Government-Sponsored Enterprises (GSEs): Regulatory Reform Legislation

Publication Date: October 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance; Social conditions

Type:

Abstract:

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), chartered by Congress to establish a secondary mortgage market to improve the availability of capital for home mortgage financing. To help these privately-owned institutions accomplish this mission, Congress granted them several statutory benefits not available to other private companies. The advantages of GSE status have helped the enterprises to grow very large and dominate the secondary mortgage market.

In 1992, Congress established the Office of Federal Housing Enterprise Oversight (OFHEO), an agency within the Department of Housing and Urban Development (HUD), to oversee the financial safety and soundness of the enterprises. OFHEO is authorized to set capital requirements, conduct annual risk-based examinations, and generally enforce compliance with safety and soundness standards.

With the rapid growth of the GSEs, and major accounting scandals at Fannie Mae and Freddie Mac, the effectiveness of the current regulatory regime has been widely questioned. Several legislative proposals considered in the 108th and earlier Congresses addressed GSE regulatory reform, but none was enacted. However, adequacy of GSE regulation remains a prominent legislative issue.

While improving supervision of Fannie Mae and Freddie Mac is the major focus, regulatory reform also involves the 12 Federal Home Loan Banks, which comprise one collective GSE. The Federal Home Loan Banks lend to lenders -- their member banks -- primarily for housing, but also for many other purposes. Under the proposed GSE reform, they would be brought under a single regulatory umbrella with Fannie and Freddie.

In the 109th Congress, H.R. 1461 and S. 190 propose to restructure the GSE supervisor and enhance its regulatory powers. H.R. 1461 was marked up and reported by the Financial Services Committee on May 25, 2005, and passed the full House, with amendments, on October 26, 2005. Chairman Shelby put forward an amendment in the nature of a substitute for S. 190, which was marked up and approved by the Banking Committee on July 28, 2005.

Common provisions of S. 190 and H.R. 1461 would abolish OFHEO and establish an independent agency to oversee the housing GSEs and the Federal Home Loan Banks; enhance the safety and soundness, disclosure, and enforcement tools available to the new regulator; and increase the budget autonomy of the new agency by exempting its assessments from the annual appropriations process. S. 190 as reported takes the further step of limiting the type of assets that Fannie and Freddie could hold in their investment portfolios.

This report summarizes legislative proposals in the 109th Congress that aim to strengthen the regulation of the GSEs, and will be updated as warranted.