Baker, Oxley Introduce Legislation to Reform Regulation of Fannie Mae, Freddie Mac

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New proposal would strengthen regulatory oversight of the housing finance government-sponsored enterprises
RISMEDIA, April 7 ? New legislation aimed at reforming and strengthening regulatory oversight of the housing finance government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac, and the Federal Home Loan Banks has been proposed by two key members of Congress.

The legislation comes from Capital Markets subcommittee chairman Richard H. Baker (LA) and House Financial Services committee chairman Michael Oxley (OH) in the midst of several ongoing investigations into faulty accounting and questionable business practices at Fannie, and in the wake of an accounting scandal at Freddie, the representatives say.

?The terrible troubles at Fannie Mae make it painfully clear that major reforms are necessary to strengthen regulatory oversight of the housing GSEs, to reduce the risks to taxpayers and investors, and to improve our commitment to serving America?s homebuyers,? Baker said. ?I am pleased to have the support of Chairman Oxley, whose leadership will be essential for advancing legislative reforms in the House.?

The Federal Housing Finance Reform Act would strengthen regulation of the housing GSEs by establishing the Federal Housing Finance Agency (FHFA), an independent agency to oversee the financial safety and soundness as well as the housing mission of the enterprises, and grants the new regulator a host of new powers and authorities commensurate with other financial regulators.

As government-sponsored enterprises, Fannie, Freddie, and the Federal Home Loan Banks receive billions of dollars in federal subsidies annually to provide liquidity to the home mortgage market to promote affordable home ownership, but because of their perceived government ties many believe that their massive debt would have to be paid by the federal government in the event of default.

To combat potential risks to the financial system and to taxpayers, Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow have recently advocated the need to reduce the combined $1.5 trillion portfolios of Fannie and Freddie. In response, the Baker-Oxley bill directs the new regulator to review the on-balance sheet assets and off-balance sheet obligations of the enterprises, and authorizes the regulator to require an enterprise ?to dispose of or acquire any asset or obligation ? consistent with safe and sound operation of the enterprise? or with fulfilling its housing mission.

In addition, the legislation directs the regulator to submit to Congress a report including:

* A description of the portfolio holdings of the enterprises

* A description of the risk implications for the enterprises of the portfolio holdings

* An analysis of portfolio holdings for safety and soundness purposes

* An assessment of whether portfolio holdings fulfill the housing mission of the enterprises

* An analysis of systemic risk implications from the portfolio holdings and whether the holdings should be limited or reduced over time.

?I am growing toward the conclusion that how we address the size of Fannie and Freddie?s portfolios lies at the heart of our efforts to reduce risks and improve their housing mission performance, and I believe these provisions represent a good starting point for discussion about the best approach to take,? Baker said.

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