Government Sponsorship Should Benefit Consumers More, Fannie & Freddie Shareholders Less

Rep. Barney Frank (D-Mass.), the ranking member on the House Financial Services Committee, dismissed concerns about the solvency of the mortgage giants, saying that reports of solvency issues at the companies were the result of a “journalistic crusade” cooked up by competitors and the White House.

“There’s been, I think, a wholly manufactured crisis about the GSEs,” Frank said during a secondary-lending conference in Washington. He said that neither of the companies was on the verge of collapse, despite a “journalistic crusade” against Fannie Mae and Freddie Mac that he blamed on the White House and competitors in the industry.

But Assistant Treasury Secretary Wayne Abernathy said conflicts of interests had led the companies astray in recent years, prompting them to lose sight of their special responsibilities to serve their shareholders and the public at the same time.

“The concept of having a government-sponsored enterprise is that these GSEs are going to reduce the cost of mortgages,” Abernathy said during a panel discussion on GSE oversight at the Mortgage Bankers of America conference. “By being a residual holder of mortgages they make their money in that part of their business from the spread and now they have an interest to their shareholders in seeing that spread widen.”

“That creates a very significant and problematic conflict of interest,” he said, noting that Fannie and Freddie currently hold $1.5 trillion worth of mortgages, up from $100 billion a decade ago. “They have an interest in higher mortgage rates.”

The Organization for Economic Co-operation and Development agreed in a report released this week that recommended tougher regulations and stripping the GSEs of their special status.

“Without reducing the size of the GSEs’ portfolios, investors may still perceive them as “too big to fail,” the OECD said in its economic survey of the United States. “Limits could be placed on the growth of their mortgage-related asset portfolios, so that mortgage-backed securities traded in public markets, and not GSE debt, become the dominant source of secondary market funding for mortgages.”

Just last month, regulators said Fannie Mae might have to restate previously reported earnings because of accounting irregularities at the congressionally chartered corporation. That audit came on the heels of an announcement last November that Fannie had miscalculated mortgage commitments and revelations last year that Freddie Mac misstated some $5 billion in earnings over three years.

To avoid future problems, Abernathy said the Bush administration wants Congress to develop a unified regulatory agency with independent sources of funding, much like the Federal Reserve, and greater authority over the publicly traded companies. It has also proposed vesting additional powers in the Department of Housing and Urban Development to set affordable housing goals.

“These are government-created, government-sponsored enterprises,” Abernathy said. “They exist to meet a government mission. That has to predominate.”

Frank agreed, saying that the GSEs were not doing as much as they could to improve access to affordable housing for low- and moderate-income borrowers.

Given the benefits that they receive from the government, he said, both companies should be devoting a much higher percentage of their profits to affordable housing initiatives instead of opposing such requirements as a threat to their solvency.

“There’s a spectrum. Safety and soundness is at one end and affordable housing is at the other,” Frank said. “I think at this point we are way at the other end of the spectrum.“