A Senate bill that would require mortgage finance companies Fannie Mae and Freddie Mac to significantly reduce the size of their combined $1.5 trillion investment portfolios was approved by the Senate Banking Committee yesterday, but prospects for the bill's final passage remain in doubt.
The bill passed the committee on a party-line vote, but some Senate Republicans said they still have reservations because they think the legislation is too restrictive. There are wide differences as well with a House Committee version and disagreement over whether Fannie and Freddie should put part of their profit each year into a low-income housing fund.
Both sides pledged to keep working together.
"There is room to talk," said Banking Committee Chairman Richard C. Shelby (R-Ala.). However, he also cautioned that he does not "want a bill that isn't a strong bill" and would not move the legislation to the Senate floor unless he thinks it would force the two companies to become smaller.
Congress is considering legislation to strengthen oversight of the two companies after both experienced multibillion-dollar accounting problems. In May, the House Financial Services Committee passed a version of the legislation that would allow a new regulator to limit the companies' investments, but only after determining that they are in danger of financial trouble or that they are straying from their mission of supporting homeownership. The Bush administration and Federal Reserve Chairman Alan Greenspan criticized that proposal as too weak.
The bill the Senate Banking Committee passed yesterday is closer to what Greenspan and the White House have recommended because it directs the regulator to limit the kinds of assets the companies can hold. After the vote, Treasury Secretary John W. Snow in a written statement hailed the legislation for striking "a proper and prudent balance," ensuring that the companies continue helping home buyers without posing what critics argue is a "systemic risk" to the economy.
Fannie and Freddie help keep the housing markets supplied with cash by buying mortgages from banks and other retail lenders. They bundle those mortgages into larger securities that they sell to investors. In recent years, however, Fannie and Freddie have held on to more of those loans, leading critics to argue that the two companies are so large that they could damage the economy if they ever get into financial trouble.
The appropriate size of the companies' investment holdings has been key to the debate, with Fannie and Freddie alternatively characterized as fundamental to the workings of the mortgage industry or, at the other extreme, as a pair of unnecessary behemoths that do not do anything the financial markets would not do on their own.
Sen. Jon S. Corzine (D-N.J.) estimated that under the Senate version of the bill, Fannie and Freddie would have to get rid of about $600 million in holdings, which he argued could have negative consequences for home buyers.
Freddie Mac officials, breaking their silence about the bill, agreed with Corzine. "We think it's very unfortunate that the bill goes so far beyond regulatory reform and jeopardizes the nation's housing finance system," said spokeswoman Sharon McHale.
Fannie Mae spokesman Charles V. Greener said the company supports giving a new regulator authority over its investment holdings "in response to a clearly identified and quantifiable" risk to Fannie's operations, a similar approach to the one in the House bill.
Sen. Robert F. Bennett (R-Utah) said he shared similar concerns over the portfolio language but had agreed to support the bill in committee to keep the process moving. Bennett said differences between the Senate and the House bills would be worked out in conference committee.
Not everyone was confident.
"Nothing will change until some external event shakes it loose," said Bert Ely, a financial services consultant and longtime critic of Fannie Mae and Freddie Mac. Those events, he said, could include an upcoming report about Fannie's accounting problems that is being written by former senator Warren B. Rudman for Fannie's board and is due out later this year, as well as the final report of the companies' chief regulator, the Office of Federal Housing Enterprise Oversight.