Alan Greenspan says continued accumulation of debt by the government-chartered mortgage lenders could put the economy in danger.
By ASSOCIATED PRESS
Published February 25, 2004
WASHINGTON - Mortgage giants Fannie Mae and Freddie Mac pose a threat to the country's financial system if their ability to take on new debt is not restrained, Federal Reserve chairman Alan Greenspan said Tuesday.
Greenspan lent his influential voice to calls for reforms in the operations of the two government-chartered companies that dominate the multitrillion-dollar mortgage industry.
Speaking to the Senate Banking Committee on Tuesday, Greenspan said he supports creation of a tough new government regulatory agency to supervise the two corporations, saying the new regulator should have similar powers to federal banking regulators, including the authority to set minimum capital standards.
Fannie and Freddie, both Fortune 500 companies, have grown into two of the biggest financial companies in the world. They stand behind $4-trillion in home mortgages, or more than three-fourths of the single-family mortgages in the United States.
Greenspan stressed that this portfolio does not represent a risk currently to the financial system, but he warned that it could down the road if the explosive growth in debt held by the government-sponsored enterprises is not restrained.
"To fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventive actions are required sooner rather than later," Greenspan told the committee.
Committee chairman Sen. Richard Shelby, R-Ala., told Greenspan that he was making the creation of a new regulator for the two institutions and the Federal Home Loan Bank System a top priority this year.
Shelby is supporting legislation to replace the current Office of Federal Housing Enterprise Oversight, which critics say lacks the power to properly regulate institutions of the size of Fannie and Freddie, with a new independent regulatory agency.
Fannie Mae and Freddie Mac have been under increased scrutiny since an accounting crisis at Freddie Mac came to light last spring. Freddie acknowledged that it had understated earnings by $5-billion for 2000 through 2002. It later admitted inflation 2001 profits by nearly $1-billion.
In statements Tuesday, the two agencies took issue with Greenspan's recommendations.
Fannie Mae senior vice president Jayne Shontell said the company appreciated that Greenspan had made it clear "that his concerns are not about some imminent problem" but about what course should be taken in the future. However, she said, "We, of course, disagree with most of his conclusions."
Freddie Mac chairman Dick Syron said that "the United States remains the only nation where a 30-year, prepayable mortgage is broadly available and this is in large measure because of Freddie Mac and Fannie Mae."
Greenspan said the problem facing Congress was the fact that investors widely believe that if either Freddie or Fannie, as they are popularly known, got into financial trouble, the government would bail them out even though the bonds issued by the corporations say they are not backed by the federal government.
Greenspan said this perceived guarantee allows the two corporations to raise money at lower interest rates than their financial competitors.
The two companies say their lower cost of funds is passed on as a benefit to home buyers in the form of lower mortgage rates, but Greenspan pointed to a Fed study that this subsidy had lowered mortgage costs on average by a tiny 0.07 percent with most of the billions of dollars in savings going instead to the corporations and their shareholders.
Responding to questions from the committee, Greenspan said that the perceived government backing for Fannie and Freddie had given the institutions a tremendous competitive advantage, which means they have "essentially elbowed out a number of competitors" and allowed the institutions to grow substantially.
In addition to capping debt growth at the two institutions, Greenspan suggested the two companies should be more focused on their core responsibilities, buying home mortgages from local lenders and repackaging them as mortgage-backed securities, rather than branching out into other types of loan activities.
Fannie Mae and Freddie Mac have cultivated strong political supporters in Congress over the years, and previous overhaul efforts have gone nowhere. However, analysts said that with the support of Greenspan and Shelby, the latest efforts might succeed.
"The Greenspan statement is important because it highlights the fact that Fannie Mae and Freddie Mac pose a systemic risk to the economy generally," said Peter Wallison, an economist at the American Enterprise Institute.
