WASHINGTON -- Can the Department of Housing and Urban Development effectively regulate Fannie Mae and Freddie Mac, the two giants of housing finance?

The question is being raised in the wake of HUD's retreat from its effort to get the companies to reduce the $203,150 ceiling for home loans they purhase and securitize.

Almost two weeks ago, HUD surprised Washington by stepping into a controversy that it had been widely expected to ignore. It urged the agencies -- officially the Federal National Mortgage Association and the Federal Home Loaan Mortgage Corp. -- to cut the loan limit by about $6,000 to conform to a housing price index that had declined by 3%.

Lack of Authority Conceded

Freddie, however, stuck to a decision to hold the current limit, and Fannie hinted it would follow suit. Then, last Friday, HUD Secretary Henry G. Cisneros wrote to Freddie Mac and conceded that he had no authority to regulate the companies on this matter.

What led to the about-face?

Many observers say that HUD, the primary regulator for Fannie and Freddie, came face to face with the political power of the two entities and was simply outgunned.

Senators congressmen, and several powerful housing groups wrote to HUD. Sources said that the vice chairman of Fannie Mae, Franklin Raines, who served on the transition committee for the Clinton administration, called aa White House official, who in turn called HUD.

|HUD Looks Dumb'

Such influence is not new, observers say.

"Every time a new group goes into HUD, they learn what the power of Fannie and Freddie is," said Dennis Jacobe, managing director of the Financial Research Institute.

Added a congressional aide: "HUD looks dumb on this whole thing, and it does give the perception that [Fannie and Freddie are] very strong and usually get their own way."

For their part, the two agencies stoutly deny that they pressured HUD.

"What took place over the last two weeks is the direct reflection of an open, cooperative, straightforward relationship that Fannie Mae shares with its regulators," said David Jeffers, vice president of corporate relations ata Fannie Mae. That agency formally announced on Monday that it would hold its limits.

Withdrawal Criticized

Dan Driscoll, vice president of corporate communications at Freddie Mac, said his company did not ask housing groups to lobby HUD on the issue.

Critics of HUD's withdrawal, and there are many, say this episode raises fresh doubts about whether HUD is up to the task of regulating the two companies.

"HUD cannot match their firepower," said Lou Nevins of the California League of Savings Institutions. Fannie and Freddie "are in firm control of their regulatory apparatus."

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