Pressure On Fannie, Freddie Increases
Wednesday, June 14, 2006
The Bush administration yesterday increased the pressure on Fannie Mae and Freddie Mac to curtail their growth, announcing Cabinet-level studies of the companies' holdings and whether they can be reined in using existing law and regulatory powers.
Legislation to slow the companies' growth and narrow their activities began moving through Congress last year in response to multibillion-dollar accounting scandals, but it is stalled in the Senate.
Yesterday, Housing and Urban Development Secretary Alphonso Jackson said his agency would study whether billions of dollars in assets and liabilities are being held by the two companies in violation of their government charters.
Meanwhile, Treasury Undersecretary Randal K. Quarles said his agency was examining whether it had the authority to limit Fannie and Freddie's ability to sell debt and, by extension, their ability to grow.
Fannie Mae and Freddie Mac help replenish the supply of mortgage money by buying home loans from banks and other lenders. They issue debt to raise the money to buy those mortgages.
"The time is right for Treasury to review its debt approval process to ensure that we continue to act as appropriate custodians of the power that Congress gave us when the charters of Fannie Mae and Freddie Mac were created," Quarles told a gathering of Women in Housing & Finance yesterday.
Announcement of the two studies follows Fannie's agreement to pay $400 million in fines to settle charges that its executives manipulated earnings to trigger higher bonus payments. Critics have long argued that Fannie and Freddie are too big and have used the unfolding accounting scandals to bolster their case.
The HUD review will look at holdings Fannie Mae and Freddie Mac label as "other assets/other liabilities," including some non-mortgage assets, to see if they comply with the companies' government charter.
In Freddie Mac's 2004 annual report, "other assets" included investments in low-income housing tax credits, real estate and equipment. "Other liabilities" included money owed to holders of its mortgage-backed securities.
HUD was "not certain" of the total dollar value of the investments under review because Fannie Mae has not issued accurate financial statements "for some time," agency spokesman Lemar C. Wooley said in an e-mail.
The agency is developing its plans for the review, Wooley said, and "at this early point in the process, HUD does not know how long the process will take."
Both companies said they would cooperate with HUD and Treasury.
The Treasury and HUD actions come as legislation to tighten oversight of the two companies remains bogged down in the Senate. Lawmakers have not been able to agree on whether to force the companies to shrink their investment portfolios, which played a major role in the accounting problems.
The White House backs legislation that would curtail the companies' growth.
Last week, Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) said he was confident that this summer the Senate would take up legislation to strengthen regulation of the companies.
The administration resumed calls to clamp down on the companies after their chief regulator, the Office of Federal Housing Enterprise Oversight, issued a report detailing accounting violations and linking them to bonuses for top Fannie Mae executives.
The day the report was issued, Fannie Mae agreed to increase the amount of capital it keeps on hand and to temporarily cap its investment portfolio at $727 billion. OFHEO director James B. Lockhart III and Freddie Mac chief executive Richard F. Syron have also had preliminary talks about OFHEO imposing a similar cap on Freddie Mac.
Shelby has invited Lockhart, Fannie Mae chief executive Daniel H. Mudd, and former Fannie Mae chairman and chief executive Franklin D. Raines to testify Thursday before his committee on OFHEO's findings.
Raines was ousted in December 2004.