On Thursday afternoon the Senate Banking Committee narrowly approved a bill that strengthens regulation of Freddie Mac and Fannie Mae, further putting into question the fate of the GSEs. This was largely based on an earlier draft legislation brought by the Banking Committee chairman, Sen. Richard Shelby, R-Ala.

The legislation the committee approved - in a 12-9 vote, mostly along party lines and largely based on Sen. Shelby's bill - actually included a revised version of an amendment proposed by Sen. Robert Bennett, R-Utah. This amendment focuses on congressional oversight of a receivership determination. Under the revised version of the bill, the new regulator can appoint a receiver but Congress will be given 45 days to overturn this decision without the ability to filibuster the motion.

Despite the committee's OK of the bill, it is almost certain that Democrats will not approve of this revised version. Even Sen. Shelby, in published reports, said that the lack of bipartisan support might dim the bill's chances of being approved.

Art Frank, head of mortgage research at Nomura Securities International, explained that in order for the proponents of the legislation to be able to force a vote on the Senate floor over the objections of some senators - in the event there is not unanimous consent to proceed, in other words - it would take 60 votes out of 100. Republicans only can count on 51 votes. So even if a handful of Democrats decide to join with Republicans to allow a vote on the bill, it would not be sufficient.

In terms of market reaction, Frank said that, as of deadline last Thursday afternoon, it was difficult to determine how the news affected the MBS market. By the time the news hit at 4:30 p.m., the market was thinly traded. It will take the return of liquidity on Friday morning to know the market's real reaction. In the agency debenture market, however, there was a half a basis point widening.

Frank speculated that because Democrats seem inclined to block a floor vote on the bill and a compromise on receivership was written into the revised version, MBS market participants will likely not react strongly to the passing of the bill out of the Senate Banking Committee. Analysts at RBS Greenwich Capital agree. In a report written just after the news of the bill's approval broke, analysts wrote, "Based on the partisan nature of the vote and likely opposition from Fannie and Freddie, we believe it is unlikely that this measure will be able to pass the full Senate in its present form in an election year."

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