Fed Paper To Fuel Fire Around GSE Oversight

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The Federal Reserve issued a paper last week that is sure to fuel the simmering fire over regulatory oversight of the secondary mortgage market, specifically Fannie Mae and Freddie Mac.

In its paper the Fed argued that the two government-sponsored enterprises do little to stabilize the mortgage markets during financial crises, one of the main assertions of Fannie and Freddie supporters. Specifically, Fed economists found that during the 1998 financial crisis surrounding the meltdown of Long Term Capital Management the two companies' buying and selling or mortgage backed securities had "statistically negligible effects" on mortgage rates.

The two secondary market players, under fire because of accounting lapses, argue that they play a critical role in the mortgage markets because they continue to buy mortgages and issue debt even during time of market difficulties. But the Fed economists said this was not so, at least during the controversy surrounding LTCM.

The report also says Fannie and Freddie only slightly narrow the differences in rates between 30-year mortgages and Treasury securities, another major claim of supporters of the two GSEs.

The benefits of Fannie Mae and Freddie Mae will become even more widely debated in coming months as Congress renews its debate over a regulatory oversight scheme for the two mortgage giants, as well as another popular GSE for housing, the Federal Home Loan Bank System.

Lawmakers are crafting bills that would create a new regulatory agency for all three GSEs, set capital standards, and even delve into other areas, perhaps the huge financing benefits provided by Fannie Mae's and Freddie Mac's guaranteed line of credit with the U.S. government, the so-called implied U.S. guarantee on Fannie and Freddie debt.

This debate will be the first, and most pressing one in the financial services arena faced by lawmakers when they begin the 109th Congress next month.

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