GSE Reform Bill Introduced by Representative Oxley
April 5, 2005
House Financial Services Committee Chairman Michael G. Oxley (OH) today released the following statement regarding the introduction of the Federal Housing Finance Reform Act of 2005 by Capital Markets, Insurance, and Government Sponsored Enterprises Subcommittee Chairman Richard H. Baker (LA):
“I have to commend Richard Baker on this occasion of his bill introduction, and I am proud to be an original cosponsor. He is a knowledgeable and tireless advocate for sound regulation of the housing markets.
“I think we have to remember how much the secondary mortgage market has changed since Congress chartered the government-sponsored enterprises. The markets have expanded, the GSEs have grown dramatically both in their size and in their scope. According to the Congressional Research Service, since 1992, assets at the enterprises are up nearly 600 percent, and liabilities have increased by 613 percent. The enterprises are two of the largest private debt issuers in the world, and that has substantial implication for our entire system.
“The agency that regulates the GSEs, however, has not changed and has not been given the powers it needs to oversee these complex institutions. This is a serious issue we hope to address this Congress.
“We are building a new agency from the ground up, and this bill provides a solid foundation.
“The new Baker bill is both strong and reasonable. It is balanced. It does not choose winners and losers in the housing markets. It is entirely appropriate that our subcommittee chairman lead the way on the Financial Services Committee, and I want to indicate strongly today that the Baker bill is the vehicle for reform in the Financial Services Committee.
“We will, of course, pursue the bill with the normal legislative consideration and ask the Financial Services Committee and the House to work through all of the various issues.
“It is time for Congress to act. We’ve had accounting problem after accounting problem, regulatory issue after regulatory issue with the GSEs. All parties must realize that this situation just cannot continue as it is. The current agency has done a commendable job with its limited and inadequate powers.
“If there is anything that we have learned from the past several years of corporate scandal, it is that sound regulation benefits everyone, companies, shareholders, employees, and market participants.”
Summary of the Federal Housing Finance Reform Act of 2005
Title I – Reform of regulation of enterprises and Federal Home Loan Banks
Subtitle A – Improvement of Safety and SoundnessEstablishes the Federal Housing Finance Agency (FHFA), as an independent agency, to regulate Fannie Mae, Freddie Mac, and Federal Home Loan Banks (the regulated entities). FHFA succeeds to the current authority of the Office of Federal Housing Enterprise Oversight (OFHEO) and Federal Housing Finance Board (FHFB).
FHFA is headed by a Director, appointed by the President and confirmed by the Senate for a 5-year term. There are Deputy Directors for Divisions of Enterprise Regulation, Federal Home Loan Bank Regulation, and Housing.
A Housing Finance Oversight Board advises the Agency on overall strategies and policies, but has no executive authority. The Board is comprised of the Secretaries of the Treasury and Housing and Urban Development, two appointed members, and the Director as Chairperson.
The agency annually assesses the regulated entities for FHFA’s reasonable costs and expenses; Congressional appropriations approval is not required.
The agency issues and enforces prudential management and operations standards for the regulated entities, including credit, interest rate, and market risks, internal controls, liquidity, and investments.
The agency may require a regulated entity to withhold compensation from an executive officer during a review of the reasonableness and comparability of compensation, and may take into consideration any wrongdoing by the officer.
The agency is given discretion to adjust minimum and risk based capital levels. The agency may increase the minimum capital level through regulation or, if there is a serious safety and soundness concern, temporarily through an order. The agency may also establish capital or reserve requirements with respect to particular programs or activities as the agency considers appropriate.
The agency reviews the assets and obligations of each enterprise and may require an enterprise to dispose of or acquire any asset or obligation for safety and soundness or mission-related reasons.
The legislation establishes criteria for the composition, operation, and compensation of the board of directors. The enterprises are required to comply with several provisions of the Sarbanes-Oxley Act regardless of their registration status with the SEC.
Subtitle B – Improvement of Mission Supervision
Program and housing goal oversight is transferred to the new regulator.
The agency has the authority to approve new programs. An enterprise may not commence a new program before obtaining the agency’s approval. The agency must act on this request within 15-30 days after providing a 30 day notice and comment period. A program may only be approved if it is authorized by law, can be conducted in a safe and sound manner, and is in the public interest. A new activity may be commenced immediately upon approval by the agency or within 30 days if the agency does not take action. This does not restrict the Director’s general authority over all programs, activities, and products. The director shall define primary and secondary mortgage markets consistent with the Corporation and the Charter Acts.
The legislation sets the conforming loan limits and requires the agency to adjust the conforming loan limit according to the annual housing price index maintained by the agency.
The agency establishes housing goals and an annual home purchase goal for Fannie Mae and Freddie Mac. The agency may take enforcement action against an enterprise for failure to meet the housing goals.
Subtitle C – Prompt Corrective Action
The legislation establishes capital classifications for the enterprises and supervisory actions applicable to these classifications.
If the enterprises become critically undercapitalized, FHFA may be appointed by the Director as conservator or receiver to reorganize, rehabilitate, or wind up its business; a receiver may not revoke an enterprise’s charter.
Subtitle D – Enforcement Actions
The agency may issue cease and desist orders, remove officers, directors, and affiliated parties, and impose civil money and criminal penalties.
The agency is empowered to issue civil money penalties and has the authority to remove management.
Subtitle E – General Provisions
Presidential appointed board directors for Fannie Mae and Freddie Mac are eliminated.
The agency is required to report on the portfolio operations of the enterprises
Title II – Federal Home Loan Banks
Federal Home Loan Bank boards of directors are decreased in size from 14 to 13 members, all members are elected (none appointed), and at least 2 are public interest directors.
The cap on director compensation is lifted and the terms of directors are extended from 3 years to 4.
A Federal Home Loan Bank Finance Corporation is established, as a jointly owned subsidiary of the Federal Home Loan Banks, to issue and service their consolidated debt obligations.
The Federal Home Loan Banks are exempt from some of the disclosures required under the Securities Exchange Act of 1934.
Government-insured depository institutions with assets less than $1 billion (currently $500 million) may use Federal Home Loan Bank advances for lending to community development activities (currently small business and agricultural purposes only) and use such secured loans as collateral for advances generally.
Title III – Transfer of functions, personnel, and property of OFHEO and Federal Housing Finance Board
Subtitle A – Office of Federal Housing Enterprise Oversight
OFHEO is abolished within one year, through an orderly transfer of functions to FHFA.
OFHEO regulations and orders remain in effect and are enforceable, until determined otherwise; employees are transferred with temporary protections.
Subtitle B – Federal Housing Finance Oversight Board
FHFB is abolished within one year, through an orderly transfer of functions to FHFA.
FHFB regulations and orders remain in effect and are enforceable, until determined otherwise; employees are transferred with temporary protections.
Source: House Financial Services Committee