Las Vegas Sun

March 29, 2024

Mortgage giants tell Congress companies on right course

WASHINGTON -- The heads of embattled mortgage companies Fannie Mae and Freddie Mac assured Congress Wednesday that the companies are on the right course following their recent accounting scandals and opposed legally mandated limits on their combined $1.5 trillion mortgage portfolios.

With a drive under way for legislation to tighten the government's hand over the two government-sponsored companies, the chairman of the Senate Banking Committee signaled he wouldn't want to see unlimited authority bestowed on a new federal regulator.

"No one has suggested giving any bank regulator unbridled authority" over Fannie Mae and Freddie Mac, Sen. Richard Shelby, R-Ala., said at a hearing.

The companies, for years among the most politically influential in the capital, are the two biggest buyers of home mortgages in the country. A severe reduction of their portfolios could hurt the U.S. housing finance market and cut off billions of dollars from foreign investors that help make housing more affordable for moderate-income Americans, Fannie Mae interim CEO Daniel Mudd and Freddie Mac Chairman and CEO Richard Syron told the banking panel.

Treasury Secretary John Snow, meanwhile, speaking to a financial group in New York, said, "The ability to limit portfolios is an essential part of setting up a strong regulator. It has to be part of the legislation."

Congress created the two companies to inject money into the home-loan market, keeping mortgage rates lower. They buy mortgages from banks and other lenders and bundle the loans into securities for sale to investors worldwide.

The two chief executives -- both of whom were installed by the companies' boards to replace ousted leaders -- deflected Republican lawmakers' criticism of the companies' operations and defended the size of their portfolios.

Mudd and Syron also said their companies had made thorough reforms and tightened internal controls in the wake of the accounting debacles. Using nearly identical words, they spoke in terms of the companies putting their houses in order. Fannie Mae, the No. 1 U.S. mortgage financer and the second-largest financial institution after Citigroup Inc., is facing a likely $11 billion restatement of earnings after regulators accused it last fall of serious accounting manipulations. In June 2003, Freddie Mac was found to have misstated earnings by $5 billion for 2000-2002.

"It is a new day at Freddie Mac," Syron told the senators.

Mudd said that he had "set some clear priorities to help us build a new Fannie Mae for the future -- one that Congress and the housing finance system can rely upon going forward."

Mudd, who had been chief operating officer at Fannie Mae, was making his first public appearance since the board elevated him in December after forcing out CEO Franklin Raines, a high-profile Washington figure, and chief financial officer J. Timothy Howard. Syron, a Wall Street veteran and former Federal Reserve official, became Freddie Mac's chief a year earlier.

The two companies have for years fended off congressional attempts to crimp their privileges or rein in their operations. But the accounting travails have given unusual traction to the new legislative press, which is driven by Republicans.

The push for legislation to create a new regulator with broad power over Fannie Mae and Freddie Mac, and to impose limits on their portfolio holdings garnered the Bush administration's blessing two weeks ago when Snow testified on the matter before the Senate Banking Committee. That amplifies the prospects for enactment of oversight legislation this year.

And Federal Reserve Chairman Alan Greenspan, whose views carry considerable weight with lawmakers, urged Congress to restrict the companies' holdings, warning that their huge debt could imperil U.S. financial markets.

Mudd testified Wednesday that his company's mortgage portfolio "makes an important contribution to the liquidity and affordability of the U.S. mortgage market."

Fannie Mae "has drawn in billions of dollars from investors abroad to expand the availability and lower the cost of housing for low- and moderate-income Americans," Mudd said. "It is not at all clear that those foreign investors would place their money in the U.S. housing market without the predictability and convenience provided by" debt issued by Fannie Mae and smaller rival Freddie Mac.

Syron said that while several of the proposals being considered by lawmakers appear "reasonable, taken together they may result in unintended negative consequences for the nation's housing finance system."

The two chief executives expressed support for the legislative proposal establishing a stronger regulator to oversee them, whose powers would include being able to reduce the portfolios if warranted by financial conditions. But they are resisting attempts to have Congress set mandatory limits on their holdings.

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