House Passes Bill on Fannie And Freddie Oversight

By Annys Shin
Washington Post Staff Writer
Thursday, October 27, 2005

The House yesterday overwhelmingly approved a bill to strengthen oversight of Fannie Mae and Freddie Mac, a major step in Congress's response to multibillion-dollar accounting scandals at the two housing finance companies.

Though efforts have been made over the past several years to rein in the two companies, none has progressed this far, evidence of how the discovery last year of accounting violations at Fannie Mae, and at Freddie Mac two years before that, changed their once-dominant political position. Fannie and Freddie own or guarantee about half of the $7.6 trillion U.S. mortgage market.

The House bill, which passed 331 to 90, still faces obstacles to final passage. It remains at odds with legislation approved by the Senate Banking Committee in July.

One major difference concerns Fannie Mae and Freddie Mac's combined $1.5 trillion investment portfolios, which critics including the White House and Federal Reserve Chairman Alan Greenspan argue are so large they pose a risk to the financial system.

The House bill would give a new regulator for the two companies power to adjust the size of their portfolios to keep the companies solvent, while the Senate bill would force them to sell off a substantial amount of their investment holdings.

In recent years, the portfolios have generated a majority of Fannie Mae and Freddie Mac profit, and they played a central role in the accounting scandals.

The White House prefers the Senate committee bill and yesterday issued a "statement of administration policy" opposing the House legislation. "Given the size and importance of the [companies], Congress must ensure that their large mortgage portfolios do not place the U.S. financial system at risk. [The bill] fails to provide critical policy guidance in this area," the statement read.

However, placing more specific restrictions on the companies' portfolios did not enjoy broad support in the House: An amendment that would have brought the bill more in line with the Bush administration's view failed by a wide margin, though several House leaders supported it and probably will play a role in further negotiations with the Senate.

The House also rejected an amendment to eliminate Fannie Mae and Freddie Mac's long-standing line of credit with the U.S. Treasury. Critics argue that the line of credit reinforces a belief among lenders that the federal government will rescue the companies if they get into financial trouble, a perception that allows the companies to borrow money at favorable interest rates.

While the bill passed with broad bipartisan support, the fact that the House shunned the tougher portfolio language remains something of a victory for the two companies, which continue to face lawsuits and multiple investigations as a result of their accounting problems.

Once renowned for its political clout, Fannie Mae maintained an unusually low profile during the bill's progress, as did Freddie Mac. Their nearly identical responses to yesterday's vote were similarly muted.

"As the process unfolds, we remain committed to working cooperatively and constructively with members of Congress and we are hopeful a bill will be signed into law," Fannie Mae spokesman Brian Faith said.

"We look forward to working constructively with the House leadership and with the Senate to advance this effort and to achieve bipartisan legislation that will be signed into law," Freddie Mac spokeswoman Sharon McHale said.

The House bill passed yesterday despite losing the support of several key Democrats who objected to a recently added provision barring groups that engage in voter registration and get-out-the-vote efforts from participating in a low-income housing fund to be financed by the companies.

They decried it as undemocratic and argued that such a prohibition would bar many nonprofit housing developers, including faith-based groups, from a new source of funding that supporters estimate could reach $400 million a year.

Fannie and Freddie were created by Congress to keep money flowing into the housing market. The companies do this by buying mortgages from banks and other lenders, which they bundle into securities to sell to investors. In recent years, however, Fannie Mae and Freddie Mac have increasingly kept mortgages and mortgage-backed securities for investment purposes -- a lucrative but potentially risky strategy, critics argue, because it makes them more vulnerable to interest rate swings.

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