Mortgage giants under pressure to make reforms
By David Weidner
CBS MarketWatch
NEW YORK — There is wide agreement that change is coming for troubled mortgage giant Freddie Mac and its sister company Fannie Mae, but how far it will go remains open to question.
Critics, lawmakers and regulators have presented a range of reforms. Among the simplest is to make Fannie (FNM) and Freddie (FRE) meet the basic financial reporting requirements as other publicly traded U.S. companies.
At the extreme is a radical plan to remove the government exemptions the companies enjoy and break them up. That plan is championed by Freddie and Fannie's biggest competitors: banks and thrifts.
Fannie and Freddie are so-called government sponsored enterprises, or GSEs. They were set up by Congress in 1938 and 1970, respectively, to create a buyer for mortgages. They've since swelled to enormous proportions: $80 billion in annual revenues, $100 billion market capitalization and have issued nearly $3 trillion in debt.
Freddie Mac and Fannie Mae have long irked competitors because there is an implicit guarantee that the government would bail them out in the event of failure. But GSEs also enjoy better terms — they can borrow from the Federal Reserve at an interest rate that's lower than commercial banks.
No surprise, then, that banks and mortgage companies are leading the charge to see more serious reforms implemented. Allied in the Washington-based lobby group FM Watch (http://www.fmwatch.org/) Fannie and Freddie's competitors have argued that the two companies' public mission is at odds with their for-profit status.
They claim Fannie and Freddie have played favorites when buying loans from banks — denying deals with critics. They also claim that the GSEs are attempting to push automated credit scoring on the rest of the industry.
"They're too big," said Mike House, executive director of FM Watch. "Change is necessary."
House said FM Watch favors a rethinking of GSEs that includes shrinking them.
Fannie and Freddie own or indirectly control 40 percent of the nation's mortgages. In a catastrophe, the failure of a GSE would have a crippling effect on the U.S. economy, he said.
Other groups are taking a less radical approach, but they favor reform. The Consumer Bankers Association, another commercial banking trade group, doesn't have specific proposals but wants the issue revisited.
"We're looking at tighter regulation — regulation aimed at keeping them on their fundamental mission of being a secondary market without expanding into the extraneous areas that they have shown a desire to do," said Fritz Elmendorf, a CBA spokesman.
When McLean, Va.-based Freddie Mac announced last week that its three top executives were leaving — two resigned, another was fired — amid an accounting probe, the critics immediately cried, "We told you so."
Subsequently, the Securities and Exchange Commission and the U.S. Attorney have opened investigations into Freddie Mac. And the Office of Federal Housing Enterprise Oversight, the agency with direct regulatory purview, has accelerated its own investigation.
