WASHINGTON — In his first interview since legislation tightening supervision of government-sponsored enterprises advanced in the Senate, Daniel Mudd, Fannie Mae's chief executive, ticked off his list of concerns.
In addition to forming a new regulator for GSEs, the deal crafted by Senate Banking Committee Chairman Chris Dodd, D-Conn., and Sen. Richard Shelby of Alabama, the panel's lead Republican, would use profits from Fannie and Freddie Mac to fund a program designed to help homeowners avoid foreclosure.
Mr. Mudd argued Wednesday that diverting private profits for a public program is "upside down." Other provisions he wants changed would limit Fannie's ability to hold jumbo loans in portfolio, restrict new-product approvals, and give the new regulator more say over how much capital the GSEs must hold.
Under the bill, the funds would cover the cost of a Federal Housing Administration guarantee of mortgages that lenders had written down to current market values.
The FHA "sits on the full faith and credit of the government," Mr. Mudd said. "We were explicitly set up not to sit on the full faith and credit of the government, so now we're taking money out of the private market and using it to defray the cost of a government program. The logic seems to be getting a little circuitous."
He argued that the GSEs are better positioned than the government to decide which affordable housing projects should receive funding.
"We've got an infrastructure that is out there on the ground and is able to understand: 'Here's a project. It needs some subsidy. It needs some homebuyer education. It needs financial partners,' " he said.
Mr. Mudd, who marked his third anniversary as Fannie's CEO on Sunday, said he supports legislation that would tighten GSE regulation, mainly because enactment would end speculation over just what Congress might do to the companies. But it is clear he would like a number of substantive changes to the legislation the Senate Banking Committee approved in a 19-2 vote May 20.
Mr. Mudd said a provision that would require the GSEs to securitize jumbo loans overlooks the current state of the market. Fannie should be able to keep some of those loans in its portfolio, he said, because there are simply not enough buyers for such securities.
"You can securitize all you want, but if there aren't investors there to invest in the loans, the securitization is unhelpful," he said. "So you have to recognize that the way the capital markets work, you need the originator, you need the securitizer, and you need the investor."
He acknowledged that securitization could become more attractive in the long term when investors return to the housing market.
"Will we always be the lead investor?" he asked. "No, I don't think so. If spreads come back in, and banks' appetite for this type of asset returns, then somebody else will buy them, and we'll securitize them."
Mr. Mudd also criticized provisions that would force Fannie and Freddie to seek regulatory approval before raising capital or unveiling new products.
He recalled a recent meeting with servicers in which attendees asked Fannie to sign off on 18 different products.
"We said 'yes' to 17 of the 18 to be responsive," Mr. Mudd said. "There's an argument that says those were all new products, and under certain aspects of the legislation, we would have had to say, 'No … we have to go publish this in the Federal Register, and we'll get back to you in 90 days.' You know, 90 days in this market has taught us that's a lot of time not to be responsive."
Various incarnations of the GSE bill have shuttled between the House and Senate for more than four years, but the Senate Banking Committee's bipartisan approval gave GSE reform new momentum and a decent shot of enactment. A housing package the House passed last month includes GSE reform and the FHA refinancing program.
House Financial Services Committee Chairman Barney Frank, D-Mass., has said he is optimistic the two chambers will work out their differences and send a bill to President Bush by July 4.
Capital is a touchy subject for the GSEs, which have struggled since being turned inside-out by accounting scandals. Each has raised more capital in recent months, but they are leery of giving a new agency too much power.
Mr. Mudd said "appropriate consideration" should be given to the "very fine balance that needs to exist around capital, the ability to operate the business, and the mission requirement."
Congress should not crimp Fannie's ability to serve its shareholders and support the housing market, he said. "We still have to be able to operate as successful private companies with a public purpose."
Mr. Mudd urged lawmakers to be as specific as possible about the powers they grant to the new regulator, including its ability to enforce capital requirements.
"The more that that's elaborated in the legislation, the better," he said. "The whole mortgage finance market is built around how much capital we hold."
Despite his concerns, Mr. Mudd seems resigned to the idea that tighter GSE legislation will be enacted.
"We will live with whatever regulatory regime Congress designates," he said. "That's what we've always done."
