Falcon on GSE Reform; Mortgage Banking Recently Interviewed the Director of the Office of Federal Housing Enterprise Oversight, Armando Falcon. with Four Years' Experience Heading the GSEs' Safety and Soundness Regulator, Falcon Has Important Views on the Current Debate over GSE Regulatory Reform

By Hewitt, Janet Reilley | Mortgage Banking, April 2004 | Go to article overview

Falcon on GSE Reform; Mortgage Banking Recently Interviewed the Director of the Office of Federal Housing Enterprise Oversight, Armando Falcon. with Four Years' Experience Heading the GSEs' Safety and Soundness Regulator, Falcon Has Important Views on the Current Debate over GSE Regulatory Reform


Hewitt, Janet Reilley, Mortgage Banking


Armando Falcon IS SPENDING A LOT OF TIME ON CAPITOL HILL LATELY. This four-year veteran who heads the Office of Federal Housing Enterprise Oversight (OFHEO) knows better than anyone where current government-sponsored enterprise (GSE) oversight needs fixing.

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Last fall he was an important witness before the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs. Those committees are moving forward on enacting GSE regulatory reform legislation, according to their leadership.

Falcon shared with us his views on what needs to be included in any legislative package to tighten GSE oversight. Among his views is a preference for a single individual to head the new regulatory body rather than a board or commission structure. He says a single director needs to run the body to ensure timely response to any potential crisis.

Q: In your testimony in October before the Senate banking committee, you said you realized pretty quickly after becoming director of OFHEO that there were three things that jeopardized its long-term success. One was inadequate resources, another was a constraining funding mechanism and then there was a lack of powers. How quickly did you realize those were going to be a serious obstacle?

A: As I went through the process of receiving briefings and quickly assessed what needed to be done and what resources we had to do everything, it became clear to me we just didn't have the resources necessary at the agency. We were well behind deadline on getting the risk-based capital [rule] done, and we needed additional depth in our examination program. That all became pretty clear [from] my briefings on various issues from the staff.

Q: When and what convinced you that those flaws needed to be fixed by means of legislation versus other means?

A: It became clear to me right away. [J]ust to get us removed from the appropriations process [required legislation]. Being part of the appropriations process means that our budgets are assembled a year and a half or two years before they ever get enacted by Congress. So as I began assessing the fact that this agency needed additional resources, it became clear that unless I was able to get a supplemental budget request through the process, I was stuck with a budget for the next fiscal year which was totally inadequate. And so the best way to fix this problem was just to get us out of the appropriations process, and that can only be done through legislation.

Q: If Freddie Mac had not encountered its accounting problems, do you believe Congress today would be actively considering GSE regulatory reform?

A: I think so, because this issue predates Freddie Mac's accounting problems. The fact that the companies have generated controversy is more by virtue of the special benefits they receive, and that has been exacerbated by the accounting problems at one of the companies.

Q: You basically have been an advocate for legislation for the four years since you've been at OFHEO. Who else do you credit for getting to this active phase of lawmaking?

A: I think [Congressman] Richard Baker [R-Louisiana] has been, while at times, a critic, he also has been a supporter of the agency and [of] strong regulation. Baker and [Congressman] Paul Kanjorski [D-Pennsylvania] were there in the beginning, helping us to get budget increases as we pressed for them. They have been supportive of regulatory efforts at the agency.

Q: Recently Fed Chairman Alan Greenspan made a lot of headlines with his comments about systemic risk posed by the GSEs. What is your own view of the systemic risk that's posed currently by the two GSEs?

A: I think the two companies, by virtue of their size [and] their involvement in the housing finance system, pose a systemic risk. And [OFHEO] made that point in a report that we did about a year ago. I was the one who directed the staff to produce such a report. …

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Falcon on GSE Reform; Mortgage Banking Recently Interviewed the Director of the Office of Federal Housing Enterprise Oversight, Armando Falcon. with Four Years' Experience Heading the GSEs' Safety and Soundness Regulator, Falcon Has Important Views on the Current Debate over GSE Regulatory Reform
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