Federal Financial Institutions Examination Council.

TOO little too late!

The House Financial Services Committee today passed H.R. 1427, the Federal Housing Finance Reform Act of 2007. The bill will overhaul the regulatory oversight of the government sponsored enterprises (GSE) of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and create a new, independent regulator with broad powers analogous to current banking regulators.


Press Release

For Immediate Release: March 29, 2007


Financial Services Committee Passes GSE Reform Bill


Washington, DC - The House Financial Services Committee today passed H.R. 1427, the Federal Housing Finance Reform Act of 2007. The bill will overhaul the regulatory oversight of the government sponsored enterprises (GSE) of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and create a new, independent regulator with broad powers analogous to current banking regulators. In addition, the bill creates an off budget and non-taxpayer financed affordable housing fund, which will dedicate hundreds of millions of dollars for the construction, maintenance and preservation of affordable housing with the first year of the fund to be dedicated to the hurricane stricken areas of the Gulf Coast, and billions of dollars over the next five years for affordable housing nationwide. The bill, as amended, passed on a bipartisan majority of 45 to 19.

The Federal Housing Finance Reform Act of 2007 is the product of both bipartisan legislation in the 109th Congress and careful discussions and compromise with the Department of Treasury. The bill also comes after a series of legislative hearings on GSE reforms and proposals, where regulators and expert witnesses testified before both the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, and the full Financial Services Committee.

In addition, the Committee adopted amendments concerning the composition of the boards of the enterprises and of the FHLB’s, use of the Affordable Housing Fund and the Affordable Housing Goals, provisions to promote diversity at the agency and at the regulated entities, and clarifying authorities of the agency in determining capital and supervising the operations of the regulated entities.

The “Federal Housing Finance Reform Act of 2007” Summary



Title I – Reform of regulation of enterprises and Federal Home Loan Banks



Subtitle A – Improvement of Safety and Soundness



· Establishes the Federal Housing Finance Agency (FHFA), as an independent agency, to regulate Fannie Mae, Freddie Mac, and Federal Home Loan Banks (the regulated entities). FHFA succeeds to the current authority of the Office of Federal Housing Enterprise Oversight (OFHEO) and Federal Housing Finance Board (FHFB).

· FHFA is headed by a Director, appointed by the President and confirmed by the Senate for a 5-year term. There are Deputy Directors for Divisions of Enterprise Regulation, Federal Home Loan Bank Regulation, and Housing.

· A Federal Housing Enterprise Board advises the Agency on overall strategies and policies, but has no executive authority. The Board comprises of the Secretaries of the Treasury and Housing and Urban Development, two presidential appointees, and the Director as Chairperson.

· The agency annually assesses the regulated entities for FHFA’s reasonable costs and expenses; Congressional appropriations approval is not required.

· The agency issues and enforces prudential management and operations standards for the regulated entities, including credit, interest rate, and market risks; internal controls, including information security and privacy, liquidity, and investments.

· The agency may require a regulated entity to withhold compensation from an executive officer during a review of the reasonableness and comparability of compensation, and may take into consideration any wrongdoing by the officer.

· The agency is given discretion to adjust risk-based capital requirements for the regulated entities to ensure that they operate in a safe and sound manner and maintain sufficient capital and reserves to support the risks of their operations.

· The agency may increase the minimum capital levels for the regulated entities through regulation or, if there is a serious safety and soundness concern, temporarily through an order. The agency may also establish capital or reserve requirements with respect to particular programs or activities as the agency considers appropriate. The agency will periodically review the capital maintained by the regulated entities.

· The agency establishes standards by which portfolio holdings and growth of the portfolio will be deemed consistent with mission and safety and soundness.

In developing the standards, the agency considers factors relating to the size of market, liquidity, mission, risk, and other factors necessary to determine whether portfolio holdings are consistent with the mission of the enterprise as well as safe and sound operations of the enterprises. The agency reviews the assets and obligations of each enterprise and may require an enterprise to dispose of or acquire any asset or obligation for safety and soundness or mission-related reasons.


· The legislation establishes corporate governance requirements for the composition, operation, and compensation of the board of directors. The enterprises are required to comply with several provisions of the Sarbanes-Oxley Act regardless of their registration status with the SEC.

· The regulated entities are required to register at least one class of capital stock with the Securities and Exchange Commission.

The enterprises will disclose in reports filed with the SEC the amount of income they report to the IRS.


· The agency will participate as a liaison to the Federal Financial Institutions Examination Council.
· The agency, in consultation with federal banking regulators must report to Congress on guarantee fees and analogous practices.

Each regulated entity will establish an Office of Minority and Women Inclusion to implement standards for inclusion of minorities and women in all business, activities, and contracts of the regulated entities.




Subtitle B – Improvement of Mission Supervision



· Program and housing goal oversight for Fannie Mae and Freddie Mac (“enterprises”) is transferred from the Department of Housing and Development (HUD) to the new regulator.

· The agency has the authority to approve new products. An enterprise may not offer a new product before obtaining the agency’s approval. The agency must act on a request within 30 days after providing a 30 day notice and comment period. A product may only be approved if it is authorized by law, in the public interest, consistent with safety and soundness of the enterprise and the mortgage finance system, and does not materially impair the efficiency of the mortgage finance system. An enterprise must provide the agency prior notice of new activities that are not new products. This does not restrict the Director’s general authority over all programs, activities, and products.

· The legislation sets the conforming loan limits and requires the agency to adjust the conforming loan limit according to the annual housing price index maintained by the agency. An additional high-cost area limit is established for areas where the median home price exceeds the general conforming loan limit, up to the lower of 150 per cent of the conforming loan limit or the median cost in that area. Loans in high cost areas above the general conforming loan limit must be securitized. The regulator will conduct a study of whether the securitization requirement raises the cost to borrowers of high-cost area loans, and may terminate the requirement if it is found to raise costs.

· The agency establishes affordable housing goals and an annual home purchase goal for the enterprises. The agency may take enforcement action against an enterprise for failure to meet the housing goals.

· The bill creates an “Affordable Housing Fund,” to be managed by the new GSE regulator. Funds are derived through contributions by Fannie Mae and Freddie Mac in amounts equal to 1.2 basis points on each GSE’s total outstanding mortgages (including both those held in portfolio and those securitized) each year from 2007 through 2011. 75% of these funds are used for affordable housing fund purposes, and 25% are allocated to the federal government, to keep the bill deficit neutral.

· In 2007, 75% of the funds go to Louisiana and 25% of the funds go to Mississippi for affordable housing needs arising out of Hurricanes Katrina and Rita. Thereafter, funds are allocated by formula to the states (including also D.C., federal territories, and federally recognized tribes). 100% of funds must be used for the benefit of very low and extremely low income families. Funds may be used for rental housing, homeownership and public infrastructure activities in conjunction with housing. The Fund includes a number of provisions to ensure that the funds are used for housing and are not misused or used for other purposes, including a strict prohibition against any funds being used for grantee administrative costs or expenses, political activities, advocacy, lobbying, counseling, travel expense, or preparation or advice on tax returns.



Subtitle C – Prompt Corrective Action



· The legislation establishes capital classifications for the regulated entities and supervisory actions applicable to these classifications, including appointment of the agency as conservator or receiver to reorganize, rehabilitate, or wind up its business. If a regulated entity becomes critically undercapitalized, the agency must be appointed as receiver if the agency determines that the debts of the entity have exceed its assets for 30 days or the entity has not been paying its debts as they became due for 30 days. A receiver may not revoke an enterprise’s charter.



Subtitle D – Enforcement Actions



· The agency may issue cease and desist orders, remove officers, directors, and affiliated parties, and impose civil money and criminal penalties.

· The agency is empowered to issue civil money penalties and has the authority to remove management.



Subtitle E – General Provisions



· The size of the Fannie Mae and Freddie Mac boards are reduced from 18 members to thirteen or such other number as the agency determines. Presidential appointees on the boards of Fannie Mae and Freddie Mac are eliminated.

· The agency is required to conduct studies on the portfolio operations of the enterprises and on alternative secondary market systems



Title II – Federal Home Loan Banks



· Federal Home Loan Bank boards of directors are decreased in size from 14 to 13 members. The cap on director compensation is lifted and the terms of directors are extended from 3 years to 4. The grandfather clause concerning numbers of member directors from each state is preserved.

· The FHLBs are authorized to establish joint offices to perform functions on a collective basis. Joint offices, including the Office of Finance, are subject to the authority of the agency.

· The Federal Home Loan Banks are exempt from some of the disclosures required under the Securities Exchange Act of 1934.

· One or more FHLBs are permitted to merge with the approval of the boards of the FHLBs and the FHFA.

The agency, in appointing independent directors to the boards of the FHLBs, will consider the demographic makeup of the communities most served by the AHPs of the FHLBs for whom directors are being appointed.


· Government-insured depository institutions with assets less than $1 billion (currently $500 million) may use Federal Home Loan Bank advances for lending to community development activities (currently small business and agricultural purposes only) and use such secured loans as collateral for advances generally.



Title III – Transfer of functions, personnel, and property of OFHEO and Federal Housing Finance Board



Subtitle A – Office of Federal Housing Enterprise Oversight



· OFHEO is abolished six months after enactment, through an orderly transfer of functions to FHFA. OFHEO regulations and orders remain in effect and are enforceable, until determined otherwise; employees are transferred with temporary protections.



Subtitle B – Federal Housing Finance Oversight Board



· FHFB is abolished six months after enactment, through an orderly transfer of functions to FHFA. FHFB regulations and orders remain in effect and are enforceable, until determined otherwise; employees are transferred with temporary protections.



Subtitle C – Department of Housing and Urban Development



· “Enterprise-related” employees and functions of HUD are transferred to FHFA six months after enactment. HUD regulations and orders concerning the enterprises remain in effect and are enforceable, until determined otherwise; employees are transferred with temporary protections.





Detailed Summary of the Affordable Housing Fund:



The bill creates an “Affordable Housing Fund,” to be managed by the new GSE regulator [the “Director”]. Funds are derived through contributions by Fannie Mae and Freddie Mac in amounts equal to 1.2 basis points on each GSE’s total outstanding mortgages (including both those held in portfolio and those securitized) each year from 2007 through 2011. The program sunsets after five years. 75% of these funds are used for affordable housing fund purposes, and 25% are allocated to the federal government, to keep the bill deficit neutral.


75% of the affordable housing funds available in the first year will go to Louisiana and 25% of such funds will go to Mississippi for affordable housing needs arising out of the Gulf Coast hurricanes. Thereafter, funds are allocated by formula to the states (including also D.C., federal territories, and federally recognized tribes). This formula is to be developed by HUD, and is to be based on a number of factors, including population, housing affordability, percentage of very and extremely low income families, cost of rehab, and extent of substandard and aging housing. If HUD fails to establish this formula on time, funds are distributed to states based on HOME allocations to states and Participation Jurisdictions.


100% of funds must be used for the benefit of very low and extremely low income families. Funds may be used for rental housing, homeownership [at least 10% of funds must be used by each state for this purpose], and public infrastructure activities in conjunction with housing [no more than 12.5% of funds in any state].


Affordable housing grants are to be made to eligible recipients, which can be any “organization, agency, or other entity (including a for-profit entity, a nonprofit entity, a federally recognized tribe, an Alaskan Native Village, or a faith-based organization)” that has a demonstrated experience and capacity to carry out the proposed fund use. Grantee funds may only be used for affordable uses and not for administrative costs.


Each state allocates funds under its own Allocation Plan, to be based on priority housing needs in each state, and on criteria that include greatest impact, geographic diversity, ability to obligate funds in a timely manner, and the extent to which rental housing projects are affordable, especially for extremely low income families. Funds are redistributed from any state that does not obligate funds within 2 years.


The Fund includes a number of provisions to ensure that the funds are used for housing and are not misused or used for other purposes, including:
(a) a strict prohibition against any funds being used for grantee administrative costs or expenses, political activities, advocacy, lobbying, counseling, travel expense, or preparation or advice on tax returns,

(b) limits set by the Director on how much States can spend on administrative costs,

(c) a requirement by the Director to establish program regulations, authority for the Director to audit each state’s compliance, a requirement that each state develop systems to ensure program compliance, and required annual state fund use reports,

(d) authority of the Director to impose penalties on states that do not comply with requirements, including requiring states and grantees to reimburse misused funds.