[StBernard] Financial Services Committee Website Update- GSE Reform and Overs ight Legislation

[Westley Annis]

Bipartisan GSE Reform and Oversight Legislation Introduced

New Legislation to Create New Independent Regulator; Affordable Housing Fund

Washington, DC - Congressman Barney Frank, along with Reps. Richard Baker
(R-LA), Mel Watt (D-NC) and Gary Miller (R-CA) today introduced bipartisan
legislation to overhaul the regulatory oversight of the government sponsored
enterprises (GSE) of Fannie Mae, Freddie Mac and the Federal Home Loan
Banks.  The legislation, H.R. 1427, the "Federal Housing Finance Reform Act
of 2007" is the product of both bipartisan legislation in the 109th Congress
and careful discussions and compromise with the Department of Treasury.  The
legislation will create a new, independent regulator with broad powers
analogous to current banking regulators.  In addition, the bill creates an
off budget and non-taxpayer financed affordable housing fund, which will
dedicate hundreds of millions of dollars for the construction, maintenance
and preservation of affordable housing with the first year of the fund to be
dedicated to the hurricane stricken areas of the Gulf Coast.

The House Financial Services Committee will hold two hearings on this
legislation next week with the Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises holding a hearing on Monday, March 12
at 2:00 p.m. in Room 2128 and the full Committee will discuss the bill and
hear from witnesses at a hearing on Thursday, March 15 at 10:00 a.m. in room
2128 Rayburn House Office Building.

"This is a very important bill which will enhance the regulatory authority
in an appropriate manner, while significantly improving the contribution the
GSE's will make to increasing the stock of affordable housing in the
country," said Chairman Frank.

"I'm encouraged knowing that the legislation we introduce today represents
the culmination of eight years of painstaking consensus-building and a solid
foundation for bipartisan negotiation, improvement, and -- hopefully and at
long last -- action," said Baker.  "This bill creates the kind of tough
regulatory oversight that companies this big and complex require, addresses
the risks their portfolios present to taxpayers and the financial system,
and improves their performance in providing affordable homeownership
opportunities, especially in the two hurricane-stricken Gulf states so
desperately in need of housing solutions."

On specific issues covered in the bill, Baker added: "The provisions on
safety and soundness, minimum capital requirements in particular, are quite
strong, and we simply must make sure they are maintained through the
legislative process.  I also hope to continue to work with Chairman Frank
and my colleagues on both sides of the aisle in taking a thoughtful approach
to refine the affordable housing fund."

"It is time to move expeditiously to consider and pass GSE reform and get
the regulator and the GSEs out of limbo.  The real benefit of this bill is
that it will serve this purpose and provide a big stimulus for more
affordable housing," said Congressman Watt.

"This legislation provides for a strong regulator for the GSEs so that
investors and the markets are assured that these companies are sound and
that their investments in America's housing markets are safe.  Improved
regulation will provide a means to achieve our ultimate goal of expanding
the supply of affordable mortgage credit across the country.  GSEs have been
at the forefront of creating affordable housing opportunities for families
and we must ensure that these successes continue," said Congressman Gary
Miller.

Continued Congressman Miller: "Along these lines, I commend Chairman Frank
for recognizing that there are communities in America that are currently
underserved by the GSEs because entry-level home prices surpass the national
conforming loan limit.  This bill addresses this disparity and provides for
high-cost areas to exceed the national loan limit based on their median home
prices.  Such limits will not go beyond what is currently provided for
Alaska, Hawaii, Guam, and the Virgin Islands.  I am confident that
addressing this issue in GSE reform will ensure that Americans in high-cost
areas are equally able to achieve the dream of homeownership."

Specifically, the bill differs from the bill the House of Representatives
passed in 2006 (H.R. 1461, as amended) in the following ways:

* Compromise agreements with Treasury on regulatory provisions to strengthen
temporary minimum capital provisions, provide the regulator authority to
establish rules for safety and soundness, mission-compliant operation of the
portfolios, revise product approval standards, and provide for mandatory
receivership under certain conditions if an entity is critically
undercapitalized.

* Affordable housing goals are enhanced through the addition of a new
affordable housing sub-goal for re-financing transactions under single
family goal affordable housing goal.

* The Affordable Housing Fund to be funded by contributions from Freddie Mac
and Fannie Mae will be altered to calculate their contributions based on the
average total mortgage portfolio, whether held in portfolio or backing
securitizations, rather than profit.  For the first year of the program, the
proceeds will go entirely to the areas of Louisiana and Mississippi affected
by Hurricanes Katrina and Rita to support reconstruction of affordable
housing in those areas, with distribution in later years handled through the
states based on formulas developed by HUD, rather than directly by the
enterprises. Because the enterprises would no longer make distributions, the
restriction on nonprofit participation is removed, however, numerous
restrictions on use of funds remain to ensure that funds are used solely for
production and preservation of housing, and are discussed in the summary
below.

Detailed Summary of the Affordable Housing Fund:

* The bill creates an "Affordable Housing Fund," to be managed by the new
GSE regulator [the "Director"].  Funds are derived through contributions by
Fannie Mae and Freddie Mac in amounts equal to 1.2 basis points on each
GSE's total outstanding mortgages (including both those held in portfolio
and those securitized) each year from 2007 through 2011.  The program
sunsets after five years.  75% of these funds are used for affordable
housing fund purposes, and 25% are allocated to the federal government, to
keep the bill deficit neutral.

* 75% of the affordable housing funds available in the first year will go to
Louisiana and 25% of such funds will go to Mississippi for affordable
housing needs arising out of the Gulf Coast hurricanes.  Thereafter, funds
are allocated by formula to the states (including also D.C., federal
territories, and federally recognized tribes).  This formula is to be
developed by HUD, and is to be based on a number of factors, including
population, housing affordability, percentage of very and extremely low
income families, cost of rehab, and extent of substandard and aging housing.
If HUD fails to establish this formula on time, funds are distributed to
states based on HOME allocations to states and Participation Jurisdictions.

* 100% of funds must be used for the benefit of very low and extremely low
income families.  Funds may be used for rental housing, homeownership [at
least 10% of funds must be used by each state for this purpose], and public
infrastructure activities in conjunction with housing [no more than 12.5% of
funds in any state]. 

* Affordable housing grants are to be made to eligible recipients, which can
be any "organization, agency, or other entity (including a for-profit
entity, a nonprofit entity, a federally recognized tribe, an Alaskan Native
Village, or a faith-based organization)" that has a demonstrated capacity to
carry out the proposed fund use.  Grantee funds may only be used for
affordable uses and not for administrative costs.

* Each state allocates funds under its own Allocation Plan, to be based on
priority housing needs in each state, and on criteria that include greatest
impact, geographic diversity, ability to obligate funds in a timely manner,
and the extent to which rental housing projects are affordable, especially
for extremely low income families.  Funds are redistributed from any state
that does not obligate funds within 2 years.

* The Fund includes a number of provisions to ensure that the funds are used
for housing and are not misused or used for other purposes, including: 

(a) a strict prohibition against any funds being used for grantee
administrative costs or expenses, political activities, advocacy, lobbying,
counseling, travel expense, or preparation or advice on tax returns, 

(b) limits set by the Director on how much States can spend on
administrative costs, 

(c) a requirement by the Director to establish program regulations,
authority for the Director to audit each state's compliance, a requirement
that each state develop systems to ensure program compliance,  and required
annual state fund use reports, 

(d) authority of the Director to impose penalties on states that do not
comply with requirements, including requiring states and grantees to
reimburse misused funds. 

The "Federal Housing Finance Reform Act of 2007" Summary

Title I - Reform of regulation of enterprises and Federal Home Loan Banks

Subtitle A - Improvement of Safety and Soundness

* Establishes 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 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 risk-based capital requirements
for the regulated entities to ensure that they operate in a safe and sound
manner and maintain sufficient capital and reserves to support the risks of
their operations. 

* The agency may increase the minimum capital levels for the regulated
entities 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 will
periodically review the capital maintained by the regulated entities.

* The agency establishes standards by which portfolio holdings and growth of
portfolio will be deemed consistent with mission and safety and soundness.
In developing the standards, the agency considers factors relating to the
size of market, liquidity, mission, risk, and other factors related to the
safety and soundness and mission of the enterprises.  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 corporate governance requirements 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.

* The regulated entities are required to register at least one class of
capital stock with the Securities and Exchange Commission. 

* The agency is made a member of the Federal Financial Institutions
Examination Council.

* The Government Accountability Office, in consultation with the agency and
federal banking regulators must report to Congress on guarantee fees and
analogous practices.

Subtitle B - Improvement of Mission Supervision

* Program and housing goal oversight for Fannie Mae and Freddie Mac
("enterprises") is transferred from the Department of Housing and
Development (HUD) to the new regulator.

* The agency has the authority to approve new products.  An enterprise may
not offer a new product before obtaining the agency's approval.  The agency
must act on a request within 30 days after providing a 30 day notice and
comment period.  A program may only be approved if it is authorized by law,
in the public interest, consistent with safety and soundness of the
enterprise and the mortgage finance system, and does not materially impair
the efficiency of the mortgage finance system.  An enterprise must provide
the agency prior notice of new activities that are not new products.  This
does not restrict the Director's general authority over all programs,
activities, and products. 

* 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.  An additional high-cost area limit is established
for areas where the median home price exceeds the general conforming loan
limit, up to the lower of 150 per cent of the conforming loan limit or the
median cost in that area.  Loans in high cost areas above the general
conforming loan limit must be securitized.  The regulator will conduct a
study of whether the securitization requirement raises the cost of high-cost
area loans, and may terminate the requirement if it is found to raise costs.


* The agency establishes housing goals and an annual home purchase goal for
the enterprises.  The agency may take enforcement action against an
enterprise for failure to meet the housing goals.

* The bill creates an "Affordable Housing Fund," to be managed by the new
GSE regulator. Funds are derived through contributions by Fannie Mae and
Freddie Mac in amounts equal to 1.2 basis points on each GSE's total
outstanding mortgages (including both those held in portfolio and those
securitized) each year from 2007 through 2011. 75% of these funds are used
for affordable housing fund purposes, and 25% are allocated to the federal
government, to keep the bill deficit neutral.

* In 2007 the funds go to Louisiana and Mississippi for affordable housing
needs arising out of Hurricanes Katrina and Rita. Thereafter, funds are
allocated by formula to the states (including also D.C., federal
territories, and federally recognized tribes). 100% of funds must be used
for the benefit of very low and extremely low income families. Funds may be
used for rental housing, homeownership and public infrastructure activities
in conjunction with housing. The Fund includes a number of provisions to
ensure that the funds are used for housing and are not misused or used for
other purposes, including a strict prohibition against any funds being used
for grantee administrative costs or expenses, political activities,
advocacy, lobbying, counseling, travel expense, or preparation or advice on
tax returns. 

Subtitle C - Prompt Corrective Action

* The legislation establishes capital classifications for the regulated
entities and supervisory actions applicable to these classifications,
including appointment of the agency as conservator or receiver to
reorganize, rehabilitate, or wind up its business.  If a regulated entity
become critically undercapitalized, the agency must be appointed as receiver
if the agency determines that the debts of the entity have exceed its assets
for 30 days or the entity has not been paying its debts as they became due
for 30 days.  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

* The size of the Fannie Mae and Freddie Mac boards are reduced from 18
members to between seven and fifteen.  

* The agency is required to conduct studies on the portfolio operations of
the enterprises and on alternative secondary market systems

Title II - Federal Home Loan Banks

* Federal Home Loan Bank boards of directors are decreased in size from 14
to 13 members.  The cap on director compensation is lifted and the terms of
directors are extended from 3 years to 4.

* The FHLBs are authorized to establish joint offices to perform functions
on a collective basis.

* The Federal Home Loan Banks are exempt from some of the disclosures
required under the Securities Exchange Act of 1934.

* A FHLB is permitted to merge with another FHLB with the approval of its
board and the FHFA.

* 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 six months after enactment, 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 six months after enactment, 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.

Subtitle C - Department of Housing and Urban Development

* "Enterprise-related" employees and functions of HUD are transferred to
FHFA six months after enactment.  HUD regulations and orders concerning the
enterprises remain in effect and are enforceable, until determined
otherwise; employees are transferred with temporary protections.

Click here for bill text of H.R. 1427, the "Federal Housing Finance Reform
Act of 2007."
<http://www.house.gov/apps/list/press/financialsvcs_dem/hr1427030907.pdf>  

Click here for summary of H.R. 1427, the "Federal Housing Finance Reform Act
of 2007."
<http://www.house.gov/apps/list/press/financialsvcs_dem/hr1427summary030907.
pdf>