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There's good news and bad in the continuing discussions on the modernization of regulation of Freddie Mac and Fannie Mae. Recently published studies by Treasury and the Congressional Budget Office (CBO) fulfill requirements imposed by the Omnibus Budget Reconciliation Act of 1990 (OBRA) and follow last years' Treasury and GAO studies.

Last years' studies promoted some troubling notions regarding Freddie Mac/Fannie Mae regulatory oversight. Treasury and GAO put forward the idea of requiring all government-sponsored enterprises (GSEs) to obtain a triple-A credit rating within five years or lose their agency status. In addition, they advanced the concept of a single GSE regulator for all nine GSEs with the regulator possibly being Treasury. At the time, there was no sympathy for making HUD the regulator for Fannie Mae and Freddie Mac. Last, Treasury and GAO promoted the concept of a bank-like regulatory structure with bank-like minimum capital standards.

The good news is that the most recent Treasury and CBO statements on GSE regulations are more enlightened than earlier espoused views. The bad news is that their views are not enlightened enough to avoid direct and indirect costs to mortgage lenders and homebuyers.

The recent Treasury study provided the following six recommendations: * financial safety and soundness should be given primacy

over other public policy concerns (e.g., affordable housing

programs); * the regulator must have sufficient stature to avoid capture

by the GSEs or special interest; therefore financial

oversight over Fannie Mae and Freddie Mac should be

conducted by a separate "arms-length" bureau of HUD,

financed through assessments on the two GSEs and having

the ability to attract highly qualified staff; * the scope of HUD's regulatory powers need to be made

more specific in the areas of enforcement powers (e.g.,

cease and desist, conservatorship, etc.) and the authority

to promulgate risk-based capital standards; * minimum capital and critical capital (i.e., a level below

which the GSE may be put into conservatorship) should

be set in statute; risk-based capital requirements should

be determined in the discretion of the regulator and related

to risks of on- and off-balance-sheet activities using

stress test or other techniques; * the regulator needs the flexibility to determine in advance

how the risks associated with "financially significant

new activities" should be assessed for capital adequacy;

and * the regulator can use national credit-rating agencies to

assess the financial health of GSEs, and those GSEs

rated triple A will be exempt from regulatory capital


The conclusions of the CBO study indicated below are more in the form of options rather than recommendations: * HUD's statutory mandate to supervise Fannie Mae and

Freddie Mac and its institutional capabilities are inadequate

to ensure that those agencies will not increase their

exposure to risk or allow their capital to deteriorate; therefore,

legislation enhancing supervision may be appropriate. * If Congress desires to minimize the risk that a GSE

would be able to influence the supervisory process (i.e.,

"regulatory capture") at the expense of safety and soundness,

the single-agency option is most likely to achieve

that objective. If the primary concern of Congress is to

develop sufficient expertise to supervise effectively, then

enhancing the statutory authority and institutional capacity

of HUD might be more appropriate. * To minimize the possibility of regulatory capture,

Congress could use the following private assessments of

risk: a) regular reports of GSE financial condition published

by the regulator; b) analyses and ratings of national

credit rating agencies; and c) subordinated debt investors'

discounting the value of those securities if the

government restricted the ability of inadequately capitalized

GSEs to issue implicitly guaranteed debt. * The government could more effectively limit its exposure

to risk by imposing binding, risk-based capital standards

that incorporate the use of stress tests employed

by the supervisory agency rather than relying solely on

the current leverage ratio that does not look at MBS risk. * If private rating agencies are used to help set risk-based

capital standards, Congress may want to create a "safe

harbor" from those requirements if the GSE is rated acceptably

high from at least two credit rating agencies. * In addition to stress-test-derived capital assessments, capital

is needed for protection from management and

operations risk.

The current capital requirement for the Federal Home Loan Banks (FHLBs) is too high, relative to Fannie Mae and Freddie Mac, to allow thrifts to compete with other lenders (i.e., mortgage bankers) on an equal footing. To address this, the government should set comparable capital standards.

Although the regulator probably should not have the power to liquidate Fannie Mae or Freddie Mac, it would be appropriate to allow the safety and soundness regulator to appoint a conservator if the enterprise was insolvent or near insolvency.

The Mortgage Bankers Association of America (MBA) supports the concept of leaving the regulatory oversight function within HUD. We are concerned, however, about expanded regulatory powers including the power of the regulator to place the agencies in conservatorship, the primacy of fiscal matters over housing policy, the separation of safety and soundness and programmatic regulation, the potential imposition of excessive minimum capital requirements and/or an unreasonably short period to achieve them, using capital to establish competitive equality between the housing GSEs and the FHLBs, a capital add-on for management and operations risk and the incentive to obtain a triple-A rating requirement.
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Title Annotation:modernization of regulation of Federal Home Loan Mortgage Corp. and Federal National Mortgage Association
Author:Taliefero, Michael S.
Publication:Mortgage Banking
Date:Jun 1, 1991
Previous Article:Technology.
Next Article:Economic trends.

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