Treasury Secretary: Create Federal Agency to Regulate, Supervise GSEs
WASHINGTON - After postponing his testimony before the House Financial Services Committee originally scheduled for Sept. 4, Secretary of the Treasury John Snow testified on Sept. 10 and recommended what he was expected to suggest: that Congress enact legislation to create a new Federal Agency as a bureau of the...
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WASHINGTON – After postponing his testimony before the House Financial Services Committee originally scheduled for Sept. 4, Secretary of the Treasury John Snow testified on Sept. 10 and recommended what he was expected to suggest: that Congress enact legislation to create a new Federal Agency as a bureau of the Treasury to supervise and regulate government sponsored enterprises (GSEs). GSEs Freddie Mac and Fannie Mae are currently regulated by the Office of Federal Housing Enterprise Oversight. The OFHEO has been under scrutiny since June when Freddie Mac, in a series of moves triggered by the company’s announced restatement earlier in the year of three-years’ worth of financial results and questions concerning the circumstances surrounding accounting errors, fired its president and chief operating officers and made other leadership changes as well. (CU Times, June 18) In July, the Senate Banking Committee held a hearing on the regulatory oversight of the GSEs, and in August, Sen. Chuck Hagel (R-Neb.) introduced legislation – the Federal Enterprise Regulatory Reform Act of 2003 – to regulate GSEs. In one of the last developments, House Financial Services Committee Chairman Michael Oxley (R-Ohio) announced Sept. 11 that the committee intended to hold a hearing the week of Sept. 15 on a bill, H.R. 2575 – the Secondary Mortgage Market Enterprises Regulatory Improvement Act – introduced by Capital Markets Subcommittee Chairman Richard Baker (R-La.) to strengthen regulation of Fannie Mae and Freddie Mac. “There is a general recognition that the supervisory system for housing-related government sponsored enterprises (GSEs) neither has the tools, nor the stature, to deal effectively with the current size, complexity, and importance of these enterprises. As we attempt to remedy this situation, we must be mindful that we have two core objectives that should guide us: a sound and resilient financial system, and increased homeownership opportunities for less advantaged Americans,” said Snow. “.Housing finance is so important to our national economy that we need a strong, world-class regulatory agency to oversee the prudential operations of the GSEs and the safety and soundness of their financial activities consistent with maintaining healthy national markets for housing finance,” he continued. Snow laid out what he said the new agency’s powers should be: *”possess operational independence and adequate resources, including provisions for ongoing supervision, and powers to address compliance with laws as well as safety and soundness concerns”; *”have authority for and supervisory practices that consist of some form of both on-site and off-site supervision”; *”have the authority to review and reject any proposals to transfer significant ownership or controlling interests to other parties”; *”have the authority to establish and enforce the criteria for acquisitions, new lines of business, or investments by the GSE and for ensuring that corporate affiliations or structures do not expose the GSE to undue risks or hinder effective supervision”; *”have the authority to decide which prudential requirements will be applied on an enterprise-only basis, which ones will be applied on a consolidated basis, and which ones will be applied on both bases”; * “have the authority to ensure that the GSE has in place systems that accurately measure, monitor and control market risks, and have the powers to impose specific limits or a specific capital charge on market risk exposures, if warranted”; *”have at its disposal adequate supervisory measures to bring about timely corrective action when a GSE fails to meet prudential requirements, including when there are regulatory violations”; *have independent litigation authority and related powers; *”set prudent and appropriate minimum capital adequacy requirements for the GSE.” The regulator, said Snow, should also have the authority with regard to capital for the GSE. He emphasized, though, that he was not proposing a moratorium on making any adjustments to risk-based capital. “The existing statutes place a clear responsibility on GSE supervisors to ensure that each GSE retains adequate capital to support its risks and they give supervisors the power and duty to require capital changes as risks change. We expect the supervisors to make full and proper use of that authority as need arises,” said Snow. But, he added, the new agency should have more flexible authority to adjust risk-based capital standards for GSEs than what’s currently provided in the law. U.S. Department of Housing and Urban Development (HUD) Secretary Mel Martinez, also testifying Sept. 10, echoed Snow’s comments, saying that “Congress and the Administration have an opportunity and an obligation to strengthen the regulatory structure of the GSEs.We must ensure that, through the GSEs, financing is available for low- and moderate-income families. And we must ensure that the GSEs are subject to rigorous oversight, so that they are serving their public purpose.” Martinez pointed out in his testimony that while OFHEO is part of HUD, Congress mandated that OFHEO’s safety and soundness-related decisions must be made independently of HUD. Martinez recommended that the “core element” of the GSE’s charter, the housing goals, be retained at HUD. “HUD is the appropriate agency to develop and enforce the housing goals,” he said. “Institutionally, our mission is devoted to furthering the goal of affordable housing and homeownership, and HUD has the most expertise in this area,” he said. Among Martinez’s additional recommendations, he suggested the Administration consider forming a new GSE Housing office within HUD, independently funded by the GSEs, to establish, maintain and enforce and housing goals, and to grant HUD new administrative authority to enforce its housing goals. -
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