The chairman of the House Banking Committee has turned up the heat on Fannie Mae over its plan to insure borrowers.
Rep. Jim Leach is asking the Clinton administration to investigate whether the death-and-disability insurance proposal oversteps the government-sponsored enterprise's charter.
Under a program to be announced soon, Fannie Mae plans to essentially give mortgage life insurance to homeowners by paying the policies' premiums on their behalf. Fannie would earn interest on the premiums, as is common on whole life insurance policies, and receive a portion of the benefit if a homeowner dies.
In a surprisingly blistering letter this week to Andrew Cuomo, secretary of Housing and Urban Development, Rep. Leach said the program "appears to be chiefly an arbitrage operation." The government-sponsored enterprise lends "money raised at agency rates to the insurance industry under the guise of life insurance."
"Fannie Mae is precariously close to entering the life insurance business," the Iowa Republican added.
Rep. Leach's concerns echo those of other observers who worry that as profit growth becomes harder in a business they already dominate, Fannie Mae and its sister agency, Freddie Mac, will leverage their government privileges-notably their access to cheap debt-into other investments.
The House Banking chairman cited Freddie Mac's recent $340 million investment in Philip Morris bonds and two mortgage investment pilot programs at the Federal Home Loan banks as additional examples of government-sponsored agencies' stretching the bounds of their charters in pursuit of shareholder profits.
Fannie Mae took exception to Rep. Leach's description of its program as "arbitrage."
Said spokesman David Jeffers, "This is an exciting new product that will be a breakthrough for first-time homebuyers."
"We are buying insurance by paying a premium," Mr. Jeffers said. "The idea that we are lending money (to insurers) is completely incorrect."
Fannie will pay the premiums with retained earnings, not debt, he said.
Anticipating that argument in his letter, Mr. Leach stated that "money is fungible, and therefore Fannie Mae cannot make the distinction between equity and debt funding easily."
Fannie Mae will recover the cost of its investment through interest earned on premiums, reduced credit losses, and by winning additional business from lenders, Mr. Jeffers added.
A spokeswoman, Sharon McHale, said in defense of Freddie Mac: "We firmly believe our investment strategies support our housing mission and are clearly within our charter authority.
Freddie disclosed last week that it had sold the Philip Morris bonds in the wake of Rep. Leach's criticism.
Rep. Leach said a Fannie Mae internal document, presumably prepared for senior executives and board members, showed the agency was "painfully cognizant that the (insurance program) may be interpreted as an abuse of GSE privileges"-and is taking steps to combat that perception.
Thus, he said in his letter, the agency's description of the program in talking points prepared for questions from the public, plays down Fannie's profits from the program in contrast to internal estimates that it would add almost $1 billion in net income by the 30th year.
The internal documents "indicate that Fannie Mae must keep the lowest possible profile, maintain a minimal and clear role in the structure and balance the speed of program introduction with the need to maintain control over expectations and public perceptions," the letter added.
