Hallelujah! The Fannie/Freddie wars are over.
Thanks to accounting scandals that have cleared executives' suites and laid low their once-formidable lobbying machines, the giant mortgage lenders have accepted the inevitability of getting a strong new regulator that will rein in their activities.
At the same time, critics and competitors of Fannie Mae and Freddie Mac have finally realized that, even with a sympathetic president and a Republican Congress, they don't have sufficient political support to shut down these government-subsidized enterprises or cut all government ties.
Of course, not all the guns have been silenced or the disingenuous arguments put aside.
Federal Reserve Chairman Alan Greenspan was before the Senate Banking Committee this week, still complaining about all the mortgages Fan and Fred had been buying but denying that such an increase in demand had in any way raised the price of mortgages and lowered interest rates, as simple economics would suggest.
On the other side, there's Sen. Charles Schumer (D-N.Y.), who still can't admit the obvious fact that the big reason Fan and Fred have been growing their balance sheets is that it's been a surefire way to boost profits and share prices and to fatten executive pay.
By and large, however, most of the old issues have been resolved.
The administration has now dropped its insistence that regulation of Fan and Fred be moved to the Treasury, while Democrats have dropped theirs that it remain with the Department of Housing and Urban Development. The new regulator will be an independent agency, modeled after the FDIC.
Last year, the big fight was over whether the new regulator would have the power to liquidate Fan and Fred if they got into financial trouble, undercutting the notion of an implicit federal guarantee. But now that debt-rating companies have concluded such a provision would have little effect on their bond ratings, Fan and Fred have dropped their objections.
There is even agreement that Fan and Fred be required to get approval before offering new products or getting into new lines of business, although defining exactly what is new or how the process will work remains up in the air.
The biggest remaining question is how many mortgages Fan and Fred should be allowed to keep on their balance sheets rather than sell to other investors -- a key factor in their profitability. In their politically weakened state, the companies no longer argue that their size and growth rate should be left to the market. On the other hand, the White House and key House and Senate members have now rejected the suggestion from Greenspan and others for a statutory ceiling of $200 billion on their mortgage holdings.
The consensus now is that the decision will be left largely to the new regulator, operating under a set of broad objectives. Expanding home ownership, providing liquidity to the secondary mortgage market and assuring the safety and soundness of the enterprises are the obvious goals. So, too, is minimizing risk to the financial system that comes from concentrating so much interest-rate risk in one place.
But too literal an application of such principles could reduce Fan and Fred to nothing more than regulated public utilities -- companies that attract investors by paying predictable dividends and grow only as fast as the mortgage market. Under a public utility model, the companies would have little incentive to continue providing the kind of innovative new products and services that have attracted hundreds of billions of foreign capital to the United States while making the housing market the envy of the world.
From a parochial point of view, this cramped model for Fan and Fred would also be a blow to the Washington-area economy, where the companies have been a reliable source of job and income growth and anchors for a fast-growing financial-services sector. And no doubt it would force the directors of Fannie and Freddie to seriously consider asking permission to take the companies private -- which, of course, is what critics have wanted all along.
Steven Pearlstein can be reached at pearlsteins@washpost.com.
