Even as banks grow more dependent on Fannie Mae and Freddie Mac, they are lobbying the government to sharply increase the capital that must be held by the housing finance agencies.
At stake is how the agencies and big banks carve up the mortgage investment business. Right now, Fannie Mae, formally the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp., dominate that business, purchasing 46% of the $639 billion of home loans made in 1995. A growing portion ends up in the agencies' investment portfolios.
Their dominance is attributable in part to favorable capital rules. But banks are trying to level the playing field.
In a Nov. 1 letter to the Office of Federal Housing Enterprise Oversight, the American Bankers Association is advocating that the agencies be required to hold enough capital to earn a triple-A bond rating on their financial merits rather than on the implied government guarantee that their debt enjoys.
The ABA wrote the letter jointly with America's Community Bankers, the thrift trade group, commenting on the first of a two-part risk-based capital rule now being designed by the government.
A Freddie Mac spokeswoman reiterated that the agency is "more than adequately capitalized for the risks that we assume." She said the agency supports its regulators' efforts to develop a risk-based standard and awaits the result.
"We would be surprised if any of the institutions that (ACB and ABA) represent have triple-A ratings," the spokeswoman added.
Fannie Mae executives could not be reached for comment.
As it happens, the oversight agency has already asked Standard & Poor's to rate Fannie Mae and Freddie Mac independent of the government's backing.
The last time this was done, in 1990, Freddie Mac earned an A-plus rating and Fannie Mae an A-minus. Since then, their mortgage portfolios have grown substantially, but so have their hedges, making it hard to gauge how the agencies might be rated today.
Still, a triple-A standard is considered tough and would likely cut into Fannie Mae's and Freddie Mac's biggest competitive advantage - their capacity to issue cheap debt at the present low capital levels. Its enactment is generally considered unlikely, but the banks' position underscores the broad impact that the government's redefinition of capital standards will have on the mortgage market.
Meanwhile, mortgage bankers, real estate agents, and home builders are backing Fannie Mae and Freddie Mac to the hilt. They argue that the government is running the risk of requiring too much capital - a move, they say, will make home loans more expensive and price low-income borrowers out of the market.
The banks' position reflects their increasingly complex relationship with Fannie Mae and Freddie Mac. As the agencies' largest customers, the banks cultivate good relations. Such ties can be helpful in getting good prices for the loans they sell.
But mortgage investment is the last profitable niche of the business, and banks, which have lately stepped up their involvement in home loans, clearly want a bigger piece of it. The origination and servicing of home loans is increasingly done for slim profits, or at a loss.
Banks want the mortgage agencies to be reined in, said Warren Lasko, executive vice president of the Mortgage Bankers Association.
Thus banks, along with other large players, see Fannie Mae's and Freddie Mac's underwriting technologies as competitive challenges, Mr. Lasko said. Some bank-owned mortgage companies have their own systems.
Big banks also favor limits on Fannie Mae's and Freddie Mac's ceilings on the largest loans they may buy, he said.
"The world's become more complicated," Mr. Lasko said. Ten years ago, the mortgage industry spoke with one voice. Now small and midsize companies tend to support Fannie Mae's and Freddie Mac's growth without reservation, whereas larger players view the agencies as competitive threats, he said.
At the very least, the conflicting interests mean Fannie Mae and Freddie Mac have to police themselves more carefully, Mr. Lasko said. "If they willy-nilly seek to expand their powers, sooner or later Congress will say 'enough is enough' and take matters into its legislative hands," he said.
