Enter "FM Watch," a group that has set forth some serious allegations against these twin enterprises. The organization (www.fmwatch.com) makes a number of claims that portray Fannie Mae and Freddie Mac as more interested in courting shareholders than in serving potential homeowners -- all to the detriment of the U.S. taxpayer.
 
Though it might be easy to write off FM Watch as just another bunch of brash upstarts, you will see that FM Watch has gathered some victories (along with dissenters) within the federal government -- making this debate one to watch.

 

Fannie and Freddie: Evil Twins…?
FM Watch describes itself as "a coalition of financial services and housing-related trade associations working with affordable housing and consumer advocates, taxpayer groups and financial institutions … dedicated to monitoring the activities of … Fannie Mae and Freddie Mac." More succinctly, Dow Jones News terms FM Watch a "lobbying effort" supported by such blue-chip firms as Chase Manhattan Corp. and PNC Financial Services Group's PNC Bank.

 

In short, the group's cries have amplified serious criticism over the past year from both the U.S. government and the press that Fannie Mae and Freddie Mac are unresponsive to the needs of lower-income Americans. Fannie Mae's Desktop Underwriter, a type of mortgage approval software, has come under especially close scrutiny. Critics contend that it is unfairly biased against lower-income mortgage holders.

 

Meanwhile, many may view some of the latest GSE initiatives -- such as Fannie Mae's rewarding of certain mortgage holders with lower rates in exchange for timely payments, and the lowering of the private mortgage-insurance required for a Fannie Mae loan -- as welcome ways to make home ownership more affordable. But FM Watch devotes its efforts to noting that, overall, these moves by the GSEs have been primarily self-serving rather than in the best interest of mortgage holders.
 
Among the accusations FM Watch poses are that the agencies carry an overwhelming amount of debt -- $908 billion -- compared with only $29 billion in stockholder equity. FM Watch also cites a study by the American Enterprise Institute, projecting that Fannie Mae and Freddie Mac will have assumed the risk for almost half of all U.S. residential mortgages by 2003, leaving taxpayers to bear the risk for $1.8 trillion in mortgage debt. Finally, the group claims the GSEs are woefully under-serving the lower-income market. Pointing to a 25 percent shortfall in loans to very low-income homeowners as compared with Federal Housing Administration-eligible loans retained by financial institutions, FM Watch rests its case. Well, not quite.

 

A big victory came for the group when they successfully lobbied the U.S. Department of Housing and Urban Development (HUD) to prod Fannie Mae and Freddie Mac into aiming half of its portfolios toward low-income families. In turn, this move is expected to increase the financial burden on both agencies. FM Watch has also convinced HUD to examine other recent decisions by Fannie Mae and Freddie Mac that include new lines of credit extended through joint ventures and the underwriting of some non-traditional loans. After some well-publicized reluctance, the agencies handed over documentation to HUD on these ventures.

 

…Or a Dynamic Duo?
A major counterattack on FM Watch comes from an Internet site with equivalent verve called FM Watch Observer (www.fmwatch-observer.com). Defining itself as "some folks at Fannie Mae" (and applying the nickname "Coalition for Higher Mortgage Costs" to FM Watch), Observer counters that the big-name players behind FM Watch are motivated by fear that any expansion of the GSEs' attractiveness to lower-income homeowners poses a threat to its members' higher-risk, higher-interest mortgage base. Observer alleges that the resulting FM Watch agenda includes efforts to make members more competitive by driving up Fannie Mae's costs; opening Fannie Mae to potential mortgage fraud by pushing it to reveal the proprietary weightings that compose its Desktop Underwriter system; and lobbying to require Fannie Mae to buy FM Watch members' loans without use of Desktop Underwriter, thus forcing Fannie Mae to buy loans without any back-up on the underwriting.

 

For its part, Freddie Mac conducts its own defense online (www.freddiemac.com). The agency cites "many independent, formal studies -- conducted by government agencies and private rating agencies" that confirm Freddie Mac is on solid financial footing, with $11.5 billion in capital reserves and a total portfolio of $862 billion. Quoting the U.S. Office of Management and Budget, Freddie Mac notes that "mortgage rates are 25-50 basis points lower because Fannie Mae and Freddie Mac exist in the form and size they do." And the secondary mortgage market saves homebuyers up to one-half percent on their mortgages, according to Freddie Mac, giving mortgage borrowers an average of nearly $15 billion annually in savings.

 

Rhetoric and Your Customers
Regardless of where you stand on FM Watch's assertions, the debate they've created now feeds a public examination of two agencies responsible for thousands of Americans' mortgage security. For your customers, this hopefully means that Fannie Mae and Freddie Mac will emerge stronger and more capable of meeting mortgage needs for a broader range of Americans -- especially lower-income homeowners -- at a time when rising housing costs can send home ownership soaring out of reach.