By David S. Hilzenrath
Washington Post Staff Writer
Friday, March 30, 2007

Long-running efforts to tighten oversight of Fannie Mae Mae and Freddie Mac took a step forward yesterday as a House committee passed a bill that would create a stronger regulator for the mortgage-funding companies.

The bill also would require the federally chartered companies to contribute to a new fund for affordable housing, which Democrats supported but many Republicans opposed.

The bill also would give Fannie Mae and Freddie Mac an opening to expand their business in parts of the country with exceptionally high housing costs.

The measure passed the Financial Services Committee by a vote of 45 to 19, with more than a dozen Republicans joining the Democratic majority.

After the vote the committee chairman, Barney Frank (D-Mass.), said, "Something very close to this bill is likely to become law."

The House passed a version of the bill in 2005, and the Senate Banking Committee passed legislation in 2004, but the full Senate has not acted.

Frank said the outlook has changed because, unlike the earlier House bill, the one approved by the committee yesterday is supported by the Treasury Department, and Democrats now have a majority in the Senate.

As part of a compromise between Frank and the Treasury Department late last year, the current bill would give more power to the regulator than the earlier House bill, and it would eliminate presidential appointees to the companies' boards, putting more distance between them and the government.

Chartered by the government to promote home ownership, Fannie Mae and Freddie Mac buy mortgages from lenders, which then have more money to make loans. The companies also package mortgages into securities for sale to investors, and they guarantee to compensate the investors for any interest or principal payments the borrowers fail to make. They are able to borrow money at favorable rates, in part because the financial markets believe that the U.S. government would prop them up in a crisis, analysts say.

Together, Fannie Mae and Freddie Mac have debts and outstanding credit guarantees of $5.2 trillion, more than the government's $4.9 trillion in publicly held debt.

Financial-services firms with competing interests have pressed lawmakers to rein in Fannie Mae and Freddie Mac and make it clearer to investors that there is no guarantee that the government would stand behind the companies' obligations.

Both Fannie Mae and Freddie Mac have acknowledged in recent years that they misstated profits by billions of dollars. The Federal Reserve has argued that the collapse of either could shake the financial system.

The bill approved yesterday by the House committee would give regulators the power to put the two companies into receivership, limit their mortgage investments, block new products, and require them to hold additional capital as a cushion against financial trouble. Requiring additional capital could reduce profits.

However, in a boon for the companies, the bill would allow Fannie Mae, which is based in the District, and Freddie Mac, of McLean, to take on larger mortgages in areas with high housing costs. Currently, a national ceiling prohibits the companies from securitizing or buying loans of more than $417,000 in the case of single-family homes; the bill would raise the limit by as much as 50 percent, allowing the companies to take on mortgages as large as $625,500 in high-price markets.

The biggest point of contention in the committee was creating an affordable housing fund, potentially worth $500 million a year, and deciding who should control it.

Democrats said the fund would provide housing for people in need and force the companies to give back more to the public. Frank said there was no question that Fannie Mae and Freddie Mac benefit from their government-sponsored status, and "over the years the public has not received sufficient value" in return.

Republicans said the fund could foster wasteful bureaucracy, increase mortgage costs for middle-class home buyers and channel money to groups with partisan agendas.

Under the bill, the affordable-housing funds collected from the companies would be distributed to states, which would then give them to buyers. The initial money would be dedicated to states hit by Hurricane Katrina in 2005.

Fannie Mae spokesman Brian Faith said in a written statement that the bill was a step forward even if "there are important aspects of the legislation that we would hope to see improved."

Freddie Mac spokeswoman Sharon McHale called it "a very tough bill," adding that the company was particularly concerned about provisions that could require the company to hold more capital.

FM Policy Focus, a lobbying group for firms that want Fannie Mae and Freddie Mac restrained, praised the bill. This carefully crafted legislation places in the hands of one regulator all the authority necessary to oversee the [companies'] activities with regard to affordable housing, liquidity and safety and soundness," said Mike House, the group's executive director.