THE TOP LINE

UNSUBSCRIBE NOW FORWARD THIS EMAIL

Dear Friend:

With all eyes on November's midterm election and its implications for a lame duck session of Congress, the Administration continues to work towards a compromise on GSE reform. Secretary of the Treasury Henry Paulson met with the CEOs of Fannie Mae and Freddie Mac the week of October 16; no details of the talks have emerged, but the meetings come at a pivotal time for GSE oversight reform. In this issue of GSe-News, we examine these and other developments, including:

• Treasury Secretary Paulson Meets with Fannie Mae, Freddie Mac CEOs
  
  
• OFHEO Director Disputes Freddie Mac Chief's Assessment of Systemic Risks in GSEs
  
  
• In Case You Missed It: Fannie Mae Misses Affordable Housing Subgoal for First-Time Buyers
  
  
• Boston Fed Critical of GSE Mortgage Securities
  
  

Sincerely yours,

J.C. Watts
Chairman,
FM Policy Focus

TREASURY SECRETARY PAULSON MEETS WITH FANNIE MAE, FREDDIE MAC CEOS

U.S. Treasury Secretary Henry Paulson met with Fannie Mae Chief Executive Daniel Mudd and Freddie Mac Chairman and Chief Executive Richard Syron during the week of October 16. Although both parties declined to comment on the subject or substance of the meetings, they came at a critical juncture and are seen as a positive sign for keeping GSE oversight reform legislation moving forward.

In the past few months, Banking Committee Chairman Richard Shelby (R-AL) and Treasury Department officials have softened their position on strict limits on the GSEs' retained portfolios, which total more than $1.4 trillion. Senators involved in the GSE reform negotiations have said that Secretary Paulson is the only person with the stature to break the legislative stalemate and reach a compromise. The meetings with the companies have been interpreted as a positive step in that direction.

OFHEO director James Lockhart gave a hard-hitting speech on October 20 calling for passage of legislation that gives the new GSE regulator effective control over the agencies' retained portfolios and other powers currently available to financial regulators. These new powers include authority over mission, products and services, and safety and soundness. Lockhart also noted that "bank regulators are responsible for reducing systemic risk as part of their core regulatory responsibilities" and the same should be true for the new GSE regulator.

Mr. Lockhart also directly countered the arguments made by Freddie Mac CEO Richard Syron in a speech the previous day stating that the issue of systemic risk was being "misapplied to the GSEs." He noted that Mr. Syron had ignored several important facts about the systemic risk which remains in the large retained GSE portfolios, despite their ability to issue callable debt and hold large derivatives positions. These other ignored facts include operational problems such as deficient models or unauthorized trading, which Mr. Lockhart suggested could be reduced by a strong regulator and smaller retained portfolios.

A study by the Federal Reserve Bank of Boston finds that GSE sale of mortgage securities does nothing to help lower the cost of homeownership.

Between the years of 1983 and 2001, the cost of borrowing went down for low-income and first-time homebuyers, and borrowers were increasingly able to buy homes that fit their prospective income. Authors of the Federal Reserve Bank study endeavored to find the source of this improved system of housing finance, attempting to answer questions such as, "Was it deregulation? Was it the creation of a secondary market? Or was it the activities of the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, whose mission is to help families realize the 'American dream' of owning a home?"

The conclusion? "We find no evidence that the GSEs' activities have contributed to this phenomena . . . The GSEs and their activities in the secondary market have failed to improve the housing finance environment facing low-income and first-time homebuyers."

The study was authored by Harvey S. Rosen, the John L. Weinberg Professor of Economics and Business Policy and Co-Director of the Center for Economic Policy Studies at Princeton University, Paul Willen, a Senior Economist at the Federal Reserve Bank of Boston and Kristopher Gerardi, a Research Associate at the Federal Reserve Bank of Boston and a Ph.D. candidate at Boston University.

INFORMATION ON FM POLICY FOCUS