Banker Update: GSEs Center Stage This Week
Fannie Mae, Freddie Mac and the Federal Home Loan Banks were front and center this week as the House Financial Services Committee heard directly from the housing government-sponsored enterprises, their regulators and a variety of other witnesses on the important details surrounding the administration's proposal for a new GSE regulator to be housed in the Treasury Department.
Negative news about the GSEs formed a backdrop to the hearing, providing fuel to calls for a new regulatory scheme. Freddie Mac announced that it would not meet its goal of restating its earnings by Sept. 30 as it is still validating the restated results The Federal Home Loan Bank of New York announced it would suspend its October dividend due to downgrading of manufactured housing securities. And the Federal Home Loan Bank of Pittsburgh announced an 83% decline in second quarter earnings due to heavy refinancings and ineffective hedging of its MPF loan portfolio. The Bank, which has the second largest MPF portfolio in the system, had to dip into retained earnings to pay its quarterly dividend.
A seemingly unstoppable train is leaving the station whose engine is the proposed new Treasury regulator for Fannie Mae and Freddie Mac. Most witnesses at Thursday's hearing supported establishment of the new regulator. But what the other cars on the train will carry in terms of powers for the new agency is where the major differences lie. Differences regarding what degree of independence the new regulator should have from the Treasury Dept., whether the new regulator should have jurisdiction over both safety and soundness and mission/activities for Fannie and Freddie, and whether the new agency should also regulate the Federal Home Loan Banks.
In ICBA's view, independence for the new Fannie/Freddie regulator and strong firewalls between the agency and Treasury are critical to ensure that it is not politically controlled or subject to political winds. Unfortunately, the administration's proposal would require the new regulator to clear both regulations and congressional testimony with the Treasury. Office of Federal Housing Enterprise Oversight director Armando Falcon, Fannie/Freddie's current regulator, said if he had to clear testimony through Treasury, he might not be able to provide his own perspective on the issues under debate.
Whether HUD's current mission/program approval and oversight over Fannie and Freddie should be moved to Treasury is another contentious issue. The National Association of Home Builders has vociferously opposed this aspect of the proposal, concerned that Treasury lacks the expertise HUD has on housing issues. NAHB says the proposal threatens to jeopardize the success of our housing finance system and undermine the vibrant housing market that has sustained the economy in recent years. ICBA is sympathetic to this concern.
As for the Federal Home Loan Bank System, ICBA strongly supports maintaining a separate independent agency to oversee this important source of funding for community banks. The structure of the FHLBs is unique and substantially different than that of Fannie and Freddie. While Treasury and others would prefer to include the FHLBs with Fannie and Freddie under the same regulator, most recognize the issue is controversial enough that it could prevent quick enactment of a bill.
Federal Housing Finance Board Chairman Korsmo said at the hearing that FHFB board members are unanimous that the Finance Board's independence should be preserved, given the progress the FHFB has made to increase its examination and supervision function, and given the difference in charters, ownership and capital structures and business model between the FHLBs and Fannie/Freddie. Responding to some who contend the FHLBs might be at a competitive funding disadvantage if they were not under the same regulator as Fannie/Freddie, Korsmo said such views are highly speculative, particularly if each GSE has a world-class regulator.
The FHLBs themselves are split on the issue. FHLB of San Francisco president Dean Schultz testified in support of a single independent agency under Treasury to regulate Fannie/Freddie and the FHLBs, with two deputy directors, one for the cooperatively-owned FHLBs and one for the publicly-held Fannie/Freddie. In contrast, FHLB of Cincinnati president David Hehman defended the current independent regulatory structure for the FHLBs as being in the best interests of shareholders and the public. Hehman pointed out that currently FHLB debt trades at a premium relative to that of other GSEs, illustrating market confidence in the FHLB System.
ICBA released a statement this week summarizing our views on GSE regulatory structure.