Last year, Congressional Democrats dropped a regulatory nuclear bomb on the financial industry. Republicans in the House are taking a different approach to reform troubled mortgage companies Fannie Mae and Freddie Mac. Their strategy is more a steady stream of smaller bills aimed at reforming the housing finance giants.
The House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises released the agenda for its second round of reform late last week. Like the first round, there are some pretty strong, uncontroversial ideas presented.
Although all eight of the bills passed through the subcommittee in April, only a couple garnered broad bipartisan support. For example, one bill that sought to subject Fannie and Freddie to the same risk retention rules that banks must follow passed 34 to zero. The financial regulation bill as written made Fannie and Freddie exempt from risk retention. Another rule approved by voice vote would strip the affordable housing goals from the missions of Fannie and Freddie.
Another seven draft bills were announced on Friday. Like the others, there are a few that should almost certainly achieve bipartisan support. There are several standouts:
Subject Fannie and Freddie to FOIA
Despite the fact that taxpayers now own these entities, the firms are not subject to Freedom of Information Act requests. This bill (.pdf), introduced by Rep. Jason Chaffetz (R-UT), would change that. This would provide a wonderful tool to journalists who want to better understand these firms' past and present portfolios and underwriting criteria. It's hard to think of a legitimate reason why firms that are now explicit government entities should be exempt from the FOIA.
Require Disposition of Non-Mission Critical Assets
At this time, these firms still exist only because they are providing the financing bridge between home buyers and lenders. Since these firms owe taxpayers around $158 billion and counting, any assets that they do not need in order to achieve that end should be sold to pay back their debt. Since there's broad consensus that these firms should be wound down, this seems pretty uncontroversial. The bill's (.pdf) lead sponsor is Rep. Robert Hurt (R-VA).
Prevent Dividend Payment Decrease
As a part of the "deal" that the government provided to Fannie and Freddie, they must pay a 10% annual dividend to taxpayers on their borrowings. This is a huge sum of money, considering the size of their bailout. In 2011, they'll owe somewhere in the ballpark of $15 billion. These firms have said their profits will never provide enough money to pay this dividend in perpetuity. Rep. Don Manzullo (R-IL) is the lead sponsor of a bill (.pdf) that would keep the dividend in place. This would ensure that the firms do not survive. As mentioned, this end has bipartisan support.
Prohibit Taxpayer Funding of GSE Employee Legal Fees
Earlier this year, some were outraged to learn that some of Fannie's and Freddie's executives were leaving taxpayers with their legal bills. Rep. Randy Neugebauer (R-TX) wants to make sure that stops. Really, this should have been an initial stipulation of the bailout, so his legislation (.pdf) would make this fix.
But not all of these new bills are uncontroversial. This one might sound pretty sensible, but it's also impractical:
Set a Bailout Cap for the GSEs
Isn't $158 billion enough for taxpayers to pay? Rep. Michael Fitzpatrick (R-PA) likely thinks so. He's the lead sponsor of a bill (.pdf) that would set a cap on the Fannie-Freddie bailout. It would be the greater of $200 billion and the amount these firms need to keep going through 2012. The problem, however, is that the market won't be amused if the U.S. government slowly backs away from Fannie and Freddie's debt or the mortgage bonds they guarantee. Unfortunately, the U.S. must stand behind its promise to honor Fannie's and Freddie's obligations. So this bill is just impractical, even if its heart is in the right place.
But this is politics. Principle doesn't always matter: which of these bills will reach the desk of President Obama and receive his signature? Ben Veghte, spokesman for Subcommittee Chairman Scott Garrett (R-NJ), certainly believes some should. He noted the strong bipartisan support that some of these bills had in the first round and expected similar support for some of these new ones. He explained that the piecemeal philosophy here is meant to get important, broadly supported legislation passed, rather than get caught up in politics about specific, more controversial sections of a large, sweeping bill.
Let's hope Democrats and the president embrace this approach. Fannie and Freddie desperately need reform. Waiting until the next time we have a single-party in power in Washington would be far too long to wait.