HUD Willing to End Regulatory Role

In a Reversal, Says It Can't Police Fannie, Freddie

WASHINGTON -- Spooked by revelations that Salomon Brothers manipulated the market for housing agency debt, the Department of Housing and Urban Development is willing to relinquish its role as regulator of Fannie Mae and Freddie Mac.

HUD has neither the skill nor the clear authority to police the secondary mortgage agencies' sophisticated bond market operations, HUD Deputy Secretary Alfred A. DelliBovi said in an interview last week.

His statement was a sharp reversal of policy. HUD had previously sought to tighten its regulatory grip on the government-chartered mortgage market titans, formally known as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.

"We clearly are not able to regulate against that type of activity," the department's No. 2 official said. "Maybe the regulator requires skills that are clearly beyond HUD's ability."

Consequently, he added, HUD won't resist if Congress wants to vest oversight of the mortgage agencies in a new, independent regulator. "We don't win if the taxpayers lose," Mr. DelliBovi said.

"It's certainly not what we preferred a year ago," he added.

Probe Reaches Housing Debt

Both Fannie Mae and Freddie Mac have indicated that they would like to get out from under HUD's jurisdiction. But they have pressed the matter quietly, apparently to avoid offending their regulator and their housing constituencies -- home builders, mortgage lenders, and Realtors.

Mr. DelliBovi disclosed HUD's reappraisal Thursday, a day after the Securities and Exchange Commission said it had widened its probe of the government securities market to include dealers in housing agency debt.

SEC Chairman Richard Breeden said a "distressingly large" number of firms have admitted to filing incorrect or misleading reports to Fannie Mae. That agency promptly announced it was tightening rules for the 56 securities dealers that sell its debt.

Fannie Mae president James A. Johnson said the wrongdoing had not affected trading prices. He said it was too soon to say whether any dealer would be suspended or expelled from Fannie Mae's selling group.

The new stance splits from a compromise proposal -- unveiled in May by the Treasury Department after intense debate with HUD -- to revamp the regulatory framework for Fannie Mae, Freddie Mac, and other government-sponsored entities.

Under the Treasury's approach, Fannie Mae and Freddie Mac would remain under HUD, but a new arms-length bureau reporting directly to the HUD secretary would handle regulatory tasks.

Displeasure with a bill approved in July by the House Banking Committee also helped spur HUD's offer to cede its regulatory turf, Mr. DelliBovi said. In an Aug. 16 letter to Treasury Secretary Nicholas Brady, Mr. Kemp argued that the House measure would saddle HUD with new supervisory costs while diluting, rather than strengthening, its authority.

Weaker regulation could let Fannie Mae and Freddie Mac "embark on risky businesses outside the scope of residential lending," he wrote. Mr. Delli-Bovi said HUD could have lived with the House bill "if it produced good public policy."

HUD's new position should find favor in the Senate Banking Committee. Chairman Donald Riegle, D-Mich., and ranking Republican Jake Garn of Utah have stated a strong preference for an independent regulator. Committee staff members have nearly completed a draft bill on government-sponsored entities.

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