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FHFB Chair Says Go Slow on GSE Reform

OCTOBER 17, 2003


FHFB Chair Says Go Slow on GSE Reform

Federal Housing Finance Board chairman John Korsmo this week called for a more deliberative and comprehensive approach to addressing the question of housing GSE reform. Saying that the current debate has been "sidetracked…to focus on the wrong questions at the wrong time," Korsmo suggested policy makers take two years to define the roles that Fannie Mae, Freddie Mac and the Federal Home Loan Banks should play in the mortgage finance market, define the appropriate risks the GSEs should assume, and then determine how best to regulate their roles and risks.

Korsmo said the Federal Home Loan Bank Act should be the model for housing GSE oversight as it grants the regulator the authority, the independence and the Executive Branch voice needed for robust supervision. Fannie and Freddie are not supervised on comparable terms to credit unions, banks, thrifts and bank holding companies, or the Federal Home Loan Banks, Korsmo said. The FHFB currently has tools and independence that OFHEO, the current regulator of Fannie and Freddie, does not, Korsmo noted. He enumerated some of these tools including enforcement authority similar to bank regulators, capital standards flexibility, and new business activities approval authority.

Interjecting a cautionary note, however, Korsmo said "strong, independent supervision of housing GSEs does not guarantee good news." Referring to investment, hedging and accounting problems at the New York, Pittsburgh, and Atlanta FHLBs, Korsmo said they were not caused by slack regulatory oversight, but by business decisions made by the Banks as risk-taking enterprises. Korsmo warned it is "unwise or unrealistic to suggest that moving oversight of some or all housing GSEs to Treasury will mean that GSE executives will no longer make mistakes, will no longer at times push the regulatory or financial envelope, or that GSE shareholders will no longer expect maximum rewards."

Korsmo also described efforts his agency has taken to build up its supervision and examination capabilities by doubling its examination staff and "hiring the best and brightest from other federal banking agencies."