WSJ: Shelby to the Rescue (Fannie Mae and Freddie Mac reform)

Wall Street Journal ^ | July 27, 2005 | Editorial

[OESY]

The doughty band of Fannie Mae and Freddie Mac reformers isn't beaten yet. Senate Banking Committee Chairman Richard Shelby plans to mark up a bill this week to protect taxpayers against the risky business of these "government-sponsored enterprises," and the question is whether he can coax enough skittish Republicans to pass it.

The Alabama Senator's proposal is a quantum improvement over the non-reform that passed the House Financial Services Committee earlier this year. In particular, it would force Fan and Fred to reduce their portfolios of mortgage-backed securities, a source of great profit for the companies but also of significant taxpayer risk. The House bill punted on this point, and without it any reform isn't worth much.

Just as encouraging is what the Shelby bill deletes from Congressman Mike Oxley's House embarrassment: It doesn't raise the conforming loan limit in high-cost housing areas, an increase that would allow Fan and Fred to use their taxpayer subsidy to grow even more market share. And it doesn't include an "affordable housing fund" that Mr. Oxley created as a sop to the homebuilder lobby and to Barney Frank of Massachusetts; this is little more than a Congressional tax on Fannie profits to dole out to favored interest groups. Federal Reserve Chairman Alan Greenspan said last week that "no bill" would be better than Mr. Oxley's folly.

The Senate expectation is that most or all Banking Committee Democrats will oppose the Shelby bill, since they view Fan and Fred as Congressional business subsidiaries -- guaranteed sources of political cash and high-paid patronage jobs. This means Mr. Shelby will need the votes of all Republicans, and his Committee does include such reform stalwarts as Elizabeth Dole (N.C.) and John Sununu (N.H.).

The question marks are....

[Vision]

bttt

[cloud8]

"[The Shelby proposal] doesn't raise the conforming loan limit in high-cost housing areas, an increase that would allow Fan and Fred to use their taxpayer subsidy to grow even more market share."

I don't understand this sentence.

[ikka]

There is an upper limit on the size of the loan, so in more expensive areas the limit is less than what some houses are going for.

The taxpayer subsidy is I assume, the lower cost of borrowing due to Fan and Fred essentially being government-backed and thus very good credit risks.

[priceofreedom]

$359,650 is the current limit for conforming loans, anything above this would be considered a Jumbo Loan. In southern California where I live for instance the average house is near $500,000.