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Fannie Supports New Regulator, But Wants a Say

Company Hopes to Get Its Way on Bill's Details

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Friday, November 26, 2004; Page E01

Fannie Mae, which has long fought legislative efforts to limit its powers, will now support a bill to create a stronger regulator of its activities, according to officials at the mortgage funding giant.

The strategy will put Fannie Mae in a stronger position to bargain over crucial details of how its business would be regulated. It wants to avoid limits on its ability to develop new financial products. It also wants to be sure that the federal government would give explicit protection to mortgage-backed securities holders if Fannie Mae were ever forced into receivership.

Ohio Sues Fannie Mae, Alleges Securities Fraud (The Washington Post, Nov 20, 2004)
No Action Taken After OFHEO Probe (The Washington Post, Nov 18, 2004)
Fannie Mae Misses SEC Filing Deadline (The Washington Post, Nov 16, 2004)
Fannie Regulator's Budget Loses Key Backer, for Now (The Washington Post, Nov 11, 2004)
Fannie's Issues: Simple or Not? (The Washington Post, Oct 23, 2004)
SEC Takes Fannie Mae Investigation To Next Level (The Washington Post, Oct 15, 2004)
Report on Fannie Mae Regulator a Secret (The Washington Post, Oct 14, 2004)
Justice Asks Fannie to Save Documents on Accounting (The Washington Post, Oct 13, 2004)

"I don't think anyone will have any doubt about our commitment to achieving legislative reform next year," said Charles Greener, Fannie Mae's chief spokesman.

The District-based financial behemoth has made similar statements before and then torpedoed legislation by fighting key elements. For example, after its chief executive, Franklin D. Raines, said last year that the company "looks forward" to creating a new regulator, at least one of Fannie Mae's offices solicited for grass-roots advocates to undercut the administration's plan.

That history has made many lawmakers skeptical that the firm would ever lay down its arms. "It doesn't surprise me that Fannie Mae is saying that it's willing to play nice; that's been its pattern for years," said Michael DiResto, spokesman for Rep. Richard H. Baker (R-La.), chairman of the House panel that oversees the company and its smaller rival Freddie Mac. "But behind the scenes they've always worked to gut any legislation."

The chief reason for Fannie Mae's change in tune, officials there said, is the highly critical study of its accounting and management practices issued in September by its current regulator, the Office of Federal Housing Enterprise Oversight. OFHEO alleged that in one instance in 1998, the company inappropriately deferred $200 million of estimated expenses, which enabled it to dole out bonuses to its top executives.

As a consequence, the Justice Department and Securities and Exchange Commission are investigating. And the company, while disputing the accusations, announced last week that it would have to lop $9 billion off its profit since 2001 if the SEC determined that its accounting was wrong.

A stronger regulator, Fannie Mae executives asserted, would give investors confidence that any such problems have been dealt with.

The company made an almost identical decision to help craft legislation 12 years ago when Congress created OFHEO. Initially, Fannie opposed an oversight agency. But when some of its lucrative ties to government were placed in jeopardy for largely ideological reasons, the company reversed itself and was able to use its place at the negotiating table to limit the regulators' powers.

Another reason for Fannie Mae's new attitude is that the gap has already closed between what lawmakers have proposed in the bill and what the company and its fellow housing-industry lobbyists would accept. "Over the past year the issues have narrowed significantly as Congress and the administration worked hard on the legislation," Greener said. "Any remaining issues are bridgeable."

The company has good reason to try to rush the acceptance of the latest version of the legislation.

The nation's two most prominent economic officials -- Federal Reserve Chairman Alan Greenspan and Treasury Secretary John W. Snow -- have campaigned for months to place stricter controls on Fannie Mae and Freddie Mac. And the administration earlier this year complained that the current Senate bill was too weak because it gave too much authority to Congress in the case of receivership.

In addition, Republicans, who have pressed hardest for the new regulator, will be in a stronger position to pass tougher legislation.

Fannie Mae officials say the company could reverse course again and try to stall a bill if the Republicans try to add fresh restrictions. Few companies are as well-situated to make good on such a threat.

"Outside the National Rifle Association, they're probably the strongest lobbying presence on Capitol Hill," said W. Michael House, executive director of FM Policy Focus, a group that included financial services companies that compete with Fannie Mae.

Staff writer David A. Vise contributed to this report.

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