Have Fannie Mae and Freddie Mac become too powerful? Very definitely, says Anthony Frank, former chief executive of First Nation wide Bank.

Mr. Frank, who also was postmaster general and is now retired, laid out his concerns about the role played by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. at a recent forum of the Housing Roundtable. Excerpts from his talk follow:

My thesis this morning is very simple. These two entities have too great a share of market. They are too upscale, and their actions have grave consequences throughout our financial structure.

When Ronald Reagan came into office, of course, he decried government. He said: the less government, the better. It has always been fascinating to me that the combined share of market of Fannie and Freddie, and maybe Ginnie, was about 20% when he took office. Everybody has their own statistics, I suppose. But when President Bush left office, it was between 70% and 80%.

We have come perilously close to socializing or nationalizing or federalizing the mortgage market in the United States. It is so big that the Roundtable had great difficulty finding somebody from the private sector today who would stand up and say anything critical of these two entities because there's a certain amount of risk in doing that. That's certainly a measure of size.

Effect on Portfolio Lending

In addition to size, we can't ignore the lobbying strength of Fannie Mae, which I think we all recognize as the strongest lobbying force in Washington, having employed, or [currently] employing, most of the major lobbying entities in Washington.

Importantly, Fannie and Freddie are eliminating the possibility of financial institutions to do portfolio lending. The only type of present portfolio lending, as the audience knows, is in market niches. Such niches are risky and undesirable from a regulatory point of view.

Nevertheless, the structure of Fannie Mae is such that they can own loans, while portfolio lenders cannot, because Fannie's cost of operations and cost of money is so much less.

In turn, that hurts what I think is one of the great problems in our country, namely our rate of savings. We've all heard about the rate of savings - 4, 5, or 6%, depending on how you want to measure it. But the act of saving is generally not done by picking up the phone, which is what Fannie Mae does and should do. They call Wall Street and request $1 billion, $2 billion, $5 billion, which comes through.

Savings is what I call "drib by drab" - $50 a month, $100 a month, $1,000 a month coming from millions and millions of people, which in total should add up to a decent percentage of gross domestic product. This drib-by-drab method is very expensive. It requires branches. It requires a lot of personal handholding, and of course, it requires investments into which those liabilities can be placed.

Disrupting a Relationship

By dominating the mortgage market, Fannie and Freddie reduce the ability of financial intermediaries to attract savings in small denominations, which has been, basically, the only way we even reached 4, 5, or 6%.

This market dominance does a couple of other things, too.

For most people, a mortgage is the single largest investment that they'll ever make. Not often discussed today is that, in the old days, the mortgage served as the cornerstone of a relationship between the financial institution and the borrower. That relationship is gone now because the mortgage is gone.

Third-party servicers, who are not trying to build a relationship with that family in terms of other financial products, now call the shots.

We've all had the experience hundreds of times of borrowers' calling the institution that initially made the loan to ask for some clarification or modification. The response is, "We don't hold that loan anymore. We don't even service that loan anymore. We sold both the loan and the servicing."

I think this opaque screen has come down between the lender and the borrower and doesn't bode well for the future of financial service providers in this country.

Heightening Rigidity

Finally, the ownership of so many of these loans by the GSEs reduces the flexibility of the mortgage. I am very critical of the way that mortgages are administered in this country. I think that they could be infinitely more flexible.

We all know, when somebody takes on a first mortgage and buys a new home, that they will incur another $10,000, $20,000, or $30,000 in debt for items such as a refrigerator, shelves in the garage, and sprinklers in the lawn - all the things that make a house a home. Yet there's no relationship between those expenditures and the first mortgage.

I think there should be. I think the first mortgage should provide an equity line. I think the first mortgage should be susceptible to tailoring to the circumstances of the family.

We all know so many instances of people who are struggling to qualify for a loan and then, as their income goes up, the making of the monthly payment gets easier and easier. There must be a way to deal with that. There must be a way to deal with young families in our country who want to buy a home and who will be able to buy a home in three to five years when their apprenticeship in whatever profession concludes.

They need a helping hand. Maybe they need a lower rate of interest for a short period. In France, as some of your audience knows, they have a layering system. They add layers of mortgages at different rates and different down payments in order to accommodate different types of borrowers. I would like to see Fannie Mae and Freddie Mac take a look at that.

There is an unseemly emphasis on the high end of home values rather than on the low end. There is just a continuous lobbying pressure on the Congress to keep raising those limits.

I would like to see Fannie and Freddie devote their awesome energies and capabilities to the low end of the scale; toward helping house and rehabilitate America, not toward financing homes that are a quarter of a million dollars and up.

I just don't think that those are priorities that are in the national interest. As long as there's an implied subsidy, there has to be a public policy payoff. I don't think [that exists] when you start dealing in homes over $200,000.

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