FHFA: GOP Bills Could Do More Harm than Good

WASHINGTON — The regulator of Fannie Mae and Freddie Mac warned Thursday that congressional proposals to clamp down on the two government-sponsored enterprises could put taxpayers at greater risk.

Edward DeMarco, acting director of the Federal Housing Finance Agency, said the legislation would make it harder for the GSEs to retain employees, have the ironic effect of causing more complaints about their size and, ultimately, bring higher costs to the government.

"I am concerned that legislation to overhaul the compensation levels and programs in place today with the application of a federal pay system to nonfederal employees carries great risk for the conservatorships and hence the taxpayer," DeMarco said at a hearing before the House Financial Services' capital markets subcommittee.

His comments came the same day the agency's Inspector General issued a report evaluating the executive compensation packages at both companies. In its report, the agency said FHFA, which authorizes such compensation packages, should perform ongoing reviews, establish criteria for reviewing performance data, and consider the level of federal support for the GSEs.

"These factors may warrant lower compensation for enterprise executives," the IG's report said. It also urged the agency to publicly disclose information about executive compensation and links to the GSEs' securities filings.

The agency agreed to most of the recommendations made by the IG.

The GOP rolled out eight bills this week designed to constrain the mortgage giants. DeMarco specifically raised issue with three of them. One measure, proposed by Financial Services Committee Chairman Spencer Bachus, R-Ala., would suspend Fannie and Freddie's current employee compensation system.

Rep. Jeb Hensarling, R-Texas, has introduced a bill to set an annual size limit on the GSEs' retained portfolios, and set tougher limits every five years. The third bill, by Rep. Scott Garrett, R-N.J., would ensure the GSEs are subject to the risk-retention requirements imposed on lending institutions under the Dodd-Frank Act.

DeMarco told the lawmakers that a new legislative timetable for Fannie and Freddie to downsize their retained portfolios was not necessary, since they are already on track to "meet or exceed" an annual 10% reduction in their retained portfolios. That reduction is required under the senior preferred stock purchase agreements drafted by the Treasury Department for the GSEs, which have been in a federal conservatorship since the fall of 2008.

"While some faster reduction of the enterprises' retained portfolios may be possible, a congressional mandate for a significantly faster reduction could cost taxpayers unnecessarily, as some of the illiquid assets may recover some or much of their lost value over time," DeMarco said.

DeMarco said the agency is still studying Garrett's legislation to enforce risk-retention requirements, but he raised questions about the bill. Under a regulation that bank regulators proposed this week, institutions would have to hold 5% of the credit risk sold to a securitization, though "qualified residential mortgages" meeting strict criteria for safe lending would be exempt.

Although the regulation would impose no new requirements on Fannie and Freddie for now, DeMarco clarified Thursday that the GSEs do not qualify for the QRM treatment. Instead, he said, they meet a risk-retention test simply because they already retain 100% of credit risk through their guarantees.

But he cited other issues with Garrett's bill. Even though critics of the two GSEs have called for them to become smaller, DeMarco said subjecting them to even tougher risk-retention requirements, requiring them to hold more credit risk, would make it that much harder for Fannie and Freddie to wind down.

"This outcome is inconsistent with the current 10%-per-year wind-down in the retained portfolios contained in the PSPAs, and other efforts to seek faster reductions in the retained portfolios," he said.

"It also is not clear how having the enterprises meet the risk-retention requirement as described above would encourage private capital to enter the market."

Meanwhile, Democrats have charged that the eight bills never deal with the larger issue of what should replace the GSEs once they are wound down.

"There are one or two controversial pieces, in the portfolio area mainly, but the key question of what do you do to replace Fannie and Freddie, which will be abolished, remains untouched," said Rep. Barney Frank, D-Mass, the full committee's ranking member.

"That tough issue, which [Republicans] were so eager to tackle last year, they are acknowledging is now harder than they were prepared to acknowledge last year."