Federal Reserve Chairman Alan Greenspan waded deeply into the growing controversy over the secondary mortgage market last week when he told Congress last week he favors fully privatizing secondary mortgage market giants Fannie Mae and Freddie Mac or limiting their growth by putting constraints on their debt issuance.
The two entities are classified as government sponsored enterprises, or GSEs, which were chartered by the federal government but have become quasi-public entities as they have become publicly owned. However, both companies, which dominate the secondary market for mortgages, continue to enjoy numerous benefits through their government charters, including exemptions from state and local taxes and a guaranteed line of credit with the U.S. Treasury.
The Fed Chairman, testifying before the Senate Banking Committee, conceded his stance is unlikely to hold sway in the current argument over reform of the secondary market, as both Fannie and Freddie are among the most powerful lobbies on Capitol Hill. But he said he feels that it is essential to the U.S. economy to eliminate the federal subsidies enjoyed by the two companies, as well as their ability to grow their on-balance sheet assets.
Chairman Greenspan testified that he thinks the two companies borrowing advantage in the debt market is an "abnormality" and the two companies are squeezing out competitors. He called the current structure of the GSEs "opaque and circuitous." He also believes that a strong bank-like regulator is needed to oversee them.
The Senate panel is expected to draft legislation over the next month aimed at reforming the oversight of the two government sponsored enterprises. While proposals last year would have simply moved the current regulator, the Office of Federal Housing Enterprises Oversight, known as OFHEO, from the Department of Housing and Urban Development (HUD) into the Treasury Department, Greenspan's remarks are sure to broaden the debate.
In a statement, Fannie Mae senior vice president Jayne Shontell said Greenspan's testimony, "does not appreciate the role of our mortgage portfolio," saying the company's ability to invest in mortgage-backed securities reduces mortgage costs to consumers and makes fixed-rate loans more available. A Freddie Mac spokeswoman said, "the issue of debt is critical to fulfilling our housing mission. We think the growth of our retained portfolio is very important to that."
The Credit Union Journal's Ed Roberts can be reached via e-mail at eroberts
