Congress is almost sure to approve legislation by the end of the year that will create a new regulatory scheme overseeing the two secondary mortgage market giants, Fannie Mae and Freddie Mac.
But if the legislation simply results in moving the regulator of the two government chartered enterprises from the Department of Housing and Urban Development (HUD) into the Treasury then lawmakers will have missed a giant opportunity to reform the system that has created a liquid mortgage market that is the envy of the world. As it stands now, the bill would only shuffle the deck and leave the same rules in place.
The accounting scandal engulfing Freddie Mac has raised serious questions about the whole system which continues to be subsidized to great lengths by taxpayers. And despite the fact that Freddie hid profits, and not losses, from stockholders, it should be considered a scandal because the failure to book pre-tax gains of as much as $8 billion over three years amounts to a massive manipulation of the books that affected the buying and selling decisions of millions of stockholders and institutions.
Now, with the huge portfolios held by entities like Freddie and Fannie, complete with billions of dollars in sophisticated financial derivatives to hedge interest rate risk, it is impossible to set an exact accounting. After all, accounting in such areas is based on much guesswork. But $8 billion of questionable accounting is another matter altogether.
The legislation likely to come out of this mess, however, will do little to address this issue. In fact, the only thing that will probably come out of it is the creation of a new regulator that looks very much like the old one, the Office of Federal Housing Enterprise Oversight, known as OFHEO. Representatives from both companies have endorsed such a move, basically removing the major obstacles.
Rep. Richard Baker, R-La., a chief critic of the two mortgage giants, has indicated he will agree to limit the congressional inquiry into the two companies in exchange for quick passage of a bill this year.
But Congress should not be deterred from using the opportunity to delve deeper into the overall issue of the safety and soundness of the two companies, their proper roles in the vast American mortgage markets, and how much the taxpayer should continue to subsidize them.
These are all ripe issues for credit unions, as well, who are closely tied to the two secondary market giants through the sale of billions of dollars in mortgages as well as the purchase of billions of dollars in securities, debt and mortgage backed bonds ven the two chief credit union lobbying groups, CUNA and NAFCU, have financial ties with Freddie and Fannie, which some might argue could affect their own positions on these issues.
Among the issues Congress should continue probing are whether they should move ahead with the full privatization of the two quasi-public entities, eliminating their perceived government ties through a guaranteed line of credit. If the two are legitimate public entities, beholden, first, to their stockholders, they should not continue to enjoy this benefit which lowers their borrowing costs to below that of market competitors.
Should the two companies continue to be exempt from billions of dollars in state and local taxes providing additional cost benefits? Should the two companies, as the largest issuers of debt in the country outside the U.S. government continue to be exempt from registration and the registration fees required of all other public issuers of debt, including all of their market competitors? Should they be allowed to set the standards for the mortgage market through computerized desktop underwriting which determines which mortgages they will and will not buy? And should they be allowed to expand into new services and products that were not included in their original missions?
These are questions Baker and other critics have raised but are not likely to get a full hearing this year as Congress rushes to get a bill passed.
Fannie Mae's chief executive Franklin Raines, addressing NAFCU's annual Congressional caucus last month, suggested that to do anything that may address these issues would negatively affect the mortgage markets. He derisively called the financial entities lobbying to rein in his company and Freddie Mac, the "Coalition For Higher Mortgage Costs."
But who is to say that opening the giant secondary mortgage market to more competition wouldn't, in the end, lower mortgage costs and spur more innovation? Wouldn't it be beneficial for more entities to be competing to buy loans from credit unions and banks? To think that only Freddie Mac and Fannie Mae can provide these services may be a little shortsighted, as several other large financial entities are certainly capable and resourceful enough to do much, if not all, of what the two companies do.
There is no question that both mortgage giants play a vital role in the markets but it is also true that the markets have evolved so much since the introduction of Fannie and Freddie that it may be time to rethink the government's role.
