Fannie, Freddie Wary of Controls
Friday, March 16, 2007
The recent meltdown in unconventional home loans provided political ammunition for Fannie Mae and Freddie Mac just as House members are poised to move ahead on long-delayed legislation aimed at tightening controls on the federally chartered mortgage-funding companies.
Freddie Mac chief executive Richard F. Syron testified yesterday that the legislation could not only hurt the two companies but also damage the already weakened housing market.
"We support strengthening [government] oversight, but not at the cost of crippling our ability to compete in the marketplace," Syron said in the longer, written version of testimony delivered to the House Financial Services Committee.
Fannie Mae chief executive Daniel H. Mudd's criticisms of the bill were milder. After testifying, he called the bill "a positive step forward" compared with earlier proposals. But at a time when regulators, rivals and other critics question how much the public benefits from Fannie Mae and Freddie Mac, Mudd said the companies can cushion shocks such as the trouble in the subprime mortgage market.
He said Fannie Mae is developing loans to rescue borrowers trapped in mortgages with sharply rising interest rates. Syron said Freddie Mac is developing safer alternatives to existing subprime loans.
But Judith A. Kennedy, president of the National Association of Affordable Housing Lenders, testified that Fannie Mae and Freddie Mac have helped fuel the increase in subprime mortgages by purchasing securities backed by such loans and not doing enough to offer alternatives in the past.
Fannie Mae and Freddie Mac, which were chartered by Congress to promote homeownership, help keep money flowing to lenders by investing in mortgages and packaging them into securities for sale to other investors. The standards they use in choosing loans help shape the mortgage market.
Many borrowers have been having difficulty making payments on subprime loans, which helped pump up the housing market in recent years, and many companies that specialized in issuing those loans have been foundering. The loans typically offered people with weaker credit ratings the ability to buy houses -- at the cost of high or potentially rising interest rates.
The debate over how the companies should be regulated reflects the often conflicting demands placed on them. Government officials want Fannie Mae and Freddie Mac to do more to help low-income people buy homes -- even as they want the companies to avoid taking on too much risk.
The bill, which the committee is scheduled to mark up March 28, would create a new regulator for Fannie Mae and Freddie Mac with the power to put them into receivership, limit their mortgage investments, block their offerings of new products and require them to hold additional capital as a cushion against financial trouble.
The bill would also require them to make contributions to a fund for affordable housing that would be administered by the new regulator in concert with state officials.
Mudd said that Fannie Mae and Freddie Mac should be allowed to administer the funds, as called for in an earlier version of the bill. But Committee Chairman Barney Frank (D-Mass.) said he could not argue with other lawmakers who feared Fannie Mae and Freddie Mac would use the money to cultivate political support, for example, by funding projects in the districts of influential politicians.
By taking the funds out of the companies' hands, he said, the latest version of the bill would protect them from being hit up by members of Congress.