Shelby Still Wants Limit on GSE Portfolios

Senate Banking Committee chairman Richard Shelby, R-Ala., will push for a committee vote on a GSE reform bill that would grant the new regulator clear authority to reduce the size of Fannie Mae and Freddie Mac's mortgage portfolios.

Sen. Shelby explained his legislative strategy in a private meeting with committee Republicans late last week and sources are indicating he wants to mark up a GSE bill before Congress adjourns for its August recess.

Under Shelby's bill, the new regulator will be able to order the two government-sponsored enterprises to reduce the size of their giant portfolios for safety and soundness reasons, to reduce systematic risks and to further mission compliance. Fannie and Freddie's portfolios have combined assets of $1.5 trillion.

There will be no hard-dollar cap or limits on the portfolio, according to sources. However, the senator penned a column for a Capitol Hill newspaper last week that says the two GSEs should focus their secondary market activities on securitizations.

Guidance to the regulator should be "geared toward keeping assets off the books when they could be securitized and used to spread risk more evenly through the capital markets."

Sources also indicated he will try to secure Democratic support for the GSE bill by allowing Sen. Jack Reed, D-R.I., to attach an amendment that creates a GSE affordable housing fund.

However, Sen. Shelby and other committee Republicans have concerns about the Reed amendment because it requires the two GSEs to contribute 5% of after-tax profits to the fund.

A profit-based structure would "provide incentives for the GSEs to continue to grow and potentially engage in riskier behavior to counter the new tax on their profits," Sen. Shelby said in The Hill column.

It also appears that Sen. Shelby has dropped the idea of a "bright line" test that would require the GSE regulator to establish a boundary between the GSE business activities and lender activities.

Instead, the Shelby bill would require the GSEs to go through a rigorous application process to get approval for new products and activities.

Sen. Shelby has not released a copy of his bill yet. But sources indicate it is much tougher on portfolio limits and product approval than a GSE bill passed by the House Financial Services Committee on May 25.

However, the portfolio limits are not as tough as the Bush administration and Federal Reserve Board chairman Alan Greenspan want.

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