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KBW says eight GSE reform bills barely dent mortgage market

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The House Financial Services Committee is set to vote Tuesday on eight pieces of legislation aimed at winding down Fannie Mae and Freddie Mac, and their role in the mortgage marketplace. But one investment bank said regardless of Tuesday's outcome, the effects felt by the mortgage market will be minimal. Keefe, Bruyette & Woods believes all eight bills proposed last week will pass; however, "they do not fundamentally change the GSEs' business models nor do they create conditions for the private sector to replace Fannie Mae and Freddie Mac." Instead the proposed legislation addresses oversight issues, which means little structural change will manifest because of them, according to a report released by KBW Tuesday. Members of the House of Representatives introduced eight bills last week, which cover issues such as GSE executive compensation, fair housing goals, new GSE activity and business, and portfolio caps. The GSE Mission Improvement Act, introduced by Rep. Ed Royce (R-Cali.), aims to end all affordable housing goals set by the government-sponsored enterprises. "The passage of legislation in the early '90s required the government-sponsored enterprises to devote a significant portion of their business to specific affordable housing goals," Royce said. "To meet these goals, the GSEs purchased more than $1 trillion in junk loans. These loans accounted for a large portion of the mortgage giants’ losses – losses that were later loaded onto the backs of American taxpayers." This bill would essentially repeal The Federal Housing Enterprises Financial Safety and Soundness Act of 1992. Rep. Jeb Hensarling (R-Texas), vice chairman of the House Financial Services Committee, sponsored another bill called the GSE Portfolio Risk Reduction Act, to cap the current portfolios of Fannie Mae and Freddie Mac and increase their annual attrition rate. In the first year, the GSEs would have their portfolios capped at no more than $700 billion, declining to $600 billion for year two, $475 billion for year three, $350 billion for year four, and finally $250 billion in year five. Still, KBW is not convinced any of the eight bills will have a monumental or substantial impact. "Our view continues to be that comprehensive GSE reform legislation is unlikely to pass before 2013," KBW said. "In our view, there is political risk for Republicans from high cost areas who worry about the impact of eliminating the GSEs will have on the housing markets in their districts and states and we think the gulf between Treasury's goals and House Republicans' goals is not easily bridged." Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR.

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