Federal Reserve Chairman Alan Greenspan gave Congress a timely piece of advice this week: Cover your Fannie . . . and Freddie. He was referring to Fannie Mae and Freddie Mac, the acronyms for two corporations whose domination of the mortgage marketplace is a growing concern. It is a warning Congress should heed.
Both companies were created by Congress decades ago to supply money to lenders who make home loans. To say they have succeeded is an understatement. Fannie Mae is America's second largest corporation measured by assets, and along with Freddie Mac the two are responsible for $4-trillion worth of mortgages or about three-fourths of single-family home loans.
The companies have prospered largely because of the implied backing of the federal government. While taxpayers wouldn't be obligated to bail out the two companies should they fail, in all likelihood Congress would do so to avoid financial chaos. The companies' special relationship with the government means they can borrow money at a cheaper rate, which has given them a competitive advantage (and left them with $2-trillion worth of debt). That situation is at the heart of Greenspan's concerns.
Fannie Mae and Freddie Mac have accumulated so much debt that they pose a "systemic risk" to the nation's financial health, Greenspan said. Congress should act to slow the companies' growth, he said, and he urged lawmakers to move quickly. The Senate Banking Committee is considering legislation that would create an independent regulatory agency to oversee the companies. (Currently, the Treasury Department has some authority to control their debt levels but has not attempted to do so.)
Reining in the two powerful companies won't be easy. They have clout on Capitol Hill and they warn that any further regulation would make home loans more difficult to obtain and more costly. There is little evidence that the claim is true, however.
In fact, the companies have only themselves to blame for the scrutiny. They have increased their direct mortgage holdings, which brings particular risk in a period of rising interest rates. And they have fudged their numbers. Freddie Mac understated its earning by $5-billion the past two years to make the company appear to be less volatile, and Fannie Mae had to correct $1-billion in financial errors late last year.
Although Fannie Mae and Freddie Mac have succeeded in helping Americans become homeowners, they have also increased the financial risk to American taxpayers. The companies have abused their special relationship with the federal government and it is time they be made to stand on their own.
