Republican gains in the House of Representatives and the Senate, as well as the re-election of George W. Bush, reanimate the ghost of a stronger regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks, as Democrats who were sympathetic to the mission of government intervention to make housing affordable have been weakened. The gridlock over legislation regarding the GSEs regulator over the past few years may now be eased.
The result would be positive for the GSEs bonds, if not for their stocks. "[A stricter regulator] will actually be better for bondholders, but will create more frustration for Fannie and Freddie and Home Loan," said Chad Puryear, senior agency strategist at Morgan Keegan. Puryear noted that if a new regulator is created, agency spreads may widen initially, but would tighten up due to what would be seen as a plus for bondholders.
Republicans solidified their hold on Congress on election night with 55 seats in the Senate and 231 seats in the House. The shift in power increases the odds that Congress will pass legislation either toughening up the government-sponsored enterprises' current regulator, the Office of Federal Housing Enterprise Oversight, or create a completely new, more powerful regulator. The new regulator may have powers ranging from setting higher capital margins to putting the company into receivership if it goes bankrupt.
Bush's re-election also adds support for tougher reform on the GSEs because of the administration comments that there should be greater regulatory oversight of the GSEs. "The Bush administration will press hard for regulatory reform. I think it has been a little perturbed by what's been going on behind the scenes [at Fannie Mae]," said Gerald Lucas, chief Treasury and agency strategist at Banc of America Securities. OFHEO's investigation centered around Fannie's alleged use of a cookie jar to meet bonus targets for its executives and manipulating its accounting to smooth out volatility.
OFHEO seems well aware of the risk to the threat to its existence, as evidenced by the recent investigation into Fannie's accounting practices. The efforts may lead Congress to simply better fund OFHEO. "It seems like [OFHEO] is taking a lot more interest and looking for potential problems. And that's what you want for the regulator to be raising these questions," according to Jim Rhodes, agency strategist at ABN AMRO.
However, it wouldn't be unreasonable to create a new branch of the Treasury to be the regulator because of the Treasury's clout and greater resistance to outside influence, Rhodes added.
"We share the commitment to have a strong regulator with the Bush administration," said Sharon McHale, Freddie Mac spokeswoman. Calls to Fannie Mae were not returned by press time.
