WASHINGTON – The sides were clearly discernable at the hearing called by Rep. Richard Baker (R-La.), chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises in the wake of Freddie Mac's accounting irregularities and management shakeup, to decide whether and how to tighten the regulatory structure of government sponsored enterprises Freddie Mac and Fannie Mae. On one side were legislators and others who testified that tighter regulation would result in diminished mortgage funds for low-income and minority-home buyers. On the other side were those who argued that bank-like regulatory requirements for Freddie and Fannie will ultimately result in lower home mortgage costs. Baker set the tone for the hearing in his opening statement at "GSE Oversight: The Need for Reform and Modernization" when, in referencing Freddie Mac's twice restated income announcement from $1 or $3 billion to $4 billion, he said that "this revelation underscores the importance of what has been previously observed by many – that current regulatory oversight is not adequate." Baker introduced a bill, H.R. 2575, on June 24 that would shift regulatory oversight of the GSEs from the Office of Federal Housing Enterprise Oversight to the U.S. Treasury department. His measure, he said, has three goals – to insure an independent regulator of the GSEs; to insure there is reasonable funding for the supervision, and to provide the regulator with the same tools other financial regulators use. "There should be no controversy over this legislation at all, in light of the revelations over accounting irregularity," said Baker. Congressman Ed Royce (R-Calif.) echoed Baker, saying that the OFHEO should be "folded in to a new agency under the umbrella of the Treasury Department", and he added the Federal Housing Finance Board, which regulates the Federal Home Loan Bank System in to the mix. "In my view, such a regulatory institution will have better direction through its association with the Treasury and its sister regulators the OCC and the OTS. The new regulator will also have the ability to achieve `best practices' of regulation because it will have a broader scope than either OFHEO or the FHFB has today, and it will be focused on protecting the taxpaper from like types of systemic risk," Baker stated at the hearing. Rep. Paul Gillmor (R-Ohio) pointed the finger of blame at OFHEO for the situation Freddie Mac found itself it. "Clearly, OFHEO was not doing its job," he said. Gillmor is one of the original co-sponsors of Baker's measure. He announced at the hearing that he intends to offer an amendment to the legislation that would repeal the GSEs' special exemption from the Securities Act of 1933 and the Securities Exchange Act of 1934. "The result will be a bill that provides for a strong safety and soundness regulator and equally strong securities disclosure," said the Ohio congressman. Rep. Paul Kanjorski (D-Pa.), the ranking Democratic member of the subcommittee suggested the subcommittee pursue a "three-prong supervisory approach" that includes regular congressional oversight of the GSEs, sustained effective government regulation over then, and increased market discipline for Freddie and Fannie. But it was Subcommittee Member Rep. William Lacy Clay (D-Mo.) who voiced his support of Fannie Mae and Freddie Mac and cautioned the subcommittee not to throw the baby out with the bath water. He reminded the subcommittee that "Fannie Mae and Freddie Mac are a big part of the solution to our housing problems. Also they are taking leadership in the attack on predatory lending." In addition, Freddie Mac leads the market with lending to African-American and Hispanic families. "[Freddie Mac and Fannie Mae] have done their jobs well and exceeded all expectations. Today, they are the dominant institutions in the secondary mortgage market," said Clay. He also took exceptions to lumping Fannie Mae with Freddie Mac. "Fannie Mae did not commit any violations or have mismanagement gaffes. Freddie Mac did. Fannie Mae has already been maligned as if it were a partner in this situation. Punish Fannie Mae if and when it does something improper.," he said. ".Congress must not hamstring the affordable housing mission of these GSEs with unnecessary regulatory burdens," Clay concluded. Testifying at the hearing, Karen Shaw Petrou, a managing partner with Federal Financial Analytics took the position that tighter regulation of Freddie Mac and Fannie Mae would not negatively impact homeownership. She recommended Fannie Mae and Freddie Mac adopt the same standards as U.S. banks. By doing that, she said, it would strengthen the GSEs and improve their ability to promote homeownership while reducing their funding costs. She argued that "the standards used to regulate banks haven't impeded their ability to promote homeownership and that their capacity to originate mortgages is just as important as the GSEs' ability to purchase them." Meanwhile, Rep. Cliff Stearns (R-Fla.), chairman. Commerce, Trade & Consumer Protection Subcommittee announced the committee plans to hold its own hearing of Freddie Mac's accounting restatement in July. -

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