Financial Reform Watch

Published — November 16, 2010 Updated — May 19, 2014 at 12:19 pm ET

Reform Reading: Should Fannie and Freddie be cooperative(s)?

Co-op model no guarantee of safety for Fannie, Freddie?

Introduction

Converting housing finance giants Fannie Mae and Freddie Mac to cooperatives owned by the lenders that sell mortgages to them is no guarantee of safe and sound operations, the Government Accountability Office says. Taxpayers have pumped some $150 billion into Fannie and Freddie since the U.S. government put them into conservatorship two years ago amid the collapsing housing market.

In a carefully-worded letter to Congress, the GAO neither endorsed nor criticized the business model but did note that several cooperatively-owned Federal Home Loan Banks “have experienced significant losses” in recent years. While proponents say a co-op would encourage safer mortgage underwriting by lenders, the GAO said such a structure requires consensus and sometimes lengthy negotiations among members to make decisions. If Congress chooses to go the co-op route in restructuring Fannie and Freddie, it would have to decide how many to create, their capital and membership requirements, their mission, and who oversees them, the watchdog said.

The Dodd-Frank law requires Treasury Secretary Tim Geithner to offer recommendations in January to reorganize Fannie and Freddie, and he is expected to seek some form of federal subsidy program to replace them. But many Republican lawmakers bitterly oppose any additional help for Fannie and Freddie and want to liquidate them.

Fannie and Freddie are also likely to come up at today’s Senate Banking Committee hearing about robo-signing and fraud in mortgage foreclosures. Executives from JPMorgan and from Bank of America may testify that some foreclosure problems are due to confusing rules by Fannie and Freddie, which require banks to start the foreclosure process while also trying to modify the loans, reports Fox Business’ Charlie Gasparino. The dual approach stems from Fannie and Freddie having conflicting goals of trying to promote home ownership at the same time they need to recoup losses through foreclosure, he reports.

The Senate panel begins its hearing at 2:30 p.m. ET with testimony from the two banks plus Iowa Attorney General Tom Miller. A House Financial Services subcommittee holds a hearing on the same topic on Thursday, but has not yet said who is testifying.

SEC urged to give small companies, banks a break

Small and mid-cap companies should be excused from the Dodd-Frank law’s requirement that publicly-traded companies hold a “say on pay” shareholder vote to approve the compensation of top executives, a corporate governance group says. The Society of Corporate Secretaries and Governance Professionals is also asking the Securities and Exchange Commission to exempt small companies from having to disclose annually if their products contain so-called conflict gold from the Republic of Congo.

The requests were made in a letter to the SEC ahead of the agency’s annual forum on small business capital formation scheduled for Thursday.

Separately, the biggest U.S. bankers group is renewing its five-year-old quest to persuade the SEC to exempt publicly-traded banks with fewer than 2,000 shareholders from certain regulations. That move would save about $250,000 per bank, the American Bankers Association says in a letter, and each dollar would support $7 to $10 in new lending.

Look for the agency to take some kind of action fairly soon. The SEC last week received a firm nudge from Republican Spencer Bachus, the likely next chairman of the House Financial Services Committee, who made it clear he expects the agency to help small companies and to promote economic growth.

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