In his testimony, Falcon also criticized the company's policy of holding mortgage-backed securities for a month before deciding whether to sell them or hold them in the company's own investment portfolio.
"This practice appears to stand in stark contrast to the company's denials of engaging in 'cherry picking' when the matter was reviewed by a 2003 Task Force on Mortgage-Backed Securities Disclosure," Falcon told lawmakers. The task force included officials from OFHEO, the SEC and the Treasury Department.
Fannie Mae's Greener declined to comment on the issue, though the company has denied using its vast nonpublic information base about the home loans it buys to determine which mortgages or mortgage-backed securities to keep or sell. Critics have said use of such inside information is unfair to the broader market Fannie Mae resells to because the company obtains the information through its quasi-government status.
The OFHEO probe began last year following a similar investigation into accounting mistakes at McLean-based Freddie Mac, a scandal that led to the ouster of several top executives there, including two chief executives.
The accounting scandals are being used by Rep. Richard H. Baker (R-La.), chairman of the subcommittee that held the hearing, and the Bush administration to move forward on legislation that would increase oversight and curb the growth of Fannie Mae and Freddie Mac. Baker and others have tried for years to pass such legislation, only to find it defeated by the lobbying efforts of the two companies.
The companies' accounting scandals have bolstered the position of critics, such as Federal Reserve Board Chairman Alan Greenspan. He told the Senate Banking Committee yesterday that the companies' federal subsidies may not benefit homeowners and that the firms' large size and dominance of housing markets could pose a threat to the nation's financial system if they ever fell into trouble.
While there is a general consensus in Congress that Fannie Mae and Freddie Mac need a new, stronger regulator, Greenspan's testimony focused largely on the most controversial aspect of the debate: the size of the companies' portfolios of mortgage assets. Together, the mortgages and mortgage-backed securities that Fannie Mae and Freddie Mac own total $1.5 trillion, a more than tenfold increase in the past 15 years.
The Fed chairman called on Congress to sharply reduce the two companies' massive mortgage portfolios "while we can," saying that without a reduction, they will "inevitably" have major financial problems, causing a crisis in the economy.
Fannie Mae, Freddie Mac and housing industry advocates say the two companies' growing size has strengthened their financial health and improved their flexibility for providing a stable and affordable flow of cash to the home mortgage market -- their congressionally chartered mission.
But Greenspan said the only reason he could find for the vast increase in the companies' balance sheets is to allow Fannie Mae and Freddie Mac to make more money for their shareholders. The companies, , because of their implicit government backing -- what he repeatedly called a "subsidy" -- are able to borrow money at below-market rates and invest the money in market-rate investments. This "spread" between their borrowing costs and what they make on mortgage investments creates a "profit motive" that is at odds with their public mission to provide affordable mortgages and, further, concentrates mortgage investment market risks in two large companies, he said.
Baker's bill calls for giving a new regulator authority to restrict the size of either Fannie Mae or Freddie Mac if the size of the portfolio poses a safety and soundness risk, but it does not call for specific limits or decreases in their balance sheets.
