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House Republicans Want to Wind Down GSEs

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Republicans in the House of Representatives, led by Financial Services Committee ranking member Rep. Spencer Bachus (R-AL), authored a list of principals they wish to see as part of "immediate" legislative efforts to plan for the future of the government-sponsored enterprises (GSEs). "It is time to deal with bailed out companies, which were at the center of the mortgage market meltdown that caused the financial crisis, and have cost taxpayers hundreds of billions of dollars," Bachus said in a statement. The Republican lawmakers are calling for a timed wind-down of operations at Fannie Mae (FNM) and Freddie Mac (FRE) within four years, "ending once and for all the disastrous government experiment in privatized profits and socialized losses," according to their list of 10 principals on GSE reform. "For years we warned about the systemic risk posed by Fannie and Freddie," said Rep. Ed Royce (R-CA). "Unfortunately our calls for reform were largely ignored under the guise of promoting affordable housing." The plan would reduce the mortgage portfolio holdings of Fannie and Freddie by 25% and phase-in capital requirements consistent with global standards for large and complex financial institutions over a four-year period. The Republicans urged a phasing out of the elevated conforming loan limits in high-cost areas over two years, "thereby cutting off taxpayer subsidies of millionaires' mortgages." The plan would create a regulatory safe harbor for mortgages that meet underwriting standards consisted with the Federal Reserve Board's final HOEPA rule. The plan would prevent Fannie and Freddie from funding long-term assets with short-term borrowing, which the House lawmakers said exposes taxpayers to interest rate risk. It would create an Inspector General for the Federal Housing Finance Agency (FHFA) that would report regularly to Congress as long as the FHFA oversees the GSEs in conservatorship. "Taxpayers deserve to know where their dollars are going, what risks they are being exposed to, and how these institutions are being managed or mismanaged," said Rep. Judy Biggert (R-IL). "Our reforms will impose some common-sense accountability on these intuitions, end the bailouts, and take immediate steps to wind down the immense risks they pose to the long-term stability of our housing market." The House Republicans are also calling to move the operations of Fannie and Freddie onto the federal budget and subject the debt issued by the GSEs to the national debt limit. Their plan would suspend compensation packages already approved for senior executives at Fannie and Freddie and would instead establish a compensation system equal to that paid to executive- and senior-level employees of the US government. The plan would also establish a regulatory framework for a US covered bond market -- an effort championed by Rep. Scott Garrett (R-NJ) with the introduction of the highly-anticipated United States Covered Bond Act. The push by House Republicans to reform the GSEs comes as efforts move forward by Senate Democrats to reform the financial regulatory system. Senator Christopher Dodd (D-CT), chairman of the Senate Banking Committee, last week unveiled details of a new bill to Congress that aims to overhaul the financial regulatory system and establish the Consumer Financial Protection Agency (CFPA). Some of the language in the 1,300+ page bill is already earning the criticism of industry professionals that say requirements for credit risk retention could make origination and securitization prohibitively expensive. The Senate Banking Committee on Monday approved the bill to move to a vote on the full Senate floor. Write to Diana Golobay. Disclosure: The author holds no relevant investment positions.

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