Financial Update (Third Quarter 2004)



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Proposals to Reform Oversight of Housing GSEs

In the wake of a $5 billion accounting restatement by Freddie Mac in 2003, various legislative proposals have been put forward to reorganize the regulatory oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System. These proposals have been prompted by concerns about taxpayer liability associated with these housing government-sponsored enterprises (GSEs).

The potential liability stems from the federal guarantee implicit in the housing GSEs' charter benefits and past supervisory forbearance. This guarantee—which gives rise to many of the benefits the GSEs transmit to homebuyers—represents a risk to taxpayers if one of the GSEs becomes insolvent and the government provides financial assistance.

Related
Economic Review article (Second Quarter 2004)
Senate Committee on Banking, Housing, and Urban Affairs
Office of Federal Housing Enterprise Oversight
Fannie Mae
Freddie Mac

In a recent Economic Review article, Scott Frame and Lawrence White discuss the proposals for regulatory reform of the housing GSEs. The authors draw on lessons from U.S. banking regulation to identify and evaluate the points of contention.

The legislative proposals generally pertain to institutional design and institutional authorities. Institutional design issues deal with where the safety-and-soundness regulator is located, how it is funded, and whom it should supervise. Institutional authorities center on issues such as the discretion to alter capital requirements and the ability to appoint conservators and receivers.

With respect to institutional design, the authors conclude that there may not be a clearly dominant approach. In regard to institutional authorities, the authors recommend that the safety-and-soundness regulator have (1) responsibility for approving new programs and other activities, (2) the discretion to set both minimum and risk-based capital requirements, (3) receivership authority, and (4) other enforcement authorities comparable to the federal banking agencies.

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