WASHINGTON — Today the Bush administration must make a tough political call that will signal how it plans to deal with the powerful government-sponsored enterprises, Fannie Mae and Freddie Mac.

The administration’s Office of Management and Budget must decide whether to grant or reject a request by the secondary mortgage market giants to postpone the release of a complicated capital rule — a rule that was mandated by Congress in 1992 and has already been subject to numerous delays, including one that led to today’s deadline.

With the final say on federal regulations, OMB Director Mitchell E. Daniels Jr. is stuck between Fannie and Freddie and the agency that oversees them, the Office of Federal Housing Enterprise Oversight. Granting the GSEs’ request for a delay would be a blow to the beleaguered oversight agency, which has proposed this capital rule three times since February 1995. It would also clarify how the Bush administration plans to manage Fannie and Freddie.

OMB took on the government-sponsored enterprises in April, questioning in President Bush’s budget proposal how Fannie and Freddie can continue to grow when they are securitizing mortgages at a faster pace than lenders are originating them. The OMB analysis also noted the companies’ growing interest in the subprime mortgage market, saying “increasing attention must be paid to their practices for pricing and managing the associated risks.”

While hardly damning, that OMB decided to say anything about Fannie and Freddie is notable considering how few people make anything but glowing statements about the companies on the record.

Administration officials, including the President’s top economic adviser, Larry Lindsey, have said that Fannie’s and Freddie’s phenomenal growth deserves attention, but they also have quickly added that the new administration has many other, higher priorities.

It is unclear what call OMB will make. Officials there would not comment beyond saying a decision would be announced today. Most observers expect OMB to side with the politically potent GSEs. “After nine years, it’s not like the rule is time-sensitive at this point,” said Steve Blumenthal, an analyst who follows Fannie and Freddie for Schwab Capital Markets. “I expect it to be delayed.”

Executives from Fannie and Freddie are not accustomed to losing, and they applied a full-court press to OMB officials last week, holding a face-to-face meeting on Tuesday and engaging in numerous other discussions about the new capital rule. Tuesday’s meeting included plenty of political types, including Pippa Malmgren from the White House as well as former OMB Director Jim Miller, a consultant hired by Freddie.

Publicly, Fannie and Freddie contend the capital rule is complex, untested, and should not be made final until everyone is sure it works. But privately sources said the companies are urging OMB to “fix” the rule or, if the rule has changed from the way it was proposed, force the Enterprise Oversight agency to reissue it for another — the fourth — round of comments.

The ’92 law that mandated the capital rule also created the Housing Enterprise office, commonly referred to as OFHEO (o-FAY-o), an underfunded, humbled agency assigned to ensure Fannie and Freddie are financially safe and sound.

The agency ran through a string of directors in its early years, and generally accomplishing little. Its current director, Armando Falcon, has been in the post for nearly two years and gets high marks for improving performance, but the agency is still considered weak. Legislation is pending to abolish it, and transfer oversight of the GSEs to the Federal Reserve Board.

It is clear that completing this rule would be a huge boost to OFHEO’s stature and its staffs’ morale. In May, Mr. Falcon called the risk-based capital rule “perhaps our most important and innovative regulation.”

“We can and have created a model-based capital rule that is finely attuned to the specific risks of the institutions we regulate,” he said in a speech sponsored by the Federal Reserve Bank of Chicago. “And it will be fully transparent because we will release the actual computer code along with the regulation.”

This computer code is what has Fannie and Freddie sweating.

Neither company has seen the final version — only officials at OMB, the Treasury, and Housing and Urban Development departments have — so Fannie and Freddie cannot gauge how much capital it will require them to hold. Fannie was caught off guard in 1999 when the rule was proposed and OFHEO tried to illustrate its potential impact by selecting two dates and calculating how much capital the GSEs would have had to have if the rule had been in effect. Freddie had enough, but Fannie’s capital was $3.7 billion shy of the rule’s target.

“We have seen nothing since the draft,” said Freddie spokeswoman Sharon McHale. “This rule is enormously complicated and we all need make sure we understand how it works, and that it does work.”

She described OMB as “an objective third party” and insisted the GSEs are eager to have the capital rule in place. “We feel the risk-based capital rule is the best political shield against our detractors,” she said.

In fact, the moves to prevent the rule from becoming final contradict repeated public praise by both Freddie chief executive officer Leland Brendsel and Fannie chairman and CEO Franklin D. Raines.

“We operate under a rigorous risk-based capital standard, one that most banks and thrifts could not meet,” Mr. Raines testified before Congress May 8. “OFHEO is in the final stages of promulgating regulations to implement the standard in the 1992 Act. The agency has made a great deal of progress recently on the rule, and we hope to see the final risk-based capital standard in place as soon as possible.”

Fannie’s and Freddie’s moves to delay the rule also reinforces the perception that OFHEO is an ineffective regulator, which is not in the GSEs’ collective interest considering neither company backs the bill that would move oversight to the Fed. Rep. Richard H. Baker, the legislation’s sponsor, made that point during a hearing last week.

Rep. Baker, R-La., asked Fannie and Freddie executives on Tuesday to supply the letters they wrote to OMB about the rule. They said they would, but neither had done so by Friday. The lawmaker on July 6 also asked OMB to a series of related questions, but has not received a response, his spokesman said Friday. “If at close of business Monday,” the spokesman said, “the rule is not presented to the public and there is some sort of decision to extend the deadline again … come Tuesday morning there’s going to be lots and lots of hot questions to be answered and Congressman Baker is going to ask them.”

This drama over delaying the capital rule repeats a drill OMB put OFHEO through in 1999 when this most recent version of the rule was proposed. OFHEO finished writing the proposal in the fall of 1998 and delivered it to OMB, which officially has 90 days to do its reviews. Fannie executives immediately started lobbying OMB to sideline the rule. OMB dragged its heels well past its late January deadline, finally letting OFHEO publish the plan, which appeared in the April 13 Federal Register. (This was the third proposed rule OFHEO had attempted. Earlier versions were released for comment in June 1996 and February 1995.)

The deadline for opinions to be filed on the April ’99 plan came and went, and the comment period finally closed on March 10, 2000. Fannie filed 306 pages of comments while Freddie flooded OFHEO with 428 pages.

OFHEO went back to work and finally announced in December 2000 that it had finished the risk-based capital ‘‘stress test,” which by law must calculate how much capital Fannie and Freddie would need to withstand a 10-year period of economic stress. It is 647 pages — the agency’s Web site warns visitors in red capital letters that the “extremely large file” could take over an hour to download.

With the change in administrations from President Clinton to President Bush, OMB was not staffed to review such a massive rule, and asked OFHEO to wait a while before officially turning it in.

So OMB’s 90-day clock did not start ticking until March 29. As OMB’s deadline approached late last month, Fannie and Freddie both sent letters asking the agency to take three more months.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.