House Takes Up Bill On Fannie Oversight
Wednesday, May 25, 2005
The Bush administration is at odds with key provisions of legislation that would create a new regulator for housing finance companies Fannie Mae and Freddie Mac, but the administration will not attempt to derail the bill as it begins moving through the House today.
Last week, the administration recommended that Congress adopt legislation that would force the two companies to shrink their $1.5 trillion investment portfolios by sharply curtailing the kinds of assets they can hold. Critics of Fannie and Freddie, including Federal Reserve Chairman Alan Greenspan, have long argued that by having such large investment portfolios, which are vulnerable to changes in interest rates, the two companies put the financial system and taxpayers at risk.
But the legislation proposed by House Financial Services Committee Chairman Michael G. Oxley (R-Ohio) and scheduled to be debated in committee today does not force the companies to reduce their portfolios. Instead, it gives a new regulator the authority to require that Fannie and Freddie buy or sell portfolio holdings if it's judged to be important to the financial soundness of the companies, according to a copy of the legislation Oxley released yesterday.
Nevertheless, White House spokesman Trent Duffy said that while the administration remained committed to its view that Fannie and Freddie's investments should be restricted, it was "pleased there is movement on the Hill" toward changing how the two companies are governed.
The administration's position is a marked contrast to the hard-line stance it took two years ago, when it denounced a similar bill Oxley introduced as too weak, forcing him to cancel the bill's markup. Unlike in 2003, however, the Senate is now also considering legislation to tighten oversight of Fannie and Freddie, giving the administration another opportunity to weigh in.
Last night, lawmakers were still negotiating some provisions of Oxley's bill that would allow the new regulator to define which kinds of business the two companies could participate in. While Fannie and Freddie's charters prohibit them from originating loans, the companies' competitors have complained that they have strayed beyond their mission of keeping home loans plentiful and tried to break into new lines of business, such as mortgage insurance.
Under Oxley's bill, Fannie and Freddie would have to obtain approval from the new regulator before launching a new program.
Brian Faith, a spokesman for Fannie Mae, and Sharon McHale, a spokeswoman for Freddie Mac, both declined to comment on Oxley's bill.
The legislation is likely to garner Democratic support thanks to a compromise Oxley forged with ranking Democratic member Barney Frank (Mass.) on affordable housing. Oxley proposed putting 5 percent of Fannie and Freddie's after-tax profits into an affordable-housing fund controlled by the two companies. Fannie and Freddie would dole out grants -- potentially hundreds of millions of dollars annually -- to promote homeownership among first-time home buyers and to preserve or rehabilitate rental housing for low-income Americans.
Oxley's proposal would also allow the companies to buy more expensive mortgages in areas where housing prices are high -- allowing them to buy loans of more than half a million dollars in some cases. Under current rules, the companies cannot buy mortgages of more than around $360,000 for a single-family home.
Frank said Oxley's proposal addressed concerns that Fannie and Freddie's chief regulator, the Office of Federal Housing Enterprise Oversight, didn't have enough power to ensure the companies were financially healthy, and that not enough of the profits of the two companies benefited home buyers.
Frank characterized the remaining critics of Oxley's proposal as "competitors who want to knock them out of the box and the ideological critics."
Fannie and Freddie are government-chartered, shareholder-owned companies set up to promote homeownership. They borrow money to buy mortgages from banks and other lenders, freeing up the banks to offer more mortgages. Fannie and Freddie repackage the loans as mortgage-backed securities to sell to investors, and they guarantee the repayment of the loans.
Fannie and Freddie make money off the spread between their borrowing costs and the return on assets they buy, which include $57 billion in non-mortgage assets, such as airplane-lease securities and car loans.
In recent years, the companies have been holding more mortgages in a long-term portfolio. Officials at both companies have said the investment portfolio supports their mission of promoting home ownership because it helps them attract foreign investment, allows them to act as a lender of last resort during financial crises and helps them encourage lending to low-income home buyers.
To protect themselves from shifts in interest rates, the companies invest in derivatives, complex financial instruments that can be used to speculate or hedge against movements in rates.
Last year, OFHEO found that Fannie Mae did not account properly for losses from those derivatives, allowing the company to still hit earnings targets that qualified top executives for millions of dollars in bonuses. Similar practices had been discovered earlier at Freddie Mac by a law firm the company hired to review its books.
The findings forced both companies to oust their senior managers and to restate billions of dollars in previously reported earnings.