GSE mortage debt
chicken little, but worth adding to the pot IMO
Thursday June 15 12:26 PM ET
Regulator Concerned About Agency Debt
By Joanne Morrison
WASHINGTON (Reuters) - The U.S. regulator that oversees housing finance giants Fannie
Mae (NYSE:FNM - news) and Freddie Mac (NYSE:FRE - news) on Thursday highlighted
concerns about the dramatic growth of their debt, saying that if either agency were ever to
default, the entire financial system could be at risk.
In its annual review of the two agencies, the Office of Federal Housing Enterprise (OFHEO)
gave both Fannie Mae and Freddie Mac a clean bill of financial health.
But in an interview, the regulator's director warned that an economic downturn which hurt
the two agencies could also have a broader impact, referring to the savings and loans crisis
of the 1980s which crippled the U.S. financial sector for years.
``They are well run, they are financially healthy...but we're in
a very good economy right now and we have to be
prepared for the next cyclical downturn. Fannie and Freddie
haven't always been the healthiest companies,'' OFHEO
Director Armando Falcon told Reuters.
During a downturn in the housing sector in the 1980s, Fannie Mae ran into financial
difficulties for a while.
Consumer advocate Ralph Nader (news - web sites) and other groups testifying before the
House Banking Committee's subcommittee on capital markets likened the potential risks of
a failure of these so-called government sponsored enterprises (GSEs) to the savings and
loan crisis.
``While there are clear differences between the thrift industry and the GSEs, (the bill) is a
reminder of what Congress failed to do to protect the taxpayers and the savings and loans a
quarter of a century ago.'' Nader said in his prepared testimony.
OFHEO's report comes as a key congressman, Rep. Richard Baker of Louisiana, put forth
controversial legislation that would consolidate government oversight of government
sponsored enterprises like Fannie Mae and Freddie Mac.
``For too long, Congress has played the role of an indulgent parent to the GSEs,'' Nader
said in this testimony. ``It is time for the GSEs to give up ties to the federal government that
have made them poster children for corporate welfare.''
In its annual report, the regulator cautioned that if the housing finance agencies' debt
continues to expand rapidly, greater financial disclosure might be warranted. The federal
mortgage agencies are estimated to have combined debts of more than $1 trillion.
It also said the mortgage market as a whole could require more federal oversight if the debt
were to assume more prominence as a benchmark fixed-income security.
``Concerns about the systemic risk that Fannie Mae and Freddie Mac may pose are likely
to increase if the Enterprises' outstanding debt continues to grow rapidly,'' OFHEO's report
said.
Overhauling Regulation
OFHEO's Falcon supported efforts by Rep. Baker to overhaul the regulation of these huge
agencies through legislation that would also sever the Treasury Department's lines of credit.
``It's certainly appropriate for Congress to periodically take a look at the enterprises and
reassess the nature of their growth, the risks they pose and whether or not regulation of them
is adequate,'' Falcon said.
Congress established OFHEO in 1992 as an independent entity within the Department of
Housing and Urban Development. Its mission is to ensure the capital adequacy and financial
safety of Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac operate under a private charter to assist home ownership by
purchasing mortgage securities and repackaging them for investors.
In its report, OFHEO noted that the big growth in the outstanding debt of the agencies has
come at the same time that rising budget surpluses are reducing the supply of available
Treasury debt, leading to speculation that agency debt might eventually become a new
fixed-income benchmark.
``Any debt instrument which is a benchmark becomes much more essential to the market,
not just the housing finance sector,'' Falcon said. ``The implications are greater if there are
problems.'' |
