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Fannie, Freddie Back Regulator But Will Fight Portfolio Limits

By Kathleen Day and Annys Shin
Washington Post Staff Writers
Wednesday, April 20, 2005; Page E01

Fannie Mae and Freddie Mac plan to tell Congress today that they support the idea of a stronger, independent federal regulator to oversee them but oppose several key provisions in pending legislation intended to rein them in following multimillion-dollar accounting and recordkeeping errors over the past two years, according to documents and sources familiar with the testimony.

Executives for the two mortgage finance companies intend to say they oppose provisions that would restrict the total value of the mortgages they hold for their own portfolios, require each company to seek regulatory approval before offering new products and force the new regulator to define in detail what areas of the mortgage market the two companies can do business in.

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"Fannie Mae understands that we have disappointed a lot of people," Fannie Mae's interim chief executive, Daniel H. Mudd, plans to tell the Senate Banking Committee, according to a copy of the written testimony the company gave lawmakers yesterday. It will be the company's first congressional testimony since its board ousted Franklin D. Raines as chief executive in December.

"We must . . . rebuild relationships with our regulators, partners, stakeholders and Congress," he plans to say, according to the prepared testimony, which strikes what sources familiar with the document described as a deliberately contrite tone.

Freddie Mac's chief executive, Richard F. Syron, plans to tell lawmakers that the companies serve a valuable purpose in keeping home loan money plentiful but that the regulatory structure is inadequate. He will argue, however, against putting limits on either company's portfolio.

Fannie and Freddie mostly make money by buying home loans from banks and other lenders and bundling them into securities that are sold to investors on Wall Street -- a process that keeps the original lenders supplied with cash to make new loans. But over the past decade, the companies also have built a $1.5 trillion portfolio of mortgages and mortgage-backed securities that they hold onto.

Mudd plans to argue that holding onto some loans and mortgage securities has several benefits. It enables the companies to keep funding available even during a crisis, as they did in the weeks following the Sept. 11, 2001, terrorist attacks, and to buy loans from smaller lenders. Spokesmen for the companies would not comment on the testimony.

Today's hearing will be the latest in a series held as Congress considers ways to tighten regulation of Fannie Mae and Freddie Mac. The legislative push follows accounting scandals at Fannie and Freddie over the past two years that have led to the ousters of their top executives, restatements of the companies' earnings and investigations by regulators at the Securities and Exchange Commission and the Justice Department.

Longtime critics of Fannie and Freddie have complained that their ties to government have given them unfair advantages over other companies in the mortgage business. Those advantages include the ability to borrow money at cheaper rates than other companies and to save hundreds of millions of dollars a year in fees by being exempt from having to register their bonds with the SEC.

Critics in the Bush and Clinton administrations have worried that the companies' growth over the past 20 years could pose a risk to the financial system at large if either fell into trouble. Along with many members of Congress, they have criticized the structure of the companies' regulator, the Office of Federal Housing Enterprise Oversight, as inadequate.

For over a decade, the companies' extensive lobbying efforts beat back attempts to impose tougher regulation.

Yesterday, the Senate committee heard testimony from mortgage brokers, realtors, small community bankers and executives representing some of the nation's largest financial institutions on how regulation of Fannie and Freddie should change. Executives representing these groups presented many of the same ideas Mudd and Syron plan to offer today.

The executives who testified yesterday disagreed with Federal Reserve Board Chairman Alan Greenspan, who recently suggested a $100 billion to $200 billion limit on the amount of mortgages Freddie and Fannie could hold in their portfolios. They were unanimous in saying a new independent regulator should have the power to decide the size of such holdings and to prevent the two companies from competing directly with the retail mortgage industry.

Two groups -- the Housing Policy Council of the Financial Services Roundtable, which represents giant banks, and the Mortgage Bankers Association -- said the new regulator should define which markets Fannie and Freddie are allowed to enter. Over several decades, the line between Fannie, Freddie and the retail mortgage industry has blurred as Fannie and Freddie have sought new ways to profit.

The two have created a uniform underwriting system that most banks use to determine who qualifies for a loan, for example. Many banks rely on the underwriting system because they are too small to create their own. Larger banks, however, see the system as an attempt by Fannie and Freddie to compete with lenders.

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