilders, believes that everyone would benefit from the GSEs purchasing of subprime mortgages, much to the dismay of private-sector competitors. "We ... encourage the GSEs to bring the benefits of standardization and lower costs to the subprime market in the same way they have benefited the conventional mortgage market," Smith said.
As for combining the safety and soundness and mission regulators of Fannie Mae and Freddie Mac with that of the Federal Home Loan Bank System, the groups varied greatly on the issue.
"ACB is opposed to consolidating the federal oversight of the FHLBank System with regulation of Fannie Mae and Freddie Mac because of the different nature of the capital base, ownership structure and the motivation of new programs," said Bochmowski.
"By having authority to address both topics, the regulator will be better able to look at a GSE's activities in total and make appropriate judgement," rebutted Steve Bartlett, president of the Financial Services Roundtable.
A provision in the legislation also dictates that all new program activities must be placed in the Federal Register for public comment. Financial Services Roundtable, among others, perceived this proposal as well intended, but restrictive.
"Safe harbors from the notice and comment rulemaking must be established so that lenders may proceed to gain approvals from the GSEs for these kinds of negotiated products confidentially and speedily," added Christopher Summer, president of the MBA. In other words, publicly displaying new activities could be a disadvantage for the GSEs, as competitors would be able to mimic a GSE's product development.
All groups participating stated that the line of credit the GSEs currently have with the U.S. Treasury not be removed, as it is symbolic and has not been used since its inception. Also, the panelists agreed that the risk-based capital rule currently being finalized by the Office of Federal Housing Enterprise Oversight - the safety and soundness regulator of Fannie Mae and Freddie Mac - not be delayed any longer.