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Administration Proposes New Regulatory Oversight for Housing GSEs

SEPTEMBER 12, 2003


Administration Proposes New Regulatory Oversight for Housing GSEs

Treasury Secretary Snow and HUD Secretary Martinez testified before the House Financial Services Committee this week to present the administration's proposal on regulatory oversight of Fannie Mae and Freddie Mac-a proposal that also recommends the inclusion of the FHLBanks in a new system of supervision to be housed in the Treasury Department.

Noting that the current supervision of the GSEs is ineffective in dealing with their complexity and size, Secretary Snow stated that the administration has two core objectives-a sound, resilient financial system, and increased homeownership opportunities. These objectives would be carried out by the Treasury Department and HUD respectively. According to Secretary Snow, by placing the new regulatory body within a cabinet level agency, such as the Treasury Department, the GSEs will be able to draw upon the agency for "policy guidance and oversight," and would have powers comparable in scope, force and effectiveness to other "world class" financial supervisors. By the same measure, HUD would develop and enforce housing goals through the establishment of a new GSE housing office within HUD carrying new administrative authority and the ability to assess civil penalties. Secretary Martinez voiced his full support of the proposal, emphasizing the need for rigorous oversight to ensure that the GSEs are serving their public purpose.

The fate of the FHLBanks in this regulatory overhaul remains unknown, but in light of the administration's recommendation, the push for inclusion appears to be gaining momentum. Nevertheless, "I doubt it" was Secretary Snow's response to Chairman Oxley when asked if it would be possible to include the FHLBanks without their consensus. He correctly pointed out that a political consensus doesn't presently exist to bring the FHLBanks under the same Treasury-based regulatory system as Fannie and Freddie. He also acknowledged that the legislation would get "bogged down" and he would not personally want the FHLBank issue to get in the way of the larger effort, but opined that the legislation would be much better if it included the FHLBanks.

While many key Democrats agree that there is a need for regulatory restructuring, they did not appear convinced that the proposed bifurcated scheme, granting regulatory oversight to Treasury and housing goals to HUD, was plausible. Calling it "mission impossible" if not "mission implausible," Rep. Barney Frank (D-MA) called for more hearings on the issue and cautioned the committee not to rush to judgment.

Immediately following the hearing, Chairman Oxley and Senate Banking Committee chairman Richard Shelby indicated that they will jointly draft legislation to overhaul GSE regulation. This strengthens the odds for legislation this year.