With a tougher Senate version of the GSE bill expected this month, the likelihood of legislation passing this year has dimmed considerably, said analysts.
Andrew Parmentier, senior policy analyst at Friedman, Billings, Ramsey, said that to the degree that Sen. Richard Shelby, (R., Ala.), tentatively set to introduce the Senate version of the bill this month, includes more rigorous standards on GSE portfolio limits and asset control, it would be more difficult to find Democratic support and to have a bill that would come to the floor with bipartisan support. "The art of compromise is going to be needed to see a bill passed later this year or early next year," Parmentier said, adding that the House's version of the bill, even with its shortcomings, is still better than the status quo.
Although Shelby's version of the bill has not yet been revealed, indications are that it could contain a provision requiring any new regulator to insure that GSE portfolio holdings do not veer away from the GSE mission. Aside from this, Merrill Lynch analyst Rajiv Setia said that it is unlikely to include a provision requiring Fannie Mae and Freddie Mac to put aside a part of their profits towards an affordable housing fund, a move favored by the Democrats. There is also speculation the Shelby bill might require both agencies to register their debt with the Securities & Exchange Commission. If Shelby's proposal includes the aforementioned items, Setia said, "we expect a strictly partisan vote in the Senate Banking committee, which will doom the chances for legislation being enacted in 2005," noting that if a bill passes in its Committee, there is less likelihood of a debate on the Senate floor if it lacks broad bipartisan support. For instance, last year Shelby's GSE bill passed its Committee by a 12-9 vote. It was not, however, brought up for debate before the full Senate.
Setia said that another complication is the potential legislative logjam with the need to immediately fill the current Supreme Court vacancies. "To wit, if GSE deliberations are pushed back into the fall, it may prove difficult to move any legislation, especially if President Bush's nominee evokes a partisan response in Congress," he stated.
FBR's Parmentier added that even with Congress having to decide on two major issues this fall - appropriations must be completed individually with the budget deficit and two potential Supreme Court confirmations - a bill with full bipartisan support could still quickly move through the Senate.
This uncertainty regarding the GSE bill and the agencies' portfolio limits comes at a time when the MBS market is facing a weak supply and demand picture. Traditionally, providing a backstop bid for mortgages, the GSEs have not offered as much support to the agency debt market recently. While Fannie Mae MBS selling is expected to cease by September assuming it meets its excess capital requirements set by the Office of Federal Housing Enterprise Oversight, MBS market participants do not expect GSE MBS demand to rise considering current mortgage valuations versus agency debt.
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