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    Government-sponsored enterprises (GSEs) play a significant role in The U.S. Housing markets. As of year-end 2002, they held or guaranteed over $4 J trillion in primarily mortgage-related assets. The three housing GSEs are also highly leveraged compared to federally insured banks and thrifts.

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    Government-sponsored enterprises (GSEs) play a significant role in The U.S. Housing markets. As of year-end 2002, they held or guaranteed over $4 J trillion in primarily mortgage-related assets. The three housing GSEs are also highly leveraged compared to federally insured banks and thrifts.

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    3 views16 pages

    Regulating Housing GSEs

    Uploaded by

    Caroline Osborne
    Government-sponsored enterprises (GSEs) play a significant role in The U.S. Housing markets. As of year-end 2002, they held or guaranteed over $4 J trillion in primarily mortgage-related assets. The three housing GSEs are also highly leveraged compared to federally insured banks and thrifts.

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    Regulating Housing GSEs: Thoughts on Institutional Structure and Authorities W. SCOTT FRAME AND LAWRENCE J. WHITE Frame isa. fimancial economist and associate policy adviser the Atlanta Fed's research department. White is the Arthaer E Imperatore Professor of Economics at Now York University’s Stern School of Business. From 1986 to 1989 he was a member of the Federal Home Loan Bank Raard and hence twas also a boarel member of Freddie Mac and oversaw the Federal Home Loan Bank System. The authors thank Rick Carnel, Tom Cureninghaam, Jerry Dury, Michael Pratantoni, Eeivard Golding, Matthew Green, Mark Kamstra, Mario Ugoletts, Larry Wall, and seminar participants at the 2008 Allied Social Science Associations meetings for helpful comments and discussions ree government-sponsored enterprises (GSEs) play a significant role in the US. housing markets: the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Bank System (FHLB System) Congress created each of these entities, and thelr federal charters include numerous provisions that result in lower operating and funding costs ! These GSEs’ primary public contribution with respect to housing is to use their federal benefits to reduce mortgage interest rates faced by homebuyers with ‘conforming” mortgages ? The US. Congressional Budget Oifice (CBO) (2004) estimates that for 2003 the gross benefit accruing to the three housing GSEs was $280 billion, the net benefit to homebuyers was $1366 billion, and the residual benefit to GSE equity holders was $9.4 billion® ‘The three housing GSEs have grown rapidly over the past decade and now constitute three of the five largest financial institutions in the United States AAs of year-end 2002, they held or guaranteed over $4.1 tuillion in primarily mortgage-related assets the three housing GSEs are also highly leveraged compared to federally insured banks and thrifts. In the aggregate, the former operated with a ratio of total capital to total assets of 87 percent as of year- end 2002 while the latter maintained a ratio of 92 percent on the same date. As their large absolute sizes and small capital ratios indicate, the housing GSEs fund their portfolios primarily by issuing sig- nificant quantities of debt. Further, they manage the attendant market risks by acting as major par- ticipants in derivatives markets® Arguably, the housing GSEs have achieved their scale and can operate in such a leveraged manner because thelr obligations (debt and mortgage-backed securities) benefit from an implied federal guarantee arising from their charter benefits and from past gov- ermiment actions * Indeed, the financial reporting of the ylelds on GSE obligations usually refers to them as “government agency” issues * As result, the hous- ing GSEs are able to borrow at interest rates that are more favorable than those of AAA-rated corporate borrowers though not quite as favorable as the inter- est rates at which the US Treasury can borrow Without the implied guarantee, the GSEs’ ratings probably would be in the A to AA range® ‘The presence of the implied federal guarantee is, the central issue with respect to not only the housing GSEs’ business operations but also their regulation ‘The implied guarantee allows the federal govern- ment to channel additional funds to the conforming mortgage market without an annual appropriation, While the implicit guarantee provides most of the benefits that the housing GSEs transmit to hom: buyers, it also represents a contingent liability to taxpayers In the event that an enterprise becomes insolvent and the government elects to provide — Foon aces Bank ot Mona Ecosoaie aEvIEH Seine Quan 2008 | 87 financial assistance Some have looked at the ques- tion ofthe public benefits and costs of housing GSEs and concluded that privatization is most appropri- ate (Calomiris 2001; White 2003a) However, since this recommendation is unlikely to be adopted in the near term, it seems reasonable that the federal government should seek jointly to maximize bene- fits to homebuyers and minimize taxpayer risk while recognizing that these objectives may be conflict- ing, The federal government attempts to maximize benefits and minimize risks by way of @ two-part regulatory system (described below) that does not seem to be functioning as intended (US. Office of ‘Management and Budget 2004, 80-85) Concerns about taxpayer liability associated with the housing GSEs were recently renewed inthe wake of a $5 billion accounting restatement by Freddie Mac in 2003. This, in turn, led to various legislative proposals to reotganize housing GSE regulatory over- sight that are an active concern for Congress and the Bush administration. This article discusses these proposals, identities the points of contention, and then evaluates these points, drawing on lessons from US. banking regulation Its imporiant to note that the current legislative approach assumes that the most effective method of reducing taxpayer risk isto strengthen housing GSE regulation As a theoretical matter, however, this methods effectiveness is unclear, especially relative to the complete absence of a safety-and-soundness regulatory regime. For housing GSES, expected tax- payer losses are calculated as the product ofthe prob- ability of insolvency, the probability of baout, and the expected dollar losses in the event of default, ‘The presence of a safety-and-soundness regulatory regime likely serves to reinforce the perception of an plicit guarantee and hence influences each of these components, First, regulation itself is likely to reduce the probability of insolvency; but the implied guaran- tee affects this probability in two different ways: a positive “moral hazard effect” and a negative “charter value effect” (Frame and White 2004), Regulation is also likely to increase the probability of a bailout, and this likelihood is reflected in the implied guarantee Finally, since it probably strengthens the implied guarantee, regulation may also influence the dollar value of losses to the extent that itallows the housing GSBs to grow larger and hold relatively less capital than they otherwise would, Regulation would there- fore likely reduce the probability of insolvency (although this prediction depends on how sensitive the housing GSEs are to changes in their charter value), increase the probability of a bailout, and Increase the size of potential shortfalls. Overal, whether housing GSE regulation results in more or less taxpayer risk Is an open empirical question The Current Regulatory Structure Ihe current regulatory structure for the housing GSBs has been in place for just over a decade ‘The US. Department of Housing and Urban Develop- ment (HUD) and an independent agency within HUD, the Oifice of Federal Housing Enterprise Oversight (OFHEO), regulate Fannie Mae and Freddie Mac ‘The Federal Housing Finance Board Finance Board) exclusively regulates the FHLB System HUD is the mission regulator of Fannie Mae and Freddie Mac and is broadly charged with ensuring that these enterprises are enhancing the availablity of mortgage credit by creating and maintaining a sec- ‘ondary market for residential mortgages. HUD is also required to establish goals and monitor compliance {for Fannie Mae's and Freddie Mac's financing of hous- ing for ow-and moderate-income families, housing in central cities, and other “underserved areas.” OFHBO is the safety-and-soundness regulator for annie Mae and Freddie Mac and hence is authorized to set risk-based capital standards, conduct. exami nations, and take enforcement actions if unsafe or ‘unsound financial or management practices are iden tified. A director nominated by the president for a five-year term and confirmed by the Senate leads OFHEO. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 established this safety-and-soundness regulator Prior to this, HUD maintained exclusive regulatory oversight responsi- bilities over Fannie Mae and (for 1989-92) Freddie Mac. Before the passage of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, Freddie Mac was the responsibilty of the Federal Home Loan Bank Boatd (FHLBB), ‘The Finance Board was established by FIRREA Jn 1989 as the regulator of the FHLB System, thereby replacing the FHLBB The Finance Board supervises each of the FHLB System banks and their collee- tively owned financing arm, the Office of Finance, to ensure that they operate in a safe and sound man- ner and that they carry out their housing finance mission related to community investment and affordable housing. A five-member board governs the Finance Board, which isan independent agency within the executive branch ‘The president appoints {our full-time members with the advice and consent ‘of the Senate for seven-year terms, designating one ‘of the four as chait® ‘The secretary of HUD is the ‘ith member. All three regulators (OFHEO, HUD, and the Finance Board) have been criticized for a perceived lack of effectiveness. Examples of this include 2) the lengthy delays that OFHEO experienced in issuing and finalizing its risk-based capital regula- tion for Fannie Mae and Freddie Mac and (2) HUD's and the Finance Board’s failure to propose regula- tory limits on nonmortgage investments made by the respective housing GSEs under their purview, Studies by the US. General Accounting Office (GAO) (1997a, 1998a, 1998b, 1998) evaluate the regulatory effectiveness of HUD, OFHEO, and the Finance Board. More recently, in testimony before the House Financial Services Committee on Septem- ber 10, 2008, Treasury Secretary John Snow remarked that there is a “general recognition that the supervi- sory system for the housing GSEs neither has the tools, nor the stature, to ellectively deal with the current size, complexity, and importance of these enterprises.” In light of these criticisms and recent financial and accounting revelations at Fannie Mae and Freddie Mac (which are reviewed in the box on page 90), a number of legislative proposals were introduced in Congress during 2003 to enhance the safety-and-soundness regulation of the housing GSEs Legislative Response ring the summer of 2008, several members of Congress introduced bills aimed at strengthten- ing the current supervisory and regulatory framework for Fannie Mae and Freddie Mac: HR. 2575 (Repre- sentative Baker), H.R, 2803 (Representative Royce), S, 1508 (Senators Hagel, Sununu, and Dole), and 1656 (Senator Corzine) ! While the approaches to regulatory reform vary somewhat, all of the leg- islative proposals would, ‘+ abolish OFHEO and create a new regulator in the ‘Treasury Departanent, *+ increase the budget autonomy ofthe new regulator, + transfer some oversight responsibilies from HUD to the new regulator, ‘+ increase regulatory discretion in setting certain capital standards, and + enhance enforeement authorities Nott and Jickling (2003) include a detailed side-by- side comparison of each bill's provisions ‘Treasury Secretary Snow first presented the Bush administration's views on GSE regulatory 1 Seo, for example, US. Congressional Budget Oifice (2001, 19-14 for a discusion of the various benefits afforded the three housing GSES. The charter acts for these institutions car be found at 12 USC. sec. 1716 et sex. (Farmie Mae), 12 USC. sec. 1451 ef seq (Preddlie Mac), and 12 USC. sec. 1421 et seq, (Federal Home Loan Barks) 2. Conforming martgagesare those with balances below the legal ts onthe s2e of rontgages that Fannie Mae and Free Mac can boy: Por single-family morgage Kans, de cororming Jan ie was $300,700 in 2002 ane $322,700 n 203 ais $33,700 in 2904 8. These estimates were based, in pat, on parameter values presented in CBO (2001) See also Passmore (2003) for benefit estimates consistent with the CBO studies. See Fanuie Mae (2001), Preddic Mac (2001), Toevs (2001), and Pearce and Miller 2001) for various cities of the CBO's methodology 4 As of year-end 2002, the five lngest US. enterprises (ranked by total on-balance-sheet assets) were: (1) CitiGroup, (@) Fannie Mae, (3) JPMorgan Chase, (4) the FHLB System, and () Freddie Mac 5 See, for example, Jaffee (2008) for a discussion of interest rate risk management at Fannie Mae and Free Mac 6, By law, GSE securities are required to include language indicating that they are not guatanteed by, or otherwise an obiga- ion ofthe federal governnuent. However, past govennunent actions suggest otherwise During te late 1970s and ently 1980s, Fannie Mae was insolvent on a market value basis and benefited from superisary forbearance Also, in the late 1980s, the Faim Credit System (awother GSE) required a taxpayer ballout totaling $4 bilion The US. General Accounting Otice (1990, 90-91) ascusses both af these episodes, and Kane and Poster (1086) provide estimates ofthe degree of insolvency for Fannie Mae during its financial distress This labeling is likely rested to the fact that GSE securtles are considered government securities under the Securities and Exchange Act of 1994 8 Pannie Mae and Proddie Mac do receive AA~ ratings ftom Standard and Poor's in teams of thet risk to the government ‘However, such ratings incorporate whatever government support or intervention Une entity typically enjoys during the not- ral courte of business. See Frame and Wall (2002) fora dscassion 8 Atleast one of the four appointees isto be chosen ftom an ouganizaton representing consumer of corumuniy interests in banking services, credit needs, housing, of fnancial consumer protection 10 There was also a House Financial Sorvices Committee manager's amendment to HR 2575 released in preparation for an October 8, 2008, markup that was subsequently canocled Thue related bis were itzoduced in 2003 tat would remove certain satutory benefits afforded Fannie Moe and Freddie Moc Fist, HR. 2022 (Representatives Shays and Markey) would repeal the ceteris’ exemption fom registering their socaries with te Secures and Exchange Corusion (SEC), Second, HR. 2117 ‘Representative Pete Statk) would eliminate Parnie Mae's av Freddie Mac's statuary exemption fom state and local income taxes nally, HR. 9071 (Representative Ron Pal) would repel several aspects of all thee housing GSES’ chutes: 1) the stale and local income tax exemption, (2) the president's autho to appolt dzectar to these GSES boards of dzectors, (9) the “Treasury secretary authority to approve GSE debt issues, (4) the Treasury secretary’ cscretonary authority ta purchase GSE bigations, and (6) certain olher provisions that confor favorabie investment tas on GSE soeunies Few Reere Banc otaeete EcoxaIe KevI Ge Seema quane 2006 | 89 Recent Events jider seriously: whether changes: should be made to Uve oversight of the housing GSEs, The ‘frst was a disclosure by Fannie Mae, suggesting ‘that the enterprise hail a significant exposure to interest rate movements, The second was Te | uncovering of accounting misstatements at I | The sce nts ard cose to con si Freddie Mac, which resalted in the departure of several (op execulives from the institution. Fannie Mae's Duration Gap In October 2000, Fannie Mae and Freddie Mac ‘announced six voluntary initiatives intended to enhance their market discipline, mcrease liquidity, and improve transparency.) In. terms of disclo- sures, the two GSEs subsequently began reporting ‘certain interest rate risk measures On a monthly basis, including their duration gap, or the differ- ‘ence between the weighted-average durations of E tete asseis na thelr babiliies ® [| Fannie Mae's duration gap was scrutinized duning:the summer of 2002 as it exceeded its {atdet range (plus ot minus six months) for three consecutive monthe—suagesting a considerable exposure to future interest rate movernents? ‘Specifically, between July and September 2002, ‘Fannie Mae's duration gap was minus nine months, ‘minus fourteen months, aid minus ten months, | respeciively, rellecting a considerable shortening, | inthe elffective duration ofits assets. According to. the Shadow Financial Regulatory, Committee (2002), given Fannie Mae's leverage position, a uration gap of minus fourteen mionths would have inplied that a I percentage point decline in inter: es€ rales could result in 9 40 percent decline in its capital? To reduce its duration gap, Fannie Mae rolled on portfolio growth and hedging that is, = ‘combination of mortgage commitinetts, mortgage ‘purchases, hedging with swaps and swaptions, and callable debt issues (Haviv 2002), Following the September 2002 dutation gap armouncement, OPHEO reportedly sent a letter to Representatives Richard Baker and Paul Kanjorski indicating that it had increased its oversight of Fannie Mae's mortgage portfolio and duration gap (Ganfield & Associates Inc. 2002). In this letter, ‘OFHEO required a plan to correct the imbalance ‘and to monitor Fannie Mae duration gap manage. ‘ment for the following six months, ih a September 2002 letter, Representative Baker reportedly then criticved OFHEO for not addressing Pannie's |) growing risk sooner: “OFHEO's recognition of Ew Sear Fannie Mae's problem is ovetdue and your delay. Ing allowed unacceptable levels of risk to contin= Lue for far too long” (Canfield & Associates Ine. 20028).° Freddie Mac's Accounting Irregularities Ti danuary 2003, Freddie Mac announced that it would restate its earings for the previous three years-afler ils new auditor recommended certain changes to the enterprise's accounting ppolicies-and that Uiese restated earnings would be materially higher” ‘The restatement was ‘originally characterized as a simple disagreement ‘about Ue application of generally accepted accounting principles (GAAP) focusing primarily ‘on how to value certain derivative transactions nd the classification of mortgage assets between. available-forsile and trading accounts via certain resecuritization transactions, This perception ‘was altered, However, when in June 2003 Freddie Mae annolinced that its three top executives had Ieft the company. Furthermore, a July 2003 report commissioned by Freddie Mack board of directors found that management had “encour- aged the use of complex, capital-market transac: lions and, to lesser extent, reserve adjustments, ‘or purposes of achieving strong, steady earnings growth" (Baker Botts LLP 2003, 5) Simply put, the report. snagests that Freddie Mac engaged in. ‘eamings maragement, The accounting restate- ‘ment, released in November 2003, resulted in an ‘upward adjustment in cumulative earnings through year-end 2002 of $5.0 billion? Following the June 2003 management shake- up, OFHEO Director Armando Falcon sent a let ter to Freddie Mac's board of directors outlining actions. ‘beyond the personnel changes —required of the board related to the enterprise's restaternent process.” The letter also indicated that OFHEO dispatched a special investization feam to Freddie Mac to laok at the restatement process, manage. ‘ment’s progress in implementing the action plan, and employee mnisconduct."! This investigation ‘culminated in a December 2003 report by OF HEO that included sixteen recommended actions for Freddie Mac and OFHEO to take and imposed a $125 million fine on the company. In the wake of the accounting travails at Freddie ‘Mac arg a number of federal investigations and lass action lawsuits, which are summarized in Freddie Mac (2003). The investigations include inquiries from OPHEO, the Internal Revenue fi oa et a om SUE stingy ase Seouities laws and niguiations, hee been ‘brousht by Gamong them) ihe Ohio: Pablie Employes: Retirement Systent and the State ‘Teachers Retirement Syalem of Ohio, cs runderaing end ipkeser srunatag westeane. | ‘re donauete rte i DE ada chibi: BASE th D602, 'S1.0 biti ih 2G, $1.3 ‘ite LSD ot aE Oo SUR Gere ade Pc ery ontario restatement: (2108 aemby ms Thee rane cea ueceitaken reform in testimony before the House Financial Services Comamittee on September 10, 2003 (Snow 2003a). In it, Secretary Snow stated that the new agency's powers should be “compatable in scope and force to those of other world-class financial supervisors,” and he recommended several changes: in the structure and powers of the safety-and- soundness regulator for Fannle Mae and Freddie Mac." These recommendations included (1) under certain conditions, locating the new regulatory agency within the ‘Treasury; (2) funding the agency by assessments that are outside of the appropria- tions process; (3) giving the agency prior approval over new activities; (4) providing the agency with the authority to direct, if necessary, the liquidation of an enterprise's assets (that is, receivership authority); and (5) giving the agency discretionary powers to adjust risk-based capital standards. In testimony on October 16, 2003, before the ‘Senate Banking Committee, Secretary Snow (2003b) 11 Testimony at the same heating from HUD Secretary Mel Martinez also made clear that the Bush adiristation supports [HUD continued involvement in GSE mission oversight, particulaly with respect to allordable housing goals. Ibis Lsti= ‘many, Secretary Martinez outlined a number of suggested changes to mission oversight: (1) creating a new GSE Housing fice within HUD that is independent funded by the GSEs to estsblish, maintain and enforce the housing gels; (2) graat= Ing HUD new administrative anthoity to enforce its housing goals; (8) instituting enhanced civil money penalties fr laure ‘tn meet housing gots; (4) expletly providing that the GSEs act to increase homeownership; and (5) expanding HUDS authority to set housing goals and subgosls beyond the three current established for moderatencome, geograplic area, il special alfordable housing This testimony is avlable at Fear nko tans 2cOsOAIe anViE® Second quanerzooe | $3 mechanism for the regulator, and whom the regula lor should supervise ‘The important trade-offs with respect. 10 each issue relate to the desired levels of “regulatory inde- pendence,” “political independence,” and “promt- nence in government.” Regulatory independence refers to the relationship between the regulator and the regulated and is concerned with limiting the potential for regulatory capture. It is influenced by the set of regulated institutions (that is, how many there are and how diverse their interests are) and the scope of the regulatory body's mission. Political inde pendence refers to the relationship between the reg Uulator and the executive and legistative branches of eae co no See a ec | DC ae ee a aoa ge eee government and the regulator’ ability to withstand external pressures generally. Prominence alludes to the stature of the regulator when testifying, when proposing and carrying out regulatory actions, and ‘when taking public positions generally. Location of the GSE regulator. All of the legisla- tive proposals in 2003 involved abolishing OF HEO and replacing it with a new olfice housed within the ‘Treasury Department. The desire to move salety- and-soundness regulation for housing GSEs to ‘Treasury, however, became quite contentious in 2003 after the Bush administration insisted that the legis- lation include provisions that would make the pro- posed bureau less “independent” than the other two wancial regulatory bureaus currently housed in ‘Treasury—the Oilice of the Comptroller of the Currency (OCC) and the Oifice of Thrift Supervision (OTS) Specifically, the administration would lke the new agency to clear regulations and congressional testimony through Treasury. According to Snow (20030), ‘Treasury’s direct involvement in policy guidance is important for two reasons First, unlike the other Treasury bureaus, the new agency would be responsible for only a handful of very lange fina cial instivutions, thereby increasing the possibilty of regulatory capture. Second, each of the housing GSEs benefits from an implied federal guarantee, which reduces market discipline; for this reason, 94 T Feat eae Gok tations ecoxoue ‘Treasury feels that it needs the power to monitor the new regulator’: policies so that they are not “rein foreing any such market misperception of an implied guarantee.” However, Snow also highlighted the Importance of protecting the independence of the agency over specifle matters of supervision, enforce- ment, and access to federal courts Some policymakers are wary of Treasury's post {don and believe that the new GSE regulator should be as independent as the OCC and the OTS. For example, at a September 25, 2003, hearing, Rep- resentative Carolyn Maloney"s written statement noted that “without the ability to take independent positions before Congress, the authority of the new regulator will constantly be in question and differ- ent parties will attempt to influence regulatory out comes by appealing to higher levels in the Treasury Department At the same hearing, OFHEO director Armando Falcon's written testimony stated that reg- Uulators “should be objective, nonpartisan, and pro: tected from political interference” and that “this is especially critical when regulators ust make di cult and sometimes politically unpopular decisions An alternative to placing housing GSE oversight in a cabinet department. would be to locate it in an independent. agency outside the executive branch, ‘This approach is taken in the FHERRA and is con- sistent with the recommendation of the GAO (4997b), which concluded that there should be a single, stand-alone housing GSE regulator for Fannie Mae, Freddie Mac, and the FHLBs that spans both mission and safety-and-soundness responsibil ties. As noted above, the FHERRA appears to meld the existing structures of many independent agen- cies by having both a director responsible for execu live decision making and a board, which includes cabinet secretaries, that reviews and reports to Congress about the state of the housing GSEs and their regulator. An agency modeled in this way has a bit more political accountability and prominence in ‘government than other independent agencies do An alternative to creating a new agency, of course, would be to merge housing GSE oversight responsi- bilities into an existing financial regulatory agency Indeed, one option would be to transier oversight responsibilities for Fannie Mae and Freddie Mac to the Finance Board, However, the current structure of the Finance Board poses a special problem since itis required by statute to appoint members to the twelve FHLBs' boards and otherwise become involved in their business (see GAO 1998a), Such involvernent in the future, as well as in the past, could compromise the Finance Boards independence in the sense that the agency does not have an arm’s length relation- 8 enna Guan 2004 ship with its regulated entities. Another option, ‘which would not suffer from the same perceived lack of regulatory independence, would be to merge GSE ‘oversight into an existing independent financial reg- latory agency such as the Federal Reserve or the Federal Deposit Insurance Corporation (FDIC) Little of the current discussion has focused on these ‘options, however, and Carell (2001b) raises several policy concems with respect to merging GSE over- sight into the Federal Reserve Should a housing GSE safety-and-soundness regu lator be In the executive branch, or should it be an independent agency? The “vegulatory independence” of a housing GSE regulator will argely be unrelated to ‘whether its housed in a cabinet department. or an independent agency Nevertheless, an exclusive regu- lator may be seen as susceptible to capture because it wil be overseeing no more than three institutions, ‘two of which (Fannie Mae and Freddie Mac) have essentially identical charters and hence similar inter- ests. An existing regulator—with a large and diverse constituency—would be perceived as having more “regulatory independence.” ‘The primary argument for an independent agency is that independence buffers the agency from political pressures. While this argument may be true with respect to the direct pressures of a presidential administration, such independence surely does not buffer the agency from other political influences; more importantly, this independence also removes the agency from the ditect line of political résponsi- bility Further, independent agencies are often less Prominent in government, a consideration that, among other things, may negatively affect its ability to recruit and retain high-quality staff. Unless they are involved in a high-profile issue (such as the current corporate governance issues that have embroiled the SEC), independent commissions and boards are often Jess well known and understood than an execulive branch cabinet department, whose sec- retary always carries the authority of the presiden- tal administration Agency funding. As noted above, OFHEO's assessments on Fannie Mae and Freddie Mac are cur- rently subject to the annual congressional appropria- tions process; the regulator has long argued that this process hinders its ability to conduct effective long- term planning and its general resource flexibility. The Finance Board and each of the federal banking agen- cies are funded outside of the appropriations process, using fees collected from the regulated institutions rather than using general tax receipts Al of the legislative proposals introduced in the 108th Congress authorized the director of the new entity to collect annual assessments, although four (HR, 2575, HR. 2803, S. 1508, and $. 1656) maintain ‘the requirement that the monies be placed in a fund at the Treasury Analysis provided in Nott and Jickling (2003) suggests that the result of this requirement is that the new office actually would not bbe removed from the appropriations process By contrast, the legislative language found in the FHESSA and the House Firiancial Services manager's aménd- rent is similar to the language that applies to other 20: This statement is avalable at (March 12, 2004) Calomitis, Charles W. 2001. An econornist's ease for GSE reform In Serving two masters yot out of con- bol Fannie Mae and Freddie Mac, edived by Peter 41. Wallison. Washington, DG: AEI Press. Canfield & Associates Ine. 2002a Congressman Baker citieizes OFHEO's concerns about Fannie as “overdue’— asks OFHEO for its woekiy status reports on Fannie. The GSE Report, September 27, 12. cwew gsereport com> (larch 12, 2004) 2002. OFHEO says it will increase its over- sight of Fannie portfolio and its duration gap. The GSE Report, September 27, 11. (arch 12, 2004) Carnell, Richard 2001a. Federal depesit insurance ver sus federal sponsorship of Fannie Mae and Freddie Ma The structure of subsidy In Proceedings: Conference ‘on Bank Structure and Competition. Chicago: Federal Reserve Bank of Chicago, —— 2001 Reforming the regulation of Fannie Mac and Freddie Mac. Statement before the Subeomtice on Capital Markets, Insurance, and Gaverniment-Sponsored Enterprises, Committee on Financial Services, US House of Representatives, uly 11. (March 12, 2004) Cohen, Hugh. 1993. Beyond duration: Measuring interest rate exposure. Federal Reserve Bank of Atlanta Eeonomic Review 78 (Marelv April): 28-81 anne Mae. 2001 Setting the record straight. An analy- ‘8 of CBO's 2001 report on Fannie Mae and Freddie ‘Mac: May 23 (March 12, 2004) —— 2002 Fannie Mae comments on duration sap and OPHEO letter. Current Issues, Septomber 18 - (March 12, 2004) Fishbein, Allen. 2908. Testimony before the Committee on Financial Services, U.S. House of Representatives, September 25 (March 12, 2004) Frame, W. Scott, 2008. Fedral Home Loan Bank mortgage ‘Durchases: Implications for mortgage markets. Federal Reserve Bank of Atlanta Econoreir Review 88 (Third Quarter) 17-81 Frame, W Scott, and Lamy Well 2002. Fannie Mae's and Freddie Mac’ voluntary initiatives: Lessons from bank- lng Fedetal Reserve Bank of Atlanta Economac Review 87 Fist Quarter): 45-59, Frame, W Soott, and Lawrence J. White. 2004. Emerging ‘competition and risk-taking incentives at Fannie Mae and Freddie Mac Federal Reserve Bank of Atlanta Working Paper 20044, February. Freddie Mac. 2001. Detailed analysis of the 2001 CBO report “federal subsidies and the housing GSEs" Appendix to the written statement of Mitchell Delk before the US. House of Representatives Subcommittee on Capital Markets, Insurance, and Government Sponsored Enter- prises, Comunlttce on Financial Services, July 11 ‘ (larch 12, 2004) 2008. Supplement to information statement dated March 29, 2002 (Released September 25) - (March 12, 2004) Gramm, Wendy L., and Gerald D. 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