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The New Housing GSE Regulator: Get the Structural Plumbing Right

MARCH 5, 2004


Banker Update: The New Housing GSE Regulator: Get the Structural Plumbing Right

Everyone agrees that the existing regulatory framework over Fannie and Freddie has sprung grievous leaks and that new regulatory plumbing is required. Most policy makers also agree that the regulation of the Federal Home Loan Banks is similarly deficient. Fannie, Freddie and the FHLBanks are leading the charge in calling for a new regulator and, apparently, they would be happy to live together in this new regulatory house. In describing the emerging new regulatory structure, the terms "independent" and "world class" have been used, authoritatively.

Senate Banking Committee Chairman Richard Shelby (R-AL) is on point in drawing up authorizing legislation over the three housing GSEs. To get anything passed, at least the White House and ranking member Paul Sarbanes (D-MD) must be on board. It is anticipated that Shelby's legislative proposal will be made public during the week of March 23. The Senate is in recess the previous week.

Chairman Shelby and House Financial Services Committee Chairman Mike Oxley (R-OH), in turn, have summarily rejected Federal Reserve Board Chairman Alan Greenspan's proposal that the Congress use this occasion to impose constraints on the GSEs' issuance of debt and purchase of assets.

But there are very different roads to Damascus in establishing a new independent housing GSE regulatory agency, and some could lead into a regulatory desert. Two major proposals are under consideration. One envisages a new agency, independent of the Treasury, headed up by a sagacious and respected world class player who reports to an advisory board on which the Treasury secretary would sit.

Chairman Greenspan, perhaps recalling the woes of the Resolution Trust Corporation's oversight board on which he sat, has already indicated he doesn't want on. The RTC was established to rid the FDIC of hundreds of billions of dollars of failed S&L assets.

The relationship of the new GSE regulatory agency CEO to the advisory committee-and to the Treasury, of course-becomes key. The definition of "independence" varies widely in Washington. There seems to be an historical consensus that the RTC, headed up by L. William Seidman-a world class figure also serving as chairman of the FDIC, which was responsible to an oversight board-was the case study in bureaucratic conflict and confusing lines of authority.

How would this new proposal-a CEO heading up a new independent agency over the housing GSEs, reporting to an advisory board run by the Treasury-be any different than what Seidman experienced?

The other, principal option would establish a presidentially appointed three or five-person board-a structure well known to Washington that occasionally even works. The Federal Reserve has such a functioning board. Yes, it did take some 30 years for the Congress to amend the 1913 Federal Reserve Act and remove the secretary of the Treasury and the Comptroller of the Currency from this board. Only then did the Fed become a world class independent agency. We also have the FDIC, where Treasury political appointees hold two of the five seats, and we have the SEC. Both work rather well. Administration officials like to point to the Federal Housing Finance Board, which has been a bit of a mess.

But from where we sit at this time, better the devil known-an independent, presidentially appointed multi-person board-than a new model or a reincarnation of what was previously a disaster.