GSE Reform in Critical Stage
Saturday, May 1, 2004
By: Leslie Paige

Government Waste Watch, Spring/Summer 2004

Congress moved one step closer this session to enacting reform of the nation's housing government-sponsored enterprises (GSEs); Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.  However, the chance of final passage may have once again withered in the face of entrenched opposition by Senate Democrats and the intense lobbying of the GSEs and their allies, including a series of pressure ads that ran on major television networks on the days preceding the mark-up.         

On April 1, the Senate Committee on Banking, Housing, and Urban Affairs, led by Chairman Richard Shelby (R-Ala.), debated and voted on a comprehensive package of regulatory reforms that would have been the most sweeping change in the GSEs' operations since 1991.  The bill passed during mark-up by a vote of 12-9, mostly along party lines, but only after a divisive, potentially fatal, amendment was grafted into it.  The next day, the Treasury Department announced that it would withdraw its support because of unacceptable amendments. 

The bill contained several key provisions aimed at introducing robust oversight over the GSEs, including:  the creation of a new, stand-alone regulator with broad powers to adjust both risk-based and minimum capital held by the GSEs; the authority to review in advance new GSE products and services; an independent funding stream for the regulator; and, more stringent and measurable requirements on the GSEs to meet affordable housing goals. 

The provision that turned out to be the most contentious was one that had been put forward earlier by Federal Reserve Chairman Alan Greenspan, who suggested that Congress enact into law specific authority on how and when to appoint a receiver for any GSE that went bankrupt.  Greenspan views such a provision as an effective way to begin to disabuse investors and analysts of the notion that the GSEs enjoy taxpayer backing.  An amendment to the bill offered by Sen. Bob Bennett (R-Utah) would have given Congress veto power over the regulator's decision to appoint a receiver, thus weakening and politicizing the process.     

Democrats, with the notable exception of Sen. Zell Miller (Ga.), appear ready to kill almost any reform effort, arguing that increased oversight will damage homeownership and that the reforms sought were nothing more than a back-door path to full privatization and "the end of GSEs as we know them."

In announcing his opposition, Treasury Secretary John Snow said that the administration would not compromise on essential elements of reform it believes must be included.  Sen. Bennett's amendment would "significantly weaken one of the core powers needed for a strong regulator," and the Bush Administration vowed to actively oppose it, jeopardizing the possibility of achieving GSE regulatory reform before the end of this legislative session.  Though Sec. Snow asserted that the long-term effort to rein in the GSEs has "gotten jump-started," he advises that such significant regulatory changes take time.