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DeMarco criticizes Republican GSE bills

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In a subcommittee hearing Wednesday the chief regulator for Fannie Mae and Freddie Mac punched holes in the latest seven reform bills sponsored by House Republicans. After the Treasury Department released its white paper on the future of housing finance, Republicans on the House Financial Services Committee announced 15 bills regarding how to wind down Fannie and Freddie. Since conservatorship in 2008, the two companies have drawn roughly $164 billion from the Treasury. Edward DeMarco, acting director of the Federal Housing Finance Agency, addressed drafts of the latest seven introduced in mid-May, pointing out redundancies in some and the potential dangers in others. The first bill drafted by Rep. Don Manzullo (R-Ill.) would prevent the Treasury from lowering the 10% dividend payment the GSEs are required to make each quarter. DeMarco said the bill is consistent with the current conservatorship agreements, and the GSEs have been making quarterly payments at this rate. The mortgage finance giants "frequently have had to draw additional funds from Treasury in order to 'pay' the dividend to Treasury," according to DeMarco. He said fixing the rate at 10% would limit resolution options and would hurt the ability of the GSEs to build up reserves and exit conservatorship. However, when responding to questions during the hearing, DeMarco said the bill is consistent with what Fannie and Freddie are doing, and there is no plan to change the dividend. DeMarco said the GSEs still face "a significant number of hurdles" before getting out of conservatorship even if the rate is reduced. Another bill from Rep. Michael Fitzpatrick (R-Pa.) would cap any federal funds used for GSE bailouts at $200 billion plus any deficiency amounts the companies owe. DeMarco said the cap is already consistent with the conservatorship agreement. A third bill introduced by Rep. Ed Royce (R-Calif.) would abolish the Affordable Housing Trust, but DeMarco said the GSEs have not contributed to the trust since entering conservatorship in 2008, and it would be inappropriate for them to do so. Rep. Jason Chaffetz (R-Utah) sponsored one bill that would subject Fannie and Freddie to Freedom of Information Act requests. DeMarco reiterated these are still private companies working in conservatorship. The two companies, he claimed, would incur significant costs responding to such requests, including "significant litigation requests." A bill sponsored by Rep. Robert Hurt (R-Va.) would require Fannie and Freddie to dispose of all "nonmission critical assets." DeMarco asked the lawmakers for regulatory discretion to preserve and conserve the GSE's assets to the FHFA's best judgment. "Moreover, FHFA has already begun to fulfill the intent of Mr. Hurt’s draft bill regarding the sale of nonmission critical assets," DeMarco said. A bill drafted by Rep. Randy Neugebauer (R-Texas) would prohibit taxpayer dollars from funding legal fees for former Fannie and Freddie employees. DeMarco said the companies have a serious challenge attracting and retaining employees. Neugebauer's proposal would require the FHFA to establish a process for setting the standard of "reasonableness" for these fees. If an employee is subjected to these lawsuits, they could be rendered bankrupt by the escalating legal cost even if they are found innocent, DeMarco said. "Further, the proposal would have to be prospective in nature to avoid undermining the status of current employees," he said. "The language currently would cover conduct occurring before the effective date of a regulation and that would make it retrospective in nature." DeMarco plans to work with the lawmakers on the ongoing drafts and help them move toward a final resolution. "I also recognize the critical and contemporaneous need to provide market participants with greater clarity and assurance about the ultimate role of the government in housing finance beyond the issues surrounding the enterprises," DeMarco said. Write to Jon Prior. Follow him on Twitter @JonAPrior.

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