The story on reforming GSEs, from an optimist on the inside

When James B. Lockhart III took the helm of the Office of Federal Housing Enterprise Oversight (OFHEO) last April, Fannie Mae and Freddie Mac were reeling from accounting scandals. The Bush administration had dispatched the former deputy commissioner of Social Security to work with Congress to create a stronger regulator for the two mortgage behemoths, known as the GSEs, as well as the 12 Federal Home Loan Banks.

Last year, the Bush administration and House lawmakers disagreed over the essentials of the legislation. But thanks to a deal struck between House Financial Services Chairman Barney Frank (D-Mass.) and the Treasury in December, Lockhart is hopeful that GSE reform will be passed into law this year.

ADVERTISEMENT
Q: OFHEO’s annual report to Congress last month described persistent problems with Fannie’s and Freddie’s financial controls, and risk management, despite a severalmonths-long effort to put their houses in order. What’s preventing them from making faster progress on these problems?


A: It is a good question. They are spending billions of dollars to fix them, and they almost have as many consultants now as employees. I think the genesis of the problem is they were so mismanaged and they under-spent in systems and internal controls for many years, and it’s just taking a long time and in many cases they’re almost starting from scratch in some of their systems.

Q: How do you feel about Congress’s progress on GSE reform?

A: Nothing goes as quickly as I would like in Washington. This is my third job here, and in every one of them I had to work on creating legislation. But I think we are making good progress. Chairman Frank’s bill that was just passed out of committee is a very balanced and strong bill and a good improvement over the last House bill.

Q: Will the meltdown in the sub-prime mortgage market affect the momentum for legislation?


A: It shouldn’t. It’s again an example of why these companies should be remediated, why they should have a strong regulator, so they can react better to these kinds of crises.

Q: What do you think of Fannie’s and Freddie’s recent announcement that they’ll buy up billions in sub-prime mortgages to help keep troubled borrowers in their homes?

A: We certainly believe that they have a role to play. And certainly trying to refinance people out of more risky mortgages into safer mortgages is the kind of role Fannie and Freddie should play. Our concern as the safety and soundness regulator, and given their operational problems, is that they do it in a safe and sound manner.

Q: Sen. Chuck Hagel (R-Neb.) recently introduced a GSE reform bill that differs from the House bill, in part because it would require Fannie and Freddie to make bigger commitments to affordable housing. Which do you prefer?


A: My belief is that [Hagel’s bill] is probably a little too restrictive compared to the House bill. Certainly, affordable housing is a key issue and certainly that should be a key component of their portfolio. But they also need the capability to support their other missions, the stability and liquidity of the mortgage market, which the House bill does provide.

Q: What about the portfolio language in Hagel’s bill? Do you think it would give a future regulator a better ability to ensure the safety and soundness of the companies?


A: I think both [Hagel’s and Frank’s bills] give a future regulator the ability to ensure future safety and soundness. I think in many ways, as I have said, the House bill is better balanced but without removing the power the regulator needs.

Q: Critics of Fannie and Freddie often point to the huge secondary market for mortgages to argue that the GSEs are no longer necessary. How do you respond?

A: I wouldn’t have taken this job if I didn’t think Fannie and Freddie had a role to play. I think they do play an important part in the secondary mortgage market in this country. They represent about 40 percent of all outstanding mortgages in this country.

Q: How do you rate the work Frank did on GSE reform this year?


A: I was impressed, first of all, that he was able to come to an agreement last year with the administration and particularly the Treasury Department on what I believe is a good set of compromises. And he’s done a good job of shepherding them through committee and drawing pretty balanced bipartisan support.

Q: What has surprised you about the job so far?

A: Well, it’s probably how big a hole these two companies dug for themselves. It is also very hard for me to believe that it is taking so long to remediate these problems. So that’s probably been the biggest surprise. The best surprise is the team at OFHEO. A very strong team has been put together over the last few years and they’re very dedicated to helping these companies recover.

Q: Will GSE be legislation signed by the president this year?


A: I am certainly very hopeful. All signs are that it will get out of the House and that it will go to the Senate. And certainly there have been comments on both sides of the aisle of the need for reform in the Senate. I just hope they get a good compromise.

More in Finance

Inside the GOP’s budget drama

Read more »