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Week Ending October 28, 2005
H.R.1461 To reform the regulation of certain housing-related Government-sponsored enterprises, and for other purposes.
BRIEF
The bill would establish the Federal Housing Financing Agency (FHFA) to oversee the government sponsored entities (GSE) that manage and support most mortgages in the US. Federal Housing Enterprise Oversight of the Department of Housing and Urban Development duties would be transferred to FHFA. The FHFA would pay its way by extracting fees from the entities it oversees. Currently, Fannie Mae and Freddie Mac enjoy a line of credit with the US Treasury and can draw at favorable interest rates.
The bill purpose includes a concern from some quarters that the two primary GSEs, control a combined $1.5 trillion in mortgage assets and such massive holding in only two entities poses a risk to the US economy if there is mismanagement and loss. Both GSEs have come under fire in the past two years for their relationship to accounting scandals. The House bill provides that the FHFA can limit the portfolios of the GSEs.
Those agencies consolidated under FHFA are the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Home Loan Banks, the Federal Home Loan Bank Finance Corporation and the Housing Finance Oversight Board. Duties of the US Office of Finance would be transferred to the FHLB.
The bill includes provisions regarding operations and administration of FHFA including levels of capital required, undercapitalized entities, loan levels, housing goals and enforcement and compliance.
Also created would be the Federal Home Loan Bank Finance Corporation. (FHLBFC). The FHLBFC would issue and maintain all the obligations of the FHFA and function as the fiscal agent of the FHLB.
Total asset requirements for community financial institution members of the FHLB would be increase.
The bill would create the Affordable Housing Fund to provide mortgage assistance to the poor and very poor and would require Fannie Mae and Freddie Mac to donate 5% of after tax income to the Fund.
Sponsor: Representative Richard H. Baker (R-LA-6th)
Vote: Passed House 331 to 90 (RC 547) October 25, 2005
Cost to the taxpayers: The House Budget Committee scored the bill this way: “increases direct spending by $360 million in 2006; $650 million in 2007; $680 million in 2008; $710 million in 2009; and $750 million in 2010. It increases revenue by $360 million in 2006; $590 million in 2007; $560 million in 2008; $570 million in 2009; and $600 million in 2010. A draft amendment submitted by the Financial Services Committee would reduce the cost of the bill during the budget window. If the amendment is incorporated into the bill before floor consideration, the amended bill will increase direct spending by $200 million in 2007; $390 million in 2008; $460 million in 2009; and $580 million in 2010. It would increase revenue by $440 million in 2007; $410 million in 2008; $580 million in 2009; and $590 million in 2010.
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AMENDMENTS (HOUSE)
We believe that an essential component of the legislation reported by the committee is the establishment of an Affordable Housing Fund for both Fannie Mae and Freddie Mac. Such establishment is patterned after the highly successful Affordable Housing Program (AHP) of the Federal Home Loan Banks, which has been in existence for more than a decade. This fund would address underserved housing markets through the provision of assistance for housing that would be affordable for very-low and extremely-low income families. This would fill a gap not being met in today's marketplace, in a manner consistent with the GSEs' charter and mission.
We understand that some members of the committee are opposed to the creation of an Affordable Housing Fund. However, we also note that an amendment to eliminate this provision from the bill failed on a vote of 53 to 17, with a majority of members from both sides of the aisle voting to retain the fund in the bill.
A common complaint by critics of the fund is that it would violate `free market principles.' In response, we note that both Fannie Mae and Freddie Mac are both federally chartered and are Government Sponsored Enterprises (as are the Federal Home Loan Banks, which operate the AHP). These GSEs are unlike most private corporations in that they receive substantial federal governmental benefits, such as an exemption from state and local taxes and a federal line of credit.
Moreover, there is a consensus, explicitly shared by the housing policies of both Democratic and Republican administrations, that the free market cannot by itself meet the entire need for housing for those with the lack of income and resources that define the homeless and extremely low income families. Some form of subsidy or assistance is necessary to make housing affordable for families in these income categories. A GSE affordable housing fund would help fill this gap, while maximizing the role of the private sector by extending the scope of these privately owned, but governmentally sponsored, entities, which work in concert with other private sector mortgage loan originators.
We also note that criticisms of the fund do not square with the specific provisions of the bill. For example, the claim is made that funds may be used by organizations for their own activities or for advocacy purposes. In fact, the bill clearly states that funds may be used `only for the production, preservation, and rehabilitation' of housing, and it specifically prohibits any funds being used for `administrative, outreach, or other costs of' any fund applicant. It is our intent that 100% of the funds be used for housing.
The claim is also made that the fund would become a `slush fund' for the GSEs. In fact, the bill requires that funds be allocated under an application process according to criteria to be established by the regulator, that the fund be audited every year to ensure compliance with program rules, that fund use be monitored for compliance with affordability standards and other requirements, and that a GSE may not condition funding on applicants using that GSE for financing.
Therefore, we would oppose efforts made by these critics to weaken the fund's impact or effectiveness as the bill moves to the full House for its consideration.
For example, we support retention of the provision now in the bill requiring that any investment returns in the fund must be used for other fund activities, and may not be retained by the GSEs. This avoids the potential conflict of interest that the GSEs might fund activities based on the likelihood of investment returns, instead of allocating funds based on the most meritorious fund applications.
We support the proposed 5% fund level, with a 3.5% transition level in the first year after bill enactment. We would not want to see the bill modified to have fund levels reduced, to have the fund's implementation unnecessarily delayed or truncated, or to have funding made contingent on certain discretionary findings of the regulator.
We are somewhat disappointed that the bill's fund provision did not permit, as last year's Senate version did, the use of funds for internal GSE loan loss reserves, to cover potential risks of new or more flexible GSE loan products. However, we are pleased that the bill explicitly retains a provision to encourage the leveraging of funds through an externalized grant process through such purposes as loan loss reserves or revolving loan funds. Regardless of whether this leveraged grant option is or is not explicitly stated in the bill, we believe that the flexible fund use language stated elsewhere in the bill clearly permits such types and forms of fund use, with application selection based on the best projects being proposed.
With regard to the Congressional Budget Office (CBO) scoring of the Affordable Housing Fund, we note that the Fund actually reduces the deficit by $370 million over the 5-year budget window the House uses for scoring provisions of this type. However, over a 10-year period, CBO scores the fund as increasing the deficit by $280 million. This apparently results from CBO's concluding that fund assessments are not counted as offsetting receipts--even though CBO claimed that the GSEs receive tens of billions of dollars in annual federal benefits--on the grounds that such benefits are not new and directly related to the fund contributions. This position appears inconsistent with CBO treatment of previous CBOGSE budget options and inconsistent with treatment of various items in the current budget.
Finally, we support the other housing mission provisions of the bill, including the improved targeting of numerical GSE housing goals and the section explicitly stating a GSE duty to serve underserved markets. With regard to the goals, we believe that the use of HMDA data as a factor in setting the housing goals is a useful statutory addition. However, such historical data should not be used presumptively in setting prospective goals, but should just be one more factor to be taken into consideration. Actual HMDA data is probably of most use by the regulator during a multi-year goal promulgation, under which a regulator can use such data to make appropriate mid-course corrections if the overall market can be shown to deviate from the assumptions used in setting the multi-year goals.
We are also concerned that the goal realignment no longer measures mortgage
refinancings in any way, and would urge consideration of the creation of home
purchase refinancings as a statutory subgoal.
Barney Frank.
Maxine Waters.
The bill reported out of the Committee provides the new regulator authority to order an enterprise to dispose of or acquire an asset or liability if the Director determines it is consistent with safety and soundness or the purposes of this legislation or the enterprises' charters, but does not require that the regulator place limits on the size of the enterprises or order reductions in their retained portfolios. We believe that this authority should be used only as necessary to ensure the safe and sound operation of the enterprises, not to place arbitrary limits on the size of retained portfolios.
We believe the strengthened safety and soundness oversight authority provided to the new regulator obviates any need for limits on the portfolios of the enterprises. In particular, this bill removes any restrictions on the type or level of risk-based capital that the regulator may require. We expect that the new regulator will use this expanded authority to determine whether the enterprises' existing risk-based capital rules, which focus primarily on interest rate risk, should be strengthened, supplemented, or replaced with capital requirements more explicitly focused on the particular assets held by the enterprises. As with banking institutions, a strong risk-based capital requirement, rather than inherently arbitrary limits on asset size, is the best means of assuring that the enterprises operate safely and do not pose a threat to the financial system.
Additionally, we believe that it would be inappropriate and counterproductive to adopt asset limits of the type proposed by the Administration, under which the enterprises could hold assets only at levels `necessary' to provide adequate liquidity to the mortgage markets. The enterprises generally purchase mortgages and mortgage-backed securities when prices are out of line with the broader markets, which provides a source of support, particularly in periods of market turmoil, that helps reduce volatility and keep mortgage funding costs stable. Limiting the portfolios of the enterprises to a level `necessary' to provide adequate liquidity to the markets effectively puts the regulator in the position of determining when mortgage rates are too high and liquidity is needed, turning what is currently a market function into a regulatory one.
Finally, portfolio limits will discourage the enterprises from creating
innovative or tailored products to respond to market needs. Because such
products are more difficult and expensive to securitize, limiting the ability of
the enterprises to hold assets in portfolio will result in higher costs for any
product that does not have a broad market. This is clearly contrary to a key
goal of this legislation: to encourage the enterprises to do more to fulfill
their housing missions.
Barney Frank.
Paul E. Kanjorski.
H.R. 1461 fails to address the core problems with the Government Sponsored Enterprises (GSEs). Furthermore, since this legislation creates new government programs that will further artificially increase the demand for housing, H.R. 1461 increases the economic damage that will occur when the housing bubble bursts. The main problem with the GSEs is the special privileges the federal government gives the GSEs. According to the Congressional Budget Office, the housing-related GSEs received almost 20 billion dollars worth of indirect federal subsidies in fiscal year 2004 alone.
One of the major privileges the federal government grants to the GSEs is a line of credit from the United States Treasury. According to some estimates, the line of credit may be worth over two billion dollars. GSEs also benefit from an explicit grant of legal authority given to the Federal Reserve to purchase the debt of the GSEs. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.
This implicit promise by the government to bail out the GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a massive unconstitutional and immoral income transfer from working Americans to holders of GSE debt. This is why I offered an amendment at the committee mark-up to cut off this line of credit. I was disappointed to see my colleagues reject this opportunity to protect taxpayers from having to bail out Fannie Mae and Freddie Mac when the housing bubble bursts.
The connection between the GSEs and the government helps isolate the GSEs' managements from market discipline. This isolation from market discipline is the root cause of the mismanagement occurring at Fannie and Freddie. After all, if investors did not believe that the federal government would bail out Fannie and Freddie if the GSEs faced financial crises, then investors would have forced the GSEs to provide assurances that the GSEs are following accepted management and accounting practices before investors would consider Fannie and Freddie to be good investments.
Federal Reserve Chairman Alan Greenspan has expressed concern that the government subsidies provided to the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac. Although he has endorsed many of the regulatory `solutions' being considered here today, Chairman Greenspan has implicitly admitted the subsidies are the true source of the problems with Fannie and Freddie.
H.R. 1461 compounds these problems by further insulating the GSEs from market discipline. By creating a `world-class' regulator, Congress would send a signal to investors that investors need not concern themselves with investigating the financial health and stability of Fannie and Freddie since a `world-class' regulator is performing that function.
However, one of the forgotten lessons of the financial scandals of a few years ago is that the market is superior at discovering and punishing fraud and other misbehavior than are government regulators. After all, the market discovered, and began to punish, the accounting irregularities of Enron before the government regulators did.
Concerns have been raised about the new regulator's independence from the Treasury Department. This is more than a bureaucratic `turf battle' as there are legitimate worries that isolating the regulator from Treasury oversight may lead to regulatory capture. Regulatory capture occurs when regulators serve the interests of the businesses they are supposed to be regulating instead of the public interest. While H.R. 1461 does have some provisions that claim to minimize the risk of regulatory capture, regulatory capture is always a threat where regulators have significant control over the operations of an industry. After all, the industry obviously has a greater incentive than any other stakeholder to influence the behavior of the regulator.
The flip side of regulatory capture is that managers and owners of highly subsidized and regulated industries are more concerned with pleasing the regulators than with pleasing consumers or investors, since the industries know that investors will believe all is well if the regulator is happy. Thus, the regulator and the regulated industry may form a symbiosis where each looks out for the other's interests while ignoring the concerns of investors.
Furthermore, my colleagues should consider the constitutionality of an `independent regulator.' The Founders provided for three branches of government--an executive, a judiciary, and a legislature. Each branch was created as sovereign in its sphere, and there were to be clear lines of accountability for each branch. However, independent regulators do not fit comfortably within the three branches; nor are they totally accountable to any branch. Regulators at these independent agencies often make judicial-like decisions, but they are not part of the judiciary. They often make rules, similar to the ones regarding capital requirements, that have the force of law, but independent regulators are not legislative. And, of course, independent regulators enforce the laws in the same way, as do other parts of the executive branch; yet independent regulators lack the day-to-day accountability to the executive that provides a check on other regulators.
Thus, these independent regulators have a concentration of powers of all three branches and lack direct accountability to any of the democratically chosen branches of government. This flies in the face of the Founders' opposition to concentrations of power and government bureaucracies that lack accountability. These concerns are especially relevant considering the remarkable degree of power and autonomy this bill gives to the regulator. For example, in the scheme established by H.R. 1461 the regulator's budget is not subject to appropriations. This removes a powerful mechanism for holding the regulator accountable to Congress. While the regulator is accountable to a board of directors, this board may conduct all deliberations in private because it is not subject to the sunshine act.
Ironically, by transferring the risk of widespread mortgage defaults to the taxpayers through government subsidies and convincing investors that all is well because a `world-class' regulator is ensuring the GSEs' soundness, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie and Freddie have distorted the housing market by allowing Fannie and Freddie to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive uses into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.
Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital into housing creates a short-term boom in housing. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have been had government policy not actively encouraged over-investment in housing.
H.R. 1461 further distorts the housing market by artificially inflating the demand for housing through the creation of a national housing trust fund. This fund further diverts capital to housing that, absent government intervention, would be put to a use more closely matching the demands of consumers. Thus, this new housing program will reduce efficacy and create yet another unconstitutional redistribution program.
Perhaps the Federal Reserve can stave off the day of reckoning by purchasing the GSEs' debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary and painful market corrections will only deepen the inevitable fall. The more people are invested in the market, the greater the effects across the economy when the bubble bursts.
Instead of addressing government policies encouraging the misallocation of resources to the housing market, H.R. 1461 further introduces distortion into the housing market by expanding the authority of federal regulators to approve the introduction of new products by the GSEs. Such regulation inevitability delays the introduction of new innovations to the market, or even prevents some potentially valuable products from making it to the market. Of course, these new regulations are justified in part by the GSEs' government subsidies. We once again see how one bad intervention in the market (the GSEs' government subsidies) leads to another (the new regulations).
In conclusion, H.R. 1461 compounds the problems with the GSEs and may increase
the damage that will be inflicted by a bursting of the housing bubble. This is
because this bill creates a new unaccountable regulator and introduces further
distortions into the housing market via increased regulatory power. H.R. 1461
also violates the Constitution by creating yet another unaccountable regulator
with quasi-executive, judicial, and legislative powers. Instead of expanding
unconstitutional and market distorting government bureaucracies, Congress should
act to remove taxpayer support from the housing GSEs before the bubble bursts
and taxpayers are once again forced to bail out investors who were misled by
foolish government interference in the market.
Ron Paul.
1. H.AMDT.596 to H.R.1461 Manager's amendment consists of the text of the
amendment contained in House Report 109-254 and printed on pages H9172-H9175 in
the Congressional Record for Oct. 26, 2005.
Sponsor: Rep Oxley, Michael G. [OH-4] (introduced 10/26/2005) Cosponsors
(None)
"An amendment numbered 1 printed in House Report 109-254 to expand the
affordable housing role of Fannie Mae and Freddie Mac; include new sections on
new single-family and multi-family housing goals, duty to serve lower-income
markets, and a new affordable housing fund with contributions from the
enterprises. The amendment moves the effective date of the entire bill up from
one year to six months following enactment, including the affordable housing
fund. For the first two years, Fannie Mae and Freddie Mac will contribute 3.5%
of after-tax earnings, and subsequently 5% of such earnings. 25% of the GSEs'
contributions will go annually to the Treasury Department to help payoff REFCorp
(S&L) bonds, with the remainder going to the fund. The amendment sunsets the
fund in five years, when its extension will be considered. During the first two
years, priority consideration will be given to areas impacted by Hurricanes
Katrina and Rita, thereafter priority in funding will be based on greatest
impact, geographic diversity, timely action, as well as other disaster area
needs. Eligible recipients-- for-profit builders, state housing agencies, and
non-profit organizations--must have a demonstrated capacity for affordable
housing activities and make assurances that they will comply with limits on the
use of funds. Funds may not be used for political activities, advocacy,
lobbying, counseling services, travel expenses, and tax return advice.
Non-profit recipients must have affordable housing as their primary purpose and,
beginning one-year before applying, non-profits and their affiliates cannot have
engaged in federal election activity, electioneering communication, or lobbying.
Recipient use of funds will be closely tracked. Those misusing funds will be
permanently barred from participation and must make reimbursement. The amendment
also clarifies that federally recognized tribes and Alaskan Native villages
qualify for funding under the Affordable Housing Fund established by the bill.
In addition, the amendment includes a request from the Judiciary Committee to
require consultation with the Attorney General by the GSE regulator when
exercising new litigation authority, and from the Government Reform Committee to
remove a FOIA exemption for the proceedings of the new agency's oversight board.
The Federal Housing Finance Agency will establish an ombudsman to hear
complaints and appeals from the GSEs and those having business relationships
with the GSEs. H.R. 1461 consolidates current GSE regulation by two agencies and
HUD into one agency. The manager's amendment clarifies that existing rules and
regulations willremain in force during the six-month transition period and until
changed by the new Federal Housing Finance Agency."
Latest Major Action: 10/26/2005 House amendment agreed to. Status: On
agreeing to the Oxley amendment (A001) Agreed to by recorded vote: 210 - 205 (RC
541).
2. H.AMDT.597 to H.R.1461 Amendment encourages Government Sponsored
Enterprises (GSEs) to purchase personal property loans secured by manufactured
housing that will count towards the GSE underserved market goals.
Sponsor: Rep Carson, Julia [IN-7] (introduced 10/26/2005) Cosponsors
(None)
Latest Major Action: 10/26/2005 House amendment agreed to. Status: On
agreeing to the Carson amendment (A002) Agreed to by voice vote.
3. H.AMDT.598 to H.R.1461 Amendment clarifies the definition of "rural"
in the bill to make it consistent with the same definition in the Housing Act of
1949 with the inclusion of language concerning micropolitan areas and tribal
trust lands.
Sponsor: Rep Davis, Artur [AL-7] (introduced 10/26/2005) Cosponsors
(None)
Latest Major Action: 10/26/2005 House amendment agreed to. Status: On
agreeing to the Davis (AL) amendment (A003) Agreed to by voice vote.
4. H.AMDT.599 to H.R.1461 Amendment sought to replace the language in the
bill concerning minimum capital levels.
Sponsor: Rep Leach, James A. [IA-2] (introduced 10/26/2005) Cosponsors
(None)
Latest Major Action: 10/26/2005 House amendment not agreed to. Status: On
agreeing to the Leach amendment (A004) Failed by recorded vote: 36 - 378 (RC
542).
5. H.AMDT.600 to H.R.1461 Amendment sought to authorize the regulator to
require one or both of the GSEs to dispose or acquire assets or liabilities if
the regulator deems those assets or liabilities to be a potential systemic risk
to the housing or capital markets, or the financial system.
Sponsor: Rep Royce, Edward R. [CA-40] (introduced 10/26/2005) Cosponsors
(None)
Latest Major Action: 10/26/2005 House amendment not agreed to. Status: On
agreeing to the Royce amendment (A005) Failed by recorded vote: 73 - 346 (RC
543).
6. H.AMDT.601 to H.R.1461 Amendment sought to eliminate the ability of
Fannie Mae, Freddie Mac, and the Federal Home Loan Bank Board, to borrow from
the Treasury.
Sponsor: Rep Paul, Ron [TX-14] (introduced 10/26/2005) Cosponsors
(None)
Latest Major Action: 10/26/2005 House amendment not agreed to. Status: On
agreeing to the Paul amendment (A006) Failed by recorded vote: 47 - 371 (RC
544).
7. H.AMDT.602 to H.R.1461 Amendment sought to strike the language in the
bill that raises the Conforming Loan Limit for certain areas.
Sponsor: Rep Garrett, Scott [NJ-5] (introduced 10/26/2005) Cosponsors
(None)
Latest Major Action: 10/26/2005 House amendment not agreed to. Status: On
agreeing to the Garrett (NJ) amendment (A007) Failed by recorded vote: 57 - 358
(RC 545).
8. H.AMDT.603 to H.R.1461 Amendment adds alternative credit scoring as an
element of the Annual Housing Report Regarding Regulated Entities required by
the bill.
Sponsor: Rep Sanchez, Loretta [CA-47] (introduced 10/26/2005) Cosponsors
(None)
Latest Major Action: 10/26/2005 House amendment agreed to. Status: On
agreeing to the Sanchez, Loretta amendment (A008) Agreed to by voice vote.
9. H.AMDT.604 to H.R.1461 Amendment restores the Presidential and
regulatory board appointment systems for Government Sponsored Enterprises (GSEs)
while preserving changes made by the bill including providing flexibility in the
size of corporate boards at Fannie Mae and Freddie Mac and lengthening the terms
of service at the Federal home loan banks.
Sponsor: Rep Kanjorski, Paul E. [PA-11] (introduced 10/26/2005) Cosponsors
(None)
Latest Major Action: 10/26/2005 House amendment agreed to. Status: On
agreeing to the Kanjorski amendment (A009) Agreed to by voice vote.
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