Fannie Mae bill advances

May 23, 2007|By Bloomberg News

WASHINGTON -- The House passed legislation yesterday creating a stronger regulator for Fannie Mae and Freddie Mac that falls short of constraints that the Bush administration sought to impose on the companies' combined $1.4 trillion in mortgage assets. The bill passed 313-104.

The legislation gives a new regulator the power to alter reserve requirements for Fannie Mae and Freddie Mac, sell their assets in the event of default, bar them from new lines of business and force a reduction in the companies' mortgage assets when the portfolios threaten the soundness of the companies.

An earlier version would have handed the regulator more power by allowing it to cut assets if the portfolios pose a risk to financial market stability. That change puts the House at odds with the Bush administration, which threatened to withdraw its support.

An amendment "weakened the bill in a very significant way" and jeopardizes its prospects in the Senate, said Bert Ely, a banking and regulations consultant in Alexandria, Va. "I just see too many forces lined up against" this.

The Treasury Department expressed regret that the House amended the original bill, which the department had supported.

"Treasury does not believe this bill adequately guards our financial system with the necessary oversight," Treasury Undersecretary for Domestic Finance Robert Steel said. "Regretfully, the House significantly weakened the regulator's abilities to examine systemic risk issues."

The president and the Treasury Department have been calling for a tougher regulator for Fannie Mae and Freddie Mac since the beginning of disclosures in 2003 of $11.3 billion in accounting errors at the companies. Much of the concern is about the threat posed to financial markets if the companies fail to hedge their assets against changes in interest rates and other risks.

Fannie Mae and Freddie Mac own or guarantee about 40 percent of the nation's $10.5 trillion residential mortgage market.

Rep. Barney Frank of Massachusetts, a Democrat, predicted last week that the Senate would pass comparable legislation and that he'll find common ground on the portfolio issue before the bill is sent to President Bush for his signature.

Frank said after the vote yesterday that he has been encouraged by discussions with the Treasury Department since May 17 about controls on the portfolio and other aspects of the legislation.

The new regulator also would supervise the Federal Home Loan Banks, a government-chartered cooperative that advances money to 8,100 thrifts, credit unions, insurers and banks at below-market rates.

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