I’d like a show of hands: who of you used Cliff Notes while wading through the classics? There’s no shame in it, come on, fess up. When faced with 900 pages of impenetrable prose, plenty of students opt for Cliff’s concise summary. The temptation to try this strategy surfaced in April when Congressman Richard Baker’s (R-La.) GSE Reform Bill was introduced. Baker played Tolstoy to Senator Chuck Hagel’s (R-Neb.) Cliff: this latest bill tops 238 pages. Hagel’s was shorter. Yet, just like relying on those little black and yellow study gems, you miss the fabric of the story, and important details by taking a short cut.We’d be doing ourselves – and our industry – a disservice not to read this legislation cover-to-cover – there’s plenty to the story, and the details matter. You may have read our earlier comments on Sen. Hagel’s bill S. 190, titled `Bright Lines or Dark Shadows: The Other Side of GSE Reform’ (CU Times, March 30) and our opinion on how its provisions impact credit unions and their members – American homebuyers and taxpayers. Now there’s H.R. 1461, the Federal Housing Finance Reform Act of 2005, legislation introduced in April by Congressman Baker and co-sponsored by Congressman Michael Oxley (R-Ohio). A third bill, rumored for introduction by Senator Richard Shelby (R-Ala.), could come at any time. =While we can’t speak to the Shelby bill, we are of – are rife with provisions that harm credit unions and our ability to help our members become homeowners. No one is certain whose bill becomes law, although it’s mostly certain that legislation will pass this year. That’s the bright side: it gets us focused once again on doing the important work: helping our neighbors achieve the American Dream. Face it, we’ve spent the last several years debating arcane accounting matters and not enough on what matters, which is putting people in homes, something in which everyone in this effort has a vested interest. A second bright spot is a stronger regulator charged with ensuring GSE safety and soundness. Much has been made in the press over the last several years about accounting practices, portfolio sizes and capital levels at both Freddie Mac and Fannie Mae. Fundamental to preserving our housing policy is ongoing assurance that the GSEs have the financial wherewithal to fulfill their mission. Yet how many people become homeowners after the legislation is passed depends on the details. Imagine a scenario where there’s abundant, affordable housing available, yet no affordable financing. Sound far-fetched in today’s low-interest, booming-housing environment? It’s not. Baker’s bill allows the regulator to establish a number of caps on GSE growth, capital and portfolio size that could result in just this situation. While all three are problematic, capping portfolio size is the oddest of measures, especially at the limits being discussed. A little background: there is approximately $5.7 trillion in mortgage debt outstanding. Fannie Mae and Freddie Mac hold approximately $1.4 trillion of it today. Federal Reserve Board Chairman Alan Greenspan suggested recently that the GSE portfolios should be in the neighborhood of $100 to $200 billion. The rest, he asserts, should be held by the market: banks, brokerages, hedge funds, insurance companies and governments, foreign and domestic. $1.2 trillion – $1.4 trillion minus a $200 billion portfolio cap – is a lot to absorb in a credit market that is tightening. Against foreign currencies, our dollar-denominated mortgage debt is becoming less attractive all the time. If the market uses its liquidity to buy existing mortgage debt, how will it issue new mortgage debt? With demand for money high, what will become of mortgage rates, and, therefore, the affordability of housing? And what becomes of housing prices? With mortgage rates high, demand will fall. As demand falls, so does price. As housing prices fall, wealth decreases. As wealth decreases the economy weakens. Get the picture? U.S. housing is the envy of the world. Homeownership rates grow year after year precisely because Freddie Mac and Fannie Mae keep mortgage-debt markets liquid. Sound like hyperbole? Harken back to 1998 and the Asian and Russian financial crises that threatened market liquidity. The GSEs kept the housing market moving. After September 11, U.S. financial markets shut down for several days. Fannie Mae and Freddie Mac kept their windows open. Cap their growth, their capital, and/or their portfolios and they won’t be able to fulfill the mission Congress previously defined for them: meeting all lender liquidity needs all the time. They also won’t be there the next time the market needs them. And there’s always a next time. The dark side of the Baker bill rears its shadowy head in another way: `Prior Approval’. Different Bill – Prior Approval appeared in Hagel, too – same issue. Look at this provision as you would the old game `Mother May I’. Before Fannie Mae or Freddie Mac may offer anything new, they would have to ask permission of the regulator and, worse yet, have their proposal run through the public comment process. Fannie Mae and Freddie Mac will both tell you that their customers are the genesis of many innovative ideas. What customer is going to share their bright ideas only to have them bandied about in public by competing lenders? Prior Approval? More like innovation immolation. Bright Lines makes an appearance in Baker as well. In `Bright Lines – Dark Shadows’ I make the point that drawing a line between primary and secondary market activities will end the direct access we as credit unions enjoy to the GSEs. That leaves us in the unfortunate position of having to use our competitors – the big banks – as our conduit to the secondary market. It also means we’ll have to follow their rules for origination and use their systems. This isn’t simply GSE Reform Legislation, it’s Operation Credit Union played out in the halls of Congress. Next time you run into your friendly neighborhood mega-banker shake their hand and thank them for the bright lines provision: it was their idea. It’s aimed at us, not the GSEs. Good legislation rights a wrong, protects a consumer, answers a public need, provides a public good. Stronger regulatory oversight belongs on this side of the ledger. Poor legislation, on the other hand, is self-serving, stymies competition, rights imagined wrongs, disadvantages consumers. Caps on GSE growth, capital and portfolio size, Mother May I and Bright Lines fall on this side of the ledger. It’s time to talk with your Senator and your Congressman. Ask them to read – and understand – the complete legislation without taking shortcuts before they vote. Help them understand the impact this legislation could have on consumers, credit unions and affordable housing. Write them or call them today.