Based on a recommendation by the General Accounting Office (GAO), U.S. Rep. Richard Baker (R., La.) has introduced legislation that would abolish the three agencies that regulate Fannie Mae, Freddie Mac and the Federal Home Loan Bank System and create a single new agency that would oversee all three enterprises.

The bill, introduced to the House of Representatives Feb. 29, will eliminate the Office of Federal Housing Enterprise Oversight (OFHEO) which is the safety and soundness regulator of the government-sponsored enterprises. The Federal Housing Finance Board, which regulates the FHLBank System, will also be abolished, along with the GSE mission-related area of the Department of Housing and Urban Development. In their places, the Federal Housing Oversight Board (FHOB) will be created.

"Based on several studies it conducted, GAO found that the creation of a single regulator to oversee both safety and soundness and mission compliance of the housing GSEs would lead to improved oversight," Baker said in his floor statement to the House.

Under the provisions of the "Housing Finance Regulatory Improvement Act of 2000," the FHOB will consist of five members, including the Secretary of HUD, the Secretary of the Treasury, and three U.S. citizens appointed by the president and confirmed by Congress for a six-year term. None of the citizens appointed to the FHOB can have any formal ties to the agencies, including stock ownership.

"I believe that an independent board consisting of five persons, including representatives from HUD and Treasury, is a more effective oversight agency for the three housing GSEs than the current regulatory system," Baker said.

The Duties of the FHOB

The goal of the FHOB is to control the nonmission-related activities of the enterprises and the FHLBanks, and to make sure the GSEs and FHLBanks operate in a financially safe and sound manner, carry out their mission and remain adequately capitalized. The new bill will also give ultimate authority to the FHOB to approve or deny all new GSE activities, and approval must be given in order to proceed with any activities.

According to the legislation, the FHOB will approve programs only if they are authorized by law, can be conducted in a safe and sound manner and are in the public interest. The request must be submitted in writing, and will have a 30-day comment period. Within 90 days, the board will either approve or deny the request, and the agency may seek judicial review of the decision if the FHOB denies the request.

Other provisions of the bill include the elimination of the line of credit from the Treasury to the agencies. It is currently $2.25 billion for the enterprises and $4 billion for the FHLBank System. Furthermore, the maintenance of the conforming loan limit will remain intact, along with a uniform risk-based capital rule for both GSEs and the FHLBanks system. Equal capital treatment of agency and private-label MBS is also a major part of the bill.

The legislation also gives the FHOB permission to appoint a receiver to liquidate or wind up affairs if the GSEs become critically undercapitalized or if the FHLBanks do not comply with risk-based capital requirements. "The total obligations of the three housing GSEs are about half of our $5.6 trillion federal debt. To assure they remain healthy throughout economic downturns and that taxpayers are never called upon to bail out GSEs, my bill aims to improve their supervision," Baker said.

Constituencies Reviewing Bill

Since the bill's introduction last week, the constituencies outlined in the legislation have been diligently reviewing it. At press time, many agencies were still looking over the bill and could not give any formal comment.

"We are looking at the bill, and it's certainly within the purview of Congress that they created our regulators in the first place," said Freddie Mac spokesman Douglas Robinson.

Stefanie Mullin, spokeswoman for OFHEO, said that the agency is still reviewing the language of the bill and offered no specifics as of yet.

However, Fannie Mae has said it is outright opposed to the bill. "We don't see how the legislation drawn up by the congressman's staff helps consumers and we fear it could harm consumers by interfering with the functioning of the secondary market and by stifling product innovations," said David Jeffers, vice president of corporate relations for Fannie Mae.

Jeffers added that because the current system is beneficial to consumers, the legislation must be judged on the impact it will have on homeowners and potential homeowners. And because of the risks the bill potentially has, "We doubt there's much interest on the Hill in the bill, because no one we know up there wants to increase regulatory burden and harm consumers at the same time," he said.

However, FM Watch, a self-described watchdog over the GSEs, gives Baker its support, though stated that more still needs to be done. "FM Watch applauds Congressman Baker's leadership and his intent to enhance federal oversight of the GSEs," said FM Watch Executive Director Mike House in a prepared statement. "While this is an important first step, there is more to do. FM Watch believes more GSE oversight is needed and looks forward to working with Rep. Baker and Congress in the coming months."

Representatives from HUD and the FHFB did not respond by press time.

However, market observers do not think that a bill of this magnitude is very likely of getting passed in 2000, an election year. "My understanding is that Congress and the president are going to agree on the budget and probably not a whole lot else," said Art Frank, head of mortgage-backed securities research at Nomura Securities.

Frank also said that because of the conflicting - though not necessarily contradictory - viewpoints between the views of HUD's secretary Andrew Cuomo and Congress, this bill has an unlikely chance of being enacted.

And while there are no similar bills being presented in the Senate, Christie Harlan, spokeswoman for the Senate's banking committee said, "If Congressman Baker's bill passes the House, we'll be happy to take a look at it."

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