Fannie Mae, Freddie Mac Face Shift
Washington May Cut Deal
To Push Treasury Oversight
Of Mortgage Companies
By JOHN D. MCKINNON
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- The Bush administration is likely to recommend shifting financial regulation of Fannie Mae and Freddie Mac, the mortgage-market giants, to the Treasury Department from the Department of Housing and Urban Development, and to seek broader regulatory authority over the companies' activities in the marketplace.
If Congress goes along with the plan, which is expected to be announced this week, the moves could significantly strengthen the government's hand in dealing with the two companies.
The government is likely to offer big concessions to win the companies' support. Most notably, the administration is considering granting a five-year moratorium on imposing certain new capital requirements in exchange for broader authority after that period, according to people familiar with the deliberations. That's important for Fannie Mae and Freddie Mac because they are highly leveraged and don't want to set aside more money to meet higher capital requirements. The move also would lessen the risk of roiling housing markets with tough new regulations, something Bush administration officials are eager to avoid.
In an effort to head off a turf war between the Treasury and HUD, the plan would leave HUD with the responsibility for the companies' role in encouraging housing, particularly for lower-income people. Treasury officials declined to comment, and HUD officials didn't respond to requests for comment.
A Freddie Mac spokesman said only that the company has "a long record of supporting a credible regulatory structure," and is "happy to work with Congress" to make improvements. Fannie Mae officials declined to comment publicly.
Lately, the mortgage companies' current regulator, the Office of Federal Housing Enterprise Oversight, has been asserting itself aggressively. It ordered Freddie Mac, which has admitted to managing its earnings, to get rid of one CEO and is demanding it take back millions in promised payouts to two ousted executives.
Ofheo had been criticized for not doing enough to head off the scandal at Freddie Mac. Director Armando Falcon Jr. said his agency has been doing its job. "We'll get criticized whether we do something or nothing," Mr. Falcon said. "We just move forward and do what we think is appropriate."
Mr. Falcon added, though, that he thinks it would be "inappropriate" to impose a moratorium on his agency's ability to exercise discretion in setting new capital requirements.
The federal government created Fannie Mae and Freddie Mac to free up capital for home loans; with money the two raise in the capital markets, they buy mortgages from lenders and package them into securities for sale to investors or hold them in their own portfolios. By buying the mortgages from banks and others who originate loans, the agencies free lenders to make fresh mortgage loans and have kept the U.S. housing market buoyant.
Both Fannie Mae and Freddie Mac are now private companies whose shares are publicly traded, but critics say Fannie and Freddie have used their historic government ties to create a privileged place for themselves in the marketplace. They can borrow at favorable rates because of a widespread perception that the government would step in if they couldn't meet their obligations. That has allowed them to grow to tremendous size, with more than $1.5 trillion in assets, much of them mortgage-backed securities.
A recent accounting blowup at Freddie Mac has led Congress to revisit the companies' situation. Treasury Secretary John Snow is scheduled to give details on the administration's recommendations at a hearing before the House Financial Services Committee on Wednesday. HUD Secretary Mel Martinez also will appear at the hearing, reflecting the administration's efforts to find a consensus on the issue.
People familiar with the administration's effort say many specifics of the proposal are still being debated. Treasury officials clearly want a much greater voice in regulating the companies' safety and soundness, since any financial crisis at such big entities could affect the nation's financial system. Treasury officials also are interested in the companies' broader role in the marketplace, where they compete with banks and other institutions that securitize loans. Among other things, that would likely include greater flexibility in setting some capital standards.
The current capital standards, largely determined by statute, allow Fannie Mae and Freddie Mac to be more highly leveraged than banks. The companies say they are conservatively leveraged because they invest in relatively safe mortgages. Treasury officials, as well as the companies' current HUD overseers, would like the flexibility to impose different standards as the companies change their investment strategies.
Treasury officials also want the authority to review new business programs that the companies start.
"The one thing that was clear was that didn't think it was appropriate to take an extremely narrow view of safety and soundness, that you needed to look at the overall impact of these companies on the housing finance market," said a person familiar with the administration's effort.
Some critics say such enhanced powers will mean little in practice because regulators will be too timid to use them.
The administration seems less likely to propose greater powers to take over an insolvent Fannie or Freddie and break them up if they get into trouble -- a power some say is needed. Fannie and Freddie are likely to oppose that vigorously, arguing it is up to Congress -- which chartered them -- to put them out of business.
It isn't clear what will happen to Ofheo, the current safety and soundness regulator, if Congress adopts the plan. Ofheo would cease to exist as a HUD agency, but it could be transferred to the Treasury and beefed up with personnel. |
