The appropriate regulatory structure for the three housing government-sponsored enterprises (GSEs) raises interesting issues of political economy, as well as being an active concern for the Congress and the Bush Administration. In this paper, we review recent events, including several legislative proposals aimed at altering the institutional structure and authorities of housing GSE oversight. We then outline the relevant issues and offer some opinions about what we view as the appropriate institutional structure and authorities of GSE regulation. JEL Classification Numbers: G21, G28 Keywords: Government-sponsored enterprises, risk, regulation *The views expressed in this paper do not necessarily reflect those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or their staffs. During 1986-1989 White was a member of the Federal Home Loan Bank Board and hence was also a board member of Freddie Mac and oversaw the Federal Home Loan Bank System. We would like to thank Michael Fratantoni and Edward Golding for their helpful comments on an earlier draft. Regulating Housing GSEs: Thoughts on Institutional Structure and Authorities

Depository institutions have traditionally looked to deposits to fund their asset growth. But since 1978, the value of bank assets has increased proportionally much more than the value of bank

Bank management can change its charter and so its supervisor(s) at any time. Some argue that the supervisory competition resulting from the existence of the charter flip option promotes more efficient bank regulation. Others assert that it leads to “competition in laxity ” as supervisors compete for clientele. Research on this issue is warranted because little empirical research on charter flips is available and the frequency of flips appears to have risen during the past decade. This paper focuses on identifying the factors that best explain the decision of national banks to convert to a state charter. A discrete-time logistic hazard model is used in the study. The sample consists of 2,298 national banks followed quarterly over the 1994 – 2001 time period. The results reveal that several indicators of bank risk significantly increase the likelihood of a national bank charter flip. The opposite effect is evident for a measure of credit risk. The results also indicate that flips are more likely, the more competitive the local market in which a bank operates and in states where past flip activity has been high. Several supervisory variables also are significantly related to the likelihood of charter flips, even after including the effects of the set of variables previously discussed. In general, banks are more likely to flip their charter the worse their supervisory ratings, although the relationship is non-monotonic.

US state chartered commercial banks are supervised alternately by state and federal regulators. Each regulator supervises a given bank for a fixed time period according to a predetermined rotation schedule. We examine differences between federal and state regulators for these banks. Federal regulators are significantly less lenient, downgrading supervisory ratings about twice as frequently as state supervisors. Under federal regulators, banks report higher nonperforming loans, more delinquent loans, higher regulatory capital ratios, and lower ROA. There is a higher frequency of bank failures and problem-bank rates in states with more lenient supervision relative to the federal benchmark. Some states are more lenient than others. Regulatory capture by industry constituents and supervisory staff characteristics can explain some of these differences. These findings suggest that inconsistent oversight can hamper the effectiveness of regulation by delaying corrective actions and by inducing costly variability in operations of regulated entities.

Mortgage companies (MCs) do not fall under the strict regulatory regime applicable to depository institutions. We empirically show that the resulting regulatory arbitrage allowed bank holding companies (BHCs) to circumvent capital requirements and avoid loan-related losses. MC subsidiaries of BHCs originated riskier mortgages (than bank subsidiaries), characterized by borrowers with lower credit scores, lower incomes, higher loan-to-income ratios, and higher default rates. Our results imply that regulation had the capacity to prevent the deterioration of pre-crisis lending standards, but only if consistently applied and enforced. The higher involvement of MCs in subprime lending and securitization do not explain our results.