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The GSE Reform Bill is Dead; Long Live the GSE Bill!

As Mortgage Servicing News went to press this month, the Bush White House put the final nail in the coffin of GSE reform by opposing a provision in the Shelby bill that would allow Congress to override a regulatory decision to place a housing GSE into receivership.

Introduced by Richard Shelby, R-Ala., chairman of the Senate Banking Committee, the legislation actually passed the panel before the Treasury Department (the White House, that is) torpedoed it the very next day by saying the provision was unacceptable.

Treasury Secretary John Snow, though, was 100% correct in his move to oppose the provision. What kind of a "world class" regulator would submit to the will of Congress? It sounds like a recipe for the "Keating Five" all over again.

As one mortgage industry veteran put it: "That gives Tom DeLay veto power. Why would you want to do that?" Tom DeLay, as most everyone in Power City, USA knows, is the very powerful House majority leader. In Washington, when this Texas Republican says "jump," the correct lobbyist response is: "How much money do you need, Mr. DeLay?"

The National Association of Home Builders was livid when they heard about the provision. They wanted no receivership powers whatsoever. Zippo. Fannie Mae, apparently, wasn't so livid and reportedly caved on the issue, agreeing to give Congress veto power.

You would figure that Fannie would be on the same team as NAHB on this issue, but the two parted ways. Why? As I write this, plenty of folks in Washington are scratching their heads, trying to figure out what went wrong. The only thing I can figure is that since Fannie donates so much money to Congress it's better to have control over the institution with veto power. Right?

But let's think about this for a moment. Fannie was OK with giving Congress veto power over receivership. The NAHB was not. Let's ask a basic question here: If Fannie (and Freddie) are as robustly healthy as they portray themselves to be, what are they (and the NAHB) so afraid of? If they have plenty of cash, receivership is really a non-issue. Right? Who says receivership will ever be needed? Is there something to be afraid of in regard to Fannie and Freddie that we don't know about? If there is nothing to fear, then give receivership powers to the regulator and to the regulator only.

GSE regulatory reform is dead for this year. At least it looks that way. The sorry thing is that Fannie Mae could really have benefited from this bill, a bill that would finally put to rest all of Wall Street's (read: investors') concerns about its "political" future. Perhaps, by agreeing to give Congress veto power, Fannie Mae chairman Franklin Raines was hoping that his company's stock price would finally break out of the sorry state it's been in the past three years. Certainly, Fannie's board of directors can't be happy with a flat stock price over three years.

The again, students of the mortgage industry know full well there wouldn't be a bill in the first place if Freddie Mac hadn't shot itself in the foot last year with its $5 billion earnings restatement scandal. Lucky for Freddie the restatement was upwards, not downwards.

Keep in mind that Fannie's regulator, the Office of Federal Housing Enterprise Oversight, recently said Fannie, too, might have to restate earnings. Is it possible that a Fannie restatement could be downward? Let's hope not. It doesn't have anywhere near the excess capital that Freddie Mac has.

Now that GSE reform is dead, maybe the pro-GSE camp is hoping the issue will fade with time. Maybe, they're hoping that John Kerry will be elected president and a pro-housing politician will go easy on Fannie, Freddie and the FHLB System. Wait a second, George Bush has done a pretty good job of portraying himself as being pro-housing.

If Bush gets a second term, GSE regulatory reform will get a new set of sea legs in the next Congress. If Kerry gets elected it could die. Then again, maybe not. If Kerry gets in office, Frank Raines might be the next Treasury secretary, or maybe chief of staff. At least that's what some GSE watchers are saying. But who knows? Right now it's all fantasy baseball. And as most Washingtonians know, the capital city has no baseball team - and no GSE regulator with a full arsenal of powers.

Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News. He can be e-mailed at: Paul.MuoloThomsonMedia.com.

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