Fight over GSE reform comes to Senate panel

The banking industry will be keeping a close watch on Sen. Richard Shelby (R-Ala.) in the next week as he unveils a bill to provide stricter oversight of Fannie Mae and Freddie Mac, the two mortgage-lending giants that were plagued by embarrassing accounting scandals over the past few years.

Shelby, who chairs the Banking Committee, also faces political pressure within his own party to create a smooth path for his bill. Conservative lawmakers objected to House Financial Services Chairman Mike Oxley’s (R-Ohio) compromise with Democrats to secure their votes on the House bill by adding a provision that would dedicate 5 percent of Fannie Mae and Freddie Mac’s profits to low-income housing.

Shelby plans to mark up a bill before the August recess creating a new regulator to replace the Office of Federal Housing Enterprise Oversight (OFHEO), which oversees Fannie Mae and Freddie Mac.

“Senator Shelby is hopeful that the committee can reach consensus on meaningful legislation that can create a regulatory system to ensure that [Fannie Mae and Freddie Mac] operate in a safe and sound manner,” said Shelby spokeswoman Virginia Davis.

But conservative Republicans are already bracing for a fight if Shelby’s bill contains any measure that would require the two lending giants to divert a portion of their profits. Members of the conservative Republican Study Committee (RSC) have railed against the requirement in the Oxley legislation, vowing to prevent the bill from reaching the floor for a vote.

Industry lobbyists predicted that Shelby would work out any differences within his conference before bringing the bill to the committee for a vote.

“You just don’t know whether Republicans are talking about building consensus about portfolio issues … whether Shelby has been able to get them behind something,” said Steve Verdier, a top lobbyist for Independent Community Bankers of America. “Shelby is not going to go into a markup and get rolled.”

“From all indications, there should be a markup late next week,” predicted Bob Davis, executive vice president of America’s Community Bankers. “They are focusing directly on safety and soundness, and I am confident the Senate Banking Committee can pass out a [bill reforming Fannie Mae and Freddie Mac] that creates a strong new regulator.”

“Safety and soundness” refers to the OFHEO mandate to keep Fannie and Freddie’s debts and portfolios in check. The phrase has become a rallying cry for officials seeking greater enforcement power at the agency to prevent further accounting scandals. The Office of the Comptroller of the Currency, the banking industry’s safety and soundness regulator, has been cited as a model for OFHEO’s escalated role.

The new regulator’s ability to limit the lending giants’ debt could hinge on the so-called “33 Act,” a mandate that Fannie, Freddie and the Federal Home Loan Banks affiliated with them — referred to as government-sponsored enterprises, or GSEs — notify the Securities and Exchange Commission (SEC) of all of their debt transactions. The Federal Home Loan Banks are pursuing exemption from 33 Act registrations because of their high volume of debt transactions, but Fannie and Freddie may balk if the rules were to apply to only them.

A provision to increase the cap on individual mortgage values that Fannie and Freddie may purchase was included in the House version of the bill but is less likely to make it to Shelby’s draft thanks to a split between the real-estate industry, which supports raising the limits, and certain bankers who have voiced strong opposition.

John Bolton, president of the Financial Services Roundtable, sided with bankers in a letter to Shelby sent late last week.

“GSE reform should maintain a focus on supporting loans to low- and moderate-income borrowers” without buying up oversized mortgages, Bolton wrote.

The affordable-housing fund that has stymied the House Fannie-Freddie bill is likely to be a similar sticking point between Shelby and committee Democrats, such as Sen. Charles Schumer (D-N.Y.), who has been a major proponent of Fannie and Freddie’s past low-income initiatives.

RSC members working to strike the fund element in the House cite fears of creating a slush fund that could be directed to advocacy groups for use on their priority issues. Shelby has objected to siphoning off a percentage of GSE profits, what he regards as a tax increase.

Bolton did not oppose the affordable-housing fund in his letter, instead stressing the need for any new GSE regulator to monitor closely the fund’s spending patterns. Erick Gustafson, vice president for government affairs at the Mortgage Bankers Association (MBA), said the issue was proving an undue distraction for some lawmakers from the substance of the bill.

“It’s not the whole point of GSE reform, and in that sense it’s a tertiary issue that’s keeping a very good bill from reaching the floor,” Gustafson said. He added that he would be “very surprised” if some form of the fund is not included in the final version of the bill.

The MBA’s top priority for Shelby’s bill is keeping Fannie and Freddie confined to the secondary mortgage market, leaving banks themselves to provide primary services to consumers and homebuyers. More than 70 percent of all U.S. mortgages are secured with GSEs, making the secondary market a significant playing field in its own right.