The Real Story Behind the Calls for Greater Oversight of Fannie Mae and Freddie Mac
We've all read recently about proposed legislation to strengthen the regulation of Government Sponsored Enterprises (GSEs). The increased oversight either by an agency of the Treasury Department or an independent super agency will, we are told, ensure the safety and soundness of Fannie Mae and Freddie Mac, even in the worst market conditions. I am not sure we're hearing the complete story. Fannie Mae and Freddie Mac have been around for so long that many in the mortgage lending business may not know or recall why they were established. Both GSEs were chartered to purchase mortgage loans from private lenders, such as mortgage bankers, banks, S&Ls, and credit unions. Prior to the emergence of Fannie Mae and Freddie Mac, mortgage lenders often went through periods of loan droughts, i.e., funds were not available to borrowers to finance the purchase of homes. Fannie Mae and Freddie Mac were chartered to establish a secondary marketing cycle to purchase loans, thereby replenishing lenders' capital to make more loans and avoid loan droughts. Since 1996, Navy Federal has sold over $17 billion in mortgage loans to Fannie Mae, Freddie Mac and other lenders. Being able to participate in the secondary market has allowed us to aggressively offer mortgage lending products to our members while maintaining available capital for our other robust lending products, such as automobile loans and credit cards, which Navy Federal does not sell. These two secondary marketing entities have been extremely successful at helping fuel the rise in homeownership over the past 30 years. They have offered many innovative new loan products and both have taken the lead in technological advances, which have allowed lenders to serve their borrowers more efficiently (e.g., automated underwriting systems). So if Fannie Mae and Freddie Mac have been so successful, why all the clamor to keep a closer eye on them? Recent disclosures about accounting irregularities at Freddie Mac and a miscalculation of figures under a new accounting standard by Fannie Mae have provided impetus for the most recent push for greater oversight. We, in the credit union movement, along with our brethren in the banking industry, are well accustomed to dealing with our regulators on matters of capital reserves and allowances for loan losses. Everyone recognizes that the financial soundness of Fannie Mae and Freddie Mac is critical to the continued well-being of the housing and securities markets. But Fannie Mae and Freddie Mac are not Enron or WorldCom. Their reserve requirements may need to be revisited, but this piece of the debate should be separated from the goal of those who want to reduce Fannie Mae's and Freddie Mac's ability to fulfill their charters effectively. Since the 1980s, we have heard cries from a vocal minority of very large financial institutions, politicians and some government officials who claim Fannie Mae and Freddie Mac have an unfair competitive advantage because of their implied line of credit to the Treasury. The biggest opponents of Fannie Mae and Freddie Mac are the financial institutions who make up an organization called FMWatch. FMWatch has a vested interest in seeing that Fannie Mae and Freddie Mac are constrained and over-regulated. When this group, and the politicians who promote their views, were unsuccessful in arguing that Fannie Mae and Freddie Mac are unfair competitors, they jumped on the recent accounting missteps to accomplish their goal of neutering the two secondary marketing leaders. If they are successful, the door may open to permit these institutions to crowd out Fannie Mae and Freddie Mac. If the role of Fannie Mae and Freddie Mac are diminished, there is no question in my mind that the price of mortgage lending for credit union members and all mortgage borrowers will increase. Fannie Mae and Freddie Mac stockholders have benefited from their successes, but both GSEs have a public mission to help Americans realize their dream of homeownership. The folks at FMWatch have only the best interests of their stockholders at heart, not the average American homebuyer. Fannie Mae and Freddie Mac are private concerns with a public, social mission. The institutions comprising FMWatch are out to steal the model established by Fannie Mae and Freddie Mac and recast it for their own benefit. What would happen if the role of Fannie Mae and Freddie Mac in mortgage lending and the secondary market was greatly reduced or turned over completely to the private sector - to institutions such as those who comprise FMWatch? As already stated, we would see increased costs for mortgage financing. Second, creative and innovative programs developed by financial institutions in consort with Fannie Mae and Freddie Mac would be stifled. Don't forget that many of the creative and innovative programs developed by Fannie Mae, Freddie Mac and lenders serve low-income borrowers. Third, selling loans in the secondary market would become much more difficult. I have dealt with jumbo loan investors over the years, including some who belong to FMWatch. I have found many to be arrogant and inflexible. These financial institutions charge very high premiums for borrowers, who do not strictly fit to their profiling models (none of their models give credit to long-term, good credit union member relationships). These investors want to cherry-pick only the very best loans. They may buy a less-than-perfect loan, but it will cost you dearly. And don't be surprised if you are asked to repurchase a loan at the first sign of trouble. Fannie Mae and Freddie Mac have helped establish a secondary market that works extremely well replenishing mortgage capital and is efficient in ensuring reasonable prices for mortgage loans. Both of these GSEs have taken the lead in innovative mortgage products so that an increasing number of Americans can achieve the dream of homeownership. Fannie Mae and Freddie Mac have helped lead the way in making our mortgage operations more efficient through the use of technology. I have no problem with re-assessing the capital reserve requirements of Fannie Mae and Freddie Mac; that's the same thing NCUA does with my credit union every year. However, I am very cynical of those financial institutions and politicians, who have a hidden agenda to diminish the role and effectiveness of Fannie Mae and Freddie Mac because their agendas could jeopardize a secondary marketing system that has worked so well for so long.