----- Original Message ----- From: "Marvin Gandall" <marvgandall at videotron.ca>
This is where Fannie and Freddie step in By Lawrence Summers Financial Times August 26 2007
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<http://www.washingtonpost.com/wp-dyn/content/article/2007/08/10/AR2007081001746.html>
Reins Kept on Fannie, Freddie
By David S. Hilzenrath Washington Post Staff Writer Saturday, August 11, 2007; D01
A government agency yesterday refused to loosen restraints on Fannie Mae and Freddie Mac so they could play a larger role in the troubled mortgage markets.
The companies, which were created by the government to provide funding for home loans, had argued that they could help struggling lenders and borrowers if regulators allowed them to buy more mortgages and mortgage-related investments.
But the Office of Federal Housing Enterprise Oversight said yesterday that Fannie Mae and Freddie Mac can pick up slack in the markets by more efficient means -- packaging mortgages into securities for sale to other investors. The agency cast doubt on the potential benefits of letting the companies buy more, saying that the prime segment of the market in which they operate is generally free of trouble.
The agency added that it was still concerned about the safety and soundness of the companies, which remain unable to issue timely financial statements years after accounting scandals exposed weaknesses in their internal controls. Those concerns are what inspired the agency to negotiate the caps on the companies' investments last year, OFHEO said.
OFHEO "will keep under active consideration requests for an increase in the portfolio caps, but we are not authorizing any significant changes at this time," James B. Lockhart III, the agency's director, said in a news release.
Lockhart said the agency was exploring ways for the companies to "enhance their support for affordable housing," but he didn't say what that might involve.
The companies' stocks have shot up over the past week based on perceptions that they stand to benefit from the mortgage industry's woes and on anticipation that OFHEO would lift the caps. The stocks continued to climb even after President Bush threw cold water on the notion of raising the caps in comments earlier this week.
OFHEO, which isn't required to follow the president's lead, announced its decision yesterday after the markets had closed.
For Fannie Mae and Freddie Mac, the battle wasn't a total loss. On the field of public relations, they were able to cast themselves as willing to ride to the rescue while their nemeses in the government stood in the way.
Early yesterday, Fannie Mae chief executive Daniel H. Mudd issued a statement arguing that raising the company's investment cap by 10 percent "would help to alleviate the ongoing credit crunch . . . and bring an additional measure of stability." On Thursday, Mudd went on television to deliver a similar message.
For years, politicians and regulators have accused the companies of doing little for the public benefit while using their federally chartered status to the advantage of their shareholders and executives. Meanwhile, the Federal Reserve has declared that the companies have gotten so big that they could pose a risk to the financial system. Together, they hold or guarantee 40 percent of the mortgages in the United States, according to OFHEO.
That agency has been a persistent critic, issuing reports on alleged accounting manipulations and joining the Bush administration in demanding tighter regulation of the companies than many in Congress have been willing to support.
Analysts generally agreed that allowing Fannie Mae and Freddie Mac to increase their investments would boost their profits. Leaving a cap on their investments could prevent them from seizing a rare opportunity to buy huge volumes of assets at fire-sale prices.
But there was disagreement and uncertainty as to who else would benefit from a lifting of the caps.
"We want to know how that would be linked to keeping people in their homes," said Allen Fishbein, the Consumer Federation of America's director of housing and credit policy. "I don't think I've seen enough information to determine how that would work."
In an appearance on the financial cable channel CNBC on Thursday, Mudd said Fannie Mae would use added buying power to help people trying to finance apartment buildings and credit-worthy borrowers who are locked in subprime loans. Mudd noted that the company was prohibited from funding mortgages of more than $417,000, known as jumbo mortgages, and he said it would take an act of Congress to change that.
Much of the pressure to raise the investment caps was coming from Wall Street, and some observers said giving Fannie Mae and Freddie Mac a freer hand would primarily benefit institutional investors such as hedge funds holding assets that have plunged in value.
Bailing out investors could enable them to pump more cash into the mortgage market, but it wouldn't obligate them to do so.
"Buying more of the distressed subprime or Alt-A [unconventional mortgage] securities tilts more toward a lift for Wall Street balance sheets than toward subprime borrowers," Steven Abrahams, a senior managing director at Bear Stearns, said in a report this week.
Fannie Mae and Freddie Mac "have the means to make meaningful purchases without breaching their portfolio limits," analysts at Bank of America said yesterday in a report to clients.
Some troubled lenders were looking to Fannie Mae and Freddie Mac for relief. But others in the financial services industry opposed strengthening the companies' hands.
"Calls to extend the reach and authority of Fannie Mae and Freddie Mac into the healthy and functioning primary mortgage market provided by community lenders appear unjustified," Alfred A. DelliBovi, president of the Federal Home Loan Bank of New York, said in a letter to OFHEO.
Since the companies were found to have misstated their finances by billions of dollars, policymakers generally have agreed that the regulators need more power, but they have argued to a stalemate over details.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in an interview this week that the debate over Fannie Mae and Freddie Mac was largely ideological, dividing policymakers who believe the companies have an important role to play in support of housing from others who believe government-sponsored enterprises have no place in the private market.
The upheaval in the financial markets over the past week may have altered the debate, giving new urgency to the legislation -- and additional focus to the potential good Fannie Mae and Freddie Mac can do, some observers said.
Yesterday, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) reaffirmed his view that regulators could safely ease the caps. "The Administration can't continue to close their eyes to the scope of the problem and hope it goes away," he said in a statement.