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Stricter Bill Introduced For Fannie, Freddie

By Annys Shin
Washington Post Staff Writer
Saturday, July 23, 2005

Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) yesterday released legislation that could force mortgage finance companies Fannie Mae and Freddie Mac to significantly reduce their combined $1.5 trillion investment portfolios.

Shelby has for weeks signaled his intent to support a set of strict new rules for the two mortgage giants, and the bill he unveiled yesterday met those expectations. By proposing to give a new regulator broad discretion over the kinds of assets Fannie Mae and Freddie Mac can hold, Shelby has followed the course preferred by the Bush administration -- but set up a possible conflict with the House, where Financial Services Committee Chairman Michael G. Oxley (R-Ohio) supports a less strict set of rules.

Both the White House and Federal Reserve Chairman Alan Greenspan say Fannie Mae and Freddie Mac pose a risk to the economy because they have grown too large. Shelby plans to bring his bill before the Banking Committee Thursday.

"I am hopeful that the Committee will be able to pass this strong, meaningful legislation. The new regulator simply must be able to ensure the safe and sound operations of [the two companies] while they pursue their mission in a manner that does not pose systemic risk" to the economy, Shelby said yesterday in a written statement.

Congress is moving to toughen regulation of Fannie Mae and Freddie Mac after a series of accounting scandals raised concern about how the two companies were being managed and what would happen if they ran into financial trouble. Fannie Mae and Freddie Mac buy home mortgages from banks and other lenders, keeping the housing markets supplied with cash. Together, they help finance two-fifths to two-thirds of the home sales in the country each year.

Typically, after buying mortgages, the companies repackage them and resell them to other investors. In recent years, however, they have held onto more and more of their investments -- a strategy critics say may boost company profit but has little to do with their government-chartered mission of supporting homeownership.

In a version of the bill approved by Oxley's committee in May, the new regulator would be able to adjust the size of the companies' portfolios to keep them from running into financial trouble. In Shelby's bill, by contrast, the regulator would also be able to look more broadly at whether the size of either company poses a risk to the financial system. The regulator would also have the power to force Fannie Mae and Freddie Mac to dispose of assets that do not help them fulfill their housing mission.

It is unclear by how much Shelby's bill might force Fannie Mae and Freddie Mac to contract. Greenspan at one point said he thought the companies needed to hold only around $200 billion apiece in their portfolios to keep money flowing in the housing market.

Shelby cited concern over the companies' investment portfolios when he came out against a proposal in the House bill that would require Fannie Mae and Freddie Mac to contribute a portion of their profit to fund the creation of low-income housing. He said such a fund would give the companies an incentive to expand their investment holdings to boost profit.

Shelby did not include the proposed set-aside in the bill he released yesterday, making it less likely that Democrats will vote for it. As a result, the bill, while likely to be approved by the Banking Committee next week, may not reach the Senate floor, said analysts.

"Chairman Shelby has tailored a bill to gain administration support at the expense of obtaining bipartisan legislation," said Howard Glaser, a housing industry consultant. "A partisan split tends not to launch a bill to the head of the line for consideration by the full Senate."

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