Too unregulated

September 29, 2004

MORE THAN A year ago, when we last commented on Fannie Mae and Freddie Mac, two of this nation's largest and most politically well-connected corporations, we urged that they be forced to provide more disclosure of their financial workings, come under much stricter government oversight, and perhaps face more market competition.

Those needs have not changed - and we hope that last week's revelations of an Enron-style accounting scandal at Fannie Mae will finally break the long-running Washington stalemate over reining in these two financial juggernauts with greater regulation.

Much is at stake for taxpayers and homeowners with these federally chartered but privately owned corporations. Together, the corporate sisters play a central role in increasing homeownership - enabling the spread of fixed-rate, long-term loans by ultimately owning or guaranteeing about half of all home loans, about $4 trillion worth of debt.

They are said to be too big to fail - that is, a meltdown at either would be devastating for the nation's housing industry and banking system. But they are also too big - and enjoy too much financial benefit from their government association - to be allowed to operate the way they have.

Last June, it was Freddie Mac under fire for understating its earnings. Two of its most senior officers resigned; investigations are still open. At the time, Franklin D. Raines - the powerful head of its older and larger sibling - assured investors that Fannie Mae was free of such issues. And together, as they have in the past, the two corporations pulled out all the stops lobbying - thwarting by early this year Republican efforts to transfer their oversight to the much better equipped Treasury Department from an obscure, long-understaffed Housing Department office.

But last week, that little, much embarrassed agency finally showed some sharp teeth - albeit perhaps much too late - in issuing a tough report that alleges Fannie Mae has been manipulating its earnings to meet Wall Street's expectations and, in one case, targets for executive bonuses.

Encouragingly, Fannie Mae has broken from its usual pattern of hardball political resistance by agreeing this week to increase its capital reserves, change its accounting and tighten its internal controls; an earnings correction and management shakeup, as at Freddie Mac last year, could follow. And so far, analysts say, the financial result could be limited to a slight tightening of the mortgage market.

But the shattering of the two mortgage giants' credibility since last year is the real issue here. Some, like Federal Reserve chief Alan Greenspan, have been saying that Fannie Mae and Freddie Mac should be privatized. But short of that, if they are to retain their cheap lines of credit at the federal Treasury, much firmer oversight is in order.

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