Banks Object to Plan for Fannie Mae Home Loans

A plan by Fannie Mae to make $10 billion worth of home construction loans over the next 10 years has renewed calls among banks and lenders for legislation that would tighten regulation of the housing finance giant and its sibling, Freddie Mac.

Although the company first announced the plan as part of an affordable-housing initiative two years ago, remarks made yesterday by Fannie Mae chief executive Daniel H. Mudd at a gathering of the National Association of Home Builders in Orlando stirred concerns in the banking industry about a move by the giant company into construction finance, a $350 billion industry.

Even though the District-based company is struggling to overhaul its books after a multibillion-dollar accounting scandal, its critics contend that the government-chartered firm has a competitive advantage because it can borrow money more cheaply.

"Once they are in a line of business, because of their marketplace advantages, they are able to do very well," said Paul Leonard, a vice president of the Financial Services Roundtable, a group representing large financial institutions.

Mudd tried to allay such fears during his speech, saying: "We'll still be a small player in a big market. . . . We're not striving to put a big, hairy King Kong footprint on the market."

At the same time, however, he argued that Fannie Mae had a role to play in construction finance. "While construction financing is plentiful right now, the flow can have cyclical ups and downs, as banks and thrifts move in and out of commercial lending," Mudd said. "We're striving to serve the market."

Some housing industry representatives agreed. "As interest rates continue to move just slightly up, anything we can do to provide more additional financing for home construction adds to the possibility of keeping costs down for home buyers," said Al Mansell, past president of the National Association of Realtors.

Banking industry representatives countered that there's no shortage of money for construction. "There is no demonstrated need for more home construction loans," said Anne Canfield, executive director of the Consumer Mortgage Coalition, which represents large mortgage companies.

The company's construction-loan initiative began as a pilot program 15 years ago and has since grown with the blessing of federal regulators. The renewed attention to it has revived calls for Congress to pass legislation tightening oversight of Fannie Mae this year. The House approved a bill to do just that in October. A companion bill is pending in the Senate.

"The way the . . . approval process goes, once it's a pilot project, it's difficult for [regulators] to turn down its expansion," Leonard said. "This shows the need to have oversight consolidated under one regulator."

The political dispute up over the program may complicate Fannie Mae's efforts to find new sources of income.

Changing consumer preferences for adjustable-rate loans and increasing competition from private banks have eroded the company's market share in its core business of buying home loans from banks and lenders and bundling them into securities to sell to investors. The company's previous strategy of increasing its investment holdings to generate much of its profit has been criticized by the White House and outgoing Federal Reserve Chairman Alan Greenspan as too risky.