Fannie, Freddie investments `uninsured'

No government backing, Treasury chief warns

March 10, 2004|By BLOOMBERG NEWS

WASHINGTON - Investments in the stocks and bonds of Fannie Mae and Freddie Mac, the two biggest U.S. mortgage buyers, are "uninsured" and aren't backed by the U.S. government, Treasury Secretary John W. Snow said yesterday.

The companies, chartered by Congress to furnish money for home loans, have more than $1.5 trillion in combined debt. They can borrow at lower rates than other U.S. companies because investors perceive that their debt has an implied government guarantee. That is "not a healthy perception," Snow said.

"We don't believe in a `too-big-to-fail' doctrine, but the reality is that the market treats the paper as if the government is backing it," Snow said in a speech to community bankers. "We strongly resist that notion."

Shares of Freddie Mac dropped 81 cents to close at $62.77 yesterday. Fannie Mae's shares fell $1.23 to $77.05.

Fannie Mae and Freddie Mac have faced greater scrutiny from the Bush administration and Congress since Freddie Mac said in January last year that it had understated earnings. In November, it restated profit for the past three years, adding $5 billion.

Snow said it's a "critical time" for Congress to enact legislation that creates a regulator with heightened authority to monitor the companies. The current regulator, the Office of Federal Housing Enterprise Oversight, is "not equipped" to watch over their dealings, he said.

"We're pressing hard on legislation to create a new regulator," he said.

In a separate speech to the Mortgage Bankers Association, Brian C. Roseboro, Snow's acting undersecretary for domestic finance, said tighter oversight of the enterprises would not harm their businesses.

"Oversight not intended to stifle innovation and opportunity, but instead to insure stability for homeowners, future homeowners, global fixed-income markets and the U.S. economy," is the goal, he said.

The Bush administration has proposed making the new regulator part of the Treasury Department.

The new regulator of the government-sponsored enterprises must have the power to review "new activities," set minimum and risk-based capital levels, place an enterprise in receivership to "ensure an orderly wind-down" of a failed entity, and be financed through assessments on the companies, Snow said.

Snow joined a chorus of U.S. bank regulators who have raised concern in recent weeks about the dominance of the two companies in the housing market. "They have become enormous entities," Snow said.

Federal Reserve Chairman Alan Greenspan told Congress on Feb. 24 that Fannie Mae and Freddie Mac ought to reduce their portfolios. Fed Governor Susan Schmidt Bies, the central bank's leading expert on corporate governance on risk-management issues, said Feb. 25 that ever-higher risk-taking by the two lenders takes them beyond their mission of expanding mortgage financing.

Fannie Mae and Freddie Mac own or guarantee 42 percent of the U.S. mortgage market. They profit from the difference between the cost of debt they issue and the return on mortgages they buy. They also charge lenders for guaranteeing pools of loans in mortgage securities.

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