Plenty Of Theories Over Fannie, Freddie's Plans

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In this town of rampant conspiracy theories a big one making the rounds the last couple of years has focused on the dominant role Fannie Mae and Freddie Mac have assumed in the mortgage market.

The theory goes something like this: The two giants, chartered by the government to facilitate a secondary market for home loans, have outgrown that function and they are now setting their sights on the market for loan originations.

The theory goes on to hypothesize that one or both of the government sponsored enterprises, among the biggest financial institutions in the world, will eventually spread their wings into loan originations by one of a number of methods. One would be the creation of a nationwide network of agents, through already established relationships. This could be accomplished, the conspiracy theorists suggest, through a network of loyal Fannie and Freddie partners, such as community banks and credit unions. The victims of this grand conspiracy would be the same lenders, as well as their giant competitors, who, like everyone else in the mortgage business, have been making a mint the past two years.

Looking To Sallie Mae

The conspiracy theorists point to a similar scenario that played itself out in the student loan market in recent years. That's where Sallie Mae, also chartered by the federal government to facilitate a secondary market for loans, underwent a corporate restructuring, which included a privatization that allowed it to begin originating loans, in direct competition with its bank and credit union clients it was chartered to work with. In just two years time, Sallie Mae has come to dominate that very market it was meant to facilitate and has become the largest non-government originator of guaranteed student loans, by far. With such economies of sale, small student loan originators are finding it impossible to compete with this government-created monolith, now more than $80 billion in assets, resulting in the departure from the market of many lenders, including credit unions.

Like Sallie Mae, Fannie and Freddie would require legislation in order to embark on a similar course into originations.

While both companies vehemently deny such ambitions, the theory continues to be fed by a well-funded amalgam of interests, most of them competitors in the mortgage market. The group, calling itself FM Watch, includes Bank of America, JP Morgan Chase, GE Capital, Household Finance, Wells Fargo and American International Group, no small players themselves.

The group argues that the benefits bestowed on Fannie and Freddie by the government charter-a line of credit with the U.S. Treasury, exemptions from local property taxes and costly registration fees with the Securities and Exchange Commission for their billions of dollars in debt issuance-require that the two entities hew closely to the restrictions in their charters.

The sheer size and political muscle of this well-financed mortgage-banking coalition has given the conspiracy theory legs in the corridors of Capitol Hill. The group has even found a champion in Rep. Richard Baker (R-LA), the chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. Baker, though reluctant to publicly endorse the grand conspiracy theory, has taken the lead in fighting for reforms aimed at keeping tighter reins on the two secondary market giants. And more than one lawmaker has echoed some of the same arguments that the powerful anti-FM Watch coalition has put forward.

It's hard to predict where this battle of political titans will lead. Baker's crusade has made little progress in Congress, partly because Fannie and Freddie have lobbying teams that are among the best on Capitol Hill. But more importantly, the issue of mortgage finance has become sacrosanct as part and parcel of the American Dream, making lawmakers of either party loath to tackle the issue.

Representatives of Fannie and Freddie say the companies' efforts have helped make home ownership a reality for millions of Americans by creating liquidity in the market, thus helping to reduce borrowing costs. That may be true. But the advent of several other major entities into the secondary market over the last decade raises the question of whether such benefits would accrue without the federal government providing those advantages to its offspring. They argue that competition, if allowed to occur without government intervention, could provide the same benefits to loan borrowers.

Stakes Enormous For Credit Unions

The stakes for credit unions are enormous in this battle. For one, both Fannie and Freddie have carefully cultivated the credit union market to such an extent that they assist smaller institutions in setting up a mortgage loan program, often with the eye towards buying those loans.

Of course, such cozy relationships, often discourage those credit unions from negotiating with Fannie and Freddie competitors that may offer similar or better deals.

This clash of titans is not likely to be resolved any time soon. Any efforts to rein in Fannie and Freddie on Capitol Hill will take years to come to fruition. That's the typical time frame for major legislative initiatives.

Often, major changes, such as those contemplated by the FM Watch constituents, are precipitated by a major crisis. One need look no further than the s&l debacle, or more recently, the Enron scandal, for proof of that. If that were to happen in this market, the breadth of the mortgage market would make all prior financial crisis look tepid by comparison.

Ed Roberts can be reached at robertscuj

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