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'Serious Times' For Fannie Mae, Freddie Mac's New Regulator

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Friday, August 1, 2008

The director of the new agency regulating Fannie Mae and Freddie Mac told hundreds of his employees yesterday that they face a difficult task in addressing the challenges that have rocked the two housing finance giants and that even more staff may be required to carry out the government's expanded mission.

"These are very serious times for the mortgage market," James B. Lockhart III, director of the nascent Federal Housing Finance Agency, or FHFA, said in an interview after briefing more than 400 employees at a meeting in the Mayflower Hotel in downtown Washington. "We [will] need more people, not less."

President Bush created FHFA this week when he signed a sweeping housing rescue bill into law. The agency merges three existing federal entities into a new, tougher regulator for Fannie Mae and Freddie Mac. The agency will also oversee the nation's 12 Federal Home Loan Banks, which, like Fannie Mae and Freddie Mac, were chartered by Congress to improve the nation's housing capacity.

FHFA combines the Office of Federal Housing Enterprise Oversight (OHFEO), which has been overseeing Fannie Mae and Freddie Mac, with the Federal Housing Finance Board, which regulates the home loan banks and a small unit of the Department of Housing and Urban Development.

Authority over Fannie Mae and Freddie Mac has been greatly expanded. Lockhart, the director of OHFEO, became the head of FHFA when the president signed the housing bill Tuesday morning. Bush can now nominate a new director of FHFA and ask the Senate to confirm him or her to a five-year term. But congressional observers don't expect any change at the top until a new president takes office next year.

The existing employees of the three agencies will be formally transferred to the FHFA no later than July 30, 2009. But Lockhart said that is likely to happen much sooner, perhaps this fall.

The two companies for years fought the idea of getting a stricter overseer, but they lost that argument after their accounting scandals and controversy over the high salaries paid to their executives. The change was given added urgency this year after both companies suffered steep losses because of the decline in the U.S. housing market.

Fannie Mae and Freddie Mac are vital to the well-being of that market and to the smooth operation of the broader financial markets. The companies back more than half of all outstanding U.S. mortgages. The firms also funded about 70 percent of home mortgages issued in the first three months of the year.

Lockhart has much more latitude than he did at OHFEO to ensure the financial health of the companies, including compelling them to raise more capital. He must also approve any new products, in particular various types of mortgage-backed securities, that the companies want to sell to investors.

FHFA will also have to consult with the Federal Reserve Chairman Ben S. Bernanke about possible risks to the financial system posed by troubles at the companies.

The agency will have to develop an extensive set of rules governing the adequacy of internal controls and maintenance of liquidity and reserves at the two companies. Rules also have to be written by the agency to regulate the securities that the companies can buy.

"Pretty much everything will have to go through a rulemaking process," Lockhart said. "We count between 25 and 30 new regulations that have to be created out of the new law. We're going to be very busy."

By contrast, Ronald A. Rosenfeld, chairman of the Federal Housing Finance Board, said the functions of his old agency will not be altered much.

"The role they [the employees] have played in the past quite well will continue," he said. "Safety and soundness examinations of the 12 home loan banks will continue as they're done today."

But the five-member board that Rosenfeld heads -- the policymaking arm of the agency -- has been replaced by Lockhart. It can still continue to operate for up to a year, however, as it winds down its activities, according to the new law. Rosenfeld said he hopes to shut down the board "as judiciously and promptly as possible."

"I guess I still am the chairman of a board where there's not too much to do," he added. In fact, in an interview Rosenfeld at first said that he was no longer chairman, then an aide reminded him the board was still intact.

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