House GOP Makes the Next Move on GSE Reform
The Obama administration’s February report that outlined a series of near-term and long-term proposals for reforming Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac provided a starting point for Congressional debate—and now House Republicans appear ready to act.
This afternoon, Republicans on the House Financial Services Committee held a press conference to unveil eight separate proposals for providing near-term reforms to Fannie and Freddie. Several of the GOP proposals mirror those made by the Obama administration, including an increase in Fannie and Freddie’s guarantee fees and a winding down of both GSE’s investment portfolios, which currently hover around $1 trillion. Of particular significance, however, is the GOP’s omission of a long-term proposal for replacing Fannie and Freddie, highlighting the difficulty in significantly decreasing the GSE’s outsized role in the U.S. housing finance market.
Below is a summary of each GOP proposal:
Executive Compensation—Introduced by Chairman Spencer Bachus (R-AL), the Equity in Government Compensation Act of 2011 would suspend current compensation packages for Fannie and Freddie’s senior executives and replace them with compensation packages on par with current pay rates for senior employees in the Executive Branch of the Federal Government.
Congressional Oversight—Introduced by Rep. Judy Biggert (R-IL), the Fannie Mae and Freddie Mac Accountability and Transparency for Taxpayers Act of 2011 would require the Inspector General of the Federal Housing Finance Agency to submit quarterly reports to the Congress during the conservatorship of Fannie and Freddie.
Risk Retention—Introduced by Rep. Scott Garrett (R-NJ), the GSE Credit Risk Equitable Treatment Act of 2011 would prohibit mortgages held or securitized by Fannie or Freddie from being exempted from the risk retention rules established under Dodd-Frank and currently being proposed by the FDIC.
Investment Portfolio—Introduced by Rep. Jeb Hensarling (R-TX), the GSE Portfolio Risk Reduction Act of 2011 would incrementally impose caps on Fannie and Freddie’s investment portfolios so that it reaches $250 billion after five years.
Guarantee Fees—Introduced by Rep. Randy Neugebauer (R-TX), the GSE Subsidy Elimination Act of 2011 would increase the guarantee fees over two years that Fannie and Freddie charge investors in exchange for a guarantee of the timely payment of interest and principal on Mortgage Backed Securities (MBS).
Debt Issuance—Introduced by Rep. Steve Pearce (R-NM), the GSE Debt Issuance Approval Act of 2011 would prohibit Fannie or Freddie from issuing any new debt without approval from the Secretary of the Treasury.
Affordable Housing—Introduced by Rep. Ed Royce (R-CA), the GSE Mission Improvement Act of 2011 would repeal Fannie and Freddie’s congressionally-mandated affordable housing goals.
Lending Markets—Introduced by Freshmen Rep. David Schweikert (R-AZ), the GSE Risk and Activities Limitation Act of 2011 would prohibit Fannie and Freddie from approving any new financial products while in conservatorship or receivership.
The House Financial Services Subcommittee on Capital Markets & Government Sponsored Enterprises will consider the eight GOP proposals during a hearing on Thursday, as Federal Housing Finance Agency Acting Director Edward DeMarco is slated to testify.
The piecemeal approach to GSE reform is a continuation of House Republicans’ legislative strategy in the 112th Congress, aimed at avoiding comprehensive proposals that are more liable to political attack and getting bogged down in the legislative process.
The fast-track approach, however, will only go so far in the Senate. During a GSE reform hearing on Tuesday, Banking, Housing and Urban Affairs Committee Ranking Member Richard Shelby (R-AL) made clear in his opening statement that housing finance reform will require a long and protracted congressional debate that may last beyond 2012.
“Before Congress can consider legislation, this Committee needs to do its homework,” said Shelby. “The Committee needs to thoroughly examine Federal housing policy and identify the problems with our current system. Accordingly, I believe this hearing is premature.”
Shelby, one of the leading critics of Dodd-Frank, warned his colleagues that hastily crafted GSE reform legislation would lead to “unintended consequences,” citing the financial reform legislation as an example.
The phasing out of Fannie Mae and Freddie Mac will bring back private capital and banks to the real estate market
and the playing field will be level for private capital investment. Borrowers will also be required to put down a larger down payment.