Fannie, Freddie Aim to Ease Mortgage-Market Crunch

By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, August 8, 2007

For Fannie Mae and Freddie Mac, the chronically embattled companies chartered by the government to make homeownership more attainable, the recent upheaval in the mortgage market presents financial and political opportunities.

After accounting scandals and allegations that Fannie Mae in particular was run largely for the enrichment of its executives, even some longtime allies in Congress have demanded the companies to do more for the public good.

As mortgage funding dries up, Fannie Mae and Freddie Mac are calling on regulators to loosen restrictions on their business so they can fill the breach. They want the freedom to buy more mortgages and mortgage-backed securities.

"Freddie and Fannie were created to bring liquidity, affordability and stability to the market. I think if there was ever a time when liquidity was needed, it's now," Sharon McHale, Freddie Mac spokeswoman, said yesterday.

Some mortgage-industry players are hoping Fannie Mae and Freddie Mac will come to the rescue. Others see them as exploiting the situation to pressure regulators. And some say giving the companies a bigger role could have risky consequences.

Bill Fleckenstein, president of Fleckenstein Capital, a hedge fund manager who is betting against credit-industry stocks, said the market is going through a correction in which securitized mortgages that fueled the housing boom are being marked to their real value.

"There's going to be a shutdown in the housing market. And Fannie Mae and Freddie Mac are not going to be able to bail it out, nor should they," Fleckenstein said. "If Fannie Mae and Freddie or somebody bails out the housing market, then you tell me why we don't start up Gambler Mae so that any lottery ticket owner, any football bettor, any guy at the track, any stock operator who loses money can get bailed out, too."

Two Democrats on the Senate Banking Committee suggested yesterday that regulators loosen restraints on the companies. Chairman Christopher J. Dodd (D-Conn.), said it "may be appropriate, consistent with safe-and-sound practices as determined by the regulator, to ease the temporary regulatory cap on Fannie and Freddie's mortgage portfolio."

Sen. Charles E. Schumer (D-N.Y.) urged a regulator to consider temporarily raising caps on the companies' investments "to allow them to perform their critical role as a market stabilizer."

The regulator, the Office of Federal Housing Enterprise Oversight, is reviewing the senators' statements "and will respond to them shortly," agency spokeswoman Corinne Russell said.

OFHEO Director James B. Lockhart III has frequently criticized Fannie Mae and Freddie Mac and has championed pending legislation that would give regulators more power over them.

The restrictions, contained in agreements between OFHEO and the companies, were put in place last year to limit the trouble the companies could get into as they struggled to rebuild flawed internal controls. Neither company has rebuilt its systems sufficiently to issue timely quarterly reports.

Although Freddie Mac has described its acceptance of the limit as voluntary, McHale said "any decision to withdraw it would be made in conjunction with our regulator."

A Fannie Mae spokesman declined to comment.

Analysts and industry officials offered a range of views as to how much difference lifting the limits would make and whether that is needed. Increasing the companies' mortgage investments could increase their profits. It also could saddle them with greater risks, in part because the value of mortgages is sensitive to fluctuations in interest rates.

Other financial services companies have a love-hate relationship with Fannie Mae and Freddie Mac, simultaneously doing business with them, competing with them, and lobbying the government to keep them in check. With the current market turmoil, some of those adversaries may find their interests aligned with Fannie Mae and Freddie Mac, financial services lobbyists said.

Staff writer Tomoeh Murakami Tse contributed to this report.

© 2007 The Washington Post Company