I’d like to hear your thoughts on the effectiveness of the “world-class regulator” for the GSEs that this legislation would create.

It seems to me that a strong regulator looking at the Fan and Fred is going to want them to lever way, way down. That would entail buying fewer mortgages and holding onto fewer in their portfolio. Moving away from their current 65 to 1 leverage to something in the high teens.

This flies in the face of the stated need for the two GSEs to save the housing market by soaking up all the loans they can.

Also, the provisions that expect the GSEs to pay into affordable housing funds seem to have been written last year at a time when Fan and Fred weren’t losing billions of dollars every quarter. With house prices expected to fall even more, is it really believable that these two are going to be able to sustain funding anything other than themselves (with govt. backstops, of course).

Once this strong regulator comes out and tells the GSEs that they are in precarious financial shape and need to drastically cut back — and Barney Frank’s head explodes, then what?

Thanks for the great blog and I look forward to your response.