Sarbanes Blames ‘Ideologues’ for Impasse Over GSE Reform Legislation - 5/10/2004 - Attorney Lawyer Legal Building Codes Zoning

Sarbanes Blames ‘Ideologues’ for Impasse Over GSE Reform Legislation

“Some have argued that we’ve put too much of our resources in housing,” Sarbanes said. “They think housing is getting a break because these institutions are receiving a boost. They want to privatize the GSEs and remove the ‘G’ and ‘S’ from the equation and just make them enterprises.”

“Congress has deemed housing a national priority,” he added. “Homeownership makes a tremendous difference in improving a neighborhood. It strengthens communities and builds pride in communities. It is a real source of wealth building for ordinary people and gives them a degree of economic stability and security.”

Last month, the Senate Banking Committee narrowly approved S. 1508, legislation put forth by committee chairman Richard Shelby (R-AL) to restructure the regulatory framework of the GSEs.

The bill was opposed by NAHB because it is bad legislation for the nation’s home buyers and represents a retreat from the national policies that have expanded housing opportunities over the past several decades. Because the bill passed largely along partisan lines and is opposed by the Administration, most congressional observers believe it has little chance of moving forward this year.

As ranking member of the Senate Banking Committee, Sarbanes had offered an alternative amendment that would have sufficiently addressed the nation’s housing concerns at the same time as it assured the soundness and safety of the housing GSEs; but it was voted down, also largely along party lines.

“There is no argument from anybody on the need to improve the regulatory framework of the GSEs,” Sarbanes said. “We are open to improving their safety and soundness. In the course of doing so, we are very concerned that we don’t give up or severely curtail their housing mission.”

He outlined concerns over S. 1508 provisions on structure and governance, minimum capital requirements and receivership provisions.

The legislation provides for a single regulator for all three GSEs, structured to allow an independent director to make all major decisions with input from a non-voting advisory board.

“We need to structure the regulator in such a way so that more housing people are involved in the decision-making process rather than a single regulator. If you get the wrong person, you are in trouble,” said Sarbanes.

The measure also provides the regulator with overly broad authority to adjust the minimum capital standards of Fannie Mae and Freddie Mac, which would have the effect of taking capital out of housing and dampening innovations in the residential finance market.

“We were willing to raise these requirements for safety and soundness reasons, but we don’t want to run the risk that some regulator can choke these enterprises or squeeze them to death for other reasons,” he said.

Sarbanes described the critical issue of receivership as “very difficult,” noting that there is no need to grant a regulator such authority as long as the safety and soundness issues are properly addressed.

“My perception is this was driven by ideology as a way to move the GSEs along the path to privatization. Why take those risks if you can come along with an approach that significantly enhances their safety and soundness? I can give what I view as a consensus bill that would offer strong support except for the ideologues who want to take capital away from housing.”

While the bill’s receivership provisions were watered down in committee to grant the regulator authority to liquidate a GSE unless Congress passes a joint resolution opposing such a move, NAHB has said that these stipulations would nevertheless open the door to the complete privatization of Fannie Mae and Freddie Mac and make investment in these institutions less attractive, resulting in higher mortgage interest rates.

The Administration, however, ultimately opposed the bill because in its view the receivership provisions were not strong enough.

“This is a rigid ideological view from the Administration. We have to be very cautious and careful to change the system. The GSEs have created the most effective and liquid housing mortgage finance system in the world. It’s not by chance that more than two-thirds of our citizens own their own homes. We must protect the ability of Fannie Mae and Freddie Mac to carry forth their mission of serving low-income and middle-income families,” Sarbanes said.

In assessing the negative short-term outlook for S. 1508, Sarbanes said, “For the moment, we’ve avoided placing the housing finance system in serious jeopardy.”

Briefly touching on two other housing issues, Sarbanes expressed support for the Sec. 8 voucher program and thanked NAHB for its support of the HOPE VI program, a unique initiative that has contributed to the revitalization of some of the most difficult public housing neighborhoods in the country. The Administration is proposing to eliminate this program in its FY 2005 budget.

To read the legislation, click here, and enter S. 1508 in the box at the upper left.

Photo by Herman Farrer