Federal Reserve Bank President Urges Regulatory Reform Legislation

 By: David Reinholtz
James Bullard, the Federal Reserve Bank president noted that the Obama administration's proposed legislation to overall the United States' financial rules doesn't do enough to revamp a system that helped drive the recent housing crisis and urged Washington not to miss an opportunity to pass effective and lasting legislation.

Last June, the Obama Administration released an 88-page proposal that intends to rewrite the finance rules but one major ingredient that was missing from this proposal, according to James Bullard, was that it avoided addressing a future restructuring of Fannie Mae and Freddie Mac, the two companies that are at the core of the Unites States' mortgage system and two major contributors to the economic and housing meltdown of 2008.

Fannie Mae and Freddie Mac together own or guarantee at least one-half of the United States' mortgages, a staggering number. After they were seized by the U.S. government in 2008, they were placed into conservatoriship and since that time, the country still waits for word about what changes will be made to correct the mistakes of these two financial giants.

When the Administration's proposal was released in June of last year, it claimed that details and ideas about the future of these two government-sponsored enterprises would be released and discussed around the time of the president's fiscal 2011 budget proposal. Yet, when the Administration released its budget proposal, it neglected, or deferred, depending on the point of view, to directly address any such issues. Instead, it stated that it would "provide updates on considerations for longer-term reform... as appropriate."

This announcement has caused some organizations to claim this is both alarming as well as a 'cop-out' by the current administration. What should be even more alarming, however, is not necessarily the fact that this administration is refusing to either acknowledge the serious underlying repercussions of failing to propose any serious reform avenues, but that, with a housing market still reeling and struggling to bring back some measure of sustainability, this administration is setting up the nation's housing market for a repeat of the worst housing crash in U.S. history.

Bullard states that regulatory reform should be a "main pillar" to fix the situation in the mortgage markets. Any regulatory reforms that are being presented to Capitol Hill, specifically leave out these two government-sponsored enterprises, though U.S. House Financial Services Committee Chairman Barney Frank has stated that his panel will hold hearings starting on March 2 that will consider long-term GSE reform.

The bottom line is that the government is continuing to drag its feet with regard to changing the way these mortgage companies conduct business and the longer reform takes to move ahead, the longer it will take for the housing market and industry as a whole to rebound. James Bullard doesn't see much deterioration in 2010 in the housing market, but he expects it to remain flat throughout this calendar year.

Hanging on is what most mortgage brokers and real estate agents can expect to occur for the foreseeable future. With the Fed's decision to end its $1.25 trillion program to purchase mortgage-backed securities this April, it is not expected to cause any further trouble for the housing market. Yet, with news of the Obama Administration now deciding to punt on the issue of legislative reform that is critical to future long-term growth and success, one wonders just how seamless this transition will be.

The question then lies in what will happen to the future mortgage-backed securities and how will investors react to policies that brought the nation into this housing crisis continuing unchanged into the future? Perhaps only time will tell, but hopefully the Administration will realize how important legislative reform is to long-term health and security of the housing market.
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