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Warnings Shadowed Firms' Rapid Growth

Fannie, Freddie Tried to Hedge Risks

By Albert B. Crenshaw
Washington Post Staff Writer
Thursday, September 23, 2004; Page E01

Yesterday's disclosure that government regulators have raised safety and soundness questions about mortgage finance giant Fannie Mae has given new ammunition to critics of the company and its sister firm, Freddie Mac.

Such critics, who recently have included Federal Reserve Chairman Alan Greenspan and Treasury Secretary John W. Snow, worry that the firms have grown so big so fast that if they get into financial trouble, they could imperil the nation's entire financial system.

_____In Today's Post_____
Report Slams Fannie Mae (The Washington Post, Sep 23, 2004)
Probe Examining Fannie's Promises (The Washington Post, Sep 23, 2004)
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Falling Stock
_____On the Web_____
Statement by Ann McLaughlin Korologos -- Presiding Director, Fannie Mae Board of Directors
Fannie Mae Second Quarter 2004 Financial Information (pdf)
_____Primer_____
Freddie Mac Freddie Mac and Fannie Mae: Understanding the complexities of the organizations that help fund the nation's housing market
_____Related Articles_____
Mortgage Regulator To Keep Agency Job (The Washington Post, Sep 16, 2004)
Judge Rules Against OFHEO (The Washington Post, Sep 1, 2004)
Freddie Mac May Face SEC Suit For Errors (The Washington Post, Aug 19, 2004)
More Freddie Mac Articles
_____Fannie Mae_____
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Greenspan and Snow have called for tighter regulation and restrictions on further growth.

The companies say that they are carefully managed, that they hedge risks effectively and that they have repeatedly tested their systems and found them to perform well under all sorts of economic conditions.

A study by the former chairman of the Bush White House's Council of Economic Advisers, R. Glenn Hubbard, released last week by Fannie Mae, concluded that the company's "level of safety and soundness is comparable to or better than" that of most large banks and that the chance the company will fail in the next year is one in 10,000.

But in view of yesterday's findings and last year's disclosure that Freddie Mac had used improper accounting methods to manage its earnings, critics say they no longer have confidence in the companies' assurances.

The two companies represent roughly "$4 trillion in assets that are implicitly backed by the federal government," said Thomas H. Stanton, a Washington lawyer and longtime critic of the companies. Both are owned by private shareholders but hold government charters that require them to support housing and homeownership.

They carry out this mandate primarily by buying mortgages from original lenders, thus providing the lenders with additional cash with which they can make more loans.

The two companies borrow heavily to finance this operation and derive revenue from payments made by homeowners whose mortgages they hold.

Their federal charters also create a relationship with the government that is widely viewed as an implicit federal guarantee. As a result, the companies' voluminous debt is viewed as low risk and carries correspondingly low interest rates.


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