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Steven Pearlstein
Steven Pearlstein
The Post
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Talk: Business News message boards
Archive: Past columns by Pearlstein
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Spotlight on Freddie Mac and Fannie Mae
Steven Pearlstein
Washington Post Business and Economy Columnist

Wednesday, June 11, 2003; 11:00 a.m. ET

On Monday, June 9, FreddieMac announced that its top leadership was being replaced (Read The Post's coverage). FreddieMac's board said it took the step after it learned that the chief executive his information from investigators probing the company's books.

In his column today, Steven Pearlstein offers a balanced look at Freddie Mac and Fannie Mae, writing that while there is room for reform at both of the government-backed mortgage giants, by and large they are successful institutions. Read the full column.

Washington Post columnist Steven Pearlstein was online earlier today to discuss the state of FreddieMac and FannieMae. A Transcript of the Discussion Follows:

About Pearlstein

Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.



washingtonpost.com:

Good morning. Steven Pearlstein will be online in a few minutes.

Today's Washington Post has two articles on the Freddie Mac situation:

* U.S. Opens Criminal Probe of Freddie Mac
* Mortgage Giants Stir Congress

In addition, Freddie Mac confirmed today that the Securities and Exchange Commission has launched a formal investigation into the company's accounting.

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Annandale, VA: Could Freddie Mac's turmoil affect interest rates for mortgages? Nothing I've read about the management firings there seems to explain how this could affect the mortgage market. Would it only affect conforming loans and not jumbos? Or would it affect both? Thanks -- love your columns!

Steven Pearlstein: Thanks. It is possible it could very slightly affect mortgage rates if the borrowing costs of fannie and freddie go up relative to us treasuries for an extended period of time. That would apply primarily to the conforming or non-jumbo loans that fannie and freddie deal with. But I doubt this will wind up having a lasting effect.

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Alexandria, Va.: How would the economic history of the past three decades been any different if Fannie and Freddie were never created?

Steven Pearlstein: Mortgage rates would be slightly higher and certainly more volatile. Refinancings would have been harder, more expensive to do. Closing costs would be higher. It would take a lot longer to get mortgage loan approvals. Lower rates of home ownership. More economic volatility.

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Southaven, Miss: Wouldn't the best thing for freddie and fannie be to break away from the govt, and go private? This would allow them to get into the lending of mortgages. They have never used the credit line established by Congress and they really don't need them. Without the charters which restrict their business to mortgages, they could give do what they do with mortgages,with credit card debt,auto debt and any other business they desire to pursue.

Steven Pearlstein: That's one option but I don't think it is the best one. Fannie and Freddie have a very dominant position, and if that position is used in ways that improve the overall system and produce public benefits (social as well as economic) that markets can't or don't usually provide, then having some public control is a good thing. Remember, the reason we created Fannie and Freddie is that the mortgage market failed at various times. They provide stability, economies of scale that are passed on in large part to homeowners. They have also been the source of tremendous innovation.

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Washington, DC: I'm pessimistic after reading your column. How can we NOT be headed for a big housing market bubble bust? You write that Fannie and Freddie control nearly 50 percent of the mortgage market. You write that both companies are committed to the type of unsustainable growth they've had in recent years. If Freddie's problems turn out to be bigger than initial reports indicated -- and if Fannie has some problems or starts having bad quarters -- are we in for a rough landing?

Steven Pearlstein: I don't see any reason to be particularly worried. There may be a housing bubble in some places but the system is fairly robust and there is lots of hedging done. Computer models have been run assuming some bad case scenarios and the system holds up pretty well.

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Arlington, Va.: Freddie is really putting the spin on this, saying that the feds are only investigating accounting technicalities. I don't buy it, do you?

Steven Pearlstein: Don't know, but the information that has come out so far suggests that the criminal misdeeds have to do with lying and destroying evidence, not defrauding consumers. And there is no indication of any underlying and fundamental problem with the finances of the entire enterprise. I would be surprised if freddie was doing much spinning at the moment, frankly, because that would get them in more trouble with the feds.

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Bethesda, Md.: Steve: Where was the media on this one? No one was talking about this until Freddie Mac fired the execs on Monday.

Steven Pearlstein: The media is not very likely to uncover accounting disputes inside an organization unless somebody inside drops a dime. And even then, it is often so arcane and complicated that it doesn't lend itself to the kind of expose you have in mind. Accounting treatment of swaptions, which is what we understand the freddie thing is about, is pretty tough stuff.

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Loudoun Co., Va.: The political ties of FannieMae and FreddieMac are very interesting. I understand your defense of the Fs from congressional critics, but don't you think more oversight is a necessary outcome of this? Thanks

Steven Pearlstein: I doubt more congressional oversight is the answer to this problem. What would be is to move regulatory oversight from HUD to the Treasury. Perhaps it made sense 20 years ago to put it at HUD because knowing about the economics of housing was the key thing. But now, these institutions are so involved in arcane financing and hedging and credit markets that the Treasury makes more sense. There's been some proposals to move regulation to the other bank regulator, the Fed, but I don't think that is preferable.

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McLean, Va.: In light of recent events, would you recommend that Freddie Mac employees look for new jobs?

Steven Pearlstein: Absolutely not.

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Flagstaff, AZ: If Fannie and Freddie are so consumer friendly, then why don't they allow consumers to see and correct errors within their credit reports "during" LP and DU violating a consumers right under the FCRA?

Steven Pearlstein: I don't exactly know what you're talking about and I don't hold myself out as the great defender of these institutions. Not an issue I know anything about. Sorry.

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Chapel Hill NC: What is the potential for this to become another Worldcom/Enron fiasco?

Steven Pearlstein: Very low.

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McLean, VA: I recently accepted a position at Freddie Mac. Was this a mistake?

Steven Pearlstein: No.

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Harrisburg, Pa.: There is a report that some in Congress are questioning the severance pay given to some of those recently dismissed from Fannie Mae. Do you have any information on what these questions are?

Steven Pearlstein: I'm sure Congress and the regulators will be all over that. There may be some severance that is due under employment contracts signed years ago. Unless the employee engaged in some sort of fraud or gross negligence, it will be hard to get out of those obligations, however.

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Chapel Hill NC: Are the current investigations focusing on the altering of the diaries by top execs or is there reason to believe that the companies accounting could be under investigation (besides the derivative restatements)?

Steven Pearlstein: I'm sure the accounting will be given a thorough going over.

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Washington, DC: OK, so besides reining in executive compensation, what reforms would you impose on Fannie and Freddie?

Steven Pearlstein: If this hadn't become such a political and ideological battleground, the charter could probably be fine tuned to reflect changes in the mortgage market. It could be more explicit, for example, about the boundaries that Fannie and Freddie should be operating in, their role in that, and maybe limits on how much of the market they should represent in order to achieve the public purposes for which they were created. But right now is not a good time to do that because it would quickly become a donnybrook. Best just to change regulators, tweak some of the incentives and perhaps try to some out-of-court settlement with the more reasonable parties associated with FM Watch.

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Washington, DC: I read a figure of assets equalling something like $1.7 trillion, which is one thousand, seven hundred billions, and nearly the size of the federal budget. Assuming the worst, how much of that is gone? Again, assuming the worst, where's the weakest link in the accountability system which would allow large-scale fraud?

Steven Pearlstein: Those are all big numbers but they don't tell you anything. Behind them are mortgages that are current for houses that are valued well in excess of the loans. These are about as safe a asset foundation as you could ask for. It is just that the value of all those outstanding mortgages is in trillions of dollars. Its not the size that matters here so much as the structure.

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Alexandria, Va.: How widely held are the Fannie and Freddie stocks?

Steven Pearlstein: Very.

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Vienna VA: In response to the question about severance packages, Freddie Mac stated in its investor call on Monday morning, that the severance will be as stated in the publicly filed information statements. Leland Brendsel will be entitled to his retirement compensation. David Glenn will not be.

Steven Pearlstein: Right.

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VA: The company were well-connected with the Clinton/Gore administration by hiring political appointees. All the scandals (Enron, Arthur, Global Crossing, etc)

Steven Pearlstein: The companies are very political because managing political risk is as important to the shareholders as managing credit or prepayment risk. As long as they continue to be political battleground sites, you can expect that to continue.

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Vienna VA: With Fannie Mae and Freddie Mac representing such a large part of the capital market, what do you think should be done, if anything, to calm the market?

Steven Pearlstein: Make it clear that all the relevant people are trying to get to the bottom of whatever problem there is as quickly as possible. Then disclose, disclose, disclose.

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Falls Church, Va.: Is there a story here that's not being told -- about the fight between the FM Watch folks and Fannie Mae/Freddie Mac? Did FM dig up the goods here and spill it to the feds?

Steven Pearlstein: No evidence of that, although I'm sure they wish they had. Just some background: Freddie had announced months ago that it was reviewing its accounting treatment of certain derivatives that may result in a restatement of earnings upward for past years. The alleged cover up appears to have occurred as part of that process, triggering the resignations and firings. By the way, I failed to catch a problem in a previous question: the resignations and firings happened at Freddie Mac, not Fannie Mae, as one previous questioner stated.

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Wash, DC: We sure could use an increase in the District's tax base. Do you think Fannie should be paying taxes?

Steven Pearlstein: There is a public policy argument for exempting them from local taxation. But considering that we have largely privatized their operations and allowed them to operate like a private company, I don't see any reason to tilt the competitive playing field in their favor any further than necessary. And as you say, we could sure use the revenue. Maybe Fairfax County could use its share to pay for Metro extension.

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Steven Pearlstein: Thanks folks. See you next week.

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