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Stalemate on GSE Regulatory Restructuring?

OCTOBER 17, 2003


Banker Update: Stalemate on GSE Regulatory Restructuring?

Treasury Secretary Snow has just testified before the Senate Banking Committee-eight days after the Treasury's insistence on control over housing GSE policy blew House Financial Services Committee chairman Mike Oxley's (R-OH) legislative proposal out of the water.

The Treasury secretary's hard-line testimony could be the death knell of efforts to bring the housing GSEs under a new regulator this year.

Some of the questions by senators touched on a major concern of the housing lobby led by the National Association of Homebuilders-that the Treasury will be biased against housing. The ICBA would add the Treasury responsibility for tax policy and fiscal policy, which is tending towards an ever increasing deficit, would create real policy conflicts of interest. Housing policy could get the short straw. The ICBA shares the housing lobby's concerns and adds one of our own.

The mood in Congress seemed to be shifting towards including the Federal Home Loan Banks under the new regulator for Fannie and Freddie. With Washington Mutual, World Savings, ACB and some FHLBank support, an amendment to include the FHLBanks under a regulator in the Treasury Department was gaining steam in the House. In turn, Senate Banking Committee chairman Richard Shelby (R-Al) and ranking minority member Paul Sarbanes had indicated that the FHLBanks should be under any new regulator over Fannie and Freddie. The Treasury and White House are no fans of the FHLBanks, and this could create regulatory bias.

Secretary Snow's bottom line remained crystal clear-"policy accountability" must rest with the secretary of the Treasury even if a new independent regulatory agency were established. The Treasury Department must have the power "to clear new regulations," and have "review authority over the new agency's budget" while clearing "policy statements to the Congress."

In our view, such direct Treasury policy oversight would also enshrine too-big-to-fail as government policy.

The Snow testimony also hardened the administration's previous position by insisting that the regulator have broad authority to set risk-based and minimum capital. This won't fly with Fannie.

The Snow testimony also sets forth demands that are unacceptable to the housing lobby, the ICBA and, hopefully, the FHLBanks, which are so important to community banks.

It is highly unlikely that Chairman Shelby will find any consensus behind the administration's legislative demands. The Treasury has overreached. With time running short in this congressional year, GSE regulatory restructuring legislation almost certainly will be put over until 2004-and since this will be a crucial election year, maybe even 2005. There is no crisis. Fannie, Freddie and the FHLBanks will be on their best behavior, and they will likely face increased scrutiny by their current regulators-the Federal Housing Finance Board and the OFHEO.

The chairman concluded this important hearing by announcing there would be additional hearings.