Treasury Secretary John W. Snow and Department of Housing and Urban Development Secretary Alphonso R. Jackson threw their support yesterday behind legislation to tighten federal oversight of Fannie Mae and Freddie Mac, adding momentum to efforts by key congressional Republicans to pass a bill this year.
Snow and Jackson said in testimony before the Senate Banking Committee that they favor the creation of an independent agency -- possibly within the Treasury Department -- that would have more explicit power to control growth of the two companies by forcing them to hold more cash as a cushion against possible losses and to shrink their portfolios of mortgage assets.
The two officials said they also favor giving a new regulator the power to determine which products and services Fannie and Freddie can offer and to put either company into receivership, in the event of insolvency, without seeking prior approval from Congress. The companies have lobbied for protection from receivership unless Congress approves.
The new regulator would replace the Office of Federal Housing Enterprise Oversight, a unit of HUD, which oversees the two companies.
Snow, by saying he favors giving a new regulator the right to force the companies to reduce their mortgage investment portfolios, backed a similar recommendation Federal Reserve Board Chairman Alan Greenspan made a day earlier to the same committee.
Fannie and Freddie are congressionally chartered, stockholder-owned companies that were created to keep home-mortgage funding plentiful. Mostly they do this by buying home loans from banks and other lenders, then bundling them into securities that are sold to the public. Over the past 15 years, however, the companies have held onto increasing numbers of mortgages and mortgage-backed securities, and they now have a combined portfolio totaling $1.5 trillion.
Snow, Greenspan and other critics of Fannie and Freddie say the companies don not need such a large concentration of mortgage holdings to fulfill their mandate of keeping home-loan markets well supplied with cash. Worse, they say, such a large concentration of mortgage or mortgage-related products could expose the companies to the risk of losses if interest rates change, a problem that contributed to widespread failures in the savings-and-loan industry in the 1980s and a multibillion-dollar taxpayer bailout. Because the companies are such large players in the mortgage markets -- they fund nearly half of all home loans made in the United States -- they could upset the entire U.S. economy if either falls into trouble, critics contend.
Greenspan said he did not see any reason for either company to hold more than $100 billion to $200 billion in its mortgage portfolio. Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) and Rep. Richard H. Baker (R-La.), who has led efforts of the House Financial Services Committee to toughen oversight of Fannie and Freddie, say the appropriate amount should be left up to a new regulator to determine.
Deft lobbying by Fannie and Freddie has stymied attempts to strengthen or replace OFHEO for years. Now the clout of both companies has been eroded by multibillion-dollar accounting scandals and the departure of their top officials, most recently Fannie's Franklin D. Raines, ousted as chief executive in December.
Lawmakers hope that will allow creation of a stronger regulator by the end of the year.