Oversight of Mortgage Giants Sought
(Associated Press) Treasury Secretary John Snow asked Congress Wednesday for a stronger government hand over mortgage giants Fannie Mae and Freddie Mac, saying "we cannot be complacent" about the economically vital housing finance market.
Amid accounting turmoil at Freddie Mac that has brought the departure of two chief executives since early June, Snow put forward an administration proposal that would shift financial regulation of the two U.S.-sponsored companies to his Treasury Department from the Department of Housing and Urban Development. It would widen the government's authority over the two biggest players in the multitrillion-dollar home mortgage market.
"Housing finance is so important to our national economy that we need a strong, world-class regulatory agency to oversee the prudential operations" of Fannie Mae and Freddie Mac, Snow said in testimony to the House Financial Services Committee.
Snow did not specifically mention Freddie Mac's accounting and management troubles. He did, however, express regret that the company has not fulfilled its pledge to comply with federal financial disclosure rules that apply to nearly all other publicly traded corporations.
Snow said the government needs to pay close attention "to the resilience of our system of housing finance."
"That system is the envy of the world, but we cannot be complacent," he told the lawmakers.
Snow also floated a novel idea: abolishing presidential appointments of a certain portion of directors sitting on the two companies' boards.
Congress, which created the two companies and has been loath to upset the housing market, now may be receptive to such a plan. After Freddie Mac's woes surfaced in the spring and brought federal investigations, members of the House and Senate proposed legislation that would tighten regulatory oversight of the two politically influential companies whose stock is widely traded.
Committee Chairman Rep. Michael Oxley, R-Ohio, told reporters before the hearing that he sees a "better-than-even chance" of legislative success for the plan. "I think you would have a very credible regulator at Treasury that would have a solid impact on the market, on interest rates," Oxley said.
But Rep. Barney Frank of Massachusetts, the panel's senior Democrat, said, "I do not believe we are facing any kind of a crisis."
In what was described as a compromise, the administration proposal would leave HUD with authority over Fannie Mae and Freddie Mac's mission to expand homeownership, especially among lower-income people, while moving financial regulation to Treasury.
HUD Secretary Mel Martinez, appearing with Snow, said that "HUD is the appropriate agency to develop and enforce the housing goals."
Frank expressed skepticism, saying it could be difficult for HUD to make the two companies meet the goals if regulatory power only resided in Treasury.
"What's HUD going to do, yell at them?" he asked Martinez.
The HUD agency that currently oversees Fannie Mae and Freddie Mac has been criticized by some lawmakers as weak and ineffective and too slow to investigate Freddie Mac. Its director Armando Falcon, a Clinton appointee who is leaving the post soon, said in a statement Wednesday that if his agency is shifted to Treasury, "We must ensure that it remains an independent regulator."
Spokesmen for Freddie Mac didn't return a telephone call seeking comment Wednesday. Fannie Mae spokeswoman Janis Smith declined comment.
Created by Congress to pump money into the home mortgage market, the two rival companies have grown explosively in recent years as they've snapped up home loans from banks and bundled them into securities for sale on Wall Street. They have a peculiar status: they are not directly guaranteed by the government, but they can borrow directly from the Treasury. That makes their borrowing rates lower.
Taking a different tack from the administration proposal, Senate Republicans on Tuesday called on Congress to consider cutting some or all of the government's ties to Fannie Mae and Freddie Mac to limit taxpayers' exposure in the event of a collapse of either one.
McLean, Va.-based Freddie Mac, a $40 billion-a-year company, disclosed that accounting errors and manipulations of internal accounts resulted in its underreporting earnings by $1.5 billion to $4.5 billion in the 2000-2002 period.
-- Marcy Gordon, AP Business Writer