WASHINGTON – Just how much of an impact – if any – thetightening of the regulation of housing Government SponsoredEnterprises Freddie Mac and Fannie Mae will have on credit unions'mortgage lending activities is still being debated. Credit unionsare following development closely even though the outcome of theinitiative is not a sure thing. Eric Richard, CUNA's generalcounsel stressed that the transfer of regulation of housing GSEsfrom the Office of Federal Housing Enterprise Oversight (OFHEO) tothe Treasury “is not necessarily a done deal. It's relatively latein the congressional session, and especially in the Senate younever know what's going to pass in the final week of the session.”However, Richard added, “Both the Administration and the GSEs atthis point are passively supporting a move of the regulation toTreasury, so legislation has a good shot when Congress decides totake up the bill. It has a pretty good chance of passing.” If thathappens, says Richard, “it will not necessarily be a bad thing forcredit unions. It will depend on what Treasury does.” He addedthat, “Treasury is a good choke point for a lot of our enemies,”and cited, by example, Treasurys success with getting NCUA to cutback some liberalization it was considering putting in to effect onmember business lending. In addition, Richard said the deputysecretary of the Treasury opposed changes NCUA wanted to make toPrompt Corrective Action (PCA). Even before the BushAdministration, Richard said Treasury was “the inventor” of PCA forcredit unions and statutory capital standards for CUs. In addition,the federal agency has had “limited views” on what CUs' power ofauthority should be and what changes should be made regardingcredit union regulation. Richard worked for eight years at FreddieMac as their legislative and regulatory counsel before coming toCUNA, and while he worked there he helped craft the statute that'scurrently being criticized. The current pressure to move theregulation of the GSEs over to Treasury “is not new,” he said.“When I worked at Freddie Mac, the goal of the GSEs was to have aslittle regulation as possible. They didn't have any known safetyand soundness problems. Their focus was on carrying out theirCongressional mission to help provide homeownership to Americans,so they saw no need for a lot of regulations. So there was a lot ofcontention concerning the regulation of the GSEs even back then,”he said. As for the Treasury, Richard said the federal agency “hasnever been a fan of GSEs”, and there's an understandable reason forthat, he said. “Treasury's job is to protect the Federal purse, andthey perceive GSEs as being a potential threat to that purse,” hesaid. “If Congress moves the regulation of the GSEs to Treasury, itwill increase the tension between GSEs' fulfillment of theirmission under HUD and Treasury's concern to protect the safety andsoundness. The trick will be striking the right balance between thetwo.” Still, said Richard, “it's hard to have a regulator thatdoesn't believe in you.” Richard offered that “there will always bea lot of people who think the government should not be involvedwith housing, but the federal government has been involved inhousing from top to bottom for years.”He further offered that, “thepeople who are pushing for the tightened regulation of the GSEs arethe people who would like to have the secondary mortgage businessthe GSEs have. These businesses can't compete with the GSEs nowbecause Freddie and Fannie have government backing. “The GSEs'potential competitors would like to take over the secondary market.They're exploiting the current situation,” said Richard. At presstime, House Financial Services Committee Chairman Michael Oxley(R-Ohio) had released the witness list for the hearing scheduledfor Sept. 25 on H.R. 2575, the Secondary Mortgage MarketEnterprises Regulatory Improvement Act and legislative proposalsmade to the Committee on Sept. 10 by Treasury Secretary John Snowand Housing and Urban Development Secretary Mel Martinez (CU Times,Sept. 24). At that hearing Martinez recommended that the “coreelement” of the GSE's charter, the housing goals, be retained atHUD, the same as they are now. Among the witnesses who are expectedto testify at the Sept 25th hearing were: Armando Falcon Jr.,director, OFHEO; John Korsmo, chairman, Federal Housing FinanceBoard; George Gould, director, Freddie Mac; and Franklin Raines,chief executive officer, Fannie. Nine additional witnesses werescheduled to testify at the hearing. In his Sept. 10th testimony tothe Committee, Snow proposed that the Treasury have authority to“set prudent and appropriate minimum capital adequacy requirementsfor the GSE.” If that happens, Richard said he questions whetherTreasury would set “fair” capital requirements. “If they're toohigh, then the added cost of doing business would affect the GSEs'ability to offer mortgages at low rates,” said Richard. Snow alsorecommended the Treasury have the authority to approve any newproducts from the GSE. Richard is concerned that if that happens,it could create opportunities for banks to restrict the GSEs'product offerings to credit unions. At a time when credit unionsholding a large amount of their mortgage portfolio in fixed ratemortgages are being encouraged to sell some of their mortgages onthe secondary market, any lessening of the GSEs' ability to offerlow rate mortgages could make it more difficult for credit unionsto sell their products on the secondary market. That's why DonCharron, senior vice president of lending for Suncoast Schools FCU,Tampa, Fla. has been following the developments. Suncoast has $1.2billion in its mortgage portfolio. It sells all of its 30-yearfixed rate mortgages to Fannie Mae. Charron said Suncoast Schoolshas a designated percentage of fixed rate mortgages it keeps in itsportfolio. If the percentage goes above that designated point, the$3.8 billion credit union would sell some of its 15-year fixed ratemortgages. “If anything happened that would make it harder for usto sell on the secondary market, that would be a big problem forus,” said Charron. “It's part of risk management to sell-off partof our portfolio when we determine it's necessary.” KeithSultemeier, CFO, Security Service FCU, San Antonio, Texas isconcerned that any added cost of doing business with the GSEs willwind up being passed on to consumers and make mortgages moreexpensive for them. “Everyone will be forced to deal with tighterregulations,” he said, “and someone will have to pay for that. Theincreased cost will end up being added to the cost of the equationfor consumers.” Sultemeier admits he's a firm believer in `lessgovernment is good government.' “The more players there are in thepie, the more inefficient it can be,” he said. SSFCU has a $300million mortgage loan portfolio. It currently sells on thesecondary market through private investors, but it plans to beginselling directly to the GSEs by yearend `”because it's cheaper,” hesaid. “The oversight of the GSEs needs to be tightened, and OFHEOshould be subject to a higher level of oversight. But I'm not surea government agency with a team of examiners like the Treasury isthe way to go,” said Sultemeier. NAFCU meanwhile is less concernedany increase in the regulation of Freddie Mac and Fannie Mae willhave “any impact at this point” on credit unions' mortgage lendingactivities, said the trade association's Communications ManagerJohn Zimmerman. “Hopefully whatever comes out of Congress willimprove the safety and soundness of the GSEs,” he said. –[email protected]