Fannie, Freddie Bill Tied to Katrina Aid

Key House leaders have agreed to require Fannie Mae and Freddie Mac to set aside a portion of their profits to finance rebuilding efforts in the hurricane-ravaged Gulf Coast region, a compromise that may clear the way for a House vote as early as next week on legislation tightening regulation of the two housing finance companies.

The agreement announced yesterday by House Financial Services Committee Chairman Michael G. Oxley (R-Ohio) and Rep. Richard H. Baker (R-La.) doesn't guarantee final passage of the bill, intended to create a new independent regulator to oversee the companies following a series of accounting scandals. Key disagreements remain between the House and Senate versions of the legislation, and the White House and Federal Reserve Chairman Alan Greenspan also oppose parts of the House bill.

But a vote in the full House would mark a milestone of sorts: Efforts over five years to overhaul regulation of Fannie and Freddie have never made it that far.

The bill has been stalled since the House Financial Services Committee voted out its version in May. Conservative lawmakers objected to a provision that would force the companies to divert 5 percent of their profits to finance affordable housing, arguing it would become a slush fund for the companies' political allies. The Senate Banking Committee rejected the housing proposal as well and didn't include such a fund in the bill it passed in July.

Under the proposal announced yesterday, Fannie and Freddie would set aside 3.5 percent of their profits for the fund, which would expire after five years. During the first two years, priority would be given to projects in areas affected by Hurricane Katrina. Baker, of Baton Rouge, estimated the fund could generate about $700 million to $800 million during that time.

He said he believes the bill now has the votes to pass the House, possibly as part of a Katrina relief package.

Fannie and Freddie keep money flowing into the housing market by buying mortgages, bundling them as securities and selling them to investors. In recent years, however, the companies have kept mortgages and mortgage-backed securities for investment purposes, a profitable strategy but one that increases the companies' vulnerability to interest rate swings.

The Senate bill hews more closely to recommendations by Federal Reserve Chairman Alan Greenspan and the Bush administration, which believes the size of the two companies poses a risk to the financial system and wants legislation that ensures they will have to decrease their combined $1 trillion investment portfolios.

Greenspan renewed his plea to Congress in a Sept. 2 letter addressed to Sen. Robert F. Bennett (R-Utah), saying any reluctance on the part of lawmakers to reduce the size of the companies "could prove destabilizing to our financial system as a whole and in the end could seriously diminish the availability of home mortgage funds."

Senate Banking Committee Chairman Richard C. Shelby (R-Ala.), who in the past said he would support a low-income housing fund as long as it is not tied to the companies' profits, said the House proposal has not changed his mind.

In an e-mailed statement, he said that while "there could be no more worthy cause than to direct much needed federal assistance to the areas devastated by Hurricane Katrina," tying the fund to the companies' profits is a "fundamentally wrong approach" that might encourage them to grow.

The Bush administration's position is also unchanged, said spokesman Trent Duffy. "While we certainly appreciate the desire to help people affected by Hurricane Katrina . . . the need for strong reform" of the two companies remains, "including the need for limitations for the portfolios."

But Prudential Securities analyst Charles Gabriel said tying Fannie's and Freddie's profits to rebuilding the Gulf Coast makes it politically harder for Greenspan and the White House to prevail because it "does a good job of reminding people of the positive things" the companies can do.