(FNM) Fannie Mae Buy/Sell

New White House Fire for Fannie, Freddie

By David S. Hilzenrath
Washington Post Staff Writer
Friday, November 7, 2003; Page E03


A top White House economist called yesterday for stronger regulation of Fannie Mae, Freddie Mac and other government-sponsored housing financiers, saying that "even a small mistake" in managing their risks "could have ripple effects throughout the financial system."



N. Gregory Mankiw, chairman of the Council of Economic Advisers, told a group of state bank supervisors that the companies are so large and complex "that it is hard even for the companies themselves to keep track of their own situations." He was joining the administration's push for legislation that appears to have stalled in Congress.

Rep. Barney Frank (D-Mass.), the ranking Democrat on the House Financial Services Committee, said the administration's position is driven by concerns about the financial safety and soundness of the companies "to the exclusion of concern about housing." Committee members were ready to support legislation that would give the Treasury Department oversight of Fannie and Freddie, as the administration has sought, Frank said, not power over the companies' housing activities, which are regulated by the Department of Housing and Urban Development.

Mankiw said "the appearance of greater oversight without the reality would be a step in the wrong direction."

Fannie and Freddie provide funding to mortgage lenders by purchasing their mortgages and then holding them or selling them to investors in the form of securities that they guarantee. The companies borrow money on Wall Street, and their federal charters enable them to do so at reduced interest rates, Mankiw said.

Combined with another group of "government sponsored enterprises," the Federal Home Loan Banks, they had debts of $2.2 trillion at the end of 2002, approaching the privately held national debt of $3.2 trillion.

Politicians have stepped up calls for stricter regulation of the enterprises since Freddie Mac disclosed in June that it understated past income by as much as $4.5 billion. That announcement came shortly after regulators reported that Freddie had effective controls.

Fannie Mae added to concern about the enterprises last week with its announcement that it had understated shareholders' equity by more than $1 billion in its most recent quarterly earnings release.

Mankiw said yesterday that the companies' federal charters feed perceptions that the government would bail them out of financial trouble. "The savings-and-loan crisis of the 1980s illustrates the adverse incentive effects that can arise as a result of government guarantees," he said. The risks go beyond a potential taxpayer bailout, he added, noting that securities issued by the GSEs are widely held by other financial institutions.

Citing data from the Congressional Budget Office, Mankiw said the amount by which the enterprises reduce mortgage interest rates for consumers "is small relative to normal fluctuations in interest rates."

Freddie Mac spokesman David R. Palombi said a study Freddie commissioned found that the enterprises reduced interest rates by a much greater amount. He also disagreed with Mankiw's comment about complexity, saying that the methods Freddie uses to hedge against changes in interest rates are "very safe, very plain vanilla."

Fannie Mae spokesman Chuck Greener said in a statement that "appreciation for our role and mission . . . has never been greater."


© 2003 The Washington Post Company